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THIRD DIVISION

[G.R. No. 157309. March 28, 2008.]

MARLOU L. VELASQUEZ , petitioner, vs . SOLIDBANK CORPORATION ,


respondent.

DECISION

REYES, R.T. , J : p

PARTIES may not impugn the effectivity of a contract, after much bene t has
been gained to the prejudice of another. They are bound by the obligations they
expressly set out to do.
Before Us is a petition for review on certiorari of the Decision 1 of the Court of
Appeals (CA) which a rmed with modi cation that of the Regional Trial Court (RTC) in
Cebu City, 2 holding petitioner Marlou Velasquez liable under his letter of undertaking to
respondent Solidbank Corporation.
The Facts
Petitioner is engaged in the export business operating under the name
Wilderness Trading. Respondent is a domestic banking corporation organized under
Philippine laws.
The case arose out of a business transaction for the sale of dried sea cucumber
for export to South Korea between Wilderness Trading, as seller, and Goldwell Trading
of Pusan, South Korea, as buyer. To facilitate payment of the products, Goldwell
Trading opened a letter of credit in favor of Wilderness Trading in the amount of
US$87,500.00 3 with the Bank of Seoul, Pusan, Korea.
On November 12, 1992, petitioner applied for credit accommodation with
respondent bank for pre-shipment nancing. The credit accommodation was granted.
Petitioner was successful in his rst two export transactions both drawn on the letter
of credit. The third export shipment, however, yielded a different result.
On February 22, 1993, petitioner submitted to respondent the necessary
documents for his third shipment. Wanting to be paid the value of the shipment in
advance, petitioner negotiated for a documentary sight draft to be drawn on the letter
of credit, chargeable to the account of Bank of Seoul. The sight draft represented the
value of the shipment in the amount of US$59,640.00. 4
As a condition for the issuance of the sight draft, petitioner executed a letter of
undertaking in favor of respondent. Under the terms of the letter of undertaking,
petitioner promised that the draft will be accepted and paid by Bank of Seoul according
to its tenor. Petitioner also held himself liable if the sight draft was not accepted. The
letter of undertaking provided:
Feb. 22, 1993

SOLIDBANK CORPORATION
32 Borromeo Street
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Cebu City

Gentlemen: Re: PURCHASE OF ONE DOC. SIGHT DRAFT DRAWN UNDER


LC#M2073210NS00040 FOR US$59,640.00 UNDER OUR
CEBP93/102.

In consideration of your negotiating the above described draft(s), we


hereby warrant that the above referred to draft(s) and accompanying
documents are genuine and accurately represent the facts stated therein and
that the draft(s) will be accepted and paid in accordance with its/their tenor. We
further undertake and agree, jointly and severally, to hold you free and harmless
from and to defend all actions, claims and demands whatsoever, and to pay on
demand all damages, actual or compensatory, including attorney's fees, in case
of suit, at least equal to __% of the amount due, which you may suffer arising by
reason of or on account of your negotiating the above draft(s) because of the
following discrepancies or reasons or any other discrepancy or reason whatever:

1) B/L MARKED "SAID TO CONTAIN" & "SHIPPER'S LOAD, STOWAGE &


COUNT."

2) LATE SHIPMENT.
3) QUANTITY SHIPPED @ US$14.00 OVERDRAWN BY 0.06 TON.

4) NO INSPECTION CERTIFICATE PRESENTED.

We hereby undertake to pay on demand the full amount of the draft(s) or


any unpaid balance of the draft(s), with interest at the prevailing rate of today
from the date of negotiation, plus all charges and expenses whatsoever incurred
in connection therewith. You shall neither be obligated to contest or dispute any
refusal to accept or to pay the whole or any part of the above draft(s) nor to
proceed in anyway against the drawee thereof, the issuing bank, or against any
indorser thereof before making a demand on us for the payment of the whole or
any unpaid balance of the draft(s). 5 (Emphasis added)
By virtue of the letter of undertaking, respondent advanced the value of the
shipment which, at the current rate of exchange at that time was P1,495,115.16, less
bank charges, to petitioner. Respondent then sent all the documents pertinent to the
export transaction to the Bank of Seoul.
Respondent failed to collect on the sight draft as it was dishonored by non-
acceptance by the Bank of Seoul. The reasons given for the dishonor were late
shipment, forged inspection certi cate, and absence of countersignature of the
negotiating bank on the inspection certi cate. 6 Goldwell Trading likewise issued a
stop payment order on the sight draft because most of the bags of dried sea cucumber
exported by petitioner contained soil.
Due to the dishonor of the sight draft and the stop payment order, respondent
demanded restitution of the sum advanced. 7 Petitioner failed to heed the demand.
On June 3, 1993, respondent led a complaint for recovery of sum of money 8
with the RTC in Cebu City. In his answer, petitioner alleged that his liability under the
sight draft was extinguished when respondent failed to protest its non-acceptance, as
required under the Negotiable Instruments Law (NIL). He also alleged that the letter of
undertaking is not binding because it is a super uous document, and that he did not
violate any of the provisions of the letter of credit. 9

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RTC and CA Dispositions
On September 25, 1996, the RTC rendered judgment 10 in favor of respondent
with the following fallo:
IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering the
defendant:

(1) to pay the plaintiff the principal sum of P1,495, 115.16 plus interest at
20% per annum counted from February 22, 1993 up to the time the
entire amount shall have been fully paid;

(2) to pay attorney's fees equivalent to 10% of the total amount due the
plaintiff; and

(3) to pay the costs.

SO ORDERED. 1 1
The RTC ratiocinated:
This court is not convinced with the defendant's argument that because
of plaintiff's failure to protest the dishonor of the sight draft, his liability is
extinguished because his liability remains under the letter of undertaking which
he signed and without which plaintiff would not have advanced or credited to
him the amount.
Section 152 of the Negotiable Instruments Law under which defendant
claims extinguishment of his liability to plaintiff is not a bar to the ling of other
appropriate remedies which the aggrieved party may pursue to vindicate his
rights and in this instant case, plaintiff wants his right vindicated by virtue of
the letter of undertaking which defendant signed. By the letter of undertaking,
defendant bound himself to pay on demand all damages including attorney's
fees which plaintiff may suffer arising by reason of or on account of
negotiating the above draft because of the following discrepancies or any other
discrepancy or reasons whatsoever and further to pay on demand full amount
of any unpaid balance with interest at the prevailing rate. He should be bound to
the ful llment of what he expressly obligated himself to do and perform in the
letter of undertaking without which, plaintiff would not have advance (sic) and
credited to him the amount in the draft. He should not enrich himself at the
expense of plaintiff. 1 2 (Emphasis added)
Disagreeing, petitioner elevated the matter to the CA.
On June 27, 2002, the CA a rmed with modi cation the RTC decision, disposing
as follows:
WHEREFORE, premises considered, the assailed Decision is hereby
AFFIRMED with MODIFICATION. Defendant-appellant Marlou L. Velasquez is
hereby ordered to pay plaintiff-appellee Solidbank Corporation, the following: (1)
the principal amount of One Million Four Hundred Ninety-Five Thousand One
Hundred Fifteen and Sixteen Centavos (P1,495,115.16) plus interest at twelve
percent (12%) per annum from February 22, 1993 until fully paid, (2) attorney's
fees equivalent to ve percent (5%) of the total amount due, and (3) costs of the
suit.
SO ORDERED. 1 3
In ruling against petitioner, the CA opined:

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The fact that said draft was dishonored and not paid by the Bank of
Seoul-Korea, (sic) it is incumbent upon defendant-appellant Velasquez to
comply with his obligation under the Letter of Undertaking. He cannot be
allowed to impugn the contract of undertaking he entered into by saying that it
was a super uous document, and therefore, not binding on him. The contract of
undertaking is the law between them, and must be enforced accordingly. This is
in accord with Article 1159 of the New Civil Code, which provides that
"obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith." And parties to a
contract are bound to the ful llment of what has expressly been stipulated
therein, regardless of the fact that it turn (sic) out to be nancially
disadvantageous. 1 4
xxx xxx xxx
The fact that Defendant-appellant bene ted from the advance payment
made by Plaintiff appellee, (sic) it is incumbent upon him to return what he
received because the purpose of the advance payment was not attained and/or
realized, as the sight draft was not paid accordingly, otherwise, it will result to
unjust enrichment on the part of Defendant-appellant at the expense of Plaintiff-
appellee, in violation of Articles 19 and 22 of the New Civil Code. The doctrine of
unjust enrichment and restitution simply means that "the exercise of a right
ends when the right disappears, and it disappears when it is abused, especially
to the prejudice of others." 1 5 (Emphasis added)
Petitioner moved for reconsideration 1 6 but his motion was denied. 1 7 Hence, the
present recourse.
Issues
Petitioner raises twin issues for Our consideration, to wit:
THE COURT OF APPEALS HAS DECIDED A QUESTION OF SUBSTANCE,
NOT HERETOFORE DETERMINED BY THIS HONORABLE COURT, OR HAS
DECIDED IT IN A WAY PROBABLY NOT IN ACCORD WITH LAW OR WITH THE
APPLICABLE DECISIONS OF THIS HONORABLE COURT, IN THAT:

I.
THE COURT OF APPEALS RULED THAT PETITIONER IS LIABLE ON THE
ACCESSORY CONTRACT, THE LETTER OF UNDERTAKING, DESPITE THE
FACT THAT PETITIONER WAS ALREADY RELEASED FROM LIABILITY
UNDER THE SIGHT DRAFT, THE PRINCIPAL CONTRACT, UNDER THE
PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW AND THE CIVIL
CODE.
II.
THE COURT OF APPEALS HELD PETITIONER LIABLE UNDER THE
ACCESSORY CONTRACT, THE LETTER OF UNDERTAKING, DESPITE THE
FACT THAT THERE WAS NO PROOF WHATSOEVER THAT PETITIONER
VIOLATED EITHER THE PRINCIPAL CONTRACT, THE SIGHT DRAFT, OR
EVEN THE LETTER OF UNDERTAKING. 1 8 (Underscoring supplied)

The main issue is whether or not petitioner should be held liable to respondent
under the sight draft or the letter of undertaking. There is no dispute that petitioner duly
signed and executed these documents. It is likewise admitted that the sight draft was
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dishonored by non-acceptance by the Bank of Seoul.
Our Ruling
The petition is without merit.
Petitioner is not liable under the
sight draft but he is liable under
his letter of undertaking; liability
under the letter of undertaking
was not extinguished by non-
protest of the dishonor of the
sight draft.
Petitioner argues that he cannot be held liable under either the sight draft or the
letter of undertaking. He claims that the failure of respondent to protest the dishonor of
the sight draft under Section 152 of the NIL discharged him from liability under the
negotiable instrument. It is also contended that his liability under the letter of
undertaking is that of a mere guarantor; that the letter of undertaking is only an
accessory contract to the sight draft. Since he was discharged from liability under the
sight draft, he cannot be held liable under the letter of undertaking.
For its part, respondent counters that petitioner's liability springs from the letter
of undertaking, independently of the sight draft. It would not have advanced the amount
without the letter of undertaking. According to respondent, the letter of undertaking is
an independent agreement and not merely an accessory contract. To permit petitioner
to escape liability under the letter of undertaking would result in unjust enrichment.
Petitioner's liability under the letter of undertaking is independent from his
liability under the sight draft. He may be held liable under either the sight draft or the
letter of undertaking or both.
Admittedly, petitioner was discharged from liability under the sight draft when
respondent failed to protest it for non-acceptance by the Bank of Seoul. A sight draft
made payable outside the Philippines is a foreign bill of exchange. 1 9 When a foreign bill
is dishonored by non-acceptance or non-payment, protest is necessary to hold the
drawer and indorsers liable. Verily, respondent's failure to protest the non-acceptance
of the sight draft resulted in the discharge of petitioner from liability under the
instrument.
Section 152 of the NIL is explicit:
Section 152. In what cases protest necessary . — Where a foreign bill
appearing on its face to be such is dishonored by non-acceptance, it must be
duly protested for non-acceptance, and where such a bill which has not been
previously dishonored by non-acceptance, is dishonored by non-payment, it
must be duly protested for non-payment. If it is not so protested, the drawer and
indorsers are discharged. Where a bill does not appear on its face to be a
foreign bill, protest thereof in case of dishonor is unnecessary. (Emphasis
added)
Petitioner, however, can still be made liable under the letter of undertaking. It
bears stressing that it is a separate contract from the sight draft. The liability of
petitioner under the letter of undertaking is direct and primary. It is independent from
his liability under the sight draft. Liability subsists on it even if the sight draft was
dishonored for non-acceptance or non-payment.
Respondent agreed to purchase the draft and credit petitioner its value upon the
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undertaking that he will reimburse the amount in case the sight draft is dishonored. The
bank would certainly not have agreed to grant petitioner an advance export payment
were it not for the letter of undertaking. The consideration for the letter of undertaking
was petitioner's promise to pay respondent the value of the sight draft if it was
dishonored for any reason by the Bank of Seoul.
We cannot accept petitioner's thesis that he is only a mere guarantor under the
letter of credit. Petitioner cannot be both the primary debtor and the guarantor of his
own debt. This is inconsistent with the very purpose of a guarantee which is for the
creditor to proceed against a third person if the debtor defaults in his obligation.
Certainly, to accept such an argument would make a mockery of commercial
transactions.
Petitioner bound himself liable to respondent under the letter of undertaking if
the sight draft is not accepted. He also warranted that the sight draft is genuine; will be
paid by the issuing bank in accordance with its tenor; and that he will be held liable for
the full amount of the draft upon demand, without necessity of proceeding against the
drawee bank. 2 0 Petitioner breached his undertaking when the Bank of Seoul
dishonored the sight draft and Goldwell Trading ordered a stop payment order on it for
discrepancies in the export documents.
Petitioner is liable without need for
respondent to establish collateral
facts such as violations of the letter
of credit.
It is also argued that petitioner cannot be held liable under the letter of
undertaking because respondent failed to prove that he violated any of the provisions in
the letter of credit or that sixty (60) of the seventy-one (71) bags shipped to Goldwell
Trading contained soil instead of dried sea cucumber.
We cannot agree. Respondent need not prove that petitioner violated the
provisions of the letter of credit in order to be held liable under the letter of
undertaking. Parties are bound to ful ll what has been expressly stipulated in the
contract. 2 1 Petitioner's liability under the letter of undertaking is clear. He is liable to
respondent if the sight draft is not accepted by the Bank of Seoul. Mere non-
acceptance of the sight draft is su cient for liability to attach. Here, the sight draft was
dishonored for non-acceptance. The non-acceptance of the sight draft triggered
petitioner's liability under the letter of undertaking.
Records also show that the Bank of Seoul found discrepancies in the documents
submitted by petitioner. Goldwell Trading issued a stop payment order because the
products shipped were defective. It found that most of the bags shipped contained soil
instead of dried sea cucumber. If petitioner disputes the nding of Goldwell Trading, he
can le a case against said company but he cannot dispute his liability under either the
sight draft or the letter of undertaking.
As We see it, this is a straightforward case of collection of sum of money on the
basis of a letter of undertaking. Respondent advanced the export payment to petitioner
on the understanding that the draft will be honored and paid. The draft was dishonored.
Justice and equity dictate that petitioner be held liable to respondent bank.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court
of Appeals dated June 27, 2002 is hereby AFFIRMED.
SO ORDERED.
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Austria-Martinez, * Tinga, ** Chico-Nazario and Nachura, JJ., concur.
Footnotes
1. Rollo, pp. 38-55. Penned by Associate Justice Andres B. Reyes, Jr., with Associate Justices
Josefina Guevara-Salonga and Mario L. Guariña, III. concurring.
2. Id. at 115-121.
3. Irrevocable Letter of Credit No. M2073210NS00040, opened on October 6, 1992.
4. Rollo, p. 70.
5. Id.

6. Annex "Q".
7. Rollo, pp. 81-82. Demand letters dated March 9, 1993, March 23, 1993, and April 7, 1993.
8. Docketed as Civil Case No. CEB-14080, RTC, Branch 8, Cebu City.
9. Rollo, pp. 100-109.
10. Id. at 115-121.

11. Id. at 121.


12. Id.
13. Id. at 55.
14. Id. at 49.

15. Id. at 50-51.


16. Id. at 242-253.
17. Id. at 58.
18. Id. at 12.
19. Negotiable Instruments Law, Sec. 129 provides:

Sec. 129. Inland and Foreign Bills of Exchange. — An inland bill of exchange is a bill which is,
or on its face purports to be, both drawn and payable within the Philippines. Any other
bill is foreign bill. Unless the contrary appears on the face of the bill, the holder may treat
is as an inland bill.
20. Rollo, pp. 61-62.
21. New Civil Code, Art. 1315 provides: "Contracts are perfected by mere consent, and from that
moment the parties are bound not only to the ful llment of what has been expressly
stipulated but also to all the consequences which, according to their nature, may be in
keeping with good faith, usage and law."

* Vice Associate Justice Consuelo Ynares-Santiago, Chairperson, who is on o cial leave per
Special Order No. 497 dated March 14, 2008.

** Designated as additional member per Special Order No. 497 dated Mach 14, 2008.

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EN BANC

[G.R. No. L-8349. May 23, 1956.]

PHILIPPINE NATIONAL BANK , plaintiff-appellant, vs . MACAPANGA


PRODUCERS INC. , defendant. PLARIDEL SURETY AND INSURANCE
CO. , defendant-appellee.

Ramon B. de los Reyes for appellant.


Carlos, Laurea, Fernando & Padilla for appellee.

SYLLABUS

1. SURETY AND GUARANTY; IF PERSON BINDS HIMSELF SOLIDARITY WITH


PRINCIPAL. — If a person binds himself solidarity with the principal debtor, the contract
is called a suretyship.
2. ID.; ASSIGNMENT; MADE WITHOUT KNOWLEDGE AND CONSENT OF
SURETY; IS NOT MATERIAL ALTERATION OF CONTRACT. — An assignment without
knowledge or consent of the surety is not a material alteration of the contract,
sufficient to discharge the surety. (Stearns Law of Suretyship, Elder, fifth edition p.
113.) There is besides no allegation in the complaint or provision in the deed of
assignment, or any change therein that makes the obligation of surety more onerous
than that stated in the performance bond. Such assignment did not, therefore, release
the surety from the obligation under the surety bond.

DECISION

LABRADOR , J : p

Appeal against an order of the Court of First Instance of Manila, Hon. Bienvenido
A. Tan, presiding, dismissing the complaint as against Plaridel Surety and Insurance
Company.

Complaint is by Philippine National Bank against Macapanga Producers Inc. and


Plaridel Surety and Insurance Co. Principal allegations are: On December 26, 1952,
Luzon Sugar Company leased a sugar mill located at Calumpit, Bulacan to Macapanga
Producers beginning with the crop year 1952-53 at a minimum annual royalty of
P50,000, which shall be a lien on the sugar produced by the lessee and shall be paid
before sale or removal of sugar from warehouse (copy of lease contract attached as
Annex A to the Complaint); on December 26, 1952, Macapanga Producers, as principal,
and Plaridel Surety & Insurance, as surety, executed and delivered to plaintiff a
performance bond in the amount of P50,000 for the full and faithful compliance by
Macapanga Producers of all terms and conditions of the lease (copy of bond attached
as Annex B to Complaint); on December 21, 1953, Luzon Sugar assigned to plaintiff the
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payment due from Macapanga Producers in the sum of P50,000, representing royalty
for the lease of the sugar mill for the crop year 1952-53 (deed of assignment attached
as Annex C to Complaint); plaintiff noti ed Macapanga Producers and Plaridel Surety &
Insurance of said assignment; plaintiff had demanded from Macapanga Producers
payment of said royalty of P50,000, but the latter has refused and refuses to make
payment; and plaintiff also made demand on Plaridel Surety & Insurance for said
payment, but the latter refused and refuses to make payment.
Plaridel Surety & Insurance moved to dismiss the complaint for failure to state
cause of action, alleging that it is a guarantor and as such is responsible only if
Macapanga Producers has no property or assets to pay its obligation as lessee.
Plaintiff opposed the motion calling attention to the provision of the performance bond
in which Macapanga Producers and Plaridel Surety & Insurance, the former as principal
and the latter as surety, agreed to be held and rmly bound unto Luzon Sugar in the
penal sum of P50,000, "for the payment of which, well and truly be made, we bind
ourselves, our heirs, executors, administrators, successors, and assigns, jointly and
severally." Plaintiff contended that, as Plaridel Surety & Insurance bound itself solidarily
with Macapanga Producers, it became a surety in accordance with Article 2047, par. 2
of the Civil Code.
The trial court dismissed the complaint against Plaridel Surety & Insurance and
subsequently denied a motion to reconsider the order of dismissal.
The action joining Plaridel Surety & Insurance as party defendant is justi ed by
the following provisions and cases:.
"ART. 2047. ...
If a person binds himself solidarily with the principal debtor, the provisions
of section 4, Charter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship." (Civil Code.)
"The sureties on the superedeas bond given in this particular case, were
jointly and severally liable with principal debtor and that an execution might issue
against their property concurrently with the execution against the property of the
principal." (Molina vs. De la Riva, et al., 7 Phil., 345.)
"Article 1822, invoked by the appellant, provides that 'if the surety bound
himself jointly with the principal debtor, the provisions of section fourth, chapter
third, title first of this book shall be observed,' that is of book fourth of the Civil
Code. Section fourth of the chapter title, and book mentioned provides that 'a
creditor may sue any of the joint debtor or all of them simultaneously.' (Art. 1144).
In conformity with this provision, the sureties Pua Ti and Yap Chatco having
bound themselves in solidum (jointly and severally) with the principal debtor Pua
Te Ching, the creditor, that is, the Chinese Chamber of Commerce, may sue any of
them or all of them simultaneously; which is what the Chinese Chamber of
Commerce did in filing suit against the joint and several debtors." (Chinese
Chamber of Commerce vs. Pua Te Ching, 16 Phil., 406.).
"As the principal debtor's obligation' is valid and has not been satisfied by
his estate, and as the defendant sureties bound themselves solidarily, article 1144
of the Civil Code is applicable, which provides, as follows:
The creditor may sue any of the solidary debtors or all of them
simultaneously. An action instituted against one shall not be a bar to those which
may be subsequently brought against the others, as long as the debt has not been
entirely satisfied. (Molina vs. De la Riva, 7 Phil., 345; Chinese Chamber of
Commerce vs. Pua Te Ching, 16 Phil., 406; Inchausti & Co. vs. Yulo, 34 Phil., 978.)"
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(Ferrer vs. Lopez and Santos, 56 Phil., 592.)
It is also argued on behalf of Plaridel Surety and Insurance that as it was not a
party to the assignment, and same was made without its consent, it is, therefore,
discharged from its obligation. An assignment without knowledge or consent of the
surety is not a material alteration of the contract, suf cient to discharge the surety
(Stearns Law of Suretyship, Elder, fifth edition, p. 113.) There is, besides, no allegation in
the complaint, or provision in the deed of assignment, or any change therein that makes
the obligation of Plaridel Surety & Insurance more onerous than that stated in the
performance bond. Such assignment did not, therefore, release the Plaridel Surety &
Insurance from its obligation under the surety bond. (Bank of P. I. vs. Albaladejo y Cia,
53 Phil., 141; Bank of P. I. vs. Gooch, et al., 45 Phil., 514; Visayan Distributors, Inc. vs.
Flores, et al., 92 Phil., 145, 48 Off. Gaz., 4784; Del Rosario vs. Nava, 95 Phil., 637, 50 Off.
Gaz., 4189.)
It is lastly contended that as plaintiff or the lessor had a lien in the sugar
produced, and failed to proceed against it or enforce such lien, Plaridel Surety &
Insurance was released thereby. There is no allegation to this effect in the complaint,
that lessor or plaintiff ever had possession or control of the sugar, or ever waived or
released the lien thereon. Appellee cannot raise the issue in a motion to dismiss.
The order of dismissal is hereby reversed, and the appellee ordered to answer
the complaint, with costs.
Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.

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EN BANC

[G.R. No. L-9306. May 25, 1956.]

SOUTHERN MOTORS, INC. , plaintiff-appellee, vs . ELISEO BARBOSA ,


defendant-appellant.

Diosdado Garingalao for appellee.


Juan V. Borra and Eduardo Gildoro for appellant.

SYLLABUS

1. SURETY AND GUARANTY; RIGHT OF GUARANTORS; EXHAUSTION OF


PRINCIPAL DEBTOR'S PROPERTY. — The right of guarantors, under article 2058 of the
Civil Code of the Philippines, to demand exhaustion of the property of the principal
debtor, exists only when a pledge or a mortgage has not been given as special security
for the payment of the principal obligation. Guarantees, without any such pledge or
mortgage, are governed by title XV of said Code, whereas pledges and mortgages fall
under title XVI thereof, in which articles 2087 and 2126 of same code among others are
found.
2. ID.; ID.; ORDINARY PERSONAL GUARANTOR MAY DEMAND EXHAUSTION;
CREDITOR MAY SECURE JUDGMENT AGAINST GUARANTOR PRIOR THERETO. —
Although an ordinary personal guarantor, not a mortgagor or pledgor, may demand
exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor,
who shall be entitled, however, to a deferment of the execution of said judgment
against him, until after the properties of the principal debtor shall have been exhausted,
to satisfy the obligation involved in the case.

DECISION

CONCEPCION , J : p

This is an appeal from a decision of the Court of First Instance of Iloilo:

"(a) Ordering the defendant Eliseo Barbosa to pay to the Court, for the
benefit of the plaintiff within a period of ninety (90) days from receipt by the
defendant hereof, the sum of P2,889.53, with interest at the rate of 12% per
annum computed on the basis of the amounts of the installments mentioned in
the mortgage and of the dates they respectively fell due, until fully paid; the sum
of P200 by way of attorney's fees, plus costs; and (b) Upon failure of the
defendant to pay as aforesaid, ordering the land described in the complaint and
subject of the mortgage to be sold at public auction in accordance with law in
order to realize the amount of the judgment debt and costs."
Although originally forwarded to the Court of Appeals, the same has certi ed the
record to this Court in view of the fact that the issues raised in the appeal involve
merely questions of law.
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Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to
foreclose a real estate mortgage, constituted by the latter in favor of the former, as
security for the payment of the sum of P2,889.53 due to said plaintiff from one Alfredo
Brillantes, who had failed to settle his obligation in accordance with the terms and
conditions of the corresponding deed of mortgage. Defendant Eliseo Barbosa led an
answer admitting the allegations of the complaint and alleging, by way of "special and
affirmative" defense:
"That the defendant herein has executed the deed of mortgage Annex A for
the only purpose of guaranteeing — as surety and/or guarantor — the payment of
the above mentioned debt of Mr. Alfredo Brillantes in favor of the plaintiff.
"That the plaintiff until now has no right action against the herein
defendant on the ground that said plaintiff, without motive whatsoever, did not
intent or intent to exhaust all recourses to collect from the true debtor Mr. Alfredo
Brillantes the debt contracted by the latter in favor of said plaintiff, and did not
resort nor intends to resort all the legal remedies against the true debtor Mr.
Alfredo Brillantes, notwithstanding the fact that said Mr. Alfredo Brillantes is
solvent and has many properties within the Province of Iloilo."
Thereupon, plaintiff moved for summary judgment which a branch of the Court of
First Instance of Iloilo, presided over by Hon. Roman Ibañez, Judge, denied upon the
ground that it "is premature". Plaintiff moved for a reconsideration of the order to this
effect. Soon later, he led, also, another motion praying that the case be transferred to
another branch of said court, because that of Judge Ibañez would be busy trying
cadastral cases, and had adopted the "policy of refraining from entertaining any other
civil cases and all incidents related thereto, until after said cadastral cases shall have
been nally disposed of." With the express authority of Judge Ibañez, the case was
referred to the branch of said court, presided over by Hon. Querube C. Makalintal,
Judge, for action, upon said motion for reconsideration. Thereafter, Judge Makalintal
rendered the aforementioned decision, from which the defendant has appealed. He
maintains, in his brief, that:
"1. The trial court erred in hearing plaintiff-appellee's 'motion for
reconsideration' dated June 9, 1951, notwithstanding the fact that defendant-
appellant was not served with a copy thereof nor served with notice of the hearing
thereof.
2. "The trial court erred in rendering a 'judgment on the pleadings' in
appellee's favor when no issue was at all submitted to it for resolution, to the
prejudice of the substantial rights of appellant.
3. "The court a quo erred in depriving defendant-appellant of his
property rights without due process of law."
The rst assignment of error is based upon an erroneous predicate, for, contrary
to defendant's assertion, his counsel in the lower court, Atty. Manuel F. Zamora, through
an employee of his of ce, by the name of Agripino Aguilar, was actually served on June
9, 1951, with copy of plaintiff's motion for reconsideration, with notice to the effect that
said motion would be submitted for the consideration and approval of the lower court,
on Saturday, June 16, 1951, at 8:00 a.m., or soon thereafter as counsel may be heard.
The second assignment of error is, likewise, untenable. It is not true that there
was no issue submitted for determination by the lower court when it rendered the
decision appealed from.
It will be recalled that each one of the allegations made in plaintiff's complaint
were expressly admitted in defendant's answer, in which he merely alleged, as "special
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and af rmative" defense, that plaintiff is not entitled to foreclose the mortgage
constituted in its favor by the defendant, because the property of Alfredo Brillantes, the
principal debtors, had not been exhausted as yet, and were not sought to be exhausted,
for the satisfaction of plaintiff's credit. Thus, there was no question of fact left for
determination. The only issue set up by the pleadings was the suf ciency of said
af rmative defense. And such was the only point discussed by the defendant in his
opposition to plaintiff's motion for a summary judgment, referring, evidently, to a
judgment on the pleadings.
Plaintiff's motion for reconsideration of the order of Judge Roman Ibañez
refusing to render said judgment, upon the ground that it was premature, revived said
issue of suf ciency of the aforementioned af rmative defense, apart from calling for a
reexamination of the question posed by said order of Judge Ibañez, namely, whether it
was proper, under the circumstances, to render a judgment on the pleadings. In other
words, said motion for reconsideration had the effect of placing before then Judge
Makalintal, for resolution, the following issues, to wit: (1) whether a summary judgment
or a judgment on the pleadings was in order, considering the allegations of plaintiff's
complaint and those of defendant's answer; and (2) whether the mortgage in question
could be foreclosed although plaintiff had not exhausted, and did not intend to exhaust,
the properties of his principal debtor, Alfredo Brillantes.
The third assignment of error is predicated upon the alleged lack of notice of the
hearing of plaintiff's motion for reconsideration. As stated in our discussion of the rst
assignment of error, this pretense is refuted by the record. Moreover, it is obvious that
defendant's affirmative defense is devoid of merit for:
1. The deed of mortgage executed by him specifically provides:
"That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors,
administrators and assigns shall well and truly perform the full obligations above-
stated according to the terms thereof, then this mortgage shall be null and void,
otherwise it shall remain in full force and effect, in which event herein mortgagor
authorizes and empowers herein mortgagee-company to take any of the following
actions to enforce said payment;.
"(a) Foreclose, judicially or extrajudicially, the chattel mortgage above
referred to and/or also this mortgage, applying the proceeds of the purchase price
at public sale of the real property herein mortgaged to any deficiency or difference
between the purchase price of said chattel at public auction and the amount of
P2,889.53, together with its interest hereby secured; or
"(b) Simply foreclose this mortgage judicially in accordance with the
provisions of section 2, Rule 70, Rules of Court, or extra- judicially under the
provisions of Act No. 3135 and Act No. 4118, to satisfy the full amount of
P2,889.53, together with its interest of 12 per cent per annum."
2. The right of guarantors, under Article 2058 of the Civil Code of the
Philippines, to demand exhaustion of the property of the principal debtor, exists only
when a pledge or a mortgage has not been given as special security for the payment of
the principal obligation. Guarantees, without any such pledge or mortgage, are
governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI
of the same Code, in which the following provisions, among others, are found:
ART. 2087. "It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or mortgage
consists may be alienated for the payment to the creditor."
ART. 2126. "The mortgage directly and immediately subjects the
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property upon which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted."
3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a
mortgagor is not entitled to the exhaustion of the property of the principal debtor.

4. Although an ordinary personal guarantor — not a mortgagor or pledgor —


may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the properties of the principal debtor
shall have been exhausted to satisfy the obligation involved in the case.
Wherefore, the decision appealed from is hereby af rmed, with costs against the
defendant-appellant. It is so ordered.
Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Bautista Angelo,
Labrador, Reyes, J.B.L., and Endencia, JJ., concur.

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LUZ ON STEEL CORPORATION vs . JOSE O. SIA

EN BANC

[G.R. No. L-26449. May 15, 1969.]

LUZON STEEL CORPORATION, represented by TOMAS AQUINO CU ,


plaintiff- appellant, vs. JOSE O. SIA , defendant, TIMES SURETY &
INSURANCE CO., INC. , surety-appellee.

German A. Sipin for plaintiff-appellant.


Galicano S. Calapatia for surety-appellee.

SYLLABUS

1. REMEDIAL LAW; ATTACHMENT; COUNTERBOND TO DISCHARGE A LEVY ON


ATTACHMENT; RULE. — Rule 57, Section 12, specifies that an attachment may be
discharged upon the making of a cash deposit or filing a counterbond "in an amount equal
to the value of the property attached as determined by the judge"; that upon the filing of
the counterbond "the property attached - shall be delivered to the party making the deposit
or giving the counterbond, or the person appearing on his behalf, the deposit or
counterbond aforesaid standing in place of the property so released". Whether the
judgment be rendered after trial on the merits or upon compromise, such judgment may
be made effective upon the property released; and since the counterbond merely stands in
the place of such property, there is no reason why the judgment should not be made
effective against the counterbond regardless of the manner how the judgment was
obtained.
2. ID.; ID.; ID.; SAID COUNTERBONDS DISTINGUISHED FROM BOND FILED BY
PLAINTIFF FOR THE ISSUANCE OF WRIT OF ATTACHMENT. — Counterbonds posted to
obtain the lifting of a writ of attachment is a security for the payment of any judgment that
the attaching party may obtain; they are thus mere replacements of the property formerly
attached and may be levied upon after final judgment in the case in order to realize the
amount adjudged. This situation does not obtain in the case of injunction counterbonds,
since the sureties in the latter case merely undertake to pay all damages that the plaintiff
may suffer by reason of the continuance - of the acts complained of and not to secure
payment of the judgment recovered.
3. ID.; ID.; ID.; NATURE THEREOF. — The counterbond contemplated in Section 17 of
Rule 57 of the Revised Rules of Court is ordinary guaranty where the sureties assume a
subsidiary liability.
4. CIVIL LAW; SPECIAL CONTRACTS; GUARANTY; EXCUSSION; PREVIOUS
EXHAUSTION OF PROPERTY OF DEBTOR DOES NOT APPLY WHERE SURETY IS BOUND IN
SOLIDUM. — Article 2059, paragraph 2, of the Civil Code of the Philippines requiring
excussion (previous exhaustion of the property of the debtor) does not apply if the
guarantor has bound himself solidarily with the debtor.
5. ID.; ID.; ID.; ID.; REASON. — A procedural rule may not amend the substantive law
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expressed in the Civil Code, and would nullify the express stipulation of the parties.
6. ID.; ID.; ID.; INSTANCE WHEN EXCUSSION DOES NOT APPLY. — Even if the surety's
undertaking were not solidary with that of the principal debtor, still he may not demand
exhaustion of the property of the latter, unless he can point out sufficient leviable property
of the debtor within Philippine territory.
7. ID.; ID.; ID.; LIABILITY OF SURETY ATTACHES UPON RENDITION OF JUDGMENT. —
Where under the rule and the bond the undertaking is to pay the judgment, the liability of
the surety or sureties attaches upon the rendition of the judgment, and the issue of an
execution and its return nulla bona is not, and should not be, a condition to the right to
resort to the bond. Payment under the bond is not made to depend upon the redelivery or
availability of the property previously attached.
8. ID.; ID.; ID.; REQUIREMENT OF NOTICE AND HEARING, SUBSTANTIAL COMPLIANCE
THEREWITH. — Where the surety was allowed to move for the quashal of the writ of
execution and for the cancellation of its obligation, the requirement of notice and summary
hearing in the same action is substantially complied with.

DECISION

REYES, J.B.L. , C.J : p

Direct appeal from two orders, dated 19 May and 5 June 1965, issued by the Court of First
Instance of Manila (Judge Francisco Arca presiding), in its Civil Case No. 54913, entitled
Luzon Steel Corporation, plaintiff, vs. Metal Manufacturing of the Philippines, Inc., and Jose
O. Sia, defendants, whereby the court aforesaid quashed a writ of execution issued against
the Times Surety & Insurance Co., Inc., and cancelled the undertaking of said surety
company.
The essential and uncontroverted facts of the case may be summarized as follows:
Luzon Steel Corporation has sued Metal Manufacturing of the Philippines and Jose O. Sia,
the former's manager, for breach of contract and damages. It obtained a writ of
preliminary attachment of the properties of the defendants, but the attachment was lifted
upon a P25,000.00 counter-bond executed by the defendant Sia, as principal, and the
Times Surety & Insurance., Inc. (hereinafter designated as the surety), as solidary
guarantor, in the following terms:
"'WHEREFORE, we JOSE O. SIA, as principal, and the TIMES SURETY &
INSURANCE CO., INC., as Surety, in consideration of the dissolution of
attachment, hereby jointly and severally bind ourselves in the sum of Twenty Five
Thousand Pesos (P25,000.00), Philippine currency, to answer for the payment to
the plaintiff of any judgment it may recover in the action in accordance with
Section 12, Rule 59, of the Rules of Court. (pp. 32, 45, Rec. on Appeal.)"

Issues having been joined, plaintiff and defendant (without intervention of the surety)
entered into a compromise whereby defendant Sia agreed to settle the plaintiff's claim in
the following manner:
"1. That the Defendant shall settle with the Plaintiff the amount of TWENTY
FIVE THOUSAND (P25,000.00) PESOS, in the following manner: FIVE HUNDRED
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(P500.00) PESOS, monthly for the first six (6) months to be paid at the end of
every month and to commence in January, 1965, and within one month after
paying the last installment of P500.00, the balance of P22,000.00 shall be paid in
lump sum, without interest. It is understood that failure of the Defendant to pay
one or any installment will make the whole obligation immediately due and
demandable and that a writ of execution will be issued immediately against
Defendants bond."

The compromise was submitted to the court and the latter approved it, rendered judgment
in conformity therewith, and directed the parties to comply with the same (Record on
Appeal, page 22).
Defendant having failed to comply, plaintiff moved for and obtained a writ of execution
against defendant and the joint and several counter-bond. The surety, however, moved to
quash the writ of execution against it, averring that it was not a party to the compromise,
and that the writ was issued without giving the surety notice and hearing. The court,
overruling the plaintiff's opposition, set aside the writ of execution, and later cancelled the
counter-bond, and denied the motion for reconsideration. Hence this appeal.
Main issues posed are (1) whether the judgment upon the compromise discharged the
surety from its obligation under its attachment counterbond and (2) whether the writ of
execution could be issued against the surety without previous exhaustion of the debtor's
properties.
Both questions can be solved by bearing in mind that we are dealing with a counterbond
filed to discharge a levy on attachment. Rule 57, Section 12, specifies that an attachment
may be discharged upon the making of a cash deposit or filing a counterbond "in an
amount equal to the value of the property attached as determined by the judge"; that upon
the filing of the counterbond "the property attached . . . shall be delivered to the party
making the deposit or giving the counterbond, or the person appearing on his behalf, the
deposit or counterbond of aforesaid standing in place of the property so released".
The italicized expressions constitute the key to the entire problem. Whether the judgment
be rendered after trial on the merits or upon compromise, such judgment undoubtedly may
be made effective upon the property released; and since the counterbond merely stands in
the place of such property, there is no reason why the judgment should not be made
effective against the counterbond regardless of the manner how the judgment was
obtained.
Squarely on the point, and rebutting the appellee's apprehension that the compromise
could be the result of a collusion between the parties to injure the surety, is our decision in
Anzures vs. Alto Surety & Insurance Co., Inc., et al., 92 Phil. 742, where this Court, through
former Chief Justice Paras, ruled as follows:
"Under Section 12, Rule 59, of the Rules of Court, the bond filed, as in this case, for
the discharge of an attachment is 'to secure the payment to the plaintiff of any
judgment he may recover in the action,' and stands 'in place of the property so
released'. It follows that the order of cancellation issued by the respondent judge
is erroneous. Indeed, judgment had already been rendered by the Court of First
Instance of Manila in civil case No. 11748, sentencing Benjamin Aguilar to pay
the sum of P3,500.00 to the petitioner; and it is not pretended that said judgment
is a nullity. There is no point in the contention of the respondent Surety Company
that the compromise was entered into without its knowledge and consent, thus
becoming as to it essentially fraudulent. The Surety is not a party to civil case No.
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11748 and, therefore, need not be served with notice of the petition for judgment.
As against the conjecture of said respondent that the parties may easily connive
by means of a compromise to prejudice it, there is also the likelihood that the
same end may be attained by parties acting in bad faith through a simulated trial.
At any rate, it is within the power of the Surety Company to protect itself against a
risk of the kind.

Wherefore, the order of the respondent Judge cancelling the bond in question is
set aside. So ordered with costs against the respondent Alto Surety & Insurance
Co., Inc."

The lower court and the appellee herein appear to have relied on doctrines of this Court
concerning the liability of sureties in bonds filed by a plaintiff for the issuance of writs of
attachment, without discriminating between such bonds and those filed by a defendant for
the lifting of writs of attachment already issued and levied. This confusion is hardly
excusable considering that this Court has already called attention to the difference
between these kinds of bonds. Thus, in Cajefe vs. Judge Fernandez, et al., L-15709, 19
October 1960, this Court pointed out that —

"The diverse rule in Section 17 of Rule 59 for counterbonds posted to obtain the
lifting of a writ of attachment is due to these bonds being security for the
payment of any judgment that the attaching party may obtain; they are thus mere
replacements of the property formerly attached, and just as the latter may be
levied upon after final judgment in the case in order to realize the amount
adjudged, so is the liability of the countersureties ascertainable after the
judgment has become final. This situation does not obtain in the case of
injunction counterbonds, since the sureties in the latter case merely undertake 'to
pay all damages that the plaintiff may suffer by reason of the continuance . . . of
the acts complained of' (Rule 60, Section 6) and not to secure payment of the
judgment recovered." 1

It was, therefore, error on the part of the court below to have ordered the surety bond
cancelled, on the theory that the parties' compromise discharged the obligation of the
surety.
As declared by us in Mercado vs. Macapayag, 69 Phil. 403, 405- 406, in passing upon the
liability of counter sureties in replevin who bound themselves to answer solidarily for the
obligations of the defendants to the plaintiffs in a fixed amount of P912.04, to secure
payment of the amount that said plaintiff be adjudged to recover from the defendants, 2
"the liability of the sureties was fixed and conditioned on the finality of the
judgment rendered regardless of whether the decision was based on the consent
of the parties or on the merits. A judgment entered on a stipulation is nonetheless
a judgment of the court because consented to by the parties. "But the surety in the
present case insists (and the court below so ruled) that the execution issued
against it was invalid because the writ issued against its principal, Jose O. Sia, et
al., defendants below, had not been returned unsatisfied; and the surety invoked
in its favor Section 17 of Rule 57 of the Revised Rules of Court (old Rule 59),
couched in the following terms:
"SEC. 17 When execution returned unsatisfied recovery had upon bond.—If
the execution be returned unsatisfied in whole or in part, the surety or sureties on
any counterbond given pursuant to the provisions of this rule to secure the
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payment of the judgment shall become charged on such counterbond, and bound
to pay to the judgment creditor upon demand, the amount due under the
judgment, which amount may be recovered from such surety or sureties after
notice and summary hearing in the same action."

The surety's contention is untenable. The counterbond contemplated in the rule is evidently
an ordinary guaranty where the sureties assume a subsidiary liability. This is not the case
here, because the surety in the present case bound itself "jointly and severally" (in solidum)
with the defendant; and it is prescribed in Article 2059, paragraph 2, of the Civil Code of
the Philippines that excussion (previous exhaustion of the property of the debtor) shall not
take place "if he (the guarantor) has bound himself solidarily with the debtor". The rule
heretofore quoted can not be construed as requiring that an execution against the debtor
be first returned unsatisfied even if the bond were a solidary one; for a procedural rule may
not amend the substantive law expressed in the Civil Code, and further would nullify the
express stipulation of the parties that the surety's obligation should be solidary with that
of the defendant.
A second reason against the stand of the surety and of the court below is that even if the
surety's undertaking were not solidary with that of the principal debtor, still he may not
demand exhaustion of the property of the latter, unless he can point out sufficient leviable
property of the debtor within Philippine territory. There is no record that the appellee
surety has done so. Says Article 2060 of the Civil Code of the Philippines:
"ART. 2060. In order that the guarantor may make use of the benefit of
excussion, he must set it up against the creditor upon the latter's demand for
payment from him, and point out to the creditor available property of the debtor
within Philippine territory, sufficient to cover the amount of the debt."

A third reason against the thesis of appellee is that, under the rule and its own terms, the
counter-bond is only conditioned upon the rendition of the judgment. Payment under the
bond is not made to depend upon the re-delivery or availability of the property previously
attached, as it was under Section 440 of the old Code of Civil Procedure. Where under the
rule and the bond the undertaking is to pay the judgment, the liability of the surety or
sureties attaches upon the rendition of the judgment, and the issue of an execution and its
return nulla bona is not, and should not be, a condition to the right to resort to the bond. 3
It is true that under Section 17 recovery from the surety or sureties should be "after notice
and summary hearing in the same action." But this requirement has been substantially
complied with from the time the surety was allowed to move for the quashal of the writ of
execution and for the cancellation of their obligation.
WHEREFORE, the orders appealed from are reversed, and the court of origin is ordered to
proceed with the execution against the surety appellee, Times Surety & Insurance Co., Inc.
Costs against said appellee.
Dizon, Makalintal, Zaldivar, Sanchez, Fernando, Capistrano, and Barredo, JJ., concur.
Teehankee, Concepcion, C.J. and Castro, JJ., took no part.
Footnotes

1. See concurring opinion, Alliance Insurance & Surety Co. vs. Piccio, ante.
2. Note the similarity in conditions of this replevin bond with that of appellee surety in the
case at bar (v. ante. page 2).
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3. See Anzures vs. Alto Surety and Mercado vs. Macapayag, ante; 7 C.J.S., page 510; 6 Am.
Jur. 2d, page 938, Section 530.

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SECOND DIVISION

[G.R. No. 126490. March 31, 1998.]

ESTRELLA PALMARES , petitioner, vs . COURT OF APPEALS and M.B.


LENDING CORPORATION , respondents.

Roco, Bunag, Kapunan & Magallos for petitioner.


Angelo E. Grasparail for private respondent.

SYNOPSIS

Petitioner signed as co-maker in a loan. A promissory note was executed whereby she
acknowledged her joint and several (solidary) liability with the principal, that the creditor
may demand payment in case of default, and that she fully understood the contents
thereof. Petitioner, when informed that the debtors defaulted, requested that creditor try
to collect from her principal first and offered to settle the obligation in case the creditor
fails to collect. She also offered a parcel of land to settle the obligation which the creditor
refused. Thereafter, a complaint was filed against petitioner to the exclusion of the
principal debtors. Again petitioner offered to pay but the amount offered was way below
the amount computed. The trial court dismissed the complaint and ruled that the
complaint against the petitioner amounted to a discharge of a prior party, that the offer to
pay made by petitioner who is secondarily liable to the instrument discharged petitioner.
The Court of Appeals, reversing the trial court, ruled that petitioner is solidarily liable with
the principal debtors and may be sued for the entire obligation. Hence, this recourse. aTEScI

The Supreme Court held that it is a cardinal rule in interpretations of contracts that if the
terms of a contract are clear and leave no doubt upon the intention of the parties, the literal
meaning of its stipulation shall control. Hence, where petitioner expressly binds herself to
be jointly and severally or solidarily liable with the principal maker of the note, her liability is
that of a surety and is bound equally and absolutely with the principal.
Having entered into a contract with full knowledge of its terms and conditions, petitioner is
estopped to assert that she did so in ignorance of their legal effect.
The obligee is entitled to demand fulfillment of the obligation or performance stipulated,
hence, an offer to pay obligation in an amount less or different from that due does not
discharge liability. SECIcT

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS OF ADHESION; NOT PER


SE INVALID. — Contracts of adhesion are not invalid per se and that on numerous
occasions the binding effects thereof have been upheld. The peculiar nature of such
contracts necessitate a close scrutiny of the factual milieu to which the provisions are
intended to apply. Hence, just as consistently and unhesitatingly, but without categorically
invalidating such contracts, the Court has construed obscurities and ambiguities in the
restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the
drafter thereof when justified in light of the operative facts and surrounding
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circumstances. The factual scenario obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.
2. ID.; ID.; INTERPRETATION OF CONTRACTS; LITERAL MEANING OF ITS PROVISION
SHALL CONTROL IF THE TERMS THEREOF ARE CLEAR AND LEAVE NO DOUBT UPON THE
INTENTION OF THE PARTIES. — It is a cardinal rule in the interpretation of contracts that if
the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulation shall control.
aEAcHI

3. ID.; ID.; ID.; ID.; CASE AT BAR. — In the case at bar, petitioner expressly bound herself
to be jointly and severally or solidarily liable with the principal maker of the note. The terms
of the contract are clear, explicit and unequivocal that petitioner's liability is that of a
surety. Her pretension that the terms "jointly and severally or solidarily liable" contained in
the second paragraph of her contract are technical and legal terms which could not be
easily understood by an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the contents" of the promissory
note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner
admits that she voluntary affixed her signature thereto; ergo, she cannot now be heard to
claim otherwise. Any reference to the existence of fraud is unavailing. Fraud must be
established by clear and convincing evidence, mere preponderance of evidence not even
being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by her own uncorroborated and, expectedly, self-serving allegations.
4. ID.; ID.; PARTY IS ESTOPPED TO ASSERT MISAPPREHENSION OF LEGAL EFFECT OF
UNDERTAKING WHERE SHE ENTERED INTO IT WITH FULL KNOWLEDGE OF ITS TERMS
AND CONDITIONS. — Having entered into the contracts with full knowledge of its terms
and conditions, petitioner is estopped to assert that she did so under a misapprehension
or in ignorance of their legal effect, or as to the legal effect of the undertaking. The rule
that ignorance of the contents of an instrument does not ordinarily affect the liability of
one who signs it also applies to contracts of suretyship. And the mistake of a surety as to
the legal effect of her obligation is ordinarily no reason for relieving her of liability.
CScaDH

5. ID.; ID.; SURETY DIFFERENTIATED FROM GUARANTY. — A surety is an insurer of the


debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall
pay. Stated differently, a surety promises to pay the principal's debt if the principal will not
pay, while a guarantor agrees that the creditor, after proceeding against the principal, may
proceed against the guarantor if the principal is unable to pay. A surety binds himself to
perform if the principal does not, without regard to his ability to do so. A guarantor, on the
other hand, does not contract that the principal will pay, but simply that he is able to do so.
In other words, a surety undertakes directly for the payment and is so responsible at once
if the principal debtor makes default, while a guarantor contracts to pay if, by the use of
due diligence, the debt cannot be made out of the principal debtor.
6. ID.; ID.; INTENTION OF CONTRACTING PARTIES; JUDGED BY THEIR
CONTEMPORANEOUS AND SUBSEQUENT ACTS. — It is a well-entrenched rule that in order
to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall also be principally considered.
7. ID.; ID.; SURETYSHIP; SURETY IS BOUND EQUALLY AND ABSOLUTELY WITH THE
PRINCIPAL. — A surety is bound equally and absolutely with the principal, and as such is
deemed an original promisor and debtor from the beginning. This is because in suretyship
there is but one contract, and the surety is bound by the same agreement which binds the
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principal. In essence, the contract of a surety starts with the agreement, which is precisely
the situation obtaining in this case before the Court.
8. ID.; ID.; ID.; ID.; SURETY IS AN ORIGINAL DEBTOR AND HIS LIABILITY IS IMMEDIATE
AND DIRECT. — A surety is usually bound with his principal by the same instrument,
executed at the same time and upon the same consideration; he is an original debtor, and
his liability is immediate and direct. Thus, it has been held that where a written agreement
on the same sheet of paper with and immediately following the principal contract between
the buyer and seller is executed simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal contract, the signers were "sureties" jointly
liable with the buyer. A surety usually enters into the same obligation as that of his
principal, and the signatures of both usually appear upon the same instrument, and the
same consideration usually supports the obligation for both the principal and the surety. ASDCaI

9. ID.; ID.; ID.; SURETY BOUND BY WAIVER EXECUTED BY PRINCIPAL. — There is no


merit in petitioner's contention that the complaint was prematurely filed because the
principal debtors cannot as yet be considered in default, there having been no judicial or
extrajudicial demand made by respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan from her in case the principal
maker defaults, subject to the same conditions expressed in the promissory note.
Significantly, paragraph (G) of the note states that "should I fail to pay in accordance with
the above schedule of payment, I hereby waive my right to notice and demand." Hence,
demand by the creditor is no longer necessary in order that delay may exist since the
contract itself already expressly so declares. As a surety, petitioner is equally bound by
such waiver.
10. ID.; ID.; ID.; DEMAND ON SURETIES, NOT NECESSARY BEFORE BRINGING SUIT
AGAINST THEM; NOR ENTITLED TO BE GIVEN NOTICE OF PRINCIPAL'S DEFAULT. — Even
if it were otherwise, demand on the sureties is not necessary before bringing suit against
them, since the commencement of the suit is a sufficient demand. On this point, it may be
worth mentioning that a surety is not even entitled, as a matter of right, to be given notice
of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take
care of the interest of the surety, his mere failure to voluntarily give information to the
surety of the default of the principal cannot have the effect of discharging the surety. The
surety is bound to take notice of the principal's default and to perform the obligation. He
cannot complain that the creditor has not notified him in the absence of a special
agreement to that effect in the contract of surety. In the absence of a statutory or
contractual requirement, it is not necessary that payment or performance of his obligation
be first demanded of the principal, especially where demand would have been useless; nor
is it a requisite, before proceeding against the sureties, that the principal be called on to
account.

11. ID.; ID.; ID.; ID.; RATIONALE BEHIND. — The underlying principle therefor is that
suretyship is a direct contract to pay the debt of another. A surety is liable as much as his
principal is liable, and absolutely liable as soon as default is made, without any demand
upon the principal whatsoever or any notice of default. As an original promisor and debtor
from the beginning, he is held ordinarily to know every default of his principal.TIDcEH

12. ID.; ID.; ID.; CREDITOR, NOT REQUIRED TO EXHAUST REMEDIES AGAINST THE
PRINCIPAL BEFORE HE CAN PROCEED AGAINST THE SURETY. — A creditor's right to
proceed against the surety exists independently of his right to proceed against the
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principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of
the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the
obligation is joint and several, the creditor has the right to proceed even against the surety
alone. Since, generally, it is not necessary for a creditor to proceed against the principal in
order to hold the surety liable, where, by the terms of the contract, the obligation of the
surety is the same as that of the principal, then as soon as the principal in order to hold the
surety liable, where, by the terms of the contract, the obligation of the surety is the same
as that of the principal, then as soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are had against the
principal. Perforce, in accordance with the rule that, in the absence of statute or agreement
otherwise, a surety is primarily liable, and with the rule that his proper remedy is to pay the
debt and pursue the principal for reimbursement, the surety cannot at law, unless
permitted by statute and in the absence of any agreement limiting the application of the
security, require the creditor or obligee, before proceeding against the surety, to resort to
and exhaust his remedies against the principal, particularly where both principal and surety
are equally bound.
13. ID.; ID.; ID.; ID.; REASON. — Where a creditor refrains from proceeding against the
principal, the surety is not exonerated. In other words, mere want of diligence or
forbearance does not affect the creditor's rights vis-a-vis the surety, unless the surety
requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of
the principal does not discharge the surety whether given at the principal's request or
without it, and whether it is yielded by the creditor through sympathy or from an inclination
to favor the principal, or is only the result of passiveness. The neglect of the creditor to sue
the principal at the time the debt falls due does not discharge the surety, even if such delay
continues until the principal becomes insolvent. And, in the absence of proof of resultant
injury, a surety is not discharged by the creditor's mere statement that the creditor will not
look to the surety, or that he need not trouble himself. The consequences of the delay, such
as the subsequent insolvency of the principal, or the fact that the remedies against the
principal may be lost by lapse of time, are immaterial. The raison d' etre for the rule is that
there is nothing to prevent the creditor from proceeding against the principal at any time.
At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor
in the pursuit of his principal, he may pay the debt himself and become subrogated to all
the right and remedies of the creditor.
14. ID.; ID.; ID.; EXTENSION DISCHARGING SURETY, CONSTRUED. — It may not be
amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor
without change in the time when the debt might be demanded, does not constitute an
extension of the time of payment, which would release the surety. In order to constitute an
extension discharging the surety, it should appear that the extension was for a definite
period, pursuant to an enforceable agreement between the principal and the creditor, and
that it was made without the consent of the surety or with a reservation of rights with
respect to him. The contract must be one which precludes the creditor from, or at least
hinders him in, enforcing the principal contract within the period during which he could
otherwise have enforced it, and which precludes the surety from paying the debt.
15. ID.; ID.; ID.; ID.; CASE AT BAR. — None of these elements are present in the instant
case. Verily, the mere fact that respondent corporation gave the principal debtors an
extended period of time within which to comply with their obligation did not effectively
absolve herein petitioner from the consequences of her undertaking. Besides, the burden
is on the surety, herein petitioner, to show that she has been discharged by some act of the
creditor, herein respondent corporation, failing in which we cannot grant the relief prayed
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for. EHSITc

16. ID.; ID.; ID.; DELAY IN DISCHARGING SURETY; THERE MUST BE ACTUAL OFFER OF
PAYMENT. — Respondent corporation cannot be faulted for not immediately demanding
payment from petitioner. It was petitioner who initially requested that the creditor try to
collect from her principal first, and she offered to pay only in case the creditor fails to
collect. The delay, if any, was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no actual offer of
payment to speak of but only a commitment to pay if the principal does not pay.
17. ID.; ID.; DEBTOR OF A THING CANNOT COMPEL THE CREDITOR TO RECEIVE A
DIFFERENT ONE; CASE AT BAR. — Petitioner made a second attempt to settle the
obligation by offering a parcel of land which she owned. Respondent corporation was
acting well within its rights when it refused to accept the offer. The debtor of a thing
cannot compel the creditor to receive a different one, although the latter may be of the
same value, or more valuable than that which is due. The obligee is entitled to demand
fulfillment of the obligation or performance as stipulated. A change of the object of the
obligation would constitute novation requiring the express consent of the parties.
18. ID.; ID.; A PERSON ENTERING INTO A CONTRACT HAS A RIGHT TO INSIST ON ITS
PERFORMANCE IN ALL PARTICULARS. — After the complaint was filed against her,
petitioner reiterated her offer to pay the outstanding balance of the obligation in the
amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation
cannot be blamed for refusing the amount being offered because it fell way below the
amount it had computed, based on the stipulated interests and penalty charges, as owing
and due from herein petitioner. A debt shall be understood to have been paid unless the
thing or service in which the obligation consists has been completely delivered or
rendered, as the case may be. In other words, the prestation must be fulfilled completely. A
person entering into a contract has a right to insist on its performance in all particulars.
Petitioner cannot compel respondent corporation to accept the amount she is willing to
pay because the moment the latter accept the performance, knowing its incompleteness
or irregularity, and without expressing any protest or objection, then the obligation shall be
deemed fully complied with. Precisely, this is what respondent corporation wanted to
avoid when it continually refused to settle with petitioner at less than what was actually
due under their contract. ATHCac

19. ID.; ID.; LOAN; PAYMENT OF INTEREST AS PENALTY; AMOUNT MAY BE


EQUITABLY REDUCED. — It must be remembered that from the principal loan of
P30,000.00, the amount of P16,300.00 had already been paid even before the filing of the
present case. Article 1229 of the Civil Code provides that the court shall equitably reduce
the penalty when the principal obligation has been partly or irregularly complied with by the
debtor. And, even if there has been no performance, the penalty may also be reduced if it is
iniquitous or leonine. In a case previously decided by this Court which likewise involved
private respondent M.B. Lending Corporation, and which is substantially on all fours with
the one at bar, we decided to eliminate altogether the penalty interest for being excessive
and unwarranted. Accordingly, the penalty interest of 3% per month being imposed on
petitioner should similarly be eliminated.
20. ID.; ID.; PAYMENT OF ATTORNEY'S FEES; MAY BE REDUCED IF THE AMOUNT
APPEARS UNCONSCIONABLE OR UNREASONABLE; 25% OF THE TOTAL AMOUNT DUE,
UNCONSCIONABLE. — Finally, with respect to the award of attorney's fees, this Court has
previously ruled that even with an agreement thereon between the parties, the court may
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nevertheless reduce such attorney's fees fixed in the contract when the amount thereof
appears to be unconscionable or unreasonable. To that end, it is not necessary to show, as
in other contracts, that it is contrary to morals or public policy. The grant of attorney's fees
equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate,
considering the minimal unpaid amount involved and the extent of the work involved in this
simple action for collection of a sum of money. We, therefore, hold that the amount of
P10,000.00 as and for attorney's fee would be sufficient in this case. CAHTIS

DECISION

REGALADO , J : p

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

Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmeña and Merlyn Azarraga, together with
petitioner Estrella Palmares, in the amount of P30,000.00 payable on or before May 12,
1990, with compounded interest at the rate of 6% per annum to be computed every 30
days from the date thereof. 1 On four occasions after the execution of the promissory note
and even after the loan matured, petitioner and the Azarraga spouses were able to pay a
total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made
after the last payment on September 26, 1991. 2

Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint 3 against petitioner Palmares as the lone party-
defendant, to the exclusion of the principal debtors, allegedly by reason of the insolvency
of the latter.
In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in August
1990, immediately after the loan matured, she offered to settle the obligation with
respondent corporation but the latter informed her that they would try to collect from the
spouses Azarraga and that she need not worry about it; that there has already been a
partial payment in the amount of P17,010.00; that the interest of 6% per month
compounded at the same rate per month, as well as the penalty charges of 3% per month,
are usurious and unconscionable; and that while she agrees to be liable on the note but
only upon default of the principal debtor, respondent corporation acted in bad faith in
suing her alone without including the Azarragas when they were the only ones who
benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the
resolution of the trial court: (1) what the rate of interest, penalty and damages should be;
(2) whether the liability of the defendant (herein petitioner) is primary or subsidiary; and (3)
whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and
not a co-maker with primary liability. 5
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed
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and the memoranda to be submitted by them. On November 26, 1992, the Regional Trial
Court of Iloilo City, Branch 23, rendered judgment dismissing the complaint without
prejudice to the filing of a separate action for a sum of money against the spouses
Osmeña and Merlyn Azarraga who are primarily liable on the instrument. 6 This was based
on the findings of the court a quo that the filing of the complaint against herein petitioner
Estrella Palmares, to the exclusion of the Azarraga spouses, amounted to a discharge of a
prior party; that the offer made by petitioner to pay the obligation is considered a valid
tender of payment sufficient to discharge a person's secondary liability on the instrument;
that petitioner, as co-maker, is only secondary liable on the instrument; and that the
promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and
rendered judgment declaring herein petitioner Palmares liable to pay respondent
corporation:
1. The sum of P13,700.00 representing the outstanding balance still due
and owing with interest at six percent (6%) per month computed from
the date the loan was contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per
month, of the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit. 7
Contrary to the findings of the trial court, respondent appellate court declared that
petitioner Palmares is a surety since she bound herself to be jointly and severally or
solidarity liable with the principal debtors, the Azarraga spouses, when she signed as a co-
maker. As such, petitioner is primarily liable on the note and hence may be sued by the
creditor corporation for the entire obligation. It also adverted to the fact that petitioner
admitted her liability in her Answer although she claims that the Azarraga spouses should
have been impleaded. Respondent court ordered the imposition of the stipulated 6%
interest and 3% penalty charges on the ground that the Usury Law is no longer enforceable
pursuant to Central Bank Circular No. 905. Finally, it rationalized that even if the promissory
note were to be considered as a contract of adhesion, the same is not entirely prohibited
because the one who adheres to the contract is free to reject it entirely; if he adheres, he
gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is
therefore solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do
not establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-maker's
liability as that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is
solidary.
4. The promissory note is a contract of adhesion and should be construed
against M.B. Lending Corporation.
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5. Palmares cannot be compelled to pay the loan at this point.
B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in
strictly imposing the interests and penalty charges on the outstanding balance of
the promissory note.

The foregoing contentions of petitioner are denied and contradicted in their material
points by respondent corporation. They are further refuted by accepted doctrines in the
American jurisdiction after which we patterned our statutory law on suretyship and
guaranty. This case then affords us the opportunity to make an extended exposition on the
ramifications of these two specialized contracts, for such guidance as may be taken
therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in this
wise:
ATTENTION TO CO-MAKERS : PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully
understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily
liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand
payment of the above loan from me in case the principal maker, Mrs. Merlyn
Azarraga defaults in the payment of the note subject to the same conditions
above-contained. 8

Petitioner contends that the provisions of the second and third paragraph are conflicting in
that while the second paragraph seems to define her liability as that of a surety which is
joint and solidary with the principal maker, on the other hand, under the third paragraph her
liability is actually that of a mere guarantor because she bound herself to fulfill the
obligation only in case the principal debtor should fail to do so, which is the essence of a
contract of guaranty. More simply stated, although the second paragraph says that she is
liable as a surety, the third paragraph defines the nature of her liability as that of a
guarantor. According to petitioner, these are two conflicting provisions in the promissory
note and the rule is that clauses in the contract should be interpreted in relation to one
another and not by parts. In other words, the second paragraph should not be taken in
isolation, but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner
avers that she could be held liable only as a guarantor for several reasons. First, the words
"jointly and severally or solidarily liable" used in the second paragraph are technical and
legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a
65-year old housewife who is likely to enter into such transactions without fully realizing
the nature and extent of her liability. On the contrary, the wordings used in the third
paragraph are easier to comprehend. Second, the law looks upon the contract of
suretyship with a jealous eye and the rule is that the obligation of the surety cannot be
extended by implication beyond specified limits, taking into consideration the peculiar
nature of a surety agreement which holds the surety liable despite the absence of any
direct consideration received from either the principal obligor or the creditor. Third, the
promissory note is a contract of adhesion since it was prepared by respondent M.B.
Lending Corporation. The note was brought to petitioner partially filled up, the contents
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thereof were never explained to her, and her only participation was to sign thereon. Thus,
any apparent ambiguity in the contract should be strictly construed against private
respondent pursuant to Art. 1377 of the Civil Code. 9
Petitioner accordingly concludes that her liability should be deemed restricted by the
clause in the third paragraph of the promissory note to be that of a guarantor. cdasia

Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because
the principal debtors cannot be considered in default in the absence of a judicial or
extrajudicial demand. It is true that the complaint alleges the fact of demand, but the
purported demand letters were never attached to the pleadings filed by private respondent
before the trial court. And, while petitioner may have admitted in her Amended Answer that
she received a demand letter from respondent corporation sometime in 1990, the same
did not effectively put her or the principal debtors in default for the simple reason that the
latter subsequently made a partial payment on the loan in September, 1991, a fact which
was never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent when, in truth and in fact, the outstanding
balance of the loan is only P13,700.00. Where the interest charged on the loan is
exorbitant, iniquitous or unconscionable, and the obligation has been partially complied
with, the court may equitable reduce the penalty 1 0 on grounds of substantial justice. More
importantly, respondent corporation never refuted petitioner's allegation that immediately
after the loan matured, she informed said respondent of her desire to settle the obligation.
The court should, therefore, mitigate the damages to be paid since petitioner has shown a
sincere desire for a compromise. 1 1

After a judicious evaluation of the arguments of the parties, we are constrained to dismiss
the petition for lack of merit, but to except therefrom the issue anent the propriety of the
monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory
note executed between the parties is a contract of adhesion, it has been the consistent
holding of the Court that contracts of adhesion are not invalid per se and that on numerous
occasions the binding effects thereof have been upheld. The peculiar nature of such
contracts necessitate a close scrutiny of the factual milieu to which the provisions are
intended to apply. Hence, just as consistently and unhesitatingly, but without categorically
invalidating such contracts, the Court has construed obscurities and ambiguities in the
restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the
drafter thereof when justified in light of the operative facts and surrounding
circumstances. 1 2 The factual scenario obtaining in the case before us warrants a liberal
application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should fail
to do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship.
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It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulation shall control. 1 3 In the case at bar, petitioner expressly bound herself to be
jointly and severally or solidarily liable with the principal maker of the note. The terms of
the contract are clear, explicit and unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarity liable" contained in the
second paragraph of her contract are technical and legal terms which could not be easily
understood by an ordinary layman like her is diametrically opposed to her manifestation in
the contract that she "fully understood the contents" of the promissory note and that she is
"fully aware" of her solidary liability with the principal maker. Petitioner admits that she
voluntarily affixed her signature thereto; ergo, she cannot now be heard to claim otherwise.
Any reference to the existence of fraud is unavailing. Fraud must be established by clear
and convincing evidence, mere preponderance of evidence not even being adequate.
Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her
own uncorroborated and, expectedly, self-serving allegations. 14
Having entered into the contract with full knowledge of its terms and conditions, petitioner
is estopped to assert that she did so under a misapprehension or in ignorance of their
legal effect, or as to the legal effect of the undertaking. 1 5 The rule that ignorance of the
contents of an instrument does not ordinarily affect the liability of one who signs it also
applies to contracts of suretyship. And the mistake of a surety as to the legal effect of her
obligation is ordinarily no reason for relieving her of liability. 1 6
Petitioner would like to make capital of the fact that although she obligated herself to be
jointly and severally liable with the principal maker, her liability is deemed restricted by the
provisions of the third paragraph of her contract wherein she agreed "that M.B. Lending
Corporation may demand payment of the above loan from me in case the principal maker,
Mrs. Merlyn Azarraga defaults in the payment of the note," which makes her contract one
of guaranty and not suretyship. The purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the
debtor. 17 A suretyship is an undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. 18 Stated differently, a surety promises to pay the
principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after
proceeding against the principal, may proceed against the guarantor if the principal is
unable to pay. 19 A surety binds himself to perform if the principal does not, without regard
to his ability to do so. A guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so. 20 In other words, a surety undertakes directly
for the payment and is so responsible at once if the principal debtor makes default, while a
guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of
the principal debtor. 21
Quintessentially, the undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. The second and third
paragraphs of the aforequoted portion of the promissory note do not contain any other
condition for the enforcement of respondent corporation's right against petitioner. It has
not been shown, either in the contract or the pleadings, that respondent corporation
agreed to proceed against herein petitioner only if and when the defaulting principal has
become insolvent. A contract of suretyship, to repeat, is that wherein one lends his credit
by joining in the principal debtor's obligation, so as to render himself directly and primarily
responsible with him, and without reference to the solvency of the principal. 2 2
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In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the
rule on strictissimi juris, which holds that when the meaning of a contract of indemnity or
guaranty has once been judicially determined under the rule of reasonable construction
applicable to all written contracts, then the liability of the surety, under his contract, as thus
interpreted and construed, is not to be extended beyond its strict meaning. 2 3 The rule,
however, will apply only after it has been definitely ascertained that the contract is one of
suretyship and not a contract of guaranty. It cannot be used as an aid in determining
whether a party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the
stipulation contained in the third paragraph of the controverted suretyship contract merely
elucidated on and made more specific the obligation of petitioner as generally defined in
the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is
merely a guarantor because her liability attaches only upon default of the principal debtor,
must necessarily fail for being incongruent with the judicial pronouncements adverted to
above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall also be principally considered. 24
Several attendant factors in that genre lend support to our finding that petitioner is a
surety. For one, when petitioner was informed about the failure of the principal debtor to
pay the loan, she immediately offered to settle the account with respondent corporation.
Obviously, in her mind, she knew that she was directly and primarily liable upon default of
her principal. For another, and this is most revealing, petitioner presented the receipts of
the payments already made, from the time of initial payment up to the last, which were all
issued in her name and of the Azarraga spouses. 25 This can only be construed to mean
that the payments made by the principal debtors were considered by respondent
corporation as creditable directly upon the account and inuring to the benefit of petitioner.
The concomitant and simultaneous compliance of petitioner's obligation with that of her
principals only goes to show that, from the very start, petitioner considered herself equally
bound by the contract of the principal makers. cdasia

In this regard, we need only to reiterate the rule that a surety is bound equally and
absolutely with the principal, 2 6 and as such is deemed an original promisor and debtor
from the beginning. 2 7 This is because in suretyship there is but one contract, and the
surety is bound by the same agreement which binds the principal. 2 8 In essence, the
contract of a surety starts with the agreement, 2 9 which is precisely the situation obtaining
in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately follows
the terms and conditions stipulated between respondent corporation, as creditor, and the
principal obligors. A surety is usually bound with his principal by the same instrument,
executed at the same time and upon the same consideration; he is an original debtor, and
his liability is immediate and direct. 3 0 Thus, it has been held that where a written
agreement on the same sheet of paper with and immediately following the principal
contract between the buyer and seller is executed simultaneously therewith, providing that
the signers of the agreement agreed to the terms of the principal contract, the signers
were "sureties" jointly liable with the buyer. 3 1 A surety usually enters into the same
obligation as that of his principal, and the signatures of both usually appear upon the same
instrument, and the same consideration usually supports the obligation for both the
principal and the surety. 3 2

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There is no merit in petitioner's contention that the complaint was prematurely filed
because the principal debtors cannot as yet be considered in default, there having been no
judicial or extrajudicial demand made by respondent corporation. Petitioner has agreed
that respondent corporation may demand payment of the loan from her in case the
principal maker defaults, subject to the same conditions expressed in the promissory
note. Significantly, paragraph (G) of the note states that "should I fail to pay in accordance
with the above schedule of payment, I hereby waive my right to notice and demand."
Hence, demand by the creditor is no longer necessary in order that delay may exist since
the contract itself already expressly so declares. 3 3 As a surety, petitioner is equally bound
by such waiver.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit
against them, since the commencement of the suit is a sufficient demand. 34 On this point,
it may be worth mentioning that a surety is not even entitled, as a matter of right, to be
given notice of the principal's default. Inasmuch as the creditor owes no duty of active
diligence to take care of the interest of the surety, his mere failure to voluntarily give
information to the surety of the default of the principal cannot have the effect of
discharging the surety. The surety is bound to take notice of the principal's default and to
perform the obligation. He cannot complain that the creditor has not notified him in the
absence of a special agreement to that effect in the contract of suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the principal
debtors, by not attaching copies thereof to its pleadings, is likewise immaterial. In the
absence of a statutory or contractual requirement, it is not necessary that payment or
performance of his obligation be first demanded of the principal, especially where demand
would have been useless; nor is it a requisite, before proceeding against the sureties, that
the principal be called on to account. 3 6 The underlying principle therefor is that a
suretyship is a direct contract to pay the debt of another. A surety is liable as much as his
principal is liable, and absolutely liable as soon as default is made, without any demand
upon the principal whatsoever or any notice of default. 3 7 As an original promisor and
debtor from the beginning, he is held ordinarily to know every default of his principal. 3 8
Petitioner questions the propriety of the filing of a complaint solely against her to the
exclusion of the principal debtors who allegedly were the only ones who benefited from
the proceeds of the loan. What petitioner is trying to imply is that the creditor, herein
respondent corporation, should have proceeded first against the principal before suing on
her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed
against the principal. 3 9 Under Article 1216 of the Civil Code, the creditor may proceed
against any one of the solidary debtors or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several, the creditor has the right to proceed
even against the surety alone. 4 0 Since, generally, it is not necessary for a creditor to
proceed against a principal in order to hold the surety liable, where, by the terms of the
contract, the obligation of the surety is the same as that of the principal, then as soon as
the principal is in default, the surety is likewise in default, and may be sued immediately
and before any proceedings are had against the principal. 4 1 Perforce, in accordance with
the rule that, in the absence of statute or agreement otherwise, a surety is primarily liable,
and with the rule that his proper remedy is to pay the debt and pursue the principal for
reimbursement, the surety cannot at law, unless permitted by statute and in the absence of
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any agreement limiting the application of the security, require the creditor or obligee,
before proceeding against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound. 4 2
We agree with respondent corporation that its mere failure to immediately sue petitioner
on her obligation does not release her from liability. Where a creditor refrains from
proceeding against the principal, the surety is not exonerated. In other words, mere want
of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless
the surety requires him by appropriate notice to sue on the obligation. Such gratuitous
indulgence of the principal does not discharge the surety whether given at the principal's
request or without it, and whether it is yielded by the creditor through sympathy or from an
inclination to favor the principal, or is only the result of passiveness. The neglect of the
creditor to sue the principal at the time the debt falls due does not discharge the surety,
even if such delay continues until the principal becomes insolvent. 43 And, in the absence
of proof of resultant injury, a surety is not discharged by the creditor's mere statement that
the creditor will not look to the surety, 44 or that he need not trouble himself. 45 The
consequences of the delay, such as the subsequent insolvency of the principal, 46 or the
fact that the remedies against the principal may be lost by lapse of time, are immaterial. 47
The raison d'êtrefor the rule is that there is nothing to prevent the creditor from proceeding
against the principal at any time. 4 8 At any rate, if the surety is dissatisfied with the degree
of activity displayed by the creditor in the pursuit of his principal, he may pay the debt
himself and become subrogated to all the rights and remedies of the creditor. 4 9
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted
by the creditor without change in the time when the debt might be demanded, does not
constitute an extension of the time of payment, which would release the surety. 5 0 In order
to constitute an extension discharging the surety, it should appear that the extension was
for a definite period , pursuant to an enforceable agreement between the principal and the
creditor, and that it was made without the consent of the surety or with a reservation of
rights with respect to him. The contract must be one which precludes the creditor from, or
at least hinders him in, enforcing the principal contract within the period during which he
could otherwise have enforced it, and which precludes the surety from paying the debt. 5 1
None of these elements are present in the instant case. Verily, the mere fact that
respondent corporation gave the principal debtors an extended period of time within
which to comply with their obligation did not effectively absolve herein petitioner from the
consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to
show that she has been discharged by some act of the creditor, 52 herein respondent
corporation, failing in which we cannot grant the relief prayed for. LLjur

As a final issue, petitioner claims that assuming that her liability is solidary, the interests
and penalty chargers on the outstanding balance of the loan cannot be imposed for being
illegal and unconscionable. Petitioner additionally theorizes that respondent corporation
intentionally delayed the collection of the loan in order that the interests and penalty
charges would accumulate. The statement, likewise traversed by said respondent, is
misleading.
In an affidavit 5 3 executed by petitioner, which was attached to her petition, she stated,
among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn
Azarraga's loan has been released and that she has not paid the same upon its
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maturity. I received a telephone call from Mr. Augusto Banusing of MB Lending
informing me of this fact and of my liability arising from the promissory note
which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmeña
Azarraga. At the same time, I offered to pay MB Lending the outstanding balance
of the principal obligation should he fail to collect from Merlyn and Osmeña
Azarraga. Mr. Banusing advised me not to worry because he will try to collect first
from Merlyn and Osmeña Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr.
Banusing who reminded that the loan of Merlyn and Osmeña Azarraga, together
with interest and penalties thereon, has not been paid. Since I had no available
funds at that time, I offered to pay MB Lending by delivering to them a parcel of
land which I own. Mr. Banusing's secretary, however, refused my offer for the
reason that they are not interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint
filed against me by MB Lending before the RTC-Iloilo. After learning that a
complaint was filed against me, I instructed Sheila Gatia to go to MB Lending and
reiterate my first offer to pay the outstanding balance of the principal obligation
of Merlyn Azarraga in the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty.
Venus, counsel of MB Lending.

13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my
offer to pay the outstanding balance of the principal obligation loan (sic) of
Merlyn and Osmeña Azarraga is acceptable. Later, Atty. Venus informed Ms.
Gatia that my offer is not acceptable to Mr. Banusing.

The purported offer to pay made by petitioner can not be deemed sufficient and
substantial in order to effectively discharge her from liability. There are a number of
circumstances which conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment
from petitioner. It was petitioner who initially requested that the creditor try to collect from
her principal first, and she offered to pay only in case the creditor fails to collect. The delay,
if any, was occasioned by the fact that respondent corporation merely acquiesced to the
request of petitioner. At any rate, there was here no actual offer of payment to speak of
but only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of
land which she owned. Respondent corporation was acting well within its rights when it
refused to accept the offer. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value, or more valuable than that
which is due. 5 4 The obligee is entitled to demand fulfillment of the obligation or
performance as stipulated. A change of the object of the obligation would constitute
novation requiring the express consent of the parties. 5 5

3. After the complaint was filed against her, petitioner reiterated her offer to pay the
outstanding balance of the obligation in the amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation cannot be blamed for refusing the
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amount being offered because it fell way below the amount it had computed, based on the
stipulated interests and penalty charges, as owing and due from herein petitioner. A debt
shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may be. 5 6 In
other words, the prestation must be fulfilled completely. A person entering into a contract
has a right to insist on its performance in all particulars. 5 7
Petitioner cannot compel respondent corporation to accept the amount she is willing to
pay because the moment the latter accepts the performance, knowing its incompleteness
or irregularity, and without expressing any protest or objection, then the obligation shall be
deemed fully complied with. 58 Precisely, this is what respondent corporation wanted to
avoid when it continually refused to settle with petitioner at less than what was actually
due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per
month and attorney's fees equivalent to 25% of the total amount due are highly inequitable
and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the filing of the present case. Article 1229
of the Civil Code provides that the court shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor. And, even if
there has been no performance, the penalty may also be reduced if it is iniquitous or
leonine.
In a case previously decided by this Court which likewise involved private respondent M.B.
Lending Corporation, and which is substantially on all fours with the one at bar, we decided
to eliminate altogether the penalty interest for being excessive and unwarranted under the
following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the
economic impact of the penalty interest of three percent (3%) per month on total
amount due but unpaid should be equitably reduced. The purpose for which the
penalty interest is intended — that is, to punish the obligor — will have been
sufficiently served by the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount loaned was only
P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy
(albeit still lawful) regular compensatory interest, the penalty interest stipulated in
the parties' promissory note is iniquitous and unconscionable and may be
equitably reduced further by eliminating such penalty interest altogether. 5 9

Accordingly, the penalty interest of 3% per month being imposed on petitioner should
similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that
even with an agreement thereon between the parties, the court may nevertheless reduce
such attorney's fees fixed in the contract when the amount thereof appears to be
unconscionable or unreasonable. 6 0 To that end, it is not even necessary to show, as in
other contracts, that it is contrary to morals or public policy. 6 1 The grant of attorney's fees
equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate,
considering the minimal unpaid amount involved and the extent of the work involved in this
simple action for collection of a sum of money. We, therefore, hold that the amount of
P10,000.00 as and for attorney's fee would be sufficient in this case. 6 2
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WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the
MODIFICATION that the penalty interest of 3% per month is hereby deleted and the award
of attorney's fees is reduced to P10,000.00.
SO ORDERED. LLjur

Melo, Puno, Mendoza and Martinez, JJ .,concur.


Footnotes

1. Annex C, Petition; Rollo, 49.

2. Rollo, 38.
3. Annex D, id., ibid., 51.
4. Annex H, id., ibid., 69.

5. Rollo, 76.
6. Annex I, Petition; Rollo, 73; penned by Presiding Judge Tito G. Gustilo.

7. Annex A, id., ibid., 36; Associate Justice Jose C. de la Rama, ponente, with Associate
Justices Emeterio C. Cui and Eduardo G. Montenegro, concurring.

8. Rollo, 50.
9. Art. 1377. The interpretation of obscure words or stipulations in a contract shall not
favor the party who caused the obscurity.

10. Article 1229, Civil Code.


11. Citing Article 2031, id.

12. Philippine Airlines, Inc. vs. Court of Appeals, et al., G.R. No. 119706, March 14, 1996,
255 SCRA 48.
13. Abella vs. Court of Appeals, et al., G.R. No. 107606, June 20, 1996, 257 SCRA 482.
14. Inciong, Jr. vs. Court of Appeals, et al., G.R. No. 96405, June 26, 1996, 257 SCRA 578.
15. 72 CJS, Principal and Surety, § 83, 565.
16. Churchill vs. Bradley, 5 A. 189.
17. Northern State Bank of Grand Forks vs. Bellamy, 125 N. W. 888.
18. Shearer vs. R.S. Peele & Co., 36 N.E. 455.
19. W.T. Rawleigh Co. vs. Overstreet, et al., 32 S. E. 2d 574.
20. Manry vs. Waxelbaum Co., 33 S. E. 701.
21. 40A Words and Phrases 429.

22. Erbelding vs. Noland, Co., Inc., 64 S. E. 2d 218.


23. Covey, et al. vs. Schiesswohl, 114 P. 292.
24. Article 1371, Civil Code.

25. Rollo, 67-68.


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26. 18A Words and Phrases 657.

27. Hall, et al. vs. Weaver, 34 F. 104.


28. Howell vs. Commissioner of Internal Revenue, 69 F. 2d 447.
29. Shores-Mueller Co. vs. Palmer, et al., 216 S. W. 295.
30. Treweek vs. Howard, et al., 39 P. 20.
31. W.T. Rawleigh Co. vs. Overstreet, et al., 32 S. E. 2d 574.
32. Liquidating Midland Bank vs. Stecker, et al., 179 N. E. 504.
33. Article 1169, Civil Code.

34. Rowe, et al. vs. Bank of New Brockton, 92 So. 643.


35. 74 Am Jur 2d, Principal and Surety, § 35, 36.
36. Smith vs. US , 8 L Ed 130.
37. Rouse, et al. vs. Wooten, 53 S. E. 430.
38. Hall vs. Weaver, 34 F. 104.
39. Christenson vs. Diversified Builders, Inc., et al., 331 F. 2d 992.
40. 74 Am Jur 2d, Principal and Surety, § 144, 103.
41. Standard Accident Insurance Co. vs. Standard Oil Co., 133 So. 2d 539; School District
No. 65 of Lincoln County vs. Universal Surety Co., 135 N. W. 2d 232; Depot Realty
Syndicate vs. Enterprise Brewing Co., 171 P. 223.
42. 72 CJS, Principal and Surety, § 287, 744-745.
43. 74 Am Jur 2d, Principal and Surety, § 68, 53-54.

44. First National Bank of Huntington vs. Williams, et al., 26 N. E. 75.


45. National Bank of Commerce vs. Gilvin, 152 S. W. 652.
46. Kerby, et al. vs. State ex rel. Frohmiller, 157 P. 2d 698.
47. 72 CJS, Principal and Surety, § 208, 673.
48. Scott vs. Gaulding, et al., 122 ALR 200.
49. 74 Am Jur 2d, Principal and Surety, § 68, 53.
50. Ibid., id., § 59, 48-49.
51. 72 CJS, Principal and Surety, § 173, 651.

52. Op. cit., § 270, 723.


53. Annex E, Petition; Rollo, 54.

54. Article 1244, Civil Code.

55. Padilla, A., Civil Code Annotated, Vol. IV, 1987 ed., 434.
56. Article 1233, Civil Code.
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57. Tolentino, A., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol.
IV, 1986 ed., 280.

58. Article 1235, Civil Code.

59. Magallanes, et al .vs. Court of Appeals, et al., G.R. No. 112614, May 16, 1994, Third
Division, Minute Resolution.
60. Security Bank & Trust Co., et al. vs. Court of Appeals, et al., G.R. No. 117009, October 11,
1995, 249 SCRA 206.

61. Medco Industrial Corporation, et al. vs. The Hon. Court of Appeals, et al., G.R. No.
84610, November 24, 1988, 167 SCRA 838.

62. Supra, fn. 59.

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FIRST DIVISION

[G.R. No. 140047. July 13, 2004.]

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE


CORPORATION , petitioner, vs . V.P. EUSEBIO CONSTRUCTION, INC.; 3-
PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C.
EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST
INTEGRATED BONDING AND INSURANCE COMPANY, INC. ,
respondents.

DECISION

DAVIDE, JR. , C.J : p

This case is an offshoot of a service contract entered into by a Filipino construction


rm with the Iraqi Government for the construction of the Institute of Physical Therapy-
Medical Center, Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing.
In a complaint led with the Regional Trial Court of Makati City, docketed as Civil
Case No. 91-1906 and assigned to Branch 58, petitioner Philippine Export and Foreign
Loan Guarantee Corporation 1 (hereinafter Philguarantee) sought reimbursement from the
respondents of the sum of money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee
it issued for respondent V.P. Eusebio Construction, Inc. (VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing
and Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical
Therapy–Medical Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project)
to Ajyal Trading and Contracting Company (hereinafter Ajyal), a rm duly licensed with the
Kuwait Chamber of Commerce for a total contract price of ID5,416,089/046 (or about
US$18,739,668). 2
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of
respondent 3-Plex International, Inc. (hereinafter 3-Plex), a local contractor engaged in
construction business, entered into a joint venture agreement with Ajyal wherein the
former undertook the execution of the entire Project, while the latter would be entitled to a
commission of 4% of the contract price. 3 Later, or on 8 April 1981, respondent 3-Plex, not
being accredited by or registered with the Philippine Overseas Construction Board (POCB),
assigned and transferred all its rights and interests under the joint venture agreement to
VPECI, a construction and engineering rm duly registered with the POCB. 4 However, on 2
May 1981, 3-Plex and VPECI entered into an agreement that the execution of the Project
would be under their joint management. 5
The SOB required the contractors to submit (1) a performance bond of
ID271,808/610 representing 5% of the total contract price and (2) an advance payment
bond of ID541,608/901 representing 10% of the advance payment to be released upon
signing of the contract. 6 To comply with these requirements, respondents 3-Plex and
VPECI applied for the issuance of a guarantee with petitioner Philguarantee, a government
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nancial institution empowered to issue guarantees for quali ed Filipino contractors to
secure the performance of approved service contracts abroad. 7
Petitioner Philguarantee approved respondents' application. Subsequently, letters of
guarantee 8 were issued by Philguarantee to the Ra dain Bank of Baghdad covering 100%
of the performance and advance payment bonds, but they were not accepted by SOB.
What SOB required was a letter-guarantee from Ra dain Bank, the government bank of
Iraq. Ra dain Bank then issued a performance bond in favor of SOB on the condition that
another foreign bank, not Philguarantee, would issue a counter-guarantee to cover its
exposure. Al Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee
to Ra dain Bank, but it required a similar counter-guarantee in its favor from the petitioner.
Thus, three layers of guarantees had to be arranged. 9
Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee
issued in favor of Al Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F 1 0 (Performance
Bond Guarantee) in the amount of ID271,808/610 and Letter of Guarantee No. 81-195-F 1 1
(Advance Payment Guarantee) in the amount of ID541,608/901, both for a term of
eighteen months from 25 May 1981. These letters of guarantee were secured by (1) a
Deed of Undertaking 1 2 executed by respondents VPECI, Spouses Vicente P. Eusebio and
Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and (2)
a surety bond 1 3 issued by respondent First Integrated Bonding and Insurance Company,
Inc. (FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the amount
of coverage from P6.4 million to P6.967 million and to change the bank in whose favor the
petitioner's guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait. 1 4
On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service
contract 1 5 for the construction of the Institute of Physical Therapy — Medical
Rehabilitation Center, Phase II, in Baghdad, Iraq, wherein the joint venture contractor
undertook to complete the Project within a period of 547 days or 18 months. Under the
Contract, the Joint Venture would supply manpower and materials, and SOB would refund
to the former 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the
exchange rate of 1 Dinar to 3.37777 US Dollars. 1 6
The construction, which was supposed to start on 2 June 1981, commenced only on
the last week of August 1981. Because of this delay and the slow progress of the
construction work due to some setbacks and di culties, the Project was not completed
on 15 November 1982 as scheduled. But in October 1982, upon foreseeing the
impossibility of meeting the deadline and upon the request of Al Ahli Bank, the joint venture
contractor worked for the renewal or extension of the Performance Bond and Advance
Payment Guarantee. Petitioner's Letters of Guarantee Nos. 81-194-F (Performance Bond)
and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982 were then
renewed or extended to 9 February 1983 and 9 March 1983, respectively. 1 7 The surety
bond was also extended for another period of one year, from 12 May 1982 to 12 May
1983. 1 8 The Performance Bond was further extended twelve times with validity of up to 8
December 1986, 1 9 while the Advance Payment Guarantee was extended three times more
up to 24 May 1984 when the latter was cancelled after full refund or reimbursement by the
joint venture contractor. 2 0 The surety bond was likewise extended to 8 May 1987. 2 1
As of March 1986, the status of the Project was 51% accomplished, meaning the
structures were already nished. The remaining 47% consisted in electro-mechanical
works and the 2%, sanitary works, which both required importation of equipment and
materials. 2 2
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On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner
demanding full payment of its performance bond counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986, respondent
VPECI requested Iraq Trade and Economic Development Minister Mohammad Fadhi
Hussein to recall the telex call on the performance guarantee for being a drastic action in
contravention of its mutual agreement with the latter that (1) the imposition of penalty
would be held in abeyance until the completion of the project; and (2) the time extension
would be open, depending on the developments on the negotiations for a foreign loan to
nance the completion of the project. 2 3 It also wrote SOB protesting the call for lack of
factual or legal basis, since the failure to complete the Project was due to (1) the Iraqi
government's lack of foreign exchange with which to pay its (VPECI's) accomplishments
and (2) SOB's noncompliance for the past several years with the provision in the contract
that 75% of the billings would be paid in US dollars. 2 4 Subsequently, or on 19 November
1986, respondent VPECI advised the petitioner not to pay yet Al Ahli Bank because efforts
were being exerted for the amicable settlement of the Project. 2 5
On 14 April 1987, the petitioner received another telex message from Al Ahli Bank
stating that it had already paid to Ra dain Bank the sum of US$876,564 under its letter of
guarantee, and demanding reimbursement by the petitioner of what it paid to the latter
bank plus interest thereon and related expenses. 2 6
Both petitioner Philguarantee and respondent VPECI sought the assistance of some
government agencies of the Philippines. On 10 August 1987, VPECI requested the Central
Bank to hold in abeyance the payment by the petitioner "to allow the diplomatic machinery
to take its course, for otherwise, the Philippine government, through the Philguarantee and
the Central Bank, would become instruments of the Iraqi Government in consummating a
clear act of injustice and inequity committed against a Filipino contractor." 2 7
On 27 August 1987, the Central Bank authorized the remittance for its account of
the amount of US$876,564 (equivalent to ID271,808/610) to Al Ahli Bank representing full
payment of the performance counter-guarantee for VPECI's project in Iraq. 2 8
On 6 November 1987, Philguarantee informed VPECI that it would remit
US$876,564 to Al Ahli Bank, and reiterated the joint and solidary obligation of the
respondents to reimburse the petitioner for the advances made on its counter-guarantee.
29

The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21
January 1988. 3 0 Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait
US$59,129.83 representing interest and penalty charges demanded by the latter bank. 3 1
On 19 June 1991, the petitioner sent to the respondents separate letters demanding
full payment of the amount of P47,872,373.98 plus accruing interest, penalty charges, and
10% attorney's fees pursuant to their joint and solidary obligations under the deed of
undertaking and surety bond. 3 2 When the respondents failed to pay, the petitioner led on
9 July 1991 a civil case for collection of a sum of money against the respondents before
the RTC of Makati City.

After due trial, the trial court ruled against Philguarantee and held that the latter had
no valid cause of action against the respondents. It opined that at the time the call was
made on the guarantee which was executed for a speci c period, the guarantee had
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already lapsed or expired. There was no valid renewal or extension of the guarantee for
failure of the petitioner to secure respondents' express consent thereto. The trial court
also found that the joint venture contractor incurred no delay in the execution of the
Project. Considering the Project owner's violations of the contract which rendered
impossible the joint venture contractor's performance of its undertaking, no valid call on
the guarantee could be made. Furthermore, the trial court held that no valid notice was rst
made by the Project owner SOB to the joint venture contractor before the call on the
guarantee. Accordingly, it dismissed the complaint, as well as the counterclaims and
cross-claim, and ordered the petitioner to pay attorney's fees of P100,000 to respondents
VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs.
33

In its 14 June 1999 Decision, 3 4 the Court of Appeals a rmed the trial court's
decision, ratiocinating as follows:
First, appellant cannot deny the fact that it was fully aware of the status of
project implementation as well as the problems besetting the contractors,
between 1982 to 1985, having sent some of its people to Baghdad during that
period. The successive renewals/extensions of the guarantees in fact, was
prompted by delays, not solely attributable to the contractors, and such extension
understandably allowed by the SOB (project owner) which had not anyway
complied with its contractual commitment to tender 75% of payment in US
Dollars, and which still retained overdue amounts collectible by VPECI.

xxx xxx xxx


Second, appellant was very much aware of the violations committed by the
SOB of its contractual undertakings with VPECI, principally, the payment of
foreign currency (US$) for 75% of the total contract price, as well as of the
complications and injustice that will result from its payment of the full amount of
the performance guarantee, as evident in PHILGUARANTEE's letter dated 13 May
1987 . . .

xxx xxx xxx


Third, appellant was fully aware that SOB was in fact still obligated to the
Joint Venture and there was still an amount collectible from and still being
retained by the project owner, which amount can be set-off with the sum covered
by the performance guarantee.
xxx xxx xxx
Fourth, well-apprised of the above conditions obtaining at the Project site
and cognizant of the war situation at the time in Iraq, appellant, though earlier has
made representations with the SOB regarding a possible amicable termination of
the Project as suggested by VPECI, made a complete turn-around and insisted on
acting in favor of the unjustified "call" by the foreign banks. 3 5

The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that
the Court of Appeals erred in affirming the trial court's ruling that DHSaCA

I
. . . RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE
OF ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO
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RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.
II
. . . PETITIONER CANNOT CLAIM SUBROGATION.

III
. . . IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS
LIABLE UNDER THEIR DEED OF UNDERTAKING. 3 6

The main issue in this case is whether the petitioner is entitled to reimbursement of
what it paid under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait
based on the deed of undertaking and surety bond from the respondents.
The petitioner asserts that since the guarantee it issued was absolute,
unconditional, and irrevocable the nature and extent of its liability are analogous to those
of suretyship. Its liability accrued upon the failure of the respondents to nish the
construction of the Institute of Physical Therapy Buildings in Baghdad.
By guaranty a person, called the guarantor, binds himself to the creditor to ful ll the
obligation of the principal debtor in case the latter should fail to do so. If a person binds
himself solidarily with the principal debtor, the contract is called suretyship. 3 7
Strictly speaking, guaranty and surety are nearly related, and many of the principles
are common to both. In both contracts, there is a promise to answer for the debt or
default of another. However, in this jurisdiction, they may be distinguished thus:
1. A surety is usually bound with his principal by the same instrument
executed at the same time and on the same consideration. On the
other hand, the contract of guaranty is the guarantor's own separate
undertaking often supported by a consideration separate from that
supporting the contract of the principal; the original contract of his
principal is not his contract.
2. A surety assumes liability as a regular party to the undertaking; while
the liability of a guarantor is conditional depending on the failure of
the primary debtor to pay the obligation.
3. The obligation of a surety is primary, while that of a guarantor is
secondary.
4. A surety is an original promissor and debtor from the beginning, while
a guarantor is charged on his own undertaking.
5. A surety is, ordinarily, held to know every default of his principal;
whereas a guarantor is not bound to take notice of the non-
performance of his principal.
6. Usually, a surety will not be discharged either by the mere indulgence
of the creditor to the principal or by want of notice of the default of
the principal, no matter how much he may be injured thereby. A
guarantor is often discharged by the mere indulgence of the creditor
to the principal, and is usually not liable unless noti ed of the default
of the principal. 3 8

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In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-
194-F, which provides in part as follows:
In consideration of your issuing the above performance guarantee/counter-
guarantee, we hereby unconditionally and irrevocably guarantee, under our Ref.
No. LG-81-194 F to pay you on your rst written or telex demand Iraq Dinars Two
Hundred Seventy One Thousand Eight Hundred Eight and ls six hundred ten
(ID271,808/610) representing 100% of the performance bond required of V.P.
EUSEBIO for the construction of the Physical Therapy Institute, Phase II, Baghdad,
Iraq, plus interest and other incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay you 100% of the
obligation unpaid but in no case shall such amount exceed Iraq Dinars (ID)
271,808/610 plus interest and other incidental expenses . . . (Emphasis supplied)
39

Guided by the abovementioned distinctions between a surety and a guaranty, as well


as the factual milieu of this case, we nd that the Court of Appeals and the trial court were
correct in ruling that the petitioner is a guarantor and not a surety. That the guarantee
issued by the petitioner is unconditional and irrevocable does not make the petitioner a
surety. As a guaranty, it is still characterized by its subsidiary and conditional quality
because it does not take effect until the ful llment of the condition, namely, that the
principal obligor should fail in his obligation at the time and in the form he bound himself.
4 0 In other words, an unconditional guarantee is still subject to the condition that the
principal debtor should default in his obligation rst before resort to the guarantor could
be had. A conditional guaranty, as opposed to an unconditional guaranty, is one which
depends upon some extraneous event, beyond the mere default of the principal, and
generally upon notice of the principal's default and reasonable diligence in exhausting
proper remedies against the principal. 4 1
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of
default by respondent VPECI the petitioner shall pay, the obligation assumed by the
petitioner was simply that of an unconditional guaranty, not conditional guaranty. But as
earlier ruled the fact that petitioner's guaranty is unconditional does not make it a surety.
Besides, surety is never presumed. A party should not be considered a surety where the
contract itself stipulates that he is acting only as a guarantor. It is only when the guarantor
binds himself solidarily with the principal debtor that the contract becomes one of
suretyship. 4 2
Having determined petitioner's liability as guarantor, the next question we have to
grapple with is whether the respondent contractor has defaulted in its obligations that
would justify resort to the guaranty. This is a mixed question of fact and law that is better
addressed by the lower courts, since this Court is not a trier of facts.
It is a fundamental and settled rule that the ndings of fact of the trial court and the
Court of Appeals are binding or conclusive upon this Court unless they are not supported
by the evidence or unless strong and cogent reasons dictate otherwise. 4 3 The factual
ndings of the Court of Appeals are normally not reviewable by us under Rule 45 of the
Rules of Court except when they are at variance with those of the trial court. 4 4 The trial
court and the Court of Appeals were in unison that the respondent contractor cannot be
considered to have defaulted in its obligations because the cause of the delay was not
primarily attributable to it.
A corollary issue is what law should be applied in determining whether the
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respondent contractor has defaulted in the performance of its obligations under the
service contract. The question of whether there is a breach of an agreement, which
includes default or mora, 4 5 pertains to the essential or intrinsic validity of a contract. 4 6

No con icts rule on essential validity of contracts is expressly provided for in our
laws. The rule followed by most legal systems, however, is that the intrinsic validity of a
contract must be governed by the lex contractus or "proper law of the contract." This is the
law voluntarily agreed upon by the parties (the lex loci voluntatis) or the law intended by
them either expressly or implicitly (the lex loci intentionis). The law selected may be
implied from such factors as substantial connection with the transaction, or the nationality
or domicile of the parties. 4 7 Philippine courts would do well to adopt the rst and most
basic rule in most legal systems, namely, to allow the parties to select the law applicable
to their contract, subject to the limitation that it is not against the law, morals, or public
policy of the forum and that the chosen law must bear a substantive relationship to the
transaction. 4 8
It must be noted that the service contract between SOB and VPECI contains no
express choice of the law that would govern it. In the United States and Europe, the two
rules that now seem to have emerged as "kings of the hill" are (1) the parties may choose
the governing law; and (2) in the absence of such a choice, the applicable law is that of the
State that "has the most signi cant relationship to the transaction and the parties." 4 9
Another authority proposed that all matters relating to the time, place, and manner of
performance and valid excuses for non-performance are determined by the law of the
place of performance or lex loci solutionis, which is useful because it is undoubtedly
always connected to the contract in a significant way. 5 0
In this case, the laws of Iraq bear substantial connection to the transaction, since
one of the parties is the Iraqi Government and the place of performance is in Iraq. Hence,
the issue of whether respondent VPECI defaulted in its obligations may be determined by
the laws of Iraq. However, since that foreign law was not properly pleaded or proved, the
presumption of identity or similarity, otherwise known as the processual presumption,
comes into play. Where foreign law is not pleaded or, even if pleaded, is not proved, the
presumption is that foreign law is the same as ours. 5 1
Our law, speci cally Article 1169, last paragraph, of the Civil Code, provides: "In
reciprocal obligations, neither party incurs in delay if the other party does not comply or is
not ready to comply in a proper manner with what is incumbent upon him."
Default or mora on the part of the debtor is the delay in the ful llment of the
prestation by reason of a cause imputable to the former. 5 2 It is the non-ful llment of an
obligation with respect to time. 5 3
It is undisputed that only 51.7% of the total work had been accomplished. The 48.3%
un nished portion consisted in the purchase and installation of electro-mechanical
equipment and materials, which were available from foreign suppliers, thus requiring US
Dollars for their importation. The monthly billings and payments made by SOB 5 4 reveal
that the agreement between the parties was a periodic payment by the Project owner to
the contractor depending on the percentage of accomplishment within the period. 5 5 The
payments were, in turn, to be used by the contractor to nance the subsequent phase of
the work. 5 6 However, as explained by VPECI in its letter to the Department of Foreign
Affairs (DFA), the payment by SOB purely in Dinars adversely affected the completion of
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the project; thus: IaEHSD

4. Despite protests from the plaintiff, SOB continued paying the


accomplishment billings of the Contractor purely in Iraqi Dinars and which
payment came only after some delays.
5. SOB is fully aware of the following:
xxx xxx xxx

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would


need foreign currency (US$), to nance the purchase of various equipment,
materials, supplies, tools and to pay for the cost of project management,
supervision and skilled labor not available in Iraq and therefore have to be
imported and or obtained from the Philippines and other sources outside Iraq.

5.3 That the Ministry of Labor and Employment of the Philippines


requires the remittance into the Philippines of 70% of the salaries of Filipino
workers working abroad in US Dollars;
xxx xxx xxx
5.5 That the Iraqi Dinar is not a freely convertible currency such that
the same cannot be used to purchase equipment, materials, supplies, etc. outside
of Iraq;
5.6 That most of the materials speci ed by SOB in the CONTRACT are
not available in Iraq and therefore have to be imported;
5.7 That the government of Iraq prohibits the bringing of local currency
(Iraqui Dinars) out of Iraq and hence, imported materials, equipment, etc., cannot
be purchased or obtained using Iraqui Dinars as medium of acquisition.
xxx xxx xxx
8. Following the approved construction program of the CONTRACT,
upon completion of the civil works portion of the installation of equipment for the
building, should immediately follow, however, the CONTRACT speci ed that these
equipment which are to be installed and to form part of the PROJECT have to be
procured outside Iraq since these are not being locally manufactured. Copy of the
relevant portion of the Technical Speci cation is hereto attached as Annex "C"
and made an integral part hereof;
xxx xxx xxx

10. Due to the lack of Foreign currency in Iraq for this purpose, and if
only to assist the Iraqi government in completing the PROJECT, the Contractor
without any obligation on its part to do so but with the knowledge and consent of
SOB and the Ministry of Housing & Construction of Iraq, offered to arrange on
behalf of SOB, a foreign currency loan, through the facilities of Circle International
S.A., the Contractor's Sub-contractor and SACE MEDIO CREDITO which will act as
the guarantor for this foreign currency loan.
Arrangements were rst made with Banco di Roma. Negotiation started in
June 1985. SOB is informed of the developments of this negotiation, attached is
a copy of the draft of the loan Agreement between SOB as the Borrower and
Agent. The Several Banks, as Lender, and counter-guaranteed by Istituto Centrale
Per II Credito A Medio Termine (Mediocredito) Sezione Speciale Per
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L'Assicurazione Del Credito All' Exportazione (Sace). Negotiations went on and
continued until it suddenly collapsed due to the reported default by Iraq in the
payment of its obligations with Italian government, copy of the news clipping
dated June 18, 1986 is hereto attached as Annex "D" to form an integral part
hereof;
15. On September 15, 1986, Contractor received information from
Circle International S.A. that because of the news report that Iraq defaulted in its
obligations with European banks, the approval by Banco di Roma of the loan to
SOB shall be deferred inde nitely, a copy of the letter of Circle International
together with the news clippings are hereto attached as Annexes "F" and "F-1",
respectively. 5 7

As found by both the Court of Appeals and the trial court, the delay or the non-
completion of the Project was caused by factors not imputable to the respondent
contractor. It was rather due mainly to the persistent violations by SOB of the terms and
conditions of the contract, particularly its failure to pay 75% of the accomplished work in
US Dollars. Indeed, where one of the parties to a contract does not perform in a proper
manner the prestation which he is bound to perform under the contract, he is not entitled
to demand the performance of the other party. A party does not incur in delay if the other
party fails to perform the obligation incumbent upon him.
The petitioner, however, maintains that the payments by SOB of the monthly billings
in purely Iraqi Dinars did not render impossible the performance of the Project by VPECI.
Such posture is quite contrary to its previous representations. In his 26 March 1987 letter
to the O ce of the Middle Eastern and African Affairs (OMEAA), DFA, Manila, petitioner's
Executive Vice-President Jesus M. Tañedo stated that while VPECI had taken every
possible measure to complete the Project, the war situation in Iraq, particularly the lack of
foreign exchange, was proving to be a great obstacle; thus:
VPECI has taken every possible measure for the completion of the project
but the war situation in Iraq particularly the lack of foreign exchange is proving to
be a great obstacle. Our performance counterguarantee was called last 26
October 1986 when the negotiations for a foreign currency loan with the Italian
government through Banco de Roma bogged down following news report that
Iraq has defaulted in its obligation with major European banks. Unless the
situation in Iraq is improved as to allay the bank's apprehension, there is no
assurance that the project will ever be completed. 5 8

In order that the debtor may be in default it is necessary that the following requisites
be present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance because it
must appear that the tolerance or benevolence of the creditor must have ended. 5 9
As stated earlier, SOB cannot yet demand complete performance from VPECI
because it has not yet itself performed its obligation in a proper manner, particularly the
payment of the 75% of the cost of the Project in US Dollars. The VPECI cannot yet be said
to have incurred in delay. Even assuming that there was delay and that the delay was
attributable to VPECI, still the effects of that delay ceased upon the renunciation by the
creditor, SOB, which could be implied when the latter granted several extensions of time to
the former. 6 0 Besides, no demand has yet been made by SOB against the respondent
contractor. Demand is generally necessary even if a period has been xed in the obligation.
And default generally begins from the moment the creditor demands judicially or extra-
judicially the performance of the obligation. Without such demand, the effects of default
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will not arise. 6 1

Moreover, the petitioner as a guarantor is entitled to the bene t of excussion, that is,
it cannot be compelled to pay the creditor SOB unless the property of the debtor VPECI
has been exhausted and all legal remedies against the said debtor have been resorted to
by the creditor. 6 2 It could also set up compensation as regards what the creditor SOB
may owe the principal debtor VPECI. 6 3 In this case, however, the petitioner has clearly
waived these rights and remedies by making the payment of an obligation that was yet to
be shown to be rightfully due the creditor and demandable of the principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture
contractor had collectibles from SOB which could be set off with the amount covered by
the performance guarantee. In February 1987, the OMEAA transmitted to the petitioner a
copy of a telex dated 10 February 1987 of the Philippine Ambassador in Baghdad, Iraq,
informing it of the note verbale sent by the Iraqi Ministry of Foreign Affairs stating that the
past due obligations of the joint venture contractor from the petitioner would "be deducted
from the dues of the two contractors." 6 4
Also, in the project situationer attached to the letter to the OMEAA dated 26 March
1987, the petitioner raised as among the arguments to be presented in support of the
cancellation of the counter-guarantee the fact that the amount of ID281,414/066 retained
by SOB from the Project was more than enough to cover the counter-guarantee of
ID271,808/610; thus:
6.1 Present the following arguments in cancelling the counterguarantee:
• The Iraqi Government does not have the foreign exchange to fulfill its
contractual obligations of paying 75% of progress billings in US
dollars.
xxx xxx xxx
• It could also be argued that the amount of ID281,414/066 retained by
SOB from the proposed project is more than the amount of the
outstanding counterguarantee. 6 5

In a nutshell, since the petitioner was aware of the contractor's outstanding


receivables from SOB, it should have set up compensation as was proposed in its project
situationer. IHTASa

Moreover, the petitioner was very much aware of the predicament of the
respondents. In fact, in its 13 May 1987 letter to the OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the completion of the project was
mainly due to SOB's violation of contract terms and as such, call on the
guarantee has no basis.
While PHILGUARANTEE is prepared to honor its commitment under the
guarantee, PHILGUARANTEE does not want to be an instrument in any case of
inequity committed against a Filipino contractor. It is for this reason that we are
constrained to seek your assistance not only in ascertaining the veracity of Al Ahli
Bank's claim that it has paid Ra dain Bank but possibly averting such an event.
As any payment effected by the banks will complicate matters, we cannot help
underscore the urgency of VPECI's bid for government intervention for the
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amicable termination of the contract and release of the performance guarantee.
66

But surprisingly, though fully cognizant of SOB's violations of the service contract
and VPECI's outstanding receivables from SOB, as well as the situation obtaining in the
Project site compounded by the Iran-Iraq war, the petitioner opted to pay the second layer
guarantor not only the full amount of the performance bond counter-guarantee but also
interests and penalty charges.
This brings us to the next question: May the petitioner as a guarantor secure
reimbursement from the respondents for what it has paid under Letter of Guarantee No.
81-194-F?
As a rule, a guarantor who pays for a debtor should be indemni ed by the latter 6 7
and would be legally subrogated to the rights which the creditor has against the debtor. 6 8
However, a person who makes payment without the knowledge or against the will of the
debtor has the right to recover only insofar as the payment has been bene cial to the
debtor. 6 9 If the obligation was subject to defenses on the part of the debtor, the same
defenses which could have been set up against the creditor can be set up against the
paying guarantor. 7 0
From the ndings of the Court of Appeals and the trial court, it is clear that the
payment made by the petitioner guarantor did not in any way bene t the principal debtor,
given the project status and the conditions obtaining at the Project site at that time.
Moreover, the respondent contractor was found to have valid defenses against SOB, which
are fully supported by evidence and which have been meritoriously set up against the
paying guarantor, the petitioner in this case. And even if the deed of undertaking and the
surety bond secured petitioner's guaranty, the petitioner is precluded from enforcing the
same by reason of the petitioner's undue payment on the guaranty. Rights under the deed
of undertaking and the surety bond do not arise because these contracts depend on the
validity of the enforcement of the guaranty.
The petitioner guarantor should have waited for the natural course of guaranty: the
debtor VPECI should have, in the rst place, defaulted in its obligation and that the creditor
SOB should have rst made a demand from the principal debtor. It is only when the debtor
does not or cannot pay, in whole or in part, that the guarantor should pay. 7 1 When the
petitioner guarantor in this case paid against the will of the debtor VPECI, the debtor
VPECI may set up against it defenses available against the creditor SOB at the time of
payment. This is the hard lesson that the petitioner must learn.
As the government arm in pursuing its objective of providing "the necessary support
and assistance in order to enable . . . [Filipino exporters and contractors to operate viably
under the prevailing economic and business conditions," 7 2 the petitioner should have
exercised prudence and caution under the circumstances. As aptly put by the Court of
Appeals, it would be the height of inequity to allow the petitioner to pass on its losses to
the Filipino contractor VPECI which had sternly warned against paying the Al Ahli Bank and
constantly apprised it of the developments in the Project implementation.
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit,
and the decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
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Panganiban, Ynares-Santiago, Carpio and Azcuna, JJ ., concur.

Footnotes

1. Now known as the Trade Investment Development Corporation of the Philippines.

2. Exhibit "V" and "2-3," Original Record, vol. III (hereinafter OR III), 395.
3. Exh. "12-E," OR III, 433.

4. Exh. "12-E," OR III, 433.


5. Exh. "9-A," OR III, 416.

6. Exh. "12-G," OR III, 435.

7. Exh. "V," OR III, 395.


8. Exh. "13-V," OR III, 447.

9. CA Decision, 3.
10. Exh. "A," OR III, 49.

11. Exh. "B," OR III, 64.

12. Exh. "11," OR III, 421.


13. Exh. "12," OR III, 81.

14. Exh. "E-1," OR III, 83.


15. Exh. "1," OR III, 276.

16. Exh. "1-J," OR III, 282.

17. Exh. "A-1," OR III, 51.


18. Exh. "E-2," OR III, 84.

19. Exhs. "A-2" to "A-13," OR III, 51-63.


20. Exhs. "B-2" to "B-4," OR III, 67-69.

21. Exhs. "E" to "E-12," OR III, 84.

22. TSN, 10 April 1992, 41-44.


23. Exh. "22," OR III, 344-345.

24. Exh. "40," OR III, 366.

25. Exh. "16," OR III, 220.


26. Exh. "G-12-a," OR III, 207.

27. Exh. "7-A," OR III, 306.


28. Exh. "G-12-g," OR III, 213.

29. Exh. "I," OR III, 230.


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30. Exh. "G-12-h," OR III, 214.
31. Exhs. "G-13-d" to "G-13-f," OR III, 220-222; Exh. "G-12-h," OR III, 214.

32. Exhs. "Q" to "T," OR III, 254–263.


33. Per Judge Zosimo Z. Angeles. Rollo, 72-79.

34. Per Associate Justice Martin S. Villarama, Jr. with Associate Justices Angelina
Sandoval-Gutierrez (now Supreme Court Associate Justice) and Romeo A. Brawner
concurring. Rollo, 48-71.
35. Rollo, 61-68.
36. Id., 293-294.
37. Article 2047, Civil Code.
38. E. Zobel Inc. v. CA, G.R. No. 113931, 6 May 1998, 290 SCRA 1; VI AMBROSIO PADILLA,
CIVIL LAW 497-498 (5th ed. 1969)(hereinafter PADILLA).

39. Exh. "A," OR III, 49-50.


40. VI PADILLA 494.

41. Black's Law Dictionary 635 (5th ed. 1979).


42. Art. 2047, Civil Code.

43. Alba v. Court of Appeals, G.R. No. 120066, 9 September 1999, 314 SCRA 36.
44. Development Bank of the Philippines v. Court of Appeals, G.R. No. 119712, 29 January
1999, 302 SCRA 362.
45. DISEDERIO P. JURADO, COMMENTS AND JURISPRUDENCE ON OBLIGATIONS AND
CONTRACTS 49 (7th Revised ed. 1980) (hereinafter JURADO).

46. JOVITO R. SALONGA, PRIVATE INTERNATIONAL LAW 350 (1995 ed.) (hereinafter
SALONGA).

47. EDGARDO L. PARAS, PHILIPPINE CONFLICT OF LAWS 414 (6th ed. 1984).

48. SALONGA, 356.


49. Id., 355.
50. JORGE R. COQUIA & ELIZABETH A. PANGALANGAN, CONFLICT OF LAWS 418 (1995
ed.).
51. Lim v. Collector of Customs, 36 Phil. 472 (1917); International Harvester Co. v.
Hamburg-American Line, 42 Phil. 845; Miciano v. Brimo, 50 Phil. 867 (1924).
52. IV ARTURO M. TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL
CODE OF THE PHILIPPINES 101 (hereinafter TOLENTINO).
53. JURADO, 50.

54. Exhs. "16" to "16-O," OR III, 454-469.

55. See Court of Appeals' Decision, 19, Rollo, 66; RTC's Decision, 22, Rollo, 93.
56. RTC's Decision, 22; Rollo, 93.
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57. Exhs. "4-A" to "4-D," OR III, 296-298.

58. Exh. "25," OR III, 352.


59. IV TOLENTINO 110.

60. Id., 102.


61. Id., 110.
62. Art. 2058, Civil Code.

63. Art. 1280, Civil Code.


64. Exh. "23," OR III, 348-349.

65. Exh. "25-E," OR III, 355.


66. Exh. "5," OR III, 303-304.

67. Art. 2066, Civil Code.

68. Arts. 1302(3) and 2067, Civil Code.


69. Art. 1236, second par., Civil Code.

70. VI PADILLA, 545.


71. V TOLENTINO, 521.

72. 4th Whereas Clause of Executive Order No. 185, which took effect on 5 June 1987.

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FIRST DIVISION

[G.R. No. 145578. November 18, 2005.]

JOSE C. TUPAZ IV and PETRONILA C. TUPAZ , petitioners, vs . THE


COURT OF APPEALS and BANK OF THE PHILIPPINE ISLANDS ,
respondents.

George L. Howard for petitioners.


Benedicto Versoza Gealogo & Burkley for private respondent.

SYLLABUS

1. MERCANTILE LAW; PRIVATE CORPORATIONS; INDIVIDUALS ACTING AS


CORPORATE AGENTS ARE NOT PERSONALLY LIABLE FOR ANY DEBTS THEY INCURRED
ACTING IN SUCH CAPACITY; EXCEPTION. — A corporation, being a juridical entity, may act
only through its directors, o cers, and employees. Debts incurred by these individuals,
acting as such corporate agents, are not theirs but the direct liability of the corporation
they represent. As an exception, directors or o cers are personally liable for the
corporation's debts only if they so contractually agree or stipulate.
2. ID.; ID.; CORPORATE OFFICERS SIGNING JOINTLY AND SEVERALLY WITH
THE CORPORATION IN A TRUST RECEIPT CONTRACT IS LIABLE ONLY AS GUARANTOR;
RATIONALE. — In Prudential Bank v. Intermediate Appellate Court, the Court interpreted a
substantially identical clause in a trust receipt signed by a corporate o cer who bound
himself personally liable for the corporation's obligation. The petitioner in that case
contended that the stipulation "we jointly and severally agree and undertake" rendered the
corporate o cer solidarily liable with the corporation. We dismissed this claim and held
the corporate o cer liable as guarantor only. The Court further ruled that had there been
more than one signatories to the trust receipt, the solidary liability would exist between the
guarantors. We held: Petitioner [Prudential Bank] insists that by virtue of the clear wording
of the . . . clause ". . . we jointly and severally agree and undertake . . .," and the concluding
sentence on exhaustion, [respondent] Chi's liability therein is solidary. . . . Our . . . reading of
the questioned solidary guaranty clause yields no other conclusion than that the obligation
of Chi is only that of a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the
space therein for the party whose property may not be exhausted was not lled up. Under
Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a
guarantor before he may be held liable for the obligation. Petitioner likewise admits that
the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it
from a contract of surety. It, however, described the guaranty as solidary between the
guarantors; this would have been correct if two (2) guarantors had signed it. The clause
"we jointly and severally agree and undertake" refers to the undertaking of the two (2)
parties who are to sign it or to the liability existing between themselves. It does not refer
to the undertaking between either one or both of them on the one hand and the petitioner
on the other with respect to the liability described under the trust receipt. . . . Furthermore,
any doubt as to the import or true intent of the solidary guaranty clause should be resolved
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against the petitioner. The trust receipt, together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the petitioner; Chi's participation
therein is limited to the a xing of his signature thereon. It is, therefore, a contract of
adhesion; as such, it must be strictly construed against the party responsible for its
preparation.
3. CIVIL LAW; CONTRACTS; TRUST RECEIPT; GUARANTOR IS LIABLE FOR THE
CORPORATION'S PRINCIPAL DEBT AND OTHER ACCESSORY LIABILITIES; RATIONALE. —
However, respondent bank's suit against petitioner Jose Tupaz stands despite the Court's
nding that he is liable as guarantor only. First, excussion is not a pre-requisite to secure
judgment against a guarantor. The guarantor can still demand deferment of the execution
of the judgment against him until after the assets of the principal debtor shall have been
exhausted. Second, the bene t of excussion may be waived. Under the trust receipt dated
30 September 1981, petitioner Jose Tupaz waived excursion when he agreed that his
"liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any need whatsoever
on . . . [the] part [of respondent bank] to take any steps or exhaust any legal remedies. . . . ."
The clear import of this stipulation is that petitioner Jose Tupaz waived the bene t of
excussion under his guarantee. As guarantor, petitioner Jose Tupaz is liable for El Oro
Corporation's principal debt and other accessory liabilities (as stipulated in the trust
receipt and as provided by law) under the trust receipt dated 30 September 1981. That
trust receipt (and the trust receipt dated 9 October 1981) provided for payment of
attorney's fees equivalent to 10% of the total amount due and an "interest at the rate of 7%
per annum, or at such other rate as the bank may x, from the date due until paid. . . ." In the
applications for the letters of credit, the parties stipulated that drafts drawn under the
letters of credit are subject to interest at the rate of 18% per annum.
4. ID.; ID.; ID.; INTEREST; PROPER COMPUTATION. — The lower courts correctly
applied the 18% interest rate per annum considering that the face value of each of the trust
receipts is based on the drafts drawn under the letters of credit. Based on the guidelines
laid down in Eastern Shipping Lines, Inc. v. Court of Appeals, the accrued stipulated
interest earns 12% interest per annum from the time of the ling of the Informations in the
Makati Regional Trial Court on 17 January 1984. Further, the total amount due as of the
date of the nality of this Decision will earn interest at 18% per annum until fully paid since
this was the stipulated rate in the applications for the letters of credit. The accounting of El
Oro Corporation's debts as of 23 January 1992, which the trial court used, is no longer
useful as it does not specify the amounts owing under each of the trust receipts. Hence, in
the execution of this Decision, the trial court shall compute El Oro Corporation's total
liability under each of the trust receipts dated 30 September 1981 and 9 October 1981
based on the following formula: TOTAL AMOUNT DUE = [principal + interest + interest on
interest] - partial payments made Interest = principal x 18% per annum x no. of years from
due date until nality of judgment Interest on interest = interest computed as of the ling
of the complaint (17 January 1984) x 12% x no. of years until nality of judgment
Attorney's fees is 10% of the total amount computed as of nality of judgment Total
amount due as of the date of nality of judgment will earn an interest of 18% per annum
until fully paid. In so delegating this task, we reiterate what we said in Rizal Commercial
Banking Corporation v. Alfa RTW Manufacturing Corporation where we also ordered the
trial court to compute the amount of obligation due based on a formula substantially
similar to that indicated above: The total amount due . . . [under] the . . . contract[] . . . may
be easily determined by the trial court through a simple mathematical computation based
on the formula speci ed above. Mathematics is an exact science, the application of which
needs no further proof from the parties.
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5. ID.; CIVIL LIABILITY; NOT EXTINGUISHED BY THE ACQUITTAL IN CRIMINAL
ACTION. — The rule is that where the civil action is impliedly instituted with the criminal
action, the civil liability is not extinguished by acquittal — [w]here the acquittal is based on
reasonable doubt . . . as only preponderance of evidence is required in civil cases; where
the court expressly declares that the liability of the accused is not criminal but only civil in
nature . . . as, for instance, in the felonies of estafa, theft, and malicious mischief
committed by certain relatives who thereby incur only civil liability (See Art. 332, Revised
Penal Code); and, where the civil liability does not arise from or is not based upon the
criminal act of which the accused was acquitted . . . .

DECISION

CARPIO , J : p

The Case
This is a petition for review 1 of the Decision 2 of the Court of Appeals dated 7
September 2000 and its Resolution dated 18 October 2000. The 7 September 2000
Decision a rmed the ruling of the Regional Trial Court, Makati, Branch 144 in a case for
estafa under Section 13, Presidential Decree No. 115. The Court of Appeals' Resolution of
18 October 2000 denied petitioners' motion for reconsideration.
The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were Vice-
President for Operations and Vice-President/Treasurer, respectively, of El Oro Engraver
Corporation ("El Oro Corporation"). El Oro Corporation had a contract with the Philippine
Army to supply the latter with "survival bolos."
To nance the purchase of the raw materials for the survival bolos, petitioners, on
behalf of El Oro Corporation, applied with respondent Bank of the Philippine Islands
("respondent bank") for two commercial letters of credit. The letters of credit were in favor
of El Oro Corporation's suppliers, Tanchaoco Manufacturing Incorporated 3 ("Tanchaoco
Incorporated") and Maresco Rubber and Retreading Corporation 4 ("Maresco
Corporation"). Respondent bank granted petitioners' application and issued Letter of
Credit No. 2-00896-3 for P564,871.05 to Tanchaoco Incorporated and Letter of Credit No.
2-00914-5 for P294,000 to Maresco Corporation.
Simultaneous with the issuance of the letters of credit, petitioners signed trust
receipts in favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV
("petitioner Jose Tupaz") signed, in his personal capacity, a trust receipt corresponding to
Letter of Credit No. 2-00896-3 (for P564,871.05). Petitioner Jose Tupaz bound himself to
sell the goods covered by the letter of credit and to remit the proceeds to respondent
bank, if sold, or to return the goods, if not sold, on or before 29 December 1981.
On 9 October 1981, petitioners signed, in their capacities as o cers of El Oro
Corporation, a trust receipt corresponding to Letter of Credit No. 2-00914-5 (for
P294,000). Petitioners bound themselves to sell the goods covered by that letter of credit
and to remit the proceeds to respondent bank, if sold, or to return the goods, if not sold, on
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or before 8 December 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials
to El Oro Corporation, respondent bank paid the former P564,871.05 and P294,000,
respectively. DIAcTE

Petitioners did not comply with their undertaking under the trust receipts.
Respondent bank made several demands for payments but El Oro Corporation made
partial payments only. On 27 June 1983 and 28 June 1983, respondent bank's counsel 5
and its representative 6 respectively sent nal demand letters to El Oro Corporation. El Oro
Corporation replied that it could not fully pay its debt because the Armed Forces of the
Philippines had delayed paying for the survival bolos.
Respondent bank charged petitioners with estafa under Section 13, Presidential
Decree No. 115 ("Section 13") 7 or Trust Receipts Law ("PD 115"). After preliminary
investigation, the then Makati Fiscal's O ce found probable cause to indict petitioners.
The Makati Fiscal's O ce led the corresponding Informations (docketed as Criminal
Case Nos. 8848 and 8849) with the Regional Trial Court, Makati, on 17 January 1984 and
the cases were ra ed to Branch 144 ("trial court") on 20 January 1984. Petitioners
pleaded not guilty to the charges and trial ensued. During the trial, respondent bank
presented evidence on the civil aspect of the cases.
The Ruling of the Trial Court
On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa
on reasonable doubt. However, the trial court found petitioners solidarily liable with El Oro
Corporation for the balance of El Oro Corporation's principal debt under the trust receipts.
The dispositive portion of the trial court's Decision provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both accused
Jose C. Tupaz, IV and Petronila Tupaz based upon reasonable doubt.

However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila


Tupaz, are hereby ordered, jointly and solidarily, to pay the Bank of the Philippine
Islands the outstanding principal obligation of P624,129.19 (as of January 23,
1992) with the stipulated interest at the rate of 18% per annum; plus 10% of the
total amount due as attorney's fees; P5,000.00 as expenses of litigation; and
costs of the suit. 8

In holding petitioners civilly liable with El Oro Corporation, the trial court held:
[S]ince the civil action for the recovery of the civil liability is deemed
impliedly instituted with the criminal action, as in fact the prosecution thereof was
actively handled by the private prosecutor, the Court believes that the El Oro
Engraver Corporation and both accused Jose C. Tupaz and Petronila Tupaz,
jointly and solidarily should be held civilly liable to the Bank of the Philippine
Islands. The mere fact that they were unable to collect in full from the AFP and/or
the Department of National Defense the proceeds of the sale of the delivered
survival bolos manufactured from the raw materials covered by the trust receipt
agreements is no valid defense to the civil claim of the said complainant and
surely could not wipe out their civil obligation. After all, they are free to institute an
action to collect the same. 9

Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their
acquittal "operates to extinguish [their] civil liability" and (2) at any rate, they are not
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personally liable for El Oro Corporation's debts.
The Ruling of the Court of Appeals
In its Decision of 7 September 2000, the Court of Appeals a rmed the trial court's
ruling. The appellate court held:
It is clear from [Section 13, PD 115] that civil liability arising from the
violation of the trust receipt agreement is distinct from the criminal liability
imposed therein. In the case of Vintola vs. Insular Bank of Asia and America, our
Supreme Court held that acquittal in the estafa case (P.D. 115) is no bar to the
institution of a civil action for collection. This is because in such cases, the civil
liability of the accused does not arise ex delicto but rather based ex contractu and
as such is distinct and independent from any criminal proceedings and may
proceed regardless of the result of the latter. Thus, an independent civil action to
enforce the civil liability may be led against the corporation aside from the
criminal action against the responsible officers or employees.
xxx xxx xxx
[W]e hereby hold that the acquittal of the accused-appellants from the
criminal charge of estafa did not operate to extinguish their civil liability under the
letter of credit-trust receipt arrangement with plaintiff-appellee, with which they
dealt both in their personal capacity and as o cers of El Oro Engraver
Corporation, the letter of credit applicant and principal debtor.

Appellants argued that they cannot be held solidarily liable with their
corporation, El Oro Engraver Corporation, alleging that they executed the subject
documents including the trust receipt agreements only in their capacity as such
corporate o cers. They said that these instruments are mere pro-forma and that
they executed these instruments on the strength of a board resolution of said
corporation authorizing them to apply for the opening of a letter of credit in favor
of their suppliers as well as to execute the other documents necessary to
accomplish the same.
Such contention, however, is contradicted by the evidence on record. The
trust receipt agreement indicated in clear and unmistakable terms that the
accused signed the same as surety for the corporation and that they bound
themselves directly and immediately liable in the event of default with respect to
the obligation under the letters of credit which were made part of the said
agreement, without need of demand. Even in the application for the letter of credit,
it is likewise clear that the undertaking of the accused is that of a surety as
indicated [in] the following words: "In consideration of your establishing the
commercial letter of credit herein applied for substantially in accordance with the
foregoing, the undersigned Applicant and Surety hereby agree, jointly and
severally, to each and all stipulations, provisions and conditions on the reverse
side hereof." caAICE

xxx xxx xxx

Having contractually agreed to hold themselves solidarily liable with El Oro


Engraver Corporation under the subject trust receipt agreements with appellee
Bank of the Philippine Islands, herein accused-appellants may not, therefore,
invoke the separate legal personality of the said corporation to evade their civil
liability under the letter of credit-trust receipt arrangement with said appellee,
notwithstanding their acquittal in the criminal cases led against them. The trial
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court thus did not err in holding the appellants solidarily liable with El Oro
Engraver Corporation for the outstanding principal obligation of P624,129.19 (as
of January 23, 1992) with the stipulated interest at the rate of 18% per annum,
plus 10% of the total amount due as attorney's fees, P5,000.00 as expenses of
litigation and costs of suit. 1 0

Hence, this petition. Petitioners contend that:


1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE CIVIL
LIABILITY OF PETITIONERS[;]

2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED OBLIGATION


WAS INCURRED BY THE CORPORATION, THE SAME IS NOT YET DUE AND
PAYABLE;

3. GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY DUE


AND PAYABLE, . . . PETITIONERS ARE NOT PERSONALLY LIABLE TO . . .
RESPONDENT BANK, SINCE THEY SIGNED THE LETTER[S] OF CREDIT AS
'SURETY' AS OFFICERS OF EL ORO, AND THEREFORE, AN EXCLUSIVE
LIABILITY OF EL ORO; [AND]

4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE


SIMULATED AND VOID. 1 1

The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El Oro
Corporation's debts under the trust receipts;
(2) If so —
(a) whether petitioners' liability is solidary with El Oro Corporation;
and
(b) whether petitioners' acquittal of estafa under Section 13, PD
115 extinguished their civil liability.
The Ruling of the Court
The petition is partly meritorious. We a rm the Court of Appeals' ruling with the
modi cation that petitioner Jose Tupaz is liable as guarantor of El Oro Corporation's debt
under the trust receipt dated 30 September 1981.
On Petitioners' Undertaking Under
the Trust Receipts
A corporation, being a juridical entity, may act only through its directors, o cers,
and employees. Debts incurred by these individuals, acting as such corporate agents, are
not theirs but the direct liability of the corporation they represent. 1 2 As an exception,
directors or o cers are personally liable for the corporation's debts only if they so
contractually agree or stipulate. 1 3
Here, the dorsal side of the trust receipts contains the following stipulation:
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To the Bank of the Philippine Islands

In consideration of your releasing to _____________ under the terms of this


Trust Receipt the goods described herein, I/We, jointly and severally, agree and
promise to pay to you, on demand, whatever sum or sums of money which you
may call upon me/us to pay to you, arising out of, pertaining to, and/or in any
way connected with, this Trust Receipt, in the event of default and/or non-
ful llment in any respect of this undertaking on the part of the said
__________________ I/we further agree that my/our liability in this guarantee shall
be DIRECT AND IMMEDIATE, without any need whatsoever on your part to take
any steps or exhaust any legal remedies that you may have against the said
__________________ before making demand upon me/us. 1 4 (Capitalization in the
original) SAHITC

In the trust receipt dated 9 October 1981, petitioners signed below this clause as
o cers of El Oro Corporation. Thus, under petitioner Petronila Tupaz's signature are the
words "Vice-Pres–Treasurer" and under petitioner Jose Tupaz's signature are the words
"Vice-Pres–Operations." By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporation's obligation. In Ong v. Court of
Appeals , 1 5 a corporate representative signed a solidary guarantee clause in two trust
receipts in his capacity as corporate representative. There, the Court held that the
corporate representative did not undertake to guarantee personally the payment of the
corporation's debts, thus:
[P]etitioner did not sign in his personal capacity the solidary guarantee
clause found on the dorsal portion of the trust receipts. Petitioner placed his
signature after the typewritten words "ARMCO INDUSTRIAL CORPORATION"
found at the end of the solidary guarantee clause. Evidently, petitioner did not
undertake to guaranty personally the payment of the principal and interest of
ARMAGRI's debt under the two trust receipts.

Hence, for the trust receipt dated 9 October 1981, we sustain petitioners' claim that
they are not personally liable for El Oro Corporation's obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which
petitioner Jose Tupaz signed alone, we nd that he did so in his personal capacity.
Petitioner Jose Tupaz did not indicate that he was signing as El Oro Corporation's Vice-
President for Operations. Hence, petitioner Jose Tupaz bound himself personally liable for
El Oro Corporation's debts. Not being a party to the trust receipt dated 30 September
1981, petitioner Petronila Tupaz is not liable under such trust receipt.
The Nature of Petitioner Jose Tupaz's Liability
Under the Trust Receipt Dated 30 September 1981
As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:
To the Bank of the Philippine Islands

In consideration of your releasing to ____________________ under the terms


of this Trust Receipt the goods described herein, I/We, jointly and severally, agree
and promise to pay to you, on demand, whatever sum or sums of money which
you may call upon me/us to pay to you, arising out of, pertaining to, and/or in any
way connected with, this Trust Receipt, in the event of default and/or non-
ful llment in any respect of this undertaking on the part of the said
____________________ I/we further agree that my/our liability in this guarantee shall
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be DIRECT AND IMMEDIATE, without any need whatsoever on your part to take
any steps or exhaust any legal remedies that you may have against the said
___________________ Before making demand upon me/us. (Underlining supplied;
capitalization in the original)

The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself
solidarily liable with El Oro Corporation for the latter's debt under that trust receipt.
This is error.
In Prudential Bank v. Intermediate Appellate Court , 1 6 the Court interpreted a
substantially identical clause 1 7 in a trust receipt signed by a corporate o cer who bound
himself personally liable for the corporation's obligation. The petitioner in that case
contended that the stipulation "we jointly and severally agree and undertake" rendered the
corporate o cer solidarily liable with the corporation. We dismissed this claim and held
the corporate o cer liable as guarantor only. The Court further ruled that had there been
more than one signatories to the trust receipt, the solidary liability would exist between the
guarantors. We held:
Petitioner [Prudential Bank] insists that by virtue of the clear wording of the
. . . clause ". . . we jointly and severally agree and undertake . . . ," and the
concluding sentence on exhaustion, [respondent] Chi's liability therein is solidary.
xxx xxx xxx
Our . . . reading of the questioned solidary guaranty clause yields no other
conclusion than that the obligation of Chi is only that of a guarantor. This is
further bolstered by the last sentence which speaks of waiver of exhaustion,
which, nevertheless, is ineffective in this case because the space therein for the
party whose property may not be exhausted was not lled up. Under Article 2058
of the Civil Code, the defense of exhaustion (excussion) may be raised by a
guarantor before he may be held liable for the obligation. Petitioner likewise
admits that the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the guaranty as
solidary between the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and severally agree and
undertake" refers to the undertaking of the two (2) parties who are to sign it or to
the liability existing between themselves. It does not refer to the undertaking
between either one or both of them on the one hand and the petitioner on the
other with respect to the liability described under the trust receipt. . . .

Furthermore, any doubt as to the import or true intent of the solidary


guaranty clause should be resolved against the petitioner. The trust receipt,
together with the questioned solidary guaranty clause, is on a form drafted and
prepared solely by the petitioner; Chi's participation therein is limited to the
a xing of his signature thereon. It is, therefore, a contract of adhesion; as such, it
must be strictly construed against the party responsible for its preparation. 1 8
(Underlining supplied; italicization in the original)
cTADCH

However, respondent bank's suit against petitioner Jose Tupaz stands despite the
Court's nding that he is liable as guarantor only. First, excussion is not a pre-requisite to
secure judgment against a guarantor. The guarantor can still demand deferment of the
execution of the judgment against him until after the assets of the principal debtor shall
have been exhausted. 1 9 Second, the benefit of excussion may be waived. 2 0 Under the trust
receipt dated 30 September 1981, petitioner Jose Tupaz waived excussion when he
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agreed that his "liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any
need whatsoever on . . . [the] part [of respondent bank] to take any steps or exhaust any
legal remedies . . . ." The clear import of this stipulation is that petitioner Jose Tupaz
waived the benefit of excussion under his guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation's principal debt
and other accessory liabilities (as stipulated in the trust receipt and as provided by law)
under the trust receipt dated 30 September 1981. That trust receipt (and the trust receipt
dated 9 October 1981) provided for payment of attorney's fees equivalent to 10% of the
total amount due and an "interest at the rate of 7% per annum, or at such other rate as the
bank may x, from the date due until paid . . . ." 2 1 In the applications for the letters of
credit, the parties stipulated that drafts drawn under the letters of credit are subject to
interest at the rate of 18% per annum. 2 2
The lower courts correctly applied the 18% interest rate per annum considering that
the face value of each of the trust receipts is based on the drafts drawn under the letters
of credit. Based on the guidelines laid down in Eastern Shipping Lines, Inc. v. Court of
Appeals , 2 3 the accrued stipulated interest earns 12% interest per annum from the time of
the ling of the Informations in the Makati Regional Trial Court on 17 January 1984.
Further, the total amount due as of the date of the nality of this Decision will earn interest
at 18% per annum until fully paid since this was the stipulated rate in the applications for
the letters of credit. 2 4

The accounting of El Oro Corporation's debts as of 23 January 1992, which the trial
court used, is no longer useful as it does not specify the amounts owing under each of the
trust receipts. Hence, in the execution of this Decision, the trial court shall compute El Oro
Corporation's total liability under each of the trust receipts dated 30 September 1981 and
9 October 1981 based on the following formula: 2 5
TOTAL AMOUNT DUE = [principal + interest + interest on interest] — partial
payments made 2 6
Interest = principal x 18 % per annum x no. of years from due date 2 7 until
finality of judgment
Interest on interest = interest computed as of the ling of the complaint (17
January 1984) x 12% x no. of years until finality of judgment
Attorney's fees is 10% of the total amount computed as of nality of
judgment
Total amount due as of the date of nality of judgment will earn an
interest of 18% per annum until fully paid.

In so delegating this task, we reiterate what we said in Rizal Commercial Banking


Corporation v. Alfa RTW Manufacturing Corporation 2 8 where we also ordered the
trial court to compute the amount of obligation due based on a formula substantially
similar to that indicated above:
The total amount due . . . [under] the . . . contract[] . . . may be easily
determined by the trial court through a simple mathematical computation based
on the formula speci ed above. Mathematics is an exact science, the application
of which needs no further proof from the parties.
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Petitioner Jose Tupaz's Acquittal did not
Extinguish his Civil Liability
The rule is that where the civil action is impliedly instituted with the criminal action,
the civil liability is not extinguished by acquittal —
[w]here the acquittal is based on reasonable doubt . . . as only
preponderance of evidence is required in civil cases; where the court expressly
declares that the liability of the accused is not criminal but only civil in nature . . .
as, for instance, in the felonies of estafa, theft, and malicious mischief committed
by certain relatives who thereby incur only civil liability (See Art. 332, Revised
Penal Code); and, where the civil liability does not arise from or is not based upon
the criminal act of which the accused was acquitted . . . . 2 9 (Emphasis supplied)
cCSDTI

Here, respondent bank chose not to file a separate civil action 3 0 to recover payment
under the trust receipts. Instead, respondent bank sought to recover payment in Criminal
Case Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose Tupaz, his
acquittal did not extinguish his civil liability. As the Court of Appeals correctly held, his
liability arose not from the criminal act of which he was acquitted (ex delito) but from the
trust receipt contract (ex contractu) of 30 September 1981. Petitioner Jose Tupaz signed
the trust receipt of 30 September 1981 in his personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the rst time in this appeal the contention that El Oro
Corporation's debts under the trust receipts are not yet due and demandable. Alternatively,
petitioners assail the trust receipts as simulated. These assertions have no merit. Under
the terms of the trust receipts dated 30 September 1981 and 9 October 1981, El Oro
Corporation's debts fell due on 29 December 1981 and 8 December 1981, respectively.
Neither is there merit to petitioners' claim that the trust receipts were simulated.
During the trial, petitioners did not deny applying for the letters of credit and subsequently
executing the trust receipts to secure payment of the drafts drawn under the letters of
credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of
Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the
following MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for the total amount
due under the trust receipts dated 30 September 1981 and 9 October
1981, as computed by the Regional Trial Court, Makati, Branch 144,
upon finality of this Decision, based on the formula provided above;
2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporation's
total debt under the trust receipt dated 30 September 1981 as thus
computed by the Regional Trial Court, Makati, Branch 144; and
3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable
under the trust receipt dated 9 October 1981.
SO ORDERED.
Davide, Jr., C.J., Quisumbing, Ynares-Santiago and Azcuna, JJ., concur.

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Footnotes
1. Under Rule 45 of the 1997 Rules of Civil Procedure.
2. Penned by Associate Justice Martin S. Villarama, Jr. with Associate Justices Salome A.
Montoya and Romeo J. Callejo, Sr., concurring.
3. Supplier of 23,524 kilos of high-grade steel bars and 305 high-carbon steel sheets.
Tanchaoco Incorporated is also referred to as Tanchaoco Manufacturing Incorporation
and Tanchaoco Manufacturing Corporation in other parts of the records.

4. Supplier of 9,800 kilos of specialized rubber compound.


5. Atty. Alfonso Verzosa.
6. Manuel Maceda. It appears that the letter of 28 June 1983 was also signed by Atty.
Alfonso Verzosa.
7. "Penalty clause. — The failure of an entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three Hundred and Fifteen, Paragraph One (b) of Act Numbered
Three Thousand Eight Hundred and Fifteen, as amended, otherwise known as the
Revised Penal Code. If the violation or offense is committed by a corporation,
partnership, association or other juridical entities, the penalty provided for in this Decree
shall be imposed upon the directors, officers, employees or other officials or persons
therein responsible for the offense, without prejudice to the civil liabilities arising from
the criminal offense."

8. Records, pp. 665-666.


9. Ibid., p. 665.
10. Rollo, pp. 28-30. (Italicization in the original; internal citations omitted).
11. Ibid., p. 11.
12. MAM Realty Devt. Corp. v. NLRC, 314 Phil. 838 (1995).
13. Ibid.
14. Records, Exhs. "D and M."

15. 449 Phil. 691 (2003).


16. G.R. No. 74886, 8 December 1992, 216 SCRA 257. See Ong v. Court of Appeals, supra
note 15.

17. The clause reads: "In consideration of the PRUDENTIAL BANK AND TRUST COMPANY
complying with the foregoing, we jointly and severally agree and undertake to pay on
demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the
said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of
or pertaining to, and/or in any event connected with the default of and/or non-fulfillment
in any respect of the undertaking of the aforesaid:

PHILIPPINE RAYON MILLS, INC.


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We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have
to take any steps or exhaust its remedy against aforesaid: [___________________________]
before making demand on me/us.["] (Underlining supplied; capitalization in the original)

18. Prudential Bank v. Intermediate Appellate Court, supra note 16 (internal citations
omitted).

19. Southern Motors, Inc. v. Barbosa, 99 Phil. 263 (1956).


20. Article 2059 (1) of the Civil Code provides: "[E]xcussion shall not take place:
(1) If the guarantor has expressly renounced it;

xxx xxx xxx"


21. The trust receipts provide (Records, Exhs. "D" and "M"): "Should it become necessary for
the BANK OF THE PHILIPPINE ISLANDS to avail of the services of an attorney-at-law to
enforce any or all of its rights under this contract, I/We, jointly and severally, shall pay to
the BANK OF THE PHILIPPINE ISLANDS, for and as attorney's fees, a sum equivalent to
10% of the total amount involved, principal and interest, then unpaid, but in no case less
than P100, whether actually incurred or not, exclusive of all costs or fees allowed by law.
All obligations of the undersigned under this agreement of trust shall bear interest at the
rate of 7% per annum, or at such other rate which the BANK may fix, from the date due
until paid, plus all other bank charges." Although the trust receipts provided for payment
of "other bank charges," it appears that respondent bank did not present evidence on the
rates of such other charges. What respondent bank presented was the testimony of one
Lourdes Palomo that it imposed penalty charges of 12% per annum allegedly based on
the stipulation in the letters of credit providing payment of "charges and/or other
expenses" (TSN [Lourdes Palomo], 5 August 1985, pp. 9-15; Records, pp. 365-371).
Further, respondent bank did not present proof of disclosure to El Oro Corporation of
such penalty charges, contrary to its undertaking. Significantly, in its statement of
account as of 23 January 1992, respondent bank did not include "other bank charges"
but only took into account the 18% annual interest rate in computing El Oro
Corporation's liabilities (Records, p. 645).

22. Records, pp. 218, 229.


23. G.R. No. 97412, 12 July 1994, 234 SCRA 78. "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." (Emphasis supplied)

24. See Philippine Blooming Mills, Inc. v. Court of Appeals, G.R. No. 142381, 15 October
2003, 413 SCRA 445.
25. See Rizal Commercial Banking Corp. v. Alfa RTW Mfg. Corp., 420 Phil. 702 (2001),
citing Eastern Shipping Lines, Inc. v. Court of Appeals, supra note 23.

26. Taking into account Articles 1252-1254 of the Civil Code.

27. 8 December 1981 for the trust receipt dated 9 October 1981 and 29 December 1981 for
the trust receipt dated 30 September 1981.
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28. Supra note 25. Reported as Rizal Commercial Banking Corp. v. Alfa RTW Mfg. Corp.
29. Padilla, et al. v. CA, 214 Phil. 492 (1984).
30. The action to recover payment under a trust receipt may be instituted separately under
Article 31 of the Civil Code based on the trust receipt contract (Vintola v. Insular Bank of
Asia and America, No. L-78671, 25 March 1988, 159 SCRA 140; Vintola v. Insular Bank of
Asia and America, No. L-73271, 29 May 1987, 150 SCRA 578) or under Article 33 of the
Civil Code based on fraud (Prudential Bank v. Intermediate Appellate Court, supra note
16). The civil action under Article 31 or Article 33 proceeds independently of the criminal
action.

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EN BANC

[G.R. No. 97412. July 12, 1994.]

EASTERN SHIPPING LINES, INC. , petitioner, vs. HON. COURT OF


APPEALS AND MERCANTILE INSURANCE COMPANY, INC. ,
respondents.

SYLLABUS

1. CIVIL LAW; COMMON CARRIERS; TIME FRAME WITHIN WHICH DILIGENCE


REQUIRED IN SHIPMENT OF GOODS LAST. — The common carrier's duty to observe the
requisite diligence in the shipment of goods lasts from the time the articles are
surrendered to or unconditionally placed in the possession of, and received by, the carrier
for transportation until delivered to, or until the lapse of a reasonable time for their
acceptance, by the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon
vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).
2. ID.; ID.; ID.; PRESUMPTION OF CARRIER'S FAULT ON LOST OR DAMAGED GOODS
SHIPPED; CASE AT BAR NOT AN EXCEPTION. — When the goods shipped either are lost or
arrive in damaged condition, a presumption arises against the carrier of its failure to
observe that diligence, and there need not be an express nding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA
8 7 ; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course,
exceptional cases when such presumption of fault is not observed but these cases,
enumerated in Article 1734 of the Civil Code, are exclusive, not one of which can be applied
to this case.
3. ID.; DAMAGES; INTEREST AWARDED AS A CONCEPT THEREOF; RATE AND
ACCRUAL THEREOF, HOW DETERMINED. — 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 a 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 of the judgment of the court is made (at which time the quanti cation 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 of nally adjudged. 3.
When the judgment of the court awarding a sum of money becomes nal and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
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shall be 12% per annum from such nality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

DECISION

VITUG , J : p

The issues, albeit not completely novel, are: (a) whether or not a claim for damage
sustained on a shipment of goods can be a solidary, or joint and several, liability of the
common carrier, the arrastre operator and the customs broker; (b) whether the payment of
legal interest on an award of loss or damage is to be computed from the time the
complaint is led or from the date the decision appealed from is rendered; and (c) whether
the applicable rate of interest, referred to above, is twelve percent (12%) or six percent
(6%). llcd

The ndings of the court a quo, adopted by the Court of Appeals, on the antecedent and
undisputed facts that have led to the controversy are hereunder reproduced:
"This is an action against defendants shipping company, arrastre operator and
broker-forwarded for damages sustained by a shipment while in defendants'
custody, led by the insurer-subrogee who paid the consignee the value of such
losses/damages.

"On December 4, 1981, two ber drums of ribo avin were shipped from
Yokohama, Japan for delivery vessel `SS EASTERN COMET' owned by defendant
Eastern Shipping Lines under Bill of Lading No. YMA-8 (Exh. B). The shipment
was insured under plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.

"Upon arrival of the shipment in Manila on December 12, 1981, it was discharged
unto the custody of defendant Metro Port Services, Inc. The latter excepted to one
drum, said to be in bad order, which damage was unknown to plaintiff.

"On January 7, 1982 defendant Allied Brokerage Corporation received the


shipment from defendant Metro Port Service, Inc., one drum opened and without
seal (per 'Request for Bad Order Survey.' (Exh. D).

"On January 8 and 14, 1982, defendant Allied Brokerage Corporation made
deliveries of the shipment to the consignees' warehouse. The latter excepted to
one drum which contained spillages, while the rest of the contents was
adulterated/fake (per 'Bad Order Waybill' No. 10649, Exh. E).

"Plaintiff contended that due to the losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants who failed and refused to
pay the same (Exhs. H, I, J, K, L).
Cdpr

"As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against
defendants (per 'Form of Subrogation,' 'Release' and Philbanking check, Exhs. M,
N, and O)." (pp. 85-86, Rollo.)

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There were, to be sure, other factual issues that confronted both courts. Here, the
appellate court said:
"Defendants led their respective answers, traversing the material allegations of
the compliant contending that: As for defendant Eastern Shipping it alleged that
the shipment was discharged in good order from the vessel unto the custody of
Metro Port Service so that any damage/losses incurred after the shipment was
incurred after the shipment was turned over to the latter, is no longer its liability
(p. 17, Record); Metroport averred that although subject shipment was discharged
unto its custody, portion of the same was already in bad order (p. 11, Record);
Allied Brokerage alleged that plaintiff has no cause of action against it, not
having negligent or at fault for the shipment was already in damage and bad
order condition when received by it, but nonetheless, it still exercised extra
ordinary care and diligence in he handling/delivery of the cargo to consignee in
the same condition shipment was received by it.

"From the evidence that court found the following:

"'The issues are:

'1. Whether or not the shipment sustained


losses/damages;
'2. Whether or not these losses/damages were
sustained while in the custody of defendants (in whose
respective custody, if determinable);
prLL

'3. Whether or not defendant(s) should be held


liable for the losses/damages (see plaintiff's pre-Trial Brief,
Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's
Records, p. 38).'

'As to the rst issue, there can be no doubt that the shipment sustained
losses/damages. The two drums were shipped in good order and
condition, as clearly shown by the Bill of Lading and Commercial Invoice
which do not indicate any damages drum that was shipped (Exhs. B and
C). But when on December 12, 1981 the shipment was delivered to
defendant Metro Port Service, Inc., it excepted to one drum in bad order.
'Correspondingly, as to the second issue, it follows that the
losses/damages were sustained while in the respective and/or successive
custody and possession of defendants carrier (Eastern), arrastre operator
(Metro Port) and broker (Allied Brokerage). This becomes evident when the
Marine Cargo Survey Report (Exh. G), with its 'Additional Survey Notes,' are
considered. In the latter notes, it is stated that when the shipment was
'landed on vessel' to dock of Pier # 15, South Harbor, Manila on December
12, 1981,' it was observed that ' one (1) ber drum (was) in damaged
condition, covered by the vessel's Agent's Bad order Tally Sheet No.
86427.' The report further states that when defendant Allied Brokerage
withdrew the shipment, from defendant arrastre operator's custody on
January 7, 1982, one drum was found opened without seal, cello bag partly
torn but contents intact. Net unrecovered spillages was 15 kgs. The report
went on to state that when the drums reached the consignee, one drum
was found with adulterated/faked contents. It is obvious, therefore, that
these losses/damages occurred before the shipment reached the
consignee while under the successive custodies of defendants. Under Art.
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1737 of the New Civil Code, the common carrier's duty to observe
extraordinary diligence in the vigilance of goods remains in full force and
effect even if the goods are temporarily unloaded and stored in transit in
the warehouse of the carrier at the place of destination, until the consignee
has been advised and has had reasonable opportunity to remove or
dispose of the goods (Art. 1738, NCC). Defendant Eastern Shipping's own
exhibit, the 'Turn-Over Survey of Bad Order Cargoes' (Exhs. 3-Eastern)
states that on December 12, 1981 one drum was found 'open.'
"and thus held:

'WHEREFORE, PREMISES CONSIDERED, judgment is hereby


rendered:

A. Ordering defendants to pay plaintiff, jointly and


severally:
1. The amount of P19,032.95 with the
present legal interest of 12% per annum from October 1,
1982, the date of ling of this complaints, until fully
paid (the liability of defendant Eastern Shipping, Inc.
shall not exceed US$500 per case or the CIF value of the
loss, whichever is lesser, while the liability of defendant
Metro Port Service, Inc. shall be to the extent of the
actual invoice value of each package, crate box or
container in no case to exceed P5,000.00 each,
pursuant to Section 6.01 of the Management Contract);
LexLib

2. P3,000.00 as attorney's fees, and


3. Costs.
B. Dismissing the counterclaims and crossclaim of
defendant/cross-claimant Allied Brokerage Corporation.
SO ORDERED.' (p. 207, Record).
"Dissatisfied, defendant's recourse to US.

"The appeal is devoid of merit.


"After a careful scrutiny of the evidence on record. We nd that the conclusion
drawn therefrom is correct. As there is suf cient evidence that the shipment
sustained damage while in the successive possession of appellants, and
therefore they are liable to the appellee, as subrogee for the amount it paid to the
consignee." (pp. 87-89, Rollo.)

The Court of Appeal thus affirmed in toto the judgment of the court a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave
abuse of discretion on the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH
THE ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF
PRIVATE RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE
RESPONDENT SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE
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COMPLAINT AT THE RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF
FROM THE DATE OF THE DECISION OF THE TRIAL COURT AND ONLY AT THE
RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.


In this decision, we have begun by saying that the questions raised by petitioner carrier are
not all that novel. Indeed, we do have a fairly good number of previous decisions this Court
can merely tack to. Cdpr

The common carrier's duty to observe the requisite diligence in the shipment of goods
lasts from the time the articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for transportation until delivered to, or until the
lapse of a reasonable time for their acceptance, by the person entitled to receive them
(Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs.
Dollar Steamship Lines, 52 Phil. 863).When the goods shipped either are lost or arrive in
damaged condition, a presumption arises against the carrier of its failure to observe that
diligence, and there need not be an express nding of negligence to hold it liable (Art.
1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro
Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases
when such presumption of fault is not observed but these cases, enumerated in Article
1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of
properly delivering the goods to the consignee has, too, been passed upon by the Court. In
Fireman's Fund Insurance vs. Metro Port Services (182 SCRA 455), we have explained in
holding the carrier and the arrastre operator liable in solidum, thus: Cdpr

"The legal relationship between the consignee and the arrastre operator is akin to
that of a depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA
5 [1967]. The relationship between the consignee and the common carrier is
similar to that of the consignee and the arrastre operator (Northern Motors, Inc. v.
Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the ARRASTRE to
take good care of the goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also devolves upon the CARRIER.
Both the ARRASTRE and the CARRIER are therefore charged with the obligation to
deliver the goods in goods condition to the consignee."

We do not, of course, imply by the above pronouncement that the arrastre operator and the
customs broker are themselves always and necessarily liable solidarily with the carrier, or
vice-versa, nor that attendant facts in a given case may not vary the rule. The instant
petition has been brought solely by Eastern Shipping Lines which, being the carrier and not
having been able to rebut the presumption of fault, is, in any event, to be held liable in this
particular case. A factual nding of both the court a quo and the appellate court, we take
note, is that "there is suf cient evidence that the shipment sustained damage while in the
successive possession of appellants" (the herein petitioner among them). Accordingly, the
liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this case, is
inevitable regardless of whether there are others solidarily liable with it. llcd

It is over the issue of legal interest adjudged by the appellate court that deserves more
than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
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The early case of Malayan Insurance Co., Inc., vs. Manila Port Service, 2 decided 3 on 15
May 1969, involved a suit for recovery of money arising out of short deliveries and
pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower
court) averred in its complaint that the total amount of its claim for the value of the
undelivered goods amounted to P3,947.20. This demand, however, was neither
established in its totality nor de nitely ascertained. In the stipulation of facts later entered
into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial
court rendered judgment ordering the appellants (defendants) Manila Port Service and
Manila Railroad Company to pay appellee Malayan Insurance the sum of P1,447.51 with
legal interest thereon from the date the complaint was led on 28 December 1962 until full
payment thereof. The appellants then assailed, inter alia, the award of legal interest. In
sustaining the appellants, this Court ruled:
"Interest upon an obligation which calls for the payment of money, absent a
stipulation, is the legal rate. Such interest normally is allowable from the date of
demand, judicial or extrajudicial. The trial court opted for judicial demand as the
starting point.

"But then upon the provisions of Article 2213 of the Civil Code, interest 'cannot be
recovered upon unliquidated claims or damages, except when the demand can be
established with reasonable certainty.' And as was held by this Court in Rivera vs.
Perez 4 , L-6998, February 29, 1956, if the suit were for damages, 'unliquidated
and not known until de nitely ascertained, assessed and determined by the
courts after proof (Montilla c. Corporacion de P. P. Agustinos, 25 Phil. 447;
Lichauco v. Guzman, 38 Phil. 302), ' then, interest 'should be from the date of the
decision.'" (Emphasis supplied).Cdpr

The case of Reformina vs. Tomol , 5 rendered on 11 October 1985, was for "Recovery of
Damages for Injury to Person and Loss of Property." After trial, the lower court decreed:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third
party defendants and against the defendants and third party plaintiffs as follows:
"Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to
pay jointly and severally the following persons:
"(a) ...
"xxx xxx xxx
"(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita III together with its
accessories, shing gear and equipment minus P80,000.00 which is the value of
the insurance recovered and the amount of P10,000.00 a month as the estimated
monthly loss suffered by them as a result of the re of May 6, 1969 up to the time
they are actually paid or already the total sum of P370,000.00 as of June 4, 1972
with legal interest from the ling of the complaint until paid and to pay attorney's
fees of P5,000.00 with costs against defendants and third party plaintiffs."
(Emphasis supplied.)

On appeal of the Court of Appeals, the latter modi ed the amount of damages awarded
but sustained the trial court in adjudging legal interest from the ling of the complaint
until fully paid. When the appellate court's decision became nal, the case was
remanded to the lower court for execution, and this was when the trial court issued its
assailed resolution which applied the 6% interest per annum prescribed in Article 2209
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of the Civil Code. In their petition for review on certiorari, the petitioners contended that
Central Bank Circular No. 416, providing thus — Cdpr

"By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
Monetary Board in its Resolution No. 1622 dated July 29, 1974, has prescribed
that the rate of interest for the loan, or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the absence of express contract as
to such rate of interest, shall be twelve (12%) percent per annum. This Circular
shall take effect immediately." (Emphasis found in the text) —

should have, instead, been applied. This Court 6 ruled:


"The judgments spoken of and referred to are judgments in litigations involving
loans or forbearance of any money, goods or credits. any other kind of monetary
judgment which has nothing to do with, nor involving loans or forbearance of any
money, goods or credits does not fall within the coverage of the said law for it is
not within the ambit of the authority granted to the Central Bank.

"xxx xxx xxx


"Coming to the case at bar, the decision herein sought to be executed
is one rendered in an Action for Damages for injury to persons and loss of
property and does not involve any loan, much less forbearances of any
money, goods or credits. As correctly argued by the private respondents, the
law applicable to the said case is Article 2209 of the New Civil Code which
reads —

'ARTICLE 2209. If the obligation consists in the payment of a


sum of money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of interest
agreed upon, and in the absence of stipulation, the legal interest which is
six percent per annum.'"

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz , 7 promulgated on
28 July 1986. The case was for damages occasioned by an injury to person and loss of
property. The trial court awarded private respondent Pedro Manabat actual and
compensatory damages in the amount of P72,500.00 with legal interest thereon from the
ling of the complaint until fully paid . Relying on the Reformina v. Tomol case, this Court 8
modi ed the interest award from 12% to 6% interest per annum but sustained the time
computation thereof, i.e., from the filing of the complaint until fully paid. Cdpr

In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of
damages arising from the collapse of a building, ordered inter alia, the "defendant United
Construction Co., Inc. (one of the petitioners) . . . to pay the plaintiff, . . ., the sum of
P989,335.68 with interest at the legal rate from November 29, 1968, the date of the ling
of the complaint until full payment . . . ." Save from the modi cation of the amount granted
by the lower court, the Court of Appeals sustained the trial court's decision. When taken to
this Court for review, the case, on 03 October 1986, was decided, thus:
"WHEREFORE, the decision appealed from is hereby MODIFIED and considering
the special and environmental circumstances of this case, we deem it reasonable
to render a decision imposing, as We do hereby impose, upon the defendant and
the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art.
1723, Civil Code, Supra. p. 10) indemnity in favor of the Philippine Bar
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Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with
the exception of attorney's fees) occasioned by the loss of the building and an
additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's
fees, the total sum being payable upon the finality of this decision. Upon failure to
pay on such nality, twelve (12%) per cent interest per annum shall be imposed
upon aforementioned amounts from nality until paid . Solidary costs against the
defendant and third-party defendants (except Roman Ozaeta)." (Emphasis
supplied).

A motion for reconsideration was led by United Construction, contending that "the
interest of twelve (12%) per cent per annum imposed on the total amount of the
monetary award was in contravention of law." The Court 1 0 ruled out the applicability of
the Reformina and Philippine Rabbit Bus Lines cases and, in its resolution of 15 April
1988, it explained: LLphil

"There should be no dispute that the imposition of 12% interest pursuant to


Central Bank Circular No. 416 . . . is applicable only in the following: (1) loans; (2)
forbearance of any money, goods or credit; and (3) rate allowed in judgments
(judgments spoken of refer to judgments involving loans or forbearance of any
money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-
161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the
instant case, there is neither a loan or a forbearance, but then no interest is
actually imposed provided the sums referred to in the judgment are paid upon the
finality of the judgment. It is delay in the payment of such final judgment, that will
cause the imposition of the interest.
"It will be noted that in the cases already adverted to, the rate of interest is
imposed on the total sum, from the ling of the complaint until paid; in other
words, as part of the judgment for damages. Clearly, they are not applicable to the
instant case." (Emphasis supplied)

The subsequent case of American Express International, Inc., vs. International Appellate
Court 1 1 was a petition for review on certiorari from the decision, dated 27 February 1985,
of the then Intermediate Appellate Court reducing the amount of moral and exemplary
damages awarded by the trial court, to P240,000.00 and P100,000.00, respectively, and its
resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial
court, i.e., P2,000,000,00 as moral damages and P400,000.00 as exemplary damages with
interest thereon at 12% per annum from notice of judgment, plus costs of suit. In a
decision of 09 November 1988, this Court, while recognizing the right of the private
respondent to recover damages, held the award, however, for moral damages by the trial
court, later sustained by the IAC, to be inconceivably large. The Court 1 2 thus set aside the
decision of the appellate court and rendered a new one, "ordering the petitioner to pay
private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral
damages, with six (6%) percent interest thereon computed from the finality of this decision
until paid." (Emphasis supplied). Cdpr

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 1 3 which
arose from a breach of employment contract. For having been illegally dismissed, the
petitioner was awarded by the trial court moral and exemplary damages without, however,
providing any legal interest thereon. When the decision was appealed to the Court of
Appeals, the latter held:
"WHEREFORE, except as modi ed hereinabove the decision of the CFI of Negros
Oriental dated October 31, 1972 is af rmed in all respects, with the modi cation
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that defendants-appellants, except defendant-appellant Merton Munn, are ordered
to pay, jointly and severally, the amounts stated in the dispositive portion of the
decision, including the sum of P1,400.00 in concept of compensatory damages,
with interest at the legal rate from the date of the ling of the complaint until fully
paid." (Emphasis supplied)
The petition for review to this Court was denied. The records were thereupon
transmitted to the trial court, and an entry of judgment was made. The writ of execution
issued by the trial court directed that only compensatory damages should earn interest
at 6% per annum from the date of the ling of the complaint. Ascribing grave abuse of
discretion on the part of the trial judge, a petition for certiorari assailed the said order.
This court said:
". . ., it is to be noted that the Court of Appeals ordered the payment of interest 'at
the legal rate' from the time of the filing of the complaint. . . . Said circular [Central
Bank Circular No. 416] does not apply to actions based on a breach of
employment contract like the case at bar." (Emphasis supplied)

The Court reiterated that the 6% interest per annum on the damages should be
computed from the time the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power
Corporation vs. Angas, 1 4 decided on 08 May 1992, involved the expropriation of certain
parcels of land. After conducting a hearing on the complaints for eminent domain, the trial
court ordered the petitioner to pay the private respondents certain sums of money as just
compensation for their lands so expropriated "with legal interest thereon . . . until fully
paid." Again, in applying the 6% legal interest per annum under the Civil Code, the Court 1 5
declared: LLpr

". . ., (T)he transaction involved is clearly not a loan or forbearance of money,


goods or credits but expropriation of certain parcels of land for a public purpose,
the payment of which is without stipulation regarding interest, and the interest
adjudged by the trial court is in the nature of indemnity for damages. The legal
interest required to be paid on the amount of just compensation for the properties
expropriated is manifestly in the form of indemnity for damages for the delay in
the payment thereof. Therefore, since the kind of interest involved in the joint
judgment of the lower court sought to be enforced in this case is interest by way
of damages, and not by way of earnings from loans, etc. Art. 2209 of the Civil
Code shall apply."

Concededly, there have been seeming variances in the above holdings. The cases can
perhaps be classi ed into two groups according to the similarity of the issues involved
and the corresponding rulings rendered by the court. The " first group " would consist of the
cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v.
Ruiz (1989) and National Power Corporation v. Angas (1992). In the "second group" would
be Malayan Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of
Appeals (1988), and American Express International v. Intermediate Appellate Court
(1988). LLpr

In the " first group ," the basic issue focus on the application of either the 6% (under the Civil
Code) or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in
these cases that there has been a consistent holding that the Central Bank Circular
imposing the 12% interest per annum applies only to loans or forbearance 1 6 of money,
goods or credits, as well as to judgments involving such loan or forbearance of money,
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goods or credits, and that the 6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the concept of damage arising from the
breach of a delay in the performance of obligations in general. Observe, too, that in these
cases, a common time frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is fully paid.
The "second group ," did not alter the pronounced rule on the application of the 6% or 12%
interest per annum, 17 depending on whether or not the amount involved is a loan or
forbearance, on the one hand, or one of indemnity for damage, on the other hand. Unlike,
however, the " rst group" which remained consistent in holding that the running of the legal
interest should be from the time of the ling of the complaint until fully paid, the "second
group" varied on the commencement of the running of the legal interest. cdll

Malayan held that the amount awarded should bear legal interest from the date of the
decision of the court a quo, explaining that "if the suit were for damages, 'unliquidated and
not known until de nitely ascertained, assessed and determined by the courts after proof,'
then, interest 'should be from the date of the decision.'" American Express International v.
IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be
"computed from the nality of (the) decision until paid ." The Nakpil and Sons case ruled
that 12% interest per annum should be imposed from the nality of the decision until the
judgment amount is paid.
The ostensible discord is not dif cult to explain. The factual circumstances may have
called for different applications, guided by the rule that the courts are vested with
discretion, depending on the equities of each case, on the award of interest. Nonetheless,
it may not be unwise, by way of clari cation and reconciliation, to suggest the following
rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts 1 8 is breached, the contravenor can be held liable for damages. 1 9
The provisions under Title XVIII on "Damages" of the Civil Code govern in determining the
measure of recoverable damages. 2 0
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: LibLex

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. 2 1 Furthermore, the interest due shall itself earn legal interest from
the time it is judicially demanded. 2 2 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 2 3 of the Civil Code.
2. When a 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 2 4 at the rate of 6% per annum. 2 5 No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established with
reasonable certainty. 2 6 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
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date of the judgment of the court is made (at which time the quanti cation 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 of finally adjudged. LLjur

3. When the judgment of the court awarding a sum of money becomes nal 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 nality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT(6%) on the amount due
computed from the decision, dated 03 February 1988, of the court a quo. A TWELVE
PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount
upon finality of this decision until the payment thereof. cdll

SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo,
Quiason, Puno and Kapunan, JJ., concur.
Mendoza, J., took no part.

Footnotes

1. Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of
the goods, unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;


(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.

2. 28 SCRA 65.

3. Penned by Justice Conrado Sanchez, concurred in by Justices Jose B.L. Reyes, Arsenio
Dizon, Querube Makalintal, Calixto Zaldivar, Enrique Fernando, Francisco Capistrano,
Claudio Teehankee and Antonio Barredo, Chief Justice Roberto Concepcion and Justice
Fred Ruiz Castro were on official leave.

4. The correct caption of the case is "Claro Rivera vs. Amadeo Matute, L-6998, 29 February
1956," 98 Phil., 516.
5. 139 SCRA 260, 265.

6. Penned by Justice Serafin Cuevas, concurred in by Justices Hermogenes Concepcion,


Jr., Vicente Abad Santos, Ameurfina Melencio-Herrera, Venicio Escolin, Lorenzo Relova,
Hugo Gutierrez, Jr., Buenaventura de la Fuente, Nestor Alampay and Lino Patajo. Justice
Ramon Aquino concurred in the result. Justice Efren Plana filed a concurring and
dissenting opinion, concurred in by Justice Claudio Teehankee while Chief Justice Felix
Makasiar concurred with the separate opinion of Justice Plana.
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7. 143 SCRA 158.

8. Penned by then Justice, now Chief Justice, Andres Narvasa, concurred in by Justices
Pedro Yap, Ameurfina Melencio-Herrera, Isagani A. Cruz and Edgardo Paras.
9. 160 SCRA 334.

10. Penned by Justice Edgardo Paras, with the concurrence of Justices Marcelo Fernan,
Teodoro Padilla, Abdulwahid Bidin, and Irene Cortes. Justice Hugo Gutierrez, Jr., took no
part because he was the ponente in the Court of Appeals.
11. 167 SCRA 209.

12. Rendered per curiam with the concurrence of then Chief Justice Marcelo Fernan,
Justices Andres Narvasa, Isagani A. Cruz, Emilio Gancayco, Teodoro Padilla, Abdulwahid
Bidin, Abraham Sarmiento, Irene Cortes, CArolina Grino-Aquino, Leo Medialdea and
Florenz Regalado. Justices, Ameurfina Melencio-Herrera and Hugo Gutierrez, Jr., took no
part because they did not participate in the deliberations. Justices Edgardo Paras and
Florentino Feliciano also took no part.

13. 170 SCRA 461.


14. 208 SCRA 542.

15. Penned by Justice Edgardo Paras with the concurrence of Justices Ameurfina
Melencio-Herrera, Teodoro Padilla, Florenz Regalado and Rodolfo Nocon.
16. Black's Law Dictionary (1990 ed., 644) citing the case of Hafer v. Spaeth, 22 Wash. 2d
378, 156 P. 2d 408, 411 defines the word forbearance, within the context of usury law, as
a contractual obligation of lender or creditor to refrain, during given period of time, from
requiring borrower or debtor to repay loan or debt then due and payable.

17. In the case of Malayan Insurance, the application of the 6% and 12% interest per
annum has no bearing considering that this case was decided upon before the issuance
of Circular No. 416 by the Central Bank.

18. "ART. 1157. Obligations arise from.

(1) Law;
(2) Contracts;

(3) Quasi-contracts;
(4) Acts or omissions punished by law; and

(5) Quasi-delicts."

19. "ART. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are
liable for damages."

20. "ART. 2195. The provisions of this Title (on Damages) shall be respectively applicable
to all obligations mentioned in article 1157."
21. "ART. 1956. No interest shall be due unless it has been expressly stipulated in writing."

22. "ART. 2212. Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point."

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23. "ART. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

"However, the demand by the creditor shall not be necessary in order that delay may
exist:

(1) When the obligation or the law expressly so declare; or


(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond
his power to perform.

"In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins."
24. "ART. 2210. Interest may, in the discretion of the court, be allowed upon damages
awarded for breach of contract.

"ART. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a
proper case, be adjudicated in the discretion of the court."
25. "Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six per cent per annum."
26. "ART. 2213. Interest cannot be recovered upon unliquidated claims or damages, except
when the demand can be established with reasonable certainty."

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SECOND DIVISION

[G.R. No. 151953. June 29, 2007.]

SALVADOR P. ESCAÑO and MARIO M. SILOS , petitioners, vs . RAFAEL


ORTIGAS, JR. , respondent.

DECISION

TINGA , J : p

The main contention raised in this petition is that petitioners are not under
obligation to reimburse respondent, a claim that can be easily debunked. The more
perplexing question is whether this obligation to repay is solidary, as contended by
respondent and the lower courts, or merely joint as argued by petitioners. ITEcAD

On 28 April 1980, Private Development Corporation of the Philippines (PDCP) 1


entered into a loan agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to
make available and lend to Falcon the amount of US$320,000.00, for speci c purposes
and subject to certain terms and conditions. 2 On the same day, three stockholders-
o cers of Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and
George T. Scholey executed an Assumption of Solidary Liability whereby they agreed "to
assume in [their] individual capacity, solidary liability with [Falcon] for the due and punctual
payment" of the loan contracted by Falcon with PDCP. 3 In the meantime, two separate
guaranties were executed to guarantee the payment of the same loan by other
stockholders and o cers of Falcon, acting in their personal and individual capacities. One
Guaranty 4 was executed by petitioner Salvador Escaño (Escaño), while the other 5 by
petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo
(Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to Escaño, Silos
and Joseph M. Matti (Matti). Thus, contracts were executed whereby Ortigas, George A.
Scholey, Inductivo and the heirs of then already deceased George T. Scholey assigned their
shares of stock in Falcon to Escaño, Silos and Matti. 6 Part of the consideration that
induced the sale of stock was a desire by Ortigas, et al., to relieve themselves of all liability
arising from their previous joint and several undertakings with Falcon, including those
related to the loan with PDCP. Thus, an Undertaking dated 11 June 1982 was executed by
the concerned parties, 7 namely: with Escaño, Silos and Matti identi ed in the document as
"SURETIES," on one hand, and Ortigas, Inductivo and the Scholeys as "OBLIGORS," on the
other. The Undertaking reads in part:
3. That whether or not SURETIES are able to immediately cause PDCP and
PAIC to release OBLIGORS from their said guarantees [ sic] , SURETIES hereby
irrevocably agree and undertake to assume all of OBLIGORs' said
guarantees [ sic ] to PDCP and PAIC under the following terms and conditions:

a. Upon receipt by any of [the] OBLIGORS of any demand from


PDCP and/or PAIC for the payment of FALCON's obligations with it, any of
[the] OBLIGORS shall immediately inform SURETIES thereof so that the
latter can timely take appropriate measures;
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b. Should suit be impleaded by PDCP and/or PAIC against any
and/or all of OBLIGORS for collection of said loans and/or credit facilities,
SURETIES agree to defend OBLIGORS at their own expense, without
prejudice to any and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief in respect to any of the
claims of PDCP and/or PAIC; and

c. In the event that any of [the] OBLIGORS is for any reason made to
pay any amount to PDCP and/or PAIC, SURETIES shall reimburse
OBLIGORS for said amount/s within seven (7) calendar days from such
payment; CSEHIa

4. OBLIGORS hereby waive in favor of SURETIES any and all fees which
may be due from FALCON arising out of, or in connection with, their said
guarantees [sic]. 8

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended
by PDCP. It would also execute a Deed of Chattel Mortgage over its personal properties to
further secure the loan. However, Falcon subsequently defaulted in its payments. After
PDCP foreclosed on the chattel mortgage, there remained a subsisting de ciency of
P5,031,004.07, which Falcon did not satisfy despite demand. 9
On 28 April 1989, in order to recover the indebtedness, PDCP led a complaint for
sum of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas,
Escaño, Silos, Silverio and Inductivo. The case was docketed as Civil Case No. 89-5128.
For his part, Ortigas led together with his answer a cross-claim against his co-defendants
Falcon, Escaño and Silos, and also manifested his intent to le a third-party complaint
against the Scholeys and Matti. 1 0 The cross-claim lodged against Escaño and Silos was
predicated on the 1982 Undertaking, wherein they agreed to assume the liabilities of
Ortigas with respect to the PDCP loan.
Escaño, Ortigas and Silos each sought to seek a settlement with PDCP. The rst to
come to terms with PDCP was Escaño, who in December of 1993, entered into a
compromise agreement whereby he agreed to pay the bank P1,000,000.00. In exchange,
PDCP waived or assigned in favor of Escaño one-third (1/3) of its entire claim in the
complaint against all of the other defendants in the case. 1 1 The compromise agreement
was approved by the RTC in a Judgment 1 2 dated 6 January 1994.
Then on 24 February 1994, Ortigas entered into his own compromise agreement 1 3
with PDCP, allegedly without the knowledge of Escaño, Matti and Silos. Thereby, Ortigas
agreed to pay PDCP P1,300,000.00 as "full satisfaction of the PDCP's claim against
Ortigas," 1 4 in exchange for PDCP's release of Ortigas from any liability or claim arising
from the Falcon loan agreement, and a renunciation of its claims against Ortigas. ACETSa

In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he
agreed to pay P500,000.00 in exchange for PDCP's waiver of its claims against him. 1 5
In the meantime, after having settled with PDCP, Ortigas pursued his claims against
Escaño, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-party
complaint against Matti and Silos, 1 6 while he maintained his cross-claim against Escaño.
In 1995, Ortigas led a motion for Summary Judgment in his favor against Escaño, Silos
and Matti. On 5 October 1995, the RTC issued the Summary Judgment, ordering Escaño,
Silos and Matti to pay Ortigas, jointly and severally , the amount of P1,300,000.00, as
well as P20,000.00 in attorney's fees. 1 7 The trial court ratiocinated that none of the third-
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party defendants disputed the 1982 Undertaking, and that "the mere denials of defendants
with respect to non-compliance of Ortigas of the terms and conditions of the Undertaking,
unaccompanied by any substantial fact which would be admissible in evidence at a
hearing, are not su cient to raise genuine issues of fact necessary to defeat a motion for
summary judgment, even if such facts were raised in the pleadings." 1 8 In an Order dated 7
March 1996, the trial court denied the motion for reconsideration of the Summary
Judgment and awarded Ortigas legal interest of 12% per annum to be computed from 28
February 1994. 1 9 SaICcT

From the Summary Judgment, recourse was had by way of appeal to the Court of
Appeals. Escaño and Silos appealed jointly while Matti appealed by his lonesome. In a
Decision 2 0 dated 23 January 2002, the Court of Appeals dismissed the appeals and
a rmed the Summary Judgment. The appellate court found that the RTC did not err in
rendering the Summary Judgment since the three appellants did not effectively deny their
execution of the 1982 Undertaking. The special defenses that were raised, "payment and
excussion," were characterized by the Court of Appeals as "appear[ing] to be merely sham
in the light of the pleadings and supporting documents and a davits." 2 1 Thus, it was
concluded that there was no genuine issue that would still require the rigors of trial, and
that the appealed judgment was decided on the bases of the undisputed and established
facts of the case.
Hence, the present petition for review led by Escaño and Silos. 2 2 Two main issues
are raised. First, petitioners dispute that they are liable to Ortigas on the basis of the 1982
Undertaking, a document which they do not disavow and have in fact annexed to their
petition. Second, on the assumption that they are liable to Ortigas under the 1982
Undertaking, petitioners argue that they are jointly liable only, and not solidarily. Further
assuming that they are liable, petitioners also submit that they are not liable for interest
and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their
memorandum before the Court, the appropriateness of the summary judgment as a relief
favorable to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of Civil Procedure,
summary judgment may avail if the pleadings, supporting a davits, depositions and
admissions on le show that, except as to the amount of damages, there is no genuine
issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law. Petitioner have not attempted to demonstrate before us that there existed a
genuine issue as to any material fact that would preclude summary judgment. Thus, we
a rm with ease the common rulings of the lower courts that summary judgment is an
appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held
liable to Ortigas on the basis of the 1982 Undertaking in this Summary Judgment. An
examination of the document reveals several clauses that make it clear that the agreement
was brought forth by the desire of Ortigas, Inductivo and the Scholeys to be released from
their liability under the loan agreement which release was, in turn, part of the consideration
for the assignment of their shares in Falcon to petitioners and Matti. The whereas clauses
manifest that Ortigas had bound himself with Falcon for the payment of the loan with
PDCP, and that "amongst the consideration for OBLIGORS and/or their principals aforesaid
selling is SURETIES' relieving OBLIGORS of any and all liability arising from their said joint
and several undertakings with FALCON." 2 3 Most crucial is the clause in Paragraph 3 of the
Undertaking wherein petitioners "irrevocably agree and undertake to assume all of
OBLIGORs' said guarantees [ sic] to PDCP . . . under the following terms and conditions." 2 4
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At the same time, it is clear that the assumption by petitioners of Ortigas's
"guarantees" [ sic] to PDCP is governed by stipulated terms and conditions as set forth in
sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by "any of OBLIGORS" of any
demand from PDCP for the payment of Falcon's obligations with it, "any of OBLIGORS" was
to immediately inform "SURETIES" thereof so that the latter can timely take appropriate
measures. Second, should "any and/or all of OBLIGORS" be impleaded by PDCP in a suit for
collection of its loan, "SURETIES agree[d] to defend OBLIGORS at their own expense,
without prejudice to any and/or all of OBLIGORS impleading SURETIES therein for
contribution, indemnity, subrogation or other relief" 2 5 in respect to any of the claims of
PDCP. Third, if any of the "OBLIGORS is for any reason made to pay any amount to [PDCP],
SURETIES [were to] reimburse OBLIGORS for said amount/s within seven (7) calendar
days from such payment." 2 6
Petitioners claim that, contrary to paragraph 3 (c) of the Undertaking, Ortigas was
not "made to pay" PDCP the amount now sought to be reimbursed, as Ortigas voluntarily
paid PDCP the amount of P1.3 Million as an amicable settlement of the claims posed by
the bank against him. However, the subject clause in paragraph 3 (c) actually reads "[i]n the
event that any of OBLIGORS is for any reason made to pay any amount to PDCP . . . "
2 7 As pointed out by Ortigas, the phrase "for any reason" reasonably includes any extra-
judicial settlement of obligation such as what Ortigas had undertaken to pay to PDCP, as it
is indeed obvious that the phrase was incorporated in the clause to render the eventual
payment adverted to therein unlimited and unqualified. ASHEca

The interpretation posed by petitioners would have held water had the Undertaking
made clear that the right of Ortigas to seek reimbursement accrued only after he had
delivered payment to PDCP as a consequence of a nal and executory judgment. On the
contrary, the clear intent of the Undertaking was for petitioners and Matti to relieve the
burden on Ortigas and his fellow "OBLIGORS" as soon as possible, and not only after
Ortigas had been subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause
PDCP . . . to within a reasonable time release all the OBLIGORS . . . from their guarantees
[ sic] to PDCP . . . " 2 8 In the event that Ortigas and his fellow "OBLIGORS" could not be
released from their guaranties, paragraph 2 commits petitioners and Matti to cause the
Board of Directors of Falcon to make a call on its stockholders for the payment of their
unpaid subscriptions and to pledge or assign such payments to Ortigas, et al., as security
for whatever amounts the latter may be held liable under their guaranties. In addition,
paragraph 1 also makes clear that nothing in the Undertaking "shall prevent OBLIGORS, or
any one of them, from themselves negotiating with PDCP . . . for the release of their said
guarantees [ sic]." 2 9
There is no argument to support petitioners' position on the import of the phrase
"made to pay" in the Undertaking, other than an unduly literalist reading that is clearly
inconsistent with the thrust of the document. Under the Civil Code, the various stipulations
of a contract shall be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly. 3 0 Likewise applicable is the provision that
if some stipulation of any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render it effectual. 3 1 As a
means to effect the general intent of the document to relieve Ortigas from liability to
PDCP, it is his interpretation, not that of petitioners, that holds sway with this Court.

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Neither do petitioners impress us of the non-ful llment of any of the other
conditions set in paragraph 3, as they claim. Following the general assertion in the petition
that Ortigas violated the terms of the Undertaking, petitioners add that Ortigas "paid PDCP
BANK the amount of P1.3 million without petitioners ESCANO and SILOS's knowledge and
consent." 3 2 Paragraph 3 (a) of the Undertaking does impose a requirement that any of the
"OBLIGORS" shall immediately inform "SURETIES" if they received any demand for payment
of FALCON's obligations to PDCP, but that requirement is reasoned "so that the
[SURETIES] can timely take appropriate measures" 3 3 presumably to settle the obligation
without having to burden the "OBLIGORS." This notice requirement in paragraph 3 (a) is
markedly way off from the suggestion of petitioners that Ortigas, after already having been
impleaded as a defendant in the collection suit, was obliged under the 1982 Undertaking
to notify them before settling with PDCP. CHDAEc

The other arguments petitioners have offered to escape liability to Ortigas are
similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the rst place. They note
that Ortigas had, in his answer, denied any liability to PDCP and had alleged that he signed
the Assumption of Solidary Liability not in his personal capacity, but as an o cer of
Falcon. However, such position, according to petitioners, could not be justi ed since
Ortigas later voluntarily paid PDCP the amount of P1.3 Million. Such circumstances,
according to petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The
Partial Compromise Agreement between PDCP and Ortigas expressly stipulated that
Ortigas's offer to pay PDCP was conditioned "without [Ortigas's] admitting liability to
plaintiff PDCP Bank's complaint, and to terminate and dismiss the said case as against
Ortigas solely." 3 4 Petitioners profess it is "unthinkable" for Ortigas to have voluntarily paid
PDCP without admitting his liability, 3 5 yet such contention based on assumption cannot
supersede the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had
already assigned his obligation to petitioners through the 1982 Undertaking. Yet the fact is
PDCP did pursue a judicial claim against Ortigas notwithstanding the Undertaking he
executed with petitioners. Not being a party to such Undertaking, PDCP was not precluded
by a contract from pursuing its claim against Ortigas based on the original Assumption of
Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his
distress through a settlement with the creditor bank. Indeed, paragraph 1 of the
Undertaking expressly states that "nothing herein shall prevent OBLIGORS, or any one of
them, from themselves negotiating with PDCP . . . for the release of their said guarantees
[ sic]." 3 6 Simply put, the Undertaking did not bar Ortigas from pursuing his own settlement
with PDCP. Neither did the Undertaking bar Ortigas from recovering from petitioners
whatever amount he may have paid PDCP through his own settlement. The stipulation that
if Ortigas was "for any reason made to pay any amount to PDCP[,] . . . SURETIES shall
reimburse OBLIGORS for said amount/s within seven (7) calendar days from such
payment" 3 7 makes it clear that petitioners remain liable to reimburse Ortigas for the sums
he paid PDCP. ETDAaC

We now turn to the set of arguments posed by petitioners, in the alternative, that is,
on the assumption that they are indeed liable.

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Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas,
claiming that the Undertaking did not provide for express solidarity. They cite Article 1207
of the New Civil Code, which states in part that "[t]here is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation requires
solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable
for the Undertaking, as the language used in the agreement "clearly shows that it is a
surety agreement" 3 8 between the obligors (Ortigas group) and the sureties (Escaño
group). Ortigas points out that the Undertaking uses the word "SURETIES" althroughout the
document, in describing the parties. It is further contended that the principal objective of
the parties in executing the Undertaking cannot be attained unless petitioners are solidarily
liable "because the total loan obligation can not be paid or settled to free or release the
OBLIGORS if one or any of the SURETIES default from their obligation in the Undertaking."
39

In case there is a concurrence of two or more creditors or of two or more debtors in


one and the same obligation, Article 1207 of the Civil Code states that among them, "
[t]here is a solidary liability only when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity." Article 1210 supplies further caution
against the broad interpretation of solidarity by providing: "The indivisibility of an
obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply
indivisibility."
These Civil Code provisions establish that in case of concurrence of two or more
creditors or of two or more debtors in one and the same obligation, and in the absence of
express and indubitable terms characterizing the obligation as solidary, the presumption is
that the obligation is only joint. It thus becomes incumbent upon the party alleging that the
obligation is indeed solidary in character to prove such fact with a preponderance of
evidence. AECcTS

The Undertaking does not contain any express stipulation that the petitioners
agreed "to bind themselves jointly and severally" in their obligations to the Ortigas group,
or any such terms to that effect. Hence, such obligation established in the Undertaking is
presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact
solidary, bears the burden to overcome the presumption of jointness of obligations. We
rule and so hold that he failed to discharge such burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identi ed
themselves in the Undertaking as "SURETIES", a term repeated no less than thirteen (13)
times in the document. Ortigas claims that such manner of identi cation su ciently
establishes that the obligation of petitioners to him was solidary in nature.
The term "surety" has a speci c meaning under our Civil Code. Article 2047 provides
the statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the
creditor to ful ll the obligation of the principal debtor in case the latter should fail
to do so.
If a person binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
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contract is called a suretyship . [Emphasis supplied] 4 0

As provided in Article 2047, in a surety agreement the surety undertakes to be


bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract
as it presupposes the existence of a principal contract. It appears that Ortigas's argument
rests solely on the solidary nature of the obligation of the surety under Article 2047. In
tandem with the nomenclature "SURETIES" accorded to petitioners and Matti in the
Undertaking, however, this argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as de ned under Article 2047 in the
rst place. That clearly is not the case here, notwithstanding the use of the nomenclature
"SURETIES" in the Undertaking. AcEIHC

Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom


the surety is solidarily bound by way of an ancillary obligation of segregate identity from
the obligation between the principal debtor and the creditor. The suretyship does bind the
surety to the creditor, inasmuch as the latter is vested with the right to proceed against the
former to collect the credit in lieu of proceeding against the principal debtor for the same
obligation. 4 1 At the same time, there is also a legal tie created between the surety and the
principal debtor to which the creditor is not privy or party to. The moment the surety fully
answers to the creditor for the obligation created by the principal debtor, such obligation
is extinguished. 4 2 At the same time, the surety may seek reimbursement from the principal
debtor for the amount paid, for the surety does in fact "become subrogated to all the
rights and remedies of the creditor." 4 3
Note that Article 2047 itself speci cally calls for the application of the provisions on
solidary obligations to suretyship contracts. 4 4 Article 1217 of the Civil Code thus comes
into play, recognizing the right of reimbursement from a co-debtor (the principal debtor, in
case of suretyship) in favor of the one who paid (i.e., the surety). 4 5 However, a signi cant
distinction still lies between a joint and several debtor, on one hand, and a surety on the
other. Solidarity signi es that the creditor can compel any one of the joint and several
debtors or the surety alone to answer for the entirety of the principal debt. The difference
lies in the respective faculties of the joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal debtor under
the provisions of the second paragraph does not become a solidary co-debtor to
all intents and purposes. There is a difference between a solidary co-
debtor and a ador in solidum (surety). The latter, outside of the
liability he assumes to pay the debt before the property of the principal
debtor has been exhausted, retains all the other rights, actions and
bene ts which pertain to him by reason of the ansa ; while a solidary
co-debtor has no other rights than those bestowed upon him in Section
4, Chapter 3, Title I, Book IV of the Civil Code .
The second paragraph of [Article 2047] is practically equivalent to the
contract of suretyship. The civil law suretyship is, accordingly, nearly
synonymous with the common law guaranty; and the civil law relationship
existing between the co-debtors liable in solidum is similar to the common law
suretyship. 4 6

In the case of joint and several debtors, Article 1217 makes plain that the solidary
debtor who effected the payment to the creditor "may claim from his co-debtors only the
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share which corresponds to each , with the interest for the payment already made."
Such solidary debtor will not be able to recover from the co-debtors the full amount
already paid to the creditor, because the right to recovery extends only to the proportional
share of the other co-debtors, and not as to the particular proportional share of the
solidary debtor who already paid. In contrast, even as the surety is solidarily bound with
the principal debtor to the creditor, the surety who does pay the creditor has the right to
recover the full amount paid, and not just any proportional share, from the principal debtor
or debtors. Such right to full reimbursement falls within the other rights, actions and
bene ts which pertain to the surety by reason of the subsidiary obligation assumed by the
surety. ISCaDH

What is the source of this right to full reimbursement by the surety? We nd the right
under Article 2066 of the Civil Code, which assures that "[t]he guarantor who pays for a
debtor must be indemni ed by the latter," such indemnity comprising of, among others,
"the total amount of the debt." 4 7 Further, Article 2067 of the Civil Code likewise
establishes that "[t]he guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor." 4 8
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the
provisions should not extend to sureties, especially in light of the quali er in Article 2047
that the provisions on joint and several obligations should apply to sureties. We reject that
argument, and instead adopt Dr. Tolentino's observation that "[t]he reference in the second
paragraph of [Article 2047] to the provisions of Section 4, Chapter 3, Title I, Book IV, on
solidary or several obligations, however, does not mean that suretyship is withdrawn from
the applicable provisions governing guaranty." 4 9 For if that were not the implication, there
would be no material difference between the surety as de ned under Article 2047 and the
joint and several debtors, for both classes of obligors would be governed by exactly the
same rules and limitations.
Accordingly, the rights to indemni cation and subrogation as established and
granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as de ned
under Article 2047. These rights granted to the surety who pays materially differ from
those granted under Article 1217 to the solidary debtor who pays, since the
"indemni cation" that pertains to the latter extends "only [to] the share which corresponds
to each [co-debtor]." It is for this reason that the Court cannot accord the conclusion that
because petitioners are identi ed in the Undertaking as "SURETIES," they are consequently
joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general
presumption favoring joint liability, the Court would have to be satis ed that among the
petitioners and Matti, there is one or some of them who stand as the principal debtor to
Ortigas and another as surety who has the right to full reimbursement from the principal
debtor or debtors. No suggestion is made by the parties that such is the case, and
certainly the Undertaking is not revelatory of such intention. If the Court were to give full
fruition to the use of the term "SURETIES" as conclusive indication of the existence of a
surety agreement that in turn gives rise to a solidary obligation to pay Ortigas, the
necessary implication would be to lay down a corresponding set of rights and obligations
as between the "SURETIES" which petitioners and Matti did not clearly intend. AaIDCS

It is not impossible that as between Escaño, Silos and Matti, there was an
agreement whereby in the event that Ortigas were to seek reimbursement from them per
the terms of the Undertaking, one of them was to act as surety and to pay Ortigas in full,
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subject to his right to full reimbursement from the other two obligors. In such case, there
would have been, in fact, a surety agreement which evinces a solidary obligation in favor of
Ortigas. Yet if there was indeed such an agreement, it does not appear on the records.
More consequentially, no such intention is re ected in the Undertaking itself, the very
document that creates the conditional obligation that petitioners and Matti reimburse
Ortigas should he be made to pay PDCP. The mere utilization of the term "SURETIES" could
not work to such effect, especially as it does not appear who exactly is the principal debtor
whose obligation is "assured" or "guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires "solidary
obligation of the Sureties," since the Undertaking expressly seeks to "reliev[e] obligors of
any and all liability arising from their said joint and several undertaking with [F]alcon," and
for the "sureties" to "irrevocably agree and undertake to assume all of obligors said
guarantees to PDCP." 5 0 We do not doubt that a nding of solidary liability among the
petitioners works to the bene t of Ortigas in the facilitation of these goals, yet the
Undertaking itself contains no stipulation or clause that establishes petitioners' obligation
to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by themselves
establish that the nature of the obligation requires solidarity. Even if the liability of
petitioners and Matti were adjudged as merely joint, the full relief and reimbursement of
Ortigas arising from his payment to PDCP would still be accomplished through the
complete execution of such a judgment.

Petitioners further claim that they are not liable for attorney's fees since the
Undertaking contained no such stipulation for attorney's fees, and that the situation did not
fall under the instances under Article 2208 of the Civil Code where attorney's fees are
recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to
his being impleaded in the suit led by PDCP. The Undertaking was precisely executed as a
means to obtain the release of Ortigas and the Scholeys from their previous obligations as
sureties of Falcon, especially considering that they were already divesting their shares in
the corporation. Speci c provisions in the Undertaking obligate petitioners to work for the
release of Ortigas from his surety agreements with Falcon. Speci c provisions likewise
mandate the immediate repayment of Ortigas should he still be made to pay PDCP by
reason of the guaranty agreements from which he was ostensibly to be released through
the efforts of petitioners. None of these provisions were complied with by petitioners, and
Article 2208 (2) precisely allows for the recovery of attorney's fees "[w]hen the defendant's
act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest." TDCAHE

Finally, petitioners claim that they should not be liable for interest since the
Undertaking does not contain any stipulation for interest, and assuming that they are liable,
that the rate of interest should not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals 51 set forth the
rules with respect to the manner of computing legal interest:
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.

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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
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. DaTHAc

3. When the judgment of the court awarding a sum of money becomes


nal 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 nality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. 5 2

Since what was the constituted in the Undertaking consisted of a payment in a


sum of money, the rate of interest thereon shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand. The interest rate imposed by the
RTC is thus proper. However, the computation should be reckoned from judicial or
extrajudicial demand. Per records, there is no indication that Ortigas made any
extrajudicial demand to petitioners and Matti after he paid PDCP, but on 14 March
1994, Ortigas made a judicial demand when he led a Third-Party Complaint praying
that petitioners and Matti be made to reimburse him for the payments made to PDCP.
It is the ling of this Third-Party Complaint on 14 March 1994 that should be
considered as the date of judicial demand from which the computation of interest
should be reckoned. 5 3 Since the RTC held that interest should be computed from 28
February 1994, the appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court
dated 5 October 1995 is MODIFIED by declaring that petitioners and Joseph M. Matti are
only jointly liable, not jointly and severally, to respondent Rafael Ortigas, Jr. in the amount
of P1,300,000.00. The Order of the Regional Trial Court dated 7 March 1996 is MODIFIED
in that the legal interest of 12% per annum on the amount of P1,300,000.00 is to be
computed from 14 March 1994, the date of judicial demand, and not from 28 February
1994 as directed in the Order of the lower court. The assailed rulings are a rmed in all
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other respects. Costs against petitioners.
SO ORDERED.
Carpio, Carpio-Morales and Velasco, Jr., JJ., concur.
Quisumbing, J., is on official leave.

Footnotes

1. Now PDCP Development Bank.


2. See rollo, p. 29.
3. Id. at 38.
4. Id. at 39.

5. Id. at 41.
6. See id. at 52-53.
7. See id. at 54.

8. Id. at 53-54. Emphasis supplied.


9. See id. at 29-30.

10. See id. at 48-49.


11. See id. at 56.

12. Id. at 56-57.

13. Id. at 58-60.


14. Id. at 59.

15. See id. at 62-63.


16. While apparently dropping his cross-claim against Silos.

17. Rollo, pp. 33-34.

18. Id. at 34.


19. Id. at 35-36.

20. Id. at 26-32. Penned by Associate Justice R. A. Barrios, concurred in by then Presiding
Justice of the Court of Appeals (now Supreme Court Associate Justice) M.A. Austria-
Martinez and Associate Justice B. L. Reyes. CADacT

21. Id. at 31.

22. Matti did not appeal. See id. at 169.


23. See id. at 52.

24. Id. at 53.


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25. Id.

26. Id. at 54.


27. Id. at 53.

28. Id.

29. Id.
30. Civil Code, Art. 1374.

31. Civil Code, Art. 1373.


32. Rollo, p. 18.

33. Id. at 53.

34. Id. at 59.


35. Id.

36. Id. at 53.


37. Supra note 26.

38. Rollo, p. 177.

39. Id. at 178.


40. Civil Code, Art. 2047.

41. "Since, generally, it is not necessary for a creditor to proceed against a principal in order to
hold the surety liable, where, by the terms of the contract, the obligation of the surety is
the same as that of the principal, then as soon as the principal is in default, the surety is
likewise in default, and may be sued immediately and before any proceedings are had
against the principal." Palmares v. Court of Appeals, 351 Phil. 664, 685 (1998) citing
Standard Accident Insurance Co. v. Standard Oil Co., 133 So. 2d 539; School District No.
65 of Lincoln County v. Universal Surety Co., 135 N. W. 2d 232; Depot Realty Syndicate v.
Enterprise Brewing Co., 171 P. 223.
42. "Payment made by one of the solidary debtors extinguishes the obligation." See Civil Code,
Art. 1217.

43. See Palmares v. Court of Appeals, supra at 686; citing 74 Am Jur 2d, Principal and Surety,
Subsection 68, 53.
44. See note 49.

45. See Lapanday Agricultural v. Court of Appeals, 381 Phil. 41, 52 (2000). Art. 1217 reads in
part: ""Payment made by one of the solidary debtors extinguishes the obligation. If two
or more solidary debtors offer to pay, the creditor may choose which offer to accept . . .
He who made payment may claim from his co-debtors only on the share which corresponds to
each, with interest for the payment already made. If the payment is made before the debt
is due, no interest for the intervening period may be demanded . . .""

46. A. Tolentino, V Civil Code of the Philippines (1992 ed.), at 502. See also Inciong v. Court of
Appeals, 327 Phil. 364, 373 (1996).
47. Civil Code, Art. 2066.
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48. Civil Code, Art. 2067.
49. A. Tolentino, supra note 46 citing Manila Surety & Fidelity Co. v. Barter Construction & Co.,
et al., 53 Off. Gaz. 8836 & Arranz v. Manila Fidelity & Surety Co., 53 Off. Gaz. 7247.
50. Rollo, pp. 89-90.
51. G.R. No. 97412, 12 July 1994, 234 SCRA 78.

52. Id. at 95-97.


53. See Records, pp. 429-436. caHASI

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FIRST DIVISION

[G.R. No. 142381. October 15, 2003.]

PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING ,


petitioners, vs . COURT OF APPEALS and TRADERS ROYAL BANK ,
respondents.

Balgos and Perez for petitioners.


Gonzales, Sinense & Jimenez for private respondent.
SYNOPSIS
The Court of Appeals a rmed with modi cation the Decision rendered by Branch
113 of the Regional Trial Court of Pasay City declaring petitioner Alfredo Ching liable to
respondent Traders Royal Bank (TRB) for the payment of the credit accommodations
extended to Philippine Blooming Mills, Inc. According to the trial court, the liability of Ching
as a surety attaches independently from his capacity as a stockholder of the Philippine
Blooming Mills. Under the Deed of Suretyship, petitioner Ching unconditionally agreed to
assume PBM's liability to respondent bank in the event PBM defaulted in the payment of
the said obligation in addition to whatever penalties, expenses and bank charges that may
occur by reason of default. The appellate court a rmed with modi cation the judgment of
the trial court. The modi cation is with respect to the amount of liability of petitioner
Alfredo Ching which is lowered from P19,333,558.16 to P15,773,708.78 with legal interest
of 12% per annum until it is fully paid. Petitioner Ching asserted before the Court that the
Deed of Suretyship dated 21 July 1977 could not answer for obligations not yet in
existence at the time of its execution. Speci cally, Ching maintained that the Deed of
Suretyship could not answer for debts contracted by PBM in 1980 and 1981. AHCaED

The Supreme Court a rmed the judgment of the Court of Appeals. According to the
Court, petitioner Ching is liable for credit obligations contracted by PBM against TRB
before and after the execution of the 21 July 1977 Deed of Suretyship. It is evident from
the tenor of the deed itself, referring to amounts PBM "may now be indebted or may
hereafter become indebted" to TRB. Article 2053 of the Civil Code expressly allows a
suretyship for "future debts." The Court also ruled that petitioner Ching is liable for the
amounts stated in the letters of credit covered by the trust receipts. Petitioner Ching
executed, on behalf of PBM, separate Undertakings for each trust receipt expressly
granting to TRB the right to take possession of the goods at any time to protect TRB's
interests. TRB may exercise such right without waiving its right to collect the full amount of
the loan to PBM. The Undertakings also provide that any suspension of payment or any
assignment by PBM for the benefit of creditors renders the loan due and demandable. HESAIT

SYLLABUS

1. CIVIL LAW; GUARANTY; EXTENT OF GUARANTY; RESPONDENT IS LIABLE


FOR CREDIT OBLIGATIONS CONTRACTED AFTER THE EXECUTION OF THE DEED OF
SURETYSHIP; IT IS EVIDENT FROM THE TENOR OF THE DEED ITSELF, REFERRING TO
AMOUNTS PETITIONER "MAY NOW BE INDEBTED OR MAY HEREAFTER BECOME
INDEBTED TO." — Ching is liable for credit obligations contracted by PBM against TRB
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before and after the execution of the 21 July 1977 Deed of Suretyship. This is evident from
the tenor of the deed itself, referring to amounts PBM "may now be indebted or may
hereafter become indebted" to TRB. The law expressly allows a "suretyship for future
debts". Article 2053 of the Civil Code provides: A guaranty may also be given as security
for future debts, the amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be secure. AaECSH

2. ID.; OBLIGATIONS; JOINT AND SOLIDARY OBLIGATIONS; AS CREDITOR,


RESPONDENT BANK HAS THE RIGHT UNDER THE SURETY TO PROCEED AGAINST
RESPONDENT FOR THE ENTIRE AMOUNT OF PETITIONER'S LOAN. — In granting the loan
to PBM, TRB required Ching's surety precisely to insure full recovery of the loan in case
PBM becomes insolvent or fails to pay in full. This was the very purpose of the surety.
Thus, Ching cannot use PBM's failure to pay in full as justi cation for his own reduced
liability to TRB. As surely, Ching agreed to pay in full PBM's loan in case PBM fails to pay in
full for any reason, including its insolvency. TRB, as creditor, has the right under the surety
to proceed against Ching for the entire amount of PBM's loan. This is clear from Article
1216 of the Civil Code: ART. 1216. The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The demand made against one of
them shall not be an obstacle to those which may subsequently be directed against the
others, so long as the debt has not been fully collected.cdasiajur

3. ID.; RESPONDENT IS LIABLE FOR THE AMOUNTS STATED IN THE LETTERS


OF CREDIT COVERED BY THE TRUST RECEIPTS. — Ching is still liable for the amounts
stated in the letters of credit covered by the trust receipts. Other than his bare allegations,
Ching has not shown proof of payment or settlement with TRB. Atty. Vicente Aranda, TRB's
corporate secretary and First Vice President of its Human Resource Management
Department, testi ed that the conditions in the TRB board resolution presented by Ching
were not met or implemented. Ching also claims that TRB prevented PBM from ful lling its
obligations under the trust receipts when TRB, together with other creditor banks, took
hold of PBM's inventories, including the goods covered by the trust receipts. Ching asserts
that this act of TRB released him from liability under the suretyship. Ching forgets that he
executed, on behalf of PBM, separate Undertakings for each trust receipt expressly
granting to TRB the right to take possession of the goods at any time to protect TRB's
interests. TRB may exercise such right without waiving its right to collect the full amount of
the loan to PBM. The Undertakings also provide that any suspension of payment or any
assignment by PBM for the bene t of creditors renders the loan due and demandable.
Presidential Decree No. 115 ("PD No. 115"), otherwise known as the Trust Receipts Law,
expressly allows TRB to take possession of the goods covered by the trust receipts. Thus,
even though TRB took possession of the goods covered by the trust receipts, PBM and
Ching remained liable for the entire amount of the loans covered by the trust receipts. ETDHaC

DECISION

CARPIO , J : p

The Case
This is a petition for review on certiorari 1 to annul the Decision 2 dated 16 July 1999
of the Court of Appeals in CA-G.R. CV No. 39690, as well as its Resolution dated 17
February 2000 denying the motion for reconsideration. The Court of Appeals a rmed with
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modi cation the Decision 3 dated 31 August 1992 rendered by Branch 113 of the Regional
Trial Court of Pasay City ("trial court"). The trial court's Decision declared petitioner Alfredo
Ching ("Ching") liable to respondent Traders Royal Bank ("TRB") for the payment of the
credit accommodations extended to Philippine Blooming Mills, Inc. ("PBM").
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:
1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust
Receipt No. 106; 4
2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust
Receipt No. 113; 5 and
3. P3,500,000 under the trust loan covered by a notarized Promissory
Note. 6
Ching was the Senior Vice President of PBM. In his personal capacity and not as a
corporate o cer, Ching signed a Deed of Suretyship dated 21 July 1977 binding himself
as follows:
. . . as primary obligor(s) and not as mere guarantor(s), hereby warrant to
the TRADERS ROYAL BANK, its successors and assigns, the due and punctual
payment by the following individuals and/or companies/ rms, hereinafter called
the DEBTOR(S), of such amounts whether due or not, as indicated opposite their
respective names, to wit:
NAME OF DEBTOR(S) AMOUNT OF OBLIGATION

PHIL. BLOOMING MILLS CORP. TEN MILLION PESOS


(P10,000,000.00)

owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as


evidenced by all notes, drafts, overdrafts and other credit obligations of every kind
and nature contracted/incurred by said DEBTOR(S) in favor of said CREDITOR.

In case of default by any and/or all the DEBTOR(S) to pay the whole or
part of said indebtedness herein secured at maturity, I/We, jointly and severally,
agree and engage to the CREDITOR, its successors and assigns, the prompt
payment, without demand or notice from said CREDITOR, of such notes, drafts,
overdrafts and other credit obligations on which the DEBTOR(S) may now be
indebted or may hereafter become indebted to the CREDITOR, together with all
interests, penalty and other bank charges as may accrue thereon and all expenses
which may be incurred by the latter in collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S)
of all the obligations to be performed under any contracts, evidencing
indebtedness/obligations and any supplements, amendments, charges or
modi cations made thereto, including but not limited to, the due and punctual
payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and
also presentment, demand, protest and notice of dishonor of any and all such
instruments, loans, advances, credits, or other indebtedness or obligations
hereinbefore referred to.
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MY/OUR liability on this Deed of Suretyship shall be solidary, direct and
immediate and not contingent upon the pursuit by the CREDITOR, its successors
or assigns, of whatever remedies it or they possess; and I/WE hereby agree to be
and remain bound upon this suretyship, irrespective of the existence, value or
condition of any collateral, notwithstanding also that all obligations of the
DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate
principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the
creditor for and as attorney's fees a sum equivalent to TEN PERCENT (10%) of the
total indebtedness (principal and interest) then unpaid, exclusive of all costs or
expenses for collection allowed by law. 7 (Emphasis supplied)

On 24 March and 6 August 1980, TRB granted PBM letters of credit on application
of Ching in his capacity as Senior Vice President of PBM. Ching later accomplished and
delivered to TRB trust receipts, which acknowledged receipt in trust for TRB of the
merchandise subject of the letters of credit. Under the trust receipts, PBM had the right to
sell the merchandise for cash with the obligation to turn over the entire proceeds of the
sale to TRB as payment of PBM's indebtedness. Letter of Credit No. 479 AD, covered by
Trust Receipt No. 106, has a face value of US$591,043, while Letter of Credit No. 563 AD,
covered by Trust Receipt No. 113, has a face value of US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which uniformly
provided that:
xxx xxx xxx

6. All obligations of the undersigned under the agreement of trusts shall bear
interest at the rate of _____ per centum (___%) per annum from the date due
until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and
severally undertake and agree to pay on demand on the said BANK, all
sums and amounts of money which said BANK may call upon them to pay
arising out of, pertaining to, and/or in any manner connected with this
receipt. In case it is necessary to collect the draft covered by the Trust
Receipt by or through an attorney-at-law, the undersigned hereby further
agree(s) to pay an additional of 10% of the total mount due on the draft as
attorney's fees, exclusive of all costs, fees and other expenses of collection
but shall in no case be less than P200.00" 8 (Emphasis supplied)

On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as
co-maker in the notarized Promissory Note evidencing this trust loan. The Promissory
Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and
severally, promise to pay the TRADERS ROYAL BANK or order, at its O ce in 4th
Floor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City, the sum of Pesos THREE
MILLION FIVE HUNDRED THOUSAND ONLY (P3,500,000.00), Philippine Currency,
with the interest rate of Eighteen Percent (18%) per annum until fully paid.

In case of non-payment of this note at maturity, I/We, jointly and severally


agree to pay an additional amount equivalent to two per cent (2%) of the principal
sum per annum, as penalty and collection charges in the form of liquidated
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damages until fully paid, and the further sum of ten percent (10%) thereof in full,
without any deduction, as and for attorney' fees whether actually incurred or not,
exclusive of costs and other judicial/extrajudicial expenses; moreover, I/We jointly
and severally, further empower and authorize the TRADERS ROYAL BANK at its
option, and without notice to set off or to apply to the payment of this note any
and all funds, which may be in its hands on deposit or otherwise belonging to
anyone or all of us, and to hold as security therefor any real or personal property
which may be in its possession or control by virtue of any other contract. 9
(Emphasis supplied)

PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD)
for P959,611.96, and of Trust Receipt No. 113 (Letter of Credit No. 563 AD) for
P1,191,137.13. PBM also defaulted on its P3,500,000 trust loan.
On 1 April 1982, PBM and Ching led a petition for suspension of payments with the
Securities and Exchange Commission ("SEC"), docketed as SEC Case No. 2250. 1 0 The
petition sought to suspend payment of PBM's obligations and prayed that the SEC allow
PBM to continue its normal business operations free from the interference of its creditors.
One of the listed creditors of PBM was TRB. 1 1
On 9 July 1982, the SEC placed all of PBM's assets, liabilities, and obligations under
the rehabilitation receivership of Kalaw, Escaler and Associates. 1 2
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation
receivership, TRB led with the trial court a complaint for collection against PBM and
Ching. TRB asked the trial court to order defendants to pay solidarily the following
amounts:
(1) P6,612,132.74 exclusive of interests, penalties, and bank charges
[representing its indebtedness arising from the letters of credit issued to its
various suppliers];
(2) P4,831,361.11, exclusive of interests, penalties, and other bank charges
[due and owing from the trust loan of 27 April 1981 evidenced by a
promissory note];
(3) P783,300.00 exclusive of interests, penalties, and other bank charges [due
and owing from the money market loan of 1 April 1981 evidenced by a
promissory note];

(4) To order defendant Ching to pay P10,000,000.00 under the Deed of


Suretyship in the event plaintiff can not recover the full amount of PBM's
indebtedness from the latter;
(5) The sum equivalent to 10% of the total sum due as and for attorney's
fees;

(6) Such other amounts that may be proven by the plaintiff during the trial, by
way of damages and expenses for litigation. 1 3

On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground
that the SEC had already placed PBM under receivership. 1 4 The trial court thus dismissed
the complaint against PBM. 1 5
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the
ground that the trial court had no jurisdiction over the subject matter of the case. PBM and
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Ching invoked the assumption of jurisdiction by the SEC over all of PBM's assets and
liabilities. 1 6
TRB led an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being
sued in his personal capacity as a surety for PBM; (2) the SEC decision declaring PBM in
suspension of payments is not binding on TRB; and (3) Presidential Decree No. 1758 ("PD
No. 1758"), 1 7 which Ching relied on to support his assertion that all claims against PBM
are suspended, does not apply to Ching as the decree regulates corporate activities only.
18

In its order dated 15 August 1983, 1 9 the trial court denied the motion to dismiss
with respect to Ching and a rmed its dismissal of the case with respect to PBM. The trial
court stressed that TRB was holding Ching liable under the Deed of Suretyship. As Ching's
obligation was solidary, the trial court ruled that TRB could proceed against Ching as
surety upon default of the principal debtor PBM. The trial court also held that PD No. 1758
applied only to corporations, partnership and associations and not to individuals.
Upon the trial court's denial of his Motion for Reconsideration, Ching led a Petition
for Certiorari and Prohibition 2 0 before the Court of Appeals. The appellate court granted
Ching's petition and ordered the dismissal of the case. The appellate court ruled that the
SEC assumed jurisdiction over Ching and PBM to the exclusion of courts or tribunals of
coordinate rank.
TRB assailed the Court of Appeals' Decision 2 1 before this Court. In Traders Royal
Bank v. Court of Appeals , 2 2 this Court upheld TRB and ruled that Ching was merely a
nominal party in SEC Case No. 2250. Creditors may sue individual sureties of debtor
corporations, like Ching, in a separate proceeding before regular courts despite the
pendency of a case before the SEC involving the debtor corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety and
accommodation co-maker of PBM. He claimed that the SEC had already issued a decision
2 3 approving a revised rehabilitation plan for PBM's creditors, and that PBM obtained the
credit accommodations for corporate purposes that did not redound to his personal
bene t. He further claimed that even as a surety, he has the right to the defenses personal
to PBM. Thus, his liability as surety would attach only if, after the implementation of
payments scheduled under the rehabilitation plan, there would remain a balance of PBM's
debt to TRB. 2 4 Although Ching admitted PBM's availment of the credit accommodations,
he did not show any proof of payment by PBM or by him.
TRB admitted certain partial payments on the PBM account made by PBM itself and
by the SEC-appointed receiver. 2 5 Thus, the trial court had to resolve the following
remaining issues:
1. How much exactly is the corporate defendant's outstanding obligation to
the plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how
much? 2 6

TRB presented Mr. Lauro Francisco, loan o cer of the Remedial Management
Department of TRB, and Ms. Carla Pecson, manager of the International Department of
TRB, as witnesses. Both witnesses testified to the following:
1. The existence of a Deed of Suretyship dated 21 July 1977 executed by
Ching for PBM's liabilities to TRB up to P10,000,000; 2 7
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2. The application of PBM and grant by TRB on 13 March 1980 of Letter of
Credit No. 479 AD for US$591,043, and the actual availment by PBM of the
full proceeds of the credit accommodation; 2 8
3. The application of PBM and grant by TRB on 6 August 1980 of Letter of
Credit No. 563 AD for US$156,000, and the actual availment by PBM of the
full proceeds of the credit accommodation; 2 9 and

4. The existence of a trust loan of P3,500,000 evidenced by a notarized


Promissory Note dated 27 April 1981 wherein Ching bound himself
solidarily with PBM; 3 0 and
5. Per TRB's computation, Ching is liable for P19,333,558.16 as of 31 October
1991. 3 1

Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President
of Human Resources Department of TRB, as witness. Ching sought to establish that TRB's
Board of Directors adopted a resolution xing the PBM account at an amount lower than
what TRB wanted to collect from Ching. The trial court allowed Atty. Aranda to testify over
TRB's manifestation that the Answer failed to plead the subject matter of his testimony.
Atty. Aranda produced TRB Board Resolution No. 5935, series of 1990, which contained
the minutes of the special meeting of TRB's Board of Directors held on 8 June 1990. 3 2 In
the resolution, the Board of Directors advised TRB's Management "not to release Alfredo
Ching from his JSS liability to the bank." 3 3 The resolution also stated the following:

a) Accept the P1.373 million deposits remitted over a period of 17 years or


until 2006 which shall be applied directly to the account (as remitted per
hereto attached schedule). The amount of P1.373 million shall be
considered as full payment of PBM's account. (The receiver is amenable to
this alternative)
The initial deposit/remittance which amounts to P150,000.00 shall be
remitted upon approval of the above and conforme to PISCOR and PBM.
Subsequent deposits shall start on the 3rd year and annually thereafter
(every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due
and demandable.
b) Write-off immediately P4.278 million. The balance [of] P1.373 million to
remain outstanding in the books of the Bank. Said balance will equal the
deposits to be remitted to the Bank for a period of 17 years. 3 4

However, Atty. Aranda himself testi ed that both items (a) and (b) quoted above were
never complied with or implemented. Not only was there no initial deposit of P150,000
as required in the resolution, TRB also disapproved the document prepared by the
receiver, which would have released Ching from his suretyship. 3 5
The Ruling of the Trial Court
The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of
Suretyship. The trial court explained:
[T]he liability of Ching as a surety attaches independently from his
capacity as a stockholder of the Philippine Blooming Mills. Indisputably, under
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the Deed of Suretyship defendant Ching unconditionally agreed to assume PBM's
liability to the plaintiff in the event PBM defaulted in the payment of the said
obligation in addition to whatever penalties, expenses and bank charges that may
occur by reason of default. Clear enough, under the Deed of Suretyship (Exh. J),
defendant Ching bound himself jointly and severally with PBM in the payment of
the latter's obligation to the plaintiff. The obligation being solidary, the plaintiff
Bank can hold Ching liable upon default of the principal debtor. This is explicitly
provided in Article 1216 of the New Civil Code already quoted above. 3 6

The dispositive portion of the trial court's Decision reads:


WHEREFORE, judgment is hereby rendered declaring defendant Alfredo
Ching liable to plaintiff bank in the amount of P19,333,558.16 (NINETEEN
MILLION THREE HUNDRED THIRTY THREE THOUSAND FIVE HUNDRED FIFTY
EIGHT & 16/100) as of October 31, 1991, and to pay the legal interest thereon
from such date until it is fully paid. To pay plaintiff 5% of the entire amount by
way of attorney's fees.

SO ORDERED. 3 7

The Ruling of the Court of Appeals


On appeal, Ching stated that as surety and solidary debtor, he should bene t from
the changed nature of the obligation as provided in Article 1222 of the Civil Code, which
reads:
Article 1222. A solidary debtor may, in actions led by the creditor,
avail himself of all defenses which are deprived from the nature of the obligation
and of those which are personal to him, or pertain to his own share. With respect
to those which personally belong to the others, he may avail himself thereof only
as regards that part of the debt for which that latter are responsible.

Ching claimed that his liability should likewise be reduced since the equitable
apportionment of PBM's remaining assets among its creditors under the rehabilitation
proceedings would have the effect of reducing PBM's liability. He also claimed that the
amount for which he was being held liable was excessive. He contended that the
outstanding principal balance, as stated in TRB Board Resolution No. 5893-1990, was only
P5,650,749.09. 3 8 Ching also contended that he was not liable for interest, as the loan
documents did not stipulate the interest rate, pursuant to Article 1956 of the Civil Code. 3 9
Finally, Ching asserted that the Deed of Suretyship executed on 21 July 1977 could not
guarantee obligations incurred after its execution. 4 0
TRB did not le its appellee's brief. Thus, the Court of Appeals resolved to submit
the case for decision. 4 1
The Court of Appeals considered the following issues for its determination:
1. Whether the Answer of Ching amounted to an admission of liability.

2. Whether Ching can still be sued as a surety after the SEC placed PBM
under rehabilitation receivership, and if in the a rmative, for how much. 4 2

The Court of Appeals resolved the rst two questions in favor of TRB, The appellate
court stated:
Ching did not deny under oath the genuineness and due execution of the
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L/Cs, Trust Receipts, Undertaking, Deed of Surety, and the 3.5 Million Peso
Promissory Note upon which TRB's action rested. He is, therefore; presumed to be
liable unless he presents evidence showing payment, partially or in full, of these
obligations (Investment and Underwriting Corporation of the Philippines v.
Comptronics Philippines, Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).
As surety of a corporation placed under rehabilitation receivership, Ching
can answer separately for the obligations of debtor PBM (Rizal Banking
Corporation v. Court of Appeals , Philippine Blooming Mills, Inc., and Alfredo
Ching, 178 SCRA 738 [1990], and Traders Royal Bank v. Philippine Blooming Mills
and Alfredo Ching, 177 SCRA 788 [1989])
Even a[n] SEC injunctive order cannot suspend payment of the surety's
obligation since the rehabilitation receivers are limited to the existing assets of
the corporation. 4 3

The dispositive portion of the Decision of the Court of Appeals reads:


WHEREFORE, the judgment of the lower court is hereby AFFIRMED but
modi ed with respect to the amount of liability of defendant; Alfredo Ching which
is lowered from P19,333;558.16 to P15,773,708.78 with legal interest of 12% per
annum until it is fully paid.
SO ORDERED. 4 4

The Court of Appeals denied Ching's Motion for Reconsideration for lack of merit.
Hence, this petition.
Issues
Ching assigns the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT
PETITIONER ALFREDO CHING WAS LIABLE FOR OBLIGATIONS
CONTRACTED BY PBM LONG AFTER THE EXECUTION OF THE DEED OF
SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT
THE PETITIONERS WERE LIABLE FOR THE TRUST RECEIPTS DESPITE
THE FACT THAT PRIVATE RESPONDENT HAD PREVENTED THEIR
FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND
PETITIONER ALFREDO CHING LIABLE FOR P15,773.708.78 WITH LEGAL
INTEREST AT 12% PER ANNUM UNTIL FULLY PAID DESPITE THE FACT
THAT UNDER THE REHABILITATION PLAN OF PETITIONER PBM, WHICH
WAS APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION,
PRIVATE RESPONDENT IS ONLY ENTITLED TO P1,373,415.00. 4 5

Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for
obligations not yet in existence at the time of its execution. Speci cally, Ching maintained
that the Deed of Suretyship could not answer for debts contracted by PBM in 1980 and
1981. Ching contended that no accessory contract of suretyship could arise without an
existing principal contract of loan. Ching likewise argued that TRB could no longer claim on
the trust receipts because TRB had already taken the properties subject of the trust
receipts. Ching likewise maintained that his obligation as surety could not exceed the
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P1,373,415 apportioned to PBM under the SEC-approved rehabilitation plan.
In its Comment, TRB asserted that the rst two assigned errors raised factual
issues not brought before the trial court. Furthermore, TRB pointed out that Ching never
presented PBM's rehabilitation plan before the trial court. TRB also stated that the
Supreme Court ruling in Traders Royal Bank v. Court of Appeals 4 6 constitutes res judicata
between the parties. Therefore, TRB could proceed against Ching separately from PBM to
enforce in full Ching's liability as surety. 4 7
The Ruling of the Court
The petition has no merit.
The case before us is an offshoot of the trial court's denial of Ching's motion to have
the case dismissed against him. The petition is a thinly veiled attempt to make this Court
reconsider its decision in the prior case of Traders Royal Bank v. Court of Appeals. 4 8 This
Court has already resolved the issue of Ching's separate liability as a surety despite the
rehabilitation proceedings before the SEC. We held in Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of
PBM, the SEC could not assume jurisdiction over his person and properties. The
Securities and Exchange Commission was empowered, as rehabilitation receiver,
to take custody and control of the assets and properties of PBM only, for the SEC
has jurisdiction over corporations only [and] not over private individuals, except
stockholders in an intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D.
1758). Being a nominal party in SEC Case No. 2250, Ching's properties were not
included in the rehabilitation receivership that the SEC constituted to take custody
of PBM's assets. Therefore, the petitioner bank was not barred from ling a suit
against Ching, as a surety for PBM. An anomalous situation would arise if
individual sureties for debtor corporations may escape liability by simply co- ling
with the corporation a petition for suspension of payments in the SEC whose
jurisdiction is limited only to corporations and their corporate assets.
xxx xxx xxx
Ching can be sued separately to enforce his liability as surety for PBM, as
expressly provided by Article 1216 of the New Civil Code.
xxx xxx xxx
It is elementary that a corporation has a personality distinct and separate
from its individual stockholders and members. Being an o cer or stockholder of
a corporation does not make one's property the property also of the corporation,
for they are separate entities (Adelio Cruz vs. Quiterio Dalisay , 152 SCRA 482).

Ching's act of joining as a co-petitioner with PBM is SEC Case No. 2250 did
not vest in the SEC jurisdiction over his person or property, for jurisdiction does
not depend on the consent or acts of the parties but upon express provision of
law (Tolentino vs. Social Security System , 138 SCRA 428; Lee vs. Municipal Trial
Court of Legaspi City, Br. I, 145 SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Ching's liability as a surety
of the credit accommodations TRB extended to PBM. The decision amounts to res
judicata 4 9 which bars Ching from raising the same issue again. Hence, the only question
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that remains is the amount of Ching's liability. Nevertheless, we shall resolve the issues
Ching has raised in his attempt to escape liability under his surety.
Whether Ching is liable for obligations PBM contracted after execution of the Deed of
Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and
after the execution of the 21 July 1977 Deed of Suretyship. This is evident from the tenor
of the deed itself, referring to amounts PBM "may now be indebted or may hereafter
become indebted" to TRB.
The law expressly allows a suretyship for "future debts". Article 2053 of the Civil
Code provides:
A guaranty may also be given as security for future debts, the amount of
which is not yet known; there can be no claim against the guarantor until the debt
is liquidated. A conditional obligation may also be secure. (Emphasis supplied)

Furthermore, this Court has ruled in Diño v. Court of Appeals 5 0 that:


Under the Civil Code, a guaranty may be given to secure even future debts,
the amount of which may not be known at the time the guaranty is executed. This
is the basis for contracts denominated as continuing guaranty or suretyship. A
continuing guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering; a series of transactions,
generally for an inde nite time or until revoked. It is prospective in its operation
and is generally intended to provide security with respect to future transactions
within certain limits, and contemplates a succession of liabilities, for which, as
they accrue, the guarantor becomes liable. Otherwise stated, a continuing
guaranty is one which covers all transactions, including those arising in the
future, which are within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof. A guaranty shall be construed
as continuing when by the terms thereof it is evident that the object is to give a
standing credit to the principal debtor to be used from time to time either
inde nitely or until a certain period; especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract states that the guaranty is to secure
advances to be made "from time to time," it will be construed to be a continuing
one.
In other jurisdictions, it has been held that the use of particular words and
expressions such as payment of "any debt," "any indebtedness," or "any sum," or
the guaranty of "any transaction," or money to be furnished the principal debtor
"at any time," or "on such time" that the principal debtor may require, have been
construed to indicate a continuing, guaranty.

Whether Ching's liability is limited to the amount stated in PBM's rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount
stated in PBM's rehabilitation plan. In claiming this reduced liability, Ching invokes Article
1222 of the Civil Code which reads:
Art. 1222. A solidary debtor may, in actions led by the creditor, avail
himself of all defenses which are derived from the nature of the obligation and of
those which are personal to him, or pertain to his own share. With respect to those
which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible.
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In granting the loan to PBM, TRB required Ching's surety precisely to insure full
recovery of the loan in case PBM becomes insolvent or fails to pay in full. This was the very
purpose of the surety. Thus, Ching cannot use PBM's failure to pay in full as justification for
his own reduced liability to TRB. As surely, Ching agreed to pay in full PBM's loan in case
PBM fails to pay in full for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the
entire amount of PBM's loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against one of
thetas shall not be an obstacle to those which may subsequently be directed
against the others, so long as the debt has not been fully collected. (Emphasis
supplied)

Ching further claims a reduced liability under TRB Board Resolution No. 5935. This
resolution states that PBM's outstanding loans may be reduced to P1.373 million subject
to certain conditions like the payment of P150,000 initial payment. 5 1 The resolution also
states that TRB should not release Ching's solidary liability under his surety. The resolution
even directs TRB's management to study Ching's criminal liability under the trust
documents. 5 2
Ching's own witness testi ed that Resolution No. 5935 was never implemented. For
one, PBM or its receiver never paid the P150,000 initial payment to TRB. TRB also rejected
the document that PBM's receiver presented which would have released Ching from his
suretyship. Clearly, Ching cannot rely on Resolution No. 5935 to escape liability under his
suretyship.
Ching's attempts to have this Court review the factual issues of the case are
improper. It is not a function of the Supreme Court to assess and evaluate again the
evidence, testimonial and evidentiary, adduced by the parties particularly where the
findings of both the trial court and the appellate court coincide on the matter. 5 3
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit covered by the trust
receipts. Other than his bare allegations, Ching has not shown proof of payment or
settlement with TRB. Atty. Vicente Aranda, TRB's corporate secretary and First Vice
President of its Human Resource Management Department, testi ed that the conditions in
the TRB board resolution presented by Ching were not met or implemented, thus:
ATTY. AZURA

Q Going into the resolution itself. A certain stipulation ha[s] been outlined,
and may I refer you to condition or step No. 1, which reads: "a) Accept the
P1.373 million deposits remitted over a period of 17 years or until 2006
which shall be applied directly to the account (as remitted per hereto
attached schedule). The amount of P1.373 million shall be considered as
full payment of PBM's account. (The receiver is amenable to this
alternative.) The initial deposit/remittance which amounts to P150,000.00
shall be remitted upon approval of the above and conforme of PISCOR [. . .]
and PBM. Subsequent deposit shall start on the 3rd year and annually
thereafter (every June 30th of the year) until June 30, 2006.

Failure to pay one annual installment shall make the whole obligation due
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and demandable. Now Mr. Witness, would you be in a position to inform
[the court] if these conditions listed in item (a) in Resolution No. 5935,
series of 1990, were implemented or met?

A Yes. I know for a fact that the conditions, more particularly the initial
deposit/remittance in the amount of P150,000.00 which have to be done
with approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform the court
if those conditions were met? Because your initial answer was yes.

A Yes sir, I am in a position to state that these conditions were not met.
Q Let me refer you to the condition listed as item (b) of the same resolution
which I read and quote: "Write off immediately P4.278 million. The balance
of P1.373 million to remain outstanding in the books of the bank. Said
balance will be remitted to the Bank for a period of 17 years." Mr. Witness,
would you be in a position to inform the court if the bank implemented that
particular condition?
A In the implementation of this settlement the receiver prepared a document
for approval and conformity of the bank. The said document would in
effect release the suretyship of Alfredo Ching and for that reason the bank
refused or denied fixing its conformity and approval with the court.
xxx xxx xxx

ATTY. ATIENZA ON REDIRECT EXAMINATION

Q Mr. Witness you stated that the reason why the plaintiff bank did not
implement these conditionalities [sic] was because the former defendant
corporation requested that the suretyship of Alfredo Ching be released, is
that correct?

A I did not say that. I said that in effect the document prepared by the lawyer
of the receiver . . . the bank would release the suretyship of Alfredo Ching,
that is why the bank is not amenable to such a document.
Q Despite this approved resolution the bank, because of said requirement or
conformity did not seek to implement these conditionalities [sic]?

A Yes sir because the conditions imposed by the board is not being followed
in that document because it was the condition of the board that the
suretyship should not be released but the document being presented to the
bank for signature and conformity in effect if signed would release the
suretyship. So it would be a violation with the approval of the board so the
bank did not sign the conformity. 5 4

Ching also claims that TRB prevented PBM from ful lling its obligations under the
trust receipts when TRB, together with other creditor banks, took hold of PBM's
inventories, including the goods covered by the trust receipts. Ching asserts that this act
of TRB released him from liability under the suretyship. Ching forgets that he executed, on
behalf of PBM, separate Undertakings for each trust receipt expressly granting to TRB the
right to take possession of the goods at any time to protect TRB's interests. TRB may
exercise such right without waiving its right to collect the full amount of the loan to PBM.
The Undertakings also provide that any suspension of payment or any assignment by PBM
for the bene t of creditors renders the loan due and demandable. Thus, the separate
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Undertakings uniformly provide:

2. That the said BANK may at any time cancel the foregoing trust and
take possession of said merchandise with the right to sell and
dispose of the same under such terms and conditions it may deem
best, or of the proceeds of such of the same as may then have been
sold, wherever the said merchandise or proceeds may then be found
and all the provisions of the Trust Receipt shall apply to and be
deemed to include said above-mentioned merchandise if the same
shall have been made up or used in the manufacture of any other
goods, or merchandise, and the said BANK shall have the same rights
and remedies against the said merchandise in its manufactured state,
or the product of said manufacture as it would have had in the event
that such merchandise had remained [in] its original state and
irrespective of the fact that other and different merchandise is used in
completing such manufacture. In the event of any suspension, or
failure or assignment for the bene t of creditors on the part of the
undersigned or of the non-ful llment of any obligation, or of the non-
payment at maturity of any acceptance made under said credit, or any
other credit issued by the said BANK on account of the undersigned
or of the non-payment of any indebtedness on the part of the
undersigned to the said BANK, all obligations, acceptances,
indebtedness and liabilities whatsoever shall thereupon without
notice mature and become due and payable and the BANK may avail
of the remedies provided herein. 5 5 (Emphasis supplied)
Presidential Decree No. 115 ("PD No. 115"), otherwise known as the Trust Receipts
Law, expressly allows TRB to take possession of the goods covered by the trust receipts.
Thus, Section 7 of PD No. 115 states:
SECTION 7. Rights of the entruster. — The entruster shall be entitled to
the proceeds from the sale of the goods, documents or instruments released
under a trust receipt to the entrustee to the extent of the amount owing to the
entruster or as appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the enforcement of all other
rights conferred on him in the trust receipt provided such are not contrary to the
provisions of this Decree.
The entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds realized
therefrom at any time upon default or failure of the entrustee to comply with any
of the terms and conditions of the trust receipt or any other agreement between
the entruster and the entrustee, and the entruster in possession of the goods,
documents or instruments may, on or after default, give notice to the entrustee of
the intention to sell, and may, not less than ve days after serving or sending of
such notice, sell the goods, documents or instruments at public or private sale,
and the entruster may, at a public sale, become a purchaser. The proceeds of any
such sale, whether public or private, shall be applied (a) to the payment of the
expenses thereof, (b) to the payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster. The entrustee shall receive any surplus
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but shall be liable to the entruster for any de ciency . Notice of sale shall be
deemed su ciently given if in writing, and either personally served on the
entrustee or sent by post-paid ordinary mail to the entrustee's last known
business address. (Emphasis supplied)

Thus, even though TRB took possession of the goods covered by the trust receipts,
PBM and Ching remained liable for the entire amount of the loans covered by they trust
receipts.
Absent goof of payment or settlement of PBM and Ching's credit obligations with
TRB, Ching's liability is what the Deed of Suretyship stipulates, plus the applicable interest
and penalties. The trust receipts, as well as the Letter of Undertaking dated 16 April 1980
5 6 executed by PBM, stipulate in writing the payment of interest without specifying the
rate. In such a case, the applicable interest rate shall be the legal rate, which is now 12%
per annum. 5 7 This is in accordance with Central Bank Circular No. 416, which states:
By virtue of the authority granted to it under Section 1 of Act No. 2655, as
amended, otherwise known as the "Usury Law," the Monetary Board, in its
Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest
for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall be
twelve per cent (12%) per annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing the P3,500,000 trust loan
provides for 18% interest per annum plus 2% penalty interest per annum in case of default.
This stipulated interest should continue to run until full payment of the P3,500,000 trust
loan. In addition, the accrued interest on all the credit accommodations should earn legal
interest from the date of filing of the complaint pursuant to Article 2212 of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point.

The trial court found and the appellate court a rmed that the outstanding principal
amounts as of the ling of the complaint with the trial court on 13 May 1983 were
P959,611.96 under Trust Receipt No. 106, P1,191,137.13 under Trust Receipt No. 113, and
P3,500,000 for the trust loan. As extracted from TRB's Statement of Account as of 31
October 1991, 5 8 the accrued interest on the trust receipts and the trust loan as of the
ling of the complaint on 13 May 1983 were P311,387.51 5 9 under Trust Receipt No. 106,
P338,739.81 6 0 under Trust Receipt No. 113, and P1,287,616.44 6 1 under the trust loan.
The penalty interest on the trust loan amounted to P137,315.07. 6 2 Ching did not rebut this
Statement of Account which TRB presented during trial.
Thus, the following is the summary of Ching's liability under the suretyship as of 13
May, 1983, the date of filing of TRB's complaint with the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)

Outstanding Principal P959,611.96


Accrued Interest (12% per annum) 311,387.51

2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)

Outstanding Principal P1,191,137.13


Accrued Interest (12% per annum) 338,739.82
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3. On the Trust Loan (Promissory Note)

Outstanding Principal P3,500,000.00


Accrued Interest (18% per annum) 1,287,616.44
Accrued Penalty Interest (2% per annum) 137,315.07

WHEREFORE, we AFFIRM the decision of the Court of Appeals with MODIFICATION.


Petitioner Alfredo Ching shall pay respondent Traders Royal Bank the following (1) on the
credit accommodations under the trust receipts, the total principal amount of
P2,150,749.09 with legal interest at 12% per annum from 14 May 1983 until full payment;
(2) on the trust loan evidenced by the Promissory Note, the principal sum of P3,500,000
with 20% interest per annum from 14 May 1983 until full payment; (3) on the total accrued
interest as of 13 May 1983, P2,075,058.84 with 12% interest per annum from 14 May
1983 until full payment. Petitioner Alfredo Ching shall also pay attorney's fees to
respondent Traders Royal Bank equivalent to 5% of the total principal and interest. AIcaDC

SO ORDERED.
Davide, Jr ., C .J ., Vitug and Azcuna, JJ ., concur.
Ynares-Santiago, J ., is on leave.

Footnotes
1. Under Rule 45 of the Rules of Court.

2. Penned by Associate Justice Conchita Carpio-Morales, with Associate Justices Artemon


D. Luna and Bernardo P Abesamis, concurring.

3. Penned by Judge Baltazar Relativo Dizon.


4. Annex "A," Records, p. 11; Exh. "O," Records, p. 382.

5. Annex "D," Records, p. 23; Exh. "O," Records, p. 382.


6. Annex "H," Records, p. 44.

7. Annex "J," Records, p. 46.

8. Interest rate in item number 6 was left blank. Annexes "G" to "G-5," Records, pp. 38–43.
9. Annex "H," Records, p. 44.

10. In the Matter of the Petition for Suspension of Payments, Philippine Blooming Mills Co.,
Inc., et al.
11. Rollo, p. 19.
12. Ibid.
13. Records, pp. 7–8.

14. Ibid., p. 47.


15. Ibid., p. 48.
16. Ibid., pp. 59–62.
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17. Section 3 of PD No. 1758 provides as follows: "Section 5 of the same Presidential
Decree (PD No. 902-A) is hereby amended by adding thereunder sub-paragraph d) to
read as follows:

d) Petitions of corporations, partnerships or associations to be declared in the state of


suspension of payments in cases where the corporation, partnership or association
possesses sufficient property to cover all its debts but foresees the impossibility of
meeting them when they respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its liabilities, but is under the
management of a Rehabilitation Receiver or Management Committee created pursuant
to this Decree."
18. Records, pp. 87–89.

19. Ibid., pp. 90–91.


20. Docketed as CA-G.R. No. 03593, 29 April 1987, Records, pp. 119–125. Entitled "Alfredo
Ching v. Hon. Baltazar R. Dizon, Judge, Regional Trial Court, Pasay City, Br. 113, and
Traders Royal Bank."
21. Penned by Associate Justice Jesus M. Elbinias, with Associate Justices Fidel P.
Purisima and Emeterio C. Cui, concurring.
22. G.R. No. 78412, 26 September 1989, 177 SCRA 788, Records, pp. 198–205. Penned by
Associate Justice Carolina C. Griño-Aquino, with Associate Justices Andres R. Narvasa,
Isagani A. Cruz, Emilio A. Gancayco, and Leo D. Medialdea, concurring.

23. Exh. "1," Records, pp. 167–181.


24. Records, pp. 159–165.

25. Exh. "O," Records, p. 382.


26. Records, p. 214.

27. TSN, 15 November 1991, Records, p. 417 (Lauro Francisco).

28. TSN, 15 November 1991, Records, p. 416 (Lauro Francisco); 6 December 1991, Records,
pp. 434–450 (Carla Pecson).
29. TSN, 15 November 1991, Records, p. 416 (Lauro Francisco); 10 January 1992, Records,
pp. 453–462 (Carla Pecson).

30. TSN, 15 November 1991, Records, p. 416 (Lauro Francisco); 10 January 1992, Records,
pp. 464–465 (Carla Pecson).

31. TSN, 15 November 1991, Records, pp. 418–419 (Lauro Francisco); 10 January 1992,
Records, pp. 467–468 (Carla Pecson).
32. TSN, 6 July 1994, Records, pp. 524–529.

33. Exh. "I," Records, p. 395.


34. Ibid.
35. TSN, 6 July 1992, Records, pp. 534–537.

36. Records, pp. 542–543.


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37. Ibid., p. 545.
38. CA Rollo, p. 35.

39. Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
40. CA Rollo, pp. 39–43.

41. Ibid., p. 57.


42. Rollo, p. 23.
43. Ibid., pp. 23–24.
44. Ibid., p. 27.
45. Ibid., p. 11.
46. Supra, note 22.
47. Rollo, pp. 134–136.
48. Supra, note 22.
49. The following are the requisites of res judicata:
1. The former judgment or order must be final;

2. It must have been rendered by a court having jurisdiction of the subject matter and
of the parties;

3. It must be a judgment or order on the merits; and


4. There must be identity of parties, of subject matter, and of cause of action between
the first and second actions. San Diego v. Cardona, 70 Phil. 281 (1940); Dr. Santos v.
Gabriel, 150-A Phil. 641 (1972).
50. G.R. No. 89775, 26 November 1992, 216 SCRA 9.

51. Exh. "1-a," Records, p. 395.

52. Exh. "Q," Records, p. 395.


53. Republic v. Court of Appeals, G.R. No. 116372, 18 January 2001, 349 SCRA 87;
Telefunken Semiconductors Employees Union-FFW v. Court of Appeals, G.R. No. 143013-
14, 18 December 2000, 348 SCRA 565; Sulpicio Lines, Inc. v. Court of Appeals, 365 Phil.
21 (1999).
54. TSN, 6 July 1992, Records, pp. 534–537.

55. Annexes "G" to "G-5," Records, pp. 38–43.

56. Records, p. 330.


57. Tan v. Court of Appeals, G.R. No. 116285, 19 October 2001, 367 SCRA 571; Eastern
Shipping Lines, Inc. v. Court of Appeals, G.R. No. 12 July 1994, 234 SCRA 78; Reformina
v. Tomol, Jr., No. L-59096, 11 October 1985, 139 SCRA 260.
58. Exh. "K," Records, p. 363.
59. Legal Interest Pursuant to Central Bank Circular No. 416 = 12% per annum
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Period from 29 August 1980 (Execution of trust receipt) to 13 May 1983 (Filing of the
complaint) = 987 days
Interest Due = (Principal) (Interest Rate) (Number of Days)/365 days

Interest Due = (P959,611.96) (.12) (987days)/365 days = P311;387.51

60. Legal Interest Pursuant to Central Bank Circular No. 416 = 12% per annum
Period from 29 December 1980 (Execution of trust receipt) to 13 May 1983 (Filing of the
complaint) = 865 days

Interest Due = (Principal) (Interest Rate) (Number of Days)/365 days


Interest Due = (P1,191,137.13) (.12) (865 days)/365 days = P338,739.82

61. Stipulated Interest Rate = 18% per annum

Period from 27 April 1981 (Execution of promissory note) to 13 May 1983 (Filing of the
complaint) = 746 days

Interest Due = (Principal) (Interest Rate) (Number of Days)/365 days

Interest Due = (P3,500,000) (.18) (746 days)/365 days = P1,287,616.44


62. Stipulated Penalty Interest Rate = 2% per annum

Period from 27 May 1980 (Maturity of promissory note) to 13 May 1983 (Filing of the
complaint) = 716 days
Interest Due = (Principal) (Interest Rate) (Number of Days)/365 days

Interest Due = (P3,500,000) (.02) (716 days)/365 days = P137,315.07

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FIRST DIVISION

[G.R. No. 118342. January 5, 1998.]

DEVELOPMENT BANK OF THE PHILIPPINES , petitioner, vs . COURT OF


APPEALS and LYDIA CUBA , respondents.

[G.R. No. 118367. January 5, 1998.]

LYDIA P. CUBA , petitioner, vs . COURT OF APPEALS, DEVELOPMENT


BANK OF THE PHILIPPINES and AGRIPINA P. CAPERAL , respondents.

Office of the Legal Counsel DBP for petitioner.


Virgilio C . Leynes, Agripina Laperal J .C . Calida and Associates for
respondent Lydia Cuba.

SYNOPSIS

Lydia P. Cuba (Cuba) obtained from the Development Bank of the Philippines
(DBP) three separate loans, each of which was covered by a promissory note. As a
security for said loans, Cuba executed two Deeds of Assignment of her Leasehold
Rights over her 44-hectare shpond. For failure of Cuba to pay her loans, DBP
appropriated her Leasehold Rights over the shpond without foreclosure proceedings.
Subsequently, Cuba offered and agreed to repurchase her leasehold rights from DBP.
For failure to pay the monthly amortizations stipulated in the deed of conditional sale
executed by DBP in favor of Cuba, DBP took possession of the leasehold right and
subsequently sold the same to Agripina Capera. Cuba led a complaint with the
Regional Trial Court seeking declaration of nullity DBP's appropriation of her leasehold
rights without foreclosure proceedings which is contrary to Article 2088 of the Civil
Code. The trial court resolved the issue in favor of Cuba and declared invalid the deed
of assignment for being a clear case of patum commissorium. On appeal, the Court of
Appeals reverse the decision of the trial court and declared that the deed of
assignment was an express authority from Cuba for DBP to sell whatever right she had
over the shpond. The appellate court likewise held that the deed of assignment
amounted to a novation of the promissory note.
The Supreme Court ruled that the deed of assignment of leasehold rights was a
mortgage contract. The assignment, being in its essence a mortgage, was but a
security and not a satisfaction of indebtedness. DBP's act of appropriating Cuba's
rights was violative of Article 2088 of the Civil Code, which forbids a creditor from
appropriating, or disposing of, the thing given as security for the payment of debt. DBP
cannot take refuge in the deed of assignment to justify its act of appropriating the
leasehold rights since the said deed did not provide that the leasehold rights would
automatically pass to DBP upon Cuba's failure to pay the loans on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by Cuba,
and to apply the proceeds to the payment of the loan. The Supreme Court likewise
found no merit in the contention that the assignment novated the promissory notes in
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that the obligation to pay a sum of money was substituted by the assignment of the
rights over the shpond. The said assignment merely complemented or supplemented
the promissory notes. The obligation to pay a sum of money remained, and the
assignment merely served as security for the loans covered by the promissory notes.
HcSaAD

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; MORTGAGE; AN


ASSIGNMENT TO GUARANTEE AN OBLIGATION IS VIRTUALLY A MORTGAGE; CASE AT
BAR. — We agree with CUBA that the assignment of leasehold rights was a mortgage
contract. Simultaneous with the execution of the notes was the execution "Assignments
of Leasehold Rights" where CUBA assigned her leasehold rights and interest on a 44-
hectare fishpond, together with the improvements thereon. As pointed out by CUBA, the
deeds of assignment constantly referred to the assignor (CUBA) as "borrower"; the
assigned rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition No. 22 of the deed, it was provided that "failure to
comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed." And, condition
No. 33 provided that if "foreclosure is actually accomplished, the usual 10% attorney's
fees and 10% liquidated damages of the total obligation shall be imposed." There is,
therefore, no shred of doubt that a mortgage was intended. In People's Bank & Trust
Co. vs. Odom, this Court had the occasion to rule that an assignment to guarantee an
obligation is in effect as mortgage.
2. ID.; ID.; ID.; ASSIGNMENT OF RIGHTS COMPLEMENTED AND DID NOT
NOVATE THE PROMISSORY NOTES. — We nd no merit in DBP's contention that the
assignment novated the promissory notes in that the obligation to pay a sum of money
the loans (under the promissory notes) was substituted by the assignment of the rights
over the shpond (under the deed of assignment). As correctly pointed out by CUBA,
the said assignment merely complemented or supplemented the notes; both could
stand together. The former was only an accessory to the latter. Contrary to DBP's
submission, the obligation to pay a sum of money remained, and the assignment
merely served as security for the loans were granted. Also, the last paragraph of the
assignment stated: "The assignor further reiterates and states all terms, covenants, are
conditions stipulated in the promissory note or notes covering the proceeds of this
loan, making said promissory note or notes, to all intent and purposes, an integral part
hereof".
3. ID.; ID.; PAYMENT BY CESSION ; DOES NOT APPLY WHERE THERE IS
ONLY ONE CREDITOR. — Neither did the assignment amount to payment by cession
under Article 1255 of the Civil Code for the plain and simple reason that there was only
one creditor, the DBP. Article 1255 contemplates the existence of two or more
creditors and involves the assignment of all the debtor's property.
4. ID.; ID.; DATION IN PAYMENT; DOES NOT APPLY WHERE ASSIGNMENT
WAS A MERE SECURITY AND NOT IN SATISFACTION OF INDEBTEDNESS. — Nor did the
assignment constitute dation in payment under Article 1245 of the Civil Code, which
reads: "Dation in payment, whereby property is alienated to the creditor in satisfaction
of a debt in money, shall be governed by the law on sales." It bears stressing that the
assignment, being in its essence a mortgage, was but a security and not a satisfaction
of indebtedness.
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5. ID.; ID.; PACTUM COMMISSORIUM ; ELEMENTS. — The elements of
pactum commissorium are as follows: (1) there should be a property mortgaged by
way of security for the payment of the principal obligation, and (2) there should be a
stipulation for automatic appropriation by the creditor of the thing mortgaged in case
of non-payment of the principal obligation within the stipulated period.
6. ID.; ID.; ID.; NOT PRESENT WHERE THERE IS NO AUTOMATIC
APPROPRIATION BY THE CREDITOR OF THE THING MORTGAGED; CASE AT BAR. —
Condition No. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBA's failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by CUBA,
and to apply the proceeds to the payment of the loan. This provision is a standard
condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code,
which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged
property for the payment of the principal obligation. DBP, however, exceeded the
authority vested by condition No. 12 of the deed of assignment. As admitted by it
during the pre-trial, it had "[w]ithout, foreclosure proceedings, whether judicial or
extrajudicial . . . appropriated the [l]easehold rights of plaintiff Lydia Cuba over the
shpond in question." Its contention that it limited itself to mere administration by
posting caretakers is further belied by the deed of conditional sale it executed in favor
of CUBA. DBP cannot take refuge in condition No. 12 of the deed of assignment to
justify its act of appropriating the leasehold rights. As stated earlier, condition No. 12
did not provide that CUBA's default would operate to vest in DBP ownership of the said
rights. Besides, an assignment to guarantee an obligation, as in the present case, is
virtually a mortgage and not an absolute conveyance of title which confers ownership
on the assignee.
7. ID.; ID.; MORTGAGE; CREDITOR CANNOT APPROPRIATE THE THING
GIVEN AS SECURITY; CASE AT BAR. — At any rate, DBP's act of appropriating CUBA's
leasehold rights was violative of Article 2088 of the Civil Code, which forbids a creditor
from appropriating, or disposing of the thing given as security for the payment of a
debt. Instead of taking ownership of the questioned real rights upon default by CUBA,
DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of
the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in
its letter dated 26 October 1997, addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau of Fisheries and Aquatic
Resources, DBP declared that it "had foreclosed the mortgage and enforced the
assignment of leasehold rights on March 21, 1979 for failure of said spouses (CUBA
spouses) to pay their loan amortizations." This only goes to show that DBP was aware
of the necessity of foreclosure proceedings. In view of the false representation of DBP
that it had already foreclosed the mortgage, the Bureau of Fisheries cancelled CUBA's
original lease permit, approved the deed of conditional sale, and issued a new permit in
favor of CUBA. Said acts which were predicated on such false representation, as well as
the subsequent acts emanating from DBP's appropriation of the leasehold rights,
should therefore be set aside. To validate these acts would open the oodgates to
circumvention of Article 2088 of the Civil Code. Even in cases where foreclosure
proceedings were had, this Court had not hesitated to nullify the consequent auction
sale for failure to comply with the requirements laid down by law, such as Act No. 3135,
as amended. With more reason that the sale of property given as security for the
payment of a debt be set aside if there was no prior foreclosure proceeding.

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8. REMEDIAL LAW; ACTIONS; ESTOPPEL; CANNOT GIVE VALIDITY TO AN
ACT PROHIBITED BY LAW. — The fact that CUBA offered and agreed to purchase her
leasehold rights from DBP did not estop her from questioning DBP's act of
appropriation. Estoppel is unvailing in this case as held by this Court in some cases
estoppel cannot give validity to an act that is prohibited by law or against public policy.
Hence, the appropriation of the leasehold rights, being contrary to Article 2088 of the
Civil Code and to public policy, cannot be deemed validated by estoppel.
9. CIVIL LAW; DAMAGES; ACTUAL OR COMPENSATORY DAMAGES; MUST
BE DULY PROVED. — Actual or compensatory damages cannot be presumed, but must
be proved with reasonable degree of certainty. A court cannot rely on speculations,
conjectures, or guesswork as to the fact and amount of damages, but must depend
upon competent proof that they have been suffered by the injured party and on the best
obtainable evidence of the actual amount thereof. It must point out speci c facts which
could afford a basis for measuring whatever compensatory or actual damages' are
borne.
10. ID.; ID.; ID.; ID.; CASE AT BAR. — In the present case, the trial court
awarded in favor of CUBA P1,067,500 as actual damages consisting of P550,000
which represented the value of the alleged lost articles of CUBA and P517,500 which
represented the value of the 230,000 pieces of bangus allegedly stocked in 1979 when
DBP rst ejected CUBA from the shpond and the adjoining house. This award was
a rmed by the Court of Appeals. We nd that the alleged loss of personal belongings
and equipment was not proved by clear evidence. Other than the testimony of CUBA
and her caretaker, there was no proof as to the existence of those items before DBP
took over the shpond in question. With regard to the award of P517,000 representing
the value of the alleged 230,000 pieces of bangus which died when DBP took
possession of the shpond in March 1979, the same was not called for. Such loss was
not duly proved; besides, the claim therefor was delayed unreasonably. From 1979 until
after the ling of her complaint in court in May 1985, CUBA did not bring to the
attention of DBP the alleged loss. The award of actual damages should, therefore, be
struck down for lack of sufficient basis.
11. ID.; ID.; MORAL DAMAGES; AWARD PROPER WHERE ASSAILED ACT IS
CONTRARY TO LAW. — In view, however, of DBP's act of appropriating CUBA's
leasehold rights which was contrary to law and public policy, as well as its false
representation to the then Ministry of Agriculture and Natural Resources that it had
"foreclosed the mortgage," an award of moral damages in the amount of P50,000 is in
order conformably with Article 2219(10), in relation to Article 21, of the Civil Code.
12. ID.; ID.; EXEMPLARY OR CORRECTIVE DAMAGES; AWARDED IN CASE AT
BAR. — Exemplary or corrective damages in the amount of P25,000 should likewise be
awarded by way of example or correction for the public good.
13. ID.; ID.; ATTORNEY'S FEE; RECOVERABLE WHERE THERE IS AWARD OF
EXEMPLARY DAMAGES. — There being an award of exemplary damages, attorney's
fees are also recoverable.

DECISION

DAVIDE , JR. , J : p

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These two consolidated cases stemmed from a complaint 1 led against the
Development Bank of the Philippines (hereafter DBP) and Agripina Caperal led by
Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of
Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of
DBP's appropriation of CUBA's rights, title, and interests over a 44-hectare shpond
located in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2)
the annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the
annulment of DBP's sale of the subject shpond to Caperal; (4) the restoration of her
rights, title, and interests over the shpond; and (5) the recovery of damages, attorney's
fees, and expenses of litigation. LLjur

After the joinder of issues following the ling by the parties of their respective
pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed on the
following facts, which were embodied in the pre-trial order: 2
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No.
2083 (new) dated May 13, 1974 from the Government;

2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the
Philippines in the amounts of P109,000.00; P109,000.00; and P98,700.00
under the terms stated in the Promissory Notes dated September 6, 1974;
August 11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in
accordance with the terms of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial,
defendant DBP appropriated the leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question;

6. After defendant DBP has appropriated the Leasehold Rights of plaintiff


Lydia Cuba over the shpond in question, defendant DBP, in turn, executed
a Deed of Conditional Sale of the Leasehold Rights in favor of plaintiff
Lydia Cuba over the same fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two
letters to the Manager DBP, Dagupan City dated November 6, 1979 and
December 20, 1979. DBP thereafter accepted the offer to repurchase in a
letter addressed to plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia
Cuba, a new Fishpond Lease Agreement No. 2083-A dated March 24, 1980
was issued by the Ministry of Agriculture and Food in favor of plaintiff
Lydia Cuba only, excluding her husband;

9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed
of Conditional Sale;

10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed
of Conditional Sale, she entered with the DBP a temporary arrangement
whereby in consideration for the deferment of the Notarial Rescission of
Deed of Conditional Sale, plaintiff Lydia Cuba promised to make certain
payments as stated in temporary Arrangement dated February 23, 1982;
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11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act
dated March 13, 1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the
Leasehold Rights of the fishpond in question;

13. That after defendant DBP took possession of the Leasehold Rights over
the shpond in question, DBP advertised in the SUNDAY PUNCH the public
bidding dated June 24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of
defendant Agripina Caperal on August 6, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement
No. 2083-A on December 28, 1984 by the Ministry of Agriculture and Food.

Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the
pre-trial order. 3
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to
itself CUBA's leasehold rights over the shpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid. CUBA
insisted on an a rmative resolution. DBP stressed that it merely exercised its
contractual right under the Assignments of Leasehold Rights, which was not a contract
of mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBP's taking
possession and ownership of the property without foreclosure was plainly violative of
Article 2088 of the Civil Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge
or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

It disagreed with DBP's stand that the Assignments of Leasehold Rights were not
contracts of mortgage because (1) they were given as security for loans (2) although
the "' shpond land"' in question is still a public land, CUBA's leasehold rights and
interest thereon are alienable rights which can be the proper subject of a mortgage; and
(3) the intention of the contracting parties to treat the Assignment of Leasehold Rights
as a mortgage was obvious and unmistakable; hence, upon CUBA's default, DBP's only
right was to foreclose the Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of
Leasehold Rights for being a clear case of pactum commissorium expressly prohibited
and declared null and void by Article 2088 of the Civil Code. It then concluded that since
DBP never acquired lawful ownership of CUBA's leasehold rights, all acts of ownership
and possession by the said bank were void. Accordingly, the Deed of Conditional Sale in
favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale in
favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed by
Caperal in favor of DBP, were also void and ineffective.
As to damages, the trial court found "ample evidence on record" that in 1984 the
representatives of DBP ejected CUBA and her caretakers not only from the shpond
area but also from the adjoining big house; and that when CUBA's son and caretaker
went there on 15 September 1985, they found the said house unoccupied and
destroyed and CUBA's personal belongings, machineries, equipment, tools, and other
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articles used in shpond operation which were kept in the house were missing. The
missing items were valued at about P550,000. It further found that when CUBA and her
men were ejected by DBP for the rst time in 1979, CUBA had stocked the shpond
with 250,000 pieces of bangus sh (milk sh), all of which died because the DBP
representatives prevented CUBA's men from feeding the sh. At the conservative price
of P3.00 per sh, the gross value would have been P690,000, and after deducting 25%
of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of
P517,500. It then set the aggregate of the actual damages sustained by CUBA at
P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage on CUBA's
leasehold rights. Such representation induced the said Bureau to terminate CUBA's
leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And
considering that by reason of her unlawful ejectment by DBP, CUBA "suffered moral
shock, degradation, social humiliation, and serious anxieties for which she became sick
and had to be hospitalized" the trial court found her entitled to moral and exemplary
damages. The trial court also held that CUBA was entitled to P100,000 attorney's fees
in view of the considerable expenses she incurred for lawyers' fees and in view of the
finding that she was entitled to exemplary damages.
In its decision of 31 January 1990, 4 the trial court disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of
defendant Development Bank of the Philippines in appropriating for
its own interest, without any judicial or extra-judicial foreclosure,
plaintiffs leasehold rights and interest over the shpond land in
question under her Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980
by and between the defendant Development Bank of the Philippines
and plaintiff (Exh. E and Exh. 1) and the acts of notarial rescission
of the Development Bank of the Philippines relative to said sale
(Exhs. 16 and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by
and between the Development Bank of the Philippines and
defendant Agripina Caperal (Exh. F and Exh. 21), the Fishpond
Lease Agreement No. 2083-A dated December 28, 1984 of
defendant Agripina Caperal (Exh. 23) and the Assignment of
Leasehold Rights dated February 12, 1985 executed by defendant
Agripina Caperal in favor of the defendant Development Bank of the
Philippines (Exh. 24) as void ab initio;
cdtai

4. ORDERING defendant Development Bank of the Philippines and


defendant Agripina Caperal, jointly and severally, to restore to
plaintiff the latter's leasehold rights and interests and right of
possession over the shpond land in question, without prejudice to
the right of defendant Development Bank of the Philippines to
foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay
to plaintiff the following amounts:
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a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE
HUNDRED PESOS (P1,067,500.00), as and for actual
damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00)
PESOS as moral damages;
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and
for exemplary damages;

d) And the sum of ONE HUNDRED THOUSAND (P100,000.00)


PESOS, as and for attorney's fees;

6. And ORDERING defendant Development Bank of the Philippines to


reimburse and pay to defendant Agripina Caperal the sum of ONE
MILLION FIVE HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED
TEN PESOS AND SEVENTY-FIVE CENTAVOS (P1,532,610.75)
representing the amounts paid by defendant Agripina Caperal to
defendant Development Bank of the Philippines under their Deed of
Conditional Sale.

CUBA and DBP interposed separate appeals from the decision to the Court of
Appeals. The former sought an increase in the amount of damages, while the latter
questioned the findings of fact and law of the lower court.
In its decision 5 of 25 May 1994, the Court of Appeals ruled that (1) the trial court
erred in declaring that the deed of assignment was null and void and that defendant
Caperal could not validly acquire the leasehold rights from DBP; (2) contrary to the
claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code
because DBP appeared to be the sole creditor to CUBA — cession presupposes
plurality of debts and creditors; (3) the deeds of assignment represented the voluntary
act of CUBA in assigning her property rights in payment of her debts, which amounted
to a novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was
estopped from questioning the assignment of the leasehold rights, since she agreed to
repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of
the deed of assignment was an express authority from CUBA for DBP to sell whatever
right she had over the shpond. It also ruled that CUBA was not entitled to loss of
pro ts for lack of evidence, but agreed with the trial court as to the actual damages of
P1,067,500. It, however, deleted the amount of exemplary damages and reduced the
award of moral damages from P100,000 to P50,000 and attorney's fees, from P100.00
to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cuba's leasehold rights and interest under Fishpond Lease Agreement
No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deed
of conditional sale between CUBA and DBP; and (4) the deed of conditional sale
between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the
assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered
DBP to turn over possession of the property to Caperal as lawful holder of the
leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as actual
damages; P50,000 as moral damages; and P50,000 as attorney's fees.
Since their motions for reconsideration were denied, 6 DBP and CUBA led
separate petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral
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damages and attorney's fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the
Court of Appeals erred (1) in not holding that the questioned deed of assignment was a
pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the
deed of assignment effected a novation of the promissory notes; (c) in holding that
CUBA was estopped from questioning the validity of the deed of assignment when she
agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in
reducing the amounts of moral damages and attorney's fees, in deleting the award of
exemplary damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was mortgage
contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling
P335,000, each of which was covered by a promissory note. In all of these notes, there
was a provision that: "In the event of foreclosure of the mortgage securing this notes,
I/We further bind myself/ourselves, jointly and severally, to pay the deficiency, if any." 7
Simultaneous with the execution of the notes was the execution of "Assignments
of Leasehold Rights" 8 where CUBA assigned her leasehold rights and interest on a 44-
hectare fishpond, together with the improvements thereon. As pointed out by CUBA, the
deeds of assignment constantly referred to the assignor (CUBA) as "borrower"; the
assigned rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition no. 22 of the deed, it was provided that "failure to
comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed." And, condition
no. 33 provided that if " foreclosure is actually accomplished, the usual 10% attorney's
fees and 10% liquidated damages of the total obligation shall be imposed." There is,
therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment
was by way of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights. LibLex

In People's Bank & Trust Co . vs. Odom, 9 this Court had the occasion to rule that
an assignment to guarantee an obligation is in effect a mortgage.
We nd no merit in DBP's contention that the assignment novated the
promissory notes in that the obligation to pay a sum of money the loans (under the
promissory notes) was substituted by the assignment of the rights over the shpond
(under the deed of assignment). As correctly pointed out by CUBA, the said assignment
merely complemented or supplemented the notes; both could stand together. The
former was only an accessory to the latter. Contrary to DBP's submission, the
obligation to pay a sum of money remained, and the assignment merely served as
security for the loans covered by the promissory notes. Signi cantly, both the deeds of
assignment and the promissory notes were executed on the same dates the loans were
granted. Also, the last paragraph of the assignment stated: "The assignor further
reiterates and states all terms, covenants and conditions stipulated in the promissory
note or notes covering the proceeds of this loan, making said promissory note or notes,
to all intent and purposes, an integral part hereof."
Neither did the assignment amount to payment by cession under Article 1255 of
the Civil Code for the plain and simple reason that there was only one creditor, the DBP.
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Article 1255 contemplates the existence of two or more creditors and involves the
assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of the
Civil Code, which reads: "Dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by the law on sales." It
bears stressing that the assignment, being in its essence a mortgage, was but a
security and not a satisfaction of indebtedness. 1 0
We do not, however, buy CUBA's argument that condition no. 12 of the deed of
assignment constituted pactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the
Assignor hereby appoints the Assignee his Attorney-in-fact with full power and
authority to take actual possession of the property above-described, together with
all improvements thereon, subject to the approval of the Secretary of Agriculture
and Natural Resources, to lease the same or any portion thereof and collect
rentals, to make repairs or improvements thereon and pay the same, to sell or
otherwise dispose of whatever rights the Assignor has or might have over said
property and/or its improvements and perform any other act which the Assignee
may deem convenient to protect its interest. All expenses advanced by the
Assignee in connection with purpose above indicated which shall bear the same
rate of interest aforementioned are also guaranteed by this Assignment. Any
amount received from rents, administration, sale or disposal of said property may
be supplied by the Assignee to the payment of repairs, improvements, taxes,
assessments and other incidental expenses and obligations and the balance, if
any, to the payment of interest and then on the capital of the indebtedness
secured hereby. If after disposal or sale of said property and upon application of
total amounts received there shall remain a de ciency, said Assignor hereby
binds himself to pay the same to the Assignee upon demand, together with all
interest thereon until fully paid. The power herein granted shall not be revoked as
long as the Assignor is indebted to the Assignee and all acts that may be
executed by the Assignee by virtue of said power are hereby ratified.

The elements of pactum commissorium are as follows: (1) there should be a


property mortgaged by way of security for the payment of the principal obligation, and
(2) there should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated
period. 11
Condition no. 12 did not provide that the ownership over the leasehold rights
would automatically pass to DBP upon CUBA's failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by CUBA,
and to apply the proceeds to the payment of the loan. This provision is a standard
condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code,
which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged
property for the payment of the principal obligation. dctai

DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had "without foreclosure
proceedings, whether judicial or extrajudicial, . . . appropriated the [l]easehold [r]ights of
plaintiff Lydia Cuba over the shpond in question." Its contention that it limited itself to
mere administration by posting caretakers is further belied by the deed of conditional
sale it executed in favor of CUBA. The deed stated:
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WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its
favor by the herein vendees [Cuba spouses] the former acquired all the rights and
interest of the latter over the above-described property;
xxx xxx xxx
T h e title to the real estate property [sic] and all improvements thereon shall
remain the name of the Vendor until after the purchase price, advances and
interest shall have been fully paid. (Emphasis supplied).

It is obvious from the above-quoted paragraphs that DBP had appropriated and
taken ownership of CUBA's leasehold rights merely on the strength of the deed of
assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify
its act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not
provide that CUBA's default would operate to vest in DBP ownership of the said rights.
Besides an assignment to guarantee an obligation, as in the present case, is virtually a
mortgage and not an absolute conveyance of title which confers ownership on the
assignee. 12
At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a creditor from appropriating, or disposing
of, the thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from
DBP did not estop her from questioning DBP's act of appropriation. Estoppel is
unavailing in this case. As held by this Court in some cases, 13 estoppel cannot give
validity to an act that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA,
DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of
the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet in
its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau of Fisheries and Aquatic
Resources, DBP declared that it "had foreclosed the mortgage and enforced the
assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba
spouses] to pay their loan amortizations." 14 This only goes to show that DBP was
aware of the necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the
mortgage, the Bureau of Fisheries canceled CUBA's original lease permit, approved the
deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which
were predicated on such false representation, as well as the subsequent acts
emanating from DBP's appropriation of the leasehold rights, should therefore be set
aside. To validate these acts would open the oodgates to circumvention of Article
2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not
hesitated to nullify the consequent auction sale for failure to comply with the
requirements laid down by law, such as Act No. 3135, as amended. 15 With more
reason that the sale of property given as security for the payment of a debt be set aside
if there was no prior foreclosure proceeding.
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Hence, DBP should render an accounting of the income derived from the
operation of the shpond in question and apply the said income in accordance with
condition no. 12 of the deed of assignment which provided: "Any amount received from
rents, administration, . . . may be applied to the payment of repairs, improvements,
taxes, assessment, and other incidental expenses and obligations and the balance, if
any, to the payment of interest and then on the capital of the indebtedness . . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly
proved. Such compensation is referred to as actual or compensatory damages.

Actual or compensatory damages cannot be presumed, but must be proved with


reasonable degree of certainty. 16 A court cannot rely on speculations, conjectures, or
guesswork as to the fact and amount of damages, but must depend upon competent
proof that they have been suffered by the injured party and on the best obtainable
evidence of the actual amount thereof. 17 It must point out speci c facts which could
afford a basis for measuring whatever compensatory or actual damages are borne. 18
In the present case, the trial court awarded in favor of CUBA P1,067,500 as
actual damages consisting of P550,000 which represented the value of the alleged lost
articles of CUBA and P517,500 which represented the value of the 230,000 pieces of
bangus allegedly stocked in 1979 when DBP rst ejected CUBA from the shpond and
the adjoining house. This award was affirmed by the Court of Appeals.
We nd that the alleged loss of personal belongings and equipment was not
proved by clear evidence. Other than the testimony of CUBA and her caretaker, there
was no proof as to the existence of those items before DBP took over the shpond in
question. As pointed out by DBP, there was no "inventory of the alleged lost items
before the loss which is normal in a project which sometimes, if not most often, is left
to the care of other persons." Neither was a single receipt or record of acquisition
presented.
Curiously, in her complaint dated 17 May 1985, CUBA included "losses of
property" as among the damages resulting from DBP's take-over of the shpond. Yet, it
was only in September 1985 when her son and a caretaker went to the fishpond and the
adjoining house that she came to know of the alleged loss of several articles. Such
claim for "losses of property," having been made before knowledge of the alleged
actual loss, was therefore speculative. The alleged loss could have been a mere
afterthought or subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged
230,000 pieces of bangus which died when DBP took possession of the shpond in
March 1979, the same was not called for. Such loss was not duly proved; besides, the
claim therefor was delayed unreasonably. From 1979 until after the ling of her
complaint in court in May 1985, CUBA did not bring to the attention of DBP the alleged
loss. In fact, in her letter dated 24 October 1979, 19 she declared:
1. That from February to May 1978, I was then seriously ill in Manila and
within the same period I neglected the management and supervision of the
cultivation and harvest of the produce of the aforesaid shpond thereby resulting
to the irreparable loss in the produce of the same in the amount of about
P500,000.00 to my great damage and prejudice due to fraudulent acts of some of
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my fishpond workers.

Nowhere in the said letter, which was written seven months after DBP took
possession of the shpond, did CUBA intimate that upon DBP's take-over there was a
total of 230,000 pieces of bangus, but all of which died because of DBP's
representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of
sufficient basis.
In view however, of DBP's act of appropriating CUBA's leasehold rights which
was contrary to law and public policy, as well as its false representation to the then
Ministry of Agriculture and Natural Resources that it had "foreclosed the mortgage," an
award of moral damages in the amount of P50,000 is in order conformably with Article
2219(10), in relation to Article 21 of the Civil Code. Exemplary or corrective damages in
the amount of P25,000 should likewise be awarded by way of example or correction for
the public good. 2 0 There being an award of exemplary damages, attorney's fees are
also recoverable. 2 1
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV
No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral damages,
which is hereby sustained. The 31 January 1990 Decision of the Regional Trial Court of
Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting aside the nding
that condition no. 12 of the deed of assignment constituted pactum commissorium
and the award of actual damages; and by reducing the amounts of moral damages
from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the
attorney's fees, from P100,000 to P20,000. The Development Bank of the Philippines is
hereby ordered to render an accounting of the income derived from the operation of the
fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income
statement of DBP, as well as the statement of the account of Lydia P. Cuba, and for the
determination of each party's financial obligation to one another.
SO ORDERED.
Bellosillo, Vitug and Kapunan, JJ., concur.
Footnotes

1. Original Record (OR), 1-7.

2. OR, 168-170.
3. See OR, 169.
4. Per Judge Artemio R. Corpus. OR, 686-705.
5. Per Manuel C. Herrera, J ., with Artemon D. Luna and Alfredo J. Lagamon, JJ.,
concurring. Rollo, G.R. No. 118342, 21-41; Rollo, G.R. No. 118367, 33-53.

6. Rollo, G.R. No. 118342, 43; Rollo, G.R. No. 118367, 55.
7. Exhibits "B," "C," and "D"; OR, 37-39.

8. Exhibits "B-1," "C-1," and "D-1."

9. 64 Phil. 126, 132 [1937].

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10. Philippine Bank of Commerce v. De Vera, 6 SCRA 1026, 1029 [1962].
11. V TOLENTINO, ARTURO M., COMMENTARIES & JURISPRUDENCE ON THE CIVIL CODE
OF THE PHILIPPINES 536-537 [1992] citing Uy Tong v. Court of Appeals , 161 SCRA 383
[1988].

12. Philippine Bank of commerce v. De Vera, supra note 10.


13. Eugenio v. Perdido , 97 Phil. 41, 44 [1955]; Republic v. Go Bon Lee , 1 SCRA 1166, 1170
[1961]; Hian v. Court of Tax Appeals, 59 SCRA 110, 124 [1974].

14. Exhibit "N-1-A"; OR, 454.

15. Roxas v. Court of Appeals, 221 SCRA 729 [1993]; Sempio v. Court of Appeals, 263 SCRA
617 [1996].

16. Del Mundo v. Court of Appeals , 240 SCRA 348 [1995]; Lufthansa German Airlines v.
Court of Appeals, 243 SCRA 600 [1995]; Development Bank of the Philippines v. Court of
Appeals, 249 SCRA 331 [1995]; Del Rosario v. Court of Appeals , G.R. No. 118325, 29
January 1997.
17. Lufthansa German Airlines v. Court of Appeals , supra note 16; People v. Rosario , 246
SCRA 658 [1995]; Del Rosario v. Court of Appeals , supra note 16; Sumalpong v. Court of
Appeals, G.R. No. 123404, 26 February 1997.
18. Del Mundo v. Court of Appeals, supra note 16.
19. Exhibit 4, OR, 560.

20. Article 2229, Civil Code.


21. Article 2208(1), Civil Code.

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FIRST DIVISION

[G.R. No. 126800. November 29, 1999.]

NATALIA P. BUSTAMANTE , petitioner, vs . SPOUSES RODITO F. ROSEL


and NORMA A. ROSEL , respondents.

Emerico B. Lomibao for petitioner.


Julio C Contreras for private respondents.

SYNOPSIS

Norma Rosel, respondent herein, entered into a loan agreement with petitioner. Petitioner
used as collateral a portion of land she owned with an area of 70 sq. m., inclusive of the
apartment thereon. Under the terms of their agreement, the lender has the option to buy
the collateral for the amount of P200,000.00 inclusive of the borrowed amount
(P100,000.00) and interest therein (18% per annum). When the loan was about to mature,
respondents proposed to buy the land at the pre-set price of P200,000.00. Petitioner
refused to sell and requested for extension of time to pay the loan and offered to sell
another land instead. Respondents refused all proposals of the petitioner. On maturing
date of the loan, petitioner tendered payment to the respondents, which the latter refused
to accept and insisted that petitioner signed a prepared deed of absolute sale of the
collateral. Respondents refused. They thereafter led with the Regional Trial Court a
complaint for speci c performance with consignation against petitioner. A few days later,
petitioner filed a petition for consignation and deposited the amount of P153,000.00. After
due trial, the trial court rendered a decision denying the execution of the deed of sale to
convey the collateral and ordered that the loan be paid with the corresponding interest
thereon. Respondents appealed to the Court of Appeals, which reversed and set aside the
decision of the trial court and ordering herein petitioner to execute the necessary Deed of
Sale and accept the balance of payment thereon. Hence, this petition for review on
certiorari. The questions here are whether petitioner failed to pay the loan at its maturity
date, and whether the stipulation in the loan contract was valid and enforceable.
The Supreme Court ruled that the petitioner did not fail to pay the loan. When the
respondents refused to accept payment, petitioner consigned the amount with the trial
court. A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept of
pactum commissorium, which is proscribed by law. The petition was granted and the
decision of the Court of Appeals was reversed.

SYLLABUS

1. CIVIL LAW; CONDITIONAL OBLIGATION; SALE OF COLLATERAL IS OBLIGATION WITH


SUSPENSIVE CONDITION; CASE AT BAR. — The sale of the collateral is an obligation with a
suspensive condition. It is dependent upon the happening of an event, without which the
obligation to sell does not arise. Since the event did not occur, respondents do not have
the right to demand ful llment of petitioner's obligation, especially where the same would
not only be disadvantageous to petitioner but would also unjustly enrich respondents
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considering the inadequate consideration (P200,000.00) for a 70 square meter property
situated at Congressional Avenue, Quezon City.
2. ID.; CONTRACTS; HAVE THE FORCE OF LAW BETWEEN THE CONTRACTING PARTIES;
EXCEPTION. — Respondents argue that contracts have the force of law between the
contracting parties and must be complied with in good faith. There are, however, certain
exceptions to the rule, speci cally Article 1306 of the Civil Code, which provides: " Article
1306. The 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."
3. ID.; ID.; LOAN; PACTUM COMMISSORIUM ; ELEMENTS. — The elements of pactum
commissorium are as follows: (1) there should be a property mortgaged by way of
security for the payment of the principal obligation, and (2) there should be a stipulation
for automatic appropriation by the creditor of the thing mortgaged in case of non-payment
of the principal obligation within the stipulated period.
4. ID.; ID.; ID.; ID.; CONSTRUED IN CASE AT BAR. — A signi cant task in contract
interpretation is the ascertainment of the intention of the parties and looking into the
words used by the parties to project that intention. In this case, the intent to appropriate
the property given as collateral in favor of the creditor appears to be evident, for the
debtor is obliged to dispose of the collateral at the pre-agreed consideration amounting to
practically the same amount as the loan. In effect, the creditor acquires the collateral in the
event of non-payment of the loan. This is within the concept of pactum commissorium.
Such stipulation is void.

RESOLUTION

PARDO , J : p

The case before the Court is a petition for review on certiorari 1 to annul the decision of the
Court of Appeals, 2 reversing and setting aside the decision of the Regional Trial Court, 3
Quezon City, Branch 84, in an action for specific performance with consignation. cdrep

On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with
petitioner Natalia Bustamante and her late husband Ismael C. Bustamante, under the
following terms and conditions:
"1. That the borrowers are the registered owners of a parcel of land, evidenced by
TRANSFER CERTIFICATE OF TITLE No. 80667, containing an area of FOUR
HUNDRED TWENTY THREE (423) SQUARE Meters, more or less, situated along
Congressional Avenue.

"2. That the borrowers were desirous to borrow the sum of ONE HUNDRED
THOUSAND (P100,000.00) PESOS from the LENDER, for a period of two (2) years,
counted from March 1, 1987, with an interest of EIGHTEEN (18%) PERCENT per
annum, and to guaranty the payment thereof, they are putting as a collateral
SEVENTY (70) SQUARE METERS portion, inclusive of the apartment therein, of
the aforestated parcel of land, however, in the event the borrowers fail to pay, the
lender has the option to buy or purchase the collateral for a total consideration of
TWO HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed
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amount and interest therein;

"3. That the lender do hereby manifest her agreement and conformity to the
preceding paragraph, while the borrowers do hereby confess receipt of the
borrowed amount." 4

When the loan was about to mature on March 1, 1989, respondents proposed to buy at the
pre-set price of P200,000.00, the seventy (70) square meters parcel of land covered by
TCT No. 80667, given as collateral to guarantee payment of the loan. Petitioner, however,
refused to sell and requested for extension of time to pay the loan and offered to sell to
respondents another residential lot located at Road 20, Project 8, Quezon City, with the
principal loan plus interest to be used as down payment. Respondents refused to extend
the payment of the loan and to accept the lot in Road 20 as it was occupied by squatters
and petitioner and her husband were not the owners thereof but were mere land
developers entitled to subdivision shares or commission if and when they developed at
least one half of the subdivision area. 5
Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which
the latter refused to accept, insisting on petitioner's signing a prepared deed of absolute
sale of the collateral.
On February 28, 1990, respondents led with the Regional Trial Court, Quezon City, Branch
84, a complaint for speci c performance with consignation against petitioner and her
spouse. 6
Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell
the collateral pursuant to the option to buy embodied in the loan agreement.
On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City
a petition for consignation, and deposited the amount of P153,000.00 with the City
Treasurer of Quezon City on August 10, 1990. 7
When petitioner refused to sell the collateral and barangay conciliation failed, respondents
consigned the amount of P47,500.00 with the trial court. 8 In arriving at the amount
deposited, respondent considered the principal loan of P100,000.00 and 18% interest per
annum thereon, which amounted to P52,500.00. 9 The principal lot and the interest taken
together amounted to P152,500.00, leaving balance of P47,500.00. 1 0
After due trial, on November 10, 1992, the trial court rendered decision holding:
"WHEREFORE, premises considered, judgment is hereby rendered as follows:
"1. Denying the plaintiff's prayer for the defendants' execution of the Deed of Sale
to Convey the collateral in plaintiffs' favor;
"2. Ordering the defendants to pay the loan of P100,000.00 with interest thereon
at 18% per annum commencing on March 2, 1989, up to and until August 10,
1990, when defendants deposited the amount with the Of ce of the City
Treasurer under Official Receipt No. 0116548 (Exhibit "2"); and
"3. To pay Attorney's Fees in the amount of P5,000.00, plus costs of suit.
"SO ORDERED. cdasia

"Quezon City, Philippines, November 10, 1992.


"TEODORO P. REGINO
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"Judge" 11

On November 16, 1992, respondents appealed from the decision to the Court of Appeals.
12 On July 8, 1996, the Court of Appeals rendered decision reversing the ruling of the
Regional Trial Court. The dispositive portion of the Court of Appeals' decision reads:
"IN VIEW OF THE FOREGOING, the judgment appeal (sic) from is REVERSED and
SET ASIDE and a new one entered in favor of the plaintiffs ordering the
defendants to accept the amount of P47,000.00 deposited with the Clerk of Court
of Regional Trial Court of Quezon City under Official Receipt No. 0719847, and for
defendants to execute the necessary Deed of Sale in favor of the plaintiffs over
the 70 SQUARE METER portion and the apartment standing thereon being
occupied by the plaintiffs and covered by TCT No. 80667 within fteen (15) days
from nality hereof. Defendants, in turn, are allowed to withdraw the amount of
P153,000.00 deposited by them under Of cial Receipt No. 0116548 of the City
Treasurer's Of ce of Quezon City. All other claims and counterclaims are
DISMISSED, for lack of sufficient basis. No costs.

"SO ORDERED." 13

Hence, this petition. 1 4


On January 20, 1997, we required respondents to comment on the petition within ten (10)
days from notice. 15 On February 27, 1997 respondents filed their comment. 16
On February 9, 1998, we resolved to deny the petition on the ground that there was no
reversible error on the part of respondent court in ordering the execution of the necessary
deed of sale in conformity with the parties' stipulated agreement. The contract is the law
between the parties thereof (Syjuco v. Court of Appeals , 172 SCRA 111, 118, citing Phil.
American General Insurance v. Mutuc, 61 SCRA 22; Herrera v. Petrophil Corporation, 146
SCRA 360). 1 7
On March 17, 1998, petitioner led with this Court a motion for reconsideration of the
denial alleging that the real intention of the parties to the loan was to put up the collateral
as guarantee similar to as equitable mortgage according to Article 1602 of the Civil Code.
18

On April 21, 1998, respondents led an opposition to petitioner's motion for


reconsideration. They contend that the agreement between the parties was not a sale with
right of re-purchase, but a loan with interest at 18% per annum for a period of two years
and if petitioner fails to pay, the respondent was given the right to purchase the property
or apartment for P200,000.00, which is not contrary to law, morals, good customs, public
order or public policy. 1 9
Upon due consideration of petitioner's motion, we now resolve to grant the motion for
reconsideration.
The questions presented are whether petitioner failed to pay the loan at its maturity date
and whether the stipulation in the loan contract was valid and enforceable.
We rule that petitioner did not fail to pay the loan.
The loan was due for payment on March 1, 1989. On said date, petitioner tendered
payment to settle the loan which respondents refused to accept, insisting that petitioner
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sell to them the collateral of the loan.
When respondents refused to accept payment, petitioner consigned the amount with the
trial court.
We note the eagerness of respondents to acquire the property given as collateral to
guarantee the loan. The sale of the collateral is an obligation with a suspensive condition.
2 0 It is dependent upon the happening of an event, without which the obligation to sell
does not arise. Since the event did not occur, respondents do not have the right to demand
ful llment of petitioner's obligation, especially where the same would not only be
disadvantageous to petitioner but would also unjustly enrich respondents considering the
inadequate consideration (P200,000.00) for a 70 square meter property situated at
Congressional Avenue, Quezon City.
Respondents argue that contracts have the force of law between the contracting parties
and must be complied with in good faith. 2 1 There are, however, certain exceptions to the
rule, specifically Article 1306 of the Civil Code, which provides:
"ARTICLE 1306. The 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." prcd

A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept of
pactum commissorium, which is proscribed by law. 2 2
"The elements of pactum commissorium are as follows: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there
should be a stipulation automatic appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the stipulated period." 23
In Nakpil vs. Intermediate Appellate Court, 2 4 we said:
"The arrangement entered into between the parties, whereby Pulong Maulap was
to be "considered sold to him (respondent) . . . in case petitioner fails to reimburse
Valdes, must then be construed as tantamount to pactum commissorium which
is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be
automatic appropriation of the property by Valdes in the event of failure of
petitioner to pay the value of the advances. Thus, contrary to respondent's
manifestation, all the elements of a pactum commissorium were present: there
was a creditor-debtor relationship between the parties; the property was used as
security for the loan; and there was automatic appropriation by respondent of
Pulong Maulap in case of default of petitioner."
A signi cant task in contract interpretation is the ascertainment of the intention of the
parties and looking into the words used by the parties to project that intention. In this
case, the intent to appropriate the property given as collateral in favor of the creditor
appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-
agreed consideration amounting to practically the same amount as the loan. In effect, the
creditor acquires the collateral in the event of non-payment of the loan. This is within the
concept of pactum commissorium. Such stipulation is void. 2 5
All persons in need of money are liable to enter into contractual relationships whatever the
condition if only to alleviate their nancial burden albeit temporarily. Hence, courts are duty
bound to exercise caution in the interpretation and resolution of contracts lest the lenders
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devour the borrowers like vultures do with their prey.
WHEREFORE, we GRANT petitioner's motion for reconsideration and SET ASIDE the
Court's resolution of February 9, 1998. We REVERSE the decision of the Court of Appeals
in CA-G.R. CV No. 40193. In lieu thereof, we hereby DISMISS the complaint in Civil Case No.
Q-90-4813.
No costs.
SO ORDERED. LLphil

Davide, Jr., C.J., Puno, Kapunan and Ynares-Santiago, JJ., concur.

Footnotes

1. Under Rule 45, 1964 Revised Rules of Court.


2. In CA-G.R. CV No. 40193, promulgated on July 8, 1996.

3. In Civil Case No. Q-90-4813, dated November 10, 1992, Judge Teodoro P. Regino.
4. Exhibit "A", RTC Record, p. 142.
5. Regional Trial Court Decision, Rollo, p. 31.
6. Civil Case No. Q-90-4813.

7. Exhibit "2", RTC Record, p. 182.


8. Under Of cial Receipt No. 0719847 dated February 28, 1990, issued by the City Treasurer,
Quezon City, with the Clerk of Court, Regional Trial Court, National Capitol Judicial
Region, Quezon City, as payee, RTC Record, p. 162.
9. (P100,000.00 x 18%) 2 years and 11 months (March 8, 1987 up to February 9, 1990)

P18,000 x 2 years and 11 months = P52,500.


10. Comment, Rollo, pp. 41-45.
11. Decision, Regional Trial Court, Quezon City, Rollo, pp. 30-39.
12. Docketed as CA-G.R. CV No. 40193.
13. Court of Appeals Decision, Rollo, pp. 19-26.

14. Petition, led on November 29, 1996, Rollo, pp. 7-17. On November 27, 1996, the Court
granted petitioner an extension of thirty days from the expiration of the reglementary
period within which to file a petition for review on certiorari (Rollo, p. 14).
15. Rollo, p. 40.

16. Rollo, pp. 41-45.


17. Rollo, p. 55.
18. Motion for Reconsideration, Rollo, pp. 56-58.
19. Rollo, pp. 60-65.
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20. Article 1181, Civil Code. In conditional obligations, the acquisition of the right, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of
the event which constitutes the condition.
21. Article 1159, Civil Code.
22. Article 2088, Civil Code. The creditor cannot appropriate the things given by way of pledge
or mortgage, or dispose of them. Any stipulation to the contrary is null and void.
23 Development Bank of the Philippines vs. Court of Appeals, 284 SCRA 14, 26 (1998), citing
Tolentino, Arturo M., Commentaries & Jurisprudence on the Civil Code of the Philippines,
Vol. V, pp. 536-537 (1992), citing Uy Tong vs. Court of Appeals, 161 SCRA 383 (1988).
24. 225 SCRA 456, 467 (1993).
25. Article 2208, Civil Code, quoted above.

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SECOND DIVISION

[G.R. No. 172592. July 9, 2008.]

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG ,


petitioners, vs . ROBAN LENDING CORPORATION , respondent.

DECISION

CARPIO-MORALES , J : p

On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses
Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban
Lending Corporation (respondent) in the total amount of P4,000,000.00. These loans
were secured by a real estate mortgage on petitioners' parcels of land located in
Binauganan, Tarlac City and covered by TCT No. 297840. 1
On February 12, 2001, petitioners and respondent executed an Amendment to
Amended Real Estate Mortgage 2 consolidating their loans inclusive of charges thereon
which totaled P5,916,117.50. On even date, the parties executed a Dacion in Payment
Agreement 3 wherein petitioners assigned the properties covered by TCT No. 297840
to respondent in settlement of their total obligation, and a Memorandum of Agreement
4 reading: AIaSTE

That the FIRST PARTY [Roban Lending Corporation] and the SECOND
PARTY [the petitioners] agreed to consolidate and restructure all
aforementioned loans, which have been all past due and delinquent since April
19, 2000, and outstanding obligations totaling P5,916,117.50. The SECOND
PARTY hereby sign [sic] another promissory note in the amount of
P5,916,117.50 (a copy of which is hereto attached and forms . . . an integral part
of this document), with a promise to pay the FIRST PARTY in full within one
year from the date of the consolidation and restructuring, otherwise the
SECOND PARTY agree to have their "DACION IN PAYMENT" agreement, which
they have executed and signed today in favor of the FIRST PARTY be enforced[.]
5

In April 2002 (the day is illegible), petitioners led a Complaint, 6 docketed as


Civil Case No. 9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration
of mortgage contract as abandoned, annulment of deeds, illegal exaction, unjust
enrichment, accounting, and damages, alleging that the Memorandum of Agreement
and the Dacion in Payment executed are void for being pactum commissorium. 7
Petitioners alleged that the loans extended to them from July 14, 1999 to March
20, 2000 were founded on several uniform promissory notes, which provided for 3.5%
monthly interest rates, 5% penalty per month on the total amount due and demandable,
and a further sum of 25% attorney's fees thereon, 8 and in addition, respondent exacted
certain sums denominated as "EVAT/AR". 9 Petitioners decried these additional
charges as "illegal, iniquitous, unconscionable, and revolting to the conscience as they
hardly allow any borrower any chance of survival in case of default." 1 0
Petitioners further alleged that they had previously made payments on their loan
accounts, but because of the illegal exactions thereon, the total balance appears not to
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have moved at all, hence, accounting was in order. 1 1
Petitioners thus prayed for judgment:
a) Declaring the Real Estate Mortgage Contract and its amendments . . .
as null and void and without legal force and effect for having been renounced,
abandoned, and given up;
b) Declaring the "Memorandum of Agreement" . . . and "Dacion in
Payment" . . . as null and void for being pactum commissorium;
c) Declaring the interests, penalties, Evat [sic] and attorney's fees
assessed and loaded into the loan accounts of the plaintiffs with defendant as
unjust, iniquitous, unconscionable and illegal and therefore, stricken out or set
aside;
d) Ordering an accounting on plaintiffs' loan accounts to determine the
true and correct balances on their obligation against legal charges only; and
e) Ordering defendant to [pay] to the plaintiffs: —
e.1 Moral damages in an amount not less than P100,000.00 and
exemplary damages of P50,000.00;

e.2 Attorney's fees in the amount of P50,000.00 plus P1,000.00


appearance fee per hearing; and

e.3 The cost of suit. 1 2

as well as other just and equitable reliefs.


In its Answer with Counterclaim, 1 3 respondent maintained the legality of its
transactions with petitioners, alleging that: CaEIST

xxx xxx xxx

If the voluntary execution of the Memorandum of Agreement and Dacion


in Payment Agreement novated the Real Estate Mortgage then the allegation of
Pactum Commissorium has no more legal leg to stand on;
The Dacion in Payment Agreement is lawful and valid as it is recognized
. . . under Art. 1245 of the Civil Code as a special form of payment whereby the
debtor-Plaintiffs alienates their property to the creditor-Defendant in satisfaction
of their monetary obligation;
The accumulated interest and other charges which were computed for
more than two (2) years would stand reasonable and valid taking into
consideration [that] the principal loan is P4,000,000 and if indeed it became
beyond the Plaintiffs' capacity to pay then the fault is attributed to them and not
the Defendant[.] 1 4
After pre-trial, the initial hearing of the case, originally set on December 11, 2002,
was reset several times due to, among other things, the parties' efforts to settle the
case amicably. 1 5
During the scheduled initial hearing of May 7, 2003, the RTC issued the following
order:
Considering that the plaintiff Wilfredo Ong is not around on the ground
that he is in Manila and he is attending to a very sick relative, without objection
on the part of the defendant's counsel, the initial hearing of this case is reset to
June 18, 2003 at 10:00 o'clock in the morning. DSATCI

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Just in case [plaintiff's counsel] Atty. Concepcion cannot present his
witness in the person of Mr. Wilfredo Ong in the next scheduled hearing, the
counsel manifested that he will submit the case for summary judgment. 1 6
(Underscoring supplied)
It appears that the June 18, 2003 setting was eventually rescheduled to February
11, 2004 at which both counsels were present 1 7 and the RTC issued the following
order:
The counsel[s] agreed to reset this case on April 14, 2004, at 10:00
o'clock in the morning. However, the counsels are directed to be ready with their
memorand[a] together with all the exhibits or evidence needed to support their
respective positions which should be the basis for the judgment on the
pleadings if the parties fail to settle the case in the next scheduled setting.
ESTCHa

xxx xxx xxx 1 8 (Underscoring supplied)

At the scheduled April 14, 2004 hearing, both counsels appeared but only the
counsel of respondent filed a memorandum. 1 9
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, nding on the
basis of the pleadings that there was no pactum commissorium, dismissed the
complaint. 2 0
On appeal, 2 1 the Court of Appeals 2 2 noted that:
. . . [W]hile the trial court in its decision stated that it was rendering
judgment on the pleadings, . . . what it actually rendered was a summary
judgment. A judgment on the pleadings is proper when the answer fails to
tender an issue, or otherwise admits the material allegations of the adverse
party's pleading. However, a judgment on the pleadings would not have been
proper in this case as the answer tendered an issue, i.e. the validity of the MOA
and DPA. On the other hand, a summary judgment may be rendered by the court
if the pleadings, supporting a davits, and other documents show that, except
as to the amount of damages, there is no genuine issue as to any material fact.
23

Nevertheless, nding the error in nomenclature "to be mere semantics with no


bearing on the merits of the case", 2 4 the Court of Appeals upheld the RTC decision that
there was no pactum commissorium. 2 5
Their Motion for Reconsideration 2 6 having been denied, 2 7 petitioners led the
instant Petition for Review on Certiorari, 2 8 faulting the Court of Appeals for having
committed a clear and reversible error:
I. . . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL
REQUISITES WHICH WOULD WARRANT THE SETTING ASIDE OF THE
SUMMARY JUDGMENT IN VIOLATION OF APPELLANTS' RIGHT TO DUE
PROCESS;
II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS
NECESSARY BECAUSE THE FACTS ARE VERY MUCH IN DISPUTE;
III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE
MEMORANDUM OF AGREEMENT (MOA) AND THE DACION EN PAGO
AGREEMENT (DPA) WERE DESIGNED TO CIRCUMVENT THE LAW AGAINST
PACTUM COMMISSORIUM; and
IV. . . . WHEN IT FAILED TO CONSIDER THAT THE MEMORANDUM OF
AGREEMENT (MOA) AND THE DACION EN PAGO (DPA) ARE NULL AND VOID
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FOR BEING CONTRARY TO LAW AND PUBLIC POLICY. 2 9
The petition is meritorious.
Both parties admit the execution and contents of the Memorandum of
Agreement and Dacion in Payment. They differ, however, on whether both contracts
constitute pactum commissorium or dacion en pago. cAIDEa

This Court nds that the Memorandum of Agreement and Dacion in Payment
constitute pactum commissorium, which is prohibited under Article 2088 of the Civil
Code which provides:
The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void."
The elements of pactum commissorium, which enables the mortgagee to
acquire ownership of the mortgaged property without the need of any foreclosure
proceedings, 3 0 are: (1) there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in case of non-payment
of the principal obligation within the stipulated period. 3 1
In the case at bar, the Memorandum of Agreement and the Dacion in Payment
contain no provisions for foreclosure proceedings nor redemption. Under the
Memorandum of Agreement, the failure by the petitioners to pay their debt within the
one-year period gives respondent the right to enforce the Dacion in Payment
transferring to it ownership of the properties covered by TCT No. 297840. Respondent,
in effect, automatically acquires ownership of the properties upon petitioners' failure to
pay their debt within the stipulated period. ASEIDH

Respondent argues that the law recognizes dacion en pago as a special form of
payment whereby the debtor alienates property to the creditor in satisfaction of a
monetary obligation. 3 2 This does not persuade. In a true dacion en pago, the
assignment of the property extinguishes the monetary debt. 3 3 In the case at bar, the
alienation of the properties was by way of security, and not by way of satisfying the
debt. 3 4 The Dacion in Payment did not extinguish petitioners' obligation to respondent.
On the contrary, under the Memorandum of Agreement executed on the same day as
the Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50
which they were to pay within one year. 3 5
Respondent cites Solid Homes, Inc. v. Court of Appeals 3 6 where this Court
upheld a Memorandum of Agreement/Dacion en Pago. 3 7 That case did not involve the
issue of pactum commissorium. 3 8
That the questioned contracts were freely and voluntarily executed by petitioners
and respondent is of no moment, pactum commissorium being void for being
prohibited by law. 3 9
Respecting the charges on the loans, courts may reduce interest rates, penalty
charges, and attorney's fees if they are iniquitous or unconscionable. 4 0
This Court, based on existing jurisprudence, 4 1 nds the monthly interest rate of
3.5%, or 42% per annum unconscionable and thus reduces it to 12% per annum. This
Court nds too the penalty fee at the monthly rate of 5% (60% per annum) of the total
amount due and demandable — principal plus interest, with interest not paid when due
added to and becoming part of the principal and likewise bearing interest at the same
rate, compounded monthly 4 2 — unconscionable and reduces it to a yearly rate of 12%
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of the amount due, to be computed from the time of demand. 4 3 This Court nds the
attorney's fees of 25% of the principal, interests and interests thereon, and the penalty
fees unconscionable, and thus reduces the attorney's fees to 25% of the principal
amount only. 4 4
The prayer for accounting in petitioners' complaint requires presentation of
evidence, they claiming to have made partial payments on their loans, vis a vis
respondent's denial thereof. 4 5 A remand of the case is thus in order. TDCAIS

Prescinding from the above disquisition, the trial court and the Court of Appeals
erred in holding that a summary judgment is proper. A summary judgment is permitted
only if there is no genuine issue as to any material fact and a moving party is entitled to
a judgment as a matter of law. 4 6 A summary judgment is proper if, while the pleadings
on their face appear to raise issues, the a davits, depositions, and admissions
presented by the moving party show that such issues are not genuine. 4 7 A genuine
issue, as opposed to a ctitious or contrived one, is an issue of fact that requires the
presentation of evidence. 4 8 As mentioned above, petitioners' prayer for accounting
requires the presentation of evidence on the issue of partial payment.
But neither is a judgment on the pleadings proper. A judgment on the pleadings
may be rendered only when an answer fails to tender an issue or otherwise admits the
material allegations of the adverse party's pleadings. 4 9 In the case at bar, respondent's
Answer with Counterclaim disputed petitioners' claims that the Memorandum of
Agreement and Dation in Payment are illegal and that the extra charges on the loans are
unconscionable. 5 0 Respondent disputed too petitioners' allegation of bad faith. 5 1
WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET
ASIDE. The Memorandum of Agreement and the Dacion in Payment executed by
petitioner — spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent
Roban Lending Corporation on February 12, 2001 are declared NULL AND VOID for
being pactum commissorium. ECDAcS

In line with the foregoing ndings, the following terms of the loan contracts
between the parties are MODIFIED as follows:
1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to
12% per annum;
2. The monthly penalty fee of 5% of the total amount due and
demandable is reduced to 12% per annum, to be computed from the time
of demand; and
3. The attorney's fees are reduced to 25% of the principal amount
only. cHCaIE

Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of
receiving evidence on petitioners' prayer for accounting.
SO ORDERED.
Quisumbing, Tinga, Velasco, Jr. and Brion, JJ., concur.
Footnotes
1. Records, pp. 11-16. SEIDAC

2. Id. at 37.
3. Id. at 40.
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4. Id. at 38-39.

5. Id. at 38-39.
6. Id. at 1-5.
7. Id. at 2.

8. Id. at 2-3. Vide id. at 20.


9. Id. at 21.

10. Id. at 3.
11. Id. at 3.
12. Id. at 4.
13. Id. at 51-54.

14. Id. at 52-53.


15. Id. at 127-128, 138-143, 147-153.
16. Id. at 141.
17. Id. at 154.

18. Id. at 155.


19. Id. at 156-164, 204.
20. Id. at 205-206.
21. Id. at 207.
22. Decision of November 30, 2005, penned by Court of Appeals Associate Justice Portia Aliño-
Hormachuelos, with the concurrences of Associate Justices Mariano C. Del Castillo and
Magdangal M. de Leon. CA rollo, pp. 35-45. DHAcET

23. CA rollo, pp. 40-41.


24. Id. at 41.

25. Id. at 41-43.


26. Id. at 48-53.
27. Id. at 65-66.
28. Id. at 8-25.
29. Rollo, p. 15.

30. Vide Lumayag v. Heirs of Jacinto Nemeño, G.R. No. 162112, July 3, 2007, 526 SCRA 315,
328.

31. Development Bank of the Philippines v. Court of Appeals, 348 Phil. 15, 31 (1998).
32. Records, p. 53. Vide CIVIL CODE, Article 1245.
33. Vide CIVIL CODE, Article 1245; Development Bank of the Philippines v. Court of Appeals,
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348 Phil. 15, 30 (1998). IHEDAT

34. Vide Development Bank of the Philippines v. Court of Appeals, ibid.


35. Records, p. 38.
36. 341 Phil. 261 (1997).
37. Records, p. 160.
38. Solid Homes, Inc. v. Court of Appeals, supra note 37 at 274-280.

39. Vide CIVIL CODE, Articles 1409 and 2088.


40. Vide CIVIL CODE, Articles 1229 and 2227; United Coconut Planters Bank v. Beluso, G.R. No.
159912, August 17, 2007; 530 SCRA 567, 590; Poltan v. BPI Family Savings Bank, Inc. ,
G.R. No. 164307, March 5, 2007, 517 SCRA 430, 444-446; Radiowealth Finance Co., Inc.
v. International Corporate Bank, G.R. Nos. 77042-43, February 28, 1990, 182 SCRA 862,
868-869. DAEIHT

41. Vide Poltan v. BPI Family Savings Bank, Inc. , G.R. No. 164307, March 5, 2007, 517 SCRA
430, 444-446.
42. Records, p. 41.
43. Vide United Coconut Planters Bank v. Beluso, G.R. No. 159912, August 17, 2007, 530 SCRA
567, 590, 604-605.
44. Vide Titan Construction Corporation v. Uni-Field Enterprises, Inc. , G.R. No. 153874, March 1,
2007, 517 SCRA 180, 190.
45. Vide records, pp. 3, 51-52.
46. RULES OF COURT, Rule 35, Section 3; Pineda v. Heirs of Eliseo Guevarra, G.R. No. 143188,
February 14, 2007, 515 SCRA 627, 638.
47. Vide Marcelo v. Sandiganbayan, G.R. No. 156605, August 28, 2007, 531 SCRA 385, 398. DHIcET

48. Ibid.

49. RULES OF COURT, Rule 34, Section 1.


50. Records, pp. 53.
51. Id. at 51.

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FIRST DIVISION

[G.R. No. L-49120. June 30, 1988.]

ESTATE OF GEORGE LITTO N petitioner, vs. CIRIACO B. MENDOZA and


COURT OF APPEALS , respondents.

Ruben G. Bala for respondent Mendoza.

DECISION

GANCAYCO , J : p

This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a case,
who had previously assigned in favor of his creditor his litigated credit in said case, by a
deed of assignment which was duly submitted to the court, validly enter into a
compromise agreement thereafter releasing the defendant therein from his claim without
notice to his assignee? and (2) Will such previous knowledge on the part of the defendant
of the assignment made by the plaintiff estop said defendant from invoking said
compromise as a ground for dismissal of the action against him?
The present case stemmed from Civil Case No. Q-8303 1 entitled "Alfonso Tan vs. Ciriaco
B. Mendoza," an action for the collection of a sum of money representing the value of two
(2) checks which plaintiff Tan claims to have been delivered to him by defendant Mendoza,
private respondent herein, by way of guaranty with a commission.
The record discloses that the Bernal spouses 2 are engaged in the manufacture of
embroidery, garments and cotton materials. Sometime in September 1963, C.B.M.
Products, 3 with Mendoza as president, offered to sell to the Bernals textile cotton
materials and, for this purpose, Mendoza introduced the Bernals to Alfonso Tan. Thus, the
Bernals purchased on credit from Tan some cotton materials worth P80,796.62, payment
of which was guaranteed by Mendoza. Thereupon, Tan delivered the said cotton materials
to the Bernals. In view of the said arrangement, on November 1963, C.B.M. Products,
through Mendoza, asked and received from the Bernals PBTC Check No. 626405 for
P80,796.62 dated February 20, 1964 with the understanding that the said check will
remain in the possession of Mendoza until the cotton materials are finally manufactured
into garments after which time Mendoza will sell the finished products for the Bernals.
Meanwhile, the said check matured without having been cashed and Mendoza demanded
the issuance of another check 4 in the same amount without a date.
On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB checks 5
in favor of Tan in the total amount of P80,796.62. He informed the Bernals of the same and
told them that they are indebted to him and asked the latter to sign an instrument whereby
Mendoza assigned the said amount to Insular Products Inc. Tan had the two checks
issued by Mendoza discounted in a bank. However, the said checks were later returned to
Tan with the words stamped "stop payment" which appears to have been ordered by
Mendoza for failure of the Bernals to deposit sufficient funds for the check that the
Bernals issued in favor of Mendoza. cdrep

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Hence, as adverted to above, Tan brought an action against Mendoza docketed as Civil
Case No. Q-8303 6 while the Bernals brought an action for interpleader docketed as Civil
Case No. 56850 7 for not knowing whom to pay. While both actions were pending
resolution by the trial court, on March 20, 1966, Tan assigned in favor of George Litton, Sr.
his litigatious credit * in Civil Case No. 56850 against Mendoza duly submitted to the court,
with notice to the parties. 8 The deed of assignment was framed in the following tenor:
"DEED OF ASSIGNMENT

I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA, residing at No. 6


Kanlaon, Quezon City, doing business under the name and style ALTA
COMMERCIAL by way of securing or guaranteeing my obligation to Mr. GEORGE
LITTON, SR., do by these presents CEDE, ASSIGN, TRANSFER AND CONVEY unto
the said Mr. GEORGE LITTON, SR., my claim against C.B.M. Products, Inc.,
personally guaranteed by Mr. Ciriaco B. Mendoza, in the amount of Eighty-
Thousand Seven Hundred Ninety Six Pesos and Sixty-two centavos (P80,796.62)
the balance of which, in principal, and excluding, interests, costs, damages and
attorney's fees now stands at P76,000.00, P4,796.62, having already been
received by the assignor on December 23, 1965, pursuant to the order of the court
in Civil Case No. 56850, C.F.I., Manila, authorizing Alfonso Tan to withdraw the
amount of P4,796.62 then on deposit with the court. All rights, and interests in
said net amount, plus interests and costs, and less attorney's fees, in case the
amount allowed therefor be less than the amounts claimed in the relief in Civil
Case 56850 (C.F.I., Manila) and Q-8503 (C.F.I., Quezon City) are by these presents
covered by this assignment.

I further undertake to hold in trust any and all amounts which may hereafter be
realized from the aforementioned cases for the ASSIGNEE, Mr. GEORGE LITTON,
SR., and to turn over to him such amounts in application to my liability to him, as
his interest may then show, and I further undertake to cooperate towards the
successful prosecution of the aforementioned cases making available myself, as
witness or otherwise, as well as any and all documents thereto appertaining . . ." 9

After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in
favor of Tan for a commission in the sum of P4,847.79 and held Mendoza liable as a
drawer whose liability is primary and not merely as an indorser and thus directed Mendoza
to pay Tan the sum of P76,000.00, the sum still due, plus damages and attorney's fees. 1 0
Mendoza seasonably filed an appeal with the Court of Appeals, docketed as C.A. G.R. No.
41900-R, arguing in the main that his liability is one of an accommodation party and not as
a drawer.
On January 27, 1977, the Court of Appeals rendered a decision affirming in toto the
decision of the lower court. 1 1
Meanwhile, on February 2, 1971, pending the resolution of the said appeal, Mendoza
entered into a compromise agreement with Tan wherein the latter acknowledged that all
his claims against Mendoza had been settled and that by reason of said settlement both
parties mutually waive, release and quit whatever claim, right or cause of action one may
have against the other, with a provision that the said compromise agreement shall not in
any way affect the right of Tan to enforce by appropriate action his claims against the
Bernal spouses. 1 2
On February 25, 1977, Mendoza filed a motion for reconsideration praying that the
decision of January 27, 1977 be set aside, principally anchored upon the ground that a
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compromise agreement was entered into between him and Tan which in effect released
Mendoza from liability. Tan filed an opposition to this motion claiming that the
compromise agreement is null and void as he was not properly represented by his counsel
of record Atty. Quiogue, and was instead represented by a certain Atty. Laberinto, and
principally because of the deed of assignment that he executed in favor of George Litton,
Sr. alleging that with such, he has no more right to alienate said credit. LLphil

While the case was still pending reconsideration by the respondent court, Tan, the
assignor, died leaving no properties whatever to satisfy the claim of the estate of the late
George Litton, Sr.
In its Resolution dated August 30, 1977, 1 3 the respondent court set aside its decision and
approved the compromise agreement.
As to the first ground invoked by Tan, now deceased, the respondent court ruled that the
non-intervention of Tan's counsel of record in the compromise agreement does not affect
the validity of the settlement on the ground that the client had an undoubted right to
compromise a suit without the intervention of his lawyer, citing Aro vs. Nanawa. 1 4
As to the second ground, respondent court ruled as follows:
". . . it is relevant to note that Paragraph 1 of the deed of assignment states that
the cession, assignment, transfer, and conveyance by Alfonso Tan was only by
way of securing or guaranteeing his obligation to GEORGE LITTON, SR.

"Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art.
2085, Civil Code).

"'Even considered as a litigatious credit,' which indeed characterized the claims


herein of Alfonso Tan, such credit may be validly alienated by Tan (Art. 1634. Civil
Code).

"Such alienation is subject to the remedies of Litton under Article 6 of the Civil
Code, whereby the waiver, release, or quit-claim made by plaintiff-appellee
Alfonso Tan in favor of defendant-appellant Ciriaco B. Mendoza, if proven
prejudicial to George Litton, Sr. as assignee under the deed of assignment, may
entitle Litton to pursue his remedies against Tan.
"The alienation of a litigatious credit is further subject to the debtor's right of
redemption under Article 1634 of the Civil Code."

As mentioned earlier, the assignor Tan died pending resolution of the motion for
reconsideration. The estate of George Litton, Sr., petitioner herein, as represented by
James Litton, son of George Litton, Sr. and administrator 1 5 of the former's estate, is now
appealing the said resolution to this Court as assignee of the amount sued in Civil Case
No. Q-8303, in relation to Civil Case No. 56850.
Before resolving the main issues aforementioned, the question of legal personality of
herein petitioner to bring the instant petition for review, must be resolved.
As a rule, the parties in an appeal through a review on certiorari are the same original
parties to the case. 1 6 If after the rendition of judgment the original party dies, he should
be substituted by his successor-in-interest. In this case, it is not disputed that no proper
substitution of parties was done. This notwithstanding, the Court so holds that the same
cannot and will not materially affect the legal right of herein petitioner in instituting the
instant petition in view of the tenor of the deed of assignment, particularly paragraph two
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thereof 1 7 wherein the assignor, Tan, assumed the responsibility to prosecute the case and
to turn over to the assignee whatever amounts may be realized in the prosecution of the
suit.

We note that private respondent moved for the dismissal of the appeal without notifying
the estate of George Litton, Sr. whereas the former was fully aware of the fact that the said
estate is an assignee of Tan's right in the case litigated. 1 8 Hence, if herein petitioner failed
to observe the proper substitution of parties when Alfonso Tan died during the pendency
of private respondent's motion for reconsideration, no one is to blame but private
respondent himself. Moreover, the right of the petitioner to bring the present petition is
well within the concept of a real party-in-interest in the subject matter of the action. Well-
settled is the rule that a real party-in-interest is a party entitled to the avails of the suit or
the party who would be injured by the judgment. 1 9 We see the petitioner well within the
latter category. LexLib

Hence, as the assignee and successor-in-interest of Tan, petitioner has the personality to
bring this petition in substitution of Tan.
Now, the resolution of the main issues.
The purpose of a compromise being to replace and terminate controverted claims, 2 0
courts encourage the same. A compromise once approved by final order of the court has
the force of res judicata between parties and should not be disturbed except for vices of
consent or forgery. 2 1
In this case, petitioner seeks to set aside the said compromise on the ground that
previous thereto, Tan executed a deed of assignment in favor of George Litton, Sr.
involving the same litigated credit.
We rule for the petitioner. The fact that the deed of assignment was done by way of
securing or guaranteeing Tan's obligation in favor of George Litton, Sr., as observed by the
appellate court, will not in any way alter the resolution on the matter. The validity of the
guaranty or pledge in favor of Litton has not been questioned. Our examination of the deed
of assignment shows that it fulfills the requisites of a valid pledge or mortgage. 2 2
Although it is true that Tan may validly alienate the litigatious credit as ruled by the
appellate court, citing Article 1634 of the Civil Code, said provision should not be taken to
mean as a grant of an absolute right on the part of the assignor Tan to indiscriminately
dispose of the thing or the right given as security. The Court rules that the said provision
should be read in consonance with Article 2097 of the same code. 2 3 Although the pledgee
or the assignee, Litton, Sr. did not ipso facto become the creditor of private respondent
Mendoza, the pledge being valid, the incorporeal right assigned by Tan in favor of the
former can only be alienated by the latter with due notice to and consent of Litton, Sr. or
his duly authorized representative. To allow the assignor to dispose of or alienate the
security without notice and consent of the assignee will render nugatory the very purpose
of a pledge or an assignment of credit.
Moreover, under Article 1634, 2 4 the debtor has a corresponding obligation to reimburse
the assignee, Litton, Sr. for the price he paid or for the value given as consideration for the
deed of assignment. Failing in this, the alienation of the litigated credit made by Tan in
favor of private respondent by way of a compromise agreement does not bind the
assignee, petitioner herein.
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Indeed, a painstaking review of the record of the case reveals that private respondent has,
from the very beginning, been fully aware of the deed of assignment executed by Tan in
favor of Litton, Sr. as said deed was duly submitted to Branch XI of the then Court of First
Instance of Manila in Civil Case No. 56850 (in relation to Civil Case No. Q-8303) where
C.B.M. Products is one of the defendants and the parties were notified through their
counsel. 2 5 As earlier mentioned, private respondent herein is the president of C.B.M.
Products, hence, his contention that he is not aware of the said deed of assignment
deserves scant consideration from the Court. Petitioner pointed out at the same time that
private respondent together with his counsel were served with a copy of the deed of
assignment which allegation remains uncontroverted. Having such knowledge thereof,
private respondent is estopped from entering into a compromise agreement involving the
same litigated credit without notice to and consent of the assignee, petitioner herein. More
so, in the light of the fact that no reimbursement has ever been made in favor of the
assignee as required under Article 1634. Private respondent acted in bad faith and in
connivance with assignor Tan so as to defraud the petitioner in entering into the
compromise agreement. LibLex

WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent court
dated August 30, 1977 is hereby SET ASIDE, the said compromise agreement being null
and void, and a new one is hereby rendered reinstating its decision dated January 27, 1977,
affirming in toto the decision of the lower court. This decision is immediately executory.
No motion for extension of time to file a motion for reconsideration will be granted.
SO ORDERED.
Narvasa, Cruz and Griño-Aquino, JJ., concur.
Medialdea, J., is on leave.
Footnotes

1. Court of First Instance of Manila, Branch XI.


2. Plaintiffs-Interpleader, Civil Case No. 56850.

3. Defendant in Civil Case Nos. 8303 & 56850.


4. PBTC Check No. 927581-C.

5. For P75,948.83 & P4,847.79 respectively.


6. Supra.
7. Ramon P. Bernal vs. C.B.M. Products et al.
* This is now the subject of this petition.
8. Page 92, Rollo; Manifestation filed by George Litton, Sr. dated September 1, 1966.

9. Pages 31-32, Rollo.


10. Decision of December 2, 1967.

11. Penned by Justice Ramon C. Fernandez.


12. Pages 30-31, Rollo.

13. Penned by Justice Ricardo C. Puno and concurred into by Justices Pacifico P. de
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Castro and Delfin F1. Batacan, pages 29-36, Rollo.

14. 27 SCRA 1090 (1969).


15. He was appointed as administrator of the estate of the late George Litton, Sr. on August
7, 1978 in Special Proceedings No. 8833, letters of administration of which was issued
on August 10, 1978.
16. Page 471, Volume 2, Moran, Comments on the Rules of Court, 1979 ed.

17. Supra.
18. Infra.
19. Salonga vs. Warner Barnes & Co., Ltd., 88 Phil. 125, 131 (1951).

20. Republic vs. Estenzo, 21 SCRA 122 (1968).


21. Araneta vs. Perez, 7 SCRA 923 (1963); Republic vs. Estenzo, supra; Vda. de Corpuz vs.
Phodaca-Ambrosio, 32 SCRA 279 (1970).

22. Article 2085, Civil Code.


23. Article 2097. With the consent of the pledgee, the thing pledged may be alienated by the
pledgor or owner, subject to the pledge. The ownership of the thing pledged is
transmitted to the vendee or transferee as soon as the pledgee consents to the
alienation, but the latter shall continue in possession.
24. Article 1634. When a credit or other incorporeal right in litigation is sold, the debtor shall
have a right to extinguish it by reimbursing the assignee for the price the latter paid
therefor, the judicial costs incurred by him, and the interest on the price from the day on
which the same was paid. A credit or other incorporeal right shall be considered in
litigation from the time the complaint concerning the same is answered. The debtor may
exercise his right within thirty days from the date the assignee demands payment from
him.
25. Annex "A-1" to compliance of counsel for petitioner; page 92, Rollo.

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THIRD DIVISION

[G.R. No. 53955. January 13, 1989.]

THE MANILA BANKING CORPORATION , plaintiff-appellee, vs.


ANASTACIO TEODORO JR. and GRACE ANNA TEODORO , defendants-
appellants.

Formoso & Quimbo Law Office for plaintiff-appellee.


Serafin P. Rivera for defendants-appellants.

SYLLABUS

1. CIVIL LAW; CIVIL CODE; OBLIGATIONS AND CONTRACTS; CHARACTER OF


TRANSACTION, DETERMINED NOT BY THE LANGUAGE BUT BY THE INTENTION. — The
character of the transactions between the parties is not, however, determined by the
language used in the document but by their intention.
2. ID.; ID.; ID.; NOVATIONS; EXTINGUISHMENT OF OBLIGATION BY ANOTHER WHICH
SUBSTITUTES THE SAME; REQUISITE. — Moreover, in order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other (Article 1292, New Civil Code).
3. ID.; ID.; PLEDGE; PRESUMPTION IN FAVOR OF PLEDGE. — In case of doubt as to
whether a transaction is a pledge or a dation in payment, the presumption is in favor of
pledge, the latter being the lesser transmission of rights and interests (Lopez v. Court of
Appeals, supra).
4. ID.; ID.; ID.; ESSENCE. — It is of course of the essence of a contract of pledge or
mortgage that when the principal obligation becomes due, the things in which the pledge
or mortgage consists may be alienated for the payment to the creditor (Article 2087, New
Civil Code).
FELICIANO, J.; CONCURRING:
1. CIVIL LAW; CIVIL CODE; OBLIGATIONS AND CONTRACT; INTENT OF THE PARTIES;
TO BE DETERMINED IN THE FIRST INSTANCE BY THE LANGUAGE USED. — I would merely
wish to add a few lines in respect of the point made by Bidin, J., that "the character of the
transactions between the parties is not, however, determined by the language used in the
document but by their intention." This statement is basically not exceptionable, so far as it
goes. It might, however, be borne in mind that the intent of the parties to the transaction is
to be determined, in the first instance, by the very language which they used.
2. ID.; ID.; ID.; LANGUAGE SHOWS TRANSACTION IN CASE AT BAR IS FOR A LIMITED
PURPOSE. — The point that appears to me to be worth making is that although in its form,
the deed of assignment of receivables partakes of the nature of a complete alienation of
the receivables assigned, such form should be taken in conjunction with, and indeed must
be qualified and controlled by, other language showing an intent of the parties that title to
the receivables shall pass to the assignee for the limited purpose of securing another,
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principal; obligation owed by the assignor to the assignee. Title moves from assignor to
assignee but that title is defeasible being designed to collateralize the principal obligation.
Operationally, what this means is that the assignee is burdened with an obligation of taking
the proceeds of the receivables assigned and applying such proceeds to the satisfaction
of the principal obligation and returning any balance remaining thereafter to the assignor.
3. ID.; ID.; ID.; PLEDGE; PACTUM COMMISORIUM; PROHIBITED. — The parties gaved
the deed of assignment the form of an absolute conveyance of title over the receivables
assigned, essentially for the convenience of the assignee. Without such formally unlimited
conveyance of title, the assignee would have to treat the deed of assignment as no more
than a deed of pledge or of chattel mortgage. In other words, in such hypothetical case,
should the assignee seek to realize upon the security given to him through the deed of
assignment (which would then have to comply with the documentation and registration
requirements of a pledge or chattel mortgage), the assignee would have to foreclose upon
the securities or credits assigned and place them on public sale and there acquire the
same. It should be recalled that under the principle which forbids a pactum commisorium
Article 2088, Civil Code), a mortgagee or pledgee is prohibited from simply taking and
appropriating the personal property turned over to him as security for the payment of a
principal obligation. A deed of assignment by way of security avoids the necessity of a
public sale imposed by the rule on pactum commisorium, by in effect placing the sale of
the collateral up front.
4. ID.; ID.; TO QUALIFY DEED OF ASSIGNMENT AS A SECURITY ARRANGEMENT,
LANGUAGE TO THAT EFFECT MUST BE FOUND IN THE DOCUMENT. — The foregoing is
applicable where, as in the present instance, the deed of assignment of receivables
combines elements of both a complete or absolute alienation of the credits being
assigned and a security arrangement to assure payment of a principal obligation. Where
the second element is absent, that is, where there is nothing to indicate that the parties
intended the deed of assignment to function as a security device, it would of course follow
that the simple absolute conveyance embodied in the deed of assignment would be
operative; the assignment would constitute essentially a mode of payment or dacion en
pago. Put a little differently, in order that a deed of assignment of receivables which is in
form an absolute conveyance of title to the credits being assigned, may be qualified and
treated as a security arrangement, language to such effect must be found in the document
itself and that language, precisely, is embodied in the deed of assignment in the instant
case. Finally, it might be noted that that deed simply follows a form in standard use in
commercial banking.

DECISION

BIDIN , J : p

This is an appeal from the decision ** of the Court of First Instance of Manila, Branch XVII
in Civil Case No. 78178 for collection of sum of money based on promissory notes
executed by the defendants-appellants in favor of plaintiff-appellee bank. The dispositive
portion of the appealed decision (Record on Appeal, p. 33) reads as follows:
"WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio
Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay plaintiff the
sum of P15,037.11 plus 12% interest per annum from September 30, 1969 until
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fully paid, in payment of Promissory Notes No. 11487, plus the sum of P1,000.00
as attorney's fees; and (b) sentencing defendant Anastacio Teodoro, Jr. to pay
plaintiff the sum of P8,934.74, plus interest at 12% per annum from September
30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515 and 11699,
plus the sum of P500.00 a attorney's fees.

With Costs against defendants."

The facts of the case as found by the trial court are as follows:
"On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and
severally, executed in favor of plaintiff a Promissory Note (No. 11487) for the sum
of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per
annum. Defendants failed to pay the aid amount inspite of repeated demands
and the obligation as of September 30, 1969 stood at P15,137.11 including
accrued interest and service charge.

On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father)
and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory
Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively, payable
in 120 days at 12% interest per annum. Father and Son made a partial payment
on the May 3, 1966 Promissory Note but none on the June 20, 1966 Promissory
Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969
including accrued interest and service charge. LexLib

The three Promissory Notes stipulated that any interest due if not paid at the end
of every month shall be added to the total amount then due, the whole amount to
bear interest at the rate of 12% per annum until fully paid; and in case of
collection through an attorney-at-law, the makers shall, jointly and severally, pay
10% of the amount over-due as attorney's fees, which in no case shall be less
than P200.00.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed
of Assignment of Receivables from the Emergency Employment Administration in
the sum of P44,635.00. The Deed of Assignment provided that it was for and in
consideration of certain credits, loans, overdrafts and other credit
accommodations extended to defendants as security for the payment of said
sum and the interest thereon, and that defendants do hereby remise, release and
quitclaim all its rights, title, and interest in and to the accounts receivables.'
Further:
'(1) The title and right of possession to said accounts receivable
is to remain in the assignee, and it shall have the right to collect the same
from the debtor, and whatsoever the Assignor does in connection with the
collection of said accounts, it agrees to do as agent and representative of
the Assignee and in trust for said Assignee . . .;

(6) The Assignor guarantees the existence and legality of said


accounts receivable, and the due and punctual payment thereof unto the
assignee, . . . on demand, . . . and further, that Assignor warrants the
solvency and credit worthiness of each and every account.
(7) The Assignor does hereby guarantee the payment when due
on all sums payable under the contracts giving rise to the accounts
receivable . . . including reasonable attorney's fees in enforcing any rights
against the debtors of the assigned accounts receivable and will pay upon
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demand, the entire unpaid balance of said contract in the event of non
payment by the said debtors of any monthly sum at its due date or of any
other default by said debtors . . .
(9) . . . This Assignment shall also stand as a continuing
guarantee for any and all whatsoever there is or in the future there will be
justly owing from the Assignor to the Assignee . . .

In their stipulations of Fact, it is admitted by the parties that plaintiff extended


loans to defendants on the basis and by reason of certain contracts entered into
by the defunct Emergency Employment Administration (EEA) with defendants for
the fabrication of fishing boats, and that the Philippine Fisheries Commission
succeeded the EEA after its abolition; that non-payment of the notes was due to
the failure of the Commission to pay defendants after the latter had complied
with their contractual obligations; and that the President of plaintiff Bank took
steps to collect from the Commission, but no collection was effected.

For failure of defendants to pay the sums due on the Promissory Note, this action
was instituted on November 13, 1969, originally against the Father, Son, and the
latter's wife. Because the Father died, however, during the pendency of the suit,
the case as against him was dismissed under the provisions of Section 21, Rule 3
of the Rules of Court. The action, then is against defendant Son and his wife for
the collection of the sum of P15,037.11 on Promissory Note No. 14487; and
against defendant Son for the recovery of P8,394.74 on Promissory Notes Nos.
11515 and 11699, plus interest on both amounts at 12% per annum from
September 30, 1969 until fully paid, and 10% of the amounts due as attorney's
fees.
Neither of the parties presented any testimonial evidence and submitted the case
for decision based on their Stipulations of Fact and on their documentary
evidence.
The issues, as defined by the parties are: (1) whether or not plaintiff's claim is
already considered paid by the Deed of Assignment of Receivables by the Son;
and (2) whether or not it is plaintiff who should directly sue the Philippine
Fisheries Commission for collection." (Record on Appeal, p. 29-32).

On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8,
1972, defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was
denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June
23, 1972, defendants filed with the lower court their notice of appeal together with the
appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court
of Appeals on August 22, 1972 (Record on Appeal, p. 42). LLpr

In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment
of error, that is —
"THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF
THE CONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE,
TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION.'

As the appeal involves a pure question of law, the Court of Appeals, in its resolution
promulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on
Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1).
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In the resolution of May 30, 1980, the First Division of this Court ordered that the case be
docketed and declared submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that the case has been pending with the
Court and to determine whether supervening events may have rendered the case moot and
academic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES within
thirty days from notice, and in case they fail to make the proper manifestation within the
required period, (2) to consider the case terminated and closed with the entry of judgment
accordingly made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of the appeal/review interposed by
defendants-appellants (Rollo, p. 41).
The major issues raised in this case are as follows: (1) whether or not the assignment of
receivables has the effect of payment of all the loans contracted by appellants from
appellee bank; and (2) whether or not appellee bank must first exhaust all legal remedies
against the Philippine Fisheries Commission before it can proceed against appellants for
collections of loan under the promissory notes which are plaintiff's bases in the action for
collection in Civil Case No. 78178.
"Assignment of credit is an agreement by virtue of which the owner of a credit, known as
the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and
without the need of the consent of the debtor, transfers his credit and its accessory rights
to another, known as the assignee, who acquires the power to enforce it to the same
extent as the assignor could have enforced it against the debtor . . . It may be in the form
of a sale, but at times it may constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his creditor a credit he has against a
third person, or it may constitute a donation as when it is by gratuitous title; or it may even
be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own
debt in favor of the assignee, without transmitting ownership. The character that it may
assume determines its requisites and effects, its regulation, and the capacity of the parties
to execute it; and in every case, the obligations between assignor and assignee will depend
upon the judicial relation which is the basis of the assignment: (Tolentino, Commentaries
and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-166).
There is no question as to the validity of the assignment of receivables executed by
appellants in favor of appellee bank. The issue is with regard to its legal effects.
I
It is evident that the assignment of receivables executed by appellants on January 24,
1964 did not transfer the ownership of the receivables to appellee bank and release
appellants from their loans with the bank incurred under promissory notes Nos. 11487,
11515 and 11699. LLpr

The Deed of Assignment provided that it was for and in consideration of certain credits,
loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to
appellants by appellee bank, and as security for the payment of said sum and the interest
thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all
their rights, title and interest in and to the accounts receivable assigned (1st paragraph). It
was further stipulated that the assignment will also stand as a continuing guaranty for
future loans of appellants to appellee bank and correspondingly the assignment shall also
extend to all the accounts receivable; appellants shall also obtain in the future, until the
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consideration on the loans secured by appellants from appellee bank shall have been fully
paid by them (No. 9).
The position of appellants, however, is that the deed of assignment is a quitclaim in
consideration of their indebtedness to appellee bank, not mere guaranty, in view of the
following provisions of the deed of assignment:
". . . the Assignor do hereby remise, release and quit-claim unto said assignee all
its rights, title and interest in the accounts receivable described hereunder."
(Emphasis supplied by appellants, first par., Deed of Assignment)."
". . . that the title and right of possession to said account receivable is to remain in
said assignee and it shall have the right to collect directly from the debtor, and
whatsoever the Assignor does in connection with the collection of said accounts,
it agrees to do so agent and representative of the Assignee and it trust for said
Assignee . . . " (Ibid. par. 2 of Deed of Assignment)." (Record on Appeal, p. 27)

The character of the transactions between the parties is not, however, determined by the
language used in the document but by their intention. Thus, the Court, quoting from the
American Jurisprudence (68 2d, Secured Transaction, Section 50) said:
"The characters of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer
was. If it was intended to secure the payment of money, it must be construed all a
pledge. However, even though a transfer, if regarded by itself, appears to have
been absolute, its object and character might still be qualified and explained by a
contemporaneous writing declaring it to have been a deposit of the property as
collateral security. It has been said that a transfer of property by the debtor to a
creditor, even if sufficient on its face to make an absolute conveyance, should be
treated as a pledge if the debt continues in existence and is not discharged by the
transfer, and that accordingly, the use of the terms ordinarily importing
conveyance, of absolute ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and mortgages and
therefore do not unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and ambiguous language or other circumstances excluding an
intent to pledge." (Lopez v. Court of Appeals, 114 SCRA 671 [1962]).

Definitely, the assignment of the receivables did not result from a sale transaction. It
cannot be said to have been constituted by virtue of a dation in payment for appellants'
loans with the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which
are the subject of the suit for collection in Civil Case No. 78178. At the time the deed of
assignment was executed, said loans were non-existent yet. The deed of assignment was
executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487 is dated April
25, 1966 (Exh. "A"), promissory note 11515, dated May 3, 1966 (Exh. "B"), promissory note
11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00, the
amount of credit from appellee bank indicated in the deed of assignment. At the time the
assignment was executed, there was no obligation to be extinguished except the amount
of P10,000.00. Moreover, in order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each other (Article
1292, New Civil Code). LLjur

Obviously, the deed of assignment was intended as collateral security for the bank loans
of appellants, as a continuing guaranty for whatever sums would be owing by defendants
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to plaintiff, as stated in stipulation No. 9 of the deed.
In case of doubt as to whether a transaction is a pledge or a dation in payment, the
presumption is in favor of pledge, the latter being the lesser transmission of rights and
interests (Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title and interest of the defendant in the contracts
of lease of two buildings as well as her rights, title and interest in the land on which the
buildings were constructed to secure an overdraft from a bank amounting to P110,000.00
which was increased to P150,000.00, then to P165,000.00 was considered by the Court to
be documents of mortgage contracts inasmuch as they were executed to guarantee the
principal obligations of the defendant consisting of the overdrafts or the indebtedness
resulting therefrom. The Court ruled that an assignment to guarantee an obligation is in
effect a mortgage and not an absolute conveyance of title which confers ownership on the
assignee (Peoples Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).

II
As to whether or not appellee bank must have to exhaust all legal remedies against the
Philippine Fisheries Commission before it can proceed against appellants for collection of
loans under their promissory notes, must also be answered in the negative.
The obligation of appellants under the promissory notes not having been released by the
assignment of receivables, appellants remain as the principal debtors of appellee bank
rather than mere guarantors. The deed of assignment merely guarantees said obligations.
That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted
all the property of the debtor, and has resorted to all the legal remedies against the debtor,
under Article 2058 of the New Civil Code does not therefore apply to them. It is of course
of the essence of a contract of pledge or mortgage that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for
the payment to the creditor (Article 2087, New Civil Code). In the instant case, appellants
are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore,
resort to the other.
Appellee bank did try to collect on the pledged receivables. As the Emergency
Employment Agency (EEA) which issued the receivables had been abolished, the collection
had to be coursed through the Office of the President which disapproved the same
(Record on Appeal, p. 16). The receivable became virtually worthless leaving appellants'
loans from appellee bank unsecured. It is but proper that after their repeated demands
made on appellants for the settlement of their obligations, appellee bank should proceed
against appellants. It would be an exercise in futility to proceed against a defunct office for
the collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the
trial court is affirmed in toto.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Cortes, JJ., concur.

Separate Opinions
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FELICIANO, J., concurring :

I quite agree with the general reasoning of and the results reached by my distinguished
brother Bidin in respect of both of the principal issues he addressed in his opinion.
I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the
character of the transactions between the parties is not, however, determined by the
language used in the document but by their intention." This statement is basically not
exceptionable, so far as it goes. It might, however, be borne in mind that the intent of the
parties to the transaction is to be determined, in the first instance, by the very language
which they used. The deed of assignment contains language which suggest that the
parties intended to effect a complete alienation of title to and rights over the receivables
which are the subject of the assignment. This language is comprised of works like
"remise," "release and quitclaim" and clauses like "the title and right of possession to said
accounts receivable is to remain in said assignee" who "shall have the right to collect
directly from the debtor." The same intent is also suggested by the use of the words
"agent and representative of the assignee" in referring to the assignor. LibLex

The point that appears to me to be worth making is that although in its form, the deed of
assignment of receivables partakes of the nature of a complete alienation of the
receivables assigned, such form should be taken in conjunction with, and indeed must be
qualified and controlled by, other language showing an intent of the parties that title to the
receivables shall pass to the assignee for the limited purpose of securing another,
principal; obligation owed by the assignor to the assignee. Title moves from assignor to
assignee but that title is defeasible being designed to collateralize the principal obligation.
Operationally, what this means is that the assignee is burdened with an obligation of taking
the proceeds of the receivables assigned and applying such proceeds to the satisfaction
of the principal obligation and returning any balance remaining thereafter to the assignor.
The parties gaved the deed of assignment the form of an absolute conveyance of title over
the receivables assigned, essentially for the convenience of the assignee. Without such
formally unlimited conveyance of title, the assignee would have to treat the deed of
assignment as no more than a deed of pledge or of chattel mortgage. In other words, in
such hypothetical case, should the assignee seek to realize upon the security given to him
through the deed of assignment (which would then have to comply with the
documentation and registration requirements of a pledge or chattel mortgage), the
assignee would have to foreclose upon the securities or credits assigned and place them
on public sale and there acquire the same. It should be recalled that under the principle
which forbids a pactum commisorium Article 2088, Civil Code), a mortgagee or pledgee is
prohibited from simply taking and appropriating the personal property turned over to him
as security for the payment of a principal obligation. A deed of assignment by way of
security avoids the necessity of a public sale imposed by the rule on pactum
commisorium, by in effect placing the sale of the collateral up front.
The foregoing is applicable where, as in the present instance, the deed of assignment of
receivables combines elements of both a complete or absolute alienation of the credits
being assigned and a security arrangement to assure payment of a principal obligation.
Where the second element is absent, that is, where there is nothing to indicate that the
parties intended the deed of assignment to function as a security device, it would of
course follow that the simple absolute conveyance embodied in the deed of assignment
would be operative; the assignment would constitute essentially a mode of payment or
dacion en pago. Put a little differently, in order that a deed of assignment of receivables
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which is in form an absolute conveyance of title to the credits being assigned, may be
qualified and treated as a security arrangement, language to such effect must be found in
the document itself and that language, precisely, is embodied in the deed of assignment in
the instant case. Finally, it might be noted that that deed simply follows a form in standard
use in commercial banking.
Footnotes

* Penned by then Judge of the Court of First Instance of Manila, Ameurfina Melencio-
Herrera, now Associate Justice of the Court.

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FIRST DIVISION

[G.R. No. 78519. September 26, 1989.]

VICTORIA YAU CHU, assisted by her husband MICHAEL CHU ,


petitioners, vs. HON. COURT OF APPEALS, FAMILY SAVINGS BANK
and/or CAMS TRADING ENTERPRISES, INC. , respondents.

Francisco A. Lara, Jr. for petitioner.


D.T. Ramos and Associates for respondent Family Savings Bank.
Romulo T. Santos for respondent CAMS Trading.

DECISION

GRIÑO-AQUINO , J : p

This is a petition for review on certiorari to annul and set aside the Court of Appeals'
decision dated October 28, 1986 in CA-G.R. CV No. 03269 which affirmed the decision of
the trial court in favor of the private respondents in an action to recover the petitioners'
time deposits in the respondent Family Savings Bank.
Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on credit from
CAMS Trading Enterprises, Inc. (hereafter "Cams Trading" for brevity). To guaranty
payment for her cement withdrawals, she executed in favor of Cams Trading deeds of
assignment of her time deposits in the total sum of P320,000 in the Family Savings Bank
(hereafter the Bank). Except for the serial numbers and the dates of the time deposit
certificates, the deeds of assignment, which were prepared by her own lawyer, uniformly
provided —
". . . That this assignment serves as a collateral or guarantee for the payment of
my obligation with the said CAMS TRADING ENTERPRISES, INC. on account of
my cement withdrawal from said company, per separate contract executed
between us."

On July 24, 1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid account
with it in the sum of P314,639.75. It asked that it be allowed to encash the time deposit
certificates which had been assigned to it by Mrs. Chu. It submitted to the Bank a letter
dated July 18, 1980 of Mrs. Chu admitting that her outstanding account with Cams
Trading was P404,500. After verbally advising Mrs. Chu of the assignee's request to
encash her time deposit certificates and obtaining her verbal conformity thereto, the Bank
agreed to encash the certificates. It delivered to Cams Trading the sum of P283,737.75
only, as one time deposit certificate (No. 0048120954) lacked the proper signatures. Upon
being informed of the encashment, Mrs. Chu demanded from the Bank and Cams Trading
that her time deposit be restored. When neither complied, she filed a complaint to recover
the sum of P283,737.75 from them. The case was docketed in the Regional Trial Court of
Makati, Metro Manila (then CFI of Rizal, Pasig Branch XIX), as Civil Case No. 38861. LLphil

In a decision dated December 12, 1983, the trial court dismissed the complaint for lack of
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merit.
Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed the
dismissal of her complaint.
In this petition for review, she alleges that the Court of Appeals erred:
1. In not annulling the encashment of her time deposit certificates as a pactum
commissorium; and
2. In not finding that the obligations secured by her time deposits had already been
paid.
We find no merit in the petition for review.
The Court of Appeals found that the deeds of assignment were contracts of pledge, but,
as the collateral was also money or an exchange of "peso for peso," the provision in Article
2112 of the Civil Code for the sale of the thing pledged at public auction to convert it into
money to satisfy the pledgor's obligation, did not have to be followed. All that had to be
done to convert the pledgor's time deposit certificates into cash was to present them to
the bank for encashment after due notice to the debtor.
The encashment of the deposit certificates was not a pacto commissorio which is
prohibited under Art. 2088 of the Civil Code. A pacto commissorio is a provision for the
automatic appropriation of the pledged or mortgaged property by the creditor in payment
of the loan upon its maturity. The prohibition against a pacto commissorio is intended to
protect the obligor, pledgor, or mortgagor against being overreached by his creditor who
holds a pledge or mortgage over property whose value is much more than the debt. Where,
as in this case, the security for the debt is also money deposited in a bank, the amount of
which is even less than the debt, it was not illegal for the creditor to encash the time
deposit certificates to pay the debtors' overdue obligation, with the latter's consent.
LexLib

Whether the debt had already been paid as now alleged by the debtor, is a factual question
which the Court of Appeals found not to have been proven for the evidence which the
debtor sought to present on appeal, were receipts for payments made prior to July 18,
1980. Since the petitioner signed on July 18, 1980 a letter admitting her indebtedness to
be in the sum of P404,500, and there is no proof of payment made by her thereafter to
reduce or extinguish her debt, the application of her time deposits, which she had assigned
to the creditor to secure the payment of her debt, was proper. The Court of Appeals did
not commit a reversible error in holding that it was so.
WHEREFORE, the petition for review is denied. Costs against the appellant.
SO ORDERED.
Narvasa, Cruz and Medialdea, JJ., concur.
Gancayco, J., I inhibit.

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FIRST DIVISION

[G.R. No. 156132. October 16, 2006.]

CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS'


FINANCE CORPORATION, doing business under the name and style of
FNCB Finance , petitioners, vs . MODESTA R. SABENIANO , respondent.

DECISION

CHICO-NAZARIO , J : p

Before this Court is a Petition for Review on Certiorari, 1 under Rule 45 of the Revised
Rules of Court, of the Decision 2 of the Court of Appeals in CA-G.R. CV No. 51930, dated 26
March 2002, and the Resolution, 3 dated 20 November 2002, of the same court which,
although modifying its earlier Decision, still denied for the most part the Motion for
Reconsideration of herein petitioners.
Petitioner Citibank, N.A. (formerly known as the First National City Bank) is a banking
corporation duly authorized and existing under the laws of the United States of America and
licensed to do commercial banking activities and perform trust functions in the Philippines.
Petitioner Investor's Finance Corporation, which did business under the name and style
of FNCB Finance, was an a liate company of petitioner Citibank, speci cally handling money
market placements for its clients. It is now, by virtue of a merger, doing business as part of
its successor-in-interest, BPI Card Finance Corporation. However, so as to consistently
establish its identity in the Petition at bar, the said petitioner shall still be referred to herein
as FNCB Finance. 4
Respondent Modesta R. Sabeniano was a client of both petitioners Citibank and FNCB
Finance. Regrettably, the business relations among the parties subsequently went awry.
On 8 August 1985, respondent led a Complaint 5 against petitioners, docketed as
Civil Case No. 11336, before the Regional Trial Court (RTC) of Makati City. Respondent
claimed to have substantial deposits and money market placements with the petitioners, as
well as money market placements with the Ayala Investment and Development Corporation
(AIDC), the proceeds of which were supposedly deposited automatically and directly to
respondent's accounts with petitioner Citibank. Respondent alleged that petitioners refused
to return her deposits and the proceeds of her money market placements despite her
repeated demands, thus, compelling respondent to le Civil Case No. 11336 against
petitioners for "Accounting, Sum of Money and Damages." Respondent eventually led an
Amended Complaint 6 on 9 October 1985 to include additional claims to deposits and
money market placements inadvertently left out from her original Complaint.
In their joint Answer 7 and Answer to Amended Complaint, 8 led on 12 September
1985 and 6 November 1985, respectively, petitioners admitted that respondent had deposits
and money market placements with them, including dollar accounts in the Citibank branch in
Geneva, Switzerland (Citibank-Geneva). Petitioners further alleged that the respondent later
obtained several loans from petitioner Citibank, for which she executed Promissory Notes
(PNs), and secured by (a) a Declaration of Pledge of her dollar accounts in Citibank-Geneva,
and (b) Deeds of Assignment of her money market placements with petitioner FNCB Finance.
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When respondent failed to pay her loans despite repeated demands by petitioner Citibank,
the latter exercised its right to off-set or compensate respondent's outstanding loans with
her deposits and money market placements, pursuant to the Declaration of Pledge and the
Deeds of Assignment executed by respondent in its favor. Petitioner Citibank supposedly
informed respondent Sabeniano of the foregoing compensation through letters, dated 28
September 1979 and 31 October 1979. Petitioners were therefore surprised when six years
later, in 1985, respondent and her counsel made repeated requests for the withdrawal of
respondent's deposits and money market placements with petitioner Citibank, including her
dollar accounts with Citibank-Geneva and her money market placements with petitioner
FNCB Finance. Thus, petitioners prayed for the dismissal of the Complaint and for the award
of actual, moral, and exemplary damages, and attorney's fees. HAaScT

When the parties failed to reach a compromise during the pre-trial hearing, 9 trial
proper ensued and the parties proceeded with the presentation of their respective evidence.
Ten years after the ling of the Complaint on 8 August 1985, a Decision 1 0 was nally
rendered in Civil Case No. 11336 on 24 August 1995 by the fourth Judge 1 1 who handled the
said case, Judge Manuel D. Victorio, the dispositive portion of which reads —
WHEREFORE, in view of all the foregoing, decision is hereby rendered as
follows:
(1) Declaring as illegal, null and void the setoff effected by the defendant
Bank [petitioner Citibank] of plaintiff's [respondent Sabeniano] dollar deposit with
Citibank, Switzerland, in the amount of US$149,632.99, and ordering the said
defendant [petitioner Citibank] to refund the said amount to the plaintiff with legal
interest at the rate of twelve percent (12%) per annum, compounded yearly, from 31
October 1979 until fully paid, or its peso equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the
defendant Bank [petitioner Citibank] in the amount of P1,069,847.40 as of 5
September 1979 and ordering the plaintiff [respondent Sabeniano] to pay said
amount, however, there shall be no interest and penalty charges from the time the
illegal setoff was effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims interposed by the
parties against each other.
Costs against the defendant Bank.

All the parties appealed the foregoing Decision of the RTC to the Court of Appeals,
docketed as CA-G.R. CV No. 51930. Respondent questioned the ndings of the RTC that she
was still indebted to petitioner Citibank, as well as the failure of the RTC to order petitioners
to render an accounting of respondent's deposits and money market placements with them.
On the other hand, petitioners argued that petitioner Citibank validly compensated
respondent's outstanding loans with her dollar accounts with Citibank-Geneva, in accordance
with the Declaration of Pledge she executed in its favor. Petitioners also alleged that the RTC
erred in not declaring respondent liable for damages and interest.
On 26 March 2002, the Court of Appeals rendered its Decision 1 2 a rming with
modi cation the RTC Decision in Civil Case No. 11336, dated 24 August 1995, and ruling
entirely in favor of respondent in this wise —
Wherefore, premises considered, the assailed 24 August 1995 Decision of the
court a quo is hereby AFFIRMED with MODIFICATION , as follows:
1. Declaring as illegal, null and void the set-off effected by the defendant-
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appellant Bank of the plaintiff-appellant's dollar deposit with Citibank, Switzerland,
in the amount of US$149,632.99, and ordering defendant-appellant Citibank to
refund the said amount to the plaintiff-appellant with legal interest at the rate of
twelve percent (12%) per annum, compounded yearly, from 31 October 1979 until
fully paid, or its peso equivalent at the time of payment;

2. As defendant-appellant Citibank failed to establish by competent


evidence the alleged indebtedness of plaintiff-appellant, the set-off of P1,069,847.40
in the account of Ms. Sabeniano is hereby declared as without legal and factual
basis;
3. As defendants-appellants failed to account the following plaintiff-
appellant's money market placements, savings account and current accounts, the
former is hereby ordered to return the same, in accordance with the terms and
conditions agreed upon by the contending parties as evidenced by the certi cates of
investments, to wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes
NNPN No. 22526) issued on 17 March 1977, P318,897.34 with 14.50%
interest p.a.;
(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes
NNPN No. 22528) issued on 17 March 1977, P203,150.00 with 14.50 interest
p.a.;
(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN
No. 04952), issued on 02 June 1977, P500,000.00 with 17% interest p.a.;
(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN
No. 04962), issued on 02 June 1977, P500,000.00 with 17% interest per
annum;
(v) The Two Million (P2,000,000.00) money market placements of
Ms. Sabeniano with the Ayala Investment & Development Corporation (AIDC)
with legal interest at the rate of twelve percent (12%) per annum compounded
yearly, from 30 September 1976 until fully paid;
4. Ordering defendants-appellants to jointly and severally pay the
plaintiff-appellant the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) by
way of moral damages, FIVE HUNDRED THOUSAND PESOS (P500,000.00) as
exemplary damages, and ONE HUNDRED THOUSAND PESOS (P100,000.00) as
attorney's fees.

Apparently, the parties to the case, namely, the respondent, on one hand, and the
petitioners, on the other, made separate attempts to bring the aforementioned Decision of
the Court of Appeals, dated 26 March 2002, before this Court for review.
G.R. No. 152985
Respondent no longer sought a reconsideration of the Decision of the Court of
Appeals in CA-G.R. CV No. 51930, dated 26 March 2002, and instead, led immediately with
this Court on 3 May 2002 a Motion for Extension of Time to File a Petition for Review, 1 3
which, after payment of the docket and other lawful fees, was assigned the docket number
G.R. No. 152985. In the said Motion, respondent alleged that she received a copy of the
assailed Court of Appeals Decision on 18 April 2002 and, thus, had 15 days therefrom or until
3 May 2002 within which to le her Petition for Review. Since she informed her counsel of her
desire to pursue an appeal of the Court of Appeals Decision only on 29 April 2002, her
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counsel neither had enough time to file a motion for reconsideration of the said Decision with
the Court of Appeals, nor a Petition for Certiorari with this Court. Yet, the Motion failed to
state the exact extension period respondent was requesting for. EcDTIH

Since this Court did not act upon respondent's Motion for Extension of Time to le her
Petition for Review, then the period for appeal continued to run and still expired on 3 May
2002. 1 4 Respondent failed to le any Petition for Review within the prescribed period for
appeal and, hence, this Court issued a Resolution, 1 5 dated 13 November 2002, in which it
pronounced that —
G.R. No. 152985 (Modesta R. Sabeniano vs. Court of Appeals, et
al.). — It appearing that petitioner failed to le the intended petition for review on
certiorari within the period which expired on May 3, 2002, the Court Resolves to
DECLARE THIS CASE TERMINATED and DIRECT the Division Clerk of Court to
INFORM the parties that the judgment sought to be reviewed has become nal and
executory.

The said Resolution was duly recorded in the Book of Entries of Judgments on 3 January
2003.
G.R. No. 156132
Meanwhile, petitioners led with the Court of Appeals a Motion for Reconsideration of
its Decision in CA-G.R. CV No. 51930, dated 26 March 2002. Acting upon the said Motion, the
Court of Appeals issued the Resolution, 1 6 dated 20 November 2002, modifying its Decision
of 26 March 2002, as follows —
WHEREFORE , premises considered, the instant Motion for Reconsideration
i s PARTIALLY GRANTED as Sub-paragraph (V) paragraph 3 of the assailed
Decision's dispositive portion is hereby ordered DELETED .
The challenged 26 March 2002 Decision of the Court is AFFIRMED with
MODIFICATION .

Assailing the Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 51930,
dated 26 March 2002 and 20 November 2002, respectively, petitioners led the present
Petition, docketed as G.R. No. 156132. The Petition was initially denied 1 7 by this Court for
failure of the petitioners to attach thereto a Certi cation against Forum Shopping. However,
upon petitioners' Motion and compliance with the requirements, this Court resolved 1 8 to
reinstate the Petition.
The Petition presented fourteen (14) assignments of errors allegedly committed by
the Court of Appeals in its Decision, dated 26 March 2002, involving both questions of fact
and questions of law which this Court, for the sake of expediency, discusses jointly, whenever
possible, in the succeeding paragraphs.
I
The Resolution of this Court, dated
13 November 2002, in G.R. No.
152985, declaring the Decision of the
Court of Appeals, dated 26 March
2002, final and executory, pertains to
respondent Sabeniano alone.
Before proceeding to a discussion of the merits of the instant Petition, this Court
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wishes to address rst the argument, persistently advanced by respondent in her pleadings
on record, as well as her numerous personal and unofficial letters to this Court which were no
longer made part of the record, that the Decision of the Court of Appeals in CA-G.R. CV No.
51930, dated 26 March 2002, had already become nal and executory by virtue of the
Resolution of this Court in G.R. No. 152985, dated 13 November 2002.
G.R. No. 152985 was the docket number assigned by this Court to respondent's
Motion for Extension of Time to File a Petition for Review. Respondent, though, did not le
her supposed Petition. Thus, after the lapse of the prescribed period for the ling of the
Petition, this Court issued the Resolution, dated 13 November 2002, declaring the Decision
of the Court of Appeals, dated 26 March 2002, nal and executory. It should be pointed out,
however, that the Resolution, dated 13 November 2002, referred only to G.R. No. 152985,
respondent's appeal, which she failed to perfect through the ling of a Petition for Review
within the prescribed period. The declaration of this Court in the same Resolution would bind
respondent solely, and not petitioners which led their own separate appeal before this
Court, docketed as G.R. No. 156132, the Petition at bar. This would mean that respondent, on
her part, should be bound by the ndings of fact and law of the Court of Appeals, including
the monetary amounts consequently awarded to her by the appellate court in its Decision,
dated 26 March 2002; and she can no longer refute or assail any part thereof. 1 9
This Court already explained the matter to respondent when it issued a Resolution 2 0 in
G.R. No. 156132, dated 2 February 2004, which addressed her Urgent Motion for the Release
of the Decision with the Implementation of the Entry of Judgment in the following manner —
[A]cting on Citibank's and FNCB Finance's Motion for Reconsideration, we
resolved to grant the motion, reinstate the petition and require Sabeniano to le a
comment thereto in our Resolution of June 23, 2003. Sabeniano led a Comment
dated July 17, 2003 to which Citibank and FNCB Finance led a Reply dated August
20, 2003.
From the foregoing, it is clear that Sabeniano had knowledge of, and in fact
participated in, the proceedings in G.R. No. 156132. She cannot feign ignorance of
the proceedings therein and claim that the Decision of the Court of Appeals has
become nal and executory. More precisely, the Decision became nal and
executory only with regard to Sabeniano in view of her failure to le a petition
for review within the extended period granted by the Court, and not to Citibank and
FNCB Finance whose Petition for Review was duly reinstated and is now submitted
for decision.

Accordingly, the instant Urgent Motion is hereby DENIED. (Emphasis


supplied.)

To sustain the argument of respondent would result in an unjust and incongruous


situation wherein one party may frustrate the efforts of the opposing party to appeal the
case by merely ling with this Court a Motion for Extension of Time to File a Petition for
Review, ahead of the opposing party, then not actually ling the intended Petition. 2 1 The
party who fails to le its intended Petition within the reglementary or extended period
should solely bear the consequences of such failure. aCTADI

Respondent Sabeniano did not


commit forum shopping.
Another issue that does not directly involve the merits of the present Petition, but
raised by petitioners, is whether respondent should be held liable for forum shopping.
Petitioners contend that respondent committed forum shopping on the basis of the
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following facts:
While petitioners' Motion for Reconsideration of the Decision in CA-G.R. CV No. 51930,
dated 26 March 2002, was still pending before the Court of Appeals, respondent already
led with this Court on 3 May 2002 her Motion for Extension of Time to File a Petition for
Review of the same Court of Appeals Decision, docketed as G.R. No. 152985. Thereafter,
respondent continued to participate in the proceedings before the Court of Appeals in CA-
G.R. CV No. 51930 by ling her Comment, dated 17 July 2002, to petitioners' Motion for
Reconsideration; and a Rejoinder, dated 23 September 2002, to petitioners' Reply. Thus,
petitioners argue that by seeking relief concurrently from this Court and the Court of
Appeals, respondent is undeniably guilty of forum shopping, if not indirect contempt.
This Court, however, nds no su cient basis to hold respondent liable for forum
shopping.
Forum shopping has been de ned as the ling of two or more suits involving the same
parties for the same cause of action, either simultaneously or successively, for the purpose
of obtaining a favorable judgment. 2 2 The test for determining forum shopping is whether in
the two (or more) cases pending, there is an identity of parties, rights or causes of action,
and relief sought. 2 3 To guard against this deplorable practice, Rule 7, Section 5 of the
revised Rules of Court imposes the following requirement —
SEC. 5. Certi cation against forum shopping . — The plaintiff or principal
party shall certify under oath in the complaint or other initiatory pleading asserting a
claim for relief, or in a sworn certi cation annexed thereto and simultaneously led
therewith: (a) that he has not theretofore commenced any action or led any claim
involving the same issues in any court, tribunal or quasi-judicial agency and, to the
best of his knowledge, no such other action or claim is pending therein; (b) if there is
such other pending action or claim, a complete statement of the present status
thereof; and (c) if he should thereafter learn that the same or similar action or claim
has been led or is pending, he shall report that fact within ve (5) days therefrom
to the court wherein his aforesaid complaint or initiatory pleading has been filed.

Failure to comply with the foregoing requirements shall not be curable by


mere amendment of the complaint or other initiatory pleading but shall be cause for
the dismissal of the case without prejudice, unless otherwise provided, upon motion
and after hearing. The submission of a false certi cation or non-compliance with
any of the undertakings therein shall constitute indirect contempt of court, without
prejudice to the corresponding administrative and criminal actions. If the acts of the
party or his counsel clearly constitute willful and deliberate forum shopping, the
same shall be ground for summary dismissal with prejudice and shall constitute
direct contempt, as well as cause for administrative sanctions.

Although it may seem at rst glance that respondent was simultaneously seeking
recourse from the Court of Appeals and this Court, a careful and closer scrutiny of the details
of the case at bar would reveal otherwise.
It should be recalled that respondent did nothing more in G.R. No. 152985 than to le
with this Court a Motion for Extension of Time within which to le her Petition for Review. For
unexplained reasons, respondent failed to submit to this Court her intended Petition within
the reglementary period. Consequently, this Court was prompted to issue a Resolution, dated
13 November 2002, declaring G.R. No. 152985 terminated, and the therein assailed Court of
Appeals Decision nal and executory. G.R. No. 152985, therefore, did not progress and
respondent's appeal was unperfected.

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The Petition for Review would constitute the initiatory pleading before this Court, upon
the timely ling of which, the case before this Court commences; much in the same way a
case is initiated by the ling of a Complaint before the trial court. The Petition for Review
establishes the identity of parties, rights or causes of action, and relief sought from this
Court, and without such a Petition, there is technically no case before this Court. The Motion
led by respondent seeking extension of time within which to le her Petition for Review
does not serve the same purpose as the Petition for Review itself. Such a Motion merely
presents the important dates and the justi cation for the additional time requested for, but it
does not go into the details of the appealed case.
Without any particular idea as to the assignments of error or the relief respondent
intended to seek from this Court, in light of her failure to le her Petition for Review, there is
actually no second case involving the same parties, rights or causes of action, and relief
sought, as that in CA-G.R. CV No. 51930.
It should also be noted that the Certi cation against Forum Shopping is required to be
attached to the initiatory pleading, which, in G.R. No. 152985, should have been respondent's
Petition for Review. It is in that Certi cation wherein respondent certi es, under oath, that: (a)
she has not commenced any action or led any claim involving the same issues in any court,
tribunal or quasi-judicial agency and, to the best of her knowledge, no such other action or
claim is pending therein; (b) if there is such other pending action or claim, that she is
presenting a complete statement of the present status thereof; and (c) if she should
thereafter learn that the same or similar action or claim has been led or is pending, she shall
report that fact within ve days therefrom to this Court. Without her Petition for Review,
respondent had no obligation to execute and submit the foregoing Certi cation against
Forum Shopping. Thus, respondent did not violate Rule 7, Section 5 of the Revised Rules of
Court; neither did she mislead this Court as to the pendency of another similar case.
Lastly, the fact alone that the Decision of the Court of Appeals, dated 26 March 2002,
essentially ruled in favor of respondent, does not necessarily preclude her from appealing the
same. Granted that such a move is ostensibly irrational, nonetheless, it does not amount to
malice, bad faith or abuse of the court processes in the absence of further proof. Again, it
should be noted that the respondent did not le her intended Petition for Review. The
Petition for Review would have presented before this Court the grounds for respondent's
appeal and her arguments in support thereof. Without said Petition, any reason attributed to
the respondent for appealing the 26 March 2002 Decision would be grounded on mere
speculations, to which this Court cannot give credence. DAESTI

II
As an exception to the general rule,
this Court takes cognizance of
questions of fact raised in the
Petition at bar.
It is already a well-settled rule that the jurisdiction of this Court in cases brought
before it from the Court of Appeals by virtue of Rule 45 of the Revised Rules of Court is
limited to reviewing errors of law. Findings of fact of the Court of Appeals are conclusive
upon this Court. There are, however, recognized exceptions to the foregoing rule, namely: (1)
when the ndings are grounded entirely on speculation, surmises, or conjectures; (2) when
the interference made is manifestly mistaken, absurd, or impossible; (3) when there is grave
abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when
the ndings of fact are con icting; (6) when in making its ndings, the Court of Appeals went
beyond the issues of the case, or its ndings are contrary to the admissions of both the
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appellant and the appellee; (7) when the ndings are contrary to those of the trial court; (8)
when the ndings are conclusions without citation of speci c evidence on which they are
based; (9) when the facts set forth in the petition as well as in the petitioner's main and reply
briefs are not disputed by the respondent; and (10) when the ndings of fact are premised
on the supposed absence of evidence and contradicted by the evidence on record. 2 4
Several of the enumerated exceptions pertain to the Petition at bar.
It is indubitable that the Court of Appeals made factual ndings that are contrary to
those of the RTC, 2 5 thus, resulting in its substantial modi cation of the trial court's Decision,
and a ruling entirely in favor of the respondent. In addition, petitioners invoked in the instant
Petition for Review several exceptions that would justify this Court's review of the factual
ndings of the Court of Appeals, i.e., the Court of Appeals made con icting ndings of fact;
ndings of fact which went beyond the issues raised on appeal before it; as well as ndings
of fact premised on the supposed absence of evidence and contradicted by the evidence on
record.
On the basis of the foregoing, this Court shall proceed to reviewing and re-evaluating
the evidence on record in order to settle questions of fact raised in the Petition at bar.
The fact that the trial judge who
rendered the RTC Decision in Civil
Case No. 11336, dated 24 August
1995, was not the same judge who
heard and tried the case, does not, by
itself, render the said Decision erroneous.
The Decision in Civil Case No. 11336 was rendered more than 10 years from the
institution of the said case. In the course of its trial, the case was presided over by four (4)
different RTC judges. 2 6 It was Judge Victorio, the fourth judge assigned to the case, who
wrote the RTC Decision, dated 24 August 1995. In his Decision, 2 7 Judge Victorio made the
following findings —
After carefully evaluating the mass of evidence adduced by the parties, this
Court is not inclined to believe the plaintiff's assertion that the promissory notes as
well as the deeds of assignments of her FNCB Finance money market placements
were simulated. The evidence is overwhelming that the plaintiff received the
proceeds of the loans evidenced by the various promissory notes she had signed.
What is more, there was not an iota of proof save the plaintiff's bare testimony that
she had indeed applied for loan with the Development Bank of the Philippines.

More importantly, the two deeds of assignment were notarized, hence they
partake the nature of a public document. It makes more than preponderant proof to
overturn the effect of a notarial attestation. Copies of the deeds of assignments
were actually filed with the Records Management and Archives Office.
Finally, there were su cient evidence wherein the plaintiff had admitted the
existence of her loans with the defendant Bank in the total amount of P1,920,000.00
exclusive of interests and penalty charges (Exhibits "28", "31", "32", and "33").
In ne, this Court hereby nds that the defendants had established the
genuineness and due execution of the various promissory notes heretofore
identi ed as well as the two deeds of assignments of the plaintiff's money market
placements with defendant FNCB Finance, on the strength of which the said money
market placements were applied to partially pay the plaintiff's past due obligation
with the defendant Bank. Thus, the total sum of P1,053,995.80 of the plaintiff's past
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due obligation was partially offset by the said money market placement leaving a
balance of P1,069,847.40 as of 5 September 1979 (Exhibit "34").

Disagreeing in the foregoing ndings, the Court of Appeals stressed, in its Decision in
CA-G.R. CV No. 51930, dated 26 March 2002, "that the ponente of the herein assailed
Decision is not the Presiding Judge who heard and tried the case." 2 8 This brings us to the
question of whether the fact alone that the RTC Decision was rendered by a judge other than
the judge who actually heard and tried the case is su cient justi cation for the appellate
court to disregard or set aside the findings in the Decision of the court a quo?
This Court rules in the negative.
What deserves stressing is that, in this jurisdiction, there exists a disputable
presumption that the RTC Decision was rendered by the judge in the regular performance of
his o cial duties. While the said presumption is only disputable, it is satisfactory unless
contradicted or overcame by other evidence. 2 9 Encompassed in this presumption of
regularity is the presumption that the RTC judge, in resolving the case and drafting his
Decision, reviewed, evaluated, and weighed all the evidence on record. That the said RTC
judge is not the same judge who heard the case and received the evidence is of little
consequence when the records and transcripts of stenographic notes (TSNs) are complete
and available for consideration by the former.
In People v. Gazmen, 3 0 this Court already elucidated its position on such an issue —
Accused-appellant makes an issue of the fact that the judge who penned the
decision was not the judge who heard and tried the case and concludes therefrom
that the ndings of the former are erroneous. Accused-appellant's argument does
not merit a lengthy discussion. It is well-settled that the decision of a judge who did
not try the case is not by that reason alone erroneous. DAEaTS

It is true that the judge who ultimately decided the case had not heard the
controversy at all, the trial having been conducted by then Judge Emilio L. Polig,
who was inde nitely suspended by this Court. Nonetheless, the transcripts of
stenographic notes taken during the trial were complete and were presumably
examined and studied by Judge Baguilat before he rendered his decision. It is not
unusual for a judge who did not try a case to decide it on the basis of the record.
The fact that he did not have the opportunity to observe the demeanor of the
witnesses during the trial but merely relied on the transcript of their testimonies does
not for that reason alone render the judgment erroneous.

(People vs. Jaymalin, 214 SCRA 685, 692 [1992])


Although it is true that the judge who heard the witnesses testify is in a better
position to observe the witnesses on the stand and determine by their demeanor
whether they are telling the truth or mouthing falsehood, it does not necessarily
follow that a judge who was not present during the trial cannot render a valid
decision since he can rely on the transcript of stenographic notes taken during the
trial as basis of his decision.
Accused-appellant's contention that the trial judge did not have the
opportunity to observe the conduct and demeanor of the witnesses since he was not
the same judge who conducted the hearing is also untenable. While it is true that the
trial judge who conducted the hearing would be in a better position to ascertain the
truth and falsity of the testimonies of the witnesses, it does not necessarily follow
that a judge who was not present during the trial cannot render a valid and just
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decision since the latter can also rely on the transcribed stenographic notes taken
during the trial as the basis of his decision.

(People vs. De Paz, 212 SCRA 56, 63 [1992])


At any rate, the test to determine the value of the testimony of the witness is
whether or not such is in conformity with knowledge and consistent with the
experience of mankind (People vs. Morre, 217 SCRA 219 [1993]). Further, the
credibility of witnesses can also be assessed on the basis of the substance of their
testimony and the surrounding circumstances (People v. Gonzales , 210 SCRA 44
[1992]). A critical evaluation of the testimony of the prosecution witnesses reveals
that their testimony accords with the aforementioned tests, and carries with it the
ring of truth end perforce, must be given full weight and credit.

Irrefragably, by reason alone that the judge who penned the RTC Decision was not the
same judge who heard the case and received the evidence therein would not render the
ndings in the said Decision erroneous and unreliable. While the conduct and demeanor of
witnesses may sway a trial court judge in deciding a case, it is not, and should not be, his only
consideration. Even more vital for the trial court judge's decision are the contents and
substance of the witnesses' testimonies, as borne out by the TSNs, as well as the object and
documentary evidence submitted and made part of the records of the case.
This Court proceeds to making its
own findings of fact.
Since the Decision of the Court of Appeals in CA-G.R. CV No. 51930, dated 26 March
2002, has become nal and executory as to the respondent, due to her failure to interpose an
appeal therefrom within the reglementary period, she is already bound by the factual ndings
in the said Decision. Likewise, respondent's failure to le, within the reglementary period, a
Motion for Reconsideration or an appeal of the Resolution of the Court of Appeals in the
same case, dated 20 November 2002, which modi ed its earlier Decision by deleting
paragraph 3(v) of its dispositive portion, ordering petitioners to return to respondent the
proceeds of her money market placement with AIDC, shall already bar her from questioning
such modi cation before this Court. Thus, what is for review before this Court is the Decision
of the Court of Appeals, dated 26 March 2002, as modi ed by the Resolution of the same
court, dated 20 November 2002.
Respondent alleged that she had several deposits and money market placements with
petitioners. These deposits and money market placements, as determined by the Court of
Appeals in its Decision, dated 26 March 2002, and as modi ed by its Resolution, dated 20
November 2002, are as follows —
Deposit/Placement Amount

Dollar deposit with Citibank-Geneva $149,632.99

Money market placement with Citibank, evidenced by


Promissory Note (PN) No. 23356 (which cancels and
supersedes PN No. 22526), earning 14.5% interest per
annum (p.a.) P318,897.34

Money market placement with Citibank, evidenced by PN


No. 23357 (which cancels and supersedes PN No. 22528),
earning 14.5% interest p.a. P203,150.00

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Money market placement with FNCB Finance, evidenced
by PN No. 5757 (which cancels and supersedes PN No.
4952), earning 17% interest p.a. P500,000.00

Money market placement with FNCB Finance, evidenced


by PN No. 5758 (which cancels and supersedes PN No.
2962), earning 17% interest p.a. P500,000.00
This Court is tasked to determine whether petitioners are indeed liable to return the
foregoing amounts, together with the appropriate interests and penalties, to respondent.
It shall trace respondent's transactions with petitioners, from her money market
placements with petitioner Citibank and petitioner FNCB Finance, to her savings and
current accounts with petitioner Citibank, and to her dollar accounts with Citibank-
Geneva. TcAECH

Money market placements with petitioner Citibank


The history of respondent's money market placements with petitioner Citibank began
on 6 December 1976, when she made a placement of P500,000.00 as principal amount,
which was supposed to earn an interest of 16% p.a. and for which PN No. 20773 was issued.
Respondent did not yet claim the proceeds of her placement and, instead, rolled-over or re-
invested the principal and proceeds several times in the succeeding years for which new PNs
were issued by petitioner Citibank to replace the ones which matured. Petitioner Citibank
accounted for respondent's original placement and the subsequent roll-overs thereof, as
follows —
Maturity
Date PN No. Cancels Date Amount Interest
(mm/dd/yyyy) PN No. (mm/dd/yyyy) (P) (p.a.)

12/06/1976 20773 None 01/13/1977 500,000.00 16%


01/14/1977 21686 20773 02/08/1977 508,444.44 15%
02/09/1977 22526 21686 03/16/1977 313,952.59 15-3/4%
22528 21686 03/16/1977 200,000.00 15-3/4%
03/17/1977 23356 22526 04/20/1977 318,897.34 14-1/2%
23357 22528 04/20/1977 203,150.00 14-1/2%

Petitioner Citibank alleged that it had already paid to respondent the principal
amounts and proceeds of PNs No. 23356 and 23357, upon their maturity. Petitioner Citibank
further averred that respondent used the P500,000.00 from the payment of PNs No. 23356
and 23357, plus P600,000.00 sourced from her other funds, to open two time deposit (TD)
accounts with petitioner Citibank, namely, TD Accounts No. 17783 and 17784.
Petitioner Citibank did not deny the existence nor questioned the authenticity of PNs
No. 23356 and 23357 it issued in favor of respondent for her money market placements. In
fact, it admitted the genuineness and due execution of the said PNs, but quali ed that they
were no longer outstanding. 3 1 In Hibberd v. Rohde and McMillian , 3 2 this Court delineated
the consequences of such an admission —
By the admission of the genuineness and due execution of an instrument, as
provided in this section, is meant that the party whose signature it bears admits that
he signed it or that it was signed by another for him with his authority; that at the
time it was signed it was in words and gures exactly as set out in the pleading of
the party relying upon it; that the document was delivered; and that any formal
requisites required by law, such as a seal, an acknowledgment, or revenue stamp,
which it lacks, are waived by him. Hence, such defenses as that the signature is a
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forgery (Puritan Mfg. Co. vs. Toti & Gradi , 14 N. M., 425; Cox vs. Northwestern Stage
Co., 1 Idaho, 376; Woollen vs. Whitacre, 73 Ind., 198; Smith vs. Ehnert, 47 Wis., 479;
Faelnar vs. Escaño, 11 Phil. Rep., 92); or that it was unauthorized, as in the case of
an agent signing for his principal, or one signing in behalf of a partnership (Country
Bank vs. Greenberg, 127 Cal., 26; Henshaw vs. Root, 60 Inc., 220; Naftzker vs. Lantz,
137 Mich., 441) or of a corporation (Merchant vs. International Banking Corporation,
6 Phil Rep., 314; Wanita vs. Rollins, 75 Miss., 253; Barnes vs. Spencer & Barnes Co.,
162 Mich., 509); or that, in the case of the latter, that the corporation was authorized
under its charter to sign the instrument (Merchant vs. International Banking
Corporation, supra); or that the party charged signed the instrument in some other
capacity than that alleged in the pleading setting it out (Payne vs. National Bank, 16
Kan., 147); or that it was never delivered (Hunt vs. Weir, 29 Ill., 83; Elbring vs. Mullen,
4 Idaho, 199; Thorp vs. Keokuk Coal Co., 48 N.Y., 253; Fire Association of
Philadelphia vs. Ruby, 60 Neb., 216) are cut off by the admission of its genuineness
and due execution.
The effect of the admission is such that in the case of a promissory note a
prima facie case is made for the plaintiff which dispenses with the necessity of
evidence on his part and entitles him to a judgment on the pleadings unless a
special defense of new matter, such as payment, is interposed by the defendant
(Papa vs. Martinez, 12 Phil. Rep., 613; Chinese Chamber of Commerce vs. Pua To
Ching, 14 Phil. Rep., 222; Banco Español-Filipino vs. McKay & Zoeller, 27 Phil. Rep.,
183). . . .

Since the genuineness and due execution of PNs No. 23356 and 23357 are uncontested,
respondent was able to establish prima facie that petitioner Citibank is liable to her for
the amounts stated therein. The assertion of petitioner Citibank of payment of the said
PNs is an a rmative allegation of a new matter, the burden of proof as to such resting on
petitioner Citibank. Respondent having proved the existence of the obligation, the burden
of proof was upon petitioner Citibank to show that it had been discharged. 3 3 It has
already been established by this Court that —
As a general rule, one who pleads payment has the burden of proving it. Even
where the plaintiff must allege non-payment, the general rule is that the burden rests
on the defendant to prove payment, rather than on the plaintiff to prove non-
payment. The debtor has the burden of showing with legal certainty that the
obligation has been discharged by payment.
When the existence of a debt is fully established by the evidence contained in
the record, the burden of proving that it has been extinguished by payment devolves
upon the debtor who offers such defense to the claim of the creditor. Where the
debtor introduces some evidence of payment, the burden of going forward with the
evidence — as distinct from the general burden of proof — shifts to the creditor, who
is then under the duty of producing some evidence of non-payment. 3 4

Reviewing the evidence on record, this Court nds that petitioner Citibank failed to
satisfactorily prove that PNs No. 23356 and 23357 had already been paid, and that the
amount so paid was actually used to open one of respondent's TD accounts with petitioner
Citibank.
Petitioner Citibank presented the testimonies of two witnesses to support its
contention of payment: (1) That of Mr. Herminio Pujeda, 3 5 the o cer-in-charge of loans and
placements at the time when the questioned transactions took place; and (2) that of Mr.
Francisco Tan, 3 6 the former Assistant Vice-President of Citibank, who directly dealt with
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respondent with regard to her deposits and loans.
The relevant portion 3 7 of Mr. Pujeda's testimony as to PNs No. 23356 and 23357
(referred to therein as Exhibits No. "47" and "48," respectively) is reproduced below —
Atty. Mabasa:
Okey [sic]. Now Mr. Witness, you were asked to testify in this case and this case
is [sic] consist [sic] of several documents involving transactions between the
plaintiff and the defendant. Now, were you able to make your own
memorandum regarding all these transactions? TCEaDI

A Yes, based on my recollection of these facts, I did come up of [sic] the outline
of the chronological sequence of events.
Court:
Are you trying to say that you have personal knowledge or participation to
these transactions?
A Yes, your Honor, I was the officer-in charge of the unit that was processing
these transactions. Some of the documents bear my signature.

Court:
And this resume or summary that you have prepared is based on purely your
recollection or documents?
A Based on documents, your Honor.
Court:
Are these documents still available now?

A Yes, your honor.


Court:
Better present the documents.
Atty. Mabasa:
Yes, your Honor, that is why your Honor.
Atty. Mabasa:
Q Now, basing on the notes that you prepared, Mr. Witness, and according to
you basing also on your personal recollection about all the transactions
involved between Modesta Sabeniano and defendant City Bank [sic] in this
case. Now, would you tell us what happened to the money market
placements of Modesta Sabeniano that you have earlier identified in Exhs.
"47" and "48"?
A The transactions which I said earlier were terminated and booked to time
deposits.
Q And you are saying time deposits with what bank?
A With First National Citibank.
Q Is it the same bank as Citibank, N.A.?

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A Yes, sir.
Q And how much was the amount booked as time deposit with defendant
Citibank?
A In the amount of P500,000.00.
Q And outside this P500,000.00 which you said was booked out of the proceeds
of Exhs. "47" and "48", were there other time deposits opened by Mrs.
Modesta Sabeniano at that time.
A Yes, she also opened another time deposit for P600,000.00.
Q So all in all Mr. Witness, sometime in April of 1978 Mrs. Modesta Sabeneano
[sic] had time deposit placements with Citibank in the amount of
P500,000.00 which is the proceeds of Exh. "47" and "48" and another
P600,000.00, is it not?
A Yes, sir.
Q And would you know where did the other P600,000 placed by Mrs. Sabeneano
[sic] in a time deposit with Citibank, N.A. came [sic] from?

A She funded it directly.


Q What are you saying Mr. Witness is that the P600,000 is a [sic] fresh money
coming from Mrs. Modesta Sabeneano [sic]?
A That is right.

In his deposition in Hong Kong, Mr. Tan recounted what happened to PNs No. 23356
and 23357 (referred to therein as Exhibits "E" and "F," respectively), as follows —
Atty. Mabasa:
Now from the Exhibits that you have identified Mr. Tan from Exhibits "A" to "F",
which are Exhibits of the plaintiff. Now, do I understand from you that the
original amount is Five Hundred Thousand and thereafter renewed in the
succeeding exhibits?
Mr. Tan:
Yes, Sir.
Atty. Mabasa:
Alright, after these Exhibits "E" and "F" matured, what happened thereafter?

Mr. Tan:
Split into two time deposits.
Atty. Mabasa:
Exhibits "E" and "F"?

Before anything else, it should be noted that when Mr. Pujeda's testimony before the
RTC was made on 12 March 1990 and Mr. Tan's deposition in Hong Kong was conducted on
3 September 1990, more than a decade had passed from the time the transactions they
were testifying on took place. This Court had previously recognized the frailty and
unreliability of human memory with regards to gures after the lapse of ve years. 3 8 Taking
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into consideration the substantial length of time between the transactions and the
witnesses' testimonies, as well as the undeniable fact that bank o cers deal with multiple
clients and process numerous transactions during their tenure, this Court is reluctant to give
much weight to the testimonies of Mr. Pujeda and Mr. Tan regarding the payment of PNs No.
23356 and 23357 and the use by respondent of the proceeds thereof for opening TD
accounts. This Court finds it implausible that they should remember, after all these years, this
particular transaction with respondent involving her PNs No. 23356 and 23357 and TD
accounts. Both witnesses did not give any reason as to why, from among all the clients they
had dealt with and all the transactions they had processed as o cers of petitioner Citibank,
they specially remembered respondent and her PNs No. 23356 and 23357. Their testimonies
likewise lacked details on the circumstances surrounding the payment of the two PNs and
the opening of the time deposit accounts by respondent, such as the date of payment of the
two PNs, mode of payment, and the manner and context by which respondent relayed her
instructions to the o cers of petitioner Citibank to use the proceeds of her two PNs in
opening the TD accounts. ADSIaT

Moreover, while there are documentary evidences to support and trace respondent's
money market placements with petitioner Citibank, from the original PN No. 20773, rolled-
over several times to, nally, PNs No. 23356 and 23357, there is an evident absence of any
documentary evidence on the payment of these last two PNs and the use of the proceeds
thereof by respondent for opening TD accounts. The paper trail seems to have ended with
the copies of PNs No. 23356 and 23357. Although both Mr. Pujeda and Mr. Tan said that
they based their testimonies, not just on their memories but also on the documents on le,
the supposed documents on which they based those portions of their testimony on the
payment of PNs No. 23356 and 23357 and the opening of the TD accounts from the
proceeds thereof, were never presented before the courts nor made part of the
records of the case . Respondent's money market placements were of substantial
amounts — consisting of the principal amount of P500,000.00, plus the interest it should
have earned during the years of placement — and it is di cult for this Court to believe that
petitioner Citibank would not have had documented the payment thereof.
When Mr. Pujeda testi ed before the RTC on 6 February 1990, 3 9 petitioners' counsel
attempted to present in evidence a document that would supposedly support the claim of
petitioner Citibank that the proceeds of PNs No. 23356 and 23357 were used by respondent
to open one of her two TD accounts in the amount of P500,000.00. Respondent's counsel
objected to the presentation of the document since it was a mere "xerox" copy, and was
blurred and hardly readable. Petitioners' counsel then asked for a continuance of the hearing
so that they can have time to produce a better document, which was granted by the court.
However, during the next hearing and continuance of Mr. Pujeda's testimony on 12 March
1990, petitioners' counsel no longer referred to the said document.
As respondent had established a prima facie case that petitioner Citibank is obligated
to her for the amounts stated in PNs No. 23356 and 23357, and as petitioner Citibank failed
to present su cient proof of payment of the said PNs and the use by the respondent of the
proceeds thereof to open her TD accounts, this Court nds that PNs No. 23356 and
23357 are still outstanding and petitioner Citibank is still liable to respondent for
the amounts stated therein .
The signi cance of this Court's declaration that PNs No. 23356 and 23357 are still
outstanding becomes apparent in the light of petitioners' next contentions — that respondent
used the proceeds of PNs No. 23356 and 23357, together with additional money, to open TD
Accounts No. 17783 and 17784 with petitioner Citibank; and, subsequently, respondent pre-
terminated these TD accounts and transferred the proceeds thereof, amounting to
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P1,100,000.00, to petitioner FNCB Finance for money market placements. While
respondent's money market placements with petitioner FNCB Finance may be traced back
with de niteness to TD Accounts No. 17783 and 17784, there is only imsy and
unsubstantiated connection between the said TD accounts and the supposed proceeds paid
from PNs No. 23356 and 23357. With PNs No. 23356 and 23357 still unpaid, then they
represent an obligation of petitioner Citibank separate and distinct from the obligation of
petitioner FNCB Finance arising from respondent's money market placements with the latter.
Money market placements with petitioner FNCB Finance
According to petitioners, respondent's TD Accounts No. 17783 and 17784, in the total
amount of P1,100,000.00, were supposed to mature on 15 March 1978. However,
respondent, through a letter dated 28 April 1977, 4 0 pre-terminated the said TD accounts and
transferred all the proceeds thereof to petitioner FNCB Finance for money market
placement. Pursuant to her instructions, TD Accounts No. 17783 and 17784 were pre-
terminated and petitioner Citibank (then still named First National City Bank) issued
Manager's Checks (MC) No. 199253 4 1 and 199251 4 2 for the amounts of P500,000.00 and
P600,00.00, respectively. Both MCs were payable to Citi nance (which, according to Mr.
Pujeda, 4 3 was one with and the same as petitioner FNCB Finance), with the additional
notation that "A/C MODESTA R. SABENIANO." Typewritten on MC No. 199253 is the phrase
"Ref. Proceeds of TD 17783," and on MC No. 199251 is a similar phrase, "Ref. Proceeds of TD
17784." These phrases purportedly established that the MCs were paid from the proceeds
of respondent's pre-terminated TD accounts with petitioner Citibank. Upon receipt of the
MCs, petitioner FNCB Finance deposited the same to its account with Feati Bank and Trust
Co., as evidenced by the rubber stamp mark of the latter found at the back of both MCs. In
exchange, petitioner FNCB Finance booked the amounts received as money market
placements, and accordingly issued PNs No. 4952 and 4962, for the amounts of
P500,000.00 and P600,000.00, respectively, payable to respondent's savings account with
petitioner Citibank, S/A No. 25-13703-4, upon their maturity on 1 June 1977. Once again,
respondent rolled-over several times the principal amounts of her money market placements
with petitioner FNCB Finance, as follows —
Maturity
Date PN No. Cancels Date Amount Interest
(mm/dd/yyyy) PN No. (mm/dd/yyyy) (P) (p.a.)

04/29/1977 4952 None 06/01/1977 500,000.00 17%


4962 None 06/01/1977 600,000.00 17%
06/02/1977 5757 4952 08/31/1977 500,000.00 17%
5758 4962 08/31/1977 500,000.00 17%
08/17/1977 8167 5757 08/25/1978 500,000.00 14%
8169 5752 08/25/1978 500,000.00 14%
As presented by the petitioner FNCB Finance, respondent rolled-over only the principal
amounts of her money market placements as she chose to receive the interest income
therefrom. Petitioner FNCB Finance also pointed out that when PN No. 4962, with
principal amount of P600,000.00, matured on 1 June 1977, respondent received a partial
payment of the principal which, together with the interest, amounted to P102,633.33; 4 4
thus, only the amount of P500,000.00 from PN No. 4962 was rolled-over to PN No. 5758.
Based on the foregoing records, the principal amounts of PNs No. 5757 and 5758,
upon their maturity, were rolled over to PNs No. 8167 and 8169, respectively. PN No. 8167 4 5
expressly canceled and superseded PN No. 5757, while PN No. 8169 4 6 also explicitly
canceled and superseded PN No. 5758. Thus, it is patently erroneous for the Court of
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Appeals to still award to respondent the principal amounts and interests covered by PNs No.
5757 and 5758 when these were already canceled and superseded. It is now incumbent
upon this Court to determine what subsequently happened to PNs No. 8167 and 8169. AcISTE

Petitioner FNCB Finance presented four checks as proof of payment of the principal
amounts and interests of PNs No. 8167 and 8169 upon their maturity. All the checks were
payable to respondent's savings account with petitioner Citibank, with the following details —
Date of Issuance Amount
(mm/dd/yyyy) Check No. (P) Notation

09/01/1978 76962 12,833.34 Interest payment on PN#08167


09/01/1978 76961 12,833.34 Interest payment on PN#08169
09/05/1978 77035 500,000.00 Full payment of principal on PN#08167
which is hereby cancelled
09/05/1978 77034 500,000.00 Full payment of principal on PN#08169
which is hereby cancelled

Then again, Checks No. 77035 and 77034 were later returned to petitioner FNCB Finance
together with a memo, 4 7 dated 6 September 1978, from Mr. Tan of petitioner Citibank, to
a Mr. Bobby Mendoza of petitioner FNCB Finance. According to the memo, the two
checks, in the total amount of P1,000,000.00, were to be returned to respondent's
account with instructions to book the said amount in money market placements for one
more year. Pursuant to the said memo, Checks No. 77035 and 77034 were invested by
petitioner FNCB Finance, on behalf of respondent, in money market placements for which
it issued PNs No. 20138 and 20139. The PNs each covered P500,000.00, to earn 11%
interest per annum, and to mature on 3 September 1979.
On 3 September 1979, petitioner FNCB Finance issued Check No. 100168, pay to the
order of "Citibank N.A. A/C Modesta Sabeniano," in the amount of P1,022,916.66, as full
payment of the principal amounts and interests of both PNs No. 20138 and 20139 and,
resultantly, canceling the said PNs. 4 8 Respondent actually admitted the issuance and
existence of Check No. 100168, but with the quali cation that the proceeds thereof were
turned over to petitioner Citibank. 4 9 Respondent did not clarify the circumstances attending
the supposed turn over, but on the basis of the allegations of petitioner Citibank itself, the
proceeds of PNs No. 20138 and 20139, amounting to P1,022,916.66, was used by it to
liquidate respondent's outstanding loans. Therefore, the determination of whether or not
respondent is still entitled to the return of the proceeds of PNs No. 20138 and 20139 shall
be dependent on the resolution of the issues raised as to the existence of the loans and the
authority of petitioner Citibank to use the proceeds of the said PNs, together with
respondent's other deposits and money market placements, to pay for the same.
Savings and current accounts with petitioner Citibank
Respondent presented and submitted before the RTC deposit slips and bank
statements to prove deposits made to several of her accounts with petitioner Citibank,
particularly, Accounts No. 00484202, 59091, and 472-751, which would have amounted to a
total of P3,812,712.32, had there been no withdrawals or debits from the said accounts from
the time the said deposits were made.
Although the RTC and the Court of Appeals did not make any de nitive ndings as to
the status of respondent's savings and current accounts with petitioner Citibank, the
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Decisions of both the trial and appellate courts effectively recognized only the P31,079.14
coming from respondent's savings account which was used to off-set her alleged
outstanding loans with petitioner Citibank. 5 0
Since both the RTC and the Court of Appeals had consistently recognized only the
P31,079.14 of respondent's savings account with petitioner Citibank, and that respondent
failed to move for reconsideration or to appeal this particular nding of fact by the trial and
appellate courts, it is already binding upon this Court. Respondent is already precluded from
claiming any greater amount in her savings and current accounts with petitioner Citibank.
Thus, this Court shall limit itself to determining whether or not respondent is entitled to the
return of the amount of P31,079.14 should the off-set thereof by petitioner Citibank against
her supposed loans be found invalid.
Dollar accounts with Citibank-Geneva
Respondent made an effort of preparing and presenting before the RTC her own
computations of her money market placements and dollar accounts with Citibank-Geneva,
purportedly amounting to a total of United States (US) $343,220.98, as of 23 June 1985. 5 1
In her Memorandum led with the RTC, she claimed a much bigger amount of deposits and
money market placements with Citibank-Geneva, totaling US$1,336,638.65. 5 2 However,
respondent herself also submitted as part of her formal offer of evidence the computation of
her money market placements and dollar accounts with Citibank-Geneva as determined by
the latter. 5 3 Citibank-Geneva accounted for respondent's money market placements and
dollar accounts as follows —
MODESTA SABENIANO &/OR

US$ 30'000.-- Principal Fid. Placement


+ US$ 339.06 Interest at 3,875% p.a. from 12.07.-25.10.79
- US$ 95.-- Commission (minimum)
––––––––––––––––––
US$ 30'244.06 Total proceeds on 25.10.1979
US$ 114'000.-- Principal Fid. Placement
+ US$ 1'358.50 Interest at 4,125% p.a. from 12.07.-25.10.79
- US$ 41.17 Commission
––––––––––––––––––
US$ 115'317.33 Total proceeds on 25.10.1979
US$ 145'561.39 Total proceeds of both placements on 25.10.1979
+ US$ 11'381.31 total of both current accounts
––––––––––––––––––
US$ 156'942.70 Total funds available
- US$ 149'632.99 Transfer to Citibank Manila on 26.10.1979
–––––––––––––––––– (counter value of Pesos 1'102'944.78)
US$ 7'309.71 Balance in current accounts
- US$ 6'998.84 Transfer to Citibank Zurich — ac no. 121359 on March 13,
–––––––––––––––––– 1980
US$ 310.87 various charges including closing charges

According to the foregoing computation, by 25 October 1979, respondent had a total


of US$156,942.70, from which, US$149,632.99 was transferred by Citibank-Geneva to
petitioner Citibank in Manila, and was used by the latter to off-set respondent's outstanding
loans. The balance of respondent's accounts with Citibank-Geneva, after the remittance to
petitioner Citibank in Manila, amounted to US$7,309.71, which was subsequently expended
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by a transfer to another account with Citibank-Zuerich, in the amount of US$6,998.84, and by
payment of various bank charges, including closing charges, in the amount of US$310.87.
Rightly so, both the RTC and the Court of Appeals gave more credence to the computation of
Citibank-Geneva as to the status of respondent's accounts with the said bank, rather than the
one prepared by respondent herself, which was evidently self-serving. Once again, this Court
shall limit itself to determining whether or not respondent is entitled to the return of the
amount of US$149,632.99 should the off-set thereof by petitioner Citibank against her
alleged outstanding loans be found invalid. Respondent cannot claim any greater amount
since she did not perfect an appeal of the Decision of the Court of Appeals, dated 26 March
2002, which found that she is entitled only to the return of the said amount, as far as her
accounts with Citibank-Geneva is concerned. TcDaSI

III
Petitioner Citibank was able to
establish by preponderance of
evidence the existence of
respondent's loans.
Petitioners' version of events
In sum, the following amounts were used by petitioner Citibank to liquidate
respondent's purported outstanding loans —
Description Amount

Principal and interests of PNs No. 20138 and 20139


(money market placements with petitioner FNCB Finance) P1,022,916.66
Savings account with petitioner Citibank 31,079.14
Dollar remittance from Citibank-Geneva (peso equivalent
Of US$149,632.99) 1,102,944.78
Total P2,156,940.58

According to petitioner Citibank, respondent incurred her loans under the


circumstances narrated below.
As early as 9 February 1978, respondent obtained her rst loan from petitioner
Citibank in the principal amount of P200,000.00, for which she executed PN No. 31504. 5 4
Petitioner Citibank extended to her several other loans in the succeeding months. Some of
these loans were paid, while others were rolled-over or renewed. Signi cant to the Petition at
bar are the loans which respondent obtained from July 1978 to January 1979, appropriately
covered by PNs ( rst set). 5 5 The aggregate principal amount of these loans was
P1,920,000.00, which could be broken down as follows —
Date of Date of Date of
PN Issuance Maturity Principal Release MC
No. (mm/dd/yyyy) (mm/dd/yyyy) Amount (mm/dd/yyyy) No.

32935 07/20/1978 09/18/1978 P400,000.00 07/20/1978 220701


33751 10/13/1978 12/12/1978 100,000.00 Unrecovered
33798 10/19/1978 11/03/1978 100,000.00 10/19/1978 226285
34025 11/15/1978 01/15/1979 150,000.00 11/16/1978 226439
34079 11/21/1978 01/19/1979 250,000.00 11/21/1978 226467
34192 12/04/1978 01/18/1979 100,000.00 12/05/1978 228057
34402 12/26/1978 02/23/1979 300,000.00 12/26/1978 228203
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34534
34609 01/09/1979
01/17/1979 03/09/1979
03/19/1979 150,000.00 01/09/1979
01/17/1979 228270
228357
34740 01/30/1979 03/30/1979 220,000.00 01/30/1979 228400
Total P1,920,000.00
When respondent was unable to pay the rst set of PNs upon their maturity, these were
rolled-over or renewed several times, necessitating the execution by respondent of new
PNs in favor of petitioner Citibank. As of 5 April 1979, respondent had the following
outstanding PNs (second set), 5 6 the principal amount of which remained at
P1,920,000.00 —
Date of Issuance Date of Maturity
PN No. (mm/dd/yyyy) (mm/dd/yyyy) Principal Amount

34510 01/01/1979 03/02/1979 P400,000.00


34509 01/02/1979 03/02/1979 100,000.00
34534 01/09/1979 03/09/1979 150,000.00
34612 01/19/1979 03/16/1979 150,000.00
34741 01/26/1979 03/12/1979 100,000.00
35689 02/23/1979 05/29/1979 300,000.00
35694 03/19/1979 05/29/1979 150,000.00
35695 03/19/1979 05/29/1979 100,000.00
356946 03/20/1979 05/29/1979 250,000.00
35697 03/30/1979 05/29/1979 220,000.00
Total P1,920,000.00
All the PNs stated that the purpose of the loans covered thereby is "To liquidate existing
obligation," except for PN No. 34534, which stated for its purpose "personal investment."
Respondent secured her foregoing loans with petitioner Citibank by executing Deeds
of Assignment of her money market placements with petitioner FNCB Finance. On 2 March
1978, respondent executed in favor of petitioner Citibank a Deed of Assignment 5 7 of PN No.
8169, which was issued by petitioner FNCB Finance, to secure payment of the credit and
banking facilities extended to her by petitioner Citibank, in the aggregate principal amount of
P500,000.00. On 9 March 1978, respondent executed in favor of petitioner Citibank another
Deed of Assignment, 5 8 this time, of PN No. 8167, also issued by petitioner FNCB Finance, to
secure payment of the credit and banking facilities extended to her by petitioner Citibank, in
the aggregate amount of P500,000.00. When PNs No. 8167 and 8169, representing
respondent's money market placements with petitioner FNCB Finance, matured and were
rolled-over to PNs No. 20138 and 20139, respondent executed new Deeds of Assignment, 5 9
in favor of petitioner Citibank, on 25 August 1978. According to the more recent Deeds,
respondent assigned PNs No. 20138 and 20139, representing her rolled-over money market
placements with petitioner FNCB Finance, to petitioner Citibank as security for the banking
and credit facilities it extended to her, in the aggregate principal amount of P500,000.00 per
Deed.
In addition to the Deeds of Assignment of her money market placements with
petitioner FNCB Finance, respondent also executed a Declaration of Pledge, 6 0 in which she
supposedly pledged "[a]ll present and future duciary placements held in my personal and/or
joint name with Citibank, Switzerland," to secure all claims the petitioner Citibank may have
or, in the future, acquire against respondent. The petitioners' copy of the Declaration of
Pledge is undated, while that of the respondent, a copy certi ed by a Citibank-Geneva o cer,
bore the date 24 September 1979. 6 1
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When respondent failed to pay the second set of PNs upon their maturity, an exchange
of letters ensued between respondent and/or her representatives, on one hand, and the
representatives of petitioners, on the other.
The rst letter 6 2 was dated 5 April 1979, addressed to respondent and signed by Mr.
Tan, as the manager of petitioner Citibank, which stated, in part, that —
Despite our repeated requests and follow-up, we regret you have not granted
us with any response or payment.
We, therefore, have no alternative but to call your loan of P1,920,000.00 plus
interests and other charges due and demandable. If you still fail to settle this
obligation by 4/27/79, we shall have no other alternative but to refer your account to
our lawyers for legal action to protect the interest of the bank.

Respondent sent a reply letter 6 3 dated 26 April 1979, printed on paper bearing the
letterhead of respondent's company, MC Adore International Palace, the body of which reads

This is in reply to your letter dated April 5, 1979 inviting my attention to my
loan which has become due. Pursuant to our representation with you over the
telephone through Mr. F. A. Tan, you allow us to pay the interests due for the
meantime.
Please accept our Comtrust Check in the amount of P62,683.33.
Please bear with us for a little while, at most ninety days. As you know, we
have a pending loan with the Development Bank of the Philippines in the amount of
P11-M. This loan has already been recommended for approval and would be
submitted to the Board of Governors. In fact, to further facilitate the early release of
this loan, we have presented and furnished Gov. J. Tengco a xerox copy of your
letter.
You will be doing our corporation a very viable service, should you grant us
our request for a little more time.

A week later or on 3 May 1979, a certain C. N. Pugeda, designated as "Executive


Secretary," sent a letter 6 4 to petitioner Citibank, on behalf of respondent. The letter was
again printed on paper bearing the letterhead of MC Adore International Palace. The
pertinent paragraphs of the said letter are reproduced below —
Per instructions of Mrs. Modesta R. Sabeniano, we would like to request for a
re-computation of the interest and penalty charges on her loan in the aggregate
amount of P1,920,000.00 with maturity date of all promissory notes at June 30,
1979. As she has personally discussed with you yesterday, this date will more or
less assure you of early settlement. cTECHI

In this regard, please entrust to bearer, our Comtrust check for P62,683.33 to
be replaced by another check with amount resulting from the new computation.
Also, to facilitate the processing of the same, may we request for another set of
promissory notes for the signature of Mrs. Sabeniano and to cancel the previous
ones she has signed and forwarded to you.

This was followed by a telegram, 6 5 dated 5 June 1979, and received by petitioner
Citibank the following day. The telegram was sent by a Dewey G. Soriano, Legal Counsel. The
telegram acknowledged receipt of the telegram sent by petitioner Citibank regarding the "re-
past due obligation" of McAdore International Palace. However, it reported that respondent,
the President and Chairman of MC Adore International Palace, was presently abroad
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negotiating for a big loan. Thus, he was requesting for an extension of the due date of the
obligation until respondent's arrival on or before 31 July 1979.
The next letter, 6 6 dated 21 June 1979, was signed by respondent herself and
addressed to Mr. Bobby Mendoza, a Manager of petitioner FNCB Finance. Respondent wrote
therein —
Re: PN No. 20138 for P500,000.00 & PN No. 20139 for
P500,000.00 totalling P1 Million, both PNs will mature on
9/3/1979.

This is to authorize you to release the accrued quarterly interests payment


from my captioned placements and forward directly to Citibank, Manila Attention:
Mr. F. A. Tan, Manager, to apply to my interest payable on my outstanding loan with
Citibank.

Please note that the captioned two placements are continuously


pledged/hypothecated to Citibank, Manila to support my personal outstanding loan.
Therefore, please do not release the captioned placements upon maturity until you
have received the instruction from Citibank, Manila.

On even date, respondent sent another letter 6 7 to Mr. Tan of petitioner Citibank,
stating that —
Re: S/A No. 25-225928
and C/A No. 484-946

This letter serves as an authority to debit whatever the outstanding balance


from my captioned accounts and credit the amount to my loan outstanding account
with you.

Unlike respondent's earlier letters, both letters, dated 21 June 1979, are printed on plain
paper, without the letterhead of her company, MC Adore International Palace.
By 5 September 1979, respondent's outstanding and past due obligations to
petitioner Citibank totaled P2,123,843.20, representing the principal amounts plus interests.
Relying on respondent's Deeds of Assignment, petitioner Citibank applied the proceeds of
respondent's money market placements with petitioner FNCB Finance, as well as her deposit
account with petitioner Citibank, to partly liquidate respondent's outstanding loan balance, 6 8
as follows —

Respondent's outstanding obligation (principal and interest) P2,123,843.20


Less:Proceeds from respondent's money market placements
with petitioner FNCB Finance (principal and interest) (1,022,916.66)
Deposits in respondent's bank accounts with petitioner
Citibank (31,079.14)
––––––––––––
Balance of respondent's obligation P1,069,847.40
==========

Mr. Tan of petitioner Citibank subsequently sent a letter, 6 9 dated 28 September 1979,
notifying respondent of the status of her loans and the foregoing compensation which
petitioner Citibank effected. In the letter, Mr. Tan informed respondent that she still had a
remaining past-due obligation in the amount of P1,069,847.40, as of 5 September 1979, and
should respondent fail to pay the amount by 15 October 1979, then petitioner Citibank shall
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proceed to off-set the unpaid amount with respondent's other collateral, particularly, a
money market placement in Citibank-Hongkong.
On 5 October 1979, respondent wrote Mr. Tan of petitioner Citibank, on paper bearing
the letterhead of MC Adore International Palace, as regards the P1,920,000.00 loan account
supposedly of MC Adore Finance & Investment, Inc., and requested for a statement of
account covering the principal and interest of the loan as of 31 October 1979. She stated
therein that the loan obligation shall be paid within 60 days from receipt of the statement of
account.

Almost three weeks later, or on 25 October 1979, a certain Atty. Moises Tolentino
dropped by the o ce of petitioner Citibank, with a letter, dated 9 October 1979, and printed
on paper with the letterhead of MC Adore International Palace, which authorized the bearer
thereof to represent the respondent in settling the overdue account, this time, purportedly, of
MC Adore International Palace Hotel. The letter was signed by respondent as the President
and Chairman of the Board.
Eventually, Atty. Antonio Agcaoili of Agcaoili & Associates, as counsel of petitioner
Citibank, sent a letter to respondent, dated 31 October 1979, informing her that petitioner
Citibank had effected an off-set using her account with Citibank-Geneva, in the amount of
US$149,632.99, against her "outstanding, overdue, demandable and unpaid obligation" to
petitioner Citibank. Atty. Agcaoili claimed therein that the compensation or off-set was made
pursuant to and in accordance with the provisions of Articles 1278 through 1290 of the Civil
Code. He further declared that respondent's obligation to petitioner Citibank was now fully
paid and liquidated. aEDCAH

Unfortunately, on 7 October 1987, a re gutted the 7th oor of petitioner Citibank's


building at Paseo de Roxas St., Makati, Metro Manila. Petitioners submitted a Certi cation 7 0
to this effect, dated 17 January 1991, issued by the Chief of the Arson Investigation Section,
Fire District III, Makati Fire Station, Metropolitan Police Force. The 7th oor of petitioner
Citibank's building housed its Control Division, which was in charge of keeping the necessary
documents for cases in which it was involved. After compiling the documentary evidence for
the present case, Atty. Renato J. Fernandez, internal legal counsel of petitioner Citibank,
forwarded them to the Control Division. The original copies of the MCs, which supposedly
represent the proceeds of the rst set of PNs, as well as that of other documentary evidence
related to the case, were among those burned in the said fire. 7 1
Respondent's version of events
Respondent disputed petitioners' narration of the circumstances surrounding her
loans with petitioner Citibank and the alleged authority she gave for the off-set or
compensation of her money market placements and deposit accounts with petitioners
against her loan obligation.
Respondent denied outright executing the rst set of PNs, except for one (PN No.
34534 in particular). Although she admitted that she obtained several loans from petitioner
Citibank, these only amounted to P1,150,000.00, and she had already paid them. She secured
from petitioner Citibank two loans of P500,000.00 each. She executed in favor of petitioner
Citibank the corresponding PNs for the loans and the Deeds of Assignment of her money
market placements with petitioner FNCB Finance as security. 7 2 To prove payment of these
loans, respondent presented two provisional receipts of petitioner Citibank — No. 19471, 7 3
dated 11 August 1978, and No. 12723, 7 4 dated 10 November 1978 — both signed by Mr.
Tan, and acknowledging receipt from respondent of several checks in the total amount of
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P500,744.00 and P500,000.00, respectively, for "liquidation of loan."
She borrowed another P150,000.00 from petitioner Citibank for personal investment,
and for which she executed PN No. 34534, on 9 January 1979. Thus, she admitted to
receiving the proceeds of this loan via MC No. 228270. She invested the loan amount in
another money market placement with petitioner FNCB Finance. In turn, she used the very
same money market placement with petitioner FNCB Finance as security for her
P150,000.00 loan from petitioner Citibank. When she failed to pay the loan when it became
due, petitioner Citibank allegedly forfeited her money market placement with petitioner FNCB
Finance and, thus, the loan was already paid. 7 5
Respondent likewise questioned the MCs presented by petitioners, except for one (MC
No. 228270 in particular), as proof that she received the proceeds of the loans covered by
the rst set of PNs. As recounted in the preceding paragraph, respondent admitted to
obtaining a loan of P150,000.00, covered by PN No. 34534, and receiving MC No. 228270
representing the proceeds thereof, but claimed that she already paid the same. She denied
ever receiving MCs No. 220701 (for the loan of P400,000.00, covered by PN No. 33935) and
No. 226467 (for the loan of P250,000.00, covered by PN No. 34079), and pointed out that
the checks did not bear her indorsements. She did not deny receiving all other checks but
she interposed that she received these checks, not as proceeds of loans, but as payment of
the principal amounts and/or interests from her money market placements with petitioner
Citibank. She also raised doubts as to the notation on each of the checks that reads "RE:
Proceeds of PN#[corresponding PN No.]," saying that such notation did not appear on the
MCs when she originally received them and that the notation appears to have been written by
a typewriter different from that used in writing all other information on the checks (i.e., date,
payee, and amount). 7 6 She even testi ed that MCs were not supposed to bear notations
indicating the purpose for which they were issued.
As to the second set of PNs, respondent acknowledged having signed them all.
However, she asserted that she only executed these PNs as part of the simulated loans she
and Mr. Tan of petitioner Citibank concocted. Respondent explained that she had a pending
loan application for a big amount with the Development Bank of the Philippines (DBP), and
when Mr. Tan found out about this, he suggested that they could make it appear that the
respondent had outstanding loans with petitioner Citibank and the latter was already
demanding payment thereof; this might persuade DBP to approve respondent's loan
application. Mr. Tan made the respondent sign the second set of PNs, so that he may have
something to show the DBP investigator who might inquire with petitioner Citibank as to
respondent's loans with the latter. On her own copies of the said PNs, respondent wrote by
hand the notation, "This isa (sic) simulated non-negotiable note, signed copy given to Mr.
Tan., (sic) per agreement to be shown to DBP representative. itwill (sic) be returned to me if
the P11=M (sic) loan for MC Adore Palace Hotel is approved by DBP." 7 7
Findings of this Court as to the existence of the loans
After going through the testimonial and documentary evidence presented by both
sides to this case, it is this Court's assessment that respondent did indeed have outstanding
loans with petitioner Citibank at the time it effected the off-set or compensation on 25 July
1979 (using respondent's savings deposit with petitioner Citibank), 5 September 1979
(using the proceeds of respondent's money market placements with petitioner FNCB
Finance) and 26 October 1979 (using respondent's dollar accounts remitted from Citibank-
Geneva). The totality of petitioners' evidence as to the existence of the said loans
preponderates over respondent's. Preponderant evidence means that, as a whole, the
evidence adduced by one side outweighs that of the adverse party. 7 8
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Respondent's outstanding obligation for P1,920,000.00 had been su ciently
documented by petitioner Citibank.
The second set of PNs is a mere renewal of the prior loans originally covered by the
rst set of PNs, except for PN No. 34534. The rst set of PNs is supported, in turn, by the
existence of the MCs that represent the proceeds thereof received by the respondent. AaEcHC

It bears to emphasize that the proceeds of the loans were paid to respondent in MCs,
with the respondent speci cally named as payee. MCs checks are drawn by the bank's
manager upon the bank itself and regarded to be as good as the money it represents. 7 9
Moreover, the MCs were crossed checks, with the words "Payee's Account Only."
In general, a crossed check cannot be presented to the drawee bank for payment in
cash. Instead, the check can only be deposited with the payee's bank which, in turn, must
present it for payment against the drawee bank in the course of normal banking hours. The
crossed check cannot be presented for payment, but it can only be deposited and the
drawee bank may only pay to another bank in the payee's or indorser's account. 8 0 The effect
of crossing a check was described by this Court in Philippine Commercial International Bank
v. Court of Appeals 8 1 —
[T]he crossing of a check with the phrase "Payee's Account Only" is a warning
that the check should be deposited in the account of the payee. Thus, it is the duty
of the collecting bank PCI Bank to ascertain that the check be deposited in payee's
account only. It is bound to scrutinize the check and to know its depositors before it
can make the clearing indorsement "all prior indorsements and/or lack of
indorsement guaranteed."

The crossed MCs presented by petitioner Bank were indeed deposited in several
different bank accounts and cleared by the Clearing O ce of the Central Bank of the
Philippines, as evidenced by the stamp marks and notations on the said checks. The crossed
MCs are already in the possession of petitioner Citibank, the drawee bank, which was
ultimately responsible for the payment of the amount stated in the checks. Given that a
check is more than just an instrument of credit used in commercial transactions for it also
serves as a receipt or evidence for the drawee bank of the cancellation of the said check due
to payment, 8 2 then, the possession by petitioner Citibank of the said MCs, duly stamped
"Paid" gives rise to the presumption that the said MCs were already paid out to the intended
payee, who was in this case, the respondent.
This Court nds applicable herein the presumptions that private transactions have
been fair and regular, 8 3 and that the ordinary course of business has been followed. 8 4 There
is no question that the loan transaction between petitioner Citibank and the respondent is a
private transaction. The transactions revolving around the crossed MCs — from their
issuance by petitioner Citibank to respondent as payment of the proceeds of her loans; to its
deposit in respondent's accounts with several different banks; to the clearing of the MCs by
an independent clearing house; and nally, to the payment of the MCs by petitioner Citibank
as the drawee bank of the said checks — are all private transactions which shall be presumed
to have been fair and regular to all the parties concerned. In addition, the banks involved in
the foregoing transactions are also presumed to have followed the ordinary course of
business in the acceptance of the crossed MCs for deposit in respondent's accounts,
submitting them for clearing, and their eventual payment and cancellation.

The afore-stated presumptions are disputable, meaning, they are satisfactory if


uncontradicted, but may be contradicted and overcome by other evidence. 8 5 Respondent,
however, was unable to present su cient and credible evidence to dispute these
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presumptions.
It should be recalled that out of the nine MCs presented by petitioner Citibank,
respondent admitted to receiving one as proceeds of a loan (MC No. 228270), denied
receiving two (MCs No. 220701 and 226467), and admitted to receiving all the rest, but not
as proceeds of her loans, but as return on the principal amounts and interests from her
money market placements.
Respondent admitted receiving MC No. 228270 representing the proceeds of her loan
covered by PN No. 34534. Although the principal amount of the loan is P150,000.00,
respondent only received P146,312.50, because the interest and handling fee on the loan
transaction were already deducted therefrom. 8 6 Stamps and notations at the back of MC
No. 228270 reveal that it was deposited at the Bank of the Philippine Islands (BPI), Cubao
Branch, in Account No. 0123-0572-28. 8 7 The check also bore the signature of respondent at
the back. 8 8 And, although respondent would later admit that she did sign PN No. 34534 and
received MC No. 228270 as proceeds of the loan extended to her by petitioner Citibank, she
contradicted herself when, in an earlier testimony, she claimed that PN No. 34534 was
among the PNs she executed as simulated loans with petitioner Citibank. 8 9
Respondent denied ever receiving MCs No. 220701 and 226467. However,
considering that the said checks were crossed for payee's account only, and that they were
actually deposited, cleared, and paid, then the presumption would be that the said checks
were properly deposited to the account of respondent, who was clearly named the payee in
the checks. Respondent's bare allegations that she did not receive the two checks fail to
convince this Court, for to sustain her, would be for this Court to conclude that an irregularity
had occurred somewhere from the time of the issuance of the said checks, to their deposit,
clearance, and payment, and which would have involved not only petitioner Citibank, but also
BPI, which accepted the checks for deposit, and the Central Bank of the Philippines, which
cleared the checks. It falls upon the respondent to overcome or dispute the presumption
that the crossed checks were issued, accepted for deposit, cleared, and paid for by the
banks involved following the ordinary course of their business.
The mere fact that MCs No. 220701 and 226467 do not bear respondent's signature
at the back does not negate deposit thereof in her account. The liability for the lack of
indorsement on the MCs no longer fall on petitioner Citibank, but on the bank who received
the same for deposit, in this case, BPI Cubao Branch. Once again, it must be noted that the
MCs were crossed, for payee's account only, and the payee named in both checks was none
other than respondent. The crossing of the MCs was already a warning to BPI to receive said
checks for deposit only in respondent's account. It was up to BPI to verify whether it was
receiving the crossed MCs in accordance with the instructions on the face thereof. If, indeed,
the MCs were deposited in accounts other than respondent's, then the respondent would
have a cause of action against BPI. 9 0
BPI further stamped its guarantee on the back of the checks to the effect that, "All
prior endorsement and/or Lack of endorsement guaranteed." Thus, BPI became the indorser
of the MCs, and assumed all the warranties of an indorser, 9 1 speci cally, that the checks
were genuine and in all respects what they purported to be; that it had a good title to the
checks; that all prior parties had capacity to contract; and that the checks were, at the time
of their indorsement, valid and subsisting. 9 2 So even if the MCs deposited by BPI's client,
whether it be by respondent herself or some other person, lacked the necessary
indorsement, BPI, as the collecting bank, is bound by its warranties as an indorser and
cannot set up the defense of lack of indorsement as against petitioner Citibank, the drawee
bank. 9 3
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Furthermore, respondent's bare and unsubstantiated denial of receipt of the MCs in
question and their deposit in her account is rendered suspect when MC No. 220701 was
actually deposited in Account No. 0123-0572-28 of BPI Cubao Branch, the very same
account in which MC No. 228270 (which respondent admitted to receiving as proceeds of
her loan from petitioner Citibank), and MCs No. 228203, 228357, and 228400 (which
respondent admitted to receiving as proceeds from her money market placements) were
deposited. Likewise, MC No. 226467 was deposited in Account No. 0121-002-43 of BPI
Cubao Branch, to which MCs No. 226285 and 226439 (which respondent admitted to
receiving as proceeds from her money market placements) were deposited. It is an apparent
contradiction for respondent to claim having received the proceeds of checks deposited in
an account, and then deny receiving the proceeds of another check deposited in the very
same account. HDCTAc

Another inconsistency in respondent's denial of receipt of MC No. 226467 and her


deposit of the same in her account, is her presentation of Exhibit "HHH," a provisional receipt
which was supposed to prove that respondent turned over P500,000.00 to Mr. Tan of
petitioner Citibank, that the said amount was split into three money market placements, and
that MC No. 226467 represented the return on her investment from one of these
placements. 9 4 Because of her Exhibit "HHH," respondent effectively admitted receipt of MC
No. 226467, although for reasons other than as proceeds of a loan.
Neither can this Court give credence to respondent's contention that the notations on
the MCs, stating that they were the proceeds of particular PNs, were not there when she
received the checks and that the notations appeared to be written by a typewriter different
from that used to write the other information on the checks. Once more, respondent's
allegations were uncorroborated by any other evidence. Her and her counsel's observation
that the notations on the MCs appear to be written by a typewriter different from that used
to write the other information on the checks hardly convinces this Court considering that it
constitutes a mere opinion on the appearance of the notation by a witness who does not
possess the necessary expertise on the matter. In addition, the notations on the MCs were
written using both capital and small letters, while the other information on the checks were
written using capital letters only, such difference could easily confuse an untrained eye and
lead to a hasty conclusion that they were written by different typewriters.
Respondent's testimony, that based on her experience transacting with banks, the
MCs were not supposed to include notations on the purpose for which the checks were
issued, also deserves scant consideration. While respondent may have extensive experience
dealing with banks, it still does not qualify her as a competent witness on banking
procedures and practices. Her testimony on this matter is even belied by the fact that the
other MCs issued by petitioner Citibank (when it was still named First National City Bank)
and by petitioner FNCB Finance, the existence and validity of which were not disputed by
respondent, also bear similar notations that state the reason for which they were issued.
Respondent presented several more pieces of evidence to substantiate her claim that
she received MCs No. 226285, 226439, 226467, 226057, 228357, and 228400, not as
proceeds of her loans from petitioner Citibank, but as the return of the principal amounts and
payment of interests from her money market placements with petitioners. Part of
respondent's exhibits were personal checks 9 5 drawn by respondent on her account with
Feati Bank & Trust Co., which she allegedly invested in separate money market placements
with both petitioners, the returns from which were paid to her via MCs No. 226285 and
228400. Yet, to this Court, the personal checks only managed to establish respondent's
issuance thereof, but there was nothing on the face of the checks that would reveal the
purpose for which they were issued and that they were actually invested in money market
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placements as respondent claimed.
Respondent further submitted handwritten notes that purportedly computed and
presented the returns on her money market placements, corresponding to the amount stated
in the MCs she received from petitioner Citibank. Exhibit "HHH-1" 9 6 was a handwritten note,
which respondent attributed to Mr. Tan of petitioner Citibank, showing the breakdown of her
BPI Check for P500,000.00 into three different money market placements with petitioner
Citibank. This Court, however, noticed several factors which render the note highly suspect.
One, it was written on the reversed side of Provisional Receipt No. 12724 of petitioner
Citibank which bore the initials of Mr. Tan acknowledging receipt of respondent's BPI Check
No. 120989 for P500,000.00; but the initials on the handwritten note appeared to be that of
Mr. Bobby Mendoza of petitioner FNCB Finance. 9 7 Second, according to Provisional Receipt
No. 12724, BPI Check No. 120989 for P500,000.00 was supposed to be invested in three
money market placements with petitioner Citibank for the period of 60 days. Since all these
money market placements were made through one check deposited on the same day, 10
November 1978, it made no sense that the handwritten note at the back of Provisional
Receipt No. 12724 provided for different dates of maturity for each of the money market
placements (i.e., 16 November 1978, 17 January 1979, and 21 November 1978), and such
dates did not correspond to the 60 day placement period stated on the face of the
provisional receipt. And third, the principal amounts of the money market placements as
stated in the handwritten note — P145,000.00, P145,000.00 and P242,000.00 — totaled
P532,000.00, and was obviously in excess of the P500,000.00 acknowledged on the face of
Provisional Receipt No. 12724.

Exhibits "III" and "III-1," the front and bank pages of a handwritten note of Mr. Bobby
Mendoza of petitioner FNCB Finance, 9 8 also did not deserve much evidentiary weight, and
this Court cannot rely on the truth and accuracy of the computations presented therein. Mr.
Mendoza was not presented as a witness during the trial before the RTC, so that the
document was not properly authenticated nor its contents su ciently explained. No one was
able to competently identify whether the initials as appearing on the note were actually Mr.
Mendoza's.
Also, going by the information on the front page of the note, this Court observes that
payment of respondent's alleged money market placements with petitioner FNCB Finance
were made using Citytrust Checks; the MCs in question, including MC No. 228057, were
issued by petitioner Citibank. Although Citytrust (formerly Feati Bank & Trust Co.), petitioner
FNCB Finance, and petitioner Citibank may be a liates of one another, they each remained
separate and distinct corporations, each having its own nancial system and records. Thus,
this Court cannot simply assume that one corporation, such as petitioner Citibank or
Citytrust, can issue a check to discharge an obligation of petitioner FNCB Finance. It should
be recalled that when petitioner FNCB Finance paid for respondent's money market
placements, covered by its PNs No. 8167 and 8169, as well as PNs No. 20138 and 20139,
petitioner FNCB Finance issued its own checks. cCSHET

As a last point on this matter, if respondent truly had money market placements with
petitioners, then these would have been evidenced by PNs issued by either petitioner
Citibank or petitioner FNCB Finance, acknowledging the principal amounts of the
investments, and stating the applicable interest rates, as well as the dates of their of
issuance and maturity. After respondent had so meticulously reconstructed her other money
market placements with petitioners and consolidated the documentary evidence thereon,
she came surprisingly short of offering similar details and substantiation for these particular
money market placements.
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Since this Court is satis ed that respondent indeed received the proceeds of the rst
set of PNs, then it proceeds to analyze her evidence of payment thereof.
In support of respondent's assertion that she had already paid whatever loans she
may have had with petitioner Citibank, she presented as evidence Provisional Receipts No.
19471, dated 11 August 1978, and No. 12723, dated 10 November 1978, both of petitioner
Citibank and signed by Mr. Tan, for the amounts of P500,744.00 and P500,000.00,
respectively. While these provisional receipts did state that Mr. Tan, on behalf of petitioner
Citibank, received respondent's checks as payment for her loans, they failed to speci cally
identify which loans were actually paid. Petitioner Citibank was able to present evidence that
respondent had executed several PNs in the years 1978 and 1979 to cover the loans she
secured from the said bank. Petitioner Citibank did admit that respondent was able to pay
for some of these PNs, and what it identi ed as the rst and second sets of PNs were only
those which remained unpaid. It thus became incumbent upon respondent to prove that the
checks received by Mr. Tan were actually applied to the PNs in either the rst or second set;
a fact that, unfortunately, cannot be determined from the provisional receipts submitted by
respondent since they only generally stated that the checks received by Mr. Tan were
payment for respondent's loans.
Mr. Tan, in his deposition, further explained that provisional receipts were issued when
payment to the bank was made using checks, since the checks would still be subject to
clearing. The purpose for the provisional receipts was merely to acknowledge the delivery of
the checks to the possession of the bank, but not yet of payment. 9 9 This bank practice nds
legitimacy in the pronouncement of this Court that a check, whether an MC or an ordinary
check, is not legal tender and, therefore, cannot constitute valid tender of payment. In
Philippine Airlines, Inc. v. Court of Appeals, 1 0 0 this Court elucidated that:
Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment (Sec. 189,
Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank ,
7 Phil. 255; Tan Sunco, v. Santos , 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a
manager's check or ordinary check, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by
the obligee or creditor. Mere delivery of checks does not discharge the obligation
under a judgment. The obligation is not extinguished and remains suspended until
the payment by commercial document is actually realized (Art. 1249, Civil Code, par.
3).

In the case at bar, the issuance of an o cial receipt by petitioner Citibank would have
been dependent on whether the checks delivered by respondent were actually cleared and
paid for by the drawee banks.
As for PN No. 34534, respondent asserted payment thereof at two separate instances
by two different means. In her formal offer of exhibits, respondent submitted a deposit slip
of petitioner Citibank, dated 11 August 1978, evidencing the deposit of BPI Check No. 5785
for P150,000.00. 1 0 1 In her Formal Offer of Documentary Exhibits, dated 7 July 1989,
respondent stated that the purpose for the presentation of the said deposit slip was to
prove that she already paid her loan covered by PN No. 34534. 1 0 2 In her testimony before
the RTC three years later, on 28 November 1991, she changed her story. This time she
narrated that the loan covered by PN No. 34534 was secured by her money market
placement with petitioner FNCB Finance, and when she failed to pay the said PN when it
became due, the security was applied to the loan, therefore, the loan was considered paid.
1 0 3 Given the foregoing, respondent's assertion of payment of PN No. 34534 is extremely
dubious.
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According to petitioner Citibank, the PNs in the second set, except for PN No. 34534,
were mere renewals of the unpaid PNs in the rst set, which was why the PNs stated that
they were for the purpose of liquidating existing obligations. PN No. 34534, however, which
was part of the rst set, was still valid and subsisting and so it was included in the second
set without need for its renewal, and it still being the original PN for that particular loan, its
stated purpose was for personal investment. 1 0 4 Respondent essentially admitted executing
the second set of PNs, but they were only meant to cover simulated loans. Mr. Tan
supposedly convinced her that her pending loan application with DBP would have a greater
chance of being approved if they made it appear that respondent urgently needed the money
because petitioner Citibank was already demanding payment for her simulated loans.
Respondent's defense of simulated loans to escape liability for the second set of PNs
is truly a novel one. It is regrettable, however, that she was unable to substantiate the same.
Yet again, respondent's version of events is totally based on her own uncorroborated
testimony. The notations on the second set of PNs, that they were non-negotiable simulated
notes, were admittedly made by respondent herself and were, thus, self-serving. Equally self-
serving was respondent's letter, written on 7 October 1985, or more than six years after the
execution of the second set of PNs, in which she demanded return of the simulated or
ctitious PNs, together with the letters relating thereto, which Mr. Tan purportedly asked her
to execute. Respondent further failed to present any proof of her alleged loan application
with the DBP, and of any circumstance or correspondence wherein the simulated or ctitious
PNs were indeed used for their supposed purpose. EcTDCI

In contrast, petitioner Citibank, as supported by the testimonies of its o cers and


available documentation, consistently treated the said PNs as regular loans — accepted,
approved, and paid in the ordinary course of its business.
The PNs executed by the respondent in favor of petitioner Citibank to cover her loans
were duly- lled out and signed, including the disclosure statement found at the back of the
said PNs, in adherence to the Central Bank requirement to disclose the full nance charges
to a loan granted to borrowers.
Mr. Tan, then an account o cer with the Marketing Department of petitioner Citibank,
testi ed that he dealt directly with respondent; he facilitated the loans; and the PNs, at least
in the second set, were signed by respondent in his presence. 1 0 5
Mr. Pujeda, the o cer who was previously in charge of loans and placements,
con rmed that the signatures on the PNs were veri ed against respondent's specimen
signature with the bank. 1 0 6
Ms. Cristina Dondoyano, who worked at petitioner Citibank as a loan processor, was
responsible for booking respondent's loans. Booking the loans means recording it in the
General Ledger. She explained the procedure for booking loans, as follows: The account
o cer, in the Marketing Department, deals directly with the clients who wish to borrow
money from petitioner Citibank. The Marketing Department will forward a loan booking
checklist, together with the borrowing client's PNs and other supporting documents, to the
loan pre-processor, who will check whether the details in the loan booking checklist are the
same as those in the PNs. The documents are then sent to Signature Control for veri cation
of the client's signature in the PNs, after which, they are returned to the loan pre-processor,
to be forwarded nally to the loan processor. The loan processor shall book the loan in the
General Ledger, indicating therein the client name, loan amount, interest rate, maturity date,
and the corresponding PN number. Since she booked respondent's loans personally, Ms.
Dondoyano testi ed that she saw the original PNs. In 1986, Atty. Fernandez of petitioner
Citibank requested her to prepare an accounting of respondent's loans, which she did, and
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which was presented as Exhibit "120" for the petitioners. The gures from the said exhibit
were culled from the bookings in the General Ledger, a fact which respondent's counsel was
even willing to stipulate. 1 0 7

Ms. Teresita Glorioso was an Investigation and Reconcilement Clerk at the Control
Department of petitioner Citibank. She was presented by petitioner Citibank to expound on
the micro lming procedure at the bank, since most of the copies of the PNs were retrieved
from microfilm. Microfilming of the documents are actually done by people at the Operations
Department. At the end of the day or during the day, the original copies of all bank
documents, not just those pertaining to loans, are micro lmed. She refuted the possibility
that insertions could be made in the micro lm because the micro lm is inserted in a
cassette; the cassette is placed in the micro lm machine for use; at the end of the day, the
cassette is taken out of the micro lm machine and put in a safe vault; and the cassette is
returned to the machine only the following day for use, until the spool is full. This is the
micro lming procedure followed everyday. When the micro lm spool is already full, the
micro lm is developed, then sent to the Control Department, which double checks the
contents of the micro lms against the entries in the General Ledger. The Control Department
also conducts a random comparison of the contents of the micro lms with the original
documents; a random review of the contents is done on every role of microfilm. 1 0 8
Ms. Renee Rubio worked for petitioner Citibank for 20 years. She rose from the ranks,
initially working as a secretary in the Personnel Group; then as a secretary to the Personnel
Group Head; a Service Assistant with the Marketing Group, in 1972 to 1974, dealing directly
with corporate and individual clients who, among other things, secured loans from petitioner
Citibank; the Head of the Collection Group of the Foreign Department in 1974 to 1976; the
Head of the Money Transfer Unit in 1976 to 1978; the Head of the Loans and Placements
Unit up to the early 1980s; and, thereafter, she established operations training for petitioner
Citibank in the Asia-Pacific Region responsible for the training of the officers of the bank. She
testi ed on the standard loan application process at petitioner Citibank. According to Ms.
Rubio, the account o cer or marketing person submits a proposal to grant a loan to an
individual or corporation. Petitioner Citibank has a worldwide policy that requires a credit
committee, composed of a minimum of three people, which would approve the loan and
amount thereof. There can be no instance when only one o cer has the power to approve
the loan application. When the loan is approved, the account o cer in charge will obtain the
corresponding PNs from the client. The PNs are sent to the signature veri er who would
validate the signatures therein against those appearing in the signature cards previously
submitted by the client to the bank. The Operations Unit will check and review the
documents, including the PNs, if it is a clean loan, and securities and deposits, if it is
collateralized. The loan is then recorded in the General Ledger. The Loans and Placements
Department will not book the loans without the PNs. When the PNs are liquidated, whether
they are paid or rolled-over, they are returned to the client. 1 0 9 Ms. Rubio further explained
that she was familiar with respondent's accounts since, while she was still the Head of the
Loan and Placements Unit, she was asked by Mr. Tan to prepare a list of respondent's
outstanding obligations. 1 1 0 She thus calculated respondent's outstanding loans, which was
sent as an attachment to Mr. Tan's letter to respondent, dated 28 September 1979, and
presented before the RTC as Exhibits "34-B" and "34-C." 1 1 1
Lastly, the exchange of letters between petitioner Citibank and respondent, as well as
the letters sent by other people working for respondent, had consistently recognized that
respondent owed petitioner Citibank money.
In consideration of the foregoing discussion, this Court nds that the preponderance
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of evidence supports the existence of the respondent's loans, in the principal sum of
P1,920,000.00, as of 5 September 1979. While it is well-settled that the term "preponderance
of evidence" should not be wholly dependent on the number of witnesses, there are certain
instances when the number of witnesses become the determining factor —
The preponderance of evidence may be determined, under certain conditions,
by the number of witnesses testifying to a particular fact or state of facts. For
instance, one or two witnesses may testify to a given state of facts, and six or seven
witnesses of equal candor, fairness, intelligence, and truthfulness, and equally well
corroborated by all the remaining evidence, who have no greater interest in the result
of the suit, testify against such state of facts. Then the preponderance of evidence
is determined by the number of witnesses. (Wilcox vs. Hines, 100 Tenn. 524, 66 Am.
St. Rep., 761.) 1 1 2

Best evidence rule


This Court disagrees in the pronouncement made by the Court of Appeals summarily
dismissing the documentary evidence submitted by petitioners based on its broad and
indiscriminate application of the best evidence rule.
In general, the best evidence rule requires that the highest available degree of proof
must be produced. Accordingly, for documentary evidence, the contents of a document are
best proved by the production of the document itself, 1 1 3 to the exclusion of any secondary
or substitutionary evidence. 1 1 4
The best evidence rule has been made part of the revised Rules of Court, Rule 130,
Section 3, which reads —
SEC. 3. Original document must be produced; exceptions. — When the
subject of inquiry is the contents of a document, no evidence shall be admissible
other than the original document itself, except in the following cases:

(a) When the original has been lost or destroyed, or cannot be produced
in court, without bad faith on the part of the offeror;
(b) When the original is in the custody or under the control of the party
against whom the evidence is offered, and the latter fails to produce it after
reasonable notice;
(c) When the original consists of numerous accounts or other documents
which cannot be examined in court without great loss of time and the fact sought to
be established from them is only the general result of the whole; and ISADET

(d) When the original is a public record in the custody of a public o cer
or is recorded in a public office.

As the afore-quoted provision states, the best evidence rule applies only when the subject
of the inquiry is the contents of the document. The scope of the rule is more extensively
explained thus —
But even with respect to documentary evidence, the best evidence rule applies
only when the content of such document is the subject of the inquiry. Where the
issue is only as to whether such document was actually executed, or exists, or on
the circumstances relevant to or surrounding its execution, the best evidence rule
does not apply and testimonial evidence is admissible (5 Moran, op. cit., pp. 76-66; 4
Martin, op. cit., p. 78). Any other substitutionary evidence is likewise admissible
without need for accounting for the original.
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Thus, when a document is presented to prove its existence or condition it is
offered not as documentary, but as real, evidence. Parol evidence of the fact of
execution of the documents is allowed (Hernaez, et al. vs. McGrath, etc., et al., 91
Phil 565). . . . 1 1 5

In Estrada v. Desierto, 1 1 6 this Court had occasion to rule that —


It is true that the Court relied not upon the original but only copy of the
Angara Diary as published in the Philippine Daily Inquirer on February 4-6, 2001. In
doing so, the Court, did not, however, violate the best evidence rule. Wigmore , in his
book on evidence, states that:
"Production of the original may be dispensed with, in the trial court's
discretion, whenever in the case in hand the opponent does not bona de dispute
the contents of the document and no other useful purpose will be served by
requiring production.
xxx xxx xxx

"In several Canadian provinces, the principle of unavailability has been


abandoned, for certain documents in which ordinarily no real dispute arised. This
measure is a sensible and progressive one and deserves universal adoption (post,
sec. 1233). Its essential feature is that a copy may be used unconditionally, if the
opponent has been given an opportunity to inspect it." (Emphasis supplied.)
This Court did not violate the best evidence rule when it considered and weighed in
evidence the photocopies and micro lm copies of the PNs, MCs, and letters submitted by
the petitioners to establish the existence of respondent's loans. The terms or contents of
these documents were never the point of contention in the Petition at bar. It was
respondent's position that the PNs in the first set (with the exception of PN No. 34534) never
existed, while the PNs in the second set (again, excluding PN No. 34534) were merely
executed to cover simulated loan transactions. As for the MCs representing the proceeds of
the loans, the respondent either denied receipt of certain MCs or admitted receipt of the
other MCs but for another purpose. Respondent further admitted the letters she wrote
personally or through her representatives to Mr. Tan of petitioner Citibank acknowledging
the loans, except that she claimed that these letters were just meant to keep up the ruse of
the simulated loans. Thus, respondent questioned the documents as to their existence or
execution, or when the former is admitted, as to the purpose for which the documents were
executed, matters which are, undoubtedly, external to the documents, and which had nothing
to do with the contents thereof.
Alternatively, even if it is granted that the best evidence rule should apply to the
evidence presented by petitioners regarding the existence of respondent's loans, it should be
borne in mind that the rule admits of the following exceptions under Rule 130, Section 5 of
the revised Rules of Court —

SEC. 5. When the original document is unavailable. — When the original


document has been lost or destroyed, or cannot be produced in court, the offeror,
upon proof of its execution or existence and the cause of its unavailability without
bad faith on his part, may prove its contents by a copy, or by a recital of its contents
in some authentic document, or by the testimony of witnesses in the order stated.

The execution or existence of the original copies of the documents was established
through the testimonies of witnesses, such as Mr. Tan, before whom most of the documents
were personally executed by respondent. The original PNs also went through the whole loan
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booking system of petitioner Citibank — from the account o cer in its Marketing
Department, to the pre-processor, to the signature veri er, back to the pre-processor, then to
the processor for booking. 1 1 7 The original PNs were seen by Ms. Dondoyano, the processor,
who recorded them in the General Ledger. Mr. Pujeda personally saw the original MCs,
proving respondent's receipt of the proceeds of her loans from petitioner Citibank, when he
helped Attys. Cleofe and Fernandez, the bank's legal counsels, to reconstruct the records of
respondent's loans. The original MCs were presented to Atty. Cleofe who used the same
during the preliminary investigation of the case, sometime in years 1986-1987. The original
MCs were subsequently turned over to the Control and Investigation Division of petitioner
Citibank. 1 1 8
It was only petitioner FNCB Finance who claimed that they lost the original copies of
the PNs when it moved to a new o ce. Citibank did not make a similar contention; instead, it
explained that the original copies of the PNs were returned to the borrower upon liquidation
of the loan, either through payment or roll-over. Petitioner Citibank proffered the excuse that
they were still looking for the documents in their storage or warehouse to explain the delay
and di culty in the retrieval thereof, but not their absence or loss. The original documents in
this case, such as the MCs and letters, were destroyed and, thus, unavailable for presentation
before the RTC only on 7 October 1987, when a re broke out on the 7th oor of the o ce
building of petitioner Citibank. There is no showing that the re was intentionally set. The re
destroyed relevant documents, not just of the present case, but also of other cases, since the
7th oor housed the Control and Investigation Division, in charge of keeping the necessary
documents for cases in which petitioner Citibank was involved.
The foregoing would have been su cient to allow the presentation of photocopies or
micro lm copies of the PNs, MCs, and letters by the petitioners as secondary evidence to
establish the existence of respondent's loans, as an exception to the best evidence rule. HcDaAI

The impact of the Decision of the Court of Appeals in the Dy case


In its assailed Decision, the Court of Appeals made the following pronouncement —
Besides, We find the declaration and conclusions of this Court in CA-G.R. CV
No. 15934 entitled Sps. Dr. Ricardo L. Dy and Rosalind O. Dy vs. City Bank, N.A., et
al, promulgated on 15 January 1990, as disturbing taking into consideration the
similarities of the fraud, machinations, and deceits employed by the defendant-
appellant Citibank and its Account Manager Francisco Tan.
Worthy of note is the fact that Our declarations and conclusions against
Citibank and the person of Francisco Tan in CA-G.R. CV No. 15934 were a rmed
in toto by the Highest Magistrate in a Minute Resolution dated 22 August 1990
entitled Citibank, N.A., vs. Court of Appeals, G.R. 93350.

As the factual milieu of the present appeal created reasonable doubts as to


whether the nine (9) Promissory Notes were indeed executed with considerations,
the doubts, coupled by the ndings and conclusions of this Court in CA-G.R. CV
No. 15934 and the Supreme Court in G.R. No. 93350 . should be construed
against herein defendants-appellants Citibank and FNCB Finance.

What this Court truly nds disturbing is the signi cance given by the Court of Appeals
in its assailed Decision to the Decision 1 1 9 of its Third Division in CA-G.R. CV No. 15934 (or
the Dy case), when there is an absolute lack of legal basis for doing such.
Although petitioner Citibank and its o cer, Mr. Tan, were also involved in the Dy case,
that is about the only connection between the Dy case and the one at bar. Not only did the Dy
case tackle transactions between parties other than the parties presently before this Court,
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but the transactions are absolutely independent and unrelated to those in the instant
Petition.
In the Dy case, Severino Chua Caedo managed to obtain loans from herein petitioner
Citibank amounting to P7,000,000.00, secured to the extent of P5,000,000.00 by a Third
Party Real Estate Mortgage of the properties of Caedo's aunt, Rosalind Dy. It turned out that
Rosalind Dy and her husband were unaware of the said loans and the mortgage of their
properties. The transactions were carried out exclusively between Caedo and Mr. Tan of
petitioner Citibank. The RTC found Mr. Tan guilty of fraud for his participation in the
questionable transactions, essentially because he allowed Caedo to take out the signature
cards, when these should have been signed by the Dy spouses personally before him.
Although the Dy spouses' signatures in the PNs and Third Party Real Estate Mortgage were
forged, they were approved by the signature veri er since the signature cards against which
they were compared to were also forged. Neither the RTC nor the Court of Appeals, however,
categorically declared Mr. Tan personally responsible for the forgeries, which, in the narration
of the facts, were more likely committed by Caedo.
In the Petition at bar, respondent dealt with Mr. Tan directly, there was no third party
involved who could have perpetrated any fraud or forgery in her loan transactions. Although
respondent attempted to raise suspicion as to the authenticity of her signatures on certain
documents, these were nothing more than naked allegations with no corroborating evidence;
worse, even her own allegations were replete with inconsistencies. She could not even
establish in what manner or under what circumstances the fraud or forgery was committed,
or how Mr. Tan could have been directly responsible for the same.
While the Court of Appeals can take judicial notice of the Decision of its Third Division
in the Dy case, it should not have given the said case much weight when it rendered the
assailed Decision, since the former does not constitute a precedent. The Court of Appeals, in
the challenged Decision, did not apply any legal argument or principle established in the Dy
case but, rather, adopted the ndings therein of wrongdoing or misconduct on the part of
herein petitioner Citibank and Mr. Tan. Any nding of wrongdoing or misconduct as against
herein petitioners should be made based on the factual background and pieces of evidence
submitted in this case, not those in another case.
It is apparent that the Court of Appeals took judicial notice of the Dy case not as a
legal precedent for the present case, but rather as evidence of similar acts committed by
petitioner Citibank and Mr. Tan. A basic rule of evidence, however, states that, "Evidence that
one did or did not do a certain thing at one time is not admissible to prove that he did or did
not do the same or similar thing at another time; but it may be received to prove a speci c
intent or knowledge, identity, plan, system, scheme, habit, custom or usage, and the like." 1 2 0
The rationale for the rule is explained thus —
The rule is founded upon reason, public policy, justice and judicial
convenience. The fact that a person has committed the same or similar acts at
some prior time affords, as a general rule, no logical guaranty that he committed the
act in question. This is so because, subjectively, a man's mind and even his modes
of life may change; and, objectively, the conditions under which he may nd himself
at a given time may likewise change and thus induce him to act in a different way.
Besides, if evidence of similar acts are to be invariably admitted, they will give rise to
a multiplicity of collateral issues and will subject the defendant to surprise as well
as confuse the court and prolong the trial. 1 2 1

The factual backgrounds of the two cases are so different and unrelated that the Dy case
cannot be used to prove speci c intent, knowledge, identity, plan, system, scheme, habit,
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custom or usage on the part of petitioner Citibank or its o cer, Mr. Tan, to defraud
respondent in the present case.
IV
The liquidation of respondent's
outstanding loans were valid in so
far as petitioner Citibank used
respondent's savings account with
the bank and her money market
placements with petitioner FNCB
Finance; but illegal and void in so
far as petitioner Citibank used
respondent's dollar accounts with
Citibank-Geneva.
Savings Account with petitioner Citibank
Compensation is a recognized mode of extinguishing obligations. Relevant provisions
of the Civil Code provides —
Art. 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is necessary;

(1) That each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter has
been stated; DISEaC

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy,


commenced by third persons and communicated in due time to the debtor.

There is little controversy when it comes to the right of petitioner Citibank to


compensate respondent's outstanding loans with her deposit account. As already found by
this Court, petitioner Citibank was the creditor of respondent for her outstanding loans. At
the same time, respondent was the creditor of petitioner Citibank, as far as her deposit
account was concerned, since bank deposits, whether xed, savings, or current, should be
considered as simple loan or mutuum by the depositor to the banking institution. 1 2 2 Both
debts consist in sums of money. By June 1979, all of respondent's PNs in the second set had
matured and became demandable, while respondent's savings account was demandable
anytime. Neither was there any retention or controversy over the PNs and the deposit
account commenced by a third person and communicated in due time to the debtor
concerned. Compensation takes place by operation of law, 1 2 3 therefore, even in the absence
of an expressed authority from respondent, petitioner Citibank had the right to effect, on 25
June 1979, the partial compensation or off-set of respondent's outstanding loans with her
deposit account, amounting to P31,079.14.

Money market placements with FNCB Finance


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Things though are not as simple and as straightforward as regards to the money
market placements and bank account used by petitioner Citibank to complete the
compensation or off-set of respondent's outstanding loans, which came from persons other
than petitioner Citibank.
Respondent's money market placements were with petitioner FNCB Finance, and after
several roll-overs, they were ultimately covered by PNs No. 20138 and 20139, which, by 3
September 1979, the date the check for the proceeds of the said PNs were issued,
amounted to P1,022,916.66, inclusive of the principal amounts and interests. As to these
money market placements, respondent was the creditor and petitioner FNCB Finance the
debtor; while, as to the outstanding loans, petitioner Citibank was the creditor and
respondent the debtor. Consequently, legal compensation, under Article 1278 of the Civil
Code, would not apply since the rst requirement for a valid compensation, that each one of
the obligors be bound principally, and that he be at the same time a principal creditor of the
other, was not met.
What petitioner Citibank actually did was to exercise its rights to the proceeds of
respondent's money market placements with petitioner FNCB Finance by virtue of the Deeds
of Assignment executed by respondent in its favor.
The Court of Appeals did not consider these Deeds of Assignment because of
petitioners' failure to produce the original copies thereof in violation of the best evidence
rule. This Court again nds itself in disagreement in the application of the best evidence rule
by the appellate court.
To recall, the best evidence rule, in so far as documentary evidence is concerned,
requires the presentation of the original copy of the document only when the context thereof
is the subject of inquiry in the case. Respondent does not question the contents of the Deeds
of Assignment. While she admitted the existence and execution of the Deeds of Assignment,
dated 2 March 1978 and 9 March 1978, covering PNs No. 8169 and 8167 issued by
petitioner FNCB Finance, she claimed, as defense, that the loans for which the said Deeds
were executed as security, were already paid. She denied ever executing both Deeds of
Assignment, dated 25 August 1978, covering PNs No. 20138 and 20139. These are again
issues collateral to the contents of the documents involved, which could be proven by
evidence other than the original copies of the said documents.
Moreover, the Deeds of Assignment of the money market placements with petitioner
FNCB Finance were notarized documents, thus, admissible in evidence. Rule 132, Section 30
of the Rules of Court provides that —
SEC. 30. Proof of notarial documents. — Every instrument duly
acknowledged or proved and certi ed as provided by law, may be presented in
evidence without further proof, the certi cate of acknowledgement being prima
facie evidence of the execution of the instrument or document involved.
Signi cant herein is this Court's elucidation in De Jesus v. Court of Appeals , 1 2 4 which
reads —
On the evidentiary value of these documents, it should be recalled that the
notarization of a private document converts it into a public one and renders it
admissible in court without further proof of its authenticity (Joson vs. Baltazar, 194
SCRA 114 [1991]). This is so because a public document duly executed and entered
in the proper registry is presumed to be valid and genuine until the contrary is shown
by clear and convincing proof (Asido vs. Guzman, 57 Phil. 652 [1918]; U.S. vs.
Enriquez, 1 Phil 241 [1902]; Favor vs. Court of Appeals, 194 SCRA 308 [1991]). As
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such, the party challenging the recital of the document must prove his claim with
clear and convincing evidence (Diaz vs. Court of Appeals, 145 SCRA 346 [1986]).

The rule on the evidentiary weight that must be accorded a notarized document is
clear and unambiguous. The certi cate of acknowledgement in the notarized Deeds of
Assignment constituted prima facie evidence of the execution thereof. Thus, the burden of
refuting this presumption fell on respondent. She could have presented evidence of any
defect or irregularity in the execution of the said documents 1 2 5 or raised questions as to the
verity of the notary public's acknowledgment and certi cate in the Deeds. 1 2 6 But again,
respondent admitted executing the Deeds of Assignment, dated 2 March 1978 and 9 March
1978, although claiming that the loans for which they were executed as security were already
paid. And, she assailed the Deeds of Assignment, dated 25 August 1978, with nothing more
than her bare denial of execution thereof, hardly the clear and convincing evidence required to
trounce the presumption of due execution of a notarized document. IHaSED

Petitioners not only presented the notarized Deeds of Assignment, but even secured
certi ed literal copies thereof from the National Archives. 1 2 7 Mr. Renato Medua, an archivist,
working at the Records Management and Archives O ce of the National Library, testi ed
that the copies of the Deeds presented before the RTC were certi ed literal copies of those
contained in the Notarial Registries of the notary publics concerned, which were already in
the possession of the National Archives. He also explained that he could not bring to the RTC
the Notarial Registries containing the original copies of the Deeds of Assignment, because
the Department of Justice (DOJ) Circular No. 97, dated 8 November 1968, prohibits the
bringing of original documents to the courts to prevent the loss of irreplaceable and
priceless documents. 1 2 8
Accordingly, this Court gives the Deeds of Assignment grave importance in
establishing the authority given by the respondent to petitioner Citibank to use as security
for her loans her money her market placements with petitioner FNCB Finance, represented by
PNs No. 8167 and 8169, later to be rolled-over as PNs No. 20138 and 20139. These Deeds
of Assignment constitute the law between the parties, and the obligations arising therefrom
shall have the force of law between the parties and should be complied with in good faith.
1 2 9 Standard clauses in all of the Deeds provide that —

The ASSIGNOR and the ASSIGNEE hereby further agree as follows:

xxx xxx xxx


2. In the event the OBLIGATIONS are not paid at maturity or upon
demand, as the case may be, the ASSIGNEE is fully authorized and empowered to
collect and receive the PLACEMENT (or so much thereof as may be necessary) and
apply the same in payment of the OBLIGATIONS. Furthermore, the ASSIGNOR
agrees that at any time, and from time to time, upon request by the ASSIGNEE, the
ASSIGNOR will promptly execute and deliver any and all such further instruments
and documents as may be necessary to effectuate this Assignment.

xxx xxx xxx


5. This Assignment shall be considered as su cient authority to FNCB
Finance to pay and deliver the PLACEMENT or so much thereof as may be
necessary to liquidate the OBLIGATIONS, to the ASSIGNEE in accordance with terms
and provisions hereof. 1 3 0

Petitioner Citibank was only acting upon the authority granted to it under the foregoing
Deeds when it nally used the proceeds of PNs No. 20138 and 20139, paid by petitioner
FNCB Finance, to partly pay for respondent's outstanding loans. Strictly speaking, it did not
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effect a legal compensation or off-set under Article 1278 of the Civil Code, but rather, it
partly extinguished respondent's obligations through the application of the security given by
the respondent for her loans. Although the pertinent documents were entitled Deeds of
Assignment, they were, in reality, more of a pledge by respondent to petitioner Citibank of her
credit due from petitioner FNCB Finance by virtue of her money market placements with the
latter. According to Article 2118 of the Civil Code —
ART. 2118. If a credit has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He shall apply the
same to the payment of his claim, and deliver the surplus, should there be any, to
the pledgor.

PNs No. 20138 and 20139 matured on 3 September 1979, without them being
redeemed by respondent, so that petitioner Citibank collected from petitioner FNCB Finance
the proceeds thereof, which included the principal amounts and interests earned by the
money market placements, amounting to P1,022,916.66, and applied the same against
respondent's outstanding loans, leaving no surplus to be delivered to respondent.
Dollar accounts with Citibank-Geneva
Despite the legal compensation of respondent's savings account and the total
application of the proceeds of PNs No. 20138 and 20139 to respondent's outstanding loans,
there still remained a balance of P1,069,847.40. Petitioner Citibank then proceeded to
applying respondent's dollar accounts with Citibank-Geneva against her remaining loan
balance, pursuant to a Declaration of Pledge supposedly executed by respondent in its favor.
Certain principles of private international law should be considered herein because the
property pledged was in the possession of an entity in a foreign country, namely, Citibank-
Geneva. In the absence of any allegation and evidence presented by petitioners of the
speci c rules and laws governing the constitution of a pledge in Geneva, Switzerland, they
will be presumed to be the same as Philippine local or domestic laws; this is known as
processual presumption. 1 3 1
Upon closer scrutiny of the Declaration of Pledge, this Court nds the same
exceedingly suspicious and irregular.
First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of
Assignment of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Court
would think that petitioner Citibank would take greater cautionary measures with the
preparation and execution of the Declaration of Pledge because it involved respondent's "all
present and future duciary placements" with a Citibank branch in another country,
speci cally, in Geneva, Switzerland. While there is no express legal requirement that the
Declaration of Pledge had to be notarized to be effective, even so, it could not enjoy the same
prima facie presumption of due execution that is extended to notarized documents, and
petitioner Citibank must discharge the burden of proving due execution and authenticity of
the Declaration of Pledge.

Second, petitioner Citibank was unable to establish the date when the Declaration of
Pledge was actually executed. The photocopy of the Declaration of Pledge submitted by
petitioner Citibank before the RTC was undated. 1 3 2 It presented only a photocopy of the
pledge because it already forwarded the original copy thereof to Citibank-Geneva when it
requested for the remittance of respondent's dollar accounts pursuant thereto. Respondent,
on the other hand, was able to secure a copy of the Declaration of Pledge, certi ed by an
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o cer of Citibank-Geneva, which bore the date 24 September 1979. 1 3 3 Respondent,
however, presented her passport and plane tickets to prove that she was out of the country
on the said date and could not have signed the pledge. Petitioner Citibank insisted that the
pledge was signed before 24 September 1979, but could not provide an explanation as to
how and why the said date was written on the pledge. Although Mr. Tan testi ed that the
Declaration of Pledge was signed by respondent personally before him, he could not give the
exact date when the said signing took place. It is important to note that the copy of the
Declaration of Pledge submitted by the respondent to the RTC was certi ed by an o cer of
Citibank-Geneva, which had possession of the original copy of the pledge. It is dated 24
September 1979, and this Court shall abide by the presumption that the written document is
truly dated. 1 3 4 Since it is undeniable that respondent was out of the country on 24
September 1979, then she could not have executed the pledge on the said date. DSCIEa

Third, the Declaration of Pledge was irregularly lled-out. The pledge was in a standard
printed form. It was constituted in favor of Citibank, N.A., otherwise referred to therein as the
Bank. It should be noted, however, that in the space which should have named the pledgor,
the name of petitioner Citibank was typewritten, to wit —
The pledge right herewith constituted shall secure all claims which the Bank
now has or in the future acquires against Citibank, N.A., Manila (full name and
address of the Debtor), regardless of the legal cause or the transaction (for example
current account, securities transactions, collections, credits, payments, documentary
credits and collections) which gives rise thereto, and including principal, all
contractual and penalty interest, commissions, charges, and costs.

The pledge, therefore, made no sense, the pledgor and pledgee being the same entity.
Was a mistake made by whoever lled-out the form? Yes, it could be a possibility.
Nonetheless, considering the value of such a document, the mistake as to a signi cant
detail in the pledge could only be committed with gross carelessness on the part of
petitioner Citibank, and raised serious doubts as to the authenticity and due execution of
the same. The Declaration of Pledge had passed through the hands of several bank
o cers in the country and abroad, yet, surprisingly and implausibly, no one noticed such a
glaring mistake.
Lastly, respondent denied that it was her signature on the Declaration of Pledge. She
claimed that the signature was a forgery. When a document is assailed on the basis of
forgery, the best evidence rule applies —
Basic is the rule of evidence that when the subject of inquiry is the contents
of a document, no evidence is admissible other than the original document itself
except in the instances mentioned in Section 3, Rule 130 of the Revised Rules of
Court. Mere photocopies of documents are inadmissible pursuant to the best
evidence rule. This is especially true when the issue is that of forgery .

As a rule, forgery cannot be presumed and must be proved by clear, positive


and convincing evidence and the burden of proof lies on the party alleging forgery.
The best evidence of a forged signature in an instrument is the instrument itself
re ecting the alleged forged signature. The fact of forgery can only be established
by a comparison between the alleged forged signature and the authentic and
genuine signature of the person whose signature is theorized upon to have been
forged. Without the original document containing the alleged forged signature, one
cannot make a de nitive comparison which would establish forgery. A comparison
based on a mere xerox copy or reproduction of the document under controversy
cannot produce reliable results. 1 3 5

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Respondent made several attempts to have the original copy of the pledge produced
before the RTC so as to have it examined by experts. Yet, despite several Orders by the RTC,
1 3 6 petitioner Citibank failed to comply with the production of the original Declaration of
Pledge. It is admitted that Citibank-Geneva had possession of the original copy of the
pledge. While petitioner Citibank in Manila and its branch in Geneva may be separate and
distinct entities, they are still incontestably related, and between petitioner Citibank and
respondent, the former had more in uence and resources to convince Citibank-Geneva to
return, albeit temporarily, the original Declaration of Pledge. Petitioner Citibank did not
present any evidence to convince this Court that it had exerted diligent efforts to secure the
original copy of the pledge, nor did it proffer the reason why Citibank-Geneva obstinately
refused to give it back, when such document would have been very vital to the case of
petitioner Citibank. There is thus no justi cation to allow the presentation of a mere
photocopy of the Declaration of Pledge in lieu of the original, and the photocopy of the
pledge presented by petitioner Citibank has nil probative value. 1 3 7 In addition, even if this
Court cannot make a categorical nding that respondent's signature on the original copy of
the pledge was forged, it is persuaded that petitioner Citibank willfully suppressed the
presentation of the original document, and takes into consideration the presumption that the
evidence willfully suppressed would be adverse to petitioner Citibank if produced. 1 3 8
Without the Declaration of Pledge, petitioner Citibank had no authority to demand the
remittance of respondent's dollar accounts with Citibank-Geneva and to apply them to her
outstanding loans. It cannot effect legal compensation under Article 1278 of the Civil Code
since, petitioner Citibank itself admitted that Citibank-Geneva is a distinct and separate
entity. As for the dollar accounts, respondent was the creditor and Citibank-Geneva is the
debtor; and as for the outstanding loans, petitioner Citibank was the creditor and respondent
was the debtor. The parties in these transactions were evidently not the principal creditor of
each other.
Therefore, this Court declares that the remittance of respondent's dollar accounts
from Citibank-Geneva and the application thereof to her outstanding loans with petitioner
Citibank was illegal, and null and void. Resultantly, petitioner Citibank is obligated to return to
respondent the amount of US$149,632.99 from her Citibank-Geneva accounts, or its present
equivalent value in Philippine currency; and, at the same time, respondent continues to be
obligated to petitioner Citibank for the balance of her outstanding loans which, as of 5
September 1979, amounted to P1,069,847.40.
V
The parties shall be liable for
interests on their monetary
obligations to each other,
as determined herein.
In summary, petitioner Citibank is ordered by this Court to pay respondent the
proceeds of her money market placements, represented by PNs No. 23356 and 23357,
amounting to P318,897.34 and P203,150.00, respectively, earning an interest of 14.5% per
annum as stipulated in the PNs, 1 3 9 beginning 17 March 1977, the date of the placements.
Petitioner Citibank is also ordered to refund to respondent the amount of
US$149,632.99, or its equivalent in Philippine currency, which had been remitted from her
Citibank-Geneva accounts. These dollar accounts, consisting of two duciary placements
and current accounts with Citibank-Geneva shall continue earning their respective stipulated
interests from 26 October 1979, the date of their remittance by Citibank-Geneva to petitioner
Citibank in Manila and applied against respondent's outstanding loans.
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As for respondent, she is ordered to pay petitioner Citibank the balance of her
outstanding loans, which amounted to P1,069,847.40 as of 5 September 1979. These loans
continue to earn interest, as stipulated in the corresponding PNs, from the time of their
respective maturity dates, since the supposed payment thereof using respondent's dollar
accounts from Citibank-Geneva is deemed illegal, null and void, and, thus, ineffective.
VI
Petitioner Citibank shall be liable for
damages to respondent.
Petitioners protest the award by the Court of Appeals of moral damages, exemplary
damages, and attorney's fees in favor of respondent. They argued that the RTC did not award
any damages, and respondent, in her appeal before the Court of Appeals, did not raise in
issue the absence of such. CAaSED

While it is true that the general rule is that only errors which have been stated in the
assignment of errors and properly argued in the brief shall be considered, this Court has also
recognized exceptions to the general rule, wherein it authorized the review of matters, even
those not assigned as errors in the appeal, if the consideration thereof is necessary in
arriving at a just decision of the case, and there is a close inter-relation between the omitted
assignment of error and those actually assigned and discussed by the appellant. 1 4 0 Thus,
the Court of Appeals did not err in awarding the damages when it already made ndings that
would justify and support the said award.
Although this Court appreciates the right of petitioner Citibank to effect legal
compensation of respondent's local deposits, as well as its right to the proceeds of PNs No.
20138 and 20139 by virtue of the notarized Deeds of Assignment, to partly extinguish
respondent's outstanding loans, it nds that petitioner Citibank did commit wrong when it
failed to pay and properly account for the proceeds of respondent's money market
placements, evidenced by PNs No. 23356 and 23357, and when it sought the remittance of
respondent's dollar accounts from Citibank-Geneva by virtue of a highly-suspect Declaration
of Pledge to be applied to the remaining balance of respondent's outstanding loans. It bears
to emphasize that banking is impressed with public interest and its duciary character
requires high standards of integrity and performance. 1 4 1 A bank is under the obligation to
treat the accounts of its depositors with meticulous care whether such accounts consist
only of a few hundred pesos or of millions of pesos. 1 4 2 The bank must record every single
transaction accurately, down to the last centavo, and as promptly as possible. 1 4 3 Petitioner
Citibank evidently failed to exercise the required degree of care and transparency in its
transactions with respondent, thus, resulting in the wrongful deprivation of her property.

Respondent had been deprived of substantial amounts of her investments and


deposits for more than two decades. During this span of years, respondent had found herself
in desperate need of the amounts wrongfully withheld from her. In her testimony 1 4 4 before
the RTC, respondent narrated —
Q By the way Mrs. Witness will you kindly tell us again, you said before that you
are a businesswoman, will you tell us again what are the businesses you are
engaged into [sic]?

A I am engaged in real estate. I am the owner of the Modesta Village 1 and 2 in


San Mateo, Rizal. I am also the President and Chairman of the Board of
Macador [sic] Co. and Business Inc. which operates the Macador [sic]
International Palace Hotel. I am also the President of the Macador [sic]
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International Palace Hotel, and also the Treasures Home Industries, Inc.
which I am the Chairman and president of the Board and also operating
affiliated company in the name of Treasures Motor Sales engaged in car
dealers [sic] like Delta Motors, we are the dealers of the whole Northern Luzon
and I am the president of the Disto Company, Ltd., based in Hongkong
licensed in Honkong [sic] and now operating in Los Angeles, California.
Q What is the business of that Disto Company Ltd.?

A Disto Company, Ltd., is engaged in real estate and construction.

Q Aside from those businesses are you a member of any national or community
organization for social and civil activities?

A Yes sir.

Q What are those?


A I am the Vice-President of thes [sic] Subdivision Association of the Philippines
in 1976, I am also an officer of the . . . Chamber of Real Estate Business
Association; I am also an officer of the Chatholic [sic] Women's League and I
am also a member of the CMLI, I forgot the definition.
Q How about any political affiliation or government position held if any?

A I was also a candidate for Mayo last January 30, 1980.

Q Where?

A In Dagupan City, Pangasinan.


Q What else?

A I also ran as an Assemblywoman last May, 1984, Independent party in


Regional I, Pangasinan.

Q What happened to your businesses you mentioned as a result of your failure


to recover you [sic] investments and bank deposits from the defendants?

A They are not all operating, in short, I was hampered to push through the
businesses that I have.

A [sic] Of all the businesses and enterprises that you mentioned what are those that
are paralyzed and what remain inactive?

A Of all the company [sic] that I have, only the Disto Company that is now
operating in California.
Q How about your candidacy as Mayor of Dagupan, [sic] City, and later as
Assemblywoman of Region I, what happened to this?
A I won by voting but when election comes on [sic] the counting I lost and I
protested this, it is still pending and because I don't have financial resources I
was not able to push through the case. I just have it pending in the Comelec.

Q Now, do these things also affect your social and civic activities?

A Yes sir, definitely. CacISA

Q How?

A I was embarrassed because being a businesswoman I would like to inform


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the Honorable Court that I was awarded as the most outstanding
businesswoman of the year in 1976 but when this money was not given back
to me I was not able to comply with the commitments that I have promised to
these associations that I am engaged into [sic], sir.

For the mental anguish, serious anxiety, besmirched reputation, moral shock and social
humiliation suffered by the respondent, the award of moral damages is but proper.
However, this Court reduces the amount thereof to P300,000.00, for the award of moral
damages is meant to compensate for the actual injury suffered by the respondent, not to
enrich her. 1 4 5
Having failed to exercise more care and prudence than a private individual in its
dealings with respondent, petitioner Citibank should be liable for exemplary damages, in the
amount of P250,000.00, in accordance with Article 2229 1 4 6 and 2234 1 4 7 of the Civil Code.
With the award of exemplary damages, then respondent shall also be entitled to an
award of attorney's fees. 1 4 8 Additionally, attorney's fees may be awarded when a party is
compelled to litigate or to incur expenses to protect his interest by reason of an unjusti ed
act of the other party. 1 4 9 In this case, an award of P200,000.00 attorney's fees shall be
satisfactory.
In contrast, this Court nds no su cient basis to award damages to petitioners.
Respondent was compelled to institute the present case in the exercise of her rights and in
the protection of her interests. In fact, although her Complaint before the RTC was not
sustained in its entirety, it did raise meritorious points and on which this Court rules in her
favor. Any injury resulting from the exercise of one's rights is damnum absque injuria. 1 5 0
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed
Decision of the Court of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already
modi ed by its Resolution, dated 20 November 2002, is hereby AFFIRMED WITH
MODIFICATION, as follows —
1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding.
Petitioner Citibank is ORDERED to return to respondent the principal amounts of the said
PNs, amounting to Three Hundred Eighteen Thousand Eight Hundred Ninety-Seven Pesos
and Thirty-Four Centavos (P318,897.34) and Two Hundred Three Thousand One Hundred
Fifty Pesos (P203,150.00), respectively, plus the stipulated interest of Fourteen and a half
percent (14.5%) per annum, beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US
Dollars and Ninety-Nine Cents (US$149,632.99) from respondent's Citibank-Geneva
accounts to petitioner Citibank in Manila, and the application of the same against
respondent's outstanding loans with the latter, is DECLARED illegal, null and void. Petitioner
Citibank is ORDERED to refund to respondent the said amount, or its equivalent in Philippine
currency using the exchange rate at the time of payment, plus the stipulated interest for each
of the fiduciary placements and current accounts involved, beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral damages in the
amount of Three Hundred Thousand Pesos (P300,000.00); exemplary damages in the
amount of Two Hundred Fifty Thousand Pesos (P250,000.00); and attorney's fees in the
amount of Two Hundred Thousand Pesos (P200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the balance of her
outstanding loans, which, from the respective dates of their maturity to 5 September 1979,
was computed to be in the sum of One Million Sixty-Nine Thousand Eight Hundred Forty-
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Seven Pesos and Forty Centavos (P1,069,847.40), inclusive of interest. These outstanding
loans shall continue to earn interest, at the rates stipulated in the corresponding PNs, from 5
September 1979 until payment thereof. DTIaHE

SO ORDERED.
Panganiban, C.J., Ynares-Santiago, Austria-Martinez and Callejo, Sr., JJ., concur.

Footnotes

1. Rollo, pp. 165-325.


2. Penned by Associate Justice Andres B. Reyes, Jr. with Associate Justices Conrado M.
Vasquez, Jr. and Amelita G. Tolentino, concurring; id. at 327-366.

3. Id. at 368-374.
4. TSN, Deposition of Mr. Francisco Tan, 3 September 1990, pp. 9-10.
5. Records, Vol. I, pp. 1-8.

6. Id. at 148-157.
7. Id. at 40-51.
8. Id. at 208-227.
9. Order, dated 11 December 1985, penned by Judge Ansberto P. Paredes, Records, Vol. I, p.
346.
10. Penned by Judge Manuel D. Victorio, Records, Vol. III, pp. 1607-1621.

11. Civil Case No. 11336 was raffled and re-reffled to four different Judges of the Makati RTC
before it was finally resolved. It was originally raffled to Makati RTC, Branch 140, presided
by Judge Ansberto P. Paredes. On 4 February 1987, before the termination of the re-direct
examination of herein respondent (plaintiff before the RTC), the case was transferred to
Makati RTC, Branch 57, presided by Judge Francisco X. Velez, for reasons not disclosed in
the Records. Judge Velez was able to try and hear the case until the presentation of the
evidence by herein petitioners (defendants before the RTC). Respondent again took the
stand to present rebuttal evidence, but even before she could finish her testimony, Judge
Velez inhibited himself upon petitioners' motion (Order, dated 10 April 1992, penned by
Judge Francisco X. Velez, Records, Vol. 11, p. 1085). The case was transferred to Makati
RTC, Branch 141, presided by Judge Marcelino F. Bautista, Jr. For reasons not disclosed in
the Records, Judge Manuel D. Victorio took over Makati RTC, Branch 141. After the parties
submitted their respective Memoranda, Judge Victorio declared the case submitted for
decision (Order, dated 9 December 1994, penned by Judge Manuel D. Victorio, Records, Vol.
III, p. 1602). Judge Victorio rendered his Decision in Civil Case No. 11336 on 24 August
1995 (Records, Vol. III, pp. 1607-1621).

12. Rollo, pp. 365-366.


13. Rollo of G.R. No. 152985, pp. 3-4.
14. The filing of a motion for extension does not automatically suspend the running of the
period for appeal, since the purpose of such motion is to merely ask the court to grant an
enlargement of the time fixed by law. The movant, therefore, has no right to assume that
his motion would be granted, and should check with the court as to the outcome of his
motion, so that if the same is denied, he can still perfect his appeal. (Hon. Bello and Ferrer
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v. Fernando, 114 Phil. 101, 104 [1962].)
15. Rollo of G.R. No. 156132, p. 1227.
16. Rollo, p. 374.
17. Resolution, dated 29 January 2003; rollo, pp. 980-A-B.

18. Resolution, dated 23 June 2003; id. at 1311-1312.


19. Firestone Tire and Rubber Company of the Philippines v. Tempongko, 137 Phil. 239, 244
(1969); Singh v. Liberty Insurance Corp., 118 Phil. 532, 535 (1963).

20. Rollo, pp. 1443-1445.


21. See the case of Borromeo v. Court of Appeals (162 Phil. 430, 438 [1976]) wherein this
Court pronounced that a party's right to appeal shall not be affected by the perfection of
another appeal from the same decision; otherwise, it would lead to the absurd proposition
that one party may be deprived of the right to appeal from the portion of a decision against
him just because the other party who had been notified of the decision ahead had already
perfected his appeal in so far as the said decision adversely affects him. If the perfection
of an appeal by one party would not bar the right of the other party to appeal from the
same decision, then an unperfected appeal, as in the case at bar, would have far less
effect.

22. The Executive Secretary v. Gordon, 359 Phil. 266, 271 (1998).
23. Young v. John Keng Seng, 446 Phil. 823, 833 (2003).
24. Sps. Sta. Maria v. Court of Appeals, 349 Phil. 275, 282-283 (1998).
25. The Court of Appeals modified the trial court's findings and conclusions, as follows: (1)
By declaring the P1,069,847.40 alleged indebtedness of Ms. Sabeniano as non-existing for
failure of Citibank to substantiate its allegations; (2) By declaring that there are unpaid
money market placements, current accounts and savings account of Ms. Sabeniano; and
(3) The awarding of damages in favor of Ms. Sabeniano and against Citibank.
26. Supra note 11.
27. Records, Vol. III, pp. 1612-1613.

28. Penned by Associate Justice Andres B. Reyes with Associate Justices Conrado M.
Vasquez, Jr. and Amelita G. Tolentino, concurring; rollo, p. 344.

29. Section 3(m) of Rule 131 of the REVISED RULES OF COURT reads —

SEC. 3. Disputable presumptions. — The following presumptions are satisfactory if


uncontradicted, but may be contradicted and overcome by other evidence:

xxx xxx xxx


(m) That official duty has been regularly performed.

30. 317 Phil. 495, 501-503 (1995).

31. Records, Vol. I, p. 515.

32. 32 Phil. 476, 478-479.


33. Behn, Meyer & Co. v. Rosatzin, 5 Phil. 660, 662 (1906).
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34. Jimenez v. National Labor Relations Commission, 326 Phil. 89, 95 (1996).
35. Mr. Herminio Pujeda, at the time he testified before the RTC in 1990, was already the Vice
President of petitioner Citibank.

36. Mr. Francisco Tan, at the time of his deposition in 1990, was already working as Assistant
General Manager for Dai-Chi Kangyo Bank in Hong Kong.
37. TSN, 12 March 1990, pp. 6-10.

38. Lichauco v. Atlantic Gulf & Pacific Co., 84 Phil. 330, 346 (1949).
39. TSN, 6 February 1990, Vol. V, pp. 16-24.

40. Exhibit "37," defendants' folder of exhibits, p. 106.


41. Exhibit "37-C," id. at 107.

42. Exhibit "37-F," id. at 108.

43. TSN, 12 March 1990, p. 13.

44. Exhibit "104-C," defendants' folder of exhibits, p. 111.

45. Exhibit "105," id. at 112.


46. Exhibit "106," id. at 114.

47. Exhibit "108," id. at 118.

48. Exhibits "112" and "119," id. at 121-A, 124.

49. Records, Vol. III, p. 1367.

50. Exhibit "34-B," petitioners' folder of exhibits, p. 102.


51. Exhibit "G," plaintiff's folder of exhibits, pp. 4-15.

52. Records, Vol. III, p. 1,562.

53. Exhibit "J," plaintiff's folder of exhibits, p. 49.

54. Exhibit "120-H," defendants' folder of exhibits, pp. 131.


55. Exhibits "1" to "9," id. at 44-52.

56. Exhibits "18" to "26," id. at 83-92.

57. Exhibit "13-E," id. at 65-67.

58. Exhibit "14-G," id. at 72-74.

59. Exhibit "15" and "Exhibit 17-D," id. at 77-78, 81-82.


60. Exhibit "38," id. at 109-110.

61. Exhibit "K-1," plaintiff's folder of exhibits, pp. 54-55.

62. Exhibit "27," defendants' folder of exhibits, p. 93.

63. Exhibit "28," id. at 94.

64. Exhibit "29," id. at 95.

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65. Exhibit "30," id. at 96.

66. Exhibit "31," id. at 97.

67. Exhibit "32," id. at 98.

68. Exhibits "34-B" and "34-C," id. at 102-103.


69. Exhibit "34," id. at 100.

70. Exhibit "121," id. at 207.

71. TSN, 14 May 1991, Vol. XI, pp. 12-14.

72. TSN, 28 November 1991, Vol. XIII, pp. 5, 15, 23, 28-29.

73. Exhibit "QQQ," plaintiff's folder of exhibits, p. 117.


74. Exhibit "AAAA," id. at 124.

75. TSN, 28 November 1991, Vol. XIII, pp. 7-8, 23.

76. Id. at 16-23.


77. TSN, 7 May 1986, Vol. II, pp. 42-52; TSN, 19 May 1986, Vol. II, pp. 3-28.
78. Sarmiento v. Court of Appeals, 364 Phil. 613, 621 (1999).
79. Bank of the Philippine Islands v. Court of Appeals, 383 Phil. 538, 553 (2000), with
reference to Tan v. Court of Appeals, 239 Phil. 310, 322 (1994).

80. Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 695.
81. 403 Phil. 361, 383 (2001).

82. Moran v. Court of Appeals, G.R. No. 105836, 7 March 1994, 230 SCRA 799, 311-312.
83. REVISED RULES OF COURT, Rule 131, Section 3(p).

84. Id., Rule 131, Section 3(q).


85. Id., Section 3.
86. Exhibit "19," defendants' folder of exhibits, p. 84.

87. Exhibits "9-D" and "9-G," id. at 52.


88. Exhibit "9-F," id. at 52.

89. TSN, 19 May 1986, Vol. II, p. 10.

90. Associated Bank v. Court of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA 465, 469-
471.

91. Banco de Oro Savings and Mortgage Bank v Equitable Banking Corporation, G.R. No.
74917, 20 January 1988, 157 SCRA 188, 199.

92. NEGOTIABLE INSTRUMENTS LAW, Section 66, in connection with Section 65.
93. Associated Bank v. Court of Appeals, 322 Phil. 677, 697 (1996); Associated Bank v. Court
of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA 465, 472.
94. Plaintiff's Formal Offer of Documentary Exhibits, records, Vol. I, pp. 504-505; plaintiff's
folder of exhibits, p. 110.
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95. Exhibits "GGG" and "JJJ," plaintiff's folder of exhibits, pp. 109, 113.
96. Plaintiff's folder of exhibits, p. 110.

97. See the initials on Exhibit "III-1," plaintiff's folder of exhibits, p. 112.

98. Plaintiff's folder of exhibits, p. 112.

99. TSN, deposition of Mr. Francisco Tan, 3 September 1990, p. 118.

100. G.R. No. 49188, 30 January 1990, 181 SCRA 557, 568.
101. Exhibit "MMM," plaintiff's folder of exhibits, p. 115.

102. Records, Vol. I, p. 507.

103. TSN, 28 November 1991, Vol. XIII, pp. 7-8.

104. TSN, deposition of Mr. Francisco Tan, 3 September 1990, p. 96.

105. TSN, deposition of Mr. Francisco A. Tan, 3 September 1990, pp. 13-16.
106. TSN, 22 May 1990, Vol. V, pp. 31-61.

107. TSN, 7 March 1991, Vol. IX, pp. 15-19; TSN, 13 March 1991, Vol X, pp. 7-9.

108. TSN, 19 March 1991, Vol. X, pp. 17-21; TSN, 8 April 1991, Vol. X, pp. 31-34.

109. TSN, 18 April 1991, Vol. X, pp. 3-13.


110. Id. at 15-23.
111. Folder of defendants' exhibits, pp. 102-103.

112. Municipality of Moncada v. Cajuigan, 21 Phil 184, 190 (1912).


113. J.A.R. Sibal and J.N. Salazar, Jr., COMPENDIUM ON EVIDENCE 31 (4th ed., 1995).

114. F.D. Regalado, REMEDIAL LAW COMPENDIUM, Vol. II, p. 571 (8th ed., 2000).
115. F.D. Regalado, REMEDIAL LAW COMPENDIUM, Vol. II, 571 (8th ed., 2000).

116. G.R. Nos. 146710-15, 3 April 2001, 356 SCRA 108, 137-138.

117. TSN, 13 March 1991, Vol X, pp. 7-9.

118. TSN, 22 May 1990, Vol. V, pp. 14-17.


119. Dr. Ricardo L. Dy and Rosalind O. Dy vs. Citibank, N.A., CA-G.R. CV No. 15934, 15
January 1990, penned by Associate Justice Nicolas P. Lapeña, Jr. with Associate Justices
Santiago M. Kapunan and Emeterio C. Cui, concurring.
120. REVISED RULES OF COURT, Rule 130, Section 34.

121. J.A.R. Sibal and J.N. Salazar, Jr., COMPENDIUM ON EVIDENCE 199-200 (4th ed., 1995).

122. CIVIL CODE, Article 1980; Guingona, Jr. v. City Fiscal of Manila, 213 Phil. 516,523-524
(1984).

123. CIVIL CODE, Article 1286.

124. G.R. No. 57092, 21 January 1993, 217 SCRA 307, 313-314.
125. Anachuelo v. Intermediate Appellate Court, G.R. No. L-71391, 29 January 1987, 147
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SCRA 434, 441-442.

126. Antillon v. Barcelon, 37 Phil. 148, 150-151 (1917).


127. See Exhibits "13-E, "14-G," "15-D," and "17-D," defendants' folder of exhibits, pp. 65-67, 72-
74, 77-78, 81-82.
128. TSN, 7 March 1991, Vol. IX, pp. 3-6.

129. Cuizon v. Court of Appeals, 329 Phil. 456, 482 (1996).


130. Exhibits "13-E, "14-G," "15-D," and "17-D," defendants' folder of exhibits, pp. 65-66, 72-73,
77-78, 81-82.

131. Wildvalley Shipping Co., Ltd. v. Court of Appeals, 396 Phil. 383, 396 (2000).
132. Exhibit "38," defendants' folder of exhibits, pp. 109-110.
133. Exhibit "K-1," plaintiff's folder of exhibits, 54-55.

134. REVISED RULES OF COURT, Rule 131, Section 3(u).

135. Heirs of Severa P. Gregorio v. Court of Appeals, 360 Phil. 753, 763 (1998).
136. Order, dated 12 November 1985, penned by Judge Ansberto P. Paredes, records, Vol. I, p.
310; Order, dated 2 September 1988, id. at penned by Judge Francisco X. Velez, records,
Vol. I, p. 449; Order, dated 24 November 1988, penned by Judge Francisco X. Velez, records,
Vol. I, p. 458; Order, dated 25 April 1989, penned by Judge Francisco X. Velez, records, Vol. I,
pp. 476-477

137. Security Bank & Trust Co. v. Triumph Lumber and Construction Corporation, 361 Phil.
463, 477 (1999).

138. REVISED RULES OF COURT, Rule 131, Section 3(e).


139. The stipulated interest shall apply as indemnity for the damages incurred in the delay of
payment as provided in Article 2209 of the CIVIL CODE which reads —
ART. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs delay, the indemnity for damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon , and in the absence of a stipulation, the legal
interest, which is six percent per annum. [Emphasis supplied.]

Note, however, that the legal interest has been increased from six percent to twelve
percent per annum by virtue of Central Bank Circulars No. 416, dated 29 July 1974, and No.
905, dated 10 December 1982.

140. Radio Communications of the Philippines, Inc. v. National Labor Relations Commission,
G.R. Nos. 101181-84, 22 June 1992, 210 SCRA 222, 226-227; Ortigas, Jr. v. Lufthansa
German Airlines, G.R. No. L-28773, 30 June 1975, 64 SCRA 610, 633-634; Hernandez v.
Andal, 78 Phil. 196, 209-210 (1947).
141. THE GENERAL BANKING LAW OF 2000, Section 2.

142. Philippine National Bank v. Court of Appeals, 373 Phil. 942, 948 (1999).
143. Simex International (Manila), Inc. vs. Court of Appeals, G.R. No. 88013, 19 March 1990,
183 SCRA 360, 367; Bank of Philippine Islands vs. Intermediate Appellate Court, G.R. No.
69162, 21 February 1992, 206 SCRA 408, 412-413.

144. TSN, 28 January 1986, Vol. I, pp. 5-7.


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145. Tiongco v. Atty. Deguma, 375 Phil. 978, 994-995 (1999); Zenith Insurance Corporation v.
Court of Appeals, G.R. No. 85296, 14 May 1990, 185 SCRA 398, 402-403.
146. Exemplary or corrective damages are imposed, by way of example or correction for the
public good, in addition to the moral, temperate, liquidated or compensatory damages.

147. While the amount of exemplary damages need not be proved, the plaintiff must show
that he is entitled to moral, temperate or compensatory damages before the court may
consider the question of whether or not exemplary damages should be awarded. . . .

148. CIVIL CODE, Article 2208(1).

149. Ching Sen Ben vs. Court of Appeals, 373 Phil. 544, 555 (1999).
150. ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 498, 531-532 (1999);
Tierra International Construction Corp. v. National Labor Relations Commission, G.R. No.
88912, 3 July 1992, 211 SCRA 73, 81; Saba v. Court of Appeals, G.R. No. 77950, 24 August
1990, 189 SCRA 50, 55.

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THIRD DIVISION

[G.R. No. 156132. February 6, 2007.]

CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS'


FINANCE CORPORATION, doing business under the name and style
of FNCB Finance , petitioners, vs . MODESTA R. SABENIANO ,
respondent.

RESOLUTION

CHICO-NAZARIO , J : p

On 16 October 2006, this Court promulgated its Decision 1 in the above-entitled


case, the dispositive portion of which reads —
IN VIEW OF THE FOREGOING , the instant Petition is PARTLY
GRANTED . The assailed Decision of the Court of Appeals in CA-G.R. No. 51930,
dated 26 March 2002, as already modi ed by its Resolution, dated 20 November
2002, is hereby AFFIRMED WITH MODIFICATION , as follows —
1. PNs No. 23356 and 23357 are DECLARED subsisting and
outstanding. Petitioner Citibank is ORDERED to return to respondent the principal
amounts of the said PNs, amounting to Three Hundred Eighteen Thousand Eight
Hundred Ninety-Seven Pesos and Thirty-Four Centavos (P318,897.34) and Two
Hundred Three Thousand One Hundred Fifty Pesos (P203,150.00), respectively,
plus the stipulated interest of Fourteen and a half percent (14.5%) per annum,
beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six Hundred
Thirty Two US Dollars and Ninety-Nine Cents (US$149,632.99) from respondent's
Citibank-Geneva accounts to petitioner Citibank in Manila, and the application of
the same against respondent's outstanding loans with the latter, is DECLARED
illegal, null and void. Petitioner Citibank is ORDERED to refund to respondent the
said amount, or its equivalent in Philippine currency using the exchange rate at
the time of payment, plus the stipulated interest for each of the duciary
placements and current accounts involved, beginning 26 October 1979;

3. Petitioner Citibank is ORDERED to pay respondent moral damages


in the amount of Three Hundred Thousand Pesos (P300,000.00); exemplary
damages in the amount of Two Hundred Fifty Thousand Pesos (P250,000.00);
and attorney's fees in the amount of Two Hundred Thousand Pesos
(P200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the balance of
her outstanding loans, which, from the respective dates of their maturity to 5
September 1979, was computed to be in the sum of One Million Sixty-Nine
Thousand Eight Hundred Forty-Seven Pesos and Forty Centavos (P1,069,847.40),
inclusive of interest. These outstanding loans shall continue to earn interest, at
the rates stipulated in the corresponding PNs, from 5 September 1979 until
payment thereof.
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Subsequent thereto, respondent Modesta R. Sabeniano led an Urgent Motion to
Clarify and/or Con rm Decision with Notice of Judgment on 20 October 2006; while,
petitioners Citibank, N.A. and FNCB Finance 2 led their Motion for Partial Reconsideration
of the foregoing Decision on 6 November 2006.
The facts of the case, as determined by this Court in its Decision, may be
summarized as follows.
Respondent was a client of petitioners. She had several deposits and market
placements with petitioners, among which were her savings account with the local branch
of petitioner Citibank (Citibank-Manila); 3 money market placements with petitioner FNCB
Finance; and dollar accounts with the Geneva branch of petitioner Citibank (Citibank-
Geneva). At the same time, respondent had outstanding loans with petitioner Citibank,
incurred at Citibank-Manila, the principal amounts aggregating to P1,920,000.00, all of
which had become due and demandable by May 1979. Despite repeated demands by
petitioner Citibank, respondent failed to pay her outstanding loans. Thus, petitioner
Citibank used respondent's deposits and money market placements to off-set and
liquidate her outstanding obligations, as follows —

Respondent's outstanding obligation (principal and interest as of


26 October 1979) P2,156,940.58
Less:Proceeds from respondent's money market placements
with petitioner FNCB Finance (principal and
interest as of 5 September 1979) (1,022,916.66)
Deposits in respondent's bank accounts with petitioner
Citibank (31,079.14)
Proceeds of respondent's money market placements and
dollar accounts with Citibank-Geneva (peso
equivalent as of 26 October 1979) (1,102,944.78)
——————
Balance of respondent's obligation P0.00
===========

Respondent, however, denied having any outstanding loans with petitioner Citibank.
She likewise denied that she was duly informed of the off-setting or compensation thereof
made by petitioner Citibank using her deposits and money market placements with
petitioners. Hence, respondent sought to recover her deposits and money market
placements. cADEHI

Respondent instituted a complaint for "Accounting, Sum of Money and Damages"


against petitioners, docketed as Civil Case No. 11336, before the Regional Trial Court
(RTC) of Makati City. After trial proper, which lasted for a decade, the RTC rendered a
Decision 4 on 24 August 1995, the dispositive portion of which reads —
WHEREFORE, in view of all the foregoing, decision is hereby rendered as
follows:

(1) Declaring as illegal, null and void the setoff effected by the
defendant Bank [petitioner Citibank] of plaintiff's [respondent Sabeniano] dollar
deposit with Citibank, Switzerland, in the amount of US$149,632.99, and ordering
the said defendant [petitioner Citibank] to refund the said amount to the plaintiff
with legal interest at the rate of twelve percent (12%) per annum, compounded
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yearly, from 31 October 1979 until fully paid, or its peso equivalent at the time of
payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the
defendant Bank [petitioner Citibank] in the amount of P1,069,847.40 as of 5
September 1979 and ordering the plaintiff [respondent Sabeniano] to pay said
amount, however, there shall be no interest and penalty charges from the time the
illegal setoff was effected on 31 October 1979;

(3) Dismissing all other claims and counterclaims interposed by the


parties against each other.

Costs against the defendant Bank.

All the parties appealed the afore-mentioned RTC Decision to the Court of Appeals,
docketed as CA-G.R. CV No. 51930. On 26 March 2002, the appellate court promulgated
its Decision, 5 ruling entirely in favor of respondent, to wit —
Wherefore, premises considered, the assailed 24 August 1995 Decision of
the court a quo is hereby AFFIRMED with MODIFICATION , as follows:

1. Declaring as illegal, null and void the set-off effected by the


defendant-appellant Bank of the plaintiff-appellant's dollar deposit with Citibank,
Switzerland, in the amount of US$149,632.99, and ordering defendant-appellant
Citibank to refund the said amount to the plaintiff-appellant with legal interest at
the rate of twelve percent (12%) per annum, compounded yearly, from 31 October
1979 until fully paid, or its peso equivalent at the time of payment;

2. As defendant-appellant Citibank failed to establish by competent


evidence the alleged indebtedness of plaintiff-appellant, the set-off of
P1,069,847.40 in the account of Ms. Sabeniano is hereby declared as without
legal and factual basis;

3. As defendants-appellants failed to account the following plaintiff-


appellant's money market placements, savings account and current accounts, the
former is hereby ordered to return the same, in accordance with the terms and
conditions agreed upon by the contending parties as evidenced by the certi cates
of investments, to wit:

(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes


NNPN No. 22526) issued on 17 March 1977, P318,897.34 with 14.50%
interest p.a.;
(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes
NNPN No. 22528) issued on 17 March 1977, P203,150.00 with 14.50
interest p.a.;
(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes
NNPN No. 04952), issued on 02 June 1977, P500,000.00 with 17% interest
p.a.;

(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes


NNPN No. 04962), issued on 02 June 1977, P500,000.00 with 17% interest
per annum;
(v) The Two Million (P2,000,000.00) money market placements
of Ms. Sabeniano with the Ayala Investment & Development Corporation
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(AIDC) with legal interest at the rate of twelve percent (12%) per annum
compounded yearly, from 30 September 1976 until fully paid;

4. Ordering defendants-appellants to jointly and severally pay the


plaintiff-appellant the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00)
by way of moral damages, FIVE HUNDRED THOUSAND PESOS (P500,000.00) as
exemplary damages, and ONE HUNDRED THOUSAND PESOS (P100,000.00) as
attorney's fees.

Acting on petitioners' Motion for Partial Reconsideration, the Court of Appeals


issued a Resolution, 6 dated 20 November 2002, modifying its earlier Decision, thus —
WHEREFORE , premises considered, the instant Motion for
Reconsideration is PARTIALLY GRANTED as Sub-paragraph (V) paragraph 3 of
the assailed Decision's dispositive portion is hereby ordered DELETED .
The challenged 26 March 2002 Decision of the Court is AFFIRMED with
MODIFICATION .

Since the Court of Appeals Decision, dated 26 March 2002, as modi ed by the
Resolution of the same court, dated 20 November 2002, was still principally in favor of
respondent, petitioners led the instant Petition for Review on Certiorari under Rule 45 of
the Revised Rules of Court. After giving due course to the instant Petition, this Court
promulgated on 16 October 2006 its Decision, now subject of petitioners' Motion for
Partial Reconsideration.
Among the numerous grounds raised by petitioners in their Motion for Partial
Reconsideration, this Court shall address and discuss herein only particular points that had
not been considered or discussed in its Decision. Even in consideration of these points
though, this Court remains unconvinced that it should modify or reverse in any way its
disposition of the case in its earlier Decision.
As to the off-setting or compensation
of respondent's outstanding loan
balance with her dollar deposits in
Citibank-Geneva
Petitioners' take exception to the following ndings made by this Court in its
Decision, dated 16 October 2006, disallowing the off-setting or compensation of the
balance of respondent's outstanding loans using her dollar deposits in Citibank-Geneva —

Without the Declaration of Pledge, petitioner Citibank had no authority to


demand the remittance of respondent's dollar accounts with Citibank-Geneva and
to apply them to her outstanding loans. It cannot effect legal compensation under
Article 1278 of the Civil Code since, petitioner Citibank itself admitted that
Citibank-Geneva is a distinct and separate entity. As for the dollar accounts,
respondent was the creditor and Citibank-Geneva is the debtor; and as for the
outstanding loans, petitioner Citibank was the creditor and respondent was the
debtor. The parties in these transactions were evidently not the principal creditor
of each other. DcHaET

Petitioners maintain that respondent's Declaration of Pledge, by virtue of which she


supposedly assigned her dollar accounts with Citibank-Geneva as security for her loans
with petitioner Citibank, is authentic and, thus, valid and binding upon respondent.
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Alternatively, petitioners aver that even without said Declaration of Pledge, the off-setting
or compensation made by petitioner Citibank using respondent's dollar accounts with
Citibank-Geneva to liquidate the balance of her outstanding loans with Citibank-Manila was
expressly authorized by respondent herself in the promissory notes (PNs) she signed for
her loans, as well as sanctioned by Articles 1278 to 1290 of the Civil Code. This alternative
argument is anchored on the premise that all branches of petitioner Citibank in the
Philippines and abroad are part of a single worldwide corporate entity and share the same
juridical personality. In connection therewith, petitioners deny that they ever admitted that
Citibank-Manila and Citibank-Geneva are distinct and separate entities.
Petitioners call the attention of this Court to the following provision found in all of
the PNs 7 executed by respondent for her loans —
At or after the maturity of this note, or when same becomes due under any
of the provisions hereof, any money, stocks, bonds, or other property of any kind
whatsoever, on deposit or otherwise, to the credit of the undersigned on the books
of CITIBANK, N.A. in transit or in their possession, may without notice be applied
at the discretion of the said bank to the full or partial payment of this note.

It is the petitioners' contention that the term "Citibank, N.A." used therein should be
deemed to refer to all branches of petitioner Citibank in the Philippines and abroad;
thus, giving petitioner Citibank the authority to apply as payment for the PNs even
respondent's dollar accounts with Citibank-Geneva. Still proceeding from the premise
that all branches of petitioner Citibank should be considered as a single entity, then it
should not matter that the respondent obtained the loans from Citibank-Manila and her
deposits were with Citibank-Geneva. Respondent should be considered the debtor (for
the loans) and creditor (for her deposits) of the same entity, petitioner Citibank. Since
petitioner Citibank and respondent were principal creditors of each other, in
compliance with the requirements under Article 1279 of the Civil Code, 8 then the
former could have very well used off-setting or compensation to extinguish the parties'
obligations to one another. And even without the PNs, off-setting or compensation was
still authorized because according to Article 1286 of the Civil Code, "Compensation
takes place by operation of law, even though the debts may be payable at different
places, but there shall be an indemnity for expenses of exchange or transportation to
the place of payment."
Pertinent provisions of Republic Act No. 8791, otherwise known as the General
Banking Law of 2000, governing bank branches are reproduced below —
SEC. 20. Bank Branches. — Universal or commercial banks may open
branches or other o ces within or outside the Philippines upon prior approval of
the Bangko Sentral.
Branching by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all
of its branches as outlets for the presentation and/or sale of the nancial
products of its allied undertaking or its investment house units.

A bank authorized to establish branches or other o ces shall be


responsible for all business conducted in such branches and o ces to the same
extent and in the same manner as though such business had all been conducted
in the head o ce. A bank and its branches and o ces shall be treated as one
unit.
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xxx xxx xxx

SEC. 72. Transacting Business in the Philippines . — The entry of


foreign banks in the Philippines through the establishment of branches shall be
governed by the provisions of the Foreign Banks Liberalization Act.

The conduct of offshore banking business in the Philippines shall be


governed by the provisions of Presidential Decree No. 1034, otherwise known as
the "Offshore Banking System Decree."
xxx xxx xxx

SEC. 74. Local Branches of Foreign Banks. — In case of a foreign bank


which has more than one (1) branch in the Philippines, all such branches shall be
treated as one (1) unit for the purpose of this Act, and all references to the
Philippine branches of foreign banks shall be held to refer to such units.

SEC. 75. Head O ce Guarantee . — In order to provide effective


protection of the interests of the depositors and other creditors of Philippine
branches of a foreign bank, the head o ce of such branches shall fully
guarantee the prompt payment of all liabilities of its Philippine branch.
DSETcC

Residents and citizens of the Philippines who are creditors of a branch in


the Philippines of a foreign bank shall have preferential rights to the assets of
such branch in accordance with existing laws.

Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law,
lays down the policies and regulations speci cally concerning the establishment and
operation of local branches of foreign banks. Relevant provisions of the said statute read

Sec. 2. Modes of Entry. — The Monetary Board may authorize foreign
banks to operate in the Philippine banking system through any of the following
modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%)
of the voting stock of an existing bank; (ii) by investing in up to sixty percent
(60%) of the voting stock of a new banking subsidiary incorporated under the
laws of the Philippines; or (iii) by establishing branches with full banking
authority: Provided, That a foreign bank may avail itself of only one (1) mode of
entry: Provided, further, That a foreign bank or a Philippine corporation may own
up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or
new banking subsidiary.
Sec. 5. Head O ce Guarantee . — The head o ce of foreign bank
branches shall guarantee prompt payment of all liabilities of its Philippine
branches.

It is true that the afore-quoted Section 20 of the General Banking Law of 2000
expressly states that the bank and its branches shall be treated as one unit. It should be
pointed out, however, that the said provision applies to a universal 9 or commercial bank, 1 0
duly established and organized as a Philippine corporation in accordance with Section 8 of
the same statute, 1 1 and authorized to establish branches within or outside the Philippines.
The General Banking Law of 2000, however, does not make the same categorical
statement as regards to foreign banks and their branches in the Philippines. What Section
74 of the said law provides is that in case of a foreign bank with several branches in the
country, all such branches shall be treated as one unit . As to the relations between
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the local branches of a foreign bank and its head o ce, Section 75 of the General Banking
Law of 2000 and Section 5 of the Foreign Banks Liberalization Law provide for a "Home
O ce Guarantee," in which the head o ce of the foreign bank shall guarantee prompt
payment of all liabilities of its Philippine branches. While the Home O ce Guarantee is in
accord with the principle that these local branches, together with its head office, constitute
but one legal entity, it does not necessarily support the view that said principle is true and
applicable in all circumstances.
The Home O ce Guarantee is included in Philippine statutes clearly for the
protection of the interests of the depositors and other creditors of the local branches of a
foreign bank. 1 2 Since the head o ce of the bank is located in another country or state,
such a guarantee is necessary so as to bring the head o ce within Philippine jurisdiction,
and to hold the same answerable for the liabilities of its Philippine branches. Hence, the
principle of the singular identity of that the local branches and the head o ce of a foreign
bank are more often invoked by the clients in order to establish the accountability of the
head o ce for the liabilities of its local branches. It is under such attendant circumstances
in which the American authorities and jurisprudence presented by petitioners in their
Motion for Partial Reconsideration were rendered.
Now the question that remains to be answered is whether the foreign bank can use
the principle for a reverse purpose, in order to extend the liability of a client to the foreign
bank's Philippine branch to its head o ce, as well as to its branches in other countries.
Thus, if a client obtains a loan from the foreign bank's Philippine branch, does it absolutely
and automatically make the client a debtor, not just of the Philippine branch, but also of the
head o ce and all other branches of the foreign bank around the world? This Court rules in
the negative. EIcSTD

There being a dearth of Philippine authorities and jurisprudence on the matter, this
Court, just as what petitioners have done, turns to American authorities and jurisprudence.
American authorities and jurisprudence are signi cant herein considering that the head
office of petitioner Citibank is located in New York, United States of America (U.S.A.).

Unlike Philippine statutes, the American legislation explicitly de nes the relations
among foreign branches of an American bank. Section 25 of the United States Federal
Reserve Act 1 3 states that —
Every national banking association operating foreign branches shall
conduct the accounts of each foreign branch independently of the accounts of
other foreign branches established by it and of its home o ce, and shall at the
end of each scal period transfer to its general ledger the pro t or loss accrued at
each branch as a separate item.

Contrary to petitioners' assertion that the accounts of Citibank-Manila and Citibank-


Geneva should be deemed as a single account under its head o ce, the foregoing
provision mandates that the accounts of foreign branches of an American bank shall be
conducted independently of each other. Since the head o ce of petitioner Citibank is in
the U.S.A., then it is bound to treat its foreign branches in accordance with the said
provision. It is only at the end of its scal period that the bank is required to transfer to
its general ledger the pro t or loss accrued at each branch, but still reporting it as a
separate item. It is by virtue of this provision that the Circuit Court of Appeals of New
York declared in Pan-American Bank and Trust Co. v. National City Bank of New York 1 4
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that a branch is not merely a teller's window; it is a separate business entity.
The circumstances in the case of McGrath v. Agency of Chartered Bank of India ,
Australia & China 1 5 are closest to the one at bar. In said case, the Chartered Bank had
branches in several countries, including one in Hamburg, Germany and another in New
York, U.S.A., and yet another in London, United Kingdom. The New York branch entered in
its books credit in favor of four German rms. Said credit represents collections made
from bills of exchange delivered by the four German rms. The same four German rms
subsequently became indebted to the Hamburg branch. The London branch then
requested for the transfer of the credit in the name of the German firms from the New York
branch so as to be applied or setoff against the indebtedness of the same rms to the
Hamburg branch. One of the question brought before the U.S. District Court of New York
was "whether or not the debts and the alleged setoffs thereto are mutual," which could be
answered by determining rst whether the New York and Hamburg branches of Chartered
Bank are individual business entities or are one and the same entity. In denying the right of
the Hamburg branch to setoff, the U.S. District Court ratiocinated that —
The structure of international banking houses such as Chartered bank
de es one rigorous description. Su ce it to say for present analysis, branches
or agencies of an international bank have been held to be independent
entities for a variety of purposes (a) deposits payable only at branch where
made; Mutaugh v. Yokohama Specie Bank, Ltd ., 1933, 149 Misc. 693, 269 N.Y.S.
65; Bluebird Undergarment Corp. v. Gomez , 1931, 139 Misc. 742, 249 N.Y.S. 319;
(b) checks need be honored only when drawn on branch where deposited;
Chrzanowska v. Corn Exchange Bank , 1916, 173 App. Div. 285, 159 N.Y.S. 385,
a rmed 1919, 225 N.Y. 728, 122 N.E. 877; subpoena duces tecum on foreign
bank's record barred; In re Harris, D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a foreign
branch separate for collection of forwarded paper; Pan-American Bank and Trust
Company v. National City Bank of New York , 2 Cir., 1925, 6 F. 2d 762, certiorari
denied 1925, 269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in law there is
nothing innately unitary about the organization of international banking
institutions . IHcTDA

Defendant, upon its oral argument and in its brief, relies heavily on
Sokoloff v. National City Bank of New York , 1928, 250 N.Y. 69, 164 N.E. 745, as
authority for the proposition that Chartered Bank, not the Hamburg or New York
Agency, is ultimately responsible for the amounts owing its German customers
and, conversely, it is to Chartered Bank that the German rms owe their
obligations. The Sokoloff case, aside from its violently different fact situation, is
centered on the legal problem of default of payment and consequent breach of
contract by a branch bank. It does not stand for the principle that in every
instance an international bank with branches is but one legal entity for
all purposes . The defendant concedes in its brief (p. 15) that there are purposes
for which the various agencies and branches of Chartered Bank may be treated in
law as separate entities. I fail to see the applicability of Sokoloff either as a guide
to or authority for the resolution of this problem. The facts before me and the
cases catalogued supra lend weight to the view that we are dealing here with
Agencies independent of one another.
xxx xxx xxx
I hold that for instant purposes the Hamburg Agency and defendant were
independent business entities, and the attempted setoff may not be utilized by
defendant against its debt to the German firms obligated to the Hamburg Agency.
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Going back to the instant Petition, although this Court concedes that all the
Philippine branches of petitioner Citibank should be treated as one unit with its head
o ce, it cannot be persuaded to declare that these Philippine branches are likewise a
single unit with the Geneva branch. It would be stretching the principle way beyond its
intended purpose.
Therefore, this Court maintains its original position in the Decision that the off-
setting or compensation of respondent's loans with Citibank-Manila using her dollar
accounts with Citibank-Geneva cannot be effected. The parties cannot be considered
principal creditor of the other. As for the dollar accounts, respondent was the creditor and
Citibank-Geneva was the debtor; and as for the outstanding loans, petitioner Citibank,
particularly Citibank-Manila, was the creditor and respondent was the debtor. Since legal
compensation was not possible, petitioner Citibank could only use respondent's dollar
accounts with Citibank-Geneva to liquidate her loans if she had expressly authorized it to
do so by contract.
Respondent cannot be deemed to have authorized the use of her dollar deposits
with Citibank-Geneva to liquidate her loans with petitioner Citibank when she signed the
PNs 1 6 for her loans which all contained the provision that —
At or after the maturity of this note, or when same becomes due under any
of the provisions hereof, any money, stocks, bonds, or other property of any kind
whatsoever, on deposit or otherwise, to the credit of the undersigned on the books
of CITIBANK, N.A. in transit or in their possession, may without notice be applied
at the discretion of the said bank to the full or partial payment of this note.

As has been established in the preceding discussion, "Citibank, N.A." can only refer to
the local branches of petitioner Citibank together with its head o ce. Unless there is
any showing that respondent understood and expressly agreed to a more far-reaching
interpretation, the reference to Citibank, N.A. cannot be extended to all other branches
of petitioner Citibank all over the world. Although theoretically, books of the branches
form part of the books of the head o ce, operationally and practically, each branch
maintains its own books which shall only be later integrated and balanced with the
books of the head o ce. Thus, it is very possible to identify and segregate the books
of the Philippine branches of petitioner Citibank from those of Citibank-Geneva, and to
limit the authority granted for application as payment of the PNs to respondent's
deposits in the books of the former.
Moreover, the PNs can be considered a contract of adhesion, the PNs being in
standard printed form prepared by petitioner Citibank. Generally, stipulations in a contract
come about after deliberate drafting by the parties thereto, there are certain contracts
almost all the provisions of which have been drafted only by one party, usually a
corporation. Such contracts are called contracts of adhesion, because the only
participation of the party is the a xing of his signature or his "adhesion" thereto. This
being the case, the terms of such contract are to be construed strictly against the party
which prepared it. 1 7
As for the supposed Declaration of Pledge of respondent's dollar accounts with
Citibank-Geneva as security for the loans, this Court stands rm on its ruling that the non-
production thereof is fatal to petitioners' cause in light of respondent's claim that her
signature on such document was a forgery. It bears to note that the original of the
Declaration of Pledge is with Citibank-Geneva, a branch of petitioner Citibank. As between
respondent and petitioner Citibank, the latter has better access to the document. The
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constant excuse forwarded by petitioner Citibank that Citibank-Geneva refused to return
possession of the original Declaration of Pledge to Citibank-Manila only supports this
Court's nding in the preceding paragraphs that the two branches are actually operating
separately and independently of each other. aAcHCT

Further, petitioners keep playing up the fact that respondent, at the beginning of the
trial, refused to give her specimen signatures to help establish whether her signature on
the Declaration of Pledge was indeed forged. Petitioners seem to forget that
subsequently, respondent, on advice of her new counsel, already offered to cooperate in
whatever manner so as to bring the original Declaration of Pledge before the RTC for
inspection. The exchange of the counsels for the opposing sides during the hearing on 24
July 1991 before the RTC reveals the apparent willingness of respondent's counsel to
undertake whatever course of action necessary for the production of the contested
document, and the evasive, non-committal, and uncooperative attitude of petitioners'
counsel. 1 8

Lastly, this Court's ruling striking down the Declaration of Pledge is not entirely
based on respondent's allegation of forgery. In its Decision, this Court already extensively
discussed why it found the said Declaration of Pledge highly suspicious and irregular, to
wit —
First of all, it escapes this Court why petitioner Citibank took care to have
the Deeds of Assignment of the PNs notarized, yet left the Declaration of Pledge
unnotarized. This Court would think that petitioner Citibank would take greater
cautionary measures with the preparation and execution of the Declaration of
Pledge because it involved respondent's "all present and future duciary
placements" with a Citibank branch in another country, speci cally, in Geneva,
Switzerland. While there is no express legal requirement that the Declaration of
Pledge had to be notarized to be effective, even so, it could not enjoy the same
prima facie presumption of due execution that is extended to notarized
documents, and petitioner Citibank must discharge the burden of proving due
execution and authenticity of the Declaration of Pledge.

Second, petitioner Citibank was unable to establish the date when the
Declaration of Pledge was actually executed. The photocopy of the Declaration of
Pledge submitted by petitioner Citibank before the RTC was undated. It presented
only a photocopy of the pledge because it already forwarded the original copy
thereof to Citibank-Geneva when it requested for the remittance of respondent's
dollar accounts pursuant thereto. Respondent, on the other hand, was able to
secure a copy of the Declaration of Pledge, certi ed by an o cer of Citibank-
Geneva, which bore the date 24 September 1979. Respondent, however, presented
her passport and plane tickets to prove that she was out of the country on the
said date and could not have signed the pledge. Petitioner Citibank insisted that
the pledge was signed before 24 September 1979, but could not provide an
explanation as to how and why the said date was written on the pledge. Although
Mr. Tan testi ed that the Declaration of Pledge was signed by respondent
personally before him, he could not give the exact date when the said signing took
place. It is important to note that the copy of the Declaration of Pledge submitted
by the respondent to the RTC was certi ed by an o cer of Citibank-Geneva,
which had possession of the original copy of the pledge. It is dated 24 September
1979, and this Court shall abide by the presumption that the written document is
truly dated. Since it is undeniable that respondent was out of the country on 24
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September 1979, then she could not have executed the pledge on the said date.
Third, the Declaration of Pledge was irregularly lled-out. The pledge was
in a standard printed form. It was constituted in favor of Citibank, N.A., otherwise
referred to therein as the Bank. It should be noted, however, that in the space
which should have named the pledgor, the name of petitioner Citibank was
typewritten, to wit —
The pledge right herewith constituted shall secure all claims which
the Bank now has or in the future acquires against Citibank, N.A., Manila
(full name and address of the Debtor), regardless of the legal cause or the
transaction (for example current account, securities transactions,
collections, credits, payments, documentary credits and collections) which
gives rise thereto, and including principal, all contractual and penalty
interest, commissions, charges, and costs. CIETDc

The pledge, therefore, made no sense, the pledgor and pledgee being the
same entity. Was a mistake made by whoever lled-out the form? Yes, it could be
a possibility. Nonetheless, considering the value of such a document, the mistake
as to a signi cant detail in the pledge could only be committed with gross
carelessness on the part of petitioner Citibank, and raised serious doubts as to the
authenticity and due execution of the same. The Declaration of Pledge had
passed through the hands of several bank o cers in the country and abroad, yet,
surprisingly and implausibly, no one noticed such a glaring mistake.

Lastly, respondent denied that it was her signature on the Declaration of


Pledge. She claimed that the signature was a forgery. When a document is
assailed on the basis of forgery, the best evidence rule applies —
Basic is the rule of evidence that when the subject of inquiry is the
contents of a document, no evidence is admissible other than the original
document itself except in the instances mentioned in Section 3, Rule 130
of the Revised Rules of Court. Mere photocopies of documents are
inadmissible pursuant to the best evidence rule. This is especially true
when the issue is that of forgery .
As a rule, forgery cannot be presumed and must be proved by clear,
positive and convincing evidence and the burden of proof lies on the party
alleging forgery. The best evidence of a forged signature in an instrument
is the instrument itself re ecting the alleged forged signature. The fact of
forgery can only be established by a comparison between the alleged
forged signature and the authentic and genuine signature of the person
whose signature is theorized upon to have been forged. Without the
original document containing the alleged forged signature, one cannot
make a de nitive comparison which would establish forgery. A
comparison based on a mere xerox copy or reproduction of the document
under controversy cannot produce reliable results.
Respondent made several attempts to have the original copy of the pledge
produced before the RTC so as to have it examined by experts. Yet, despite
several Orders by the RTC, petitioner Citibank failed to comply with the production
of the original Declaration of Pledge. It is admitted that Citibank-Geneva had
possession of the original copy of the pledge. While petitioner Citibank in Manila
and its branch in Geneva may be separate and distinct entities, they are still
incontestably related, and between petitioner Citibank and respondent, the former
had more in uence and resources to convince Citibank-Geneva to return, albeit
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temporarily, the original Declaration of Pledge. Petitioner Citibank did not present
any evidence to convince this Court that it had exerted diligent efforts to secure
the original copy of the pledge, nor did it proffer the reason why Citibank-Geneva
obstinately refused to give it back, when such document would have been very
vital to the case of petitioner Citibank. There is thus no justi cation to allow the
presentation of a mere photocopy of the Declaration of Pledge in lieu of the
original, and the photocopy of the pledge presented by petitioner Citibank has nil
probative value. In addition, even if this Court cannot make a categorical nding
that respondent's signature on the original copy of the pledge was forged, it is
persuaded that petitioner Citibank willfully suppressed the presentation of the
original document, and takes into consideration the presumption that the
evidence willfully suppressed would be adverse to petitioner Citibank if produced.

As far as the Declaration of Pledge is concerned, petitioners failed to submit any


new evidence or argument that was not already considered by this Court when it rendered
its Decision. AIDcTE

As to the value of the dollar deposits


in Citibank-Geneva ordered
refunded to respondent
In case petitioners are still ordered to refund to respondent the amount of her dollar
accounts with Citibank-Geneva, petitioners beseech this Court to adjust the nominal values
of respondent's dollar accounts and/or her overdue peso loans by using the values of the
currencies stipulated at the time the obligations were established in 1979, to address the
alleged inequitable consequences resulting from the extreme and extraordinary
devaluation of the Philippine currency that occurred in the course of the Asian crisis of
1997. Petitioners base their request on Article 1250 of the Civil Code which reads, "In case
an extraordinary in ation or de ation of the currency stipulated should supervene, 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."
It is well-settled that Article 1250 of the Civil Code becomes applicable only when
there is extraordinary in ation or de ation of the currency. In ation has been de ned as
the sharp increase of money or credit or both without a corresponding increase in
business transaction. There is in ation when there is an increase in the volume of money
and credit relative to available goods resulting in a substantial and continuing rise in the
general price level. 1 9 In Singson v. Caltex (Philippines), Inc., 2 0 this Court already provided a
discourse as to what constitutes as extraordinary inflation or deflation of currency, thus —
We have held extraordinary in ation to exist when there is a decrease or
increase in the purchasing power of the Philippine currency which is unusual or
beyond the common uctuation in the value of said currency, and such increase
or decrease could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of the
obligation.

An example of extraordinary in ation, as cited by the Court in Filipino Pipe


and Foundry Corporation vs. NAWASA , supra, is that which happened to the
deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of
hyperin ation. In early 1921, the value of the German mark was 4.2 to the
U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S.
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dollar. And as prices went up rapidly, so that by October 1923, it had
reached 4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas & Victor R.
Abola, Economics, An Introduction [Third Edition]).

As reported, "prices were going up every week, then every day, then
every hour. Women were paid several times a day so that they could rush
out and exchange their money for something of value before what little
purchasing power was left dissolved in their hands. Some workers tried to
beat the constantly rising prices by throwing their money out of the
windows to their waiting wives, who would rush to unload the nearly
worthless paper. A postage stamp cost millions of marks and a loaf of
bread, billions." (Sidney Rutberg, " The Money Balloon", New York: Simon
and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by Villegas
& Abola, 3rd ed.)

The supervening of extraordinary in ation is never assumed. The party


alleging it must lay down the factual basis for the application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the
voluminous records and statistics submitted by plaintiff-appellant proved that
there has been a decline in the purchasing power of the Philippine peso, but this
downward fall cannot be considered "extraordinary" but was simply a universal
trend that has not spared our country. Similarly, in Huibonhoa vs. Court of
Appeals, the Court dismissed plaintiff-appellant's unsubstantiated allegation that
the Aquino assassination in 1983 caused building and construction costs to
double during the period July 1983 to February 1984. In Serra vs. Court of
Appeals, the Court again did not consider the decline in the peso's purchasing
power from 1983 to 1985 to be so great as to result in an extraordinary in ation.
aEHAIS

Like the Serra and Huibonhoa cases, the instant case also raises as basis
for the application of Article 1250 the Philippine economic crisis in the early
1980s — when, based on petitioner's evidence, the in ation rate rose to 50.34% in
1984. We hold that there is no legal or factual basis to support petitioner's
allegation of the existence of extraordinary in ation during this period, or, for that
matter, the entire time frame of 1968 to 1983, to merit the adjustment of the
rentals in the lease contract dated July 16, 1968. Although by petitioner's
evidence there was a decided decline in the purchasing power of the Philippine
peso throughout this period, we are hard put to treat this as an "extraordinary
inflation" within the meaning and intent of Article 1250.
Rather, we adopt with approval the following observations of the Court of
Appeals on petitioner's evidence, especially the NEDA certi cation of in ation
rates based on consumer price index:
. . . (a) from the period 1966 to 1986, the o cial in ation rate never
exceeded 100% in any single year; (b) the highest o cial in ation rate
recorded was in 1984 which reached only 50.34%; (c) over a twenty one
(21) year period, the Philippines experienced a single-digit in ation in ten
(10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and
1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980,
1981, 1982, 1984 and 1989) when the Philippines experienced double-digit
in ation rates, the average of those rates was only 20.88%; (e) while there
was a decline in the purchasing power of the Philippine currency from the
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period 1966 to 1986, such cannot be considered as extraordinary; rather, it
is a normal erosion of the value of the Philippine peso which is a
characteristic of most currencies.
"Erosion" is indeed an accurate description of the trend of decline in the
value of the peso in the past three to four decades. Unfortunate as this trend may
be, it is certainly distinct from the phenomenon contemplated by Article 1250.

Moreover, this Court has held that the effects of extraordinary in ation are
not to be applied without an official declaration thereof by competent authorities.

The burden of proving that there had been extraordinary in ation or de ation of the
currency is upon the party that alleges it. Such circumstance must be proven by competent
evidence, and it cannot be merely assumed. In this case, petitioners presented no proof as
to how much, for instance, the price index of goods and services had risen during the
intervening period. 2 1 All the information petitioners provided was the drop of the U.S.
dollar-Philippine peso exchange rate by 17 points from June 1997 to January 1998. While
the said gure was based on the statistics of the Bangko Sentral ng Pilipinas (BSP), it is
also signi cant to note that the BSP did not categorically declare that the same constitute
as an extraordinary in ation. The existence of extraordinary in ation must be o cially
proclaimed by competent authorities, and the only competent authority so far recognized
by this Court to make such an official proclamation is the BSP. 2 2
Neither can this Court, by merely taking judicial notice of the Asian currency crisis in
1997, already declare that there had been extraordinary in ation. It should be recalled that
the Philippines likewise experienced economic crisis in the 1980s, yet this Court did not
nd that extraordinary in ation took place during the said period so as to warrant the
application of Article 1250 of the Civil Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on
equitable considerations. Among the maxims of equity are (1) he who seeks equity must
do equity, and (2) he who comes into equity must come with clean hands. The latter is a
frequently stated maxim which is also expressed in the principle that he who has done
inequity shall not have equity. 2 3 Petitioner Citibank, hence, cannot invoke Article 1250 of
the Civil Code because it does not come to court with clean hands. The delay in the
recovery 2 4 by respondent of her dollar accounts with Citibank-Geneva was due to the
unlawful act of petitioner Citibank in using the same to liquidate respondent's loans.
Petitioner Citibank even attempted to justify the off-setting or compensation of
respondent's loans using her dollar accounts with Citibank-Geneva by the presentation of a
highly suspicious and irregular, and even possibly forged, Declaration of Pledge. EcSaHA

The damage caused to respondent of the deprivation of her dollar accounts for
more than two decades is unquestionably relatively more extensive and devastating, as
compared to whatever damage petitioner Citibank, an international banking corporation
with undoubtedly substantial capital, may have suffered for respondent's non-payment of
her loans. It must also be remembered that petitioner Citibank had already considered
respondent's loans paid or liquidated by 26 October 1979 after it had fully effected
compensation thereof using respondents deposits and money market placements. All this
time, respondent's dollar accounts are unlawfully in the possession of and are being used
by petitioner Citibank for its business transactions. In the meantime, respondent's
businesses failed and her properties were foreclosed because she was denied access to
her funds when she needed them most. Taking these into consideration, respondent's
dollar accounts with Citibank-Geneva must be deemed to be subsisting and continuously
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deposited with petitioner Citibank all this while, and will only be presently withdrawn by
respondent. Therefore, petitioner Citibank should refund to respondent the U.S.
$149,632.99 taken from her Citibank-Geneva accounts, or its equivalent in Philippine
currency using the exchange rate at the time of payment , plus the stipulated interest for
each of the duciary placements and current accounts involved, beginning 26 October
1979.
As to respondent's Motion to Clarify
and/or Confirm Decision with Notice
of Judgment
Respondent, in her Motion, is of the mistaken notion that the Court of Appeals
Decision, dated 26 March 2002, as modi ed by the Resolution of the same court, dated 20
November 2002, would be implemented or executed together with this Court's Decision.
This Court clari es that its a rmation of the Decision of the Court of Appeals, as
modi ed, is only to the extent that it recognizes that petitioners had liabilities to the
respondent. However, this Court's Decision modi ed that of the appellate court's by
making its own determination of the speci c liabilities of the petitioners to respondent
and the amounts thereof; as well as by recognizing that respondent also had liabilities to
petitioner Citibank and the amount thereof.
Thus, for purposes of execution, the parties need only refer to the dispositive
portion of this Court's Decision, dated 16 October 2006, should it already become final and
executory, without any further modifications.
As the last point, there is no merit in respondent's Motion for this Court to already
declare its Decision, dated 16 October 2006, nal and executory. A judgment becomes
nal and executory by operation of law and, accordingly, the nality of the judgment
becomes a fact upon the lapse of the reglementary period without an appeal or a motion
for new trial or reconsideration being led. 2 5 This Court cannot arbitrarily disregard the
reglementary period and declare a judgment nal and executory upon the mere motion of
one party, for to do so will be a culpable violation of the right of the other parties to due
process.
IN VIEW OF THE FOREGOING, petitioners' Motion for Partial Reconsideration of this
Court's Decision, dated 16 October 2006, and respondent's Motion for this Court to
declare the same Decision already nal and executory, are both DENIED for lack of merit.
EACIcH

SO ORDERED.
Ynares-Santiago, Austria-Martinez and Callejo, Sr., JJ., concur.

Footnotes

1. Penned by Associate Justice Minita V. Chico-Nazario with Chief Justice Artemio V.


Panganiban, Associate Justices Consuelo Ynares-Santiago, Ma. Alicia Austria-Martinez,
and Romeo J. Callejo, concurring; rollo, Vol. II, pp. 1897-1898.

2. Petitioner Investors' Finance Corporation, did business under the name and style of
FNCB Finance. As noted in the Decision, it is now, by virtue of a merger, doing business
as part of its successor-in-interest, BPI Finance Corporation. However, the said petitioner
shall be referred to herein as FNCB Finance, consistent with the reference used in the
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Decision.
3. "Manila," as used herein, is descriptive of any of the branches of petitioner Citibank in the
Philippines, the capital of which is the City of Manila. Respondent was actually dealing
with the branch of petitioner Citibank in Makati City.

4. Penned by Judge Manuel D. Victorio, Records, Vol. III, pp. 1607-1621.


5. Penned by Associate Justice Andres B. Reyes, Jr. with Associate Justices Conrado M.
Vasquez, Jr. and Amelita G. Tolentino, concurring; rollo, Vol. I, pp. 365-366.

6. Penned by Associate Justice Andres B. Reyes, Jr. with Associate Justices Conrado M.
Vasquez, Jr. and Amelita G. Tolentino, concurring; id. at 374.

7. Exhibits "18" to "26," defendants' folder of exhibits, pp. 83-91.


8. Article 1279 of the Civil Code reads —

ART. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of at the same kinds, and also of the same quality if the latter has
been stated;
(3) That the two debts are due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.
9. A universal bank shall have the authority to exercise, in addition to the powers authorized
for a commercial bank in Section 29, the powers of an investment house as provided in
existing laws and the power to invest in non-allied enterprises as provided in this Act.
(The General Banking Law of 2000, Section 23)
10. A commercial bank shall have, in addition to the general powers incident to
corporations, all such powers as may be necessary to carry on the business of
commercial banking, such as accepting drafts and issuing letters of credit; discounting
and negotiating promissory notes, drafts, bills of exchange, and other evidence of debt;
accepting or creating demand deposits; receiving other types of deposits and deposit
substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring
marketable bonds and other debt securities; and extending credit, subject to such rules
as the Monetary Board may promulgate. These rules may include the determination of
bonds and other debt securities eligible for investment, the maturities and aggregate
amount of such investment, the maturities and aggregate amount of investment. (The
General Banking Law of 2000, Section 29)

11. The full text of Section 8 of the General Banking Law of 2000 is as follows —
SEC. 8. Organization. — The Monetary Board may authorize the organization of a
bank or quasi-bank subject to the following conditions:

8.1. That the entity is a stock corporation;


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8.2. That its funds are obtained from the public, which shall mean twenty (20) or
more persons; and

8.3. That the minimum capital requirements prescribed by the Monetary Board for
each category of banks are satisfied.
No new commercial bank shall be established within three (3) years from the
effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board
shall take into consideration their capability in terms of their financial resources and
technical expertise and integrity. The bank licensing process shall incorporate an
assessment of the bank's ownership structure, directors and senior management, its
operating plan and internal controls as well as its projected financial condition and
capital base.

12. See Section 75, the General Banking Law of 2000.


13. 12 U.S.C.A., Section 604.

14. 6 F. 2d 762. (1925); See also Republic of China v. National City Bank of New York, 208
F. 2d 627 (1954).

15. 104 F. Supp. 964 (1952).


16. Supra note 7.
17. BPI Credit Corp. vs. Court of Appeals, G.R. No. 96755, 4 December 1991, 204 SCRA 601,
616.
18. See TSN, Vol. XII, 24 July 1991, pp. 30-40.

19. Huibonhoa v. Court of Appeals, 378 Phil. 386, 410 (1999).


20. 396 Phil. 245, 253-255 (2000).

21. Sangrador v. Valderrama, G.R. No. L-79552, 29 November 1988, 168 SCRA 215, 228-
229.

22. Ramos v. Court of Appeals, G.R. No. 119872, 7 July 1997, 275 SCRA 167, 175.
23. Pilapil v. Garchitorena, G.R. No. 128790, 25 November 1998, 299 SCRA 343, 359;
University of the Philippines v. Hon. Catungal, Jr., G.R. No. 121863, 5 May 1997, 272
SCRA 221, 237.
24. See Gatlabayan v. Ramirez, 134 Phil. 267, 272 (1968).

25. Munez v. Court of Appeals, G.R. No. L-46010, 23 July 1987, 152 SCRA 197, 201-202, in
relation to Section 10, Rule 51 of the revised Rules of Court, which provides —

SEC. 10 . Entry of judgments and final resolutions. — If no appeal or motion for


new trial or reconsideration is filed within the time provided in these Rules, the judgment
or final resolution shall forthwith be entered by the clerk in the book of entries of
judgments. The date when the judgment or final resolution becomes executory shall be
deemed as the date of its entry. The record shall contain the dispositive part of the
judgment or final resolution and shall be signed by the clerk, with a certificate that such
judgment or final resolution has become final and executory. CSTEHI

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SECOND DIVISION

[G.R. No. 176381. December 15, 2010.]

PCI LEASING AND FINANCE, INC. , petitioner, vs . TROJAN METAL


INDUSTRIES, INCORPORATED, WALFRIDO DIZON, ELIZABETH
DIZON, and JOHN DOE , respondents.

DECISION

CARPIO , J : p

The Case
This is a petition for review 1 with application for the immediate issuance of a
temporary restraining order and writ of preliminary injunction assailing the 5 October
2006 Decision 2 and the 23 January 2007 Resolution 3 of the Court of Appeals in CA-
G.R. CV No. 75855. The 5 October 2006 Decision set aside the 23 July 2002 Decision 4
of the Regional Trial Court (Branch 79) of Quezon City in Civil Case No. Q-99-37559,
which granted petitioner's complaint for recovery of sum of money and personal
property with prayer for the issuance of a writ of replevin. The 23 January 2007
Resolution denied petitioner's motion for reconsideration.
The Facts
Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to
petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a
loan, PCILF offered to buy various equipment TMI owned, namely: a Verson double
action hydraulic press with cushion, a Hinohara powerpress 75-tons capacity, a USI-
clearing powerpress 60-tons capacity, a Watanabe powerpress 60-tons capacity, a
YMGP powerpress 30-tons capacity, a YMGP powerpress 15-tons capacity, a lathe
machine, a vertical milling machine, and a radial drill. Hard-pressed for money, TMI
agreed. PCILF and TMI immediately executed deeds of sale 5 evidencing TMI's sale to
PCILF of the various equipment in consideration of the total amount of P2,865,070.00.
PCILF and TMI then entered into a lease agreement, 6 dated 8 April 1997,
whereby the latter leased from the former the various equipment it previously owned.
Pursuant to the lease agreement, TMI issued postdated checks representing 24
monthly installments. The monthly rental for the Verson double action hydraulic press
with cushion was in the amount of P62,328.00; for the Hinohara powerpress 75-tons
capacity, the USI-clearing powerpress 60-tons capacity, the Watanabe powerpress 60-
tons capacity, the YMGP powerpress 30-tons capacity, and the YMGP powerpress 15-
tons capacity, the monthly rental was in the amount of P49,259.00; and for the lathe
machine, the vertical milling machine, and the radial drill, the monthly rental was in the
amount of P22,205.00.
The lease agreement required TMI to give PCILF a guaranty deposit of
P1,030,350.00, 7 which would serve as security for the timely performance of TMI's
obligations under the lease agreement, to be automatically forfeited should TMI return
the leased equipment before the expiration of the lease agreement. AaEcHC

Further, spouses Walfrido and Elizabeth Dizon, as TMI's President and Vice-
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President, respectively executed in favor of PCILF a Continuing Guaranty of Lease
Obligations. 8 Under the continuing guaranty, the Dizon spouses agreed to immediately
pay whatever obligations would be due PCILF in case TMI failed to meet its obligations
under the lease agreement.
To obtain additional loan from another nancing company, 9 TMI used the leased
equipment as temporary collateral. 1 0 PCILF considered the second mortgage a
violation of the lease agreement. At this time, TMI's partial payments had reached
P1,717,091.00. 1 1 On 8 December 1998, PCILF sent TMI a demand letter 1 2 for the
payment of the latter's outstanding obligation. PCILF's demand remained unheeded.
On 7 May 1999, PCILF led in the Regional Trial Court (Branch 79) of Quezon City
a complaint 1 3 against TMI, spouses Dizon, and John Doe (collectively referred to as
"respondents" hereon) for recovery of sum of money and personal property with prayer
for the issuance of a writ of replevin, docketed as Civil Case No. Q-99-37559.
On 7 September 1999, the RTC issued the writ of replevin 1 4 PCILF prayed for,
directing the sheriff to take custody of the leased equipment. Not long after, PCILF sold
the leased equipment to a third party and collected the proceeds amounting to
P1,025,000.00. 1 5
In their answer, 1 6 respondents claimed that the sale with lease agreement was a
mere scheme to facilitate the nancial lease between PCILF and TMI. Respondents
explained that in a simulated nancial lease, property of the debtor would be sold to the
creditor to be repaid through rentals; at the end of the lease period, the property sold
would revert back to the debtor. Respondents prayed that they be allowed to reform
the lease agreement to show the true agreement between the parties, which was a loan
secured by a chattel mortgage.
The Ruling of the RTC
In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its complaint.
The RTC ruled that the lease agreement must be presumed valid as the law between the
parties even if some of its provisions constituted unjust enrichment on the part of
PCILF. The dispositive portion of its Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff-PCI Leasing
and Finance, Inc. and against defendants Trojan Metal, Walfrido Dizon, and
Elizabeth Dizon, as follows:
1. Ordering the plaintiff to be entitled to the possession of herein machineries.

2. Ordering the defendants to pay the remaining rental obligation in the


amount of Php888,434.48 plus legal interest from the date of ling of the
complaint;

3. Ordering defendant to pay an attorneys fees in the amount of


Php50,000.00;

4. Ordering the defendant to pay the cost of suit.

SO ORDERED. 1 7

Respondents appealed to the Court of Appeals alleging that the RTC erred in
ruling that PCILF was entitled to the possession of TMI's equipment and that
respondents still owed PCILF the balance of P888,423.48.
The Ruling of the Court of Appeals
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The Court of Appeals ruled that the sale with lease agreement was in fact a loan
secured by chattel mortgage. The Court of Appeals held that since PCILF sold the
equipment to a third party for P1,025,000.00 and TMI paid PCILF a guaranty deposit of
P1,030,000.00, PCILF had in its hands the sum of P2,055,250.00, as against TMI's
remaining obligation of P888,423.48, or an excess of P1,166,826.52, which should be
returned to TMI in accordance with Section 14 of the Chattel Mortgage Law.
Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the Decision
of the RTC. The Court of Appeals entered a new one dismissing PCILF's complaint and
directing PCILF to pay TMI, by way of refund, the amount of P1,166,826.52. The
decretal part of its Decision reads: ETaSDc

WHEREFORE, premises considered, the July 23, 2002 Decision of the Regional
Trial Court of Quezon City, Branch 79, in Civil Case No. Q-99-37559, is hereby
REVERSED and SET ASIDE, and a new one entered DISMISSING the complaint
and DIRECTING the plaintiff-appellee PCI Leasing and Finance, Inc. to PAY, by
way of REFUND, to the defendant-appellant Trojan Metal Industries, Inc., the net
amount of Php1,166,826.52.

SO ORDERED. 1 8

The Issues
The issues for resolution are (1) whether the sale with lease agreement the
parties entered into was a financial lease or a loan secured by chattel mortgage; and (2)
whether PCILF should pay TMI, by way of refund, the amount of P1,166,826.52.
The Court's Ruling
The petition lacks merit.
PCILF contends that the transaction between the parties was a sale and
leaseback nancing arrangement where the client sells movable property to a nancing
company, which then leases the same back to the client. PCILF insists the transaction
is not nancial leasing, which contemplates extension of credit to assist a buyer in
acquiring movable property which the buyer can use and eventually own. PCILF claims
that the sale and leaseback nancing arrangement is not contrary to law, morals, good
customs, public order, or public policy. PCILF stresses that the guaranty deposit should
be forfeited in its favor, as provided in the lease agreement. PCILF points out that this
case does not involve mere failure to pay rentals, it deals with a agrant violation of the
lease agreement.
Respondents counter that from the very beginning, transfer to PCILF of
ownership over the subject equipment was never the intention of the parties.
Respondents claim that under the lease agreement, the guaranty deposit would be
forfeited if TMI returned the leased equipment to PCILF before the expiration of the
lease agreement; thus, since TMI never returned the leased equipment voluntarily, but
through a writ of replevin ordered by the RTC, the guaranty deposit should not be
forfeited.
Since the lease agreement in this case was executed on 8 April 1997, Republic
Act No. 5980 (RA 5980), otherwise known as the Financing Company Act, governs as to
what constitutes nancial leasing. Section 1, paragraph (j) of the New Rules and
Regulations to Implement RA 5980 1 9 defines financial leasing as follows:
LEASING shall refer to nancial leasing which is a mode of extending credit
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through a non-cancelable contract under which the lessor purchases or acquires
at the instance of the lessee heavy equipment, motor vehicles, industrial
machinery, appliances, business and of ce machines, and other movable
property in consideration of the periodic payment by the lessee of a xed amount
of money suf cient to amortize at least 70% of the purchase price or acquisition
cost, including any incidental expenses and a margin of pro t, over the lease
period. The contract shall extend over an obligatory period during which the
lessee has the right to hold and use the leased property and shall bear the cost of
repairs, maintenance, insurance, and preservation thereof, but with no obligation
or option on the part of the lessee to purchase the leased property at the end of
the lease contract.

The above de nition of nancial leasing gained statutory recognition with the
enactment of Republic Act No. 8556 (RA 8556), otherwise known as the Financing
Company Act of 1998. 2 0 Section 3 (d) of RA 8556 defines financial leasing as:
a mode of extending credit through a non-cancelable lease contract under which
the lessor purchases or acquires, at the instance of the lessee, machinery,
equipment, motor vehicles, appliances, business and of ce machines, and other
movable or immovable property in consideration of the periodic payment by the
lessee of a xed amount of money suf cient to amortize at least seventy (70%)
of the purchase price or acquisition cost, including any incidental expenses and a
margin of pro t over an obligatory period of not less than two (2) years during
which the lessee has the right to hold and use the leased property with the right to
expense the lease rentals paid to the lessor and bears the cost of repairs,
maintenance, insurance and preservation thereof, but with no obligation or option
on his part to purchase the leased property from the owner-lessor at the end of the
lease contract. HSacEI

Thus, in a true nancial leasing, whether under RA 5980 or RA 8556, a nance


company purchases on behalf of a cash-strapped lessee the equipment the latter
wants to buy but, due to nancial limitations, is incapable of doing so. The nance
company then leases the equipment to the lessee in exchange for the latter's periodic
payment of a fixed amount of rental.
In this case, however, TMI already owned the subject equipment before it
transacted with PCILF. Therefore, the transaction between the parties in this case
cannot be deemed to be in the nature of a financial leasing as defined by law.
The facts in the instant case are analogous to those in Cebu Contractors
Consortium Co. v. Court of Appeals. 2 1 There, Cebu Contractors Consortium Co. (CCCC)
approached Makati Leasing and Finance Corporation (MLFC) to obtain a loan. MLFC
agreed to extend nancial assistance to CCCC but, instead of a loan with collateral,
MLFC induced CCCC to adopt a sale and leaseback scheme. Under the scheme, several
of CCCC's equipment were made to appear as sold to MLFC and then leased back to
CCCC, which in turn paid lease rentals to MLFC. The rentals were treated as installment
payments to repurchase the equipment.
The Court held in Cebu Contractors Consortium Co. v. Court of Appeals 2 2 that
the transaction between CCCC and MLFC was not one of nancial leasing as de ned by
law, but simply a loan secured by a chattel mortgage over CCCC's equipment. The Court
went on to explain that where the client already owned the equipment but needed
additional working capital and the nance company purchased such equipment with
the intention of leasing it back to him, the lease agreement was simulated to disguise
the true transaction that was a loan with security. In that instance, continued the Court,
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the intention of the parties was not to enable the client to acquire and use the
equipment, but to extend to him a loan.
Similarly, in Investors Finance Corporation v. Court of Appeals, 2 3 a borrower
came to Investors Finance Corporation (IFC) to secure a loan with his heavy equipment
and machinery as collateral. The parties executed documents where IFC was made to
appear as the owner of the equipment and the borrower as the lessee. As consideration
for the lease, the borrower-lessee was to pay monthly amortizations over a period of 36
months. The parties executed a lease agreement covering various equipment described
in the lease schedules attached to the lease agreement. As security, the borrower-
lessee also executed a continuing guaranty.
The Court in Investors Finance Corporation v. Court of Appeals 2 4 held that the
transaction between the parties was not a true nancial leasing because the intention
of the parties was not to enable the borrower-lessee to acquire and use the heavy
equipment and machinery, which already belonged to him, but to extend to him a loan to
use as capital for his construction and logging businesses. The Court held that the
lease agreement was simulated to disguise the true transaction between the parties,
which was a simple loan secured by heavy equipment and machinery owned by the
borrower-lessee. The Court differentiated between a true nancial leasing and a loan
with mortgage in the guise of a lease. The Court said that nancial leasing
contemplates the extension of credit to assist a buyer in acquiring movable property
which he can use and eventually own. If the movable property already belonged to the
borrower-lessee, the transaction between the parties, according to the Court, was a
loan with mortgage in the guise of a lease.
In the present case, since the transaction between PCILF and TMI involved
equipment already owned by TMI, it cannot be considered as one of financial leasing, as
defined by law, but simply a loan secured by the various equipment owned by TMI.
Articles 1359 and 1362 of the Civil Code provide:
Art. 1359. When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to
embody the agreement, by reason of mistake, fraud, inequitable conduct, or
accident, one of the parties may ask for the reformation of the instrument to the
end that such true intention may be expressed.
Art. 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true intention,
the former may ask for the reformation of the instrument.TICaEc

Under Article 1144 of the Civil Code, the prescriptive period for actions based
upon a written contract and for reformation of an instrument is ten years. 2 5 The right
of action for reformation accrued from the date of execution of the lease agreement on
8 April 1997. TMI timely exercised its right of action when it led an answer 2 6 on 14
February 2000 asking for the reformation of the lease agreement.
Hence, had the true transaction between the parties been expressed in a proper
instrument, it would have been a simple loan secured by a chattel mortgage, instead of
a simulated nancial leasing. Thus, upon TMI's default, PCILF was entitled to seize the
mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage. PCILF's sale to a third party of the mortgaged
equipment and collection of the proceeds of the sale can be deemed in the exercise of
its right to foreclose the chattel mortgage as creditor-mortgagee.
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The Court of Appeals correctly ruled that the transaction between the parties
was simply a loan secured by a chattel mortgage. However, in reckoning the amount of
the principal obligation, the Court of Appeals should have taken into account the
proceeds of the sale to PCILF less the guaranty deposit paid by TMI. After deducting
payments made by TMI to PCILF, the balance plus applicable interest should then be
applied against the aggregate cash already in PCILF's hands.
Records show that PCILF paid TMI P2,865,070.00 2 7 as consideration for
acquiring the mortgaged equipment. In turn, TMI gave PCILF a guaranty deposit of
P1,030,350.00. 2 8 Thus, the amount of the principal loan was P1,834,720.00,
which was the net amount actually received by TMI (proceeds of the sale of
the equipment to PCILF minus the guaranty deposit) . Against the principal loan
of P1,834,720.00 plus the applicable interest should be deducted loan payments,
totaling P1,717,091.00. 2 9 Since PCILF sold the mortgaged equipment to a third party
for P1,025,000.00, 3 0 the proceeds of the said sale should be applied to offset the
remaining balance on the principal loan plus applicable interest.
However, the exact date of the sale of the mortgaged equipment, which is
needed to compute the interest on the remaining balance of the principal loan, cannot
be gleaned from the facts on record. We thus remand the case to the RTC for the
computation of the total amount due from the date of demand on 8 December 1998
until the date of sale of the mortgaged equipment to a third party, which amount due
shall be offset against the proceeds of the sale.
In the absence of stipulation, the applicable interest due on the remaining
balance of the loan is the legal rate of 12% per annum, computed from the date PCILF
sent a demand letter to TMI on 8 December 1998. No interest can be charged prior to
this date because TMI was not yet in default prior to 8 December 1998. The interest
due shall also earn legal interest from the time it is judicially demanded, pursuant to
Article 2212 of the Civil Code, which provides:
Art. 2212.Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.

The foregoing provision has been incorporated in the comprehensive summary


of existing rules on the computation of legal interest laid down by the Court in Eastern
Shipping Lines, Inc. v. Court of Appeals, 3 1 to wit:
1. When an 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
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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 quanti cation 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.
IaSAHC

3. When the judgment of the court awarding a sum of money


becomes nal 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 nality until its satisfaction , this interim
period being deemed to be by then an equivalent to a forbearance of credit.
(Emphasis supplied)

Applying the rules in the computation of interest, the remaining balance of the
principal loan subject of the chattel mortgage must earn the legal interest of 12% per
annum, which interest, as long as unpaid, also earns legal interest of 12% per annum,
computed from the filing of the complaint on 7 May 1999.
In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of
Appeals, 3 2 we derive the following formula for the RTC's guidance:
TOTAL AMOUNT DUE = [principal - partial payments made] + [interest + interest
on interest], where

Interest = remaining balance x 12% per annum x no. of years from due date (8
December 1998 when demand was made) until date of sale to a third party

Interest on interest = interest computed as of the ling of the complaint on 7 May


1999 x 12% x no. of years until date of sale to a third party

From the computed total amount should be deducted P1,025,000.00


representing the proceeds of the sale already in PCILF's hands. The difference
represents overpayment by TMI, which the law requires PCILF to refund to TMI.
Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage Law,
provides:
Section 14. Sale of property at public auction; of cer's return; fees;
disposition of proceeds. — . . . The proceeds of such sale shall be applied to the
payment, rst, of the costs and expenses of keeping and sale, and then to the
payment of the demand or obligation secured by such mortgage, and the residue
shall be paid to persons holding subsequent mortgages in their order, and the
balance, after paying the mortgages, shall be paid to the mortgagor or person
holding under him on demand.

Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor


to the balance of the proceeds, upon satisfaction of the principal loan and costs.
Prevailing jurisprudence 3 3 also holds that the Chattel Mortgage Law bars the creditor-
mortgagee from retaining the excess of the sale proceeds.
TMI's right to the refund accrued from the time PCILF received the proceeds of
the sale of the mortgaged equipment. However, since TMI never made a counterclaim
or demand for refund due on the resulting overpayment after offsetting the proceeds of
the sale against the remaining balance on the principal loan plus applicable interest, no
interest applies on the amount of refund due. Nonetheless, in accord with prevailing
jurisprudence, 3 4 the excess amount PCILF must refund to TMI is subject to interest at
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12% per annum from finality of this Decision until fully paid.
WHEREFORE , we DENY the petition. We AFFIRM with MODIFICATION the 5
October 2006 Decision and the 23 January 2007 Resolution of the Court of Appeals in
CA-G.R. CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is hereby ORDERED to
PAY respondent Trojan Metal Industries, Inc., by way of refund, the excess amount to
be computed by the Regional Trial Court based on the formula speci ed above, with
interest at 12% per annum from finality of this Decision until fully paid. aScIAC

Costs against petitioner.


SO ORDERED .
Nachura, Peralta, Abad and Mendoza, JJ., concur.

Footnotes

1.Under Rule 45 of the Rules of Court.


2.Rollo, pp. 42-52. Penned by Associate Justice Vicente Q. Roxas, with Associate Justices
Josefina Guevara-Salonga and Apolinario D. Bruselas, Jr., concurring.
3.Id. at 53. Penned by Associate Justice Vicente Q. Roxas, with Associate Justices Josefina
Guevara-Salonga and Apolinario D. Bruselas, Jr., concurring.
4.CA rollo, pp. 67-72. Penned by Judge Demetrio B. Macapagal, Sr.
5.Records, pp. 179-181.

6.Id. at 10-14.
7.Id. at 12-14. TSN dated 12 July 2001, p. 19.
8.Id. at 17.
9.Technology and Livelihood Resources Center.

10.Records, pp. 279-280, 204-205; TSN dated 7 February 2002, p. 7.


11.Id. at 157, 187.
12.Id. at 15-16.
13.Id. at 1-9.
14.Id. at 75-76.

15.TSN dated 17 August 2001, p. 15.


16.Records, pp. 117-119.
17.CA rollo, p. 72.
18.Rollo, p. 52.
19.Dated 16 October 1991.

20.An Act Amending Republic Act No. 5980, otherwise known as the Financing Company Act.
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21.G.R. No. 107199, 22 July 2003, 407 SCRA 154.
22.Id.
23.G.R. No. 91334, 7 February 1991, 193 SCRA 701.

24.Id.
25.Civil Code, Art. 1144. The following actions must be brought within ten years from the time
the right of action accrues:
1. Upon a written contract;
xxx xxx xxx
26.Records, pp. 117-119.
27.Records, pp. 179-181.

28.Id.
29.Id. at 157, 187.
30.TSN dated 17 August 2001, p. 15.
31.G.R. No. 97412, 12 July 1994, 234 SCRA 78, 95-97.
32.Id.

33.PAMECA Wood Treatment Plant, Inc. v. CA, 369 Phil. 544 (1999).
34.Cuyco v. Cuyco, G.R. No. 168736, 19 April 2006, 487 SCRA 693.

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FIRST DIVISION

[G.R. No. 103576. August 22, 1996.]

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC ,


petitioners, vs . HON. COURT OF APPEALS, PRODUCERS BANK OF THE
PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY ,
respondents.

Sotto & Sotto Law Offices for petitioners.


R. C. Domingo, Jr., & Associates for Producers Bank of the Philippines.

SYLLABUS

1. REMEDIAL LAW; ACTIONS; APPEALS; APPEAL FROM JUDGMENT OF LOWER


COURTS, NOT A MATTER OF RIGHT BUT OF SOUND JUDICIAL DISCRETION. — Except in
criminal cases where the penalty of reclusion perpetua or death is imposed which the
Court so reviews as a matter of course, an appeal from judgments of lower courts is not a
matter of right but of sound judicial discretion. The circulars of the Court prescribing
technical and other procedural requirements are meant to weed out unmeritorious
petitions that can unnecessarily clog the docket and needlessly consume the time of the
Court. These technical and procedural rules, however, are intended to help secure, not
suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus
be allowed to attain the prime objective for, after all, the dispensation of justice is the core
reason for the existence of courts.
2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS OF SECURITY,
CONSTRUED. — Contracts of security are either personal or real. In contracts of personal
security, such as a guaranty or a suretyship, the faithful performance of the obligation by
the principal debtor is secured by the personal commitment of another (the guarantor or
surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that
ful llment is secured by an encumbrance of property — in pledge, the placing of movable
property in the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate mortgage,
by the execution of a public instrument encumbering the real property covered thereby;
and in antichresis, by a written instrument granting to the creditor the right to receive the
fruits of an immovable property with the obligation to apply such fruits to the payment of
interest, if owing, and thereafter to the principal of his credit — upon the essential condition
that if the principal obligation becomes due and the debtor defaults, then the property
encumbered can be alienated for the payment of the obligation, but that should the
obligation be duly paid, then the contract is automatically extinguished proceeding from
the accessory character of the agreement. As the law so puts it, once the obligation is
complied with, then the contract of security becomes, ipso facto, null and void.
3. ID.; ID.; CONTRACTS OF SECURITY; CHATTEL MORTGAGE; COVERS OBLIGATION
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EXISTING AT TIME MORTGAGE IS CONSTITUTED; EFFECT OF PROMISE TO INCLUDE
DEBTS THAT ARE TO BE CONTRACTED. — While a pledge, real estate mortgage, or
antichresis may exceptionally secure after-incurred obligations so long as these future
debts are accurately described, a chattel mortgage, however, can only cover obligations
existing at the time the mortgage is constituted. Although a promise expressed in a chattel
mortgage to include debts that are yet to be contracted can be a binding commitment that
can be compelled upon, the security itself, however, does not come into existence or arise
until after a chattel mortgage agreement covering the newly contracted debt is executed
either by concluding a fresh chattel mortgage or by amending the old contract
conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of
the borrower to execute the agreement so as to cover the after-incurred obligation can
constitute an act of default on the part of the borrower of the nancing agreement
whereon the promise is written but, of course, the remedy of foreclosure can only cover
the debts extant at the time of constitution and during the life of the chattel mortgage
sought to be foreclosed. In the chattel mortgage here involved, the only obligation
speci ed in the chattel mortgage contract was the P3,000,000.00 loan which petitioner
corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the
payment of the obligation automatically rendered the chattel mortgage void or terminated.
(Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al.) The signi cance of
the ruling to the instant problem would be that since the 1978 chattel mortgage had
ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, there no
longer was any chattel mortgage that could cover the new loans that were concluded
thereafter.
4. ID.; CHATTEL MORTGAGE LAW; EXECUTION OF AFFIDAVIT OF GOOD FAITH, A
CLEAR MANIFESTATION THAT DEBT REFERRED TO IS CURRENT. — A chattel mortgage, as
hereinbefore so intimated, must comply substantially with the form prescribed by the
Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an af davit
of good faith. While it is not doubted that if such an af davit is not appended to the
agreement, the chattel mortgage would still be valid between the parties (not against third
persons acting in good faith), the fact, however, that the statute has provided that the
parties to the contract must execute an oath makes it obvious that the debt referred to in
the law is a current, not an obligation that is yet merely contemplated.
5. ID.; DAMAGES; MORAL DAMAGES; NOT RECOVERABLE BY A JURIDICAL PERSON. —
We nd no merit in petitioner corporation's other prayer that the case should be remanded
to the trial court for a speci c nding on the amount of damages it has sustained "as a
result of the unlawful action taken by respondent bank against it." This prayer is not
re ected in its complaint which has merely asked for the amount of P3,000,000.00 by way
of moral damages. In LBC Express, Inc. vs. Court of Appeals, we have said: "Moral
damages are granted in recompense for physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. A corporation, being an arti cial person and having existence only in legal
contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience
physical suffering and mental anguish. Mental suffering can be experienced only be one
having a nervous system and it ows from real ills, sorrows, and griefs of life — all of which
cannot be suffered by respondent bank as an arti cial person." While Chua Pac is included
in the case, the complaint, however, clearly states that he has merely been so named as a
party in representation of petitioner corporation.
6. LEGAL ETHICS; ATTORNEYS; SHOULD BE CIRCUMSPECT IN DEALING WITH
COURTS. — Petitioner corporation's counsel could be commended for his zeal in pursuing
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his client's cause. It instead turned out to be, however, a source of disappointment for this
Court to read in petitioner's reply to private respondent's comment on the petition his so-
called "One Final Word;" viz: "In simply quoting in toto the patently erroneous decision of
the trial court, respondent Court of Appeals should be required to justify its decision which
completely disregarded the basic laws on obligations and contracts, as well as the clear
provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable
Court; that in the event that its explanation is wholly unacceptable, this Honorable Court
should impose appropriate sanctions on the erring justices. This is one positive step in
ridding our courts of law of incompetent and dishonest magistrates especially members
of a superior court of appellate jurisdiction. The statement is not called for. The Court
invites counsel's attention to the admonition in Guerrero vs. Villamor; thus: "(L)awyers . . .
should bear in mind their basic duty 'to observe and maintain the respect due to the courts
of justice and judical of cers and . . . (to) insist on similar conduct by others.' This
respectful attitude towards the court is to be observed, 'not for the sake of the temporary
incumbent of the judical of ce, but for the maintenance of its supreme importance.' And it
is 'through a scrupulous preference for respectful language that a lawyer best
demonstrates his observance of the respect due to the courts and judicial officers . . .'" The
virtues of humility and of respect and concern for others must still live on even in an age of
materialism. Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be
circumspect in dealing with the courts.

DECISION

VITUG , J : p

Would it be valid and effective to have a clause in a chattel mortgage that purports to
likewise extend its coverage to obligations yet to be contracted or incurred? This question
is the core issue in the instant petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe,
Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the
company, a chattel mortgage in favor of private respondent Producers Bank of the
Philippines. The mortgage stood by way of security for petitioner's corporate loan of three
million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this
effect —
"(c) If the MORTGAGOR, his heirs, executors or administrators shall well and
truly perform the full obligation or obligations above-stated according to the
terms thereof, then this mortgage shall be null and void. . . .
"In case the MORTGAGOR executes subsequent promissory note or notes either
as a renewal of the former note, as an extension thereof, or as a new loan, or is
given any other kind of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import shipments on Trust
Receipts, etc., this mortgage shall also stand as security for the payment of the
said promissory note or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the same force and effect
as if the said promissory note or notes and/or accommodations were existing on
the date thereof. This mortgage shall also stand as security for said obligations
and any and all other obligations of the MORTGAGOR to the MORTGAGEE of
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whatever kind and nature, whether such obligations have been contracted before,
during or after the constitution of this mortgage." 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in
1981, it obtained from respondent bank additional nancial accommodations totalling
P2,700,000.00. 2 These borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan
of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00
each. Due to nancial constraints, the loan was not settled at maturity. 3 Respondent bank
thereupon applied for an extrajudicial foreclosure of the chattel mortgage, hereinbefore
cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith le
an action for injunction, with damages and a prayer for a writ of preliminary injunction,
before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the
court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held
petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991,
af rmed, "in all respects," the decision of the court a quo. The motion for reconsideration
was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially denied on 04 March
1992 by this Court for having been insuf cient in form and substance. Private respondent
led a motion to dismiss the petition while petitioner corporation led a compliance and
an opposition to private respondent's motion to dismiss. The Court denied petitioner's
rst motion for reconsideration but granted a second motion for reconsideration, thereby
reinstating the petition and requiring private respondent to comment thereon. 5
Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6
which the Court so reviews as a matter of course, an appeal from judgments of lower
courts is not a matter of right but of sound judicial discretion. The circulars of the Court
prescribing technical and other procedural requirements are meant to weed out
unmeritorious petitions that can unnecessarily clog the docket and needlessly consume
the time of the Court. These technical and procedural rules, however, are intended to help
secure, not suppress, substantial justice. A deviation from the rigid enforcement of the
rules may thus be allowed to attain the prime objective for, after all, the dispensation of
justice is the core reason for the existence of courts. In this instance, once again, the Court
is constrained to relax the rules in order to give way to and uphold the paramount and
overriding interest of justice.
Contracts of security are either personal or real. In contracts of personal security, such as
a guaranty or a suretyship, the faithful performance of the obligation by the principal
debtor is secured by the personal commitment of another (the guarantor or surety). In
contracts of real security, such as a pledge, a mortgage or an antichresis, that ful llment is
secured by an encumbrance of property — in pledge, the placing of movable property in the
possession of the creditor; in chattel mortgage, by the execution of the corresponding
deed substantially in the form prescribed by law; in real estate mortgage, by the execution
of a public instrument encumbering the real property covered thereby; and in antichresis,
by a written instrument granting to the creditor the right to receive the fruits of an
immovable property with the obligation to apply such fruits to the payment of interest, if
owing, and thereafter to the principal of his credit — upon the essential condition that if the
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principal obligation becomes due and the debtor defaults, then the property encumbered
can be alienated for the payment of the obligation, 7 but that should the obligation be duly
paid, then the contract is automatically extinguished proceeding from the accessory
character 8 of the agreement. As the law so puts it, once the obligation is complied with,
then the contract of security becomes, ipso facto, null and void. 9
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-
incurred obligations so long as these future debts are accurately described, 1 0 a chattel
mortgage, however, can only cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in a chattel mortgage to include debts that are
yet to be contracted can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by concluding
a fresh chattel mortgage or by amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law. 1 1 Refusal on the part of the borrower to execute
the agreement so as to cover the after-incurred obligation can constitute an act of default
on the part of the borrower of the nancing agreement whereon the promise is written but,
of course, the remedy of foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form
prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5
thereof, is an af davit of good faith. While it is not doubted that if such an af davit is not
appended to the agreement, the chattel mortgage would still be valid between the parties
(not against third persons acting in good faith 1 2 ), the fact, however, that the statute has
provided that the parties to the contract must execute an oath that —
". . . (the) mortgage is made for the purpose of securing the obligation speci ed in
the conditions thereof, and for no other purpose, and that the same is a just and
valid obligation, and one not entered into for the purpose of fraud." 13

makes it obvious that the debt referred to in the law is a current, not an obligation that
is yet merely contemplated. In the chattel mortgage here involved, the only obligation
speci ed in the chattel mortgage contract was the P3,000,000.00 loan which petitioner
corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the
payment of the obligation automatically rendered the chattel mortgage void or
terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al. , 14
the Court said—
". . . A mortgage that contains a stipulation in regard to future advances in the
credit will take effect only from the date the same are made and not from the date
of the mortgage." 1 5

The signi cance of the ruling to the instant problem would be that since the 1978 chattel
mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00
loan, 1 6 there no longer was any chattel mortgage that could cover the new loans that were
concluded thereafter.
We nd no merit in petitioner corporation's other prayer that the case should be
remanded to the trial court for a speci c nding on the amount of damages it has
sustained "as a result of the unlawful action taken by respondent bank against it." 1 7
This prayer is not re ected in its complaint which has merely asked for the amount of
P3,000,000.00 by way of moral damages. 1 8 In LBC Express, Inc. vs. Court of Appeals,
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19 we have said:
"Moral damages are granted in recompense for physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation, and similar injury. A corporation, being an arti cial
person and having existence only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot experience physical suffering and
mental anguish. Mental suffering can be experienced only by one having a
nervous system and it ows from real ills, sorrows, and griefs of life — all of
which cannot be suffered by respondent bank as an artificial person." 20

While Chua Pac is included in the case, the complaint, however, clearly states that he
has merely been so named as a party in representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his client's
cause. It instead turned out to be, however, a source of disappointment for this Court to
read in petitioner's reply to private respondent's comment on the petition his so-called
"One Final Word;" viz:
"In simply quoting in toto the patently erroneous decision of the trial court,
respondent Court of Appeals should be required to justify its decision which
completely disregarded the basic laws on obligations and contracts, as well as
the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of
this Honorable Court; that in the event that its explanation is wholly unacceptable,
this Honorable Court should impose appropriate sanctions on the erring justices.
This is one positive step in ridding our courts of law of incompetent and
dishonest magistrates especially members of a superior court of appellate
jurisdiction." 2 1 (Emphasis supplied.)
The statement is not called for. The Court invites counsel's attention to the admonition in
Guerrero vs. Villamor; 2 2 thus:
"(L)awyers . . . should bear in mind their basic duty 'to observe and maintain the
respect due to the courts of justice and judicial of cers and . . . (to) insist on
similar conduct by others.' This respectful attitude towards the court is to be
observed, 'not for the sake of the temporary incumbent of the judicial of ce, but
for the maintenance of its supreme importance.' And it is 'through a scrupulous
preference for respectful language that a lawyer best demonstrates his
observance of the respect due to the courts and judicial officers . . ..'" 2 3

The virtues of humility and of respect and concern for others must still live on even in an
age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the lower court are set
aside without prejudice to the appropriate legal recourse by private respondent as may
still be warranted as an unsecured creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in
dealing with the courts.
SO ORDERED.
Kapunan and Hermosisima, Jr., JJ ., concur.

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Padilla, J ., took no part.
Bellosillo, J ., is on leave.

Footnotes

1. Rollo, p. 45.
2. Ibid., p. 34.
3. Ibid.
4. Associate Justice Consuelo Ynares Santiago, ponente, with Associate Justices Ricardo
L. Pronove, Jr. and Nicolas P. Lapeña, Jr., concurring.

5. In the Court's resolution, dated 27 May 1992, Rollo, p. 91.


6. Sec. 5 (2)(d), Art. VIII, 1987 Constitution.
7. See Arts. 2085, 2087, 2093, 2125, 2126, 2132, 2139 and 2140, Civil Code.
8. See Manila Surety & Fidelity Co. vs. Velayo, 21 SCRA 515.
9. See Sec. 3, Act 1508.

10. See Mojica vs. Court of Appeals, 201 SCRA 517; Lim Julian vs. Lutero, 49 Phil. 703.
11. Act No. 1508.
12. See Philippine Refining Co. vs. Jarque, 61 Phil. 229.
13. Civil Code, Vol. 3, 1990 Edition by Ramon C. Aquino and Carolina C. Griño-Aquino, pp.
610-611.
14. 49 Phil. 647.
15. At p. 655. This ruling was reiterated in Jaca vs. Davao Lumber Company , 113 SCRA
107.
16. Being merely accessory in nature, it cannot exist independently of the principal
obligation.
17. Petitioner's Memorandum, p. 5; Rollo, p. 119.

18. Complaint, p. 6; Record, p. 9.


19. 236 SCRA 602.
20. At p. 607.
21. Rollo, p. 113.
22. 179 SCRA 355, 362.

23. At p. 362.

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THIRD DIVISION

[G.R. No. 92989. July 8, 1991.]

PERFECTO DY, JR. , petitioner, vs. COURT OF APPEALS, GELAC


TRADING INC., and ANTONIO V. GONZALES , respondents.

Zosa & Quijano Law Offices for petitioner.


Expedito P. Bugarin for respondent GELAC Trading, Inc.

SYLLABUS

1. CIVIL LAW; SPECIAL CONTRACTS; CHATTEL MORTGAGE; RIGHT OF MORTGAGOR


TO SELL THE PROPERTY MORTGAGED; RULE. — The mortgagor who gave the property as
security under a chattel mortgage did not part with the ownership over the same. He had
the right to sell it although he was under the obligation to secure the written consent of the
mortgagee or he lays himself open to criminal prosecution under the provision of Article
319 par. 2 of the Revised Penal Code. And even if no consent was obtained from the
mortgagee, the validity of the sale would still not be affected.
2. ID.; ID.; ID.; ID.; APPLICABLE IN CASE AT BAR. — We see no reason why Wifredo Dy,
as the chattel mortgagor can not sell the subject tractor. There is no dispute that the
consent of Libra Finance was obtained in the instant case. In a letter dated August 27,
1979, Libra allowed the petitioner to purchase the tractor and assume the mortgage debt
of his brother. The sale between the brothers was therefore valid and binding as between
them and to the mortgagee, as well.
3. ID.; ID.; ID.; REMEDY OF MORTGAGEE IN CASE MORTGAGOR FAILED TO PAY THE
DEBT. — It was Libra Finance which was in possession of the subject tractor due to
Wilfredo's failure to pay the amortization as a preliminary step to foreclosure. As
mortgagee, he has the right of foreclosure upon default by the mortgagor in the
performance of the conditions mentioned in the contract of mortgage. The law implies
that the mortgagee is entitled to possess the mortgaged property because possession is
necessary in order to enable him to have the property sold. While it is true that Wilfredo Dy
was not in actual possession and control of the subject tractor, his right of ownership was
not divested from him upon his default. Neither could it be said that Libra was the owner of
the subject tractor because the mortgagee can not become the owner of or convert and
appropriate to himself the property mortgaged (Article 2088, Civil Code). Said property
continues to belong to the mortgagor. The only remedy given to the mortgagee is to have
said property sold at public auction and the proceeds of the sale applied to the payment of
the obligation secured by the mortgagee (See Martinez vs. PNB, 93 Phil. 765, 767 [1953]).
There is no showing that Libra Finance has already foreclosed the mortgage and that it
was the new owner of the subject tractor. Undeniably, Libra gave its consent to the sale of
the subject tractor to the petitioner. It was aware of the transfer of rights to the petitioner.
4. ID.; ID.; ID.; PURCHASER OF MORTGAGED PROPERTY STEPS INTO THE SHOES OF
THE MORTGAGOR. — Where a third person purchases the mortgaged property, he
automatically steps into the shoes of the original mortgagor (See Industrial Finance Corp.
vs. Apostol, 177 SCRA 521 [1989]). His right of ownership shall be subject to the
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mortgage of the thing sold to him. In the case at bar, the petitioner was fully aware of the
existing mortgage of the subject tractor to Libra. In fact, when he was obtaining Libra's
consent to the sale, he volunteered to assume the remaining balance of the mortgage debt
of Wilfredo Dy which Libra undeniably agreed to.
5. ID.; ID.; SALE; DELIVERY OF PROPERTY VESTS OWNERSHIP TO THE VENDEE. —
Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in any of the ways specified in Articles 1497
to 1501 or in any other manner signifying an agreement that the possession is transferred
from the vendor to the vendee. We agree with the petitioner that Articles 1498 and 1499
are applicable in the case at bar.
6. ID.; ID.; ID.; ID.; RULE ON CONSTRUCTIVE DELIVERY. — In the instant case, actual
delivery of the subject tractor could not be made. However, there was constructive delivery
already upon the execution of the public instrument pursuant to Article 1498 and upon the
consent or agreement of the parties when the thing sold cannot be immediately
transferred to the possession of the vendee (Article 1499).
7. ID.; ID.; ID.; CONSUMMATION OF SALE; NOT DEPENDENT ON THE ENCASHMENT
OF CHECK. — The payment of the check was actually intended to extinguish the mortgage
obligation so that the tractor could be released to the petitioner. It was never intended nor
could it be considered as payment of the purchase price because the relationship between
Libra and the petitioner is not one of sale but still a mortgage. The clearing or encashment
of the check which produced the effect of payment determined the full payment of the
money obligation and the release of the chattel mortgage. It was not determinative of the
consummation of the sale. The transaction between the brothers is distinct and apart from
the transaction between Libra and the petitioner. The contention, therefore, that the
consummation of the sale depended upon the encashment of the check is untenable.
8. REMEDIAL LAW; CIVIL PROCEDURE; EXECUTION OF JUDGMENT; EXTENDS ONLY
OVER PROPERTIES BELONGING TO THE JUDGMENT DEBTOR NOT EXEMPT BY LAW. —
The sale of the subject tractor was consummated upon the execution of the public
instrument on September 4, 1979. At this time constructive delivery was already effected.
Hence, the subject tractor was no longer owned by Wilfredo Dy when it was levied upon by
the sheriff in December, 1979. Well settled is the rule that only properties unquestionably
owned by the judgment debtor and which are not exempt by law from execution should be
levied upon or sought to be levied upon. For the power of the court in the execution of its
judgment extends only over properties belonging to the judgment debtor (Consolidated
Bank and Trust Corp. vs. Court of Appeals, G.R. No. 78771, January 23, 1991).
9. ID.; EVIDENCE; FRAUD; MUST BE ESTABLISHED BY CLEAR CONVINCING EVIDENCE.
— There is no sufficient evidence to show that the sale of the tractor was in fraud of
Wilfredo and creditors. While it is true that Wilfredo and Perfecto are brothers, this fact
alone does not give rise to the presumption that the sale was fraudulent. Relationship is
not a badge of fraud (Goquiolay vs. Sycip, 9 SCRA 663 [1963]). Moreover, fraud can not be
presumed; it must be established by clear convincing evidence.

DECISION

GUTIERREZ, JR. , J : p

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This is a petition for review on certiorari seeking the reversal of the March 23, 1990
decision of the Court of Appeals which ruled that the petitioner's purchase of a farm
tractor was not validly consummated and ordered a complaint for its recovery dismissed.
The facts as established by the records are as follows:
The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo Dy
purchased a truck and a farm tractor through financing extended by Libra Finance and
Investment Corporation (Libra). Both truck and tractor were mortgaged to Libra as
security for the loan.
The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he wrote
a letter to Libra requesting that he be allowed to purchase from Wilfredo Dy the said
tractor and assume the mortgage debt of the latter.
In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the
petitioner's request.
Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of the
petitioner over the tractor in question.
At this time, the subject tractor was in the possession of Libra Finance due to Wilfredo
Dy's failure to pay the amortizations.
Despite the offer of full payment by the petitioner to Libra for the tractor, the immediate
release could not be effected because Wilfredo Dy had obtained financing not only for said
tractor but also for a truck and Libra insisted on full payment for both.
The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so that
full payment could be made for both. On November 22, 1979, a PNB check was issued in
the amount of P22,000.00 in favor of Libra, thus settling in full the indebtedness of
Wilfredo Dy with the financing firm. Payment having been effected through an out-of-town
check, Libra insisted that it be cleared first before Libra could release the chattels in
question.
Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a collection
case to recover the sum of P12,269.80 was pending in another court in Cebu.
On the strength of an alias writ of execution issued on December 27, 1979, the provincial
sheriff was able to seize and levy on the tractor which was in the premises of Libra in
Carmen, Cebu. The tractor was subsequently sold at public auction where Gelac Trading
was the alone bidder. Later, Gelac sold the tractor to one of its stockholders, Antonio
Gonzales.
It was only when the check was cleared on January 17, 1980 that the petitioner learned
about GELAC having already taken custody of the subject tractor. Consequently, the
petitioner filed an action to recover the subject tractor against GELAC Trading with the
Regional Trial Court of Cebu City.
On April 8,1988, the RTC rendered judgment in favor of the petitioner. The dispositive
portion of the decision reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against
the defendant, pronouncing that the plaintiff is the owner of the tractor, subject
matter of this case, and directing the defendants Gelac Trading Corporation and
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Antonio Gonzales to return the same to the plaintiff herein; directing the
defendants jointly and severally to pay to the plaintiff the amount of P1,541.00 as
expenses for hiring a tractor; P50,000 for moral damages; P50,000 for exemplary
damages; and to pay the cost." (Rollo, pp. 35-36)

On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the
complaint with costs against the petitioner. The Court of Appeals held that the tractor in
question still belonged to Wilfredo Dy when it was seized and levied by the sheriff by virtue
of the alias writ of execution issued in Civil Case No. R-16646.

The petitioner now comes to the Court raising the following questions:
A
"WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED
THE FACTS AND ERRED IN NOT AFFIRMING THE TRIAL COURT'S FINDING THAT
OWNERSHIP OF THE FARM TRACTOR HAD ALREADY PASSED TO HEREIN
PETITIONER WHEN SAID TRACTOR WAS LEVIED ON BY THE SHERIFF
PURSUANT TO AN ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN
FAVOR OF RESPONDENT GELAC TRADING INC."

B
"WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON
MERE CONJECTURE AND SURMISE IN HOLDING THAT THE SALE OF THE
AFORESAID TRACTOR TO PETITIONER WAS DONE IN FRAUD OF WILFREDO DY'S
CREDITORS, THERE BEING NO EVIDENCE OF SUCH FRAUD AS FOUND BY THE
TRIAL COURT."
C

"WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED


THE FACTS AND ERRED IN NOT SUSTAINING THE FINDING OF THE TRIAL
COURT THAT THE SALE OF THE TRACTOR BY RESPONDENT GELAC TRADING
TO ITS CORRESPONDENT ANTONIO V. GONZALES ON AUGUST 2, 1980 — AT
WHICH TIME BOTH RESPONDENTS ALREADY KNEW OF THE FILING OF THE
INSTANT CASE WAS VIOLATIVE OF THE HUMAN RELATIONS PROVISIONS OF
THE CIVIL CODE AND RENDERED THEM LIABLE FOR THE MORAL AND
EXEMPLARY DAMAGES SLAPPED AGAINST THEM BY THE TRIAL COURT."
(Rollo, p. 13)

The respondents claim that at the time of the execution of the deed of sale, no
constructive delivery was effected since the consummation of the sale depended upon the
clearance and encashment of the check which was issued in payment of the subject
tractor.
In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA 80
[1989]), we stated that:
xxx xxx xxx
"The rule is settled that the chattel mortgagor continues to be the owner of the
property, and therefore, has the power to alienate the same; however, he is obliged
under pain of penal liability, to secure the written consent of the mortgagee.
(Francisco, Vicente, Jr., Revised Rules of Court in the Philippines, (1972), Volume
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IV-s Part I, p. 525) Thus, the instruments of mortgage are binding, while they
subsist, not only upon the parties executing them but also upon those who later,
by purchase or otherwise, acquire the properties referred to therein.

"The absence of the written consent of the mortgagee to the sale of the
mortgaged property in favor of a third person, therefore, effects not the validity of
the sale but only the penal liability of the mortgagor under the Revised Penal Code
and the binding effect of such sale on the mortgagee under the Deed of Chattel
Mortgage."
xxx xxx xxx

The mortgagor who gave the property as security under a chattel mortgage did not part
with the ownership over the same. He had the right to sell it although he was under the
obligation to secure the written consent of the mortgagee or he lays himself open to
criminal prosecution under the provision of Article 319 par. 2 of the Revised Penal Code.
And even if no consent was obtained from the mortgagee, the validity of the sale would
still not be affected. prLL

Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject
tractor. There is no dispute that the consent of Libra Finance was obtained in the instant
case. In a letter dated August 27, 1979, Libra allowed the petitioner to purchase the tractor
and assume the mortgage debt of his brother. The sale between the brothers was
therefore valid and binding as between them and to the mortgagee, as well.
Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in any of the ways specified in Articles 1497
to 1501 or in any other manner signing an agreement that the possession is transferred
from the vendor to the vendee. We agree with the petitioner that Articles 1498 and 1499
are applicable in the case at bar.
Article 1498 sta