Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19190 November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
VENANCIO CONCEPCION, defendant-appellant.

Recaredo Ma. Calvo for appellant.

Attorney-General Villa-Real for appellee.

MALCOLM, J.:

By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine National
Bank, Venancio Concepcion, President of the Philippine National Bank, between April 10, 1919, and
May 7, 1919, authorized an extension of credit in favor of "Puno y Concepcion, S. en C." in the amount
of P300,000. This special authorization was essential in view of the memorandum order of President
Concepcion dated May 17, 1918, limiting the discretional power of the local manager at Aparri, Cagayan,
to grant loans and discount negotiable documents to P5,000, which, in certain cases, could be increased
to P10,000. Pursuant to this authorization, credit aggregating P300,000, was granted the firm of "Puno
y Concepcion, S. en C.," the only security required consisting of six demand notes. The notes, together
with the interest, were taken up and paid by July 17, 1919.

"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion

contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente Puno,
P20,000; and Rosario San Agustin, "casada con Gral. Venancio Concepcion," P50,000. Member Miguel
S. Concepcion was the administrator of the company.

On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and as
member of the board of directors of this bank, was charged in the Court of First Instance of Cagayan
with a violation of section 35 of Act No. 2747. He was found guilty by the Honorable Enrique V. Filamor,
Judge of First Instance, and was sentenced to imprisonment for one year and six months, to pay a fine
of P3,000, with subsidiary imprisonment in case of insolvency, and the costs.

Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference must
hereafter repeatedly be made, reads as follows: "The National Bank shall not, directly or indirectly,
grant loans to any of the members of the board of directors of the bank nor to agents of the branch
banks." Section 49 of the same Act provides: "Any person who shall violate any of the provisions of this
Act shall be punished by a fine not to exceed ten thousand pesos, or by imprisonment not to exceed
five years, or by both such fine and imprisonment." These two sections were in effect in 1919 when the
alleged unlawful acts took place, but were repealed by Act No. 2938, approved on January 30, 1921.

Counsel for the defense assign ten errors as having been committed by the trial court. These errors
they have argued adroitly and exhaustively in their printed brief, and again in oral argument. Attorney-
General Villa-Real, in an exceptionally accurate and comprehensive brief, answers the proposition of
appellant one by one.

1
The question presented are reduced to their simplest elements in the opinion which follows:

I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, a "loan" within the meaning of section
35 of Act No. 2747?

Counsel argue that the documents of record do not prove that authority to make a loan was given, but
only show the concession of a credit. In this statement of fact, counsel is correct, for the exhibits in
question speak of a "credito" (credit) and not of a " prestamo" (loan).

The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust
reposed by a lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490;
Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the receipt by the other party
of a given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or
without interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The concession of a "credit" necessarily
involves the granting of "loans" up to the limit of the amount fixed in the "credit,"

II. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.," by
Venancio Concepcion, President of the Philippine National Bank, a "loan" or a "discount"?

Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan," it does not
prohibit what is commonly known as a "discount."

In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of the
Insular Auditor whether section 37 of Act No. 2612 was intended to apply to discounts as well as to
loans. The ruling of the Acting Insular Auditor, dated August 11, 1916, was to the effect that said section
referred to loans alone, and placed no restriction upon discount transactions. It becomes material,
therefore, to discover the distinction between a "loan" and a "discount," and to ascertain if the instant
transaction comes under the first or the latter denomination.

Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an actual,
live, transaction. But in its last analysis, to discount a paper is only a mode of loaning money, with,
however, these distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest
is taken at the expiration of a credit; (2) a discount is always on double-name paper; a loan is generally
on single-name paper.

Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not
discounts, yet the conclusion is inevitable that the demand notes signed by the firm "Puno y Concepcion,
S. en C." were not discount paper but were mere evidences of indebtedness, because (1) interest was
not deducted from the face of the notes, but was paid when the notes fell due; and (2) they were single-
name and not double-name paper.

The facts of the instant case having relation to this phase of the argument are not essentially different
from the facts in the Binalbagan Estate case. Just as there it was declared that the operations
constituted a loan and not a discount, so should we here lay down the same ruling.

III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, an "indirect loan" within the meaning
of section 35 of Act No. 2747?

2
Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect loan."
In this connection, it should be recalled that the wife of the defendant held one-half of the capital of
this partnership.

In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the
intention of the Legislature. In this instance, the purpose of the Legislature is plainly to erect a wall of
safety against temptation for a director of the bank. The prohibition against indirect loans is a
recognition of the familiar maxim that no man may serve two masters — that where personal interest
clashes with fidelity to duty the latter almost always suffers. If, therefore, it is shown that the husband
is financially interested in the success or failure of his wife's business venture, a loan to partnership of
which the wife of a director is a member, falls within the prohibition.

Various provisions of the Civil serve to establish the familiar relationship called a conjugal partnership.
(Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be specially noted.) A loan, therefore, to a
partnership of which the wife of a director of a bank is a member, is an indirect loan to such director.

That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the
acknowledged fact that in this instance the defendant was tempted to mingle his personal and family
affairs with his official duties, and to permit the loan P300,000 to a partnership of no established
reputation and without asking for collateral security.

In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the Supreme
Court of Maryland said:

What then was the purpose of the law when it declared that no director or officer should borrow of the
bank, and "if any director," etc., "shall be convicted," etc., "of directly or indirectly violating this section
he shall be punished by fine and imprisonment?" We say to protect the stockholders, depositors and
creditors of the bank, against the temptation to which the directors and officers might be exposed, and
the power which as such they must necessarily possess in the control and management of the bank,
and the legislature unwilling to rely upon the implied understanding that in assuming this relation they
would not acquire any interest hostile or adverse to the most exact and faithful discharge of duty,
declared in express terms that they should not borrow, etc., of the bank.

In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the Binalbagan Estate decision,
it was said:

We are of opinion the statute forbade the loan to his copartnership firm as well as to himself directly.
The loan was made indirectly to him through his firm.

IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a violation
of section 35 of Act No. 2747 in relation with section 49 of the same Act, when these portions of Act
No. 2747 were repealed by Act No. 2938, prior to the finding of the information and the rendition of
the judgment?

As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to section
35 of the same Act, provides a punishment for any person who shall violate any of the provisions of the
Act. It is contended, however, by the appellant, that the repeal of these sections of Act No. 2747 by Act
No. 2938 has served to take away the basis for criminal prosecution.

This same question has been previously submitted and has received an answer adverse to such
contention in the cases of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs. Concepcion ([1922],
43 Phil., 653); and Ong Chang Wing and Kwong Fok vs. United States ([1910], 218 U. S., 272; 40 Phil.,

3
1046). In other words, it has been the holding, and it must again be the holding, that where an Act of
the Legislature which penalizes an offense, such repeals a former Act which penalized the same offense,
such repeal does not have the effect of thereafter depriving the courts of jurisdiction to try, convict,
and sentenced offenders charged with violations of the old law.

V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, in violation of section 35 of Act No.
2747, penalized by this law?

Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank, and
since section 49 of said Act provides a punishment not on the bank when it violates any provisions of
the law, but on a personviolating any provisions of the same, and imposing imprisonment as a part of
the penalty, the prohibition contained in said section 35 is without penal sanction.lawph!l.net

The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to the
board of directors, and to each director separately and individually. (People vs. Concepcion, supra.)

VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National Bank, in
extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." constitute a legal
defense?

Counsel argue that if defendant committed the acts of which he was convicted, it was because he was
misled by rulings coming from the Insular Auditor. It is furthermore stated that since the loans made to
the copartnership "Puno y Concepcion, S. en C." have been paid, no loss has been suffered by the
Philippine National Bank.

Neither argument, even if conceded to be true, is conclusive. Under the statute which the defendant
has violated, criminal intent is not necessarily material. The doing of the inhibited act, inhibited on
account of public policy and public interest, constitutes the crime. And, in this instance, as previously
demonstrated, the acts of the President of the Philippine National Bank do not fall within the purview
of the rulings of the Insular Auditor, even conceding that such rulings have controlling effect.

Morse, in his work, Banks and Banking, section 125, says:

It is fraud for directors to secure by means of their trust, and advantage not common to the other
stockholders. The law will not allow private profit from a trust, and will not listen to any proof of honest
intent.

JUDGMENT

On a review of the evidence of record, with reference to the decision of the trial court, and the errors
assigned by the appellant, and with reference to previous decisions of this court on the same subject,
we are irresistibly led to the conclusion that no reversible error was committed in the trial of this case,
and that the defendant has been proved guilty beyond a reasonable doubt of the crime charged in the
information. The penalty imposed by the trial judge falls within the limits of the punitive provisions of
the law.

Judgment is affirmed, with the costs of this instance against the appellant. So ordered.

Araullo, C. J., Johnson, Street, Avanceña, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

4
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-16106 December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK, ET AL., defendants,
THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.

Picazo, Lichauco and Agcaoili for defendant-appellee.

BAUTISTA ANGELO, J.:

The Republic of the Philippines filed on September 25, 1957 before the Court of First Instance of Manila
a complaint for escheat of certain unclaimed bank deposits balances under the provisions of Act No.
3936 against several banks, among them the First National City Bank of New York. It is alleged that
pursuant to Section 2 of said Act defendant banks forwarded to the Treasurer of the Philippines a
statement under oath of their respective managing officials of all the credits and deposits held by them
in favor of persons known to be dead or who have not made further deposits or withdrawals during the
period of 10 years or more. Wherefore, it is prayed that said credits and deposits be escheated to the
Republic of the Philippines by ordering defendant banks to deposit them to its credit with the Treasurer
of the Philippines.

In its answer the First National City Bank of New York claims that, while it admits that various savings
deposits, pre-war inactive accounts, and sundry accounts contained in its report submitted to the
Treasurer of the Philippines pursuant to Act No. 3936, totalling more than P100,000.00, which remained
dormant for 10 years or more, are subject to escheat however, it has inadvertently included in said
report certain items amounting to P18,589.89 which, properly speaking, are not credits or deposits
within the contemplation of Act No. 3936. Hence, it prayed that said items be not included in the claim
of plaintiff.

After hearing the court a quo rendered judgment holding that cashier's is or manager's checks and
demand drafts as those which defendant wants excluded from the complaint come within the purview
of Act No. 3936, but not the telegraphic transfer payment which orders are of different category.
Consequently, the complaint was dismissed with regard to the latter. But, after a motion to reconsider
was filed by defendant, the court a quo changed its view and held that even said demand drafts do not
come within the purview of said Act and so amended its decision accordingly. Plaintiff has
appealed.lawphil.net

5
Section 1, Act No. 3936, provides:

Section 1. "Unclaimed balances" within the meaning of this Act shall include credits or deposits of
money, bullion, security or other evidence of indebtedness of any kind, and interest thereon with banks,
as hereinafter defined, in favor of any person unheard from for a period of ten years or more. Such
unclaimed balances, together with the increase and proceeds thereof, shall be deposited with the
Insular Treasure to the credit of the Government of the Philippine Islands to be as the Philippine
Legislature may direct.

It would appear that the term "unclaimed balances" that are subject to escheat include credits or
deposits money, or other evidence of indebtedness of any kind with banks, in favor of any person
unheard from for a period of 10 years or more. And as correctly stated by the trial court, the term
"credit" in its usual meaning is a sum credited on the books of a company to a person who appears to
be entitled to it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by
reason of property or estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the
correlative to debt or indebtedness, and that which is due to any person, a distinguished from that
which he owes (Mountain Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1, 4; See
also Libby vs. Hopkins, 104 U.S. 303, 309; Prudential Insurance Co. of America vs. Nelson, 101 F. 2d,
441, 443; Barnes vs. Treat, 7 Mass. 271, 274). The same is true with the term "deposits" in banks where
the relationship created between the depositor and the bank is that of creditor and debtor (Article 1980,
Civil Code; Gullas vs. National Bank, 62 Phil. 915; Gopoco Grocery, et al. vs. Pacific Coast Biscuit Co., et
al., 65 Phil. 443).

The questions that now arise are: Do demand draft and telegraphic orders come within the meaning of
the term "credits" or "deposits" employed in the law? Can their import be considered as a sum credited
on the books of the bank to a person who appears to be entitled to it? Do they create a creditor-debtor
relationship between drawee and the payee?

The answers to these questions require a digression the legal meaning of said banking terminologies.

To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs.
Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs. Republic
State Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the former, an
open letter of request from, and an order by, one person on another to pay a sum of money therein
mentioned to a third person, on demand or at a future time therein specified (13 Words and Phrases,
371). As a matter of fact, the term "draft" is often used, and is the common term, for all bills of exchange.
And the words "draft" and "bill of exchange" are used indiscriminately (Ennis vs. Coshoctan Nat. Bank,
108 S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).

On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No.
2031) does not operate as an assignment of funds in the hands of the drawee who is not liable on the
instrument until he accepts it. This is the clear import of Section 127. It says: "A bill of exchange of itself
does not operate as an assignment of the funds in the hands of the drawee available for the payment
thereon and the drawee is not liable on the bill unless and until he accepts the same." In other words,
in order that a drawee may be liable on the draft and then become obligated to the payee it is necessary
that he first accepts the same. In fact, our law requires that with regard to drafts or bills of exchange
there is need that they be presented either for acceptance or for payment within a reasonable time
after their issuance or after their last negotiation thereof as the case may be (Section 71, Act 2031).
Failure to make such presentment will discharge the drawer from liability or to the extent of the loss
caused by the delay (Section 186, Ibid.)

6
Since it is admitted that the demand drafts herein involved have not been presented either for
acceptance or for payment, the inevitable consequence is that the appellee bank never had any chance
of accepting or rejecting them. Verily, appellee bank never became a debtor of the payee concerned
and as such the aforesaid drafts cannot be considered as credits subject to escheat within the meaning
of the law.

But a demand draft is very different from a cashier's or manager's cheek, contrary to appellant's
pretense, for it has been held that the latter is a primary obligation of the bank which issues it and
constitutes its written promise to pay upon demand. Thus, a cashier's check has been clearly
characterized in In Re Bank of the United States, 277 N.Y.S. 96. 100, as follows:

A cashier's check issued by a bank, however, is not an ordinary draft. The latter is a bill of exchange
payable demand. It is an order upon a third party purporting to drawn upon a deposit of funds. Drinkall
v. Movious State Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State v. Tyler County
State Bank (Tex. Com. App.) 277 S.W. 625, 42 A.L.R. 1347. A cashier's check is of a very different
character. It is the primary obligation of the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253,
S.E. 776) and constitutes its written promise to pay upon demand (Steinmetz v. Schultz, 59 S.D. 603,
241 N.W. 734)....lawphil.net

The following definitions cited by appellant also confirm this view:

A cashier's check is a check of the bank's cashier on his or another bank. It is in effect a bill of exchange
drawn by a bank on itself and accepted in advance by the act of issuance (10 C.J.S. 409).

A cashier's check issued on request of a depositor is the substantial equivalent of a certified check and
the deposit represented by the check passes to the credit of the checkholder, who is thereafter a
depositor to that amount (Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552).

A cashier's check, being merely a bill of exchange drawn by a bank on itself, and accepted in advance
by the act of issuance, is not subject to countermand by the payee after indorsement, and has the same
legal effects as a certificate deposit or a certified check (Walker v. Sellers, 77 So. 715, 201 Ala. 189).

A demand draft is not therefore of the same category as a cashier's check which should come within
the purview of the law.

The case, however, is different with regard to telegraphic payment order. It is said that as the
transaction is for the establishment of a telegraphic or cable transfer the agreement to remit creates a
contractual obligation a has been termed a purchase and sale transaction (9 C.J.S. 368). The purchaser
of a telegraphic transfer upon making payment completes the transaction insofar as he is concerned,
though insofar as the remitting bank is concerned the contract is executory until the credit is
established (Ibid.) We agree with the following comment the Solicitor General: "This is so because the
drawer bank was already paid the value of the telegraphic transfer payment order. In the particular
cases under consideration it appears in the books of the defendant bank that the amounts represented
by the telegraphic payment orders appear in the names of the respective payees. If the latter choose
to demand payment of their telegraphic transfers at the time the same was (were) received by the
defendant bank, there could be no question that this bank would have to pay them. Now, the question
is, if the payees decide to have their money remain for sometime in the defendant bank, can the latter
maintain that the ownership of said telegraphic payment orders is now with the drawer bank? The
latter was already paid the value of the telegraphic payment orders otherwise it would not have
transmitted the same to the defendant bank. Hence, it is absurd to say that the drawer banks are still
the owners of said telegraphic payment orders."

7
WHEREFORE, the decision of the trial court is hereby modified in the sense that the items specifically
referred to and listed under paragraph 3 of appellee bank's answer representing telegraphic transfer
payment orders should be escheated in favor of the Republic of the Philippines. No costs.

Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ., concur.

Bengzon, C.J., Padilla, Labrador and Concepcion, JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-48349 December 29, 1986

FRANCISCO HERRERA, plaintiff-appellant,

vs.
PETROPHIL CORPORATION, defendant-appellee.

Paterno R. Canlas Law Offices for plaintiff-appellant.

CRUZ, J.:

This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First Instance
of Rizal on a pure question of law. 1

The judgment appealed from was rendered on the pleadings, the parties having agreed during the
pretrial conference on the factual antecedents.

The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern. Inc.,
(later substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the former
leased to the latter a portion of his property for a period of twenty (20) years from said date,
subject inter alia to the following conditions:

3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm. and are to be
expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on 1,693 sqm. or P2,370.21
per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable yearly in advance within
the 1st twenty days of each year; provided, a financial aid in the sum of P15,000 to clear the leased
premises of existing improvements thereon is paid in this manner; P10,000 upon execution of this lease
and P5,000 upon delivery of leased premises free and clear of improvements thereon within 30 days
from the date of execution of this agreement. The portion on the side of the leased premises with an
area of 365 sqrm. more or less, will be occupied by LESSEE without rental during the lifetime of this

8
lease. PROVIDED FINALLY, that the Lessor is paid 8 years advance rental based on P2,930.70 per month
discounted at 12% interest per annum or a total net amount of P130,288.47 before registration of lease.
Leased premises shall be delivered within 30 days after 1st partial payment of financial aid. 2

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintfff-
appellant advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73,
the amount it computed as constituting the interest or discount for the first eight years, in the total
sum P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a
mistake in computation, paid to the appellant the additional sum of P2,182.70, thereby reducing the
deducted amount to only P98,828.03. 3

On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03,
with interest, claiming this had been illegally deducted from him in violation of the Usury Law. 4 He also
prayed for moral damages and attorney's fees. In its answer, the defendant-appellee admitted the
factual allegations of the complaint but argued that the amount deducted was not usurious interest
but a given to it for paying the rentals in advance for eight years. 5 Judgment on the pleadings was
rendered for the defendant. 6

Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the
computation of the interest collected out of the rentals paid for the first eight years; that such interest
was excessive and violative of the Usury Law; and that he had neither agreed to nor accepted the
defendant-appellant's computation of the total amount to be deducted for the eight years advance
rentals. 7

The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read:

6. The interest collected by defendant out of the rentals for the first eight years was excessive and
beyond that allowable by law, because the total interest on the said amount is only P33,755.90 at
P4,219.4880 per yearly rental; and considering that the interest should be computed excluding the first
year rental because at the time the amount of P281, 199.20 was paid it was already due under the lease
contract hence no interest should be collected from the rental for the first year, the amount of
P29,536.42 only as the total interest should have been deducted by defendant from the sum of
P281,299.20.

The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is
not excessive and above that allowed by law.

As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is clearly
denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties
intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be
construed as a repayment of a loan because there was no grant or forbearance of money as to
constitute an indebtedness on the part of the lessor. On the contrary, the defendant-appellee was
discharging its obligation in advance by paying the eight years rentals, and it was for this advance
payment that it was getting a rebate or discount.

The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the
parties may establish such stipulations, clauses, terms and condition as they may want to include; and
as long as such agreements are not contrary to law, morals, good customs, public policy or public order,
they shall have the force of law between them. 8

There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-
appellant, nor did it allow him to use its money already in his possession. 9 There was neither loan nor

9
forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee to
deduct from the total payments because they were being made in advance for eight years. The discount
was in effect a reduction of the rentals which the lessor had the right to determine, and any reduction
thereof, by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to be
repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on
usury. 10

To constitute usury, "there must be loan or forbearance; the loan must be of money or something
circulating as money; it must be repayable absolutely and in all events; and something must be exacted
for the use of the money in excess of and in addition to interest allowed by law." 11

It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding
between the parties that the money lent shall or may be returned; that for such loan a greater rate or
interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt
intent to take more than the legal rate for the use of money loaned. Unless these four things concur in
every transaction, it is safe to affirm that no case of usury can be declared. 12

Concerning the computation of the deductible discount, the trial court declared:

As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shag pay the
lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per month discounted at 12%
interest per annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20 multiplied by
12 months) and that the interest therefrom is P4,219.4880 (P35,162.40 multiplied by 12%). So,
therefore, the total interest for the first eight (8) years should be only P33,755.90 (P4,129.4880
multiplied by eight (8) years and not P98,828.03 as the defendant claimed it to be.

The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most seriously
misleading. He just computed the annual discount to be at P4,129.4880 and then simply multiplied it
by eight (8) years. He did not take into consideration the naked fact that the rentals due on the eight
year were paid in advance by seven (7) years, the rentals due on the seventh year were paid in advance
by six (6) years, those due on the sixth year by five (5) years, those due on the fifth year by four (4)
years, those due on the fourth year by three (3) years, those due on the third year by two (2) years, and
those due on the second year by one (1) year, so much so that the total number of years by which the
annual rental of P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of
P118,145.44 (P4,129.48 multiplied by 28 years) as the discount. However, defendant was most fair to
plaintiff. It did not simply multiply the annual rental discount by 28 years. It computed the total discount
with the principal diminishing month to month as shown by Annex 'A' of its memorandum. This is why
the total discount amount to only P 8,828.03.

The allegation of plaintiff that defendant made the computation in a compounded manner is erroneous.
Also after making its own computations and after examining closely defendant's Annex 'A' of its
memorandum, the court finds that defendant did not charge 12% discount on the rentals due for the
first year so much so that the computation conforms with the provision of the Lease Agreement to the
effect that the rentals shall be 'payable yearly in advance within the 1st 20 days of each year. '

We do not agree. The above computation appears to be too much technical mumbo-jumbo and could
not have been the intention of the parties to the transaction. Had it been so, then it should have been
clearly stipulated in the contract. Contracts should be interpreted according to their literal meaning and
should not be interpreted beyond their obvious intendment. 13

10
The plaintfff-appellant simply understood that for every year of advance payment there would be a
deduction of 12% and this amount would be the same for each of the eight years. There is no showing
that the intricate computation applied by the trial court was explained to him by the defendant-
appellee or that he knowingly accepted it.

The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had
actually agreed to a 12% reduction for advance rentals for all of twenty eight years. That is absurd. It is
not normal for a person to agree to a reduction corresponding to twenty eight years advance rentals
when all he is receiving in advance rentals is for only eight years.

The deduction shall be for only eight years because that was plainly what the parties intended at the
time they signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it, but
that is how the lessor understood the arrangement. In fact, the Court will reject his subsequent
modification that the interest should be limited to only seven years because the first year rental was
not being paid in advance. The agreement was for a uniform deduction for the advance rentals for each
of the eight years, and neither of the parties can deviate from it now.

On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, the
total rental was P281,347.20 from which was deducted the total discount of P33,761.68, leaving a
difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid will
leave a balance of P65,114.35 still due the plaintiff-appellant.

The above computation is based on the more reasonable interpretation of the contract as a
whole rather on the single stipulation invoked by the respondent for the flat reduction of P130,288.47.

WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee Petrophil
Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One Hundred
Fourteen pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate until fully paid,
plus Ten Thousand Pesos (P10,000.00) as attorney's fees. Costs against the defendant-appellee.

SO ORDERED.

Yap (Chairman), Narvasa, Melencio-Herrera and Feliciano, JJ., concur.

11
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.

Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.

Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p

In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28,
1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential
damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at
the legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00.
The present appeal is from that judgment.

12
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance
Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as
follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.

Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura
on the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao
City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a
trust receipt in favor of the said bank.

On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to
be secured by a first mortgage on the factory building to be constructed, the land site thereof, and the
machinery and equipment to be installed. Among the other terms spelled out in the resolution were
the following:

1. That the proceeds of the loan shall be utilized exclusively for the following purposes:

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery and equipment 240,900.00

For working capital 9,100.00

T O T A L P500,000.00

4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and
China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;

5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to
availability of funds, and as the construction of the factory buildings progresses, to be certified to by an
appraiser of this Corporation;"

Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however,
evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting
a modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which
was willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-
maker on the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an
amount equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia
Arellano as one of the other co-makers, having acquired the latter's shares in Saura, Inc.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the
aspects of this approved loan ... with special reference as to the advisability of financing this particular
project based on present conditions obtaining in the operations of jute mills, and to submit his findings
thereon at the next meeting of the Board."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer
for the loan, and asked that the necessary documents be prepared in accordance with the terms and
conditions specified in Resolution No. 145. In connection with the reexamination of the project to be

13
financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake the necessary
studies, although in appointing its own committee Saura, Inc. made the observation that the same
"should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the
agreement already) entered into," referring to its acceptance of the terms and conditions mentioned
in Resolution No. 145.

On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage,
which was duly registered on the following April 17.

It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June
10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the
loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:

RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution
No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-
examination of all the various aspects of the loan granted the Saura Import & Export Co. under
Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with
special reference as to the advisability of financing this particular project based on present conditions
obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive
discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan
granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up
to P100,000 may be authorized as may be necessary from time to time to place the factory in actual
operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent
herewith, shall remain in full force and effect."

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China
Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and
therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2
requested RFC that the registration of the mortgage be withdrawn.

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The
request was denied by RFC, which added in its letter-reply that it was "constrained to consider as
cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
expressing their desire to consider the loan insofar as they are concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China
Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us
the P500,000.00 originally approved by you.".

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly
with the borrower-corporation," but with the following proviso:

That in view of observations made of the shortage and high cost of imported raw materials, the
Department of Agriculture and Natural Resources shall certify to the following:

1. That the raw materials needed by the borrower-corporation to carry out its operation are available
in the immediate vicinity; and

14
2. That there is prospect of increased production thereof to provide adequately for the requirements
of the factory."

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954,
wherein it was explained that the certification by the Department of Agriculture and Natural Resources
was required "as the intention of the original approval (of the loan) is to develop the manufacture of
sacks on the basis of locally available raw materials." This point is important, and sheds light on the
subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao
was for the manufacture of bags from local raw materials. The cover page of its brochure (Exh. M)
describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the
Saura Import and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture
copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials,
principal kenaf." The explanatory note on page 1 of the same brochure states that, the venture "is the
first serious attempt in this country to use 100% locally grown raw materials notably kenaf which is
presently grown commercially in theIsland of Mindanao where the proposed jutemill is located ..."

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first
place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and
Natural Resources as to the availability of local raw materials to provide adequately for the
requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of
January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry "kenaf will
not be available in sufficient quantity this year or probably even next year;" (2) requesting "assurances
(from RFC) that my company and associates will be able to bring in sufficient jute materials as may be
necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as
follows:

a) For the payment of the receipt for jute mill

machineries with the Prudential Bank &

Trust Company P250,000.00

(For immediate release)

b) For the purchase of materials and equip-

ment per attached list to enable the jute
mill to operate 182,413.91

c) For raw materials and labor 67,586.09

1) P25,000.00 to be released on the open-

ing of the letter of credit for raw jute
for $25,000.00.

2) P25,000.00 to be released upon arrival

of raw jute.

3) P17,586.09 to be released as soon as the

mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

Dear Sirs:

15
This is with reference to your letter of January 21, 1955, regarding the release of your loan under
consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if
revived, are proposed to be made from time to time, subject to availability of funds towards the end
that the sack factory shall be placed in actual operating status. We shall be able to act on your request
for revised purpose and manner of releases upon re-appraisal of the securities offered for the loan.

With respect to our requirement that the Department of Agriculture and Natural Resources certify that
the raw materials needed are available in the immediate vicinity and that there is prospect of increased
production thereof to provide adequately the requirements of the factory, we wish to reiterate that
the basis of the original approval is to develop the manufacture of sacks on the basis of the locally
available raw materials. Your statement that you will have to rely on the importation of jute and your
request that we give you assurance that your company will be able to bring in sufficient jute materials
as may be necessary for the operation of your factory, would not be in line with our principle in
approving the loan.

With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the
corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura,
Inc.

It appears that the cancellation was requested to make way for the registration of a mortgage contract,
executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co.,
under which contract Saura, Inc. had up to December 31 of the same year within which to pay its
obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the said
obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.

On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of
Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor
of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and
approved, thereby preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between
the parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and
reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been
waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the
plaintiff itself did not comply with the terms thereof.

We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the
Civil Code, which provides:

ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perferted until the delivery of
the object of the contract.

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was
executed and registered. But this fact alone falls short of resolving the basic claim that the defendant
failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the
factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no

16
serious dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083
approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed
two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and (2) that there is prospect of increased production
thereof to provide adequately for the requirements of the factory." The imposition of those conditions
was by no means a deviation from the terms of the agreement, but rather a step in its implementation.
There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145,
passed on January 7, 1954, namely — "that the proceeds of the loan shall be utilized exclusively for the
following purposes: for construction of factory building — P250,000.00; for payment of the balance of
purchase price of machinery and equipment — P240,900.00; for working capital — P9,100.00."
Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its
letter of January 21, 1955, stating that local jute "will not be able in sufficient quantity this year or
probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released
"for raw materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and
embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to
purposes other than those agreed upon.

When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been
going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no
position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released
as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955.
The action thus taken by both parties was in the nature cf mutual desistance — what Manresa terms
"mutuo disenso"1 — which is a mode of extinguishing obligations. It is a concept that derives from the
principle that since mutual agreement can create a contract, mutual disagreement by the parties can
cause its extinguishment.2

The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged
breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request
for cancellation of the mortgage carried no reservation of whatever rights it believed it might have
against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance
a rice and corn project, which application was disapproved. It was only in 1964, nine years after the
loan agreement had been cancelled at its own request, that Saura, Inc. brought this action for
damages.All these circumstances demonstrate beyond doubt that the said agreement had been
extinguished by mutual desistance — and that on the initiative of the plaintiff-appellee itself.

With this view we take of the case, we find it unnecessary to consider and resolve the other issues
raised in the respective briefs of the parties.

WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against
the plaintiff-appellee.

Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur.

Makasiar, J., took no par

17
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-49101 October 24, 1983

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,

vs.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE, respondents.

Edgardo I. De Leon for petitioners.

Siguion Reyna, Montecillo & Associates for private respondent.

18
GUERRERO, J:

Petition for review on certiorari seeking the reversal of the decision of the defunct Court of Appeals,
now Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie vs. Philippine
Bank of Commerce, et al.," promulgated August 11, 1978 1 as well as the Resolution denying the
motion for reconsideration.

The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First
Instance of Rizal against respondent Philippine Bank of Commerce sought the annulment of the Deed
of Mortgage dated December 6, 1966 executed in favor of the Philippine Bank of Commerce by the
spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made on
September 4, 1968. It alleged among others that (a) the Deed of Mortgage lacks consideration and (b)
the mortgage was executed by one who was not the owner of the mortgaged property. It further
alleged that the property in question was foreclosed pursuant to Act No. 3135 as amended, without,
however, complying with the condition imposed for a valid foreclosure. Granting the validity of the
mortgage and the extrajudicial foreclosure, it finally alleged that respondent Bank should have
accepted petitioner's offer to redeem the property under the principle of equity said justice.

On the other hand, the answer of defendant Bank, now private respondent herein, specifically denied
most of the allegations in the complaint and raised the following affirmative defenses: (a) that the
defendant has not given its consent, much less the requisite written consent, to the sale of the
mortgaged property to plaintiff and the assumption by the latter of the loan secured thereby; (b) that
the demand letters and notice of foreclosure were sent to Jose Lozano at his address; (c) that it was
notified for the first time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that
the law on contracts requires defendant's consent before Jose Lozano can be released from his
bilateral agreement with the former and doubly so, before plaintiff may be substituted for Jose
Lozano and Alfonso Lim; (e) that the loan of P75,000.00 which was secured by mortgage, after two
renewals remain unpaid despite countless reminders and demands; of that the property in question
remained registered in the name of Jose M. Lozano in the land records of Rizal and there was no
entry, notation or indication of the alleged sale to plaintiff; (g) that it is an established banking
practice that payments against accounts need not be personally made by the debtor himself; and (h)
that it is not true that the mortgage, at the time of its execution and registration, was without
consideration as alleged because the execution and registration of the securing mortgage, the signing
and delivery of the promissory note and the disbursement of the proceeds of the loan are mere
implementation of the basic consensual contract of loan.

After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a motion
for intervention. The intervention was premised on the Deed of Assignment executed by petitioner
Honesto Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and interests of
petitioner Honesto Bonnevie over the subject property. The intervention was ultimately granted in
order that all issues be resolved in one proceeding to avoid multiplicity of suits.

On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as
follows:

WHEREFORE, all the foregoing premises considered, judgment is hereby rendered dismissing the
complaint with costs against the plaintiff and the intervenor.

After the motion for reconsideration of the lower court's decision was denied, petitioners appealed to
respondent Court of Appeals assigning the following errors:

19
1. The lower court erred in not finding that the real estate mortgage executed by Jose Lozano was null
and void;

2. The lower court erred in not finding that the auction sale decide on August 19, 1968 was null and
void;

3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the property;

4. The lower court erred in not finding that the defendant acted in bad faith; and

5. The lower court erred in dismissing the complaint.

On August 11, 1978, the respondent court promulgated its decision affirming the decision of the
lower court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present
petition for review.

The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby
adopt the facts found the trial court and found by the Court of Appeals to be consistent with the
evidence adduced during trial, to wit:

It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the owners of the property
which they mortgaged on December 6, 1966, to secure the payment of the loan in the principal
amount of P75,000.00 they were about to obtain from defendant-appellee Philippine Bank of
Commerce; that on December 8, 1966, executed in favor of plaintiff-appellant the Deed of Sale with
Mortgage ,, for and in consideration of the sum of P100,000.00, P25,000.00 of which amount being
payable to the Lozano spouses upon the execution of the document, and the balance of P75,000.00
being payable to defendant- appellee; that on December 6, 1966, when the mortgage was executed
by the Lozano spouses in favor of defendant-appellee, the loan of P75,000.00 was not yet received
them, as it was on December 12, 1966 when they and their co-maker Alfonso Lim signed the
promissory note for that amount; that from April 28, 1967 to July 12, 1968, plaintiff-appellant made
payments to defendant-appellee on the mortgage in the total amount of P18,944.22; that on May 4,
1968, plaintiff-appellant assigned all his rights under the Deed of Sale with Assumption of Mortgage
to his brother, intervenor Raoul Bonnevie; that on June 10, 1968, defendant-appellee applied for the
foreclosure of the mortgage, and notice of sale was published in the Luzon Weekly Courier on June
30, July 7, and July 14, 1968; that auction sale was conducted on August 19, 1968, and the property
was sold to defendant-appellee for P84,387.00; and that offers from plaintiff-appellant to repurchase
the property failed, and on October 9, 1969, he caused an adverse claim to be annotated on the title
of the property. (Decision of the Court of Appeals, p. 5).

Presented for resolution in this review are the following issues:

Whether the real estate mortgage executed by the spouses Lozano in favor of respondent bank was
validly and legally executed.

II

Whether the extrajudicial foreclosure of the said mortgage was validly and legally effected.

III

20
Whether petitioners had a right to redeem the foreclosed property.

IV

Granting that petitioners had such a right, whether respondent was justified in refusing their offers to
repurchase the property.

As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold. They
primarily attack the validity of the mortgage executed by the Lozano spouses in favor of respondent
Bank. Next, they attack the validity of the extrajudicial foreclosure and finally, appeal to justice and
equity. In attacking the validity of the deed of mortgage, they contended that when it was executed
on December 6, 1966, there was yet no principal obligation to secure as the loan of P75,000.00 was
not received by the Lozano spouses "So much so that in the absence of a principal obligation, there is
want of consideration in the accessory contract, which consequently impairs its validity and fatally
affects its very existence." (Petitioners' Brief, par. 1, p. 7).

This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly
seen that the mortgage deed was executed for and on condition of the loan granted to the Lozano
spouses. The fact that the latter did not collect from the respondent Bank the consideration of the
mortgage on the date it was executed is immaterial. A contract of loan being a consensual contract,
the herein contract of loan was perfected at the same time the contract of mortgage was executed.
The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does
not indicate lack of consideration of the mortgage at the time of its execution.

Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the
original loan, using as security the same property which the Lozano spouses had already sold to
petitioners, rendered the mortgage null and void,

This argument failed to consider the provision 2 of the contract of mortgage which prohibits the sale,
disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent
of the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged
property is sold, the vendee shall assume the mortgage in the terms and conditions under which it is
constituted. These provisions are expressly made part and parcel of the Deed of Sale with Assumption
of Mortgage.

Petitioners admit that they did not secure the consent of respondent Bank to the sale with
assumption of mortgage. Coupled with the fact that the sale/assignment was not registered so that
the title remained in the name of the Lozano spouses, insofar as respondent Bank was concerned, the
Lozano spouses could rightfully and validly mortgage the property. Respondent Bank had every right
to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the
mortgagor's title, the doctrine of innocent purchaser for value being applicable to an innocent
mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48).
Another argument for the respondent Bank is that a mortgage follows the property whoever the
possessor may be and subjects the fulfillment of the obligation for whose security it was constituted.
Finally, it can also be said that petitioners voluntarily assumed the mortgage when they entered into
the Deed of Sale with Assumption of Mortgage. They are, therefore, estopped from impugning its
validity whether on the original loan or renewals thereof.

Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following
grounds:

a) petitioners were never notified of the foreclosure sale.

21
b) The notice of auction sale was not posted for the period required by law.

c) publication of the notice of auction sale in the Luzon Weekly Courier was not in accordance with
law.

The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not being
a party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not aware of
the same and hence, it may not be obliged to notify petitioners. Secondly, petitioner Honesto
Bonnevie was not entitled to any notice because as of May 14, 1968, he had transferred and assigned
all his rights and interests over the property in favor of intervenor Raoul Bonnevie and respondent
Bank not likewise informed of the same. For the same reason, Raoul Bonnevie is not entitled to
notice. Most importantly, Act No. 3135 does not require personal notice on the mortgagor. The
requirement on notice is that:

Section 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least
three public places of the municipality or city where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be published once a week for at least
three consecutive weeks in a newspaper of general circulation in the municipality or city

In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July 14,
1968 and notices of the sale were posted for not less than twenty days in at least three (3) public
places in the Municipality where the property is located. Petitioners were thus placed on constructive
notice.

The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said case
involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly
registered making the mortgaged privy to the sale.

As regards the claim that the period of publication of the notice of auction sale was not in accordance
with law, namely: once a week for at least three consecutive weeks, the Court of Appeals ruled that
the publication of notice on June 30, July 7 and July 14, 1968 satisfies the publication requirement
under Act No. 3135 notwithstanding the fact that June 30 to July 14 is only 14 days. We agree. Act No.
3135 merely requires that such notice shall be published once a week for at least three consecutive
weeks." Such phrase, as interpreted by this Court in Basa vs. Mercado, 61 Phil. 632, does not mean
that notice should be published for three full weeks.

The argument that the publication of the notice in the "Luzon Weekly Courier" was not in accordance
with law as said newspaper is not of general circulation must likewise be disregarded. The affidavit of
publication, executed by the Publisher, business/advertising manager of the Luzon Weekly Courier,
stares that it is "a newspaper of general circulation in ... Rizal, and that the Notice of Sheriff's sale was
published in said paper on June 30, July 7 and July 14, 1968. This constitutes prima facie evidence of
compliance with the requisite publication. Sadang vs. GSIS, 18 SCRA 491).

To be a newspaper of general circulation, it is enough that "it is published for the dissemination of
local news and general information; that it has a bona fide subscription list of paying subscribers; that
it is published at regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not have
the largest circulation so long as it is of general circulation. Banta vs. Pacheco, 74 Phil. 67). The
testimony of three witnesses that they do read the Luzon Weekly Courier is no proof that said
newspaper is not a newspaper of general circulation in the province of Rizal.

Whether or not the notice of auction sale was posted for the period required by law is a question of
fact. It can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126).

22
Nevertheless, the records show that copies of said notice were posted in three conspicuous places in
the municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig
Municipal Hall. In the same manner, copies of said notice were also posted in the place where the
property was located, namely: the Municipal Building of San Juan, Rizal; the Municipal Market and on
Benitez Street. The following statement of Atty. Santiago Pastor, head of the legal department of
respondent bank, namely:

Q How many days were the notices posted in these two places, if you know?

A We posted them only once in one day. (TSN, p. 45, July 25, 1973)

is not a sufficient countervailing evidence to prove that there was no compliance with the posting
requirement in the absence of proof or even of allegation that the notices were removed before the
expiration of the twenty- day period. A single act of posting (which may even extend beyond the
period required by law) satisfies the requirement of law. The burden of proving that the posting
requirement was not complied with is now shifted to the one who alleges non-compliance.

On the question of whether or not the petitioners had a right to redeem the property, We hold that
the Court of Appeals did not err in ruling that they had no right to redeem. No consent having been
secured from respondent Bank to the sale with assumption of mortgage by petitioners, the latter
were not validly substituted as debtors. In fact, their rights were never recorded and hence,
respondent Bank is charged with the obligation to recognize the right of redemption only of the
Lozano spouses. But even granting that as purchaser or assignee of the property, as the case may be,
the petitioners had acquired a right to redeem the property, petitioners failed to exercise said right
within the period granted by law. Thru certificate of sale in favor of appellee was registered on
September 2, 1968 and the one year redemption period expired on September 3, 1969. It was not
until September 29, 1969 that petitioner Honesto Bonnevie first wrote respondent and offered to
redeem the property. Moreover, on September 29, 1969, Honesto had at that time already
transferred his rights to intervenor Raoul Bonnevie.

On the question of whether or not respondent Court of Appeals erred in holding that respondent
Bank did not act in bad faith, petitioners rely on Exhibit "B" which is the letter of lose Lozano to
respondent Bank dated December 8, 1966 advising the latter that Honesto Bonnevie was authorized
to make payments for the amount secured by the mortgage on the subject property, to receive
acknowledgment of payments, obtain the Release of the Mortgage after full payment of the
obligation and to take delivery of the title of said property. On the assumption that the letter was
received by respondent Bank, a careful reading of the same shows that the plaintiff was merely
authorized to do acts mentioned therein and does not mention that petitioner is the new owner of
the property nor request that all correspondence and notice should be sent to him.

The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the
maturity of said loan up to said date and accordingly on June 10, 1968 when defendant applied for
the foreclosure of the mortgage, the loan was not yet due and demandable, is totally incorrect and
misleading. The undeniable fact is that the loan matured on December 26, 1967. On June 10, 1968,
when respondent Bank applied for foreclosure, the loan was already six months overdue. Petitioners'
payment of interest on July 12, 1968 does not thereby make the earlier act of respondent Bank
inequitous nor does it ipso facto result in the renewal of the loan. In order that a renewal of a loan
may be effected, not only the payment of the accrued interest is necessary but also the payment of
interest for the proposed period of renewal as well. Besides, whether or not a loan may be renewed
does not solely depend on the debtor but more so on the discretion of the bank. Respondent Bank
may not be, therefore, charged of bad faith.

23
WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby
AFFIRMED. Costs against petitioners.

SO ORDERED.

Aquino, J., concur.

Makasiar (Chairman), Abad Santos and Escolin, JJ., concurs in the result.

Concepcion J J., took no part.

De Castro, J., is on leave.

24
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE
DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island
Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.

I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15,
1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio M.
Tolentino for injunction, specific performance or rescission, and damages with preliminary injunction.

On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las
Nieves, Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title
the next day. The approved loan application called for a lump sum P80,000.00 loan, repayable in
semi-annual installments for a period of 3 years, with 12% annual interest. It was required that
Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other
property into a subdivision.

25
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank;
and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12%
annual interest, payable within 3 years from the date of execution of the contract at semi-annual
installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-
month period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this
pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by
the Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.).
The Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00
balance (p. 113, rec.).

On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities, the
Board, by unanimous vote, decided as follows:

1) To prohibit the bank from making new loans and investments [except investments in government
securities] excluding extensions or renewals of already approved loans, provided that such extensions
or renewals shall be subject to review by the Superintendent of Banks, who may impose such
limitations as may be necessary to insure correction of the bank's deficiency as soon as possible;

xxx xxx xxx

(p. 46, rec.).

On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take
charge of the assets of Island Savings Bank (pp. 48-49, rec).

On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.

On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the
real estate mortgage (pp. 32-43, rec.).

On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).

On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of
the petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central
Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the

26
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining
order so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.

On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of
First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor
collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.

The issues are:

1. Can the action of Sulpicio M. Tolentino for specific performance prosper?

2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?

3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage be
foreclosed to satisfy said amount?

When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready
and willing to perform his part of the contract, the other party who has not performed or is not ready
and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the
Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from
doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish
the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over
insolvent banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which
took effect on June 15, 1948, the validity of which is not in question.

The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the
contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs.
Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by
him (vol. 17A, 1974 ed., CJS p. 650)

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be
taken as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in
asking the advance interest for 6 months on the supposed P80,000.00 loan, was improper considering
that only P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged
interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted

27
interest was an exercise of his right to it, which right exist independently of his right to demand the
completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the
exercise of the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151
[1981]). It is the obligation of the bank's officials and employees that before they approve the loan
application of their customers, they must investigate the existence and evaluation of the properties
being offered as a loan security. The recent rush of events where collaterals for bank loans turn out to
be non-existent or grossly over-valued underscore the importance of this responsibility. The mere
reliance by bank officials and employees on their customer's representation regarding the loan
collateral being offered as loan security is a patent non-performance of this responsibility. If ever
bank officials and employees totally reIy on the representation of their customers as to the valuation
of the loan collateral, the bank shall bear the risk in case the collateral turn out to be over-valued. The
representation made by the customer is immaterial to the bank's responsibility to conduct its own
investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had enjoined
petitioners from presenting proof on the alleged over-valuation because of their failure to raise the
same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by
the Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in
a motion to dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same
issue before the Supreme Court.

Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.

Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such
amount is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the
partial release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note
to cover it, the bank was deemed to have complied with its reciprocal obligation to furnish a
P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay
the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil
Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is,
Island Savings Bank. If Tolentino had not signed a promissory note setting the date for payment of
P17,000.00 within 3 years, he would be entitled to ask for rescission of the entire loan because he
cannot possibly be in default as there was no date for him to perform his reciprocal obligation to pay.

Since both parties were in default in the performance of their respective reciprocal obligations, that
is, Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by
the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not

28
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI
7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely
foreclosed to satisfy his P 17,000.00 debt.

The consideration of the accessory contract of real estate mortgage is the same as that of the
principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of
his obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate
mortgage, the consideration of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).

The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was
then in existence, as there was no debt yet because Island Savings Bank had not made any release on
the loan, does not make the real estate mortgage void for lack of consideration. It is not necessary
that any consideration should pass at the time of the execution of the contract of real mortgage
(Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the
consideration is subsequent to the mortgage, the mortgage can take effect only when the debt
secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in
the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration,
the mortgage becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172
N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder
of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for
more than the actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th
ed., Wiltsie on Mortgage, Vol. 1, P. 180).

Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75%
of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent
of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for
the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.

Article 2089 provides:

A pledge or mortgage is indivisible even though the debt may be divided among the successors in
interest of the debtor or creditor.

Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the pledge or cancel
the mortgage, to the prejudice of other heirs who have not been paid.

The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes
several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of
indivisibility of a mortgage cannot apply

29
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY
MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM
OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD
FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED
FROM AUGUST 22, 1985 UNTIL PAID;

2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25
HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND

3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE
AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.

NO COSTS. SO ORDERED.

Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.

Aquino (Chairman) and Abad Santos, JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.

D. T. Reyes, Liaison and Associates for petitioner-appellant.

Office of the Solicitor General for plaintiff-appellee.

30
PADILLA, J.:

The Court of Appeals certified this case to this Court because only questions of law are raised.

On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and
a Sahiniwal, of P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes
subject to a government charge of breeding fee of 10% of the book value of the bulls. Upon the
expiration on 7 May 1949 of the contract, the borrower asked for a renewal for another period of one
year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof of only
one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of the other two.
On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the value
of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value with a deduction
of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the Director of
Animal Industry advised him that the book value of the three bulls could not be reduced and that they
either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay
the book value of the three bulls or to return them. So, on 20 December 1950 in the Court of First
Instance of Manila the Republic of the Philippines commenced an action against him praying that he be
ordered to return the three bulls loaned to him or to pay their book value in the total sum of P3,241.45
and the unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other just
and equitable relief be granted in (civil No. 12818).

On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of
the bad peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the
pending appeal he had taken to the Secretary of Agriculture and Natural Resources and the President
of the Philippines from the refusal by the Director of Animal Industry to deduct from the book value of
the bulls corresponding yearly depreciation of 8% from the date of acquisition, to which depreciation
the Auditor General did not object, he could not return the animals nor pay their value and prayed for
the dismissal of the complaint.

After hearing, on 30 July 1956 the trial court render judgment —

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus
the breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the
filing of this complaint and costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18
October and issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by
the plaintiff on November 1958 for the appointment of a special sheriff to serve the writ outside Manila.
Of this order appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse
of the defendant Jose Bagtas who died on 23 October 1951 and as administratrix of his estate, was
notified. On 7 January 1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and
Bhagnari were returned to the Bureau Animal of Industry and that sometime in November 1958 the
third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda Felicidad
Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction be
issued. On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply
thereto. On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the
Court of Appeals to this Court as stated at the beginning of this opinion.

It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned
the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal
Industry, Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter

31
(Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's motion to quash the writ
of execution the appellee prays "that another writ of execution in the sum of P859.53 be issued against
the estate of defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which
already had been returned to and received by the appellee.

The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in
November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the
animal was kept, and that as such death was due to force majeure she is relieved from the duty of
returning the bull or paying its value to the appellee. The contention is without merit. The loan by the
appellee to the late defendant Jose V. Bagtas of the three bulls for breeding purposes for a period of
one year from 8 May 1948 to 7 May 1949, later on renewed for another year as regards one bull, was
subject to the payment by the borrower of breeding fee of 10% of the book value of the bulls. The
appellant contends that the contract was commodatum and that, for that reason, as the appellee
retained ownership or title to the bull it should suffer its loss due to force majeure. A contract
of commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then the
contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject
to the responsibilities of a possessor in bad faith, because she had continued possession of the bull
after the expiry of the contract. And even if the contract be commodatum, still the appellant is liable,
because article 1942 of the Civil Code provides that a bailee in a contract of commodatum —

. . . is liable for loss of the things, even if it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated . . .

(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed
for another period of one year to end on 8 May 1950. But the appellant kept and used the bull until
November 1953 when during a Huk raid it was killed by stray bullets. Furthermore, when lent and
delivered to the deceased husband of the appellant the bulls had each an appraised book value, to with:
the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at P744.46. It was not stipulated
that in case of loss of the bull due to fortuitous event the late husband of the appellant would be exempt
from liability.

The appellant's contention that the demand or prayer by the appellee for the return of the bull or the
payment of its value being a money claim should be presented or filed in the intestate proceedings of
the defendant who died on 23 October 1951, is not altogether without merit. However, the claim that
his civil personality having ceased to exist the trial court lost jurisdiction over the case against him, is
untenable, because section 17 of Rule 3 of the Rules of Court provides that —

After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice,
the legal representative of the deceased to appear and to be substituted for the deceased, within a
period of thirty (30) days, or within such time as may be granted. . . .

and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of
Rule 3 which provides that —

Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court
promptly of such death . . . and to give the name and residence of the executory administrator, guardian,
or other legal representative of the deceased . . . .

32
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had
been issue letters of administration of the estate of the late Jose Bagtas and that "all persons having
claims for monopoly against the deceased Jose V. Bagtas, arising from contract express or implied,
whether the same be due, not due, or contingent, for funeral expenses and expenses of the last sickness
of the said decedent, and judgment for monopoly against him, to file said claims with the Clerk of this
Court at the City Hall Bldg., Highway 54, Quezon City, within six (6) months from the date of the first
publication of this order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the
appointed administratrix of the estate of the said deceased," is not a notice to the court and the
appellee who were to be notified of the defendant's death in accordance with the above-quoted rule,
and there was no reason for such failure to notify, because the attorney who appeared for the
defendant was the same who represented the administratrix in the special proceedings instituted for
the administration and settlement of his estate. The appellee or its attorney or representative could
not be expected to know of the death of the defendant or of the administration proceedings of his
estate instituted in another court that if the attorney for the deceased defendant did not notify the
plaintiff or its attorney of such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is
only liable for the sum of P859.63, the value of the bull which has not been returned to the appellee,
because it was killed while in the custody of the administratrix of his estate. This is the amount prayed
for by the appellee in its objection on 31 January 1959 to the motion filed on 7 January 1959 by the
appellant for the quashing of the writ of execution.

Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas
having been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in
favor of the appellee cannot be enforced by means of a writ of execution but must be presented to the
probate court for payment by the appellant, the administratrix appointed by the court.

ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and
Makalintal, JJ., concur.
Barrera, J., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-8321 October 14, 1913

33
ALEJANDRA MINA, ET AL., plaintiffs-appellants,
vs.
RUPERTA PASCUAL, ET AL., defendants-appellees.

N. Segundo for appellants.

Iñigo Bitanga for appellees.

ARELLANO, C.J.:

Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his
lifetime, on March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of Ilocos
Norte, the property having been awarded to him through its purchase at a public auction held by
the alcalde mayor of that province. The lot has a frontage of 120 meters and a depth of 15.

Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the said
lot, embracing 14 meters of its frontage by 11 meters of its depth.

Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et
al., were recognized without discussion as his heirs.

Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta
Pascual were recognized likes without discussion, though it is not said how, and consequently are
entitled to the said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-
half of it, the other half belonging, as it appears, to the plaintiffs themselves, and the remaining one-
seventh of the first one-half to the children of one of the plaintiffs, Elena de Villanueva. The fact is that
the plaintiffs and the defendants are virtually, to all appearance, the owners of the warehouse; while
the plaintiffs are undoubtedly, the owners of the part of the lot occupied by that building, as well as of
the remainder thereof.

This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor
children, the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization
to sell "the six-sevenths of the one-half of the warehouse, of 14 by 11 meters, together with its lot."
The plaintiffs — that is Alejandra Mina, et al. — opposed the petition of Ruperta Pascual for the reason
that the latter had included therein the lot occupied by the warehouse, which they claimed was their
exclusive property. All this action was taken in a special proceeding in reguardianship.

The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to
decide the question of the ownership of the lot before it pass upon the petition for the sale of the
warehouse. But the court before determining the matter of the ownership of the lot occupied by the
warehouse, ordered the sale of this building, saying:

While the trial continues with respect to the ownership of the lot, the court orders the sale at public
auction of the said warehouse and of the lot on which it is built, with the present boundaries of the
land and condition of the building, at a price of not less than P2,890 Philippine currency . . . .

So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other defendant
in this case, for the price mentioned.

34
The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided
it by holding that this land belonged to the owner of the warehouse which had been built thereon thirty
years before.

The plaintiffs appealed and this court reversed the judgment of the lower court and held that the
appellants were the owners of the lot in question. 1

When the judgment became final and executory, a writ of execution issued and the plaintiffs were given
possession of the lot; but soon thereafter the trial court annulled this possession for the reason that it
affected Cu Joco, who had not been a party to the suit in which that writ was served.

It was then that the plaintiffs commenced the present action for the purpose of having the sale of the
said lot declared null and void and of no force and effect.

An agreement was had ad to the facts, the ninth paragraph of which is as follows:

9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court
which found for them by holding that they are the owners of the lot in question, although there existed
and still exists a commodatum by virtue of which the guardianship (meaning the defendants) had and
has the use, and the plaintiffs the ownership, of the property, with no finding concerning the decree of
the lower court that ordered the sale.

The obvious purport of the cause "although there existed and still exists a commodatum," etc., appears
to be that it is a part of the decision of the Supreme Court and that, while finding the plaintiffs to be
the owners of the lot, we recognized in principle the existence of a commodatum under which the
defendants held the lot. Nothing could be more inexact. Possibly, also, the meaning of that clause is
that, notwithstanding the finding made by the Supreme Court that the plaintiffs were the owners, these
former and the defendants agree that there existed, and still exists, a commodatum, etc. But such an
agreement would not affect the truth of the contents of the decision of this court, and the opinions
held by the litigants in regard to this point could have no bearing whatever on the present decision.

Nor did the decree of the lower court that ordered the sale have the least influence in our previous
decision to require our making any finding in regard thereto, for, with or without that decree, the
Supreme Court had to decide the ownership of the lot consistently with its titles and not in accordance
with the judicial acts or proceedings had prior to the setting up of the issue in respect to the ownership
of the property that was the subject of the judicial decree.

What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the
ownership, and they themselves only the use, of the said lot.

On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the
manner in which the sale was effected, whether judicially or extrajudicially.

He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a
transfer of the ownership of the thing, it is evident that he who has only the mere use of the thing
cannot transfer its ownership. The sale of a thing effected by one who is not its owner is null and void.
The defendants never were the owners of the lot sold. The sale of it by them is necessarily null and void.
On cannot convey to another what he has never had himself.

The returns of the auction contain the following statements:

35
I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred upon me
on the 31st of July, 1909, by the Court of First Instance of Ilocos Norte, proceeded with the sale at public
auction of the six-sevenths part of the one-half of the warehouse constructed of rubble stone, etc.

Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the land and all
the rights title, interest, and ownership in the said property to Cu Joco, who was the highest bidder, etc.

Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and assigns, all the
interest, ownership and inheritance rights and others that, as the guardian of the said minors, I have
and may have in the said property, etc.

The purchaser could not acquire anything more than the interest that might be held by a person to
whom realty in possession of the vendor might be sold, for at a judicial auction nothing else is disposed
of. What the minor children of Ruperta Pascual had in their possession was the ownership of the six-
sevenths part of one-half of the warehouse and the use of the lot occupied by his building. This, and
nothing more, could the Chinaman Cu Joco acquire at that sale: not the ownership of the lot; neither
the other half, nor the remaining one-seventh of the said first half, of the warehouse. Consequently,
the sale made to him of this one-seventh of one-half and the entire other half of the building was null
and void, and likewise with still more reason the sale of the lot the building occupies.

The purchaser could and should have known what it was that was offered for sale and what it was that
he purchased. There is nothing that can justify the acquisition by the purchaser of the warehouse of
the ownership of the lot that this building occupies, since the minors represented by Ruperta Pascual
never were the owners of the said lot, nor were they ever considered to be such.

The trial court, in the judgment rendered, held that there were no grounds for the requested annulment
of the sale, and that the plaintiffs were entitled to the P600 deposited with the clerk of the court as the
value of the lot in question. The defendants, Ruperta Pascual and the Chinaman Cu Joco, were absolved
from the complaint, without express finding as to costs.

The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to accept the
price set on the lot by expert appraisers, not even though the plaintiffs be considered as coowner of
the warehouse. It would be much indeed that, on the ground of coownership, they should have to abide
by and tolerate the sale of the said building, which point this court does not decide as it is not a question
submitted to us for decision, but, as regards the sale of the lot, it is in all respects impossible to hold
that the plaintiffs must abide by it and tolerate, it, and this conclusion is based on the fact that they did
not give their consent (art. 1261, Civil Code), and only the contracting parties who have given it are
obliged to comply (art. 1091, idem).

The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but
subsequently the plaintiffs, through motion, asked for an amendment by their complaint in the sense
that the action should be deemed to be one for the recovery of possession of a lot and for the
annulment of its sale. The plaintiff's petition was opposed by the defendant's attorney, but was allowed
by the court; therefore the complaint seeks, after the judicial annulment of the sale of the lot, to have
the defendants sentenced immediately to deliver the same to the plaintiffs.

Such a finding appears to be in harmony with the decision rendered by the Supreme Court in previous
suit, wherein it was held that the ownership of the lot lay in the plaintiffs, and for this reason steps
were taken to give possession thereof to the defendants; but, as the purchaser Cu Joco was not a party
to that suit, the present action is strictly one for recover against Cu Joco to compel him, once the sale
has been annulled, to deliver the lot to its lawful owners, the plaintiffs.

36
As respects this action for recovery, this Supreme Court finds:

1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that Andres
Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot, some thirty years
ago, with the explicit consent of his brother Francisco Fontanilla, the plaintiff's predecessor in interest.

2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the coowners
of the warehouse.

3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his successors
paid any consideration or price whatever for the use of the lot occupied by the said building; whence it
is, perhaps, that both parties have denominated that use a commodatum.

Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the
defendants to deliver the lot to the plaintiffs does not follow as a necessary corollary of the judicial
declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot, made
in the present case.

The defendants do not hold lawful possession of the lot in question.1awphil.net

But, although both litigating parties may have agreed in their idea of the commodatum, on account of
its not being, as indeed it is not, a question of fact but of law, yet that denomination given by them to
the use of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable.
Contracts are not to be interpreted in conformity with the name that the parties thereto agree to give
them, but must be construed, duly considering their constitutive elements, as they are defined and
denominated by law.

By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order
that the latter may use it during the certain period and return it to the former, in which case it is
called commodatum . . . (art. 1740, Civil Code).

It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another
shall for a certain period. Francisco Fontanilla did not fix any definite period or time during which Andres
Fontanilla could have the use of the lot whereon the latter was to erect a stone warehouse of
considerable value, and so it is that for the past thirty years of the lot has been used by both Andres
and his successors in interest. The present contention of the plaintiffs that Cu Joco, now in possession
of the lot, should pay rent for it at the rate of P5 a month, would destroy the theory of the commodatum
sustained by them, since, according to the second paragraph of the aforecited article 1740,
"commodatum is essentially gratuitous," and, if what the plaintiffs themselves aver on page 7 of their
brief is to be believed, it never entered Francisco's mind to limit the period during which his brother
Andres was to have the use of the lot, because he expected that the warehouse would eventually fall
into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres, which did not come
to pass for the reason that Fructuoso died before his uncle Andres. With that expectation in view, it
appears more likely that Francisco intended to allow his brother Andres a surface right; but this right
supposes the payment of an annual rent, and Andres had the gratuitous use of the lot.

Hence, as the facts aforestated only show that a building was erected on another's ground, the question
should be decided in accordance with the statutes that, thirty years ago, governed accessions to real
estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions
of articles 361 and 362 of the Civil Code. So, then, pursuant to article 361, the owner of the land on
which a building is erected in good faith has a right to appropriate such edifice to himself, after payment

37
of the indemnity prescribed in articles 453 and 454, or to oblige the builder to pay him the value of the
land. Such, and no other, is the right to which the plaintiff are entitled.

For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by
Ruperta Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the
use of the lot until the plaintiffs shall choose one or the other of the two rights granted them by article
361 of the Civil Code.1awphil.net

The judgment appealed from is reversed and the sale of the lot in question is held to be null and void
and of no force or effect. No special finding is made as to the costs of both instances.

Torres, Johnson, Carson, Moreland and Trent, JJ., concur.

38
SECOND DIVISION

[ G.R. No. 195166, July 08, 2015 ]

SPOUSES SALVADOR ABELLA AND ALMA ABELLA, PETITIONERS, VS. SPOUSES ROMEO ABELLA AND
ANNIE ABELLA, RESPONDENTS.

DECISION

LEONEN, J.:

This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that
judgment be rendered reversing and setting aside the September 30, 2010 Decision[1] and the January
4, 2011 Resolution[2] of the Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388. The Petition
also prays that respondents Spouses Romeo and Annie Abella be ordered to pay petitioners Spouses
Salvador and Alma Abella 2.5% monthly interest plus the remaining balance of the amount loaned.

The assailed September 30, 2010 Decision of the Court of Appeals reversed and set aside the December
28, 2005 Decision[3] of the Regional Trial Court, Branch 8, Kalibo, Aklan in Civil Case No. 6627. It
directed petitioners to pay respondents P148,500.00 (plus interest), which was the amount

39
respondents supposedly overpaid. The assailed January 4, 2011 Resolution of the Court of Appeals
denied petitioners' Motion for Reconsideration.

The Regional Trial Court's December 28, 2005 Decision ordered respondents to pay petitioners the
supposedly unpaid loan balance of P300,000.00 plus the allegedly stipulated interest rate of 30% per
annum, as well as litigation expenses and attorney's fees.[4]

On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint[5] for sum of money
and damages with prayer for preliminary attachment against respondents Spouses Romeo and Annie
Abella before the Regional Trial Court, Branch 8, Kalibo, Aklan. The case was docketed as Civil Case No.
6627.[6]

In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount of
P500,000.00. The loan was evidenced by an acknowledgment receipt dated March 22, 1999 and was
payable within one (1) year. Petitioners added that respondents were able to pay a total of
P200,000.00—P100,000.00 paid on two separate occasions—leaving an unpaid balance of
P300,000.00.[7]

In their Answer[8] (with counterclaim and motion to dismiss), respondents alleged that the amount
involved did not pertain to a loan they obtained from petitioners but was part of the capital for a joint
venture involving the lending of money.[9]

Specifically, respondents claimed that they were approached by petitioners, who proposed that if
respondents were to "undertake the management of whatever money [petitioners] would give them,
[petitioners] would get 2.5% a month with a 2.5% service fee to [respondents]."[10] The 2.5% that each
party would be receiving represented their sharing of the 5% interest that the joint venture was
supposedly going to charge against its debtors. Respondents further alleged that the one year averred
by petitioners was not a deadline for payment but the term within which they were to return the money
placed by petitioners should the joint venture prove to be not lucrative. Moreover, they claimed that
the entire amount of P500,000.00 was disposed of in accordance with their agreed terms and
conditions and that petitioners terminated the joint venture, prompting them to collect from the joint
venture's borrowers. They were, however, able to collect only to the extent of P200,000.00; hence, the
P300,000.00 balance remained unpaid.[11]

In the Decision[12] dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners. It
noted that the terms of the acknowledgment receipt executed by respondents clearly showed that: (a)
respondents were indebted to the extent of P500,000.00; (b) this indebtedness was to be paid within
one (1) year; and (c) the indebtedness was subject to interest. Thus, the trial court concluded that
respondents obtained a simple loan, although they later invested its proceeds in a lending
enterprise.[13] The Regional Trial Court adjudged respondents solidarity liable to petitioners. The
dispositive portion of its Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendants jointly and severally to pay the plaintiffs the sum of
P300,000.00 with interest at the rate of 30% per annum from the time the
complaint was filed on July 31, 2002 until fully paid;

2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50 as

reimbursement for litigation expenses, and another sum of P5,000.00 as
attorney's fees.

40
 For lack of legal basis, plaintiffs' claim for moral and exemplary damages has to be
denied, and for lack of merit the counter-claim is ordered dismissed.[14]

In the Order dated March 13, 2006,[15] the Regional Trial Court denied respondents' Motion for
Reconsideration.

On respondents' appeal, the Court of Appeals ruled that while respondents had indeed entered into a
simple loan with petitioners, respondents were no longer liable to pay the outstanding amount of
P300,000.00.[16]

The Court of Appeals reasoned that the loan could not have earned interest, whether as contractually
stipulated interest or as interest in the concept of actual or compensatory damages. As to the loan's
not having earned stipulated interest, the Court of Appeals anchored its ruling on Article 1956 of the
Civil Code, which requires interest to be stipulated in writing for it to be due.[17] The Court of Appeals
noted that while the acknowledgement receipt showed that interest was to be charged, no particular
interest rate was specified.[18] Thus, at the time respondents were making interest payments of 2.5%
per month, these interest payments were invalid for not being properly stipulated by the parties. As
to the loan's not having earned interest in the concept of actual or compensatory damages, the Court
of Appeals, citing Eusebio-Calderon v. People,[19] noted that interest in the concept of actual or
compensatory damages accrues only from the time that demand (whether judicial or extrajudicial) is
made. It reasoned that since respondents received petitioners' demand letter only on July 12, 2002,
any interest in the concept of actual or compensatory damages due should be reckoned only from
then. Thus, the payments for the 2.5% monthly interest made after the perfection of the loan in 1999
but before the demand was made in 2002 were invalid.[20]

Since petitioners' charging of interest was invalid, the Court of Appeals reasoned that all payments
respondents made by way of interest should be deemed payments for the principal amount of
P500,000.00.[21]

The Court of Appeals further noted that respondents made a total payment of P648,500.00, which, as
against the principal amount of P500,000.00, entailed an overpayment of P148,500.00. Applying the
principle of solutio indebiti, the Court of Appeals concluded that petitioners were liable to reimburse
respondents for the overpaid amount of P148,500.00.[22] The dispositive portion of the assailed
Court of Appeals Decision reads:

WHEREFORE, the Decision of the Regional Trial Court is hereby REVERSED and SET
ASIDE, and a new one issued, finding that the Spouses Salvador and Alma Abella
are DIRECTED to jointly and severally pay Spouses Romeo and Annie Abella the
amount of P148,500.00, with interest of 6% interest (sic) per annum to be computed
upon receipt of this decision, until full satisfaction thereof. Upon finality of this
judgment, an interest as the rate of 12% per annum, instead of 6%, shall be imposed
on the amount due, until full payment thereof.[23]

In the Resolution[24] dated January 4, 2011, the Court of Appeals denied petitioners' Motion for
Reconsideration.

Aggrieved, petitioners filed the present appeal[25] where they claim that the Court of Appeals erred
in completely striking off interest despite the parties' written agreement stipulating it, as well as in
ordering them to reimburse and pay interest to respondents.

In support of their contentions, petitioners cite Article 1371 of the Civil Code,[26] which calls for the
consideration of the contracting parties' contemporaneous and subsequent acts in determining their
true intention. Petitioners insist that respondents' consistent payment of interest in the year

41
following the perfection of the loan showed that interest at 2.5% per month was properly agreed
upon despite its not having been expressly stated in the acknowledgment receipt. They add that
during the proceedings before the Regional Trial Court, respondents admitted that interest was due
on the loan.[27]

In their Comment,[28] respondents reiterate the Court of Appeals' findings that no interest rate was
ever stipulated by the parties and that interest was not due and demandable at the time they were
making interest payments.[29]

In their Reply,[30] petitioners argue that even though no interest rate was stipulated in the
acknowledgment receipt, the case fell under the exception to the Parol Evidence Rule. They also
argue that there exists convincing and sufficiently credible evidence to supplement the imperfection
of the acknowledgment receipt.[31]

For resolution are the following issues:

First, whether interest accrued on respondents' loan from petitioners, If so, at what rate?

Second, whether petitioners are liable to reimburse respondents for the Litter's supposed excess
payments and for interest.

As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple loan
or mutuum, rather than a joint venture, with petitioners.

Respondents' claims, as articulated in their testimonies before the trial court, cannot prevail over the
clear terms of the document attesting to the relation of the parties. "If the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control."[32]

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual
relation is one of simple loan or mutuum:

Art. 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and
quality shall be paid, in which case the contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple
loan, ownership passes to the borrower.

....

Art. 1953. A person who receives a loan of money or any other fungible thing acquires
the ownership thereof, and is bound to pay to the creditor an equal amount of the
same kind and quality. (Emphasis supplied)

42
On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states:

Batan, Aklan
March 22, 1999

This is to acknowledge receipt of the Amount of Five Hundred

Thousand (P500,000.00) Pesos from Mrs. Alma R. Abella, payable
within one (1) year from date hereof with interest.

Annie C. Abella (sgd.) Romeo M. Abella (sgd.)[33]

(Emphasis supplied)

The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first,
respondents' receipt of the sum of P500,000.00 from petitioner Alma Abella; second, respondents'
duty to pay tack this amount within one (1) year from March 22, 1999; and third, respondents' duty to
pay interest. Consistent with what typifies a simple loan, petitioners delivered to respondents with
the corresponding condition lat respondents shall pay the same amount to petitioners within one (1)
year.

II

Although we have settled the nature of the contractual relation between petitioners and
respondents, controversy persists over respondents' duty to pay conventional interest, i.e., interest as
the cost of borrowing money.[34]

Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it has
been expressly stipulated in writing."

On the matter of interest, the text of the acknowledgment receipt is simple, plain, and unequivocal. It
attests to the contracting parties' intent to subject to interest the loan extended by petitioners to
respondents. The controversy, however, stems from the acknowledgment receipt's failure to state
the exact rate of interest.

Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate.
In Spouses Toring v. Spouses Olan,[35] this court clarified the effect of Article 1956 of the Civil Code
and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or forbearance of money,
according to the Civil Code, the interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum."[36]

Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank and
Trust Company v. Regional Trial Court of Makati, Branch 61: "In a loan or forbearance of money, the
interest due should be that stipulated in writing, and in the absence thereof the rate shall be 12% per
annum."[37]

Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated:[38]

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

43
 extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.[39] (Emphasis supplied)

The rule is not only definite; it is cast in mandatory language. From Eastern Shipping to Security
Bank to Spouses Toring, jurisprudence has repeatedly used the word "shall," a term that has long
been settled to denote something imperative or operating to impose a duty.[40]Thus, the rule leaves
no room for alternatives or otherwise does not allow for discretion. It requires the application of the
legal rate of interest.

Our intervening Decision in Nacar v. Gallery Frames[41] recognized that the legal rate of interest has
been reduced to 6% per annum:

Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013, approved the amendment of Section 2 of
Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, Series of
2013, effective July 1, 2013, the pertinent portion of which reads:

The Monetary Board, in its Resolution No. 796 dated 16 May 2013,
approved the following revisions governing the rate of interest in
the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or

forbearance of any money, goods or credits and
the rate allowed in judgments, in the absence of
an express contract as to such rate of
interest, shall be six percent (6%) per annum.

Section 2. In view of the above, Subsection

X305.1 of the Manual of Regulations for Banks
and Sections 4305Q.1, 4305S.3 and 4303P.1 of
the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of
interest that would govern the parties, the rate of legal interest for loans or
forbearance of any money, goods or credits and the rate allowed in judgments shall
no longer be twelve percent (12%) per annum — as reflected in the case of Eastern
Shipping Lines and Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB Circular No. 799 — but will
now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent (12%) per annum legal interest shall
apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent (6%)
per annum shall be the prevailing rate of interest when applicable.[42] (Emphasis
supplied, citations omitted)

Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and Nacar retain the
definite and mandatory framing of the rule articulated in Eastern Shipping, Security Bank, and Spouses
Toring. Nacar even restates Eastern Shipping:

44
 To recapitulate and for future guidance, the guidelines laid down in the case
of Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No.
799, as follows:

....

1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a Joan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.[43] (Emphasis
supplied, citations omitted)

Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple
loan or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall apply. At
present, this is 6% per annum, subject to Nacar's qualification on prospective application.

Applying this, the loan obtained by respondents from petitioners is deemed subjected to conventional
interest at the rate of 12% per annum, the legal rate of interest at the time the parties executed their
agreement. Moreover, should conventional interest still be due as of July 1, 2013, the rate of 12% per
annum shall persist as the rate of conventional interest.

This is so because interest in this respect is used as a surrogate for the parties' intent, as expressed as
of the time of the execution of their contract. In this sense, the legal rate of interest is an affirmation
of the contracting parties' intent; that is, by their contract's silence on a specific rate, the then
prevailing legal rate of interest shall be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist regardless of shifts in the legal rate of
interest. Stated otherwise, the legal rate of interest, when applied as conventional interest, shall
always be the legal rate at the time the agreement was executed and shall not be susceptible to shifts
in rate.

Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per annum.
They argue that the acknowledgment receipt fails to show the complete and accurate intention of the
contracting parties. They rely on Article 1371 of the Civil Code, which provides that the
contemporaneous and subsequent acts of the contracting parties shall be considered should there be
a need to ascertain their intent.[44] In addition, they claim that this case falls under the exceptions to
the Parol Evidence Rule, as spelled out in Rule 130, Section 9 of the Revised Rules on Evidence.[45]

It is a basic precept in legal interpretation and construction that a rule or provision that treats a
subject with specificity prevails over a rule or provision that treats a subject in general terms.[46]

The rule spelled out in Security Bank and Spouses Toring is anchored on Article 1956 of the Civil Code
and specifically governs simple loans or mutuum. Mutuum is a type of nominate contract that is
specifically recognized by the Civil Code and for which the Civil Code provides a specific set of
governing rules: Articles 1953 to 1961. In contrast, Article 11371 is among the Civil Code provisions
generally dealing with contracts. As this case particularly involves a simple loan, the specific rule
spelled out in Security Bank and Spouses Toringfinds preferential application as against Article 1371.

Contrary to petitioners' assertions, there is no room for entertaining extraneous (or parol) evidence.

45
In Spouses Bonifacio and Lucia Paras v. Kimwa Construction and Development Corporation,[47] we
spelled out the requisites for the admission of parol evidence:

In sum, two (2) things must be established for parol evidence to be admitted: first,
that the existence of any of the four (4) exceptions has been put in issue in a party's
pleading or has not been objected to by the adverse party; and second, that the parol
evidence sought to be presented serves to form the basis of the conclusion proposed
by the presenting party.[48]

The issue of admitting parol evidence is a matter that is proper to the trial, not the appellate, stage of
a case. Petitioners raised the issue of applying the exceptions to the Parol Evidence Rule only in the
Reply they filed before this court. This is the last pleading that either of the parties has filed in the
entire string of proceedings culminating in this Decision. It is, therefore, too late for petitioners to
harp on this rule. In any case, what is at issue is not admission of evidence per se, but the
appreciation given to the evidence adduced by the parties. In the Petition they filed before this court,
petitioners themselves acknowledged that checks supposedly attesting to payment of monthly
interest at the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2," "3," "4," "5,"
"6," "7," and "8").[49] What petitioners have an issue with is not the admission of these pieces of
evidence but how these have not been appreciated in a manner consistent with the conclusions they
advance.

Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is
unconscionable. As emphasized in Castro v. Tan,[50] the willingness of the parties to enter into a
relation involving an unconscionable interest rate is inconsequential to the validity of the stipulated
rate:

The imposition of an unconscionable rate of interest on a money debt, even if

knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a
repugnant spoliation and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles of justice, or in the
human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of public
or private morals.[51]

The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and
the law."[52]

In determining whether the rate of interest is unconscionable, the mechanical application of pre-
established floors would be wanting. The lowest rates that have previously been considered
unconscionable need not be an impenetrable minimum. What is more crucial is a consideration of the
parties' contexts. Moreover, interest rates must be appreciated in light of the fundamental nature of
interest as compensation to the creditor for money lent to another, which he or she could otherwise
have used for his or her own purposes at the time it was lent. It is not the default vehicle for
predatory gain. As such, interest need only be reasonable. It ought not be a supine mechanism for the
creditor's unjust enrichment at the expense of another.

Petitioners here insist upon the imposition of 2.5% monthly or 30% annual interest. Compounded at
this rate, respondents' obligation would have more than doubled—increased to 219.7% of the
principal—by the end of the third year after which the loan was contracted if the entire principal
remained unpaid. By the end of the ninth year, it would have multiplied more than tenfold (or
increased to 1,060.45%). In 2015, this would have multiplied by more than 66 times (or increased to
6,654.17%). Thus, from an initial loan of only P500,000.00, respondents would be obliged to pay more
than P33 million. This is grossly unfair, especially since up to the fourth year from when the loan was

46
obtained, respondents had been assiduously delivering payment. This reduces their best efforts to
satisfy their obligation into a protracted servicing of a rapacious loan.

The legal rate of interest is the presumptive reasonable compensation for borrowed money. While
parties are free to deviate from this, any deviation must be reasonable and fair. Any deviation that is
far-removed is suspect. Thus, in cases where stipulated interest is more than twice the prevailing legal
rate of interest, it is for the creditor to prove that this rate is required by prevailing market conditions.
Here, petitioners have articulated no such justification.

In sum, Article 1956 of the Civil Code, read in light of established jurisprudence, prevents the
application of any interest rate other than that specifically provided for by the parties in their loan
document or, in lieu of it, the legal rate. Here, as the contracting parties failed to make a specific
stipulation, the legal rate must apply. Moreover, the rate that petitioners adverted to is
unconscionable. The conventional interest due on the principal amount loaned by respondents from
petitioners is held to be 12% per annum.

III

Apart from respondents' liability for conventional interest at the rate of 12% per annum, outstanding
conventional interest—if any is due from respondents—shall itself earn legal interest from the time
judicial demand was made by petitioners, i.e., on July 31, 2002, when they filed their Complaint. This
is consistent with 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.

So, too, Nacar states that "the interest due shall itself earn legal interest from the time it is judicially
demanded."[53]

Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua,[54] the interest due on
conventional interest shall be at the rate of 12% per annum from July 31, 2002 to June 30, 2013.
Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per annum.

IV

Proceeding from these premises, we find that respondents made an overpayment in the amount of
P3,379.17.

As acknowledged by petitioner Salvador Abella, respondents paid a total of P200,000.00, which was
charged against the principal amount of P500,000.00. The first payment of P100,000.00 was made on
June 30, 2001,[55] while the second payment of P100,000.00 was made on December 30, 2001.[56]

The Court of Appeals' September 30, 2010 Decision stated that respondents paid P6,000.00 in March
1999.[57]

The Pre-Trial Order dated December 2, 2002,[58] stated that the parties admitted that "from the time
the principal sum of P500,000.00 was borrowed from [petitioners], [respondents] ha[d] been
religiously paying"[59] what was supposedly interest "at the rate of 2.5% per month."[60]

From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before respondents' payment
of P100,000.00 on June 30, 2001, which was deducted from the principal amount of P500,000.00), the
2.5% monthly "interest" was pegged to the principal amount of P500,000.00. These monthly interests,

47
thus, amounted to P12,500.00 per month. Considering that the period from March 1999 to June 2001
spanned twenty-seven (27) months, respondents paid a total of P337,500.00.[61]

From June 22, 2001 up to December 22, 2001 (before respondents' payment of another P100,000.00
on December 30, 2001, which was deducted from the remaining principal amount of P400,000.00),
the 2.5% monthly "interest" was pegged to the remaining principal amount of P400,000.00. These
monthly interests, thus, amounted to P10,000.00 per month. Considering that this period spanned six
(6) months, respondents paid a total of P60,000.00.[62]

From after December 22, 2001 up to June 2002 (when petitioners filed their Complaint), the 2.5%
monthly "interest" was pegged to the remaining principal amount of P300,000.00. These monthly
interests, thus, amounted to P7,500.00 per month. Considering that this period spanned six (6)
months, respondents paid a total of P45,000.00.[63]

Applying these facts and the properly applicable interest rate (for conventional interest, 12% per
annum; for interest on conventional interest, 12% per annum from July 31, 2002 up to June 30, 2013
and 6% per annum henceforth), the following conclusions may be drawn:

By the end of the first year following the perfection of the loan, or as of March 21, 2000, P560,000.00
was due from respondents. This consisted cf the principal of P500,000.00 and conventional interest of
P60,000.00.

Within this first year, respondents made twelve (12) monthly payments totalling P150,000.00
(P12,500.00 each from April 1999 to March 2000). This was in addition to their initial payment of
P6,000.00 in March 999.

Application of payments must be in accordance with Article 1253 of the Civil Code, which reads:

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed
to have been made until the interests have been covered.

Thus, the payments respondents made must first be reckoned as interest payments. Thereafter, any
excess payments shall be charged against the principal. As respondents paid a total of P156,000.00
within the first year, the conventional interest of P60,000.00 must be deemed fully paid and the
remaining amount that respondents paid (i.e., P96,000.00) is to be charged against the principal. This
yields a balance of P404,000.00.

By the end of the second year following the perfection of the loan, or as of March 21, 2001,
P452,480.00 was due from respondents. This consisted of the outstanding principal of P404,000.00
and conventional interest of P48,480.00.

Within this second year, respondents completed another round of twelve (12) monthly payments
totaling P150,000.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P156,000.00 within the
second year, the conventional interest of P48,480.00 must be deemed fully paid and the remaining
amount that respondents paid (i.e., P101,520.00) is to be charged against the principal. This yields a
balance of P302,480.00.

By the end of the third year following the perfection of the loan, or as of March 21, 2002, P338,777.60
was due from respondents. This consists of he outstanding principal of P302,480.00 and conventional
interest of P36,297.60.

48
Within this third year, respondents paid a total of P320,000.00, as follows:

Between March 22, 2001 and June 30, 2001, respondents completed three (3) monthly payments
(a)
of P12,500.00 each, totaling P37,500.00.

(b) On June 30, 2001, respondents paid P100,000.00, which was charged as principal payment.

Between June 30, 2001 and December 30, 2001, respondents delivered monthly payments of
P10,000.00 each. At this point, the monthly payments no longer amounted to P12,500.00 each
(c) because the supposed monthly interest payments were pegged to the supposedly remaining
principal of P400,000.00. Thus, during this period, they paid a total of six (6) monthly payments
totaling P60,000.00.

On December 30, 2001, respondents paid P100,000.00, which, like the June 30, 2001 payment,
(d)
was charged against the principal.

From the end of December 2002 to the end of February 2002, respondents delivered monthly
payments of P7,500.00 each. At this point, the supposed monthly interest payments were now
(e)
pegged to the supposedly remaining principal of P300,000.00. Thus, during this period, they
delivered three (3) monthly payments totaling P22,500.00.

Consistent with Article 1253 of the Civil Code, as respondents paid a total of P320,000.00 within the
third year, the conventional interest of P36,927.50 must be deemed fully paid and the remaining
amount that respondents paid (i.e., P283,702.40) is to be charged against the principal. This yields a
balance of P18,777.60.

By the end of the fourth year following the perfection of the loan, or as of March 21, 2003,
P21,203.51 would have been due from respondents. This consists of: (a) the outstanding principal of
P18,777.60, (b) conventional interest of P2,253.31, and (c) interest due on conventional interest
starting from July 31, 2002, the date of judicial demand, in the amount of P172.60. The last (i.e.,
interest on interest) must be pro-rated. There were only 233 days from July 31, 2002 (the date of
judicial demand) to March 21, 2003 (the end of the fourth year); this left 63.83% of the fourth year,
within which interest on interest might have accrued. Thus, the full annual interest on interest of 12%
per annum could not have been completed, and only the proportional amount of 7.66% per annum
may be properly imposed for the remainder of the fourth year.

From the end of March 2002 to June 2002, respondents delivered three (3) more monthly payments
of P7,500.00 each. Thus, during this period, they delivered three (3) monthly payments totalling
P22,500.00.

At this rate, however, payment would have been completed by respondents even before the end of the
fourth year. Thus, for precision, it is more appropriate to reckon the amounts due as against
payments made on monthly, rather than an annual, basis.

By April 21, 2002, P18,965.38 (i.e., remaining principal of P18,777.60 plus pro-rated monthly
conventional interest at 1%, amounting to P187.78) would have been due from respondents.

49
Deducting the monthly payment of P7,500.00 for the preceding month in a manner consistent with
Article 1253 of the Civil Code would yield a balance of P11,465.38.

By May 21, 2002, P11,580.03 (i.e., remaining principal of P11,465.38 plus pro-rated monthly
conventional interest at 1%, amounting to P114.65) would have been due from respondents.
Deducting the monthly payment of P7,500.00 for the preceding month in a manner consistent with
Article 1253 of the Civil Code would yield a balance of P4,080.03.

By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-rated monthly
conventional interest at 1%, amounting to P40.80) would have been due from respondents.
Deducting the monthly payment of P7,500.00 for the preceding month in a manner consistent with
Article 1253 of the Civil Code would yield a negative balance of P3,379.17.

Thus, by June 21, 2002, respondents had not only fully paid the principal and all the conventional
interest that had accrued on their loan. By this date, they also overpaid P3,379.17. Moreover, while
hypothetically, interest on conventional interest would not have run from July 31, 2002, no such
interest accrued since there was no longer any conventional interest due from respondents by then.

As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of
the Civil Code[64] applies. Article 2154 reads:

Article 2154. If something is received when there is no right to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.

In Moreno-Lentfer v. Wolff,[65] this court explained the application of solutio indebiti:

The quasi-contract of solutio indebiti harks back to the ancient principle that no one
shall enrich himself unjustly at the expense of another. It applies where (1) a payment
is made when there exists no binding relation between the payor, who has no duty
to pay, and the person who received the payment, and (2) the payment is made
through mistake, and not through liberality or some other cause.[66]

As respondents had already fully paid the principal and all conventional interest that had accrued,
they were no longer obliged to make further payments. Any further payment they made was only
because of a mistaken impression that they were still due. Accordingly, petitioners are now bound by
a quasi-contractual obligation to return any and all excess payments delivered by respondents.

Nacar provides that "[w]hen 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."[67] This applies to obligations arising from quasi-contracts such
as solutio indebiti.

Further, Article 2159 of the Civil Code provides:

Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if
a sum of money is involved, or shall be liable for fruits received or which should have
been received if the thing produces fruits.

He shall furthermore be answerable for any loss or impairment of the thing from any
cause, and for damages to the person who delivered the thing, until it is recovered.

50
Consistent however, with our finding that the excess payment made by respondents were borne out
of a mere mistake that it was due, we find it in the better interest of equity to no longer hold
petitioners liable for interest arising from their quasi-contractual obligation.

Nevertheless, Nacar also provides:

1. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
6% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to a forbearance of credit.[68]

Thus, interest at the rate of 6% per annum may be properly imposed on the total judgment award.
This shall be reckoned from the finality of this Decision until its full satisfaction.

WHEREFORE, the assailed September 30, 2010 Decision and the January 4, 2011 Resolution of the
Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388 are SET ASIDE. Petitioners Spouses
Salvador and Alma Abella are DIRECTED to jointly and severally reimburse respondents Spouses
Romeo and Annie Abella the amount of P3,379.17, which respondents have overpaid.

A legal interest of 6% per annum shall likewise be imposed on the total judgment award from the
finality of this Decision until its full satisfaction.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

51
G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,

vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.

Jaime G. de Leon for the Heirs of Egmidio Octaviano.

Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:

The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long
time ago can properly be considered res judicata by respondent Court of Appeals in the present two
cases between petitioner and two private respondents.

Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of
Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149
[Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the Decision of the
Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No.
3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:

WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the
Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan
Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano
(Leonardo Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs' claim or damages is hereby
denied. Said defendant is ordered to pay costs. (p. 36, Rollo)

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's
conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the
two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question; that
the two lots were possessed by the predecessors-in-interest of private respondents under claim of
ownership in good faith from 1906 to 1951; that petitioner had been in possession of the same lots as
bailee in commodatum up to 1951, when petitioner repudiated the trust and when it applied for
registration in 1962; that petitioner had just been in possession as owner for eleven years, hence there
is no possibility of acquisitive prescription which requires 10 years possession with just title and 30
years of possession without; that the principle of res judicata on these findings by the Court of Appeals
will bar a reopening of these questions of facts; and that those facts may no longer be altered.

Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.

The facts and background of these cases as narrated by the trail court are as follows —

... The documents and records presented reveal that the whole controversy started when the
defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the Court of

52
First Instance of Baguio Benguet on September 5, 1962 an application for registration of title over Lots
1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91,
said Lots being the sites of the Catholic Church building, convents, high school building, school
gymnasium, school dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez
and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively,
asserting ownership and title thereto. After trial on the merits, the land registration court promulgated
its Decision, dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.

The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio Octaviano
(plaintiffs in the herein Civil Case No. 3607) appealed the decision of the land registration court to the
then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals rendered its decision,
dated May 9, 1977, reversing the decision of the land registration court and dismissing the VICAR's
application as to Lots 2 and 3, the lots claimed by the two sets of oppositors in the land registration
case (and two sets of plaintiffs in the two cases now at bar), the first lot being presently occupied by
the convent and the second by the women's dormitory and the sister's convent.

On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of Appeals
to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May 17, 1977,
the Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration praying that both Lots
2 and 3 be ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August
12,1977, the Court of Appeals denied the motion for reconsideration filed by the Heirs of Juan Valdez
on the ground that there was "no sufficient merit to justify reconsideration one way or the other ...,"
and likewise denied that of the Heirs of Egmidio Octaviano.

Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision
of the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3, docketed as G.R.
No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals and Heirs
of Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan Valdez
and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for review, docketed
as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs
of Egmidio Octaviano and Annable O. Valdez.

On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on the
one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality
of both Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano
filed with the then Court of First Instance of Baguio, Branch II, a Motion For Execution of Judgment
praying that the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided over by Hon.
Salvador J. Valdez, on December 7, 1978, denied the motion on the ground that the Court of Appeals
decision in CA-G.R. No. 38870 did not grant the Heirs of Octaviano any affirmative relief.

On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for certiorari
and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon.
Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of Appeals dismissed the
petition.

It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil Case No.
3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil
Case No. 3655 (429) on September 24, 1979, likewise for recovery of possession of Lot 2 (Decision, pp.
199-201, Orig. Rec.).

53
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1)
witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by
their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. B—B-4 ) to
defendant Vicar for the return of the land to them; and the reasonable rentals for the use of the land
at P10,000.00 per month. On the other hand, defendant Vicar presented the Register of Deeds for the
Province of Benguet, Atty. Nicanor Sison, who testified that the land in question is not covered by any
title in the name of Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with
the testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to the
witness stand, would testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75)
years continuously and peacefully and has constructed permanent structures thereon.

In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the
case on the sole issue of whether or not the decisions of the Court of Appeals and the Supreme Court
touching on the ownership of Lot 2, which in effect declared the plaintiffs the owners of the land
constitute res judicata.

In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the defense
of ownership and/or long and continuous possession of the two lots in question since this is barred by
prior judgment of the Court of Appeals in CA-G.R. No. 038830-R under the principle of res judicata.
Plaintiffs contend that the question of possession and ownership have already been determined by the
Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1,
Minute Resolution of the Supreme Court). On his part, defendant Vicar maintains that the principle
of res judicata would not prevent them from litigating the issues of long possession and ownership
because the dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely dismissed their
application for registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive
portion of the decision, and not its body, is the controlling pronouncement of the Court of Appeals. 2

The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY
PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND
OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN

POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE
PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;

6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A
PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY
ACQUISITIVE PRESCRIPTION OF 10 YEARS;

7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS
AFFIRMED BY THE SUPREME COURT;

54
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS
2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS
2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;

9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE
BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;

10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT
RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS
OF THE DECISION IN CA G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when
it clearly held that it was in agreement with the findings of the trial court that the Decision of the Court
of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3,
declared that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private
respondents as owners of the land, neither was it declared that they were not owners of the land, but
it held that the predecessors of private respondents were possessors of Lots 2 and 3, with claim of
ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in commodatum
up to 1951, when it repudiated the trust by declaring the properties in its name for taxation purposes.
When petitioner applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept
of owner only for eleven years. Ordinary acquisitive prescription requires possession for ten years, but
always with just title. Extraordinary acquisitive prescription requires 30 years. 4

On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R.
No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said
findings are res judicatabetween the parties. They can no longer be altered by presentation of evidence
because those issues were resolved with finality a long time ago. To ignore the principle of res
judicata would be to open the door to endless litigations by continuous determination of issues without
end.

An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No.
38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register
the lands in question under its ownership, on its evaluation of evidence and conclusion of facts.

The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for
acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession
for ordinary acquisitive prescription because of the absence of just title. The appellate court did not
believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3
was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was
absolutely no documentary evidence to support the same and the alleged purchases were never
mentioned in the application for registration.

By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both
Valdez and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in possession of the questioned lots since 1906.

There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2
and 3, because the buildings standing thereon were only constructed after liberation in 1945. Petitioner
Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were

55
paid for by the Bishop but said Bishop was appointed only in 1947, the church was constructed only in
1951 and the new convent only 2 years before the trial in 1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot
from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.

Private respondents were able to prove that their predecessors' house was borrowed by petitioner
Vicar after the church and the convent were destroyed. They never asked for the return of the house,
but when they allowed its free use, they became bailors in commodatum and the petitioner the bailee.
The bailees' failure to return the subject matter of commodatum to the bailor did not mean adverse
possession on the part of the borrower. The bailee held in trust the property subject matter of
commodatum. The adverse claim of petitioner came only in 1951 when it declared the lots for taxation
purposes. The action of petitioner Vicar by such adverse claim could not ripen into title by way of
ordinary acquisitive prescription because of the absence of just title.

The Court of Appeals found that the predecessors-in-interest and private respondents were possessors
under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee
in commodatum; and that the adverse claim and repudiation of trust came only in 1951.

We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its
findings of fact have become incontestible. This Court declined to review said decision, thereby in effect,
affirming it. It has become final and executory a long time ago.

Respondent appellate court did not commit any reversible error, much less grave abuse of discretion,
when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the
principle of res judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149.
The facts as supported by evidence established in that decision may no longer be altered.

WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision
dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED,
with costs against petitioner.

SO ORDERED.

Narvasa, Cruz, Griño-Aquino and Medialdea, JJ., concur.

56
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

vs.
BECK, defendant-appellee.

Mauricio Carlos for appellants.

Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:

The plaintiff brought this action to compel the defendant to return her certain furniture which she lent
him for his use. She appealed from the judgment of the Court of First Instance of Manila which ordered
that the defendant return to her the three has heaters and the four electric lamps found in the
possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of Manila
at her own expense, and that the fees which the Sheriff may charge for the deposit of the furniture be
paid pro rata by both parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar
street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the plaintiff
and the defendant, the former gratuitously granted to the latter the use of the furniture described in
the third paragraph of the stipulation of facts, subject to the condition that the defendant would return
them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez and
Rosario Lopez and on September 14, 1936, these three notified the defendant of the conveyance, giving
him sixty days to vacate the premises under one of the clauses of the contract of lease. There after the
plaintiff required the defendant to return all the furniture transferred to him for them in the house
where they were found. On November 5, 1936, the defendant, through another person,
wrote to the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On
the 7th of the same month, the defendant wrote another letter to the plaintiff informing her that he

57
could not give up the three gas heaters and the four electric lamps because he would use them until
the 15th of the same month when the lease in due to expire. The plaintiff refused to get the furniture
in view of the fact that the defendant had declined to make delivery of all of them.
On November 15th, before vacating the house, the defendant deposited with the Sheriff
all the furniture belonging to the plaintiff and they are now on deposit in the warehouse situated at No.
1521, Rizal Avenue, in the custody of the said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in
holding that they violated the contract by not calling for all the furniture on November 5, 1936, when
the defendant placed them at their disposal; in not ordering the defendant to pay them the value of
the furniture in case they are not delivered; in holding that they should get all the furniture from the
Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the
deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the
costs; and in denying pay their respective legal expenses or the costs; and in denying the motions for
reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the
defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether
the latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net

The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the
latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil
Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's residence or house. The
defendant did not comply with this obligation when he merely placed them at the disposal of the
plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of
article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial court,
therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her
obligation to get the furniture when they were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the
furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on
deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the four electric lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof
by the defendant in case of his inability to return some of the furniture because under paragraph 6 of
the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said
value. Should the defendant fail to deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the parties may desire to present.

The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the
contract of commodatum, and without any reason he refused to return and deliver all the furniture
upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.

The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff,
in the residence to return and deliver to the plaintiff, in the residence or house of the latter, all the
furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be

58
occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of
the defendant. the defendant shall pay the costs in both instances. So ordered.

Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

SECOND DIVISION

[G.R. No. 133632. February 15, 2002]

BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS MANAGEMENT &
DEVELOPMENT CORPORATION, respondents.

DECISION

QUISUMBING, J.:

This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals
and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the
judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure
of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents
ALS Management and Development Corporation and Antonio K. Litonjua, [1] consolidated with (b) Civil

59
Case No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the
private respondents against said petitioner.

The trial court had held that private respondents were not in default in the payment of their
monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and
made in bad faith. It awarded private respondents the amount of P300,000 for moral
damages, P50,000 for exemplary damages, and P50,000 for attorneys fees and expenses for litigation.
It likewise dismissed the foreclosure suit for being premature.

The facts are as follows:

Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house
on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure
the loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio
Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roas
indebtedness with AIDC. The latter, however, was not willing to extend the old interest rate to private
respondents and proposed to grant them a new loan of P500,000 to be applied to Roas debt and
secured by the same property, at an interest rate of 20% per annum and service fee of 1% per annum
on the outstanding principal balance payable within ten years in equal monthly amortization
of P9,996.58 and penalty interest at the rate of 21% per annum per day from the date the amortization
became due and payable.

Consequently, in March 1981, private respondents executed a mortgage deed containing the
above stipulations with the provision that payment of the monthly amortization shall commence
on May 1, 1981.

On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum
of P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was liquidated
when BPIIC applied thereto the proceeds of private respondents loan of P500,000.

On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what
was left of their loan after full payment of Roas loan.

In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground
that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted
to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A
notice of sheriffs sale was published on August 13, 1984.

On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged,
among others, that they were not in arrears in their payment, but in fact made an overpayment as
of June 30, 1984. They maintained that they should not be made to pay amortization before the actual
release of the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only
the total amount of P464,351.77 was released to private respondents. Hence, applying the effects of
legal compensation, the balance of P35,648.23 should be applied to the initial monthly amortization
for the loan.

On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:

WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development

Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount
of loan granted by BPI to ALS and Litonjua was only in the principal sum of P464,351.77, with interest
at 20% plus service charge of 1% per annum, payable on equal monthly and successive amortizations
at P9,283.83 for ten (10) years or one hundred twenty (120) months. The amortization schedule
attached as Annex A to the Deed of Mortgage is correspondingly reformed as aforestated.

60
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their
publication in a newspaper of general circulation as defaulting debtors, and therefore orders BPI to
pay ALS and Litonjua the following sums:

a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages;

c) P50,000.00 as and for attorneys fees and expenses of litigation.

The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.

Costs against BPI.

SO ORDERED.[2]

Both parties appealed to the Court of Appeals. However, private respondents appeal was
dismissed for non-payment of docket fees.

On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:

WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.

SO ORDERED.[3]

In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery
of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only
on September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after
deducting therefrom the value of Roas indebtedness. Thus, payment of the monthly amortization
should commence only a month after the said date, as can be inferred from the stipulations in the
contract. This, despite the express agreement of the parties that payment shall commence on May 1,
1981. From October 1982 to June 1984, the total amortization due was only P194,960.43. Evidence
showed that private respondents had an overpayment, because as of June 1984, they already paid a
total amount of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the
mortgage and cause the publication in newspapers concerning private respondents delinquency in the
payment of their loan. This fact constituted sufficient ground for moral damages in favor of private
respondents.

The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition,
where BPIIC submits for resolution the following issues:

I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF

THE RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.

II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES
AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND
OPPOSED TO THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS,
120 SCRA 707.

On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a
simple loan is perfected upon the delivery of the object of the contract, the loan contract in this case
was perfected only on September 13, 1982. Petitioner claims that a contract of loan is a consensual
contract, and a loan contract is perfected at the time the contract of mortgage is executed conformably
with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the loan contract

61
was perfected on March 31, 1981, the date when the mortgage deed was executed, hence, the
amortization and interests on the loan should be computed from said date.

Petitioner also argues that while the documents showed that the loan was released only on August
1982, the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage
of Frank Roas loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute
Sale executed by Roa in favor of ALS, transferring the title of the property to ALS, and ALS executing the
Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan
should be attributed to private respondents. As BPIIC only agreed to extend a P500,000 loan, private
respondents were required to reduce Frank Roas loan below said amount. According to petitioner,
private respondents were only able to do so in August 1982.

In their comment, private respondents assert that based on Article 1934 of the Civil Code, [4] a
simple loan is perfected upon the delivery of the object of the contract, hence a real contract. In this
case, even though the loan contract was signed on March 31, 1981, it was perfected only on September
13, 1982, when the full loan was released to private respondents.They submit that petitioner
misread Bonnevie. To give meaning to Article 1934, according to private respondents, Bonnevie must
be construed to mean that the contract to extend the loan was perfected on March 31, 1981 but the
contract of loan itself was only perfected upon the delivery of the full loan to private respondents
on September 13, 1982.

Private respondents further maintain that even granting, arguendo, that the loan contract was
perfected on March 31, 1981, and their payment did not start a month thereafter, still no default took
place. According to private respondents, a perfected loan agreement imposes reciprocal obligations,
where the obligation or promise of each party is the consideration of the other party. In this case, the
consideration for BPIIC in entering into the loan contract is the promise of private respondents to pay
the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. 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.Therefore, private respondents conclude, they did
not incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as it
was only on September 13, 1982when petitioner fully complied with its obligation under the loan
contract.

We agree with private respondents. A loan contract is not a consensual contract but a real contract.
It is perfected only upon the delivery of the object of the contract. [5] Petitioner
misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual
contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to deliver
something by way of simple loan.

In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of P500,000 with respondent bank. The latter approved the application
through a board resolution. Thereafter, the corresponding mortgage was executed and
registered. However, because of acts attributable to petitioner, the loan was not released. Later,
petitioner instituted an action for damages. We recognized in this case, a perfected consensual contract
which under normal circumstances could have made the bank liable for not releasing the loan. However,
since the fault was attributable to petitioner therein, the court did not award it damages.

A perfected consensual contract, as shown above, can give rise to an action for damages. However,
said contract does not constitute the real contract of loan which requires the delivery of the object of
the contract for its perfection and which gives rise to obligations only on the part of the borrower. [6]

In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the
other, was perfected only on September 13, 1982, the date of the second release of the loan. Following
the intentions of the parties on the commencement of the monthly amortization, as found by the Court
of Appeals, private respondents obligation to pay commenced only on October 13, 1982, a month after
the perfection of the contract.[7]

62
 We also agree with private respondents that a contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is the consideration for that of the other. [8]As averred
by private respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration
that ALS and Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after
the supposed release of the loan. It is a basic principle in reciprocal obligations that 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.[9] Only when a party has performed his part of the contract can he demand that
the other party also fulfills his own obligation and if the latter fails, default sets in. Consequently,
petitioner could only demand for the payment of the monthly amortization after September 13,
1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in
computing the amount due as of the date when BPIIC extrajudicially caused the foreclosure of the
mortgage, the starting date is October 13, 1982 and not May 1, 1981.

Other points raised by petitioner in connection with the first issue, such as the date of actual
release of the loan and whether private respondents were the cause of the delay in the release of the
loan, are factual. Since petitioner has not shown that the instant case is one of the exceptions to the
basic rule that only questions of law can be raised in a petition for review under Rule 45 of the Rules of
Court,[10] factual matters need not tarry us now. On these points we are bound by the findings of the
appellate and trial courts.

On the second issue, petitioner claims that it should not be held liable for moral and exemplary
damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised
its right under the mortgage contract because private respondents were irregular in their monthly
amortization. It invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA 707, where
we said:

Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of
Appeals the negligence of the appellant is not so gross as to warrant moral and temperate damages,
except that, said Court reduced those damages by only P5,000.00 instead of eliminating them.
Neither can we agree with the findings of both the Trial Court and respondent Court that the SSS had
acted maliciously or in bad faith. The SSS was of the belief that it was acting in the legitimate exercise
of its right under the mortgage contract in the face of irregular payments made by private
respondents and placed reliance on the automatic acceleration clause in the contract. The filing alone
of the foreclosure application should not be a ground for an award of moral damages in the same way
that a clearly unfounded civil action is not among the grounds for moral damages.

Private respondents counter that BPIIC was guilty of bad faith and should be liable for said
damages because it insisted on the payment of amortization on the loan even before it was
released. Further, it did not make the corresponding deduction in the monthly amortization to conform
to the actual amount of loan released, and it immediately initiated foreclosure proceedings when
private respondents failed to make timely payment.

But as admitted by private respondents themselves, they were irregular in their payment of
monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad
faith. Consequently, we should rule out the award of moral and exemplary damages. [11]

However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually released
to private respondents and the date when it was released. Such negligence resulted in damage to
private respondents, for which an award of nominal damages should be given in recognition of their
rights which were violated by BPIIC.[12] For this purpose, the amount of P25,000 is sufficient.

Lastly, as in SSS where we awarded attorneys fees because private respondents were compelled
to litigate, we sustain the award of P50,000 in favor of private respondents as attorneys fees.

63
 WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution
dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of
moral and exemplary damages in favor of private respondents is DELETED, but the award to them of
attorneys fees in the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private
respondents P25,000 as nominal damages. Costs against petitioner.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

64
 FIRST DIVISION

[G.R. No. 138569. September 11, 2003]

THE CONSOLIDATED BANK and TRUST CORPORATION, petitioner, vs. COURT OF APPEALS and L.C.
DIAZ and COMPANY, CPAs, respondents.

DECISION

CARPIO, J.:

The Case

Before us is a petition for review of the Decision[1] of the Court of Appeals dated 27 October 1998
and its Resolution dated 11 May 1999. The assailed decision reversed the Decision[2]of the Regional
Trial Court of Manila, Branch 8, absolving petitioner Consolidated Bank and Trust Corporation, now
known as Solidbank Corporation (Solidbank), of any liability. The questioned resolution of the appellate
court denied the motion for reconsideration of Solidbank but modified the decision by deleting the
award of exemplary damages, attorneys fees, expenses of litigation and cost of suit.

The Facts

Solidbank is a domestic banking corporation organized and existing under Philippine laws. Private
respondent L.C. Diaz and Company, CPAs (L.C. Diaz), is a professional partnership engaged in the
practice of accounting.

Sometime in March 1976, L.C. Diaz opened a savings account with Solidbank, designated as
Savings Account No. S/A 200-16872-6.

On 14 August 1991, L.C. Diaz through its cashier, Mercedes Macaraya (Macaraya), filled up a
savings (cash) deposit slip for P990 and a savings (checks) deposit slip for P50.Macaraya instructed the
messenger of L.C. Diaz, Ismael Calapre (Calapre), to deposit the money with Solidbank. Macaraya also
gave Calapre the Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the
passbook. The teller acknowledged receipt of the deposit by returning to Calapre the duplicate copies

65
of the two deposit slips. Teller No. 6 stamped the deposit slips with the words DUPLICATE and SAVING
TELLER 6 SOLIDBANK HEAD OFFICE. Since the transaction took time and Calapre had to make another
deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied
Bank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that
somebody got the passbook.[3] Calapre went back to L.C. Diaz and reported the incident to Macaraya.

Macaraya immediately prepared a deposit slip in duplicate copies with a check

of P200,000. Macaraya, together with Calapre, went to Solidbank and presented to Teller No. 6 the
deposit slip and check. The teller stamped the words DUPLICATE and SAVING TELLER 6 SOLIDBANK
HEAD OFFICE on the duplicate copy of the deposit slip. When Macaraya asked for the passbook, Teller
No. 6 told Macaraya that someone got the passbook but she could not remember to whom she gave
the passbook. When Macaraya asked Teller No. 6 if Calapre got the passbook, Teller No. 6 answered
that someone shorter than Calapre got the passbook. Calapre was then standing beside Macaraya.

Teller No. 6 handed to Macaraya a deposit slip dated 14 August 1991 for the deposit of a check
for P90,000 drawn on Philippine Banking Corporation (PBC). This PBC check of L.C. Diaz was a check
that it had long closed.[4] PBC subsequently dishonored the check because of insufficient funds and
because the signature in the check differed from PBCs specimen signature. Failing to get back the
passbook, Macaraya went back to her office and reported the matter to the Personnel Manager of L.C.
Diaz, Emmanuel Alvarez.

The following day, 15 August 1991, L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz),
called up Solidbank to stop any transaction using the same passbook until L.C. Diaz could open a new
account.[5] On the same day, Diaz formally wrote Solidbank to make the same request. It was also on
the same day that L.C. Diaz learned of the unauthorized withdrawal the day before, 14 August 1991,
of P300,000 from its savings account. The withdrawal slip for the P300,000 bore the signatures of the
authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo. The signatories, however, denied
signing the withdrawal slip. A certain Noel Tamayo received the P300,000.

In an Information[6] dated 5 September 1991, L.C. Diaz charged its messenger, Emerano Ilagan
(Ilagan) and one Roscon Verdazola with Estafa through Falsification of Commercial Document. The
Regional Trial Court of Manila dismissed the criminal case after the City Prosecutor filed a Motion to
Dismiss on 4 August 1992.

On 24 August 1992, L.C. Diaz through its counsel demanded from Solidbank the return of its
money. Solidbank refused.

On 25 August 1992, L.C. Diaz filed a Complaint[7] for Recovery of a Sum of Money against Solidbank
with the Regional Trial Court of Manila, Branch 8. After trial, the trial court rendered on 28 December
1994 a decision absolving Solidbank and dismissing the complaint.

L.C. Diaz then appealed[8] to the Court of Appeals. On 27 October 1998, the Court of Appeals
issued its Decision reversing the decision of the trial court.

On 11 May 1999, the Court of Appeals issued its Resolution denying the motion for
reconsideration of Solidbank. The appellate court, however, modified its decision by deleting the award
of exemplary damages and attorneys fees.

The Ruling of the Trial Court

In absolving Solidbank, the trial court applied the rules on savings account written on the passbook.
The rules state that possession of this book shall raise the presumption of ownership and any payment
or payments made by the bank upon the production of the said book and entry therein of the
withdrawal shall have the same effect as if made to the depositor personally.[9]

66
 At the time of the withdrawal, a certain Noel Tamayo was not only in possession of the passbook,
he also presented a withdrawal slip with the signatures of the authorized signatories of L.C. Diaz. The
specimen signatures of these persons were in the signature cards. The teller stamped the withdrawal
slip with the words Saving Teller No. 5. The teller then passed on the withdrawal slip to Genere Manuel
(Manuel) for authentication. Manuel verified the signatures on the withdrawal slip. The withdrawal slip
was then given to another officer who compared the signatures on the withdrawal slip with the
specimen on the signature cards. The trial court concluded that Solidbank acted with care and observed
the rules on savings account when it allowed the withdrawal of P300,000 from the savings account of
L.C. Diaz.

The trial court pointed out that the burden of proof now shifted to L.C. Diaz to prove that the
signatures on the withdrawal slip were forged. The trial court admonished L.C. Diaz for not offering in
evidence the National Bureau of Investigation (NBI) report on the authenticity of the signatures on the
withdrawal slip for P300,000. The trial court believed that L.C. Diaz did not offer this evidence because
it is derogatory to its action.

Another provision of the rules on savings account states that the depositor must keep the
passbook under lock and key.[10] When another person presents the passbook for withdrawal prior to
Solidbanks receipt of the notice of loss of the passbook, that person is considered as the owner of the
passbook. The trial court ruled that the passbook presented during the questioned transaction was now
out of the lock and key and presumptively ready for a business transaction. [11]

Solidbank did not have any participation in the custody and care of the passbook. The trial court
believed that Solidbanks act of allowing the withdrawal of P300,000 was not the direct and proximate
cause of the loss. The trial court held that L.C. Diazs negligence caused the unauthorized
withdrawal. Three facts establish L.C. Diazs negligence: (1) the possession of the passbook by a person
other than the depositor L.C. Diaz; (2) the presentation of a signed withdrawal receipt by an
unauthorized person; and (3) the possession by an unauthorized person of a PBC check long closed by
L.C. Diaz, which check was deposited on the day of the fraudulent withdrawal.

The trial court debunked L.C. Diazs contention that Solidbank did not follow the precautionary
procedures observed by the two parties whenever L.C. Diaz withdrew significant amounts from its
account. L.C. Diaz claimed that a letter must accompany withdrawals of more than P20,000. The letter
must request Solidbank to allow the withdrawal and convert the amount to a managers check. The
bearer must also have a letter authorizing him to withdraw the same amount. Another person driving
a car must accompany the bearer so that he would not walk from Solidbank to the office in making the
withdrawal. The trial court pointed out that L.C. Diaz disregarded these precautions in its past
withdrawal. On 16 July 1991, L.C. Diaz withdrew P82,554 without any separate letter of authorization
or any communication with Solidbank that the money be converted into a managers check.

The trial court further justified the dismissal of the complaint by holding that the case was a last
ditch effort of L.C. Diaz to recover P300,000 after the dismissal of the criminal case against Ilagan.

The dispositive portion of the decision of the trial court reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered DISMISSING the complaint.

The Court further renders judgment in favor of defendant bank pursuant to its counterclaim the
amount of Thirty Thousand Pesos (P30,000.00) as attorneys fees.

With costs against plaintiff.

SO ORDERED.[12]

67
 The Ruling of the Court of Appeals

The Court of Appeals ruled that Solidbanks negligence was the proximate cause of the
unauthorized withdrawal of P300,000 from the savings account of L.C. Diaz. The appellate court
reached this conclusion after applying the provision of the Civil Code on quasi-delict, to wit:

Article 2176. Whoever by act or omission causes damage to another, there being fault or negligence,
is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this chapter.

The appellate court held that the three elements of a quasi-delict are present in this case, namely: (a)
damages suffered by the plaintiff; (b) fault or negligence of the defendant, or some other person for
whose acts he must respond; and (c) the connection of cause and effect between the fault or negligence
of the defendant and the damage incurred by the plaintiff.

The Court of Appeals pointed out that the teller of Solidbank who received the withdrawal slip
for P300,000 allowed the withdrawal without making the necessary inquiry. The appellate court stated
that the teller, who was not presented by Solidbank during trial, should have called up the depositor
because the money to be withdrawn was a significant amount. Had the teller called up L.C. Diaz,
Solidbank would have known that the withdrawal was unauthorized. The teller did not even verify the
identity of the impostor who made the withdrawal. Thus, the appellate court found Solidbank liable for
its negligence in the selection and supervision of its employees.

The appellate court ruled that while L.C. Diaz was also negligent in entrusting its deposits to its
messenger and its messenger in leaving the passbook with the teller, Solidbank could not escape
liability because of the doctrine of last clear chance. Solidbank could have averted the injury suffered
by L.C. Diaz had it called up L.C. Diaz to verify the withdrawal.

The appellate court ruled that the degree of diligence required from Solidbank is more than that
of a good father of a family. The business and functions of banks are affected with public interest. Banks
are obligated to treat the accounts of their depositors with meticulous care, always having in mind the
fiduciary nature of their relationship with their clients. The Court of Appeals found Solidbank remiss in
its duty, violating its fiduciary relationship with L.C. Diaz.

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

WHEREFORE, premises considered, the decision appealed from is hereby REVERSED and a new one
entered.

1. Ordering defendant-appellee Consolidated Bank and Trust Corporation to pay plaintiff-

appellant the sum of Three Hundred Thousand Pesos (P300,000.00), with interest
thereon at the rate of 12% per annum from the date of filing of the complaint until
paid, the sum of P20,000.00 as exemplary damages, and P20,000.00 as attorneys
fees and expenses of litigation as well as the cost of suit; and

2. Ordering the dismissal of defendant-appellees counterclaim in the amount of P30,000.00

as attorneys fees.

SO ORDERED.[13]

Acting on the motion for reconsideration of Solidbank, the appellate court affirmed its decision but
modified the award of damages. The appellate court deleted the award of exemplary damages and
attorneys fees. Invoking Article 2231[14] of the Civil Code, the appellate court ruled that exemplary

68
damages could be granted if the defendant acted with gross negligence. Since Solidbank was guilty of
simple negligence only, the award of exemplary damages was not justified. Consequently, the award of
attorneys fees was also disallowed pursuant to Article 2208 of the Civil Code. The expenses of litigation
and cost of suit were also not imposed on Solidbank.

The dispositive portion of the Resolution reads as follows:

WHEREFORE, foregoing considered, our decision dated October 27, 1998 is affirmed with
modification by deleting the award of exemplary damages and attorneys fees, expenses of litigation
and cost of suit.

SO ORDERED.[15]

Hence, this petition.

The Issues

Solidbank seeks the review of the decision and resolution of the Court of Appeals on these grounds:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER BANK SHOULD SUFFER
THE LOSS BECAUSE ITS TELLER SHOULD HAVE FIRST CALLED PRIVATE RESPONDENT
BY TELEPHONE BEFORE IT ALLOWED THE WITHDRAWAL OF P300,000.00 TO
RESPONDENTS MESSENGER EMERANO ILAGAN, SINCE THERE IS NO AGREEMENT
BETWEEN THE PARTIES IN THE OPERATION OF THE SAVINGS ACCOUNT, NOR IS
THERE ANY BANKING LAW, WHICH MANDATES THAT A BANK TELLER SHOULD FIRST
CALL UP THE DEPOSITOR BEFORE ALLOWING A WITHDRAWAL OF A BIG AMOUNT IN
A SAVINGS ACCOUNT.

II. THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF LAST CLEAR CHANCE
AND IN HOLDING THAT PETITIONER BANKS TELLER HAD THE LAST OPPORTUNITY TO
WITHHOLD THE WITHDRAWAL WHEN IT IS UNDISPUTED THAT THE TWO
SIGNATURES OF RESPONDENT ON THE WITHDRAWAL SLIP ARE GENUINE AND
PRIVATE RESPONDENTS PASSBOOK WAS DULY PRESENTED, AND CONTRARIWISE
RESPONDENT WAS NEGLIGENT IN THE SELECTION AND SUPERVISION OF ITS
MESSENGER EMERANO ILAGAN, AND IN THE SAFEKEEPING OF ITS CHECKS AND
OTHER FINANCIAL DOCUMENTS.

III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE INSTANT CASE IS A LAST
DITCH EFFORT OF PRIVATE RESPONDENT TO RECOVER ITS P300,000.00 AFTER
FAILING IN ITS EFFORTS TO RECOVER THE SAME FROM ITS EMPLOYEE EMERANO
ILAGAN.

IV. THE COURT OF APPEALS ERRED IN NOT MITIGATING THE DAMAGES AWARDED AGAINST
PETITIONER UNDER ARTICLE 2197 OF THE CIVIL CODE, NOTWITHSTANDING ITS
FINDING THAT PETITIONER BANKS NEGLIGENCE WAS ONLY CONTRIBUTORY. [16]

The Ruling of the Court

The petition is partly meritorious.

69
 Solidbanks Fiduciary Duty under the Law

The rulings of the trial court and the Court of Appeals conflict on the application of the law. The
trial court pinned the liability on L.C. Diaz based on the provisions of the rules on savings account, a
recognition of the contractual relationship between Solidbank and L.C. Diaz, the latter being a depositor
of the former. On the other hand, the Court of Appeals applied the law on quasi-delict to determine
who between the two parties was ultimately negligent. The law on quasi-delict or culpa aquiliana is
generally applicable when there is no pre-existing contractual relationship between the parties.

We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.

The contract between the bank and its depositor is governed by the provisions of the Civil Code
on simple loan.[17] Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple
loan. There is a debtor-creditor relationship between the bank and its depositor.The bank is the debtor
and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the
depositor on demand. The savings deposit agreement between the bank and the depositor is the
contract that determines the rights and obligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of
Republic Act No. 8791 (RA 8791),[18] which took effect on 13 June 2000, declares that the State
recognizes the fiduciary nature of banking that requires high standards of integrity and
performance.[19] This new provision in the general banking law, introduced in 2000, is a statutory
affirmation of Supreme Court decisions, starting with the 1990 case of Simex International v. Court of
Appeals,[20] holding that the bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their relationship. [21]

This fiduciary relationship means that the banks obligation to observe high standards of integrity
and performance is deemed written into every deposit agreement between a bank and its depositor.
The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a
good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an
obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good
father of a family.[22] Section 2 of RA 8791 prescribes the statutory diligence required from banks that
banks must observe high standards of integrity and performance in servicing their depositors. Although
RA 8791 took effect almost nine years after the unauthorized withdrawal of the P300,000 from L.C.
Diazs savings account, jurisprudence[23] at the time of the withdrawal already imposed on banks the
same high standard of diligence required under RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does not convert the contract
between the bank and its depositors from a simple loan to a trust agreement, whether express or
implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of
trust.[24] The law simply imposes on the bank a higher standard of integrity and performance in
complying with its obligations under the contract of simple loan, beyond those required of non-bank
debtors under a similar contract of simple loan.

The fiduciary nature of banking does not convert a simple loan into a trust agreement because
banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows
banks to offer the lowest possible interest rate to depositors while charging the highest possible
interest rate on their own borrowers. The interest spread or differential belongs to the bank and not
to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then
the interest spread or income belongs to the depositors, a situation that Congress certainly did not
intend in enacting Section 2 of RA 8791.

70
 Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from negligence in the
performance of every kind of obligation is demandable. For breach of the savings deposit agreement
due to negligence, or culpa contractual, the bank is liable to its depositor.

Calapre left the passbook with Solidbank because the transaction took time and he had to go to
Allied Bank for another transaction. The passbook was still in the hands of the employees of Solidbank
for the processing of the deposit when Calapre left Solidbank. Solidbanks rules on savings account
require that the deposit book should be carefully guarded by the depositor and kept under lock and
key, if possible. When the passbook is in the possession of Solidbanks tellers during withdrawals, the
law imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the
passbook.

Likewise, Solidbanks tellers must exercise a high degree of diligence in insuring that they return
the passbook only to the depositor or his authorized representative. The tellers know, or should know,
that the rules on savings account provide that any person in possession of the passbook is
presumptively its owner. If the tellers give the passbook to the wrong person, they would be clothing
that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that
person. For failing to return the passbook to Calapre, the authorized representative of L.C. Diaz,
Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding
the passbook, and in insuring its return to the party authorized to receive the same.

In culpa contractual, once the plaintiff proves a breach of contract, there is a presumption that
the defendant was at fault or negligent. The burden is on the defendant to prove that he was not at
fault or negligent. In contrast, in culpa aquiliana the plaintiff has the burden of proving that the
defendant was negligent. In the present case, L.C. Diaz has established that Solidbank breached its
contractual obligation to return the passbook only to the authorized representative of L.C. Diaz. There
is thus a presumption that Solidbank was at fault and its teller was negligent in not returning the
passbook to Calapre. The burden was on Solidbank to prove that there was no negligence on its part or
its employees.

Solidbank failed to discharge its burden. Solidbank did not present to the trial court Teller No. 6,
the teller with whom Calapre left the passbook and who was supposed to return the passbook to
him. The record does not indicate that Teller No. 6 verified the identity of the person who retrieved the
passbook. Solidbank also failed to adduce in evidence its standard procedure in verifying the identity
of the person retrieving the passbook, if there is such a procedure, and that Teller No. 6 implemented
this procedure in the present case.

Solidbank is bound by the negligence of its employees under the principle of respondeat
superior or command responsibility. The defense of exercising the required diligence in the selection
and supervision of employees is not a complete defense in culpa contractual, unlike in culpa
aquiliana.[25]

The bank must not only exercise high standards of integrity and performance, it must also insure
that its employees do likewise because this is the only way to insure that the bank will comply with its
fiduciary duty. Solidbank failed to present the teller who had the duty to return to Calapre the passbook,
and thus failed to prove that this teller exercised the high standards of integrity and performance
required of Solidbanks employees.

Proximate Cause of the Unauthorized Withdrawal

71
 Another point of disagreement between the trial and appellate courts is the proximate cause of
the unauthorized withdrawal. The trial court believed that L.C. Diazs negligence in not securing its
passbook under lock and key was the proximate cause that allowed the impostor to withdraw
the P300,000. For the appellate court, the proximate cause was the tellers negligence in processing the
withdrawal without first verifying with L.C. Diaz. We do not agree with either court.

Proximate cause is that cause which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury and without which the result would not have
occurred.[26] Proximate cause is determined by the facts of each case upon mixed considerations of
logic, common sense, policy and precedent.[27]

L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in
possession of the passbook while it was processing the deposit. After completion of the transaction,
Solidbank had the contractual obligation to return the passbook only to Calapre, the authorized
representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation because it gave the
passbook to another person.

Solidbanks failure to return the passbook to Calapre made possible the withdrawal of
the P300,000 by the impostor who took possession of the passbook. Under Solidbanks rules on savings
account, mere possession of the passbook raises the presumption of ownership. It was the negligent
act of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had the
passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened.
Thus, the proximate cause of the unauthorized withdrawal was Solidbanks negligence in not returning
the passbook to Calapre.

We do not subscribe to the appellate courts theory that the proximate cause of the unauthorized
withdrawal was the tellers failure to call up L.C. Diaz to verify the withdrawal. Solidbank did not have
the duty to call up L.C. Diaz to confirm the withdrawal. There is no arrangement between Solidbank and
L.C. Diaz to this effect. Even the agreement between Solidbank and L.C. Diaz pertaining to measures
that the parties must observe whenever withdrawals of large amounts are made does not direct
Solidbank to call up L.C. Diaz.

There is no law mandating banks to call up their clients whenever their representatives withdraw
significant amounts from their accounts. L.C. Diaz therefore had the burden to prove that it is the usual
practice of Solidbank to call up its clients to verify a withdrawal of a large amount of money. L.C. Diaz
failed to do so.

Teller No. 5 who processed the withdrawal could not have been put on guard to verify the
withdrawal. Prior to the withdrawal of P300,000, the impostor deposited with Teller No. 6 theP90,000
PBC check, which later bounced. The impostor apparently deposited a large amount of money to
deflect suspicion from the withdrawal of a much bigger amount of money. The appellate court thus
erred when it imposed on Solidbank the duty to call up L.C. Diaz to confirm the withdrawal when no
law requires this from banks and when the teller had no reason to be suspicious of the transaction.

Solidbank continues to foist the defense that Ilagan made the withdrawal. Solidbank claims that
since Ilagan was also a messenger of L.C. Diaz, he was familiar with its teller so that there was no more
need for the teller to verify the withdrawal. Solidbank relies on the following statements in the Booking
and Information Sheet of Emerano Ilagan:

xxx Ilagan also had with him (before the withdrawal) a forged check of PBC and indicated the amount
of P90,000 which he deposited in favor of L.C. Diaz and Company. After successfully withdrawing this
large sum of money, accused Ilagan gave alias Rey (Noel Tamayo) his share of the loot. Ilagan then
hired a taxicab in the amount of P1,000 to transport him (Ilagan) to his home province at Bauan,
Batangas.Ilagan extravagantly and lavishly spent his money but a big part of his loot was wasted in
cockfight and horse racing. Ilagan was apprehended and meekly admitted his guilt.[28] (Emphasis
supplied.)

72
 L.C. Diaz refutes Solidbanks contention by pointing out that the person who withdrew
the P300,000 was a certain Noel Tamayo. Both the trial and appellate courts stated that this Noel
Tamayo presented the passbook with the withdrawal slip.

We uphold the finding of the trial and appellate courts that a certain Noel Tamayo withdrew
the P300,000. The Court is not a trier of facts. We find no justifiable reason to reverse the factual
finding of the trial court and the Court of Appeals. The tellers who processed the deposit of the P90,000
check and the withdrawal of the P300,000 were not presented during trial to substantiate Solidbanks
claim that Ilagan deposited the check and made the questioned withdrawal. Moreover, the entry
quoted by Solidbank does not categorically state that Ilagan presented the withdrawal slip and the
passbook.

Doctrine of Last Clear Chance

The doctrine of last clear chance states that where both parties are negligent but the negligent
act of one is appreciably later than that of the other, or where it is impossible to determine whose fault
or negligence caused the loss, the one who had the last clear opportunity to avoid the loss but failed to
do so, is chargeable with the loss.[29] Stated differently, the antecedent negligence of the plaintiff does
not preclude him from recovering damages caused by the supervening negligence of the defendant,
who had the last fair chance to prevent the impending harm by the exercise of due diligence.[30]

We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach
of contract due to negligence in the performance of its contractual obligation to L.C. Diaz. This is a case
of culpa contractual, where neither the contributory negligence of the plaintiff nor his last clear chance
to avoid the loss, would exonerate the defendant from liability.[31]Such contributory negligence or last
clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff but does
not exculpate the defendant from his breach of contract. [32]

Mitigated Damages

Under Article 1172, liability (for culpa contractual) may be regulated by the courts, according to
the circumstances. This means that if the defendant exercised the proper diligence in the selection and
supervision of its employee, or if the plaintiff was guilty of contributory negligence, then the courts may
reduce the award of damages. In this case, L.C. Diaz was guilty of contributory negligence in allowing a
withdrawal slip signed by its authorized signatories to fall into the hands of an impostor. Thus, the
liability of Solidbank should be reduced.

In Philippine Bank of Commerce v. Court of Appeals,[33] where the Court held the depositor guilty
of contributory negligence, we allocated the damages between the depositor and the bank on a 40-60
ratio. Applying the same ruling to this case, we hold that L.C. Diaz must shoulder 40% of the actual
damages awarded by the appellate court. Solidbank must pay the other 60% of the actual damages.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with MODIFICATION. Petitioner
Solidbank Corporation shall pay private respondent L.C. Diaz and Company, CPAs only 60% of the actual
damages awarded by the Court of Appeals. The remaining 40% of the actual damages shall be borne
by private respondent L.C. Diaz and Company, CPAs.Proportionate costs.

SO ORDERED.

73
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

74
G.R. No. L-20240 December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.

Office of the Solicitor General for plaintiff-appellee.

Isabelo P. Samson for defendant-appellant.

ZALDIVAR, J.:

In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bank of Taiwan,
Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per annum,
compounded quarterly. These loans are evidenced by five promissory notes executed by the appellant
in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on
June 18, 1943, P22.86; on August 9, 1943,P300.00; on August 13, 1943, P200.00, all notes without due
dates, but because the loans were due one year after they were incurred. To secure the payment of
the loans the appellant executed a chattel mortgage on the standing crops on his land, Lot No. 1494
known as Hacienda Campugas in Hinigiran, Negros Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided for in the
Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of Taiwan, Ltd. were
vested in the Government of the United States. Pursuant to the Philippine Property Act of 1946 of the
United States, these assets, including the loans in question, were subsequently transferred to the
Republic of the Philippines by the Government of the United States under Transfer Agreement dated
July 20, 1954. These assets were among the properties that were placed under the administration of
the Board of Liquidators created under Executive Order No. 372, dated November 24, 1950, and in
accordance with Republic Acts Nos. 8 and 477 and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairman of the
Board of Liquidators, made a written extrajudicial demand upon the appellant for the payment of the
account in question. The record shows that the appellant had actually received the written demand for
payment, but he failed to pay.

The aggregate amount due as principal of the five loans in question, computed under the Ballantyne
scale of values as of the time that the loans were incurred in 1943, was P889.64; and the interest due
thereon at the rate of 6% per annum compounded quarterly, computed as of December 31, 1959 was
P2,377.23.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court of Hinigaran, Negros
Occidental, to collect from the appellant the unpaid account in question. The Justice of the Peace Of
Hinigaran, after hearing, dismissed the case on the ground that the action had prescribed. The appellee
appealed to the Court of First Instance of Negros Occidental and on March 26, 1962 the court a
quo rendered a decision ordering the appellant to pay the appellee the sum of P2,377.23 as of
December 31, 1959, plus interest at the rate of 6% per annum compounded quarterly from the date of
the filing of the complaint until full payment was made. The appellant was also ordered to pay the sum
equivalent to 10% of the amount due as attorney's fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellant Jose
Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution of May 13, 1963, required
Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who are the legal heirs of

75
Jose Grijaldo to appear and be substituted as appellants in accordance with Section 17 of Rule 3 of the
Rules of Court.

In the present appeal the appellant contends: (1) that the appellee has no cause of action against the
appellant; (2) that if the appellee has a cause of action at all, that action had prescribed; and (3) that
the lower court erred in ordering the appellant to pay the amount of P2,377.23.

In discussing the first point of contention, the appellant maintains that the appellee has no privity of
contract with the appellant. It is claimed that the transaction between the Taiwan Bank, Ltd. and the
appellant, so that the appellee, Republic of the Philippines, could not legally bring action against the
appellant for the enforcement of the obligation involved in said transaction. This contention has no
merit. It is true that the Bank of Taiwan, Ltd. was the original creditor and the transaction between the
appellant and the Bank of Taiwan was a private contract of loan. However, pursuant to the Trading with
the Enemy Act, as amended, and Executive Order No. 9095 of the United States; and under Vesting
Order No. P-4, dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which was
declared to be under the jurisdiction of the enemy country (Japan), were vested in the United States
Government and the Republic of the Philippines, the assets of the Bank of Taiwan, Ltd. were transferred
to and vested in the Republic of the Philippines. The successive transfer of the rights over the loans in
question from the Bank of Taiwan, Ltd. to the United States Government, and from the United States
Government to the government of the Republic of the Philippines, made the Republic of the Philippines
the successor of the rights, title and interest in said loans, thereby creating a privity of contract between
the appellee and the appellant. In defining the word "privy" this Court, in a case, said:

The word "privy" denotes the idea of succession ... hence an assignee of a credit, and one subrogated
to it, etc. will be privies; in short, he who by succession is placed in the position of one of those who
contracted the judicial relation and executed the private document and appears to be substituting him
in the personal rights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790).

The United States of America acting as a belligerent sovereign power seized the assets of the Bank of
Taiwan, Ltd. which belonged to an enemy country. The confiscation of the assets of the Bank of Taiwan,
Ltd. being an involuntary act of war, and sanctioned by international law, the United States succeeded
to the rights and interests of said Bank of Taiwan, Ltd. over the assets of said bank. As successor in
interest in, and transferee of, the property rights of the United States of America over the loans in
question, the Republic of the Philippines had thereby become a privy to the original contracts of loan
between the Bank of Taiwan, Ltd. and the appellant. It follows, therefore, that the Republic of the
Philippines has a legal right to bring the present action against the appellant Jose Grijaldo.

The appellant likewise maintains, in support of his contention that the appellee has no cause of action,
that because the loans were secured by a chattel mortgage on the standing crops on a land owned by
him and these crops were lost or destroyed through enemy action his obligation to pay the loans was
thereby extinguished. This argument is untenable. The terms of the promissory notes and the chattel
mortgage that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of
appellant. The obligation of the appellant under the five promissory notes was not to deliver a
determinate thing namely, the crops to be harvested from his land, or the value of the crops that would
be harvested from his land. Rather, his obligation was to pay a generic thing — the amount of money
representing the total sum of the five loans, with interest. The transaction between the appellant and
the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money. "By a contract
of (simple) loan, one of the parties delivers to another ... money or other consumable thing upon the
condition that the same amount of the same kind and quality shall be paid." (Article 1933, Civil Code)
The obligation of the appellant under the five promissory notes evidencing the loans in questions is to
pay the value thereof; that is, to deliver a sum of money — a clear case of an obligation to deliver, a
generic thing. Article 1263 of the Civil Code provides:

76
In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation.

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

In his second point of contention, the appellant maintains that the action of the appellee had prescribed.
The appellant points out that the loans became due on June 1, 1944; and when the complaint was filed
on January 17,1961 a period of more than 16 years had already elapsed — far beyond the period of ten
years when an action based on a written contract should be brought to court.

This contention of the appellant has no merit. Firstly, it should be considered that the complaint in the
present case was brought by the Republic of the Philippines not as a nominal party but in the exercise
of its sovereign functions, to protect the interests of the State over a public property. Under paragraph
4 of Article 1108 of the Civil Code prescription, both acquisitive and extinctive, does not run against the
State. This Court has held that the statute of limitations does not run against the right of action of the
Government of the Philippines (Government of the Philippine Islands vs. Monte de Piedad, etc., 35 Phil.
738-751).Secondly, the running of the period of prescription of the action to collect the loan from the
appellant was interrupted by the moratorium laws (Executive Orders No. 25, dated November 18, 1944;
Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342, approved on July 26, 1948).
The loan in question, as evidenced by the five promissory notes, were incurred in the year 1943, or
during the period of Japanese occupation of the Philippines. This case is squarely covered by Executive
Order No. 25, which became effective on November 18, 1944, providing for the suspension of payments
of debts incurred after December 31, 1941. The period of prescription was, therefore, suspended
beginning November 18, 1944. This Court, in the case of Rutter vs. Esteban (L-3708, May 18, 1953, 93
Phil. 68), declared on May 18, 1953 that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos.
25 and 32, are unconstitutional; but in that case this Court ruled that the moratorium laws had
suspended the prescriptive period until May 18, 1953. This ruling was categorically reiterated in the
decision in the case of Manila Motors vs. Flores, L-9396, August 16, 1956. It follows, therefore, that the
prescriptive period in the case now before US was suspended from November 18,1944, when Executive
Orders Nos. 25 and 32 were declared unconstitutional by this Court. Computed accordingly, the
prescriptive period was suspended for 8 years and 6 months. By the appellant's own admission, the
cause of action on the five promissory notes in question arose on June 1, 1944. The complaint in the
present case was filed on January 17, 1961, or after a period of 16 years, 6 months and 16 days when
the cause of action arose. If the prescriptive period was not interrupted by the moratorium laws, the
action would have prescribed already; but, as We have stated, the prescriptive period was suspended
by the moratorium laws for a period of 8 years and 6 months. If we deduct the period of suspension (8
years and 6 months) from the period that elapsed from the time the cause of action arose to the time
when the complaint was filed (16 years, 6 months and 16 days) there remains a period of 8 years and
16 days. In other words, the prescriptive period ran for only 8 years and 16 days. There still remained a
period of one year, 11 months and 14 days of the prescriptive period when the complaint was filed.

In his third point of contention the appellant maintains that the lower court erred in ordering him to
pay the amount of P2,377.23. It is claimed by the appellant that it was error on the part of the lower
court to apply the Ballantyne Scale of values in evaluating the Japanese war notes as of June 1943 when
the loans were incurred, because what should be done is to evaluate the loans on the basis of the
Ballantyne Scale as of the time the loans became due, and that was in June 1944. This contention of
the appellant is also without merit.

77
The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as of December 31,
1959, plus interest rate of 6% per annum compounded quarterly from the date of the filing of the
complaint. The sum total of the five loans obtained by the appellant from the Bank of Taiwan, Ltd. was
P1,281.97 in Japanese war notes. Computed under the Ballantyne Scale of values as of June 1943, this
sum of P1,281.97 in Japanese war notes in June 1943 is equivalent to P889.64 in genuine Philippine
currency which was considered the aggregate amount due as principal of the five loans, and the amount
of P2,377.23 as of December 31, 1959 was arrived at after computing the interest on the principal sum
of P889.64 compounded quarterly from the time the obligations were incurred in 1943.

It is the stand of the appellee that the Ballantyne scale of values should be applied as of the time the
obligation was incurred, and that was in June 1943. This stand of the appellee was upheld by the lower
court; and the decision of the lower court is supported by the ruling of this Court in the case of Hilado
vs. De la Costa (G.R. No. L-150, April 30, 1949; 46 O.G. 5472), which states:

... Contracts stipulating for payments presumably in Japanese war notes may be enforced in our Courts
after the liberation to the extent of the just obligation of the contracting parties and, as said notes have
become worthless, in order that justice may be done and the party entitled to be paid can recover their
actual value in Philippine Currency, what the debtor or defendant bank should return or pay is the value
of the Japanese military notes in relation to the peso in Philippine Currency obtaining on the date when
and at the place where the obligation was incurred unless the parties had agreed otherwise. ... . (italics
supplied)

IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs against the appellant.
Inasmuch as the appellant Jose Grijaldo died during the pendency of this appeal, his estate must answer
in the execution of the judgment in the present case.

78
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 96494 May 28, 1992

CASA FILIPINA DEVELOPMENT CORPORATION, petitioner,

vs.
THE DEPUTY EXECUTIVE SECRETARY, OFFICE OF THE PRESIDENT, MALACAÑANG, MANILA, AND JOSE
VALENZUELA, JR., respondents.

MEDIALDEA, J.:

This is a petition for review on certiorari (treated as a petition for certiorari) seeking reversal of the
decision of the Office of the President dated April 11, 1989, in O.P. Case No. 3722, entitled "Casa Filipina
Development Corporation, Respondent-Appellant, v. Jose Valenzuela, Jr., Complainant-Appellee,"
which affirmed the decision of the Housing and Land Use Regulatory Board dated October 6, 1987; and
its resolution dated September 26, 1989, which denied the motion for reconsideration for Lack of merit.

The antecedent facts are, as follows:

On June 30, 1986, private respondent Jose Valenzuela, Jr. filed a complaint against petitioner Casa
Filipina Development Corporation before the Office of Appeals, Adjudication and Legal Affairs (OAALA)
of the then Human Settlements Regulatory Commission (now Housing and Land Use Regulatory Board)
for its failure to execute and deliver the deed of sale and transfer certificate of title. He alleged therein
that on May 2, 1984, he entered into a contract to sell with petitioner for the purchase of a 120 sq. m.

79
lot denominated as Lot 8, Block 9, Phase II of Casa Filipina, Sucat II, Bo. San Dionisio, Parañaque, Metro
Manila, for a total purchase price of P68,400.00 with P16,416.00 as downpayment and the balance of
P51,984.00 to be paid in 12 equal monthly installments of P4,915.16 with 24% interest per
annum starting September 3, 1984; that on October 7, 1985, he made his full and final payment under
O.R. No. 6266; that despite full payment of the lot, petitioner refused to execute the necessary deed of
absolute sale and deliver the corresponding transfer certificate of title to him; that since October 1985,
he had offered to pay for or reimburse petitioner the expenses for the transfer of the title but the latter
refuses to accept the same; and that he was constrained to hire a lawyer for a fee to protect his interests.

For petitioner's defense, it contended that private respondent's action is premature because of his
failure to comply with the other conditional requirements of their contract such as payment of transfer
expenses, and that had the latter paid said fees, it would have been very much willing to effect the
transfer of the title.

On January 21, 1987, the OAALA rendered judgment in favor of private respondent, relying on Section
25 of Presidential Decree No. 957 (Regulating the Sale of Subdivision Lots and Condominiums, Providing
Penalties for Violations thereof), which provides:

Sec. 25. Issuance of Title –– The owner or developer shall deliver the title of the lot or unit to the buyer
upon full payment of the lot or unit. No fee except those required for the registration of the deed of
sale in the Registry of deeds shall be collected for the issuance of such title. In the event a mortgage
over the lot or unit is outstanding at the time of the issuance of the title to the buyer, the owner of or
developer shall redeem the mortgage or the corresponding portion thereof within six months from
such issuance in order that the title over any fully paid lot or unit may be secured and delivered to the
buyer in accordance herewith.

The dispositive portion of its decision reads (p. 19, Rollo):

WHEREFORE, PREMISES CONSIDERED, judgment is rendered ordering respondent, within 15 days from
finality of this decision, to execute the deed of absolute sale for Lot 8, Block 9, Phase II, Casa Filipina,
Sucat II, Bo. San Dionisio, Parañaque, Metro Manila in favor of the complainant and thereafter to bill
complainant the total amount due for the registration and transfer expenses of the title. Respondent
is further ordered, within 15 days from receipt of complainant's payment for registration and transfer
expenses, to deliver to the latter the transfer certificate of title of subject lot free from all liens and
encumbrances. In the event respondent is unable to deliver the title to the said lot, respondent is
hereby ordered to refund (to) complainant his total payments amounting to SEVENTY SIX THOUSAND
ONE HUNDRED EIGHTY PESOS and 82/100 (P76,180.82) plus 24% interest per annum from June 30,
1986, the date of the filing of the complaint, until fully paid. Respondent is likewise ordered to pay
complainant TWO THOUSAND PESOS (P2,000.00) by way of attorney's fees, for compelling the latter to
litigate and incur expenses in the protection of his rights.

It is SO ORDERED.

Petitioner then filed an appeal before the Housing and Land Use Regulatory Board. In petitioner's
memorandum, it narrated the events that transpired which led to its failure to deliver the title, namely:
its original mortgagee bank was Royal Savings Bank which was absorbed by Comsavings Bank
apparently due to bankrun; Comsavings Bank is not amenable to petitioner's earlier arrangement with
Royal Savings Bank on individual redemption of title, thus, it demanded that petitioner's obligations
should be paid prior to the release of any individual title; petitioner cannot seasonably meet such
demand due to the inability of the past administration to put up a viable and progressive economic
program that brought it into a fix situation wherein it has no participation either intentionally or by
negligence.

80
On October 6, 1987, the HLURB dismissed petitioner's appeal for lack of merit and affirmed in toto the
questioned decision of the OAALA (p. 23, Rollo). It opined that (ibid):

. . . Suffice it to state that the payment in full by the complainant-appellee of the purchased (sic) price
of the lot should warrant the immediate delivery of the title to the lot so purchased. Section 25 of P.D.
957 clearly provides that the redemption by the mortgagor or (sic) any mortgage (sic) property shall be
within a period of six (6) months from (the) date of issuance of the title in favor of the buyer. Obviously
from the moment full payment is made by the buyer to (sic) his purchased lot, the maximum period
contemplated by law for delivery of title is only six (6) months. Within this period it becomes mandatory
upon the owner or developer of a subdivision to deliver (the) title to the lot buyer. In the case at bar,
full payment was made on October 7, 1985 and despite the lapse of one (1) year more or less from (the)
date of full payment, delivery of (the) title is still uncertain.

The defense of the respondent-appellant that its failure to deliver the title allegedly due to the inability
of the past administration to put up a viable and progressive economic program which led to the closure
of the Royal Savings Bank as its original mortgagee bank in not well-taken since there is no proof
submitted to this Board to sunbstantiate appellant's claim. On the contrary it was only the OAALA
decision that made the respondent-appellant change its line of justification which happened to be just
an allegation which need not be passed upon by this Board.

Petitioner appealed further to the Office of the President. Again, on April 11, 1989, its appeal was
dismissed for lack of merit and the questioned decision of the HLURB was affirmed (p. 32, Rollo). On
September 26, 1989, the motion for reconsideration was denied for lack of merit (p. 36, Rollo). Hence,
the present petition, wherein petitioner raises the following issues (pp. 9-10 Rollo):

1. THE RESPONDENT DEPUTY EXECUTIVE SECRETARY, WITH DUE RESPECT ERRED IN NOT APPLYING
SETTLED JURISPRUDENCE AND THE PROVISION OF LAW APPLICABLE IN THIS CASE.

2. THE RESPONDENT DEPUTY EXECUTIVE SECRETARY, WITH DUE RESPECT, ERRED IN ARRIVING AT A
CONCLUSION CONTRADICTORY OF (sic) THE FACTS AND EVIDENCE, AMOUNTING TO GRAVE ABUSE OF
DISCRETION.

Mainly, petitioner asseverates that in granting both remedies of specific performance and rescission,
public respondent ignored a well-pronounced rule that these remedies cannot be availed of at the same
time. There is no evidence showing that private respondent had offered to pay the expenses for the
transfer of the title. Furthermore the amount of 24% interest imposed by the OAALA in case of refund
is high and without basis: firstly, HLURB Resolution No. R-421, series of 1988, strictly enjoins the
maximum interest to be awarded in case of refund to 12%; secondly, although condition no. 1 of their
contract to sell provides for said rate of interest, it merely applies to interest on installment payments
but not with respect to refunds; thirdly, since the contract between them is not a forbearance of money
or loan, the doctrine laid down in the case of Reformina v. Tomol, Jr., G.R. No. 59096, 139 SCRA 260
applies, that is, except where the action involves forbearance of money or loan, interest which courts
may award is only up to 12% (should be 6%). Finally, inasmuch as issuance of the title has not yet been
effected because of the take over by Comsavings Bank of Royal Savings Bank, the period specified under
Section 25 of P.D. No. 957 has not begun to run for the purpose of redemption.

The arguments advanced by petitioner utterly lack merit.

It is plain enough in the OAALA decision that rescission is being ordered only in the event specific
performance is not feasible. Moreover, petitioner is already estopped from raising this issue because
in its appeal memorandum submitted before the HLURB, it leaded that (p. 28, Rollo):

81
5. Appellant prays that it be given a period/time to redeem the title or the demand for issuance of title
be suspended from the Comsavings Bank before any deed of absolute sale be executed so that the
Transfer Certificate of Title be issued and/or refund be ordered.

The OAALA found as a fact that "the complaint-appellee was ready, willing and able to pay for the
expenses for the transfer of title as stipulated in the Contract to Sell . . . " (p. 22, Rollo). We accord
respect and finality to this finding (Filipinas Manufacturers Bank v. NLRC, et al., G.R. No. 72805, February
28, 1990, 182 SCRA 848; Vda. de Pineda, et al. v. Peña, etc., et al., G.R. No. 57665, July 2, 1990, 187
SCRA 22).

We adopt the disposition of the Office of the Solicitor General on the correct rate of interest as Our
own (pp. 124-125, Rollo):

The ruling in Reformina v. Tomol, it must be underscored, deals exclusively with cases where damages
in the form of interest is due but no specific rate has been previously set by the parties. In such cases,
the legal interest of 12% per annum must be applied. In the present case, however, the interest rate of
24% per annum was mutually agreed upon by petitioner and private respondent in their contract to
sell — this was the interest rate imposed on private respondent for the payment of the installments on
the contract price and there is no reason why this same interest rate should not be equally applied to
petitioner which is guilty of violating the reciprocal obligation.

In Solid Homes Inc. v. Court of Appeals (170 SCRA 63 [1989]), a subdivision owner, in violation of their
Offsetting Agreement, incurred delay in the delivery of a house and lot to the supplier of the
construction materials. On review, the issue of which rate of interest — the 6% per annum which was
then the legal interest or the stipulated interest rate of 12% — was raised. This Honorable Court ruled:

On the matter of interest, we agree with the trial court and the Court of Appeals that the proper rate
of interest is twelve (12%) per centum per annum, which is the rate of interest expressly agreed upon
in writing by the parties, as appearing in the invoices (Exhibits "C" and "D"), and sanctioned by Art. 2209
of the Civil Code, . . .(Emphasis supplied)

It is, thus, evident that if a particular rate of interest has been expressly stipulated by the parties, that
interest, not the legal rate of interest, shall be applied.

Section 25 of P.D. No. 957 imposes an obligation on the part of the owner or developer, in the event
the mortgage over the lot or unit is outstanding at the time of the issuance of the title to the buyer, to
redeem the mortgage or the corresponding portion thereof within six months from such issuance. We
focus Our attention on the period of "six months" to be reckoned "from the issuance of the title."
Supposing there is no such issuance of the title, as in this case, from what event is the six month period
to be counted? Or, will this period not begin to run at all unless the title has been issued? The argument
of petitioner that the issuance of the title is a prerequisite to the running of the six month period of
redemption, fails to convince Us. Otherwise, the owner or developer can readily concoct a thousand
and one reasons as justifications for its failure to issue the title and in the process, prolong the period
within which to deliver the title to the buyer free from any liens or encumbrances. Additionally, by not
issuing/delivering the title of the lot to private respondent upon full payment thereof, petitioner has
already violated the explicit mandate of the first sentence of Section 25 of P.D. No. 957. If We were to
count the six month period of redemption from the belated issuance of the title, petitioner will have a
lot to gain from its own non-observance of said provision. We shall not countenance such absurdity. Of
equal importance as the preceding ratiocination are the reasons behind the enactment of P.D. No. 957,
as expressed succinctly in its "whereas" clauses, to wit:

82
WHEREAS, reports of alarming magnitude also show cases of swindling and fraudulent manipulations
perpetrated by unscrupulous subdivision and condominium sellers and operators, such as failure to
deliver titles to the buyers or titles free from liens and encumbrances, and to pay real estate taxes, and
fraudulent sales of the same subdivision lots to different innocent purchasers for value;

WHEREAS, these acts not only undermine the land and housing program of the government but also
defeat the objectives of the New Society, particularly the promotion of peace and order and the
enhancement of the economic, social and moral condition of the Filipino people;

WHEREAS, this state of affairs has rendered it imperative that the real estate subdivision and
condominium businesses be closely supervised and regulated, and that penalties be imposed on
fraudulent practices and manipulations committed in connection therewith.

ACCORDINGLY, the petition is hereby DISMISSED. The decision of the Office of the President dated April
11, 1989 and its resolution dated September 26, 1989 are AFFIRMED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-26001 October 29, 1968

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, respondents.

Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.

San Juan, Africa & Benedicto for respondents.

CONCEPCION, C.J.:

The Philippine National Bank — hereinafter referred to as the PNB — seeks the review by certiorari of
a decision of the Court of Appeals, which affirmed that of the Court of First Instance of Manila,
dismissing plaintiff's complaint against the Philippine Commercial and Industrial Bank — hereinafter
referred to as the PCIB — for the recovery of P57,415.00.

83
A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals show
that, on about January 15, 1962, one Augusto Lim deposited in his current account with the PCIB branch
at Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, drawn against the PNB;
that, following an established banking practice in the Philippines, the check was, on the same date,
forwarded, for clearing, through the Central Bank, to the PNB, which did not return said check the next
day, or at any other time, but retained it and paid its amount to the PCIB, as well as debited it against
the account of the GSIS in the PNB; that, subsequently, or on January 31, 1962, upon demand from the
GSIS, said sum of P57,415.00 was re-credited to the latter's account, for the reason that the signatures
of its officers on the check were forged; and that, thereupon, or on February 2, 1962, the PNB
demanded from the PCIB the refund of said sum, which the PCIB refused to do. Hence, the present
action against the PCIB, which was dismissed by the Court of First Instance of Manila, whose decision
was, in turn, affirmed by the Court of Appeals.

It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the check,
as drawer thereof, are forged; that the person named in the check as its payee was one Mariano D.
Pulido, who purportedly indorsed it to one Manuel Go; that the check purports to have been indorsed
by Manuel Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January 15, 1962; that,
thereupon, the PCIB stamped the following on the back of the check: "All prior indorsements and/or
Lack of Endorsement Guaranteed, Philippine Commercial and Industrial Bank," Padre Faura Branch,
Manila; that, on the same date, the PCIB sent the check to the PNB, for clearance, through the Central
Bank; and that, over two (2) months before, or on November 13, 1961, the GSIS had notified the PNB,
which acknowledged receipt of the notice, that said check had been lost, and, accordingly, requested
that its payment be stopped.

In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB guilty of negligence;
(2) in not finding that the indorsements at the back of the check are forged; (3) in not finding the PCIB
liable to the PNB by virtue of the former's warranty on the back of the check; (4) in not holding that
"clearing" is not "acceptance", in contemplation of the Negotiable Instruments law; (5) in not finding
that, since the check had not been accepted by the PNB, the latter is entitled to reimbursement therefor;
and (6) in denying the PNB's right to recover from the PCIB.

The first assignment of error will be discussed later, together with the last,with which it is interrelated.

As regards the second assignment of error, the PNB argues that, since the signatures of the drawer are
forged, so must the signatures of the supposed indorsers be; but this conclusion does not necessarily
follow from said premise. Besides, there is absolutely no evidence, and the PNB has not even tried to
prove that the aforementioned indorsements are spurious. Again, the PNB refunded the amount of the
check to the GSIS, on account of the forgery in the signatures, not of the indorsers or supposed
indorsers, but of the officers of the GSIS as drawer of the instrument. In other words, the question
whether or not the indorsements have been falsified is immaterial to the PNB's liability as a drawee, or
to its right to recover from the PCIB,1 for, as against the drawee, the indorsement of an intermediate
bank does not guarantee the signature of the drawer, 2 since the forgery of the indorsement is notthe
cause of the loss.3

With respect to the warranty on the back of the check, to which the third assignment of error refers, it
should be noted that the PCIB thereby guaranteed "all prior indorsements," not the authenticity of the
signatures of the officers of the GSIS who signed on its behalf, because the GSIS is not an indorser of
the check, but its drawer.4 Said warranty is irrelevant, therefore, to the PNB's alleged right to recover
from the PCIB. It could have been availed of by a subsequent indorsee 5 or a holder in due
course6 subsequent to the PCIB, but, the PNB is neither.7 Indeed, upon payment by the PNB, as drawee,
the check ceased to be a negotiable instrument, and became a mere voucher or proof of payment. 8

84
Referring to the fourth and fifth assignments of error, we must bear in mind that, in general,
"acceptance", in the sense in which this term is used in the Negotiable Instruments Law9 is not required
for checks, for the same are payable on demand.10 Indeed, "acceptance" and "payment" are, within the
purview of said Law, essentially different things, for the former is "a promise to perform an act,"
whereas the latter is the "actual performance" thereof.11 In the words of the Law,12 "the acceptance of
a bill is the signification by the drawee of his assent to the order of the drawer," which, in the case of
checks, is the payment, on demand, of a given sum of money. Upon the other hand, actual payment of
the amount of a check implies not only an assent to said order of the drawer and a recognition of the
drawer's obligation to pay the aforementioned sum, but, also, a compliance with such obligation.

Let us now consider the first and the last assignments of error. The PNB maintains that the lower court
erred in not finding that the PCIB had been guilty of negligence in not discovering that the check was
forged. Assuming that there had been such negligence on the part of the PCIB, it is undeniable, however,
that the PNB has, also, been negligent, with the particularity that the PNB had been guilty of a greater
degree of negligence, because it had a previous and formal notice from the GSIS that the check had
been lost, with the request that payment thereof be stopped. Just as important, if not more important
and decisive, is the fact that the PNB's negligence was the main or proximate cause for the
corresponding loss.

In this connection, it will be recalled that the PCIB did not cash the check upon its presentation by
Augusto Lim; that the latter had merely deposited it in his current account with the PCIB; that, on the
same day, the PCIB sent it, through the Central Bank, to the PNB, for clearing; that the PNB
did not return the check to the PCIB the next day or at any other time; that said failure to return the
check to the PCIB implied, under the current banking practice, that the PNB considered the check good
and would honor it; that, in fact, the PNB honored the check and paid its amount to the PCIB; and that
only then did the PCIB allow Augusto Lim to draw said amount from his aforementioned current
account.

Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found nothing
wrong with the check and would honor the same, and by actually paying its amount to the PCIB, the
PNB induced the latter, not only to believe that the check was genuine and good in every respect, but,
also, to pay its amount to Augusto Lim. In other words, the PNB was the primary or proximate cause of
the loss, and, hence, may not recover from the PCIB. 13

It is a well-settled maxim of law and equity that when one of two (2) innocent persons must suffer by
the wrongful act of a third person, the loss must be borne by the one whose negligence was the
proximate cause of the loss or who put it into the power of the third person to perpetrate the wrong. 14

Then, again, it has, likewise, been held that, where the collecting (PCIB) and the drawee (PNB) banks
are equally at fault, the court will leave the parties where it finds them. 15

Lastly, Section 62 of Act No. 2031 provides:

The acceptor by accepting the instrument engages that he will pay it according to the tenor of his
acceptance; and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to
draw the instrument; and

(b) The existence of the payee and his then capacity to indorse.

85
The prevailing view is that the same rule applies in the case of a drawee who pays a bill without having
previously accepted it.16

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the Philippine National
Bank. It is so ordered.

86
THIRD DIVISION

[ G.R. No. 76518, July 13, 1990 ]

IRENE P. RELUCIO, PETITIONER, VS. ZEIDA B. BRILLANTE-GARFIN AND COURT OF APPEALS,

RESPONDENTS.

RESOLUTION

FELICIANO, J.:

On 22 October 1979, private respondent Zeida B. Brillante-Garfin filed a complaint in the lower court
for specific performance with damages against petitioner Irene P. Relucio, to compel the latter to: (a)
execute, in compliance with the Contract to Buy and Sell in question, a final deed of sale in favor of the
former over two (2) residential subdivision lots in the Mariano Village Subdivision, Naga City; and (b)
construct paved roads on the northern and southern sides of the lots, as well as "necessary facilities,
improvements, infrastructures and other forms of development of the subdivision area." Private
respondent alleged that the lots, which have a total contract price of P10,800.00, have already been
paid for, as she had already paid P200.00 as down payment, and had subsequently completed payment
of 128 equal monthly installments of P89.45 each amounting to P11,450.00; that as the law allows the
charging of interest only as monetary interest or as compensatory interest, none of which have
obtained in her case, as she had never incurred in delay in the payment of installments due, the
stipulated interest of six percent (6%) per annum on the outstanding balance is null and void; and that
the amount of P650.00 representing overpayment be returned to her.

Petitioner resisted the complaint, maintaining that private respondent, contrary to the latter's
allegations, is obliged to pay interest on the installment payments of the unpaid outstanding balance
even if paid on their "due dates" per schedule of payments; that private respondent had actually been
in arrears in the amount of P4,269.40, representing such interest as of June 1979, which therefore
entitled petitioner to cancel the contract in question. Petitioner then prayed for judicial affirmance of
her Notarial Notice of Cancellation over the said contract in question.

The lower court ordered petitioner:

"1. To execute a deed of absolute sale of the two lots described in the complaint in
favor of the plaintiff to enable the latter to secure the corresponding certificate of
title in her name within thirty (30) days from the finality of this Decision;

2. To construct or cause the construction of roads on the Northern and Southern

sides of the said two lots in accordance with the contract, if any, and in conformity
with the City of Naga planning ordinance relative to this case;

3. The return to the plaintiff the excess payment of P650.00, plus 6% interest per
annum from the date of the filing of the complaint; and

To pay to the plaintiff attorney's fees in the sum of P1,000.00 and the costs of suit."[1]

The Court of Appeals affirmed in A.C.-G.R. CV No. 03184 by a Decision[2] dated 17 July 1986.

Petitioner now comes to this Court, arguing that she has the right to rescind the contract for private
respondent's continued refusal to pay the monthly installments on the contract price.

87
Two issues are presented for resolution in this petition: (1) whether or not private respondent has fully
paid the stipulated price in the contract so as to be entitled lawfully to demand the execution of a deed
of absolute sale in her favor. This issue in turn will depend on the question of whether or not petitioner
may validly charge interest on installment payments, notwithstanding that private respondent had
been prompt in her monthly payments; and (2) whether or not petitioner's notice of cancellation was
valid and effective.

Examination of the record shows that the questioned Contract to Buy and Sell the subdivision lots
provided for payment by private respondent of the sum of P200.00 as downpayment, and that "the
balance [of P10,600.00] shall be paid in 180 monthly installments at P89.45 per month, including
interest rate at six percent (6%) per annum, until the purchase price is fully paid."[3] This stipulation
clearly specified that an interest charge of six percent (6%) per annum was included in the monthly
installment price: private respondent could not have helped noticing that P89.45 multiplied by 180
monthly installments equals P16,101.00, and not P10,600.00. The contract price of P10,800.00 may
thus be seen to be the cash price of the subdivision lots, that is, the amount payable if the price of the
lots were to be paid in cash and in full at the execution of the contract; it is not the amount that the
vendor will have received in the aggregate after fifteen (15) years if the vendee shall have religiously
paid the monthly installments. The installment price, upon the other hand, of the subdivision lots --
the sum total of the monthly installments (i.e., P16,101.00) -- typically, as in the instant case, has an
interest component which compensates the vendor for waiting fifteen (15) years before receiving the
total principal amount of P10,600.00. Economically or financially, P10,600.00 delivered in full today
is simply worth much more than a long series of small payments totalling, after fifteen (15) years,
P10,600.00. For the vendor, upon receiving the full cash price, could have deposited that amount in a
bank, for instance, and earned interest income which at six percent (6%) per year and for fifteen (15)
years, would precisely total P5,501.00 (the difference between the installment price of P16,101.00 --
and the cash price of P10,600.00--). To suppose, as private respondent argues, that mere prompt
payment of the monthly installments as they fell due would obviate application of the interest charge
of six percent (6%) per annum, is to ignore that simple economic fact. That economic fact is, of course,
recognized by law, which authorizes the payment of interest when contractually stipulated for by the
parties[4] or when implied in recognized commercial custom or usage.

Vendor and vendee are legally free to stipulate for the payment of either the cash price of a subdivision
lot or its installment price. Should the vendee opt to purchase a subdivision lot via the installment
payment system, he is in effect paying interest on the cash price, whether the fact and rate of such
interest payment is disclosed in the contract or not. The contract for the purchase and sale of a piece
of land on the installment payment system in the case at bar is not only quite lawful; it also
reflects a very wide spread usage or custom in our present day commercial life.

Applying the foregoing analysis to the case at bar: when private respondent started paying monthly
installments in September 1968, the initial P89.45 was apportioned between the principal and the
interest, with P53.00[5] being allocated to service the interest charge and P36.45[6] being credited to
the principal. During the succeeding monthly payments, however, as the outstanding balance on the
principal gradually declined, the interest component (in absolute terms) correspondingly fell while the
component credited to the principal increased proportionately, thus amortizing the balance of the
principal purchase price as that balance gradually declined.[7] This explains petitioner's theory of
declining balance, which unfortunately was not appreciated by both the trial and appellate courts.

Despite private respondent's failure to fully pay the stipulated price of the two lots in question,
petitioner, however, could not validly rescind the contract not being lawfully entitled to do
so. Petitioner failed to rebut private respondents' allegations that the former had failed to introduce
required improvements in the subdivision; the former's bare allegation that the improvements have
already been donated to the city government was not accepted by the trial court. Section 23 of
Presidential Decree No. 957, otherwise known as The Subdivision and Condominium Buyers' Protective
Decree, provides:

88
 "Section 23. Non-forfeiture of Payments. -- No installment payment made by the
buyer in a subdivision or condominium project for the lot or unit he contracted to
buy shall be forfeited in favor of the owner or developer when the buyer, after due
notice to the owneror developer desists from further payment due to the failure of
the owner or developer to develop the subdivision or condominium project according
to the approved plans and within the time limit for complying with the same. Such
buyer may, at his option, be reimbursed the total amount paid…" (Underscoring
supplied)

In this respect, the trial court was correct in holding that petitioner could not rescind the contract. As
the law vests upon the buyer the option to demand reimbursement of the total amount paid, or to wait
for further development of the subdivision, private respondent who opted for the latter alternative by
waiting for the proper development of the site, may not be ousted from the subdivision.[8]

ACCORDINGLY, the Court Resolved to GRANT the Petition due course and to SET ASIDE and NULLIFY
the Decision of the Court of Appeals. In lieu thereof, a new Decision is hereby RENDERED requiring --

1. the petitioner to complete the necessary improvements and developments in the subdivision area
in accordance with the approved subdivision plans and applicable provisions of P.D. No. 957 as well as
applicable implementing administrative regulations and City ofNaga zoning ordinances, if any;

2. private respondent immediately to resume paying installment payments under her Contract to Buy
and Sell with petitioner, subject to her right to proceed against petitioner should petitioner fail again
to comply with her obligations under P.D. No. 957; and

3. petitioner to execute the Deed of Absolute Sale when private respondent shall have fully paid the
purchase price in accordance with the mentioned Contract to Buy and Sell.

No pronouncement as to costs.

SO ORDERED.

89
 Republic of the Philippines
SUPREME COURT
Manila

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.

Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

Zapa Law Office for private respondent.

VITUG, J.:

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 for loss or
damage is to be computed from the time the complaint is filed or from the date the decision appealed

90
from is rendered; and (c) whether the applicable rate of interest, referred to above, is twelve percent
(12%) or six percent (6%).

The findings 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-forwarder for
damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who paid
the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin 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 Service, 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 consignee's 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).

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.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:

Defendants filed their respective answers, traversing the material allegations of the complaint
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 the handling/delivery of the cargo to consignee in the same condition shipment was
received by it.

From the evidence the court found the following:

The issues are:

91
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);

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 first 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) fiber 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.
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 filing 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);

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

3. Costs.

92
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 find that the conclusion drawn therefrom is
correct. As there is sufficient 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 Appeals 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 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.

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 finding 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 17341 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:

93
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 good 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 finding of both the court a
quo and the appellate court, we take note, is that "there is sufficient 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.

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:

The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 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 definitely 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 filed 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 definitely 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)

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:

94
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:

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, fishing 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 fire 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 filing 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 to the Court of Appeals, the latter modified the amount of damages awarded but sustained
the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the
appellate court's decision became final, 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 of the Civil Code. In their petition for review on certiorari, the
petitioners contended that Central Bank Circular
No. 416, providing thus —

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 Court6 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 —

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 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 filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court8 modified 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.

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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 filing of the complaint until full payment . . . ." Save from the modification 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 Association of FIVE MILLION (P5,000,000.00) Pesos to
cover all damages (with the exception to attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) 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 finality, twelve (12%) per cent interest per annum shall be imposed upon
aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party
defendants (Except Roman Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed 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 Court10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases
and, in its resolution of 15 April 1988, it explained:

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 filing 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. Intermediate Appellate Court11 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 12 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)

96
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13 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 modified hereinabove the decision of the CFI of Negros Oriental dated October
31, 1972 is affirmed in all respects, with the modification 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 filing 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 filing 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,14decided 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 Court15 declared:

. . . , (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
classified 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).

In the "first group", the basic issue focuses 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

97
annum applies only to loans or forbearance16 of money, goods or credits, as well as to judgments
involving such loan or forbearance of money, 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 or 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,17depending 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 "first group" which remained
consistent in holding that the running of the legal interest should be from the time of the filing of the
complaint until fully paid, the "second group" varied on the commencement of the running of the legal
interest.

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 definitely
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 finality of (the) decision until paid."
The Nakpil and Sons case ruled that 12% interest per annum should be imposed from the finality of the
decision until the judgment amount is paid.

The ostensible discord is not difficult 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 clarification 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-
delicts18 is breached, the contravenor can be held liable for damages.19 The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages. 20

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.21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded.22 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
116923 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 court24 at the rate of 6% per
annum.25 No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. 26 Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.

98
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

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.

SO ORDERED.

99
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-47180 May 19, 1980

THE PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY, INC., petitioner-appellant,

vs.
THE HON. JOSE P. FLORES, and CONCORDIA G. NAVALTA, respondents-appellees.

ABAD SANTOS, J.:ñé+.£ªwph!1

Petition to review the Order of the respondent judge dated August 24, 1977. The facts are simple.

Private respondent was the plaintiff and the petitioner was the defendant in Civil Case No. 2414 of the
Court of First Instance of La Union. On January 22, 1973, the respondent judge rendered judgment in
said case, the dispositive portion of which reads: têñ.£îhqwâ£

IN VIEW OF THE FOREGOING, the Court hereby renders judgment and sentences the defendant to pay
Concordia Garcia Navalta the amount of P75,000.00 with legal interest from October, 1968, Pl,000.00,
as attorney's fees am the cost of suit.

The decision was appealed by the petitioner to the Court of Appeals in CA-G.R. No. 52675-R but was
affirmed on February 7, 1977. On February 24, 1977, the petitioner paid the following amounts to the
private respondent: têñ.£îhqwâ£

On the principal P75,000.00

Interest at 6% per annum

from Oct. 1968* to April 30,

1977 P 38,250.00

Attorney's fee P 1,000.00

100
Total P114,250.00

(*Art. 2209 of the Civil Code provides: "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." This appears to be the basis for awarding interest at the legal rate from
October, 1968, although the debt was judicially demanded only on July 6, 1970.)

The petitioner was advised by the respondent and her counsel that the payment was not in fun
satisfaction of the judgment because the former had to pay compound interest or an additional sum of
P10,375.77.

Upon refusal of the petitioner to pay the sum additionally claimed, the private respondent secure a writ
of execution for the same which the former sought to quash over the opposition of the latter. In
resolving the question the respondent judge issued an Order on August 24, 1977 as
follows: têñ.£îhqwâ£

After hearing and consideration of the motion of the plaintiff for the issuance of an alias writ of
execution, and the written manifestation and opposition filed by the defendant and finding as it
appears that the written schedule of interest computation, which was submitted, is correct and in order,
because compound interest has been computed from July 6, 1970 when the claim was judicially
demanded, let an alias writ of execution issue to satisfy accordingly the unpaid balance as demanded.

It is this Order which is the object of this petition and which raises the question as to whether or not
the petitioner is obligated to pay compound interest under the judgment.

The questioned Order cannot be sustained. The judgment which was sought to be executed ordered
the payment of simple "legal interest" only. It said nothing about the payment of compound interest.
Accordingly, when the respondent judge ordered the payment of compound interest he went beyond
the confines of his own judgment which had been affirmed by the Court of Appeals and which had
become final. Fundamental is the rule that execution must conform to that ordained or decreed in the
dispositive part of the decision. Likewise, a court can not, except for clerical errors or omissions, amend
a judgment that has become final. (Jabon, et al. vs. Alo, et al., 91 Phil. 750 [1952]; Robles vs. Timario,
et al., 107 Phil. 809 [1960]; Collector of Internal Revenue vs. Gutierrez, et al., 108 Phil. 215 [1960];
Ablaza vs. Sycip, et al., 110 Phil., 4 [1960].)

Private respondent invokes Sec. 5 of the Usury Law which reads in part as follows: "In computing the
interest on any obligation, promissory note or other instrument or contract, compound interest shall
not be reckoned, except by agreement, or, in default thereof, whenever the debt is judicially claimed
in which last case it shall draw six per centum per annum interest ..." as well as Art. 2212 of the Civil
Code which stipulates: "Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point." Both legal provisions are in applicable for they
contemplate the presence of stipulated or conventional interest which had accrued when demand was
judicially made. (Sunico vs. Ramirez, 14 Phil. 500 [1909]; Salvador vs. Palencia, 25 Phil. 661 [1913];
Bachrach vs. Golingco, 39 Phil. 912 [1919]; Robinson vs. Sackermann 46 Phil. 539 [1924]; Philippine
Engineering Co. vs. Green, 48 Phil. 466 [1925]; and Cu Unjieng vs. Mabalacat Sugar Co., 54 Phil. 916
[1930].) In this case no interest had been stipulated by the parties. In other words, there was no accrued
conventional interest which could further earn interest upon judicial demand.

WHEREFORE, the Order dated August 24, 1977, of the respondent judge is hereby set aside. No special
pronouncement as to costs.

101
SO ORDERED.

102