THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK) v.

CA 356
SCRA 671

Topic: Characteristics of Simple Loan or Mutuum

Facts:

Private respondent Continental Cement Corporation obtained from Consolidated Bank

letter of credit used to purchase 500,000 liters of bunker fuel oil from Petrophil Corporation, which
the latter delivered directly to respondent Corporation in its Bulacan plant. Respondent
Corporation made a marginal deposit to petitioner. A trust receipt was executed by respondent
corporation, with respondent Gregory Lim as signatory. Claiming that respondents failed to turn
over the goods or proceeds, petitioner filed a complaint for sum of money before the RTC of
Manila. In their answer, respondents aver that the transaction was a simple loan and not a trust
receipt one, and that the amount claimed by petitioner did not take into account payments already
made by them. The trial court dismissed the complaint, CA affirmed the same.

Issue: WON the transaction between petitioner Solidbank and private respondent Continental
Cement Corp. is a trust receipt transaction instead of merely a simple loan.

Ruling:
Inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt
itself was entered into, the transaction in question was a simple loan and not a trust receipt
agreement. Prior to the date of execution of the trust receipt, ownership over the goods was
already transferred to the debtor. This situation is inconsistent with what normally obtains in a
pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only
released to the importer in trust after the loan is granted.

In the case at bar, the delivery to respondent Corporation of the goods subject of the
trust receipt occurred long before the trust receipt itself was executed. More specifically,
delivery of the bunker fuel oil to respondent Corporations Bulacan plant commenced on July 7,
1982 and was completed by July 19, 1982. Further, the oil was used up by respondent Corporation
in its normal operations by August, 1982. On the other hand, the subject trust receipt was only
executed nearly two months after full delivery of the oil was made to respondent Corporation, or
on September 2, 1982.

The danger in characterizing a simple loan as a trust receipt transaction was explained in
Colinares v. CA, to wit:

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes
the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of
another regardless of whether the latter is the owner. Here, it is crystal clear that on the part of
Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the
prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by
several receipts issued by PBC acknowledging payment of the loan
ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL CENTER
OF THE PHILIPPINES, respondents. G.R. No. 116285 | 2001-10-19

DOCTRINE A stipulation about payment of an additional interest rate partakes of the nature of
a penalty clause. Penalty clauses can be in the form of penalty or compensatory interest.

FACTS: Antonio Tan, herein petitioner, obtained 2 loans from the Cultural Center of the
Philiipines (CCP). After partial payments, the petitioner was not able to pay the balance of the
loan and requested from CCP for the restructuring of the loan which was granted by the latter.
Tan failed to pay any installment on the said restructured loan. Tan requested from CCP a
moratorium on his loan obligation. No favorable response was made, instead, CCP, wrote a letter
to Tan demanding full payment of the restructured loan. CCP filed a complaint for collection of
a sum of money, against Tan after the latter failed to settle his said restructured loan obligation.
Tan interposed the defense that he merely accommodated a friend, who allegedly asked for his
help to obtain a loan from CCP. Petitioner claimed that he has not been able to locate his friend.
While the case was pending in the trial court, Tan filed a Manifestation wherein he proposed to
settle his indebtedness to CCP. However, CCP did not agree to Tan’s proposals and so the trial
of the case ensued. Trial court ordered Tan to pay CCP his outstanding account with the
corresponding stipulated interest and charges (penalty and interest on penalty) thereof, until fully
paid. CA affirmed the decision.

ISSUES: 1. Whether there are contractual and legal bases for the imposition of the penalty and
interest on the penalty. 2. Whether interest may accrue on the penalty or compensatory interest
without violating the provisions of Article 1959 of the New Civil Code, which provides that:

HELD:

1. Yes. Article 1226 of NCC provides that: In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests in case of non-compliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses
to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be
enforced only when it is demandable in accordance with the provisions of this Code. The PNs
expressly provides for the imposition of both interest and penalties in case of default on the part
of the petitioner in the payment of the subject restructured loan. Penalty on delinquent loans
may take different forms. In GSIS v. CA, this Court has ruled that the NCC permits an
agreement upon a penalty apart from the monetary interest. If the parties stipulate this kind of
agreement, the penalty does not include the monetary interest, and as such the two are different
and distinct from each other and may be demanded separately. Quoting Equitable Banking Corp.
v. Liwanag, the GSIS case went on to state that such a stipulation about payment of an additional
interest rate partakes of the nature of a penalty clause which is sanctioned by law, more
particularly under Article 2209 of the NCC which provides that: 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.

2. Yes. Penalty clauses can be in the form of penalty or compensatory interest. Thus, the
compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to
the above-quoted provision of Article 1959 of the New Civil Code considering that: First, there
is an express stipulation in the PN permitting the compounding of interest. Second, Article 2212
of the New Civil Code provides that "Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this point." In the instant case,
interest likewise began to run on the penalty interest upon the filing of the complaint in court by
CCP
 TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT
OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents. G.R. No.
138677 February 12, 2002

DOCTRINE: A penalty clause, expressly recognized by law, is an accessory undertaking to

assume greater liability on the part of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation and to provide, in effect, for what could be the
liquidated damages resulting from such a breach. The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof on the existence and on the measure of
damages caused by the breach. Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that contravene neither law nor
morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be
equitably reduced by the courts if it is iniquitous or unconscionable or if the principal obligation
has been partly or irregularly complied with.

FACTS: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company on on 11 May 1981. The loan
was evidenced by a promissory note with interest of 15.189% per annum, a penalty of 5% every
month on the outstanding principal and interest in case of default. The obligation matured on 8
September 1981; the bank, however, granted an extension but only up until 29 December 1981.
Despite several demands from the Security Bank, petitioners failed to settle the debt which, as of
20 May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand
letter to petitioners informing them that they had five days within which to make full payment.
Since petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with the
Regional Trial Court of Makati, Branch 143, a complaint for recovery of the due amount. RTC
ruled in favor of the plaintiff and against the defendants, ordering the latter to pay, jointly and
severally, to the plaintiff. Petitioners interposed an appeal with the Court of Appeals, assailing
the imposition of the 2% service charge, the 5% per month penalty charge and 10% attorney's
fees. In its decision of 7 March 1996, the appellate court affirmed the judgment of the trial court
except on the matter of the 2% service charge which was deleted pursuant to Central Bank
Circular No. 783. Not fully satisfied with the decision of the appellate court, both parties filed
their respective motions for reconsideration. Petitioners prayed for the reduction of the 5%
stipulated penalty for being unconscionable. The bank, on the other hand, asked that the payment
of interest and penalty be commenced not from the date of filing of complaint but from the time
of default as so stipulated in the contract of the parties.

On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellee’s claim that the principal sum of P114,416.00 with interest
thereon must commence not on the date of filing of the complaint as we have previously held in
our decision but on the date when the obligation became due. Default generally begins from the
moment the creditor demands the performance of the obligation. However, demand is not
necessary to render the obligor in default when the obligation or the law so provides. In the case
at bar, defendants-appellants executed a promissory note where they undertook to pay the
obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest
in case of non-payment from the date of default.

Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case
to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of
Court, submitting thusly -

"I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and
the penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed by
private respondent bank on petitioners’ loan obligation are still manifestly exorbitant, iniquitous
and unconscionable.

Respondent bank, which did not take an appeal, would, however, have it that the penalty sought
to be deleted by petitioners was even insufficient to fully cover and compensate for the cost of
money brought about by the radical devaluation and decrease in the purchasing power of the
peso, particularly vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence.
The Bank would stress that only the amount of P5,584.00 had been remitted out of the entire
loan of P120,000.

ISSUE: Whether the penalty imposed is reasonable

HELD: Yes The question of whether a penalty is reasonable or iniquitous can be partly
subjective and partly objective. Its resolution would depend on such factors as, but not
necessarily confined to, the type, extent and purpose of the penalty, the nature of the obligation,
the mode of breach and its consequences, the supervening realities, the standing and relationship
of the parties, and the like, the application of which, by and large, is addressed to the sound
discretion of the court. In any event, the interest stipulation, on its face, does not appear as being
that excessive. The essence or rationale for the payment of interest, quite often referred to as cost
of money, is not exactly the same as that of a surcharge or a penalty. A penalty stipulation is not
necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct
concepts which may separately be demanded.What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part of the banking business and the
core of a bank's existence.
 People v Puig & Porras

Facts:

A case of Qualified Theft was filed against the respondents. This was filed by the Iloilo provincial
prosecutor, for the private complainant, Rural Bank of Potoan. It was alleged in the complaint that
Puig was the cashier & Porras was the Bookkeeper in the said bank, and that they took away money
amounting to 15k without the consent of the bank owner, to the prejudice of the bank. However,
the RTC dismissed the complaint for insufficiency of the information ruling that the real parties in
interest are the depositors-clients and not the bank because the bank does not acquire ownership
of the money deposited in it. It also denied the MR.

Issue: WON the bank was the owner and thus, the real party in interest?

Held & Rationale

Yes. Under Art 1980 of the CC, "fixed, savings, and current deposits of money in banks shall be
governed by the provisions concerning simple loans." And, Art 1953 provides that "a person who
receives a loan of money acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality." Thus, it posits that the depositors who place their
money with the bank are considered creditors of the bank. The bank acquires ownership of the
money deposited by its clients, making the money taken by respondents as belonging to the bank.
Allegations in the Information that such employees acted with grave abuse of confidence, to the
damage and prejudice of the Bank, without particularly referring to it as owner of the money
deposits, as sufficient to make out a case of Qualified Theft.
BPI Family Bank v. Amado Franco and Court of Appeals

DOCTRINE/S:

The deposit of money in banks is governed by the Civil Code provisions on simple loan or mutuum.

FACTS:

 15 Aug 1989: Tevetesco Arrastre-Stevedoring Co., Inc. opened a savings and current
account with BPI-FB (petitioner)
 25 Aug: First Metro Investment Corporation (FMIC) also opened a time deposit account
w/ same branch of BPI-FB (San Francisco del Monte) in a series of transactions
 31 Aug: Amado Franco (respondent) opened three (3) accounts (current, savings, and time-
deposit) w/ BPI-FB. Total amount of P2M use to open these accounts is traceable to a
check issued by Tevesteco allegedly in consideration of respondent Franco’s introduction
of Eladio Teves (looking for a conduit bank to facilitate Tevetesco’s business transactions)
to Jaime Sebastian (BPI-FB’s Branch Manager). The P2M is part of the P80M debited by
BPI-FB from FMCI’s time deposit account and credited to Tevetesco’s current account
pursuant to an Authority to Debit allegedly signed by FMCI’s officers w/c appears to be
forged.
o Current: Initial deposit of P500k
o Savings: Initial deposit of P500k
o Time deposit: P1M w/ maturity date of 31 Aug 1990
 4 Sept: Antonio Ong, upon being shown the Authority to debit, personally declared his
signature to be a forgery.
 Tevetesco already effected several withdrawals from its current account amounting to
P37,455,410.54 including the P2M paid to respondent Franco.
 8 Sept: BPI-FB, through Senior VP Severino Cornamcion, instructed Jesus Arangorin to
debit Franco’s savings & current accounts for the amounts remaining therein but the latter’s
time deposit account couldn’t be debited due to computer limitations.
 2 checks drawn by Franco against BPI-FB current account were dishonored upon
presentment for payment & stamped w/ notation account under garnishment.
o Garnished by virtue of an Order of Attachment issued by Makati RTC in a civil
case filed by BPI-FB against Franco, etc. to recover the P37,455,410.54
(Tevetesco’s total withdrawals from its account)
o Dishonored checks were issued by respondent Franco & presented for payment at
BPI-FB prior to Franco’s receipt of notice of garnishment. At the time the notice
dated 27 Sept was served on BPI-FB, respondent Franco has yet to be impleaded in
said case where writ of attachment was issued. It was only on 15 May 1990 that
respondent Franco was impleaded. The attachment was subsequently lifted
however the funds were not released to respondent Franco because petitioner BPI-
FB could not comply given that the money has already been debited because of
FMIC’s forgery claim. petitioner BPI-FB’s computer that branch indicated that the
current account record was not on file.
  As to respondent Franco’s savings account he agreed to an arrangement as a favor to
Sebastian where P400K from said account was temporarily transferred to Domingo
Quiaoits savings account, subject to its immediate return upon issuance of a certificate of
deposit which Quiaoit needed in connection with his visa application at the Taiwan
Embassy.
o Sebastian retained custody of Quiaoits’ savings account passbook to preserve
respondent Franco’s deposits.
 17 May 1990: Respondent Franco pre-terminated his time deposit account.
o Petitioner BPI-FB deducted P63,189 from the remaining balance of the account
representing advance interest paid to him.
 Several cases have been filed and resolved pertaining to these transactions.
 PET FPI-FB’s refusal to heed RES Franco’s demand to unfreeze his accounts & release his
deposits gave rise to the latter’s filing a case with Manila RTC.
 RTC
o Rendered judgment in favor of respondent Franco ordering Petitioner BPI-FB to
pay sums of money.
 CA
o Modified decision but Petitioner BPI-FB still to pay interest deducted rom the time-
deposit of Respondent Franco, damages, etc.

ISSUE:

Who has a better right to the deposits in respondent Franco’s accounts? (FRANCO

HELD:

 No doubt that petitioner BPI-FB owns the deposited monies in the accounts of respondent
Franco, but not as a legal consequence of its unauthorized transfer of FMIC’s deposits to
Tevetesco’s account.
o The deposit of money in banks is governed by the Civil Code provisions on simple
loan or mutuum.
o As there is a debtor-creditor relationship between a bank and its depositor,
petitioner FPI-FB ultimately acquired ownership of respondent Franco’s deposits,
but such ownership is coupled w/ a corresponding obligation to pay him an equal
amount on demand. Although petitioner BPI-FB owns the deposits, it cannot
prevent respondent Franco from demanding payment of the former’s obligation by
drawing checks against his current account or asking for the released of the funds
in his savings account.
 When respondent Franco issued checks drawn against his current account, he had every
right as creditor to expect that those checks would be honored by petitioner BPI-FB as
debtor.
 FRIAS vs. SAN DIEGO-SISON
GR No. 155223
April 4, 2007

FACTS:
Frias is the owner of a lot in Alabang, Mandaluyong she acquired from, Island Master Realty and
Development Corp. (IMRDC) by virtue of a deed of sale dated Nov. 16, 1990. On Dec. 7, 1990,
Frias and San Diego-Sison entered into a MOA over the property for the consideration of 3M
pesos. The terms of the MOA are as follows: San Diego-Sison has 6 months from the date of the
execution of the contract to notify Frias of her intention to purchase the property with
improvements at 6.4 M pesos. Frias may still offer the property to other persons, provided that the
3M pesos be paid to Sison, including interest based on prevailing compounded bank interest plus
the amount of sale in excess of 7M pesos should the property be sold at a price greater than 7M
pesos. But, if Frias has no other buyer within 6 months from the contract’s execution, no interest
shall be charged by San Diego-Sison on the 3M pesos. If San Diego-Sison decides not to buy the
property, Frias has 6 months to pay 3M pesos. The 3M pesos is treated as a loan and the property
is considered the security for the mortgage.
Upon notice of intention to purchase, San Diego-Sison has 6 months to pay the remaining balance
of 3.4M pesos. Frias received 3M pesos – 2M pesos in cash and 1M pesos in post-dated check
dated Feb. 28, 1990. Frias gave San Diego-Sispon the TCT and Deed of Absolute Sale, but the
latter decided not to purchase the property and notified the later through a letter dated March 20,
1991. Frias received the letter on June 11, 1991 with the reminder that that the 2M pesos San
Diego-Sison paid earlier should be considered as a loan payable within 6 months. Frias defaulted
and San Diego-Sison filed a complaint for sum of money with preliminary attachment. San Diego-
Sison averred that Frias tried to deprive her of the security for the loan by making a false report of
the loss of her owner’s copy of TCT, executing an affidavit of loss and by filing a petition for the
issuance of a new owner’s duplicate copy. RTC issued a writ of preliminary attachment upon the
filing of a 2M bond. RTC found that Frias was under obligation to pay Sison 2M with compounded
interest pursuant to their MOA. RTC ordered Frias to pay Sison : 2M pesos + 32% annual interest
beginning December 7, 1991 until fully paid, 70k pesos representing premiums paid by Sison on
the attachment bond with legal interest counted from the date of this decision until fully paid, 100k
pesos moral, corrective, exemplary damages, and 100k pesos attorney’s fees plus cost of litigation.
CA affirmed RTC with modification—32% reduced to 25%.
CA said that there was no basis for Frias to say that the interest should be charged for 6 months
only. It said that a loan always bears interest; otherwise, it is not a loan. The interest should
commence on June 7, 1991 until fully paid, with compounded bank interest prevailing at the time
of June 1991, the 2M pesos was considered as a loan (as certified by the bank).

RELEVANT ISSSUE:
WoN the compounded bank interest should be limited to 6 months as contained in the MOA.
RULING:

A loan always bears interest otherwise it is not a loan, is flawed since a simple loan may be
gratuitous or with a stipulation to pay interest. No error committed by the CA in awarding a 25%
interest per annum on the two-million peso loan even beyond the second six months stipulated
period.

The MOA executed between the parties is the law between the parties. In resolving an issue based
upon a contract, we must first examine the contract itself, especially the provisions thereof which
are relevant to the controversy. In this case, the phrase "for the last six months only" should be
taken in the context of the entire agreement. Their agreement speaks of 2 periods of six months
each. The first six-month period was given to San Diego-Sison to make up her mind whether or
not to purchase Frias’ property. The second six-month period was given to Frias to pay the P2
million loan in the event that San Diego-Sison decided not to buy the subject property in which
case interest will be charged "for the last six months only", referring to the second six-month
period. This means that no interest will be charged for the first six-month period while San Diego-
Sison was making up her mind whether to buy the property, but only for the second period of six
months after she had decided not to buy the property.

The agreement that the amount given shall bear compounded bank interest for the last six months
only, i.e., referring to the second six-month period, does not mean that interest will no longer be
charged after the second six-month period since such stipulation was made on the logical and
reasonable expectation that such amount would be paid within the date stipulated. Considering that
Frias failed to pay the amount given which under the MOA shall be considered as a loan, the
monetary interest for the last six months continued to accrue until actual payment of the loaned
amount.

The payment of regular interest constitutes the price or cost of the use of money and thus, until the
principal sum due is returned to the creditor, regular interest continues to accrue since the debtor
continues to use such principal amount. It has been held that for a debtor to continue in possession
of the principal of the loan and to continue to use the same after maturity of the loan without
payment of the monetary interest, would constitute unjust enrichment on the part of the debtor at
the expense of the creditor.
Cebu Financial vs CA and Alegre
GR No. 123031, 12 October 1999
316 SCRA 488

FACTS
Vicente Alegre invested with Cebu International Finance Corporation (CIFC) P500,000 in cash.
CIFC issued promissory note which covered private respondent’s placement. CIFC issued BPI
Check No. 513397 (the Check) in favor of private respondent as proceeds of his matured
investment. Mrs. Alegre deposited the Check with RCBC but BPI dishonoured it, annotating
therein that the “Check is subject of an investigation”. BPI took possession of the Check pending
investigation of several counterfeit checks drawn against CIFC’s checking account. Private
respondent demanded from CIFC that he be paid in cash but the latter refused. Private
respondent Alegre filed a case for recovery of a sum of money against CIFC.

CIFC asserts that since BPI accepted the instrument, the bank became primarily liable for the
payment of the Check. When BPI offset the value of the Check against the losses from the forged
cheks allegedly committed by private respondent, the Check was deemed paid.

ISSUE
Whether or not petitioner CIFC is discharged from the liability of paying the value of the Check.

HELD
The Court held in the negative. In a money market transaction, the investor is a lender who loans
his money to a borrower through a middleman or dealer. A check is not legal tender, and
therefore cannot constitute valid tender of payment. Since a negotiable instrument is only
substitute for money and not money, the delivery of such an instrument does not by itself,
operate as payment. Mere delivery of checks does not discharge the obligation under a judgment.
The obligation is not extinguished and remains suspended until the payment by commercial
document is actually realized. (Article 1249)

Petition denied.
 Metropolitan Bank and Trust Company v

Ana Grace Rosales

FACTS:

In 2000, respondent Ana Grace Rosales, an owner of a travel agency, and her mother Yo Yuk To
opened a Joint Peso Account10 with petitioner bank. In May 2002, respondent Rosales
accompanied her client Liu Chiu Fang, a Taiwanese National applying for a retiree’s visa from
the Philippine Leisure and Retirement Authority (PLRA), to petitioner’s branch in Escolta to
open a savings account.

On 31 July 2003, petitioner issued a "Hold Out" order against respondents’ accounts. On 3 Sept
2003, petitioner filed a criminal case for Estafa through False Pretences, Misrepresentation,
Deceit and Use of Falsified Documents against the respondent. It was alleged that the
respondents are the one responsible for the unauthorized withdrawal fo $75,000 from Liu Chiu
Fang’s account. Petitioner alleged that on 5 Feb 2003, it received from the PLRA a Withdrawal
Clearance for the account of Liu Chiu Fang, that in the afternoon of the same day, respondents
went to inform the branch head Gutierrez that Liu Chiu Fang was going to withdraw her deposits
in cash. Gutierrez told respondents to come back the following day for the bank did not have
enough dollars. On 6 Feb, respondents accompanied an unidentified impostor to the bank with
enabled them to withdraw Liu Chiu Fang’s dollar deposit.

On 3 Mar 2003, respondents opened a Joint Dollar Account with petitioner bank with an initial
deposit of $14,000. The bank later discovered that the serial numbers of the dollar notes
deposited by respondents were the same as those withdrawn by the impostor.

On 10 Sept 2004, respondents filed before the RTC of Manila a Complaint for Breach of
Obligation and Contract with Damages, against petitioner. Respondents alleged that they
attempted several times to withdraw their deposits but were unable to because petitioner had
placed their accounts under "Hold Out" status. No explanation, however, was given by petitioner
as to why it issued the "Hold Out" order. Petitioner alleged that respondents have no cause of
action because it has a valid reason for issuing the "Hold Out" order. It averred that due to the
fraudulent scheme of respondent Rosales, it was compelled to reimburse Liu Chiu Fang the
amount of US$75,000.0050 and to file a criminal complaint for Estafa against respondent
Rosales.

ISSUE:

Whether or not the Metrobank breached its contract with respondents Rosales.

HELD:

Yes. The Court held that Metrobank’s reliance on the “Hold Out” clause in the
Application and Agreement for Deposit Account is misplaced. Bank deposits, which are in the
nature of a simple loan or mutuum, must be paid upon demand by the depositor.
 The “Hold Out” clause applies only if there is a valid and existing obligation arising from
any of the sources of obligation enumerated in Article 1157 of the Civil Code, to wit: law,
contracts, quasi-contracts, delict, and quasi-delict. In this case, petitioner failed to show that
respondents have an obligation to it under any law, contract, quasi-contract, delict, or quasi-
delict. And although a criminal case was filed by petitioner against respondent Rosales, this is
not enough reason for petitioner to issue a “Hold Out” order as the case is still pending and no
final judgment of conviction has been rendered against respondent Rosales.

In fact, it is significant to note that at the time petitioner issued the “Hold Out” order, the
criminal complaint had not yet been filed. Thus, considering that respondent Rosales is not liable
under any of the five sources of obligation, there was no legal basis for petitioner to issue the
“Hold Out” order. Accordingly, we agree with the findings of the RTC and the CA that the
“Hold Out” clause does not apply in the instant case.

In view of the foregoing, the Court found that petitioner is guilty of breach of contract
when it unjustifiably refused to release respondents’ deposit despite demand. Having breached
its contract with respondents, petitioner is liable for damages.
Sebastian Siga-an, petitioner, vs. Alicia Villanueva, respondent.

Facts: Respondent filed a complaint for sum of money against petitioner. Respondent claimed that
petitioner approached her inside the PNO and offered to loan her the amount of P540,000.00 of
which the loan agreement was not reduced in writing and there was no stipulation as to the payment
of interest for the loan. Respondent issued a check worth P500,000.00 to petitioner as partial
payment of the loan. She then issued another check in the amount of P200,000.00 to petitioner as
payment of the remaining balance of the loan of which the excess amount of P160,000.00 would
be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner
pestered her to pay additional interest and threatened to block or disapprove her transactions with
the PNO if she would not comply with his demand. Thus, she paid additional amounts in cash and
checks as interests for the loan. She asked petitioner for receipt for the payments but was told that
it was not necessary as there was mutual trust and confidence between them. According to her
computation, the total amount she paid to petitioner for the loan and interest accumulated
to P1,200,000.00.
The RTC rendered a Decision holding that respondent made an overpayment of her loan obligation
to petitioner and that the latter should refund the excess amount to the former. It ratiocinated that
respondent’s obligation was only to pay the loaned amount of P540,000.00, and that the alleged
interests due should not be included in the computation of respondent’s total monetary debt
because there was no agreement between them regarding payment of interest. It concluded that
since respondent made an excess payment to petitioner in the amount of P660,000.00 through
mistake, petitioner should return the said amount to respondent pursuant to the principle of solutio
indebiti. Also, petitioner should pay moral damages for the sleepless nights and wounded feelings
experienced by respondent. Further, petitioner should pay exemplary damages by way of example
or correction for the public good, plus attorney’s fees and costs of suit.

Issue: (1) Whether or not interest was due to petitioner; and (2) whether the principle of solutio
indebiti applies to the case at bar.

Ruling: (1) No. Compensatory interest is not chargeable in the instant case because it was not duly
proven that respondent defaulted in paying the loan and no interest was due on the loan because
there was no written agreement as regards payment of interest. Article 1956 of the Civil Code,
which refers to monetary interest, specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of
monetary interest is allowed only if: (1) there was an express stipulation for the payment of interest;
and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the
two conditions is required for the payment of monetary interest. Thus, we have held that collection
of interest without any stipulation therefor in writing is prohibited by law.
 GSIS vs. CA
GR L-52478 October 30, 1986

I. Doctrine
Usury Law applies only to interest by way of compensation for the use or forbearance of
money. Interest by way of damages is governed by Article 2209 of the Civil Code of the
Philippines which provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon, …

Civil Code permits the agreement upon a penalty apart from the interest. The stipulation
about payment of such additional rate partakes of the nature of a penalty clause, which is
sanctioned by law.

II. Facts
 Sps. Nemencio and Josefina Medina applied with GSIS for a loan of P600k. GSIS
approved only the amount of P350k subject to the ff. conditions: (1) interest rate at
9%/annum compounded monthly (2) any installment that remains due and unpaid shall
bear interest at the rate of 9%/12%/month.

 Office of the Economic Coordinator reduced the amount to P295k which the Medinas
accepted and executed a real estate mortgage (original mortgage, 4 April 1962) in favor
of GSIS. Upon the request of Medinas, GSIS and the Eco. Coordinator approved the
restoration of the loan to P350k (denominated as Account No. 31055).

 Medinas then executed an Amendment of Real Estate Mortgage which states that the
mortgage will now cover the amount of P350k instead of P295k, and the payment of
monthly amortization including principal and interest. Further, all other terms and
conditions in the original mortgage insofar as they are not inconsistent with the
amended mortgage are confirmed, ratified and in full force and effect.

 Another loan was approved by GSIS for the amount of P230k on the secuiryt of the
same mortgaged properties and to bear interest at 9%/annum.
 Medinas defaulted in their payment of the monthly amortization and their fire insurance
premium. GSIS then imposed 9%/12% interest on installment due and unpaid. GSIS
notified and demanded payment from Medinas otherwise it would foreclose the
mortgage.
  GSIS filed an application for Foreclosure of Mortgage with the Sheriff of Manila.
Medinas then file with CFI Manila a complaint praying for the issuance of TRO and
writ of preliminary injunction but no TRO/writ of preliminary injunction was issued.

 Properties of Medinas were sols at public auction to GSIS as the highest bidder. Medina
then filed and Amended Complaint with CFI praying for the declaration of nullity of
their two real estate mortgage contract with GSIS as well as the extra-judicial
foreclosure.

 RTC: Extra-judicial foreclosure null and void and Certificate of Title in favor of GSIS
is of no legal force and effect. Medinas to pay P1, 611.12 in full payment of their
obligation with interest of 9%/annum.

 GSIS and Medinas both appealed to CA.

 CA: RTC judgment affirmed. GSS to reimburse P9, 580.00 as overpayment to
Medinas.

 Petition of review on certiorari to SC by GSIS.

III. Issues
(1) Whether or not the interest rates on the loan accounts of the Medinas are usurious. (NO)

IV. Held
(1) Usury Law applies only to interest by way of compensation for the use or forbearance
of money. Interest by way of damages is governed by Article 2209 of the Civil Code of the
Philippines which provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon, …

Civil Code permits the agreement upon a penalty apart from the interest. Should there be
such an agreement, the penalty does not include the interest, and as such the two are
different and distinct things which may be demanded separately. Reiterating the same
principle in the later case of Equitable Banking Corp. (supra), where this Court held that
the stipulation about payment of such additional rate partakes of the nature of a penalty
clause, which is sanctioned by law.

CA decision reversed and set aside.

 ADVOCATES FOR TRUTH IN LENDING, INC. VS. BANGKO SENTRAL NG
PILIPINAS

FACTS:
Advocates for Truth in Lending, Inc. and its President, Eduardo Olaguer claim that they are raising
issues of transcendental importance to the public and so they filed Petition for Certiorari under
Rule 65 ROC seeking to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB),
replacing the Central Bank Monetary Board (CB-MB) by virtue of R.A. No. 7653, has no authority
to continue enforcing Central Bank Circular No. 905, issued by the CB-MB in 1982, which
"suspended" the Usury Law of 1916 (Act No. 2655).

R.A. No. 265, which created the Central Bank (CB) of the Philippines, empowered the CB-MB to,
among others, set the maximum interest rates which banks may charge for all types of loans and
other credit operations, within limits prescribed by the Usury Law.

In its Resolution No. 2224, the CB-MB issued CB Circular No. 905, Series of 1982. Section 1 of
the Circular, under its General Provisions, removed the ceilings on interest rates on loans or
forbearance of any money, goods or credits.

On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the
Bangko Sentral ng Pilipinas (BSP) to replace the CB.

ISSUE/S:
1. Whether the CB-MB exceeded its authority when it issued CB Circular No. 905, which removed
all interest ceilings and thus suspended Act No. 2655 as regards usurious interest rates. NO

2. Whether under R.A. No. 7653, the BSP-MB may continue to enforce CB Circular No. 905. YES

RULING:

1. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No.
905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long
been recognized and upheld in many cases. As the Court explained in the landmark case of Medel
v. CA, citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury
Law but simply suspended the latter’s effectivity;" that "a CB Circular cannot repeal a law, [for]
only a law can repeal another law;" that "by virtue of CB Circular No. 905, the Usury Law has
been rendered ineffective;" and "Usury has been legally non-existent in our jurisdiction. Interest
can now be charged as lender and borrower may agree upon."

By lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’ freedom of contract
to agree freely on the rate of interest. It cited Article 1306 of the New Civil Code, under which the
contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public
policy.
2. The BSP-MB has authority to enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that, "The rate of interest, including commissions,
premiums, fees and other charges, on a loan or forbearance of any money, goods, or credits,
regardless of maturity and whether secured or unsecured, that may be charged or collected by any
person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant
to the Usury Law, as amended." It does not purport to suspend the Usury Law only as it applies to
banks, but to all lenders.

Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new
BSP-MB did not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653,
which expressly repealed R.A. No. 265. The petitioners point out that R.A. No. 7653 did not
reenact a provision similar to Section 109 of R.A. No. 265.

A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks,
whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the forbearance of any money,
goods or credits, including those for loans of low priority such as consumer loans, as well as such
loans made by pawnshops, finance companies and similar credit institutions. It even authorizes the
BSP-MB to prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries. Act No. 2655, an earlier law,
is much broader in scope, whereas R.A. No. 265, now R.A. No. 7653, merely supplemented it as
it concerns loans by banks and other financial institutions. Had R.A. No. 7653 been intended to
repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal terms.

Further, the lifting of the ceilings for interest rates does not authorize stipulations charging
excessive, unconscionable, and iniquitous interest. It is settled that nothing in CB Circular No. 905
grants lenders a carte blanche authority to raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their assets. Stipulations authorizing iniquitous or
unconscionable interests have been invariably struck down for being contrary to morals, if not
against the law.
 RCBC vs CA
289 SCRA 292 20 April 1998
Facts:
- Parties:
o Goyu and Sons, Inc.
o Malayan Insurance Company, Inc.
o Rizal Commercial Banking Corporation
- GOYU was granted credit facilities and accommodations by the RCBC initially in the
amount of P 30 million.
- Upon GOYU’s application, the credit was increased to P50 Million
o then P90 Million
o then P117 Million
- As security, GOYU executed in favor of RCBC
o 2 REM
o 2 CM
 registered with the RD
- Under the 4 contracts, GOYU committed itself to insure the mortgaged properties with an
insurance company approved by RCBC, and subsequently endorse and deliver the
insurance policies to RCBC.
- GOYU then obtained 10 policies from MICO
- GOYU’s buildings were gutted by fire and it claimed indemnity from MICO
o MICO denied the claim on the ground that
 the insurance policies were either attached pursuant to writs of
attachments/garnishments issued by various courts or
 that the proceeds were also claimed by other creditors of GOYU
- GOYU, alleging better rights to the proceeds, filed for specific performance and damges
before the RTC, Manila
- RTC, Manila ruled in favor of GOYU (indemnity claimed)
o but ordered it to pay RCBC its loan obligations
- On appeal to the CA
o it affirmed the ruling with regard to the liabilities of MICO and RCBC
- The trial court and appellate courts both held that, since the endorsements do not
bear the signature of any officer of GOYU, they concluded that the endorsements
are defective.
o The CA then ordered GOYU to pay its obligation to RCBC without any interest,
surcharges and penalties.
Issue:
- WoN the RTC and CA are correct
Ruling:
- SC ruled in the negative
- The essence or rationale for the payment of interest or cost of money is separate and
distinct from that of surcharges and penalties. The charging of interest for loans forms a
very essential and fundamental element of the banking business
- The law’s evident intention to protect the interests of the mortgagee upon the mortgaged
property is expressed in Article 2127 of the Civil Code which states:
 o ART. 2127. The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet received when the
obligation becomes due, and to the amount of the indemnity granted or owing to
the proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession of the mortgagor,
or it passes into the hands of a third person.
- To be deducted from interest payments due in accordance with Article 1253 of the Civil
Code which provides:
o ART. 1253. If debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.
First Metro vs Este del Sol,, GR No. 141811, 15 November 2001, 369 SCRA 99

FACTS
FMIC granted Este del Sol a loan to finance a sports/resort complex in Montalban, Rizal.
Under the agreement, the interest was 16% pa based on the diminishing balance. In case of default,
an acceleration clause was provided and the amount due is subject to 20% one-time penalty on the
amount due and such amount shall bear interest at the highest rate permitted by law. respondent
executed a REM, individual continuing suretyship and an underwriting agreement whereby FMIC
shall underwrite the public offering of one P120,000 common shares of respondent’s capital stock
for one-time underwriting fee of P200,000. For failure to pay its obligation, FMIC caused the
foreclosure of the REM. At the public auction, FIC was the highest bidder. Petitioner filed to
collect for alleged deficiency balance against respondents since it failed to collect from the sureties,
plus interest at 21% pa. the trial court ruled in favor of FMIC. Respondents appealed before the
CA which held that the fees provided for in the Underwriting and Consultacy Agreements were
mere subterfuges to camouflage the excessively usurious interest charged. The CA ordered FMIC
to reimburse petitioner representing what is ue to petitioner and what is due to respondent.

ISSUE
Whether or not the interests are lawful

HELD
No. an apparently lawful loan is usurious when it is intended that additional compensation
for the loan be disguised by an ostensibly unrelated contract for the payment by the borrower for
the lender’s services which re of little value or which are not in fact to be rendered. Article 1957
clearly provides: contracts and stipulations, under any cloak or device whatever, intended to
circumvent the law against usury shall be void. The borrower may recover in accordance with the
laws on usury.
FIRST FIL-SIN LENDING CORPORATION, petitioner, vs. GLORIA D. PADILLO,
respondent.

G.R. No. 160533 January 12, 2005

Topic: Interpretation of a contract or agreement

Ponente: YNARES-SANTIAGO, J.

DOCTRINE: When the terms of the agreement are clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be understood literally
just as they appear on the face of the contract. (Note this doctrine was cited in the 1st case: Gaisano
Cagayan, Inc. vs. Insurance Company of North America)

As between two parties to a written agreement, the party who gave rise to the mistake or error in
the provisions of the same is estopped from asserting a contrary intention to that contained
therein.
______________________________________________________________________________
__________

FACTS:

Respondent Gloria D. Padillo obtained a P500,000.00 loan from petitioner First Fil-Sin Lending
Corp. Respondent obtained another P500,000.00 loan from petitioner. In both instances,
respondent executed a promissory note and disclosure statement.

For the first loan, respondent made 13 monthly interest payments of P22,500.00 each before she
settled the P500,000.00 outstanding principal obligation. As regards the second loan, respondent
made 11 monthly interest payments of P25,000.00 each before paying the principal loan of
P500,000.00. In sum, respondent paid a total of P792,500.00 for the first loan and P775,000.00 for
the second loan.

Respondent Padillo then filed an action for sum of money against herein petitioner before the RTC
alleging that she only agreed to pay interest at the rates of 4.5% and 5% per annum, respectively,
for the two loans, and not 4.5% and 5% per month. Respondent sought to recover the amounts she
allegedly paid in excess of her actual obligations.
The RTC dismissed respondent’s complaint and ordered her to pay petitioner P311,125.00 with
legal interest. On appeal, the CA reversed and set aside the decision of the RTC and ruled that,
based on the disclosure statements executed by respondent, the interest rates should be imposed
on a monthly basis but only for the 3-month term of the loan. Thereafter, the legal interest rate will
apply. Hence, the instant petition.

Petitioner maintains that the interest rates are to be imposed on a monthly and not on a per annum
basis and the monthly interest shall be imposed until the outstanding obligations have been fully
paid. On the other hand, respondent avers that the interest on the loans is per annum as expressly
stated in the promissory notes and disclosure statements. The provision as to annual interest rate
is clear and requires no room for interpretation. Respondent asserts that any ambiguity in the
promissory notes and disclosure statements should not favor petitioner since the loan documents
were prepared by the latter.

ISSUE: Whether the interest on the loans is per annum, and not monthly, as expressly stated in
the promissory notes and disclosure statements  YES.

RULING: We agree with respondent. Perusal of the promissory notes and the disclosure
statements pertinent to the loan obligations of respondent clearly and unambiguously provide for
interest rates of 4.5% per annum and 5% per annum, respectively. Nowhere was it stated that the
interest rates shall be applied on a monthly basis.

Thus, when the terms of the agreement are clear and explicit that they do not justify an attempt to
read into it any alleged intention of the parties, the terms are to be understood literally just as they
appear on the face of the contract. It is only in instances when the language of a contract is
ambiguous or obscure that courts ought to apply certain established rules of construction in order
to ascertain the supposed intent of the parties. However, these rules will not be used to make a new
contract for the parties or to rewrite the old one, even if the contract is inequitable or harsh. They
are applied by the court merely to resolve doubts and ambiguities within the framework of the
agreement.

The lower court and the CA mistook the Loan Transactions Summary for the Disclosure Statement.
The former was prepared exclusively by petitioner and merely summarizes the payments made by
respondent and the income earned by petitioner. There was no mention of any interest rates and
having been prepared exclusively by petitioner, the same is self serving. On the contrary, the
Disclosure Statements were signed by both parties and categorically stated that interest rates were
to be imposed annually, not monthly.
As such, since the terms and conditions contained in the promissory notes and disclosure
statements are clear and unambiguous, the same must be given full force and effect. The expressed
intention of the parties as laid down on the loan documents controls.

Notably, petitioner even admitted that it was solely responsible for the preparation of the loan
documents, and that it failed to correct the pro forma note p.a. to per month. Since the mistake is
exclusively attributed to petitioner, the same should be charged against it. This unilateral mistake
cannot be taken against respondent who merely affixed her signature on the pro forma loan
agreements. As between two parties to a written agreement, the party who gave rise to the mistake
or error in the provisions of the same is estopped from asserting a contrary intention to that
contained therein. The checks issued by respondent do not clearly and convincingly prove that the
real intent of the parties is to apply the interest rates on a monthly basis. Absent any proof of vice
of consent, the promissory notes and disclosure statements remain the best evidence to ascertain
the real intent of the parties.

The same promissory note provides that x x x any and all remaining amount due on the principal
upon maturity hereof shall earn interest at the rate of _____ from date of maturity until fully paid.
The CA thus properly imposed the legal interest of 12% per annum from the time the loans matured
until the same has been fully paid on February 2, 1999. As decreed in Eastern Shipping Lines, Inc.
v. Court of Appeals, in the absence of stipulation, the rate of interest shall be 12% per annum to
be computed from default.
Integrated Realty Corp vs PNB
GR No. 60705, 28 June 1989
174 SCRA 295

FACTS
Raul Santos made a time deposit with OBM in the amount of P500H and he was issued a
certificate of time deposits. On another date, Santos again made a time deposit with OBM in the
amount of P200H, he was again issued a CTD. IRC, thru its president Raul Santos, applied for a
loan and/or credit line (P700H) with PNB. To secure such, Santos executed a Deed of Assignment
of the 2 time deposits. After due dates of the time deposit certificates, OBM did not pay PNB. PNB
then demanded payment from IRC and Santos, but they replied that the loan was deemed paid with
the irrevocable assignment of the time deposit certificates.

PB then filed with RTC to collect from IRC and Santos with interest. The trial court ruled
in favor of PNB ordering IRC and Santos to pay PNB the total amount of P700H plus interest of
9% PA, 2% additional interest and 1& PA penalty interest. On appeal, the CA ordered OBM to
pay IRC and Santos whatever amts they will to PNB with interest.

IRC and Santos now claim that OBM should reimburse them for whatever amts they may
be adjudged to pay PNB by way of compensation for damages incurred.

ISSUE
Whether or not the claim of IRC and Santos will prosper.

HELD
The Court held in the affirmative. The 2 time deposits matured on 11 January 1968 and 6
February 1968, respectively. However, OBM was not allowed and suspended to operate only on
31 July 1968 and resolved on 2 August 1968. There was a yet no obstacle to the faithful compliance
by OBM of its liabilities. For having incurred in delay in the performance of its obligation, OBM
should be held for damages. OBM contends that it had agreed to pay interest only up to the dates
of maturity of the CTD and that Santos is not entitled to interest after maturity dates had expired.

While it is true that under Article 1956 of the CC, no interest shall be due unless it has been
expressly stipulated in writing, this applies only to interest for the use of money. It does not
comprehend interest paid as damages. OBM is being required to pay such interest, not as interest
income stipulated in the CTD, but as damages fro failure and delay in the payment of its obligations
which thereby compelled IRC and Santos to resort to the courts.

The applicable rule is that LI, in the nature of damages for non-compliance with an
obligation to buy sum of money, is recoverable from the date judicially or extra-judicially demand
is made.
Bataan Seedling vs Republic
GR No. 141009, 2 July 2002
383 SCRA 590

FACTS
Petitioner entered into a contract with respondent, represented by the DENR for the
reforestation of a forest land within a period of 3 years. Petitioner undertook to report to DENR
any event or condition which delays or may delay the project. With the contract was the release of
mobilization fund but the fund was to be returned upon completion or deducted from periodic
release of moneys to petitioner. Believing that petitioners failed to comply with their obligations,
respondent sent a notice of cancellation. Petitioners failed to respond to the notice, thus, respondent
filed a complaint for damages against petitioners. The RTC held that respondent had sufficient
grounds to cancel the contract but saw no reason why the mobilization fund and the cash advances
should be refunded or that petitioners are liable for liquidated damages. Both parties appealed to
the CA, which affirmed the trial court and that the balnce of the fund should be returned with 12%
interest.

ISSUE
Whether the order to refund the balance of the fund with 12% interest pa is proper

HELD
No. Interest at the rate of 12% pa is impossible if there is no stipulation in the contract.
Herein subject contract does not contain any stipulation as to interest. However, the amount due
to respondent does not represent a loan or forbearance of money. The word “forbearance” is
defined, within, the context of usury law, as a contractual obligation of lender or creditor to refrain,
during given period of time, from requiring borrower or debtor to repay loan or debt then due and
payable. In the absence of stipulation, the legal interest is 6% pa on the amount finally adjudged
by the Court.

Banco Filipino vs CA
GR No. 129227, 30 May 2000
332 SCRA 241

FACTS
Elsa and Calvin Arcilla secured, on 3 occassions, loan from petitioner as evidenced by
promissory note. REM was also executed. Under said deeds, Banco Filipino may increase rate of
interest on said loans, within the limits allowed by law. at that time, under Usury Law, the
maximum rate of interest for loans secured by REM was 12% pa. later, the Central bank issued
Circular No. 494 provinding for the maximum interest of 19%pa. meanwhile, Skyli Builders, thru
President Calvin Arcilla secured loans from BPI with FGU Insurance as surety. Banco Filipino
issued an account statement with 17% pa as interest. The Arcillas filed for annulment of the loan
contracts because the rate of interests charged were usurious.

ISSUE
Whether or not respondents are entitled to refund of the alleged interest overpayments.
HELD
Yes. Private respondents aver that they are entitled to the refund inasmuch as the escalation
clause incorporated in the loan contracts do not have a corresponding de-escalation clause and is
therefore, illegal.

In Banco Filipino Savings & Mortgage Bank vs Navarro, the Court ruled that Central Bank
Circular 494, although it has the force and effect of law, is not a law and is not the law contemplated
by the parties which authorizes the petitioner to unilaterally raise the interest rate of loan. The
reliance on the circular was without any legal basis.

Consolidated Bank vs CA
GR No. 114286, 19 April 2001
356 SCRA 671

FACTS
Continental Cement Corp obtained from Consolidated Bank letter of credit used to
purchased 500,000 liters of bunker fuel oil. Respondent Corporation made a marginal deposit to
petitioner. A trust receipt was executed by respondent corporation, with respondent Gregory Lim
as signatory. Claiming that respondents failed to turn over the goods or proceeds, petitioner filed
a complaint for sum of money before the RTC of Manila. In their answer, respondents aver that
the transaction was a simple loan and not a trust receipt one, and tht the amount claimed by
petitioner did not take into account payments already made by them. The court dismissed the
complaint, CA affirmed the same.

ISSUE
Whether or not the marginal deposit should not be deducted outright from the amount of
the letter of credit.

HELD
No. petitioner argues that the marginal deposit should be considered only after computing
the principal plus accrued interest and other charges. It could be onerous to compute interest and
other charges on the face value of the letter of credit which a bank issued, without first crediting
or setting off the marginal deposit which the borrower paid to it-compensation is proper and should
take effect by operation of law because the requisited in Art. 1279 are present and should
extinguish both debts to the concurrent amount. Unjust enrichment.
Mendoza vs CA
GR No. 116710, 25 June 2001
359 SCRA 438

FACTS
Petitioner was granted by respondent PNB a credit line for 500H and 1M for LoC/TR line.
As security, the former mortgaged properties. The REM provided for an escalation clause that rate
of interest charged on the obligation secured shall be subject to such increase, during the life of
the contract, within the rates allowed by law. Two PNs were executed for the credit line and
stipulated therein : with interest thereon at the rate of 12% pa, until paid, with interest rate the
Bank may, at any tie, without notice, raise within the limits allowed by law xxx.” Thereafter, PNB
advised Mendoza that the bank raised its interest rates to 14% pa, in ine with CBMB Reso No
2126. Petitioner failed to payand requested for restructuring of loans. Two promissory notes were
signed by Mendoza and his wife. Petitioner testified that respondent allegedly inserted in first
promissory note No. 127/82 an interest rate of 21% instead of 18% covering the principal
amount,and on the second promissory note 128/82 the interest of 18% instead of 12% representing
accrued interest.

ISSUE
Whether or not the interests provided by respondent is proper.

HELD
No. it appears that respondent bank increased the interest rates on the 2 promissory notes
without prior consent of the petitioner. The petitioner did not agree to the increase in the stipulated
interest. As held in several cases, the unilateral determination and imposition of increased interest
rates by respondent bank is violative of the principle of mutuality of contracts ordained in Art.
1308 of the CC.
G.R. Nos. 150773 & 153599 September 30, 2005

SPOUSES DAVID B. CARPO and RECHILDA S. CARPO, Petitioners,

- versus -
ELEANOR CHUA and TINGA, and ELMA DY NG, CHICO-NAZARIO, JJ. Respondents.

DOCTRINE: Usurious loan transaction is not a complete nullity but defective only with respect
to the agreed interest.

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay
the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not
illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is the only one that is
illegal.

FACTS:
1. Petitioners borrowed from respondents the amount of P175,000.00, payable within six (6)
months with an interest rate of six percent (6%) per month. To secure the payment of the loan,
petitioners mortgaged their residential house and lot.

2. Petitioners failed to pay the loan upon demand. Consequently, the real estate mortgage was
extrajudicially foreclosed where the respondents emerged winners in the public auction.

3. Petitioners failed to exercise their right of redemption, thus a certificate of sale was issued
and new TCT was issued in the name of respondents. Despite the issuance of the TCT,
petitioners continued to occupy the said house and lot, prompting respondents to file a petition
for writ of possession.Writ of possession was then issued.

4. Petitioners filed a complaint for annulment of real estate mortgage and the consequent
foreclosure proceedings.

5. Petitioners claim that following the Courts ruling in Medel v. Court of Appeals the rate of
interest stipulated in the principal loan agreement is clearly null and void. Consequently, they
also argue that the nullity of the agreed interest rate affects the validity of the real estate
mortgage.

ISSUE: A. Whether the interest rate is valid.---NO

B. Whether validity of said interest rate affects the Mortgage Contract.--NO

HELD: A. INTEREST RATE

Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is so
excessive, iniquitous, unconscionable and exorbitant that it should have been declared null and
void. Instead of dismissing their complaint, they aver that the lower court should have declared
them liable to respondents for the original amount of the loan plus 12% interest per annum and
1% monthly penalty charge as liquidated damages, in view of the ruling in Medel v. Court of
Appeals where the Court found that the interest stipulated at 5.5% per month or 66% per annum
was so iniquitous or unconscionable as to render the stipulation void.

In a long line of cases, this Court has invalidated similar stipulations on interest rates for being
excessive, iniquitous, unconscionable and exorbitant.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the
standards set in the above-cited cases, this stipulation is similarly invalid.From that perspective,
it is apparent that the stipulated interest in the subject loan is excessive, iniquitous,
unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article
1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy. In the ordinary course, the codal provision may be
invoked to annul the excessive stipulated interest.

B. INTEREST RATE INVALIDITY &MORTGAGE CONTRACT

The question as to whether the invalidity of the stipulation on interest carries with it the
invalidity of the principal obligation is crucial . The consideration of the mortgage contract is the
same as that of the principal contract from which it receives life, and without which it cannot
exist as an independent contract. Being a mere accessory contract, the validity of the mortgage
contract would depend on the validity of the loan secured by it.

Notably in Medel, the Court did not invalidate the entire loan obligation despite the inequitability
of the stipulated interest, but instead reduced the rate of interest to the more reasonable rate of
12% per annum. This is congruent with the rule that a usurious loan transaction is not a
complete nullity but defective only with respect to the agreed interest.

Further, Article 1273, Civil Code, provides: "The renunciation of the principal debt
shall extinguish the accessory obligations; but the waiver of the latter shall leave the
former in force."

Article 1420 of the New Civil Code provides in this regard: "In case of a divisible
contract, if the illegal terms can be separated from the legal ones, the latter may be
enforced."

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay
the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not
illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is the only one that is
illegal.

The principal debt remaining without stipulation for payment of interest can thus be
recovered by judicial action. And in case of such demand, and the debtor incurs in
delay, the debt earns interest from the date of the demand (in this case from the filing
of the complaint). Such interest is not due to stipulation, for there was none, the same
being void. Rather, it is due to the general provision of law that in obligations to pay
money, where the debtor incurs in delay, he has to pay interest by way of damages

Hence, it is clear and settled that the principal loan obligation still stands and remains valid. By
the same token, since the mortgage contract derives its vitality from the validity of the principal
obligation, the invalid stipulation on interest rate is similarly insufficient to render void the
ancillary mortgage contract.