Banking 6 10

[ G.R. No.
148753, July 30, 2004 ]
NEW SAMPAGUITA BUILDERS CONSTRUCTION, INC. (NSBCI) AND SPOUSES EDUARDO R. DEE AND ARCELITA M. DEE,
PETITIONERS, VS. PHILIPPINE NATIONAL BANK, RESPONDENT.
DECISION
PANGANIBAN, J.:
Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders unrestrained power to increase interest
rates, penalties and other charges at the latter's sole discretion and without giving prior notice to and securing the consent of the borrowers. This
unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of borrowers. Although the Usury Law
has been effectively repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of money. Furthermore, excessive
interests, penalties and other charges not revealed in disclosure statements issued by banks, even if stipulated in the promissory notes, cannot be
given effect under the Truth in Lending Act.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the June 20, 2001 Decision [2] of the Court of
Appeals[3] (CA) in CA-GR CV No. 55231. The decretal portion of the assailed Decision reads as follows:
"WHEREFORE, the decision of the Regional Trial Court of Dagupan City, Branch 40 dated December 28, 1995 is REVERSED and SET
ASIDE. The foreclosure proceedings of the mortgaged properties of defendants-appellees[4] and the February 26, 1992 auction sale are declared
legal and valid and said defendants-appellees are ordered to pay plaintiff-appellant PNB,[5] jointly and severally[,] the amount of deficiency that
will be computed by the trial court based on the original penalty of 6% per annum as explicitly stated in the loan documents and to pay attorney's
fees in an amount equivalent to x x x 1% of the total amount due and the costs of suit and expenses of litigation." [6]
The Facts
The facts are narrated by the CA as follows:

"On February 11, 1989, Board Resolution No. 05, Series of 1989 was approved by [Petitioner] NSBCI [1)] authorizing the company to x x x
apply for or secure a commercial loan with the PNB in an aggregate amount of P8.0M, under such terms agreed by the Bank and the NSBCI,
using or mortgaging the real estate properties registered in the name of its President and Chairman of the Board [Petitioner] Eduardo R. Dee as
collateral; [and] 2) authorizing [petitioner-spouses] to secure the loan and to sign any [and all] documents which may be required by
[Respondent] PNB[,] and that [petitioner-spouses] shall act as sureties or co-obligors who shall be jointly and severally liable with [Petitioner]
NSBCI for the payment of any [and all] obligations.
"On August 15, 1989, Resolution No. 77 was approved by granting the request of [Respondent] PNB thru its Board NSBCI for an P8 Million
loan broken down into a revolving credit line of P7.7M and an unadvised line of P0.3M for additional operating and working capital[7] to mobilize
its various construction projects, namely:
'1) MWSS Watermain;

2) NEA-Liberty farm;
3) Olongapo City Pag-Asa Public Market;
4) Renovation of COA-NCR Buildings 1, 2 and 9;
5) Dupels, Inc., Extensive prawn farm development project;
6) Banawe Hotel Phase II;
7) Clark Air Base -- Barracks and Buildings; and
8) Others: EDSA Lighting, Roxas Blvd. Painting NEA Sapang Palay and Angeles City.'
"The loan of [Petitioner] NSBCI was secured by a first mortgage on the following: a) three (3) parcels of residential land located at Mangaldan,
Pangasinan with total land area of 1,214 square meters[,] including improvements thereon and registered under TCT Nos. 128449, 126071, and
126072 of the Registry of Deeds of Pangasinan; b) six (6) parcels of residential land situated at San Fabian, Pangasinan with total area of 1,767
square meters[,] including improvements thereon and covered by TCT Nos. 144006, 144005, 120458, 120890, 144161[,] and 121127 of the
Registry of Deeds of Pangasinan; and c) a residential lot and improvements thereon located at Mangaldan, Pangasinan with an area of 4,437
square meters and covered by TCT No. 140378 of the Registry of Deeds of Pangasinan.
"The loan was further secured by the joint and several signatures of [Petitioners] Eduardo Dee and Arcelita Marquez Dee, who signed as
accommodation-mortgagors since all the collaterals were owned by them and registered in their names.
"Moreover [Petitioner] NSBCI executed the following documents, viz: a) promissory note dated June 29, 1989 in the amount of P5,000,000.00
with due date on October 27, 1989; [b)] promissory note dated September 1, 1989 in the amount of P2,700,000.00 with due date on December 30,
1989; and c) promissory note dated September 6, 1989 in the amount of P300,000.00 with maturity date on January 4, 1990.
"In addition, [petitioner] corporation also signed the Credit Agreement dated August 31, 1989 relating to the 'revolving credit line' of P7.7 Million
x x x and the Credit Agreement dated September 5, 1989 to support the 'unadvised line' of P300,000.00.
"On August 31, 1989, [petitioner-spouses] executed a 'Joint and Solidary Agreement' (JSA) in favor of [Respondent] PNB 'unconditionally and
irrevocably binding themselves to be jointly and severally liable with the borrower for the payment of all sums due and payable to the Bank under
the Credit Document.'
1
"Later on, [Petitioner] NSBCI failed to comply with its obligations under the promissory notes.
"On June 18, 1991, [Petitioner] Eduardo R. Dee on behalf of [Petitioner] NSBCI sent a letter to the Branch Manager of the PNB Dagupan Branch
requesting for a 90-day extension for the payment of interests and restructuring of its loan for another term.
"Subsequently, NSBCI tendered payment to [Respondent] PNB [of] three (3) checks aggregating P1,000,000.00, namely 1) check no. 316004
dated August 8, 1991 in the amount of P200,000.00; 2) check no. 03499997 dated August 8, 1991 in the amount of P650,000.00; and 3) check no.
03499998 dated August 15, 1991 in the amount of P150,000.00.[8]
"In a meeting held on August 12, 1991, [Respondent] PNB's representative[,] Mr. Rolly Cruzabra, was informed by [Petitioner] Eduardo Dee of
his intention to remit to [Respondent] PNB post-dated checks covering interests, penalties and part of the loan principals of his due account.
"On August 22, 1991, [Respondent] bank's Crispin Carcamo wrote [Petitioner] Eduardo Dee[,] informing him that [Petitioner] NSBCI's proposal
[was] acceptable[,] provided the total payment should be P4,128,968.29 that [would] cover the amount of P1,019,231.33 as
principal, P3,056,058.03 as interests and penalties[,] and P53,678.93 for insurance[,] with the issuance of post-dated checks to be dated not later
than November 29, 1991.
"On September 6, 1991, [Petitioner] Eduardo Dee wrote the PNB Branch Manager reiterating his proposals for the settlement of [Petitioner]
NSBCI's past due loan account amounting to P7,019,231.33.
"[Petitioner] Eduardo Dee later tendered four (4) post-dated Interbank checks aggregating P1,111,306.67 in favor of [Respondent] PNB, viz:
'Check No. Date Amount

03500087 Sept. 29, 1991 P277,826.70
03500088 Oct. 29, 1991 P277,826.70
03500089 Nov. 29, 1991 P277,826.70
03500090 Dec. 20, 1991 P277,826.57'
"Upon presentment[,] however, x x x check nos. 03500087 and 03500088 dated September 29 and October 29, 1991 were dishonored by the
drawee bank and returned due [to] a 'stop payment' order from [petitioners].
"On November 12, 1991, PNB's Mr. Carcamo wrote [Petitioner] Eduardo Dee informing him that unless the dishonored checks [were] made
good, said PNB branch 'shall recall its recommendation to the Head Office for the restructuring of the loan account and refer the matter to its
legal counsel for legal action.['] [Petitioners] did not heed [respondent's] warning and as a result[,] the PNB Dagupan Branch sent demand letters
to [Petitioner] NSBCI at its office address at 1611 ERDC Building, E. Rodriguez Sr. Avenue, Quezon City[,] asking it to settle its past due loan
account.
"[Petitioners] nevertheless failed to pay their loan obligations within the [timeframe] given them and as a result, [Respondent] PNB filed with the
Provincial Sheriff of Pangasinan at Lingayen a Petition for Sale under Act 3135, as amended[,] and Presidential Decree No. 385 dated January
30, 1992.
"The notice of extra-judicial sale of the mortgaged properties relating to said PNB's [P]etition for [S]ale was published in the February 8, 15 and
22, 1992 issues of the Weekly Guardian, allegedly a newspaper of general circulation in the Province of Pangasinan, including the cities of
Dagupan and San Carlos. In addition[,] copies of the notice were posted in three (3) public places[,] and copies thereof furnished [Petitioner]
NSBCI at 1611 [ERDC Building,] E. Rodriguez Sr. Avenue, Quezon City, [and at] 555 Shaw Blvd., Mandaluyong[, Metro Manila;] and
[Petitioner] Sps. Eduardo and Arcelita Dee at 213 Wilson St., San Juan, Metro Manila.
"On February 26, 1992, the Provincial Deputy Sheriff Cresencio F. Ferrer of Lingayen, Pangasinan foreclosed the real estate mortgage and sold at
public auction the mortgaged properties of [petitioner-spouses,] with [Respondent] PNB being declared the highest bidder for the amount
of P10,334,000.00.
"On March 2, 1992, copies of the Sheriff's Certificate of Sale were sent by registered mail to [petitioner] corporation's address at 1611 [ERDC
Building,] E. Rodriguez Sr. Avenue, Quezon City and [petitioner-spouses'] address at 213 Wilson St., San Juan, Metro Manila.
"On April 6, 1992, the PNB Dagupan Branch Manager sent a letter to [petitioners] at their address at 1611 [ERDC Building,] E. Rodriguez Sr.
Avenue, Quezon City[,] informing them that the properties securing their loan account [had] been sold at public auction, that the Sheriff's
Certificate of Sale had been registered with the Registry of Deeds of Pangasinan on March 13, 1992[,] and that a period of one (1) year therefrom
[was] granted to them within which to redeem their properties.
"[Petitioners] failed to redeem their properties within the one-year redemption period[,] and so [Respondent] PNB executed a [D]eed of
[A]bsolute [S]ale consolidating title to the properties in its name. TCT Nos. 189935 to 189944 were later issued to [Petitioner] PNB by the
Registry of Deeds of Pangasinan.
"On August 4, 1992, [Respondent] PNB informed [Petitioner] NSBCI that the proceeds of the sale conducted on February 26, 1992 were not
sufficient to cover its total claim amounting to P12,506,476.43[,] and thus demanded from the latter the deficiency of P2,172,476.43 plus interest
and other charges[,] until the amount [was] fully paid.
"[Petitioners] refused to pay the above deficiency claim which compelled [Respondent] PNB to institute the instant [C]omplaint for the collection
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of its deficiency claim.
"Finding that the PNB debt relief package automatically [granted] to [Petitioner] NSBCI the benefits under the program, the court a quo ruled in
favor of [petitioners] in its Decision dated December 28, 1995, the fallo of which reads:
'In view of the foregoing, the Court believes and so holds that the [respondent] has no cause of action against the [petitioners].
'WHEREFORE, the case is hereby DISMISSED, without costs.'"[9]
On appeal, respondent assailed the trial court's Decision dismissing its deficiency claim on the mortgage debt. It also challenged the ruling of the
lower court that Petitioner NSBCI's loan account was bloated, and that the inadequacy of the bid price was sufficient to set aside the auction sale.
Ruling of the Court of Appeals
Reversing the trial court, the CA held that Petitioner NSBCI did not avail itself of respondent's debt relief package (DRP) or take steps to comply
with the conditions for qualifying under the program. The appellate court also ruled that entitlement to the program was not a matter of right,
because such entitlement was still subject to the approval of higher bank authorities, based on their assessment of the borrower's repayment
capability and satisfaction of other requirements.
As to the misapplication of loan payments, the CA held that the subsidiary ledgers of NSBCI's loan accounts with respondent reflected all the
loan proceeds as well as the partial payments that had been applied either to the principal or to the interests, penalties and other charges. Having
been made in the ordinary and usual course of the banking business of respondent, its entries were presumed accurate, regular and fair under
Section 5(q) of Rule 131 of the Rules of Court. Petitioners failed to rebut this presumption.
The increases in the interest rates on NSBCI's loan were also held to be authorized by law and the Monetary Board and -- like the increases in
penalty rates -- voluntarily and freely agreed upon by the parties in the Credit Agreements they executed. Thus, these increases were binding
upon petitioners.
However, after considering that two to three of Petitioner NSBCI's projects covered by the loan were affected by the economic slowdown in the
areas near the military bases in the cities of Angeles and Olongapo, the appellate court annulled and deleted the adjustment in penalty from 6
percent to 36 percent per annum. Not only did respondent fail to demonstrate the existence of market forces and economic conditions that would
justify such increases; it could also have treated petitioners' request for restructuring as a request for availment of the DRP. Consequently, the
original penalty rate of 6 percent per annum was used to compute the deficiency claim.
The auction sale could not be set aside on the basis of the inadequacy of the auction price, because in sales made at public auction, the owner is
given the right to redeem the mortgaged properties; the lower the bid price, the easier it is to effect redemption or to sell such right. The bid price
of P10,334,000.00 vis-à-vis respondent's claim of P12,506,476.43 was found to be neither shocking nor unconscionable.
The attorney's fees were also reduced by the appellate court from 10 percent to 1 percent of the total indebtedness. First, there was no extreme
difficulty in an extrajudicial foreclosure of a real estate mortgage, as this proceeding was merely administrative in nature and did not involve a
court litigation contesting the proceedings prior to the auction sale. Second, the attorney's fees were exclusive of all stipulated costs and
fees. Third, such fees were in the nature of liquidated damages that did not inure to respondent's salaried counsel.
Respondent was also declared to have the unquestioned right to foreclose the Real Estate Mortgage. It was allowed to recover any deficiency in
the mortgage account not realized in the foreclosure sale, since petitioner-spouses had agreed to be solidarily liable for all sums due and payable
to respondent.
Finally, the appellate court concluded that the extrajudicial foreclosure proceedings and auction sale were valid for the following reasons: (1)
personal notice to the mortgagors, although unnecessary, was actually made; (2) the notice of extrajudicial sale was duly published and posted;
(3) the extrajudicial sale was conducted through the deputy sheriff, under the direction of the clerk of court who was concurrently the ex-oficio
provincial sheriff and acting as agent of respondent; (4) the sale was conducted within the province where the mortgaged properties were located;
and (5) such sale was not shown to have been attended by fraud.
Hence this Petition.[10]
Issues
Petitioners submit the following issues for our consideration:

"I
Whether or not the Honorable Court of Appeals correctly ruled that petitioners did not avail of PNB's debt relief package and were not entitled
thereto as a matter of right.
"II
Whether or not petitioners have adduced sufficient and convincing evidence to overthrow the presumption of regularity and correctness of the
PNB entries in the subsidiary ledgers of the loan accounts of petitioners.
"III
Whether or not the Honorable Court of Appeals seriously erred in not holding that the Respondent PNB bloated the loan account of petitioner
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corporation by imposing interests, penalties and attorney's fees without legal, valid and equitable justification.
"IV
Whether or not the auction price at which the mortgaged properties was sold was disproportionate to their actual fair mortgage value.
"V
Whether or not Respondent PNB is not entitled to recover the deficiency in the mortgage account not realized in the foreclosure sale, considering
that:
A. Petitioners are merely guarantors of the mortgage debt of petitioner corporation which has a separate personality from the [petitioner-
spouses].
B.
C. The joint and solidary agreement executed by [petitioner- spouses] are contracts of adhesion not binding on them;
D.
E. The NSBCI Board Resolution is not valid and binding on [petitioner-spouses] because they were compelled to execute the said
Resolution[;] otherwise[,] Respondent PNB would not grant petitioner corporation the loan;
F.
G. The Respondent PNB had already in its possession the properties of the [petitioner-spouses] which served as a collateral to the loan
obligation of petitioner corporation[,] and to still allow Respondent PNB to recover the deficiency claim amounting to a very
substantial amount of P2.1 million would constitute unjust enrichment on the part of Respondent PNB.
"VI
Whether or not the extrajudicial foreclosure proceedings and auction sale, including all subsequent proceedings[,] are null and void for non-
compliance with jurisdictional and other mandatory requirements; whether or not the petition for extrajudicial foreclosure of mortgage was filed
prematurely; and whether or not the finding of fraud by the trial court is amply supported by the evidence on record."[11]
The foregoing may be summed up into two main issues: first, whether the loan accounts are bloated; and second, whether the extrajudicial
foreclosure and subsequent claim for deficiency are valid and proper.
The Court's Ruling
The Petition is partly meritorious.
First Main Issue:

Bloated Loan Accounts
At the outset, it must be stressed that only questions of law[12] may be raised in a petition for review on certiorari under Rule 45 of the Rules of
Court. As a rule, questions of fact cannot be the subject of this mode of appeal,[13] for "[t]he Supreme Court is not a trier of facts."[14] As
exceptions to this rule, however, factual findings of the CA may be reviewed on appeal [15] when, inter alia, the factual inferences are manifestly
mistaken;[16] the judgment is based on a misapprehension of facts;[17] or the CA manifestly overlooked certain relevant and undisputed facts that,
if properly considered, would justify a different legal conclusion. [18] In the present case, these exceptions exist in various instances, thus
prompting us to take cognizance of factual issues and to decide upon them in the interest of justice and in the exercise of our sound discretion.[19]
Indeed, Petitioner NSBCI's loan accounts with respondent appear to be bloated with some iniquitous imposition of interests, penalties, other
charges and attorney's fees. To demonstrate this point, the Court shall take up one by one the promissory notes, the credit agreements and the
disclosure statements.
Increases in Interest Baseless
Promissory Notes. In each drawdown, the Promissory Notes specified the interest rate to be charged: 19.5 percent in the first, and 21.5 percent in
the second and again in the third. However, a uniform clause therein permitted respondent to increase the rate "within the limits allowed by law at
any time depending on whatever policy it may adopt in the future x x x,"[20] without even giving prior notice to petitioners. The Court holds that
petitioners' accessory duty to pay interest[21] did not give respondent unrestrained freedom to charge any rate other than that which was agreed
upon. No interest shall be due, unless expressly stipulated in writing. [22] It would be the zenith of farcicality to specify and agree upon rates that
could be subsequently upgraded at whim by only one party to the agreement.
The "unilateral determination and imposition"[23] of increased rates is "violative of the principle of mutuality of contracts ordained in Article
1308[24] of the Civil Code."[25] One-sided impositions do not have the force of law between the parties, because such impositions are not based on
the parties' essential equality.
Although escalation clauses[26] are valid in maintaining fiscal stability and retaining the value of money on long-term contracts,[27] giving
respondent an unbridled right to adjust the interest independently and upwardly would completely take away from petitioners the "right to assent
to an important modification in their agreement"[28] and would also negate the element of mutuality in their contracts. The clause cited earlier
made the fulfillment of the contracts "dependent exclusively upon the uncontrolled will" [29] of respondent and was therefore void. Besides, the pro
forma promissory notes have the character of a contract d'adhésion,[30] "where the parties do not bargain on equal footing, the weaker party's [the
debtor's] participation being reduced to the alternative 'to take it or leave it.'" [31]
4
"While the Usury Law[32] ceiling on interest rates was lifted by [Central Bank] Circular No. 905,[33] nothing in the said Circular grants
lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets."[34] In fact, we have declared nearly ten years ago that neither this Circular nor PD 1684, which further amended the Usury Law,
"authorized either party to unilaterally raise the interest rate without the other's consent." [35]
Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that borrowing signified a capital transfusion from lending
institutions to businesses and industries and was done for the purpose of stimulating their growth; yet respondent's continued "unilateral and
lopsided policy"[36] of increasing interest rates "without the prior assent"[37] of the borrower not only defeats this purpose, but also deviates from
this pronouncement. Although such increases are not usurious, since the "Usury Law is now legally inexistent" [38] -- the interest ranging from 26
percent to 35 percent in the statements of account[39] -- "must be equitably reduced for being iniquitous, unconscionable and exorbitant."[40] Rates
found to be iniquitous or unconscionable are void, as if it there were no express contract thereon. [41] Above all, it is undoubtedly against public
policy to charge excessively for the use of money. [42]
It cannot be argued that assent to the increases can be implied either from the June 18, 1991 request of petitioners for loan restructuring or from
their lack of response to the statements of account sent by respondent. Such request does not indicate any agreement to an interest increase; there
can be no implied waiver of a right when there is no clear, unequivocal and decisive act showing such purpose. [43] Besides, the statements were
not letters of information sent to secure their conformity; and even if we were to presume these as an offer, there was no acceptance. No one
receiving a proposal to modify a loan contract, especially interest -- a vital component -- is "obliged to answer the proposal."[44]
Furthermore, respondent did not follow the stipulation in the Promissory Notes providing for the automatic conversion of the portion that
remained unpaid after 730 days -- or two years from date of original release --into a medium-term loan, subject to the applicable interest rate to be
applied from the dates of original release.[45]
In the first,[46] second[47] and third[48] Promissory Notes, the amount that remained unpaid as of October 27, 1989, December 1989 and January 4,
1990 -- their respective due dates -- should have been automatically converted by respondent into medium-term loans on June 30, 1991,
September 2, 1991, and September 7, 1991, respectively. And on this unpaid amount should have been imposed the same interest rate charged by
respondent on other medium-term loans; and the rate applied from June 29, 1989, September 1, 1989 and September 6, 1989 -- their respective
original release --until paid. But these steps were not taken. Aside from sending demand letters, respondent did not at all exercise its option to
enforce collection as of these Notes' due dates. Neither did it renew or extend the account.
In these three Promissory Notes, evidently, no complaint for collection was filed with the courts. It was not until January 30, 1992 that a Petition
for Sale of the mortgaged properties was filed -- with the provincial sheriff, instead.[49] Moreover, respondent did not supply the interest rate to be
charged on medium-term loans granted by automatic conversion. Because of this deficiency, we shall use the legal rate of 12 percent per annum
on loans and forbearance of money, as provided for by CB Circular 416. [50]
Credit Agreements. Aside from the promissory notes, another main document involved in the principal obligation is the set of credit agreements
executed and their annexes.
The first Credit Agreement[51] dated June 19, 1989 -- although offered and admitted in evidence, and even referred to in the first Promissory Note
-- cannot be given weight.
First, it was not signed by respondent through its branch manager. [52] Apparently it was surreptitiously acknowledged before respondent's counsel,
who unflinchingly declared that it had been signed by the parties on every page, although respondent's signature does not appear thereon.[53]
Second, it was objected to by petitioners,[54] contrary to the trial court's findings.[55] However, it was not the Agreement, but the revolving credit
line[56] of P5,000,000, that expired one year from the Agreement's date of implementation.[57]
Third, there was no attached annex that contained the General Conditions.[58] Even the Acknowledgment did not allude to its existence. [59] Thus,
no terms or conditions could be added to the Agreement other than those already stated therein.
Since the first Credit Agreement cannot be given weight, the interest rate on the first availment pegged at 3 percent over and above respondent's
prime rate[60] on the date of such availment[61] has no bearing at all on the loan. After the first Note's due date, the rate of 19 percent agreed upon
should continue to be applied on the availment, until its automatic conversion to a medium-term loan.
The second Credit Agreement[62] dated August 31, 1989, provided for interest -- respondent's prime rate, plus the applicable spread[63] in effect as
of the date of each availment,[64] on a revolving credit line of P7,700,000[65] -- but did not state any provision on its increase or
decrease.[66] Consequently, petitioners could not be made to bear interest more than such prime rate plus spread. The Court gives weight to this
second Credit Agreement for the following reasons.
First, this document submitted by respondent was admitted by petitioners. [67] Again, contrary to their assertion, it was not the Agreement -- but
the credit line -- that expired one year from the Agreement's date of implementation. [68] Thus, the terms and conditions continued to apply, even if
drawdowns could no longer be made.
Second, there was no 7-page annex[69] offered in evidence that contained the General Conditions,[70] notwithstanding the Acknowledgment of its
existence by respondent's counsel. Thus, no terms or conditions could be appended to the Agreement other than those specified therein.
Third, the 12-page General Conditions[71] offered and admitted in evidence had no probative value. There was no reference to it in the
Acknowledgment of the Agreement; neither was respondent's signature on any of the pages thereof. Thus, the General Conditions' stipulations on
interest adjustment,[72] whether on a fixed or a floating scheme, had no effect whatsoever on the Agreement. Contrary to the trial court's
findings,[73] the General Condition were correctly objected to by petitioners. [74] The rate of 21.5 percent agreed upon in the second Note thus
5
continued to apply to the second availment, until its automatic conversion into a medium-term loan.
The third Credit Agreement[75] dated September 5, 1989, provided for the same rate of interest as that in the second Agreement. This rate was to
be applied to availments of an unadvised line of P300,000. Since there was no mention in the third Agreement, either, of any stipulation on
increases or decreases[76] in interest, there would be no basis for imposing amounts higher than the prime rate plus spread. Again, the 21.5 percent
rate agreed upon would continue to apply to the third availment indicated in the third Note, until such amount was automatically converted into a
medium-term loan.
The Court also finds that, first, although this document was admitted by petitioners,[77] it was the credit line that expired one year from the
implementation of the Agreement.[78] The terms and conditions therein continued to apply, even if availments could no longer be drawn after
expiry.
Second, there was again no 7-page annex[79] offered that contained the General Conditions,[80] regardless of the Acknowledgment by the same
respondent's counsel affirming its existence. Thus, the terms and conditions in this Agreement relating to interest cannot be expanded beyond that
which was already laid down by the parties.
Disclosure Statements. In the present case, the Disclosure Statements[81] furnished by respondent set forth the same interest rates as those
respectively indicated in the Promissory Notes. Although no method of computation was provided showing how such rates were arrived at, we
will nevertheless take up the Statements seriatim in order to determine the applicable rates clearly.
As to the first Disclosure Statement on Loan/Credit Transaction [82] dated June 13, 1989, we hold that the 19.5 percent effective interest rate per
annum[83] would indeed apply to the first availment or drawdown evidenced by the first Promissory Note. Not only was this Statement issued
prior to the consummation of such availment or drawdown, but the rate shown therein can also be considered equivalent to 3 percent over and
above respondent's prime rate in effect. Besides, respondent mentioned no other rate that it considered to be the prime rate chargeable to
petitioners. Even if we disregarded the related Credit Agreement, we assume that this private transaction between the parties was fair and
regular,[84] and that the ordinary course of business was followed. [85]
As to the second Disclosure Statement on Loan/Credit Transaction[86] dated September 2, 1989, we hold that the 21.5 percent effective interest
rate per annum[87] would definitely apply to the second availment or drawdown evidenced by the second Promissory Note. Incidentally, this
Statement was issued only after the consummation of its related availment or drawdown, yet such rate can be deemed equivalent to the prime rate
plus spread, as stipulated in the corresponding Credit Agreement. Again, we presume that this private transaction was fair and regular, and that
the ordinary course of business was followed. That the related Promissory Note was pre-signed would also bolster petitioners' claim although,
under cross-examination Efren Pozon -- Assistant Department Manager I[88] of PNB, Dagupan Branch -- testified that the Disclosure Statements
were the basis for preparing the Notes.[89]
As to the third Disclosure Statement on Loan/Credit Transaction [90] dated September 6, 1989, we hold that the same 21.5 percent effective interest
rate per annum[91] would apply to the third availment or drawdown evidenced by the third Promissory Note. This Statement was made available to
petitioner-spouses, only after the related Credit Agreement had been executed, but simultaneously with the consummation of the Statement's
related availment or drawdown. Nonetheless, the rate herein should still be regarded as equivalent to the prime rate plus spread, under the similar
presumption that this private transaction was fair and regular and that the ordinary course of business was followed.
In sum, the three disclosure statements, as well as the two credit agreements considered by this Court, did not provide for any increase in the
specified interest rates. Thus, none would now be permitted. When cross-examined, Julia Ang-Lopez, Finance Account Analyst II of PNB,
Dagupan Branch, even testified that the bases for computing such rates were those sent by the head office from time to time, and not those
indicated in the notes or disclosure statements.[92]
In addition to the preceding discussion, it is then useless to belabor the point that the increase in rates violates the impairment [93] clause of the
Constitution,[94] because the sole purpose of this provision is to safeguard the integrity of valid contractual agreements against unwarranted
interference by the State[95] in the form of laws. Private individuals' intrusions on interest rates is governed by statutory enactments like the Civil
Code.
Penalty, or Increases
Thereof, Unjustified
No penalty charges or increases thereof appear either in the Disclosure Statements[96] or in any of the clauses in the second and the third Credit
Agreements[97] earlier discussed. While a standard penalty charge of 6 percent per annum has been imposed on the amounts stated in all three
Promissory Notes still remaining unpaid or unrenewed when they fell due,[98] there is no stipulation therein that would justify any increase in that
charges. The effect, therefore, when the borrower is not clearly informed of the Disclosure Statements -- prior to the consummation of the
availment or drawdown -- is that the lender will have no right to collect upon such charge[99] or increases thereof, even if stipulated in the Notes.
The time is now ripe to give teeth to the often ignored forty-one-year old "Truth in Lending Act"[100] and thus transform it from a snivelling paper
tiger to a growling financial watchdog of hapless borrowers.
Besides, we have earlier said that the Notes are contracts of adhesion; although not invalid per se, any apparent ambiguity in the loan contracts --
taken as a whole -- shall be strictly construed against respondent who caused it. [101] Worse, in the statements of account, the penalty rate has again
been unilaterally increased by respondent to 36 percent without petitioners' consent. As a result of its move, such liquidated damages intended as
a penalty shall be equitably reduced by the Court to zilch [102] for being iniquitous or unconscionable.[103]
Although the first Disclosure Statement was furnished Petitioner NSBCI prior to the execution of the transaction, it is not a contract that can be
modified by the related Promissory Note, but a mere statement in writing that reflects the true and effective cost of loans from respondent.
Novation can never be presumed,[104] and the animus novandi "must appear by express agreement of the parties, or by their acts that are too clear
6
and unequivocal to be mistaken."[105] To allow novation will surely flout the "policy of the State to protect its citizens from a lack of awareness of
the true cost of credit."[106]
With greater reason should such penalty charges be indicated in the second and third Disclosure Statements, yet none can be found therein. While
the charges are issued after the respective availment or drawdown, the disclosure statements are given simultaneously therewith. Obviously,
novation still does not apply.
Other Charges Unwarranted
In like manner, the other charges imposed by respondent are not warranted. No particular values or rates of service charge are indicated in the
Promissory Notes or Credit Agreements, and no total value or even the breakdown figures of such non-finance charge are specified in the
Disclosure Statements. Moreover, the provision in the Mortgage that requires the payment of insurance and other charges is neither made part of
nor reflected in such Notes, Agreements, or Statements. [107]
Attorney's Fees Equitably Reduced
We affirm the equitable reduction in attorney's fees.[108] These are not an integral part of the cost of borrowing, but arise only when collecting
upon the Notes becomes necessary. The purpose of these fees is not to give respondent a larger compensation for the loan than the law already
allows, but to protect it against any future loss or damage by being compelled to retain counsel in-house or not -- to institute judicial proceedings
for the collection of its credit.[109] Courts have has the power[110] to determine their reasonableness[111] based on quantum meruit[112] and to
reduce[113] the amount thereof if excessive.[114]
In addition, the disqualification argument in the Affidavit of Publication raised by petitioners no longer holds water, inasmuch as Act 496 [115] has
repealed the Spanish Notarial Law.[116] In the same vein, their engagement of their counsel in another capacity concurrent with the practice of law
is not prohibited, so long as the roles being assumed by such counsel is made clear to the client. [117] The only reason for this clarification
requirement is that certain ethical considerations operative in one profession may not be so in the other.[118]
Debt Relief Package

Not Availed Of
We also affirm the CA's disquisition on the debt relief package (DRP).
Respondent's Circular is not an outright grant of assistance or extension of payment, [119] but a mere offer subject to specific terms and conditions.
Petitioner NSBCI failed to establish satisfactorily that it had been seriously and directly affected by the economic slowdown in the peripheral
areas of the then US military bases. Its allegations, devoid of any verification, cannot lead to a supportable conclusion. In fact, for short-term
loans, there is still a need to conduct a thorough review of the borrower's repayment possibilities. [120]
Neither has Petitioner NSBCI shown enough margin of equity,[121] based on the latest loan value of hard collaterals,[122] to be eligible for the
package. Additional accommodations on an unsecured basis may be granted only when regular payment amortizations have been established, or
when the merits of the credit application would so justify. [123]
The branch manager's recommendation to restructure or extend a total outstanding loan not exceeding P8,000,000 is not final, but subject to the
approval of respondent's Branches Department Credit Committee, chaired by its executive vice-president.[124] Aside from being further
conditioned on other pertinent policies of respondent,[125] such approval nevertheless needs to be reported to its Board of Directors for
confirmation.[126] In fact, under the General Banking Law of 2000, [127] banks shall grant loans and other credit accommodations only in amounts
and for periods of time essential to the effective completion of operations to be financed, "consistent with safe and sound banking
practices."[128] The Monetary Board -- then and now -- still prescribes, by regulation, the conditions and limitations under which banks may grant
extensions or renewals of their loans and other credit accommodations. [129]
Entries in Subsidiary Ledgers

Regular and Correct
Contrary to petitioners' assertions, the subsidiary ledgers of respondent properly reflected all entries pertaining to Petitioner NSBCI's loan
accounts. In accordance with the Generally Accepted Accounting Principles (GAAP) for the Banking Industry, [130] all interests accrued or earned
on such loans, except those that were restructured and non-accruing,[131] have been periodically taken into income.[132] Without a doubt, the
subsidiary ledgers in a manual accounting system are mere private documents [133] that support and are controlled by the general ledger.[134] Such
ledgers are neither foolproof nor standard in format, but are periodically subject to audit. Besides, we go by the presumption that the recording of
private transactions has been fair and regular, and that the ordinary course of business has been followed.
Second Main Issue:

Extrajudicial Foreclosure Valid, But
Deficiency Claims Excessive
Respondent aptly exercised its option to "foreclose the mortgage,"[135] after petitioners had failed to pay all the Notes in full when they fell
due.[136] The extrajudicial sale and subsequent proceedings are therefore valid, but the alleged deficiency claim cannot be recovered.
Auction Price Adequate
In the accessory contract[137] of real mortgage,[138] in which immovable property or real rights thereto are used as security[139] for the fulfillment of
7
the principal loan obligation,[140] the bid price may be lower than the property's fair market value. [141] In fact, the loan value itself is only 70
percent of the appraised value.[142] As correctly emphasized by the appellate court, a low bid price will make it easier[143] for the owner to effect
redemption[144] by subsequently reacquiring the property or by selling the right to redeem and thus recover alleged losses. Besides, the public
auction sale has been regularly and fairly conducted,[145] there has been ample authority to effect the sale,[146] and the Certificates of Title can be
relied upon. No personal notice[147] is even required,[148] because an extrajudicial foreclosure is an action in rem, requiring only notice by
publication and posting, in order to bind parties interested in the foreclosed property. [149]
As no redemption[150] was exercised within one year after the date of registration of the Certificate of Sale with the Registry of
Deeds,[151] respondent -- being the highest bidder -- has the right to a writ of possession, the final process that will consummate the extrajudicial
foreclosure. On the other hand, petitioner-spouses, who are mortgagors herein, shall lose all their rights to the property. [152]
No Deficiency Claim Receivable
After the foreclosure and sale of the mortgaged property, the Real Estate Mortgage is extinguished. Although the mortgagors, being third persons,
are not liable for any deficiency in the absence of a contrary stipulation, [153] the action for recovery of such amount -- being clearly sureties to the
principal obligation -- may still be directed against them.[154] However, respondent may impose only the stipulated interest rates of 19.5 percent
and 21.5 percent on the respective availments -- subject to the 12 percent legal rate revision upon automatic conversion into medium-term loans --
plus 1 percent attorney's fees, without additional charges on penalty, insurance or any increases thereof.
Accordingly, the excessive interest rates in the Statements of Account sent to petitioners are reduced to 19.5 percent and 21.5 percent, as
stipulated in the Promissory Notes; upon loan conversion, these rates are further reduced to the legal rate of 12 percent. Payments made by
petitioners are pro-rated, the charges on penalty and insurance eliminated, and the resulting total unpaid principal and interest of P6,582,077.70 as
of the date of public auction is then subjected to 1 percent attorney's fees. The total outstanding obligation is compared to the bid price. On the
basis of these rates and the comparison made, the deficiency claim receivable amounting to P2,172,476.43 in fact vanishes. Instead, there is an
overpayment by more than P3 million, as shown in the following Schedules:
SCHEDULE 1: PN (1) drawdown amount on

P 5,000,000.00
6/29/89
Less: Interest deducted in advance (per
305,165.00
6/13/89 Disclosure Statement)
Net proceeds 4,694,835.00
Principal 5,000,000.00
Add:
Interest at 19.5%
p.a.
10/28/89-12/31/89 (5,000,000 x
173,630.14
19.5% x [65/365])
1/1/90-1/5/90 (5,000,000 x
13,356.16 186,986.30 186,986.30
19.5% x [5/365])
Amount due as of
5,186,986.30
1/5/90
Less: Payment on 1/5/90 (pro-rated
543,807.61 543,807.61
upon interest)
Balance (356,821.30) 4,643,178.70
Add:
Interest at 19.5%
p.a.
1/6/90-3/30/90 ([5,000,000-
208,370.59 208,370.59
356,821.30] x 19.5% x [84/365])
Amount due as of
4,851,549.29
3/30/90
163,182.85 163,182.85
upon interest)
Balance 45,187.75 4,688,366.44
Add:
Interest at 19.5%
p.a.
3/31/90-5/31/90 ([5,000,000-
153,797.34 153,797.34
356,821.30] x 19.5% x [62/365])
Amount due as of
198,985.09 4,842,163.79
5/31/90
199,806.42 199,806.42
upon interest)
Balance (821.33) 4,642,357.36
Add:
Interest at 19.5%
p.a.
6/1/90-6/29/90 ([5,000,000-
71,924.74 71,924.74
(356,821.30+821.33)] x 19.5% x [29/365])
Amount due as of 4,714,282.11
8
6/29/90
839,012.66 839,012.66
upon interest)
Balance (767,087.92) 3,875,269.44
Add:
Interest at 19.5% p.a.
6/30/90-12/31/90 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 19.5% x383,014.64
[185/365])
1/1/91-6/29/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 19.5% x 372,662.90
[180/365])
Interest at 12% p.a. upon
automatic conversion
6/30/91-8/8/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 12% x 50,962.45 806,639.99 806,639.99
[40/365])
Amount due as of 8/8/91 4,681,909.43
493,906.31 493,906.31
upon interest)
Balance 312,733.68 4,188,003.13
Add:
Interest at 12% p.a.
8/9/91-8/15/91 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 12% x 8,918.43 8,918.43
[7/365])
Amount due as of 8/15/91 321,652.11 4,196,921.55
86,593.37 86,593.37
upon interest)
Balance 235,058.74 4,110,328.18
Add:
8/16/91-11/29/91 ([5,000,000-
135,050.49 135,050.49
(356,821.30+821.33+767,087.92)] x 12% x [106/365])
Amount due as of
370,109.22 4,245,378.67
11/29/91
161,096.81 161,096.81
upon interest)
Balance 209,012.41 4,084,281.86
Add:
11/30/91-12/20/91 ([5,000,000-
26,755.28 26,755.28
(356,821.30+821.33+767,087.92)] x 12% x [21/365])
Amount due as of
235,767.70 4,111,037.14
12/20/91
162,115.78 162,115.78
upon interest)
Balance 73,651.92 3,948,921.37
Add:
12/21/91-12/31/91 ([5,000,000-
14,281.03
(356,821.30+821.33+767,087.92)] x 12% x [11/365])
1/1/92-2/26/92 ([5,000,000-
(356,821.30+821.33+767,087.92)] x 12% x 74,001.70 88,282.74 88,282.74
[57/365])
Amount due on PN (1) as of 2/26/92 161,934.66 P 4,037,204.10
SCHEDULE 2: PN (2) drawdown

P 2,700,000.00
amount on 9/1/89
Less: Interest deducted in advance (per 9/1/89
180,559.88
Disclosure Statement)
Net proceeds 2,519,440.12
Principal 2,700,000.00
Add:
Interest at 21.5%
p.a.
12/31/89 (2,700,000 x
1,590.41
21.5% x [1/365])
1/1/90-1/5/90 (2,700,000 x 7,952.05 9,542.47 9,542.47
9
21.5% x [5/365])
Amount due as of
2,709,542.47
1/5/90
27,752.12 27,752.12
upon interest)
Balance (18,209.65) 2,681,790.35
Add:
Interest at 21.5%
p.a.
1/6/90-3/30/90 ([2,700,000-
132,693.52 132,693.52
18,209.65] x 21.5% x [84/365])
Amount due as of
2,814,483.87
3/30/90
103,917.28 103,917.28
upon interest)
Balance 28,776.23 2,710,566.58
Add:
Interest at 21.5%
p.a.
3/31/90-5/31/90 ([2,700,000-
97,940.45 97,940.45
18,209.65] x 21.5% x [62/365])
Amount due as of
126,716.69 2,808,507.04
5/31/90
127,239.72 127,239.72
upon interest)
Balance (523.04) 2,681,267.31
Add:
Interest at 21.5%
p.a.
6/1/90-6/29/90 ([2,700,000-
45,801.92 45,801.92
(18,209.65+523.04)] x 21.5% x [29/365])
Amount due as of
2,727,069.24
6/29/90
534,286.14 534,286.14
upon interest)
Balance (488,484.22) 2,192,783.10
Add:
6/30/90-12/31/90 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 21.5% x238,953.28
[185/365])
1/1/91-8/8/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 21.5% x 284,160.66 523,113.94 523,113.94
[220/365])
Amount due as of 8/8/91 2,715,897.04
320,303.08 320,303.08
upon interest)
Balance 202,810.86 2,395,593.95
Add:
8/9/91-8/15/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 21.5% x 9,041.48 9,041.48
[7/365])
Amount due as of
211,852.33 2,404,635.43
8/15/91
57,033.69 57,033.69
upon interest)
Balance 154,818.64 2,347,601.74
Add:
8/16/91-9/1/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 21.5% x 21,957.87
[17/365])
9/2/91-11/29/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 12% x 64,161.43 86,119.30 86,119.30
[89/365])
Amount due as of 240,937.94 2,433,721.04
10
11/29/91
104,872.65 104,872.65
upon interest)
Balance 136,065.30 2,328,848.39
Add:
11/30/91-12/20/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 12% x 15,139.21 15,139.21
[21/365])
Amount due as of
151,204.51 2,343,987.61
12/20/91
103,969.45 103,969.45
upon interest)
Balance 47,235.07 2,240,018.16
Add:
12/21/91-12/31/91 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 12% x 7,930.06
[11/365])
1/1/92-2/26/92 ([2,700,000-
(18,209.65+523.04+488,484.22)] x 12% x 41,092.15 49,022.22 49,022.22
[57/365])
Amount due on PN (2) as of 2/26/92 96,257.28 P 2,289,040.38
SCHEDULE 3: PN (3) drawdown

P 300,000.00
amount on 9/6/89
Less: Interest deducted in advance (per 9/6/89
20,062.21
Disclosure Statement)
Net proceeds 279,937.79
Principal 300,000.00
Add:
Interest at 21.5%
p.a.
1/5/90 (300,000 x 21.5% x
176.71 176.71
[1/365])
Amount due as of 1/5/90 300,176.71
513.93 513.93
upon interest)
Balance (337.22) 299,662.78
Add:
Interest at 21.5%
p.a.
1/6/90-3/30/90 ([300,000-337.22] x
14,827.15 14,827.15
21.5% x [84/365])
Amount due as of
314,489.93
3/30/90
11,611.70 11,611.70
upon interest)
Balance 3,215.45 302,878.24
Add:
Interest at 21.5%
p.a.
3/31/90-5/31/90 ([300,000-337.22] x
10,943.85 10,943.85
21.5% x [62/365])
Amount due as of
14,159.30 313,822.08
5/31/90
14,217.74 14,217.74
upon interest)
Balance (58.44) 299,604.34
Add:
Interest at 21.5%
p.a.
6/1/90-6/29/90 ([300,000-
5,117.90 5,117.90
(337.22+58.44)] x 21.5% x [29/365])
Amount due as of
304,722.24
6/29/90
59,701.04 59,701.04
upon interest)
Balance (54,583.14) 245,021.20
11
Add:
6/30/90-12/31/90 ([300,000-
(337.22+58.44+54,583.14)] x 21.5% x 26,700.60
[185/365])
1/1/91-8/8/91 ([300,000-
(337.22+58.44+54,583.14)]] x 21.5% x 31,752.06 58,452.66 58,452.66
[220/365])
Amount due as of 8/8/91 303,473.86
35,790.61 35,790.61
upon interest)
Balance 22,662.05 267,683.25
Add:
8/9/91-8/15/91 ([300,000-
1,010.29 1,010.29
(337.22+58.44+54,583.14)]] x 21.5% x [7/365])
Amount due as of 8/15/91 23,672.34 268,693.54
6,372.93 6,372.93
upon interest)
Balance 17,299.41 262,320.61
Add:
8/16/91-9/6/91 ([300,000-
(337.22+58.44+54,583.14)]] x 21.5% x 3,175.21
[22/365])
9/7/91-11/29/91 ([300,000-
6,766.61 9,941.82 9,941.82
(337.22+58.44+54,583.14)]] x 12% x [84/365])
Amount due as of
27,241.23 272,262.43
11/29/91
11,857.24 11,857.24
upon interest)
Balance 15,383.98 260,405.18
Add:
11/30/91-12/20/91 ([300,000-
1,691.65 1,691.65
(337.22+58.44+54,583.14)]] x 12% x [21/365])
Amount due as of
17,075.64 262,096.84
12/20/91
11,741.35 11,741.35
upon interest)
Balance 5,334.29 250,355.49
Add:
12/21/91-12/31/91 ([300,000-
886.10
(337.22+58.44+54,583.14)]] x 12% x [11/365])
1/1/92-2/26/92 ([300,000-
4,591.63 5,477.73 5,477.73
(337.22+58.44+54,583.14)]] x 12% x [57/365])
Amount due on PN (3) as of 2/26/92 10,812.03 P 255,833.22
SCHEDULE 4: Application of Payments Upon Interest

Date Interest
Payable Pro-rated
1/5/90 PN (1) P 186,986.30 P 543,807.61
PN (2) 9,542.47 27,752.12
PN (3) 176.71 513.93
196,705.48 572,073.65
============== ==============
3/30/90 PN (1) 208,370.59 163,182.85
PN (2) 132,693.52 103,917.28
PN (3) 14,827.15 11,611.70
355,891.26 278,711.83
============== ===============
5/31/90 PN (1) 198,985.09 199,806.42
PN (2) 126,716.69 127,239.72
PN (3) 14,159.30 14,217.74
339,861.08 341,263.89
=============== ===============
6/29/90 PN (1) 71,924.74 839,012.66
12
PN (2) 45,801.92 534,286.14
PN (3) 5,117.90 59,701.04
122,844.56 1,432,999.84
=============== ===============
8/8/91 PN (1) 806,639.99 493,906.31
PN (2) 523,113.94 320,303.08
PN (3) 58,452.66 35,790.61
1,388,206.59 850,000.00
================ ================
8/15/91 PN (1) 321,652.11 86,593.37
PN (2) 211,852.33 57,033.69
PN (3) 23,672.34 6,372.93
557,176.79 150,000.00
================ ================
11/29/91 PN (1) 370,109.22 161,096.81
PN (2) 240,937.94 104,872.65
PN (3) 27,241.23 11,857.24
638,288.39 277,826.70
================ ================
12/20/91 PN (1) 235,767.70 162,115.78
PN (2) 151,204.51 103,969.45
PN (3) 17,075.64 11,741.35
P 404,047.85 P 277,826.57
============== ===============
In the preparation of the above-mentioned schedules, these basic legal principles were followed:
First, the payments were applied to debts that were already due. [155] Thus, when the first payment was made and applied on January 5, 1990, all
Promissory Notes were already due.
Second, payments of the principal were not made until the interests had been covered. [156] For instance, the first payment on January 15, 1990 had
initially been applied to all interests due on the notes, before deductions were made from their respective principal amounts. The resulting
decrease in interest balances served as the bases for subsequent pro-ratings.
Third, payments were proportionately applied to all interests that were due and of the same nature and burden. [157] This legal principle was the
rationale for the pro-rated computations shown on Schedule 4.
Fourth, since there was no stipulation on capitalization, no interests due and unpaid were added to the principal; hence, such interests did not earn
any additional interest.[158]The simple -- not compounded -- method of interest calculation[159] was used on all Notes until the date of public
auction.
In fine, under solutio indebiti[160] or payment by mistake,[161] there is no deficiency receivable in favor of PNB, but rather an excess claim or
surplus[162] payable by respondent; this excess should immediately be returned to petitioner-spouses or their assigns -- not to mention the
buildings and improvements[163] on and the fruits of the property -- to the end that no one may be unjustly enriched or benefited at the expense of
another.[164] Such surplus is in the amount of P3,686,101.52, computed as follows:
Total unpaid principal and interest on the promissory notes as of
February 26, 1992:
Drawdown on June 29, 1989
P 4,037,204.10
(Schedule 1)
Drawdown on September 1, 1989
2,289,040.38
(Schedule 2)
Drawdown on September 6, 1989
255,833.22
(Schedule 3)
6,582,077.70
Add: 1% attorney's fees 65,820.78
Total outstanding obligation 6,647,898.48
Less: Bid price 10,334,000.00
Excess P 3,686,101.52
Joint and Solidary Agreement. Contrary to the contention of the petitioner-spouses, their Joint and Solidary Agreement (JSA)[165] was indubitably
a surety, not a guaranty.[166] They consented to be jointly and severally liable with Petitioner NSBCI -- the borrower -- not only for the payment of
all sums due and payable in favor of respondent, but also for the faithful and prompt performance of all the terms and conditions
thereof.[167] Additionally, the corporate secretary of Petitioner NSBCI certified as early as February 23, 1989, that the spouses should act as such
surety.[168] But, their solidary liability should be carefully studied, not sweepingly assumed to cover all availments instantly.
First, the JSA was executed on August 31, 1989. As correctly adverted to by petitioners,[169] it covered only the Promissory Notes of P2,700,000
and P300,000 made after that date. The terms of a contract of suretyship undeniably determine the surety's liability[170] and cannot extend beyond
what is stipulated therein.[171] Yet, the total amount petitioner-spouses agreed to be held liable for was P7,700,000; by the time the JSA was
executed, the first Promissory Note was still unpaid and was thus brought within the JSA's ambit. [172]
Second, while the JSA included all costs, charges and expenses that respondent might incur or sustain in connection with the credit
13
documents,[173] only the interest was imposed under the pertinent Credit Agreements. Moreover, the relevant Promissory Notes had to be resorted
to for proper valuation of the interests charged.
Third, although the JSA, as a contract of adhesion, should be taken contra proferentum against the party who may have caused any ambiguity
therein, no such ambiguity was found. Petitioner-spouses, who agreed to be accommodation mortgagors,[174] can no longer be held individually
liable for the entire onerous obligation[175] because, as it turned out, it was respondent that still owed them.
To summarize, to give full force to the Truth in Lending Act, only the interest rates of 19.5 percent and 21.5 percent stipulated in the Promissory
Notes may be imposed by respondent on the respective availments. After 730 days, the portions remaining unpaid are automatically converted
into medium-term loans at the legal rate of 12 percent. In all instances, the simple method of interest computation is followed. Payments made by
petitioners are applied and pro-rated according to basic legal principles. Charges on penalty and insurance are eliminated, and 1 percent attorney's
fees imposed upon the total unpaid balance of the principal and interest as of the date of public auction. The P2 million deficiency claim therefore
vanishes, and a refund of P3,686,101.52 arises.
WHEREFORE, this Petition is hereby PARTLY GRANTED. The Decision of the Court of Appeals is AFFIRMED, with
the MODIFICATION that PNB is ORDERED to refund the sum of P3,686,101.52 representing the overcollection computed above, plus interest
thereon at the legal rate of six percent (6%) per annum from the filing of the Complaint until the finality of this Decision. After this Decision
becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction. No costs.
14
G.R. No. 148541 November 11, 2004
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
BONITA O. PEREZ and ALFREDO PEREZ, respondents.
CALLEJO, SR., J.:
This is a petition for review on certiorari seeking to reverse and set aside the Decision 1 of the Court of Appeals (CA) dated February 28, 2001,
and to reinstate the Decision of the Regional Trial Court (RTC), Makati City, Branch 145, in Civil Case No. 12057, as modified by trial court’s
Order dated June 11, 1993.
The Antecedents
On April 28, 1978, petitioner Development Bank of the Philippines (DBP) sent a letter to respondent Bonita Perez, informing the latter of the
approval of an industrial loan amounting to P214,000.00 for the acquisition of machinery and equipment and for working capital, and an
additional industrial loan amounting to P21,000.00 to cover unforeseen price escalation. 2
On May 18, 1978, the respondents were made to sign four promissory notes covering the total amount of the loan, P235,000.00. Three
promissory notes for P24,000.00, P48,000.00, and P142,000.00, respectively, were executed, totaling P214,000.00. These promissory notes were
all due on August 31, 1988.3 A fourth promissory note due on September 19, 1988 was, likewise, executed to cover the additional loan of
P21,000.00.4 The promissory notes were to be paid in equal quarterly amortizations and were secured by a mortgage contract covering real and
personal properties.5
On September 6, 1978, the petitioner sent a letter6 to the respondents informing them of the terms for the payment of the P214,000.00 industrial
loan. On November 8, 1978, the petitioner sent another letter7 to the respondents informing them about the terms and conditions of their
additional P21,000.00 industrial loan.
Due to the respondents' failure to comply with their amortization payments, the petitioner decided to foreclose the mortgages that secured the
obligation. However, in a Letter8 dated October 7, 1981, Mrs. Perez requested for a restructuring of their account due to difficulties they were
encountering in collecting receivables.
On April 1, 1982, the petitioner informed the respondents that it had approved the restructuring of their accounts. 9 The loan was restructured, and
on May 6, 1982, the respondents signed another promissory note in the amount of P231,000.00 at eighteen percent (18%) interest per annum,
payable quarterly at P12,553.27, over a period of ten years. The promissory note stated in part:
PROMISSORY NOTE
P231,000.00 Makati, Metro Manila, May 6, 1982
On or before May 7, 1992, for value received, I/we, jointly and severally, promise to pay the DEVELOPMENT BANK OF THE
PHILIPPINES, or order at its office at Makati, Metro Manila, Philippines, the sum of TWO HUNDRED THIRTY-ONE THOUSAND
PESOS (P231,000.00), Philippine Currency, with interest at the rate of EIGHTEEN per centum (18%) per annum. Before the date of
maturity, we hereby bind ourselves to make partial payments, the first payment to be made on August 7, 1982 and the subsequent
payments on the 7th day of every three (3) months thereafter, and each of all such payments shall be TWELVE THOUSAND FIVE
HUNDRED FIFTY-THREE and 27/100 PESOS (P12,553.27) which shall cover amortizations on the principal and interest at the
above-mentioned rate.
This loan shall be subject to penalty charges and additional interest as follows:
On loan with amortizations or portions thereof in arrears irrespective of age.
Additional interest at the basic loan interest rate per annum computed on total amortizations past due irrespective of age.
PLUS
Penalty charge of 8% per annum computed on total amortizations in arrears irrespective of age.
15
The DBP further reserves the right to increase, with notice to the mortgagor, the rate of interest on the loan as well as all other fees and
charges on loans and advances pursuant to such policy as it may adopt from time to time during the period of the loan; Provided that
the rate of interest on the loan shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the
Monetary Board; Provided, further, that the adjustment in the rate of interest shall take effect on or after the effectivity of the increase
or decrease in the maximum rate of interest.
In case of non-payment of the amount of this note or any portion of it on demand, when due, or any other amount or amounts due on
account of this note, the entire obligation shall become due and demandable, and if, for the enforcement of the payment thereof, the
DEVELOPMENT BANK OF THE PHILIPPINES, is constrained to entrust the case to its attorneys, I/we, jointly and severally, bind
myself/ourselves to pay for attorney's fees, as provided for in the mortgage contract, in addition to the legal fees and other incidental
expenses. In the event of foreclosure of the mortgage securing this note, I/we further bind myself/ourselves, jointly and severally, to
pay the deficiency , if any.
SIGNED IN THE PRESENCE OF:
illegible SGD. SGD.
illegible BONITA ANG ORDIALES ALFREDO PEREZ
(Bonita O. Perez)
This Promissory Note supersedes the Promissory Note dated May 18, 1978 and stands secured by a mortgage contract executed by the
above parties on the same date, subject to the following terms and conditions. 10
As stated in the promissory note, the first amortization was due on August 7, 1982, and the succeeding amortizations, every quarter thereafter.
However, the respondents made their first payment amounting to P15,000.00 11 only on April 20, 1983 or after the lapse of three quarters.12 Their
second payment, which should have been paid on November 7, 1982, was made on December 2, 1983 and only in the amount of P5,000.00. The
third payment was then made at the time when the ninth quarterly amortization should have been paid. After this, the respondents completely
stopped paying.13 The total payments they made after the restructure of the loan amounted to P35,000.00 only.14
This failure to meet the quarterly amortization of the loan prompted the petitioner to institute foreclosure proceedings on the mortgages. The sale
of the properties covered by the mortgage contract was scheduled on October 30, 1985. 15
On October 24, 1985, the respondents filed a Complaint16 for the nullification of the new promissory note with damages and preliminary
prohibitory injunction. The complaint alleged that the petitioner restructured the respondents’ obligation in bad faith by requiring them to sign
another promissory note for P231,000.00 without considering the total payments made on the loan amounting to P224,383.43. The respondents
claimed that the petitioner failed to explain to them how it had arrived at the amount of the restructured loan. The respondents also alleged that
the petitioner failed to furnish them with a disclosure statement as required by Rep. Act No. 3765, also known as the Truth in Lending Act, prior
to the consummation of the transaction. They averred that the interest imposed on the said transaction was usurious. They, likewise, alleged that
the new promissory note constituted a novation of the previous obligations.
In its answer, the petitioner denied the allegations and averred that the claim for violation of the disclosure requirement under Rep. Act No. 3765
was not within the jurisdiction of the RTC and was barred by prescription. By way of compulsory counterclaim, the petitioner prayed that the
respondents be ordered to pay their obligation, plus exemplary damages and costs. 17 During trial, the petitioner presented a Statement of Account
dated September 14, 1990, showing that the total amount of the obligation as of September 15, 1990 was P1,384,465.71. 18
On October 25, 1985, the trial court ordered the petitioner to desist from holding the public auction of the respondents’ properties. The trial court
issued an Order on April 25, 1986 to maintain the status quo.
In its Decision dated May 10, 1993, the court a quo upheld the validity of the new promissory note and ordered the respondents to pay their
obligation. The dispositive portion reads:
WHEREFORE, judgment is rendered dismissing the complaint for failure of plaintiffs to prove their causes of action by clear
preponderance of evidence, with costs against them.
The order issued on April 25, 1986, ordering the defendant Bank to maintain the status quo and suspending the auction sale, is hereby
set aside.
Defendant Bank's counterclaim is hereby granted, and plaintiffs are hereby ordered to pay the former the sum of One Million Three
Hundred Eighty-four Thousand Four Hundred Sixty-five Pesos and Seventy-one Centavos (P1,384,465.71), representing the latter's
obligation as of September 15, 1990, with interest thereon at the legal rate of twelve (12%) percent per annum pursuant to Sec. 2 of
16
CB Circular No. 905; (Sagrador vs. Valderrama, supra), from September 15, 1990 up to full payment of said sum. The other
counterclaim for exemplary damages is hereby dismissed.
SO ORDERED.19
Upon the petitioner’s motion for reconsideration, the trial court issued an order20 amending the dispositive portion of its decision by changing the
rate of interest to eighteen percent (18%) per annum.
Dissatisfied, the respondents appealed to the CA. On February 28, 2001, the CA rendered a decision, the dispositive portion of which reads:
WHEREFORE, premises considered, the Decision dated May 10, 1993, docketed as Civil Case No. 12057 by the Regional Trial Court
of Makati, Branch 145, is hereby MODIFIED in the sense that the amount of P1,384,465.71 as of September 1990 is SET ASIDE and
the formula mandated by Central Bank Circular No. 158 should be applied by the trial court in computing the total obligation and
liability of appellants. All the other parts of the assailed decision are AFFIRMED in toto.
SO ORDERED.21
The CA found that the respondents did not voluntarily sign the restructured promissory note as they were only forced to sign it for fear of having
their mortgaged property foreclosed by the bank. It ruled that the restructured promissory note which was prepared by the petitioner alone was a
contract of adhesion which violates the rule on mutuality of contracts.
Nonetheless, the CA held that the trial court should have used the formula prescribed by paragraph 3,22 Sec. 2(i), Central Bank (CB) Circular No.
158, Rules and Regulations Implementing Rep. Act No. 3765, in computing the total obligation of the respondents considering that Sec. 3(a)
thereof provides that it applies to any loans, mortgages, deeds of trust, advances and discounts. 23 The CA also held that since the loan is secured
by a mortgage contract, the eighteen percent (18%) interest rate was excessive and usurious under CB Circular No. 817. According to the
appellate court, CB Circular No. 905, series of 1982, simply suspended the effectivity of the Usury Law; it did not authorize either party to
unilaterally raise the interest without the other party's consent.24 Finally, the CA concluded that there was neither basis nor explanation as to how
the measly amount of P214,000.00 in 1972, restructured to P231,000.00 in 1982, ballooned to P1,384,465.71 as of September 15, 1990.25
Both parties moved to reconsider the said decision. The CA denied the said motions in a Resolution dated May 31, 2001.
The Present Petition
The petitioner raises the following grounds in the instant petition:
1. Whether or not the Honorable Court of Appeals had decided this instant case in a way not in accord with the spirit and intent of
Republic Act No. 3765, otherwise known as the Truth in Lending Act, when it declared that "the trial court should have applied the
formula provided by Central Bank Circular No. 158, series of 1963, as provided above to arrive at the total obligations of appellants
less the amounts paid by appellants as evidenced by the vouchers and receipts attached to the records;"
2. Whether or not the conclusion of the Honorable Court of Appeals stating that the private respondents did not voluntarily sign the
restructured promissory note is entirely grounded on speculations and/or surmises or conjectures;
3. Whether or not the Honorable Court of Appeals failed to notice certain relevant facts which if it had been considered would change
its finding that the restructured promissory note was prepared by the appellee Bank alone;
4. Whether or not the Honorable Court of Appeals failed to notice certain relevant facts which if it had been considered would change
its finding that the amount of P1,384,465.71 as of September 15, 1990 has neither basis at all nor any explanation how this amount
came to existence;
5. Whether or not the conclusion of the Honorable Court of Appeals stating that petitioner DBP failed to follow Central Bank Circular
No. 158 is grounded entirely on speculation and surmises or conjecture. And whether or not this finding is contradicted by another
finding of the same court; and
6. Whether or not this Honorable Court of Appeals committed grave abuse of discretion when it ruled that pursuant to Central Bank
Circular No. 817 the 18% interest per annum agreed upon by the parties in the restructured promissory note is usurious, and that the
same should be reduced to 12% being the legal rate of interest.26
In a nutshell, the issues in this case are as follows: (1) whether the new promissory note is voidable for not having been voluntarily signed by the
respondents and for being a contract of adhesion; (2) whether the interest rate agreed upon by the parties in the new promissory note is usurious;
17
(3) whether Central Bank Circular No. 158 should be applied in computing the total obligations of the respondents; and (4) the amount of the
total obligation of the respondents.
The petition is partly meritorious.
Anent the first issue, the petitioner points out that the respondents admitted to having signed the new promissory note. It avers that there was no
evidence on record showing that the signing of the new promissory note was attended by mistake, violence, intimidation, undue influence, or
fraud. The petitioner posits that the respondents’ claim of having been forced to sign the restructured note for fear of having their mortgaged
property foreclosed cannot serve as legal basis to conclude that the respondents did not voluntarily sign the new promissory note.27 The petitioner
maintains that a perusal of the evidence would reveal that the new promissory note was the result of the mutual agreement of the parties and, as
such, is not a contract of adhesion.28
On the other hand, the respondents argue that this is a question of fact which is not subject to review by this Court. According to the respondents,
the fact that the restructured loan proved disadvantageous to them belies the petitioner’s claim that they voluntarily signed the new promissory
note.
We agree with the petitioner.
In petitions for review on certiorari as a mode of appeal under Rule 45 of the Rules of Court, the petitioner can raise only questions of law – the
Supreme Court is not the proper venue to consider a factual issue as it is not a trier of facts. 29 A departure from the general rule may be warranted
where the findings of fact of the Court of Appeals are contrary to the findings and conclusions of the trial court, or when the same is unsupported
by the evidence on record.30
In the instant case, there was no evidence showing that the respondents signed the new promissory note through mistake, violence, intimidation,
undue influence, or fraud. The respondents merely alleged that they were forced to restructure their loan for fear of having their mortgaged
properties foreclosed. However, it is axiomatic that this would not amount to vitiated consent. The last paragraph of Article 1335 of the New
Civil Code specifically states that a threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate
consent. Foreclosure of mortgaged properties in case of default in payment of a debtor is a legal remedy afforded by law to a creditor. Hence, a
threat to foreclose the mortgage would not, per se, vitiate consent.
The CA noted that the petitioner prepared the new promissory note on its own and that the only participation of the respondents was to sign the
same. The CA concluded, therefore, that the new promissory note was a contract of adhesion.
A contract of adhesion is so-called because its terms are prepared by only one party while the other party merely affixes his signature signifying
his adhesion thereto.31 While we accede to the appellate court’s conclusion that the new promissory note was in the nature of a contract of
adhesion, we cannot fathom how this can further the respondents’ case. In discussing the consequences of a contract of adhesion, we held in Rizal
Commercial Banking Corporation v. Court of Appeals:32
It bears stressing that a contract of adhesion is just as binding as ordinary contracts. It is true that we have, on occasion, struck down
such contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the
alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing. Nevertheless, contracts of
adhesion are not invalid per se; they are not entirely prohibited. The one who adheres to the contract is in reality free to reject it
entirely; if he adheres, he gives his consent.33
On the second issue, the CA held that under CB Circular No. 817, if the loan is secured by a registered real estate, the interest of eighteen percent
(18%) is usurious. The petitioner, however, argues that usury has become legally inexistent with the promulgation of CB Circular No. 905.34 It
contends that the interest rate should be eighteen percent (18%), the interest rate they agreed upon. 35 For their part, the respondents argue that the
Central Bank engaged in self-legislation in enacting CB Circular No. 905.
We agree with the ruling of the CA. It is elementary that the laws in force at the time the contract was made generally govern the effectivity of its
provision.36 We note that the new promissory note was executed on May 6, 1982, prior to the effectivity of CB Circular No. 905 on January 1,
1983. At that time, The Usury Law, Act No. 2655, as amended by Presidential Decree No. 116, was still in force and effect.
Under the Usury Law, no person shall receive a rate of interest, including commissions, premiums, fines and penalties, higher than twelve percent
(12%) per annum or the maximum rate prescribed by the Monetary Board for a loan secured by a mortgage upon real estate the title to which is
duly registered.37
In this case, by specific provision in the new promissory note, the restructured loan continued to be secured by the same mortgage contract
executed on May 18, 1978 which covered real and personal properties of the respondents. We, therefore, find the eighteen percent (18%) interest
rate plus the additional interest and penalty charges of eighteen percent (18%) and eight percent (8%), respectively, to be highly usurious.
18
In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal debt still stands
and remains valid, but the stipulation as to the usurious interest is void. Consequently, the debt is to be considered without stipulation as to the
interest.38 In the absence of an express stipulation as to the rate of interest, the legal rate at twelve percent (12%) per annum shall be imposed.39
Neither is the contention of the respondents that the Central Bank engaged in self-legislation correct. As we held in First Metro Investment
Corporation v. Este Del Sol Mountain Reserve, Inc.: 40
… Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter's effectivity.
The illegality of usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal
another law. Thus, retroactive application of a Central Bank Circular cannot, and should not, be presumed. 41
On the third issue, the petitioner argues that CB Circular No. 158 does not prescribe a formula in computing a debtor's monetary obligation, but
merely provides for the formula in computing the simple annual rate. It contends that the amount of the debtor's obligation must be computed in
accordance with the interest rate, charges, and manner of computation agreed upon by the parties. 42
We agree. The total obligation of the respondents must be computed according to the terms and conditions agreed upon. The formula provided
under paragraph 3, Sec. 2(i), CB Circular No. 158 cannot be used in computing the total obligation of the respondents because it merely applies to
the computation of the simple annual rate. Simple annual rate is the uniform percentage which represents the ratio, on an annual basis, between
the finance charges and the amount to be financed.43 It is one of the items required to be disclosed under the Truth in Lending Act pursuant to the
State’s policy to protect its citizens from lack of awareness of the true cost of credit.44
Finally, we find that the records are insufficient to enable us to determine the total amount of the respondents’ obligation. It is not even clear how
much the respondents have already paid on the restructured loans and when such payments were made. The receipts presented in evidence by the
respondents only showed that they paid P15,000.00 on April 20, 1983 and P5,000.00 on December 2, 1983.45 On the other hand, Mr. Roberto
Balarao, who is assigned to the Traffic and Processing Department of the petitioner, testified that a third payment was made, but failed to state the
amount.46 Another witness, Carmen Chamen, an account officer of the petitioner, testified that after the restructuring of the account, the total
payment made was P35,000.00.47
Moreover, considering our previous conclusion that the interest rates prescribed under the new promissory note are usurious, the statement of
account presented by the petitioner is no longer pertinent. It must be stressed that such statement of account was arrived at based on the usurious
interest rates. Hence, the total amount of the obligation must necessarily be recomputed.
IN LIGHT OF ALL THE FOREGOING, the assailed Decision dated February 28, 2001 of the Court of Appeals and Order dated June 11, 1993
of the Regional Trial Court, Makati City, Branch 145, are AFFIRMED WITH MODIFICATION. The case is hereby REMANDED to the trial
court for determination of the total amount of the respondents' obligation according to the reduced interest rate of twelve percent (12%) per
annum.
19
G.R. No. 133107 March 25, 1999
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS and FELIPE LUSTRE, respondents.
KAPUNAN, J.:
A simple telephone call and an ounce of good faith on the part of petitioner could have prevented the present controversy.
On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, Inc. for which he made a down
payment of P164,620.00, the balance of the purchase price to be paid in 24 equal monthly installments. Private respondent thus issued 24
postdated checks for the amount of P14,976.00 each. The first was dated April 10, 1991; subsequent checks were dated every 10th day of each
succeeding month.
To secure the balance, private respondent executed a promissory note 1 and a contract of chattel mortgage 2 over the vehicle in favor of Toyota
Shaw, Inc. The contract of chattel mortgage, in paragraph 11 thereof, provided for an acceleration clause stating that should the mortgagor default
in the payment of any installment, the whole amount remaining unpaid shall become due. In addition, the mortgagor shall be liable for 25% of the
principal due as liquidated damages.
On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel mortgage to petitioner Rizal Commercial Banking
Corporation (RCBC).
All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and debited by RCBC from private respondent's account,
except for RCBC Check No. 279805 representing the payment for August 10, 1991, which was unsigned. Previously, the amount represented by
RCBC Check No. 279805 was debited from private respondent's account but was later recalled and re-credited, to him. Because of the recall, the
last two checks, dated February 10, 1993 and March 10, 1993, were no longer presented for payment. This was purportedly in conformity with
petitioner bank's procedure that once a client's account was forwarded to its account representative, all remaining checks outstanding as of the
date the account was forwarded were no longer presented for patent.
On the theory that respondent defaulted in his payments, the check representing the payment for August 10, 1991 being unsigned, petitioner, in a
letter dated January 21, 1993, demanded from private respondent the payment of the balance of the debt, including liquidated damages. The latter
refused, prompting petitioner to file an action for replevin and damages before the Pasay City Regional Trial Court (RTC). Private respondent, in
his Answer, interposed a counterclaim for damages.
After trial, the. RTC 3 rendered a decision disposing of the case as follows:
WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows:
I. The complaint; for lack of cause of action, is hereby DISMISSED and plaintiff RCBC is hereby ordered,
A. To accept the payment equivalent to the three checks amounting to a total

of P44,938.00, without interest.
B. To release/cancel the mortgage on the car . . . upon payment of the amount

of P44,938.00, without interest.
C. To pay the cost of suit.
II. On The Counterclaim.
A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as moral

damages.
B. RCBC to pay P100,000.00 as exemplary damages.
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty. Lustre is

not entitled to any fee for lawyering for himself.
20
All awards for damages are subject to payment of fees to be assessed by the Clerk of Court, RTC,
Pasay City.
SO ORDERED.
On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:
We . . . concur with the trial court's ruling that the Chattel Mortgage contract being a contract of adhesion — that is, one
wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely affixes his
signature or his "adhesion" thereto . . . — is to be strictly construed against appellant bank which prepared the form
Contract . . . Hence . . . paragraph 11 of the Chattel Mortgage contract [containing the acceleration clause] should be
construed to cover only deliberate and advertent failure on the part of the mortgagor to pay an amortization as it became
due in line with the consistent holding of the Supreme Court construing obscurities and ambiguities in the restrictive sense
against the drafter thereof . . . in the light of Article 1377 of the Civil Code.
In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee rested solely on the fact that the 5th
check issued by appellee . . . was recalled for lack of signature. However, the check was recalled only after the amount
covered thereby had been deducted from defendant-appellee's account, as shown by the testimony of plaintiff's own
witness Francisco Bulatao who was in charge of the preparation of the list and trial balances of bank customers . . . . The
"default" was therefore not a case of failure to pay, the check being sufficiently funded, and which amount was in fact
already debited [sic] from appellee's account by the appellant bank which subsequently re-credited the amount to
defendant-appelle's account for lack of signature. All these actions RCBC did on its own without notifying defendant until
sixteen (16) months later when it wrote its demand letter dated January 21, 1993.
Clearly, appellant bank was remiss in the performance, of its functions for it could have easily called the defendant's
attention to the lack of signature on the check and sent the check to or summoned, the latter to affix his signature. It is also
to be noted that the demand letter contains no explanation as to how defendant-appellee incurred arrearages in the amount
of P66,255.70, which is why defendant-appellee made a protest notation thereon.
Notably, all the other checks issued by the appellee dated subsequent to August 10, 1991 and dated earlier than the demand
letter, were duly encashed. This fact should have already prompted the appellant bank to review its action relative to the
unsigned check. . . . 4
We take exception to the application by both the trial and appellate courts of Article 1377 of the Civil Code, which states:
The interpretation of obscure words or stipulations in a contract shall not favor the party who caused
the obscurity.
It bears stressing that a contract of adhesion is just as binding as ordinary contracts. 5 It is true that we have, on occasion, struck down such
contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking
it or leaving it, completely deprived of the opportunity to bargain on equal footing. 6 Nevertheless, contracts of adhesion are not invalid per
se; 7 they are not entirely prohibited. 8 The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his
consent. 9
While ambiguities in a contract of adhesion are to be construed against the party that prepared the same, 10 this rule applies only if the stipulations
in such contract are obscure or ambiguous. If the terms thereof are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control. 11 In the latter case, there would be no need for construction. 12
Here, the terms of paragraph 11 of the Chattel Mortgage Contract 13 are clear. Said paragraph states:
11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest that may be due as provided in the
said promissory note, the whole amount remaining unpaid therein shall immediately become due and payable and the
mortgage on the property (ies) herein-above described may be foreclosed by the MORTGAGEE, or the MORTGAGEE
may take any other legal action to enforce collection of the obligation hereby secured, and in either case the
MORTGAGOR further agrees to pay the MORTGAGEE an additional sum of 25% of the principal due and unpaid, as
liquidated damages, which said sum shall become part thereof. The MORTGAGOR hereby waives reimbursement of the
amount heretofore paid by him/it to the MORTGAGEE.
The above terms leave no room for construction. All that is required is the application thereof.
Petitioner claims that private respondent's check representing the fifth installment was "not encashed," 14 such that the installment for August
1991 was not paid. By virtue of paragraph 11 above, petitioner submits that it "was justified in treating the entire balance of the obligation as due
and
21
demandable." 15 Despite demand by petitioner, however, private respondent refused to pay the balance of the debt. Petitioner, in sum imputes
delay on the part of private respondent.
We do not subscribe to petitioner's theory.
Art. 170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable for damages. The delay in the
performance of the obligation, however, must be either malicious or negligent. 16 Thus, assuming that private respondent was guilty of delay in the
payment of the value of unsigned check, private respondent cannot be held liable for damages. There is no imputation, much less evidence, that
private respondent acted with malice or negligence in failing to sign the check. Indeed, we agree with the Court of Appeals finding that such
omission was mere "in advertence" on the part of private respondent. Toyota salesperson Jorge Geronimo testified that he even verified whether
private respondent had signed all the checks and in fact returned three or four unsigned checks to him for signing:
Atty. Obispo:
After these receipts were issued, what else did you do about the transaction?
A: During our transaction with Atty. Lustre, I found out when he issued to me the 24 checks, I found
out 3 to 4 checks are unsigned and I asked him to signed these checks.
Atty. Obispo:
What did you do?
A: I asked him to sign the checks. After signing the checks, I reviewed again all the documents, after
I reviewed all the documents and found out that all are completed and the down payments was
completed, we realed to him the car. 17
Even when the checks were delivered to petitioner, it did not object to the unsigned check. In view of the lack of malice or negligence
on the part of private respondent, petitioner's blind and mechanical invocation of paragraph 11 of the contract of chattel mortgage was
unwarranted.
Petitioner's conduct, in the light of the circumstances of this case, can only be described as mercenary. Petitioner had already debited the value of
the unsigned check from private respondent's account only to re-credit it much later to him. Thereafter, petitioner encashed checks subsequently
dated, then abruptly refused to encash the last two. More than a year after the date of the unsigned check, petitioner, claiming delay and invoking
paragraph 11, demanded from private respondent payment of the value of said check and that of the last two checks, including liquidated
damages. As pointed out by the trial court, this whole controversy could have been avoided if only petitioner bothered to call up private
respondent and ask him to sign the check. Good faith not only in compliance with its contractual obligations, 18 but also in observance of the
standard in human relations, for every person "to act with justice, give everyone his due, and observe honesty and good faith." 19 behooved the
bank to do so.
Failing thus, petitioner is liable for damages caused to private respondent. 20 These include moral damages for the mental anguish, serious
anxiety, besmirched reputation, wounded feelings and social humiliation suffered by the latter. 21 The trial court found that private respondent
was:
[a] client who has shared transactions for over twenty years with a bank . . ..The shabby treatment given the defendant is
unpardonable since he was put to shame and embarrassment after the case was filed in Court. He is a lawyer in his own
right, married to another member of the bar. He sired children who are all professionals in their chosen field. He is known
to the community of golfers with whom he gravitates. Surely the filing of the case made defendant feel so bad and
bothered.
To deter others from emulating petitioner's callous example, we affirm the award of exemplary damages. 22 As exemplary damages are warranted,
so are attorney's fees. 23
We, however, find excessive the amount of damages awarded by the trial court in favor of private respondent with respect to his counterclaims
and, accordingly, reduce the same as follows:
(a) Moral damages — from P200,000.00 to P100,000.00
(b) Exemplary damages — from P100,000.00 to P75,000.00
(c) Attorney's fees — from P50,000.00 to P 30,000.00
22
WHEREFORE, subject to these modifications, the decision of the Court of Appeals is AFFIRMED.
23
G.R. No. 164968 July 3, 2009
GLORIA OCAMPO and TERESITA TAN, Petitioners,

vs.
LAND BANK OF THE PHILIPPINES, URDANETA, PANGASINAN BRANCH and EX OFFICIO PROVINCIAL SHERIFF OF
PANGASINAN, Respondents.
DECISION
DEL CASTILLO, J.:
This Petition for Review on Certiorari assails the Court of Appeals Decision1 dated July 21, 2004, in CA-G.R. CV No. 77683, which reversed
and set aside the March 18, 2002 Decision2 of the Regional Trial Court, Branch 45, Urdaneta City, Pangasinan, in Civil Case No. U-7095.
The facts, as culled from the records, follow.
In 1991, Gloria Ocampo and her daughter, Teresita Tan, obtained from the Land Bank of the Philippines a ₱10,000,000.00 3 loan (herein referred
to as quedan loan), which was released to them on the following dates: ₱3,996,000.00 on January 31, 1991, upon the issuance of promissory note
(PN) Nos. 91-038 and 98-039,4 to mature on July 30, 1991; ₱6,000,000.00, on April 5, 1991, upon the issuance of PN Nos. 91-054, 91-055 and
91-056,5 to mature on October 2, 1991.
Ocampo and Tan availed of the Quedan Financing Program for Grain Stocks of the Quedan and Rural Credit Guarantee
Corporation6 (Quedancor), whereby the latter guaranteed to pay the Land Bank their loan, upon maturity, in case of non-payment. Pursuant
thereto, they delivered to the Land Bank several grains warehouse receipts (quedans), and executed a Deed of Assignment/Contract of Pledge
covering 41,690 cavans of palay.7
The liability of Quedancor, however, was limited to eighty percent (80%) of the outstanding loan plus interests at the time of
maturity.8 Corollarily, the quedans delivered by Ocampo and Tan, as security, turned out to be insufficient. To address the matter, the Land Bank
wrote Ocampo a letter9 dated August 15, 1991, requiring her and Tan to give an additional security with respect to the (20%) percent unsecured
portion of the quedan loan.
Accordingly, Ocampo and Tan constituted a real estate mortgage10 over two parcels of unregistered land owned by Ocampo, as evidenced by Tax
Declaration (TD) Nos. 6958 and 695911 (subsequently canceled and replaced by TD No. 317-A).12 The mortgage was executed on September 6,
1991 and delivered by Ocampo and Tan to the Land Bank, together with the TDs and survey plan of the properties. Land Bank, in turn, registered
the mortgage with the Register of Deeds of Lingayen, Pangasinan.
Meanwhile, Ocampo filed with the RTC, Branch 49, Urdaneta, Pangasinan, a case for the registration of the subject properties, docketed as Land
Registration Case No. U-1116. Land Bank filed therein a Motion,13 praying for the RTC to take into consideration the mortgage over the
properties, and to register the same in Ocampo's name bearing the said encumbrance.
On August 15, 1991, Ocampo signed debit advices amounting to ₱100,000.00 as partial payment of the quedan loan. 14 After the maturity of the
remaining three (3) promissory notes on October 2, 1991, Ocampo failed to pay the balance for her quedan loan. Thus, the Land Bank filed with
Quedancor a claim for guarantee payment. It also filed with the RTC, Branch 46, Urdaneta, Pangasinan, a criminal case for estafa15 against
Ocampo for disposing the stocks of palay covered by the grains warehouse receipts, docketed as Criminal Case No. U-7373.
As regards the 20% portion of the quedan loan, Land Bank filed on March 27, 2000 a petition 16 for extrajudicial foreclosure of real estate
mortgage pursuant to Act No. 3135, as amended. On April 4, 2000, the Ex Officio Provincial Sheriff of Pangasinan issued a Notice of
Extrajudicial Sale,17 setting the sale at public auction on May 30, 2000, a copy of which was furnished to, and received by, Ocampo.
On May 25, 2000, Ocampo and Tan filed with the RTC a Complaint 18 for Declaration of Nullity and Damages with Application for a Writ of
Preliminary Injunction against the Land Bank of the Philippines and the Ex Officio Provincial Sheriff of Pangasinan, praying 19 that after due
notice and hearing on the merits, the RTC: (1) declare the deed of real estate mortgage null and void; (2) declare the extrajudicial foreclosure
proceedings and notice of extrajudicial sale, null and void; (3) make the writ of preliminary injunction permanent; and (4) order the defendants to
pay, jointly and severally, moral damages in an amount to be fixed by the RTC, plus attorney's fees, expenses of litigation, among others.
In their Complaint, Ocampo and Tan claimed that the real estate mortgage is a forgery, because Land Bank did not inform them that the
properties would be used to secure the payment of a ₱2,000,000.00 loan, which they never applied for, much less received its proceeds. They also
claimed that Tan could not have mortgaged the properties since she does not own the same.
During the trial,20 Ocampo narrated that, on August 29, 1991, she went to the Land Bank to apply for another loan amounting to ₱5,000,000.00,
but only ₱1,000,000.00 was approved. Not amenable to the said amount, she decided not to pursue her loan application. She further narrated that,
in order to facilitate her ₱5,000,000.00 loan application, she signed a document denominated as Real Estate Mortgage. She insisted, however, that
24
when she affixed her signature thereon, some portions were still in blank. 21 As for the quedan loan, she contended that she had fully paid the same
when she executed a Deed of Absolute Assignment 22 dated July 3, 1991 in favor of Quedancor.23 Such payment she made known to Land Bank
through a letter24 dated August 30, 1991.
In its Answer,25 Land Bank contended that Ocampo and Tan executed a Deed of Real Estate Mortgage dated September 6, 1991, knowing fully
well that the same would secure the 20% portion of their quedan loan, which was not guaranteed by Quedancor. They even submitted the TDs
covering the properties as well as the survey plan. Tan, on the other hand, signed, not as a co-owner of the properties, but in her capacity as a co-
borrower of the quedan loan.
Land Bank presented as its witness, Zenaida Dasig, the assigned account officer of Ocampo. Dasig testified 26 that Ocampo and Tan obtained a
₱10,000,000.00 quedan loan from the Land Bank, 80% of which was secured by quedan receipts. She stated that Ocampo was required to submit
an additional collateral for the 20% unsecured portion, which she did through the mortgage contract. As for Ocampo's claim of full payment of
the quedan loan, Land Bank insisted otherwise. It argued that the quedan loan was still not fully satisfied because it was not made a party to the
Deed of Absolute Assignment between Ocampo and Quedancor. Land Bank relayed its position on the matter through a letter 27 dated September
17, 1991 to Ocampo, wherein it acknowledged receipt of her August 30, 1991 letter and informed her of the subsisting balance in the quedan
loan.
On May 29, 2000, the RTC issued a Writ of Temporary Restraining Order, 28 effective for seventy-two (72) hours, to enjoin the Ex Officio
Provincial Sheriff from proceeding with the scheduled May 30, 2000 sale at public auction.
After the trial, the RTC rendered a Decision29 in favor of Ocampo and Tan, to wit:
WHEREFORE, in view of the foregoing, the Court renders judgment declaring the Real Estate Mortgage between the Plaintiffs and Defendant
[Land] Bank of the Philippines and signed by the Plaintiffs on September 6, 1991, null and void.30
Land Bank moved for reconsideration,31 but the RTC denied the same in its Order32 dated July 12, 2002.
Land Bank filed an appeal with the CA, which granted the same. Accordingly, it reversed the RTC and ordered the dismissal of the complaint.
The dispositive portion of the decision reads:
WHEREFORE, premises considered, the instant appeal is hereby GRANTED and the Decision dated March 18, 2002 of the Regional Trial
Court, Branch 45 of Urdaneta City, Pangasinan, is hereby REVERSED and SET ASIDE. The complaint is ordered DISMISSED.
SO ORDERED.33
Ocampo and Tan did not file a motion for reconsideration of the CA decision. Instead, they elevated the matter before the Court via the present
petition,34 which involves the following issues: (1) whether or not the deed of real estate mortgage was void; and (2) assuming that it was valid,
whether or not the loan was already extinguished.
The resolution of the first issue is factual in nature and calls for a review of the evidence already considered in the proceedings below. As a
general rule, the Court is not a trier of facts and does not normally undertake the re-examination of the evidence presented by the contending
parties during the trial of the case.35 Only errors of law are reviewable by the Supreme Court on petitions for review.36 However, this rule admits
of several exceptions, wherein We disregarded the aforesaid tenet and proceeded to review the findings of facts of the lower courts.37 Two
exceptions are present in this case, namely: (1) when the findings of facts are conflicting; and (2) when the findings of fact of the Court of
Appeals are contrary to those of the trial court.
Ocampo and Tan filed the complaint invoking the nullity of the real estate mortgage on the ground of forgery. To bolster their claim, they averred
that a physical examination of Ocampo's signature showed that the typewritten name "Gloria Ocampo" was superimposed, or it overlapped the
signature "Gloria Ocampo." They argued that this indicated that the signature "Gloria Ocampo" was affixed to the printed form of the deed before
the typewritten "Gloria Ocampo" was typed thereon. Such also confirmed the testimony of Ocampo that she was made to sign a blank form
before the typewritten parts thereof were typed.381avvphi1
Forgery is present when any writing is counterfeited by the signing of another’s name with intent to defraud. 39 Here, Ocampo admitted that she
had affixed her signature to a Deed of Real Estate Mortgage purportedly as a prefatory act to a ₱5,000,000.00 loan application. In her direct
examination,40 she testified as follows:
ATTY. TANOPO: DIRECT EXAMINATION
Q. Mrs. Ocampo, I show you here a Deed of Real Estate Mortgage purportedly executed by you and the Land Bank of the Philippines,
which has already been marked for purposes of identification as Exhibit "6" for the defendants, and I point to you a signature which
25
overlapped (sic) the typewritten name Gloria Ocampo, will you inform this Honorable Court, whose signature is that which overlaps
the typewritten name Gloria Ocampo?
A. That is my signature, sir.
ATTY. TANOPO:
Q. Now, in your complaint, you claim or alleged that this mortgage is a forgery, notwithstanding the fact that you admitted that the
signature overlapped the typewritten Gloria Ocampo is your signature. Kindly inform the court why is this a forgery?
A. Because they made me sign a blank form, sir.
Q. Why were you made to sign a blank form by the bank?
A. Because that was the procedure of the bank, letting them sign blank forms for the loan.
xxxx
COURT:
Q. Madam Witness, what do you mean by blank form? It would seem that the exhibit is not blank?
A. They showed us blank instrument for us to sign before we can obtain the loan, your Honor.
Q. You mean to say in blank form, the form is not filled up although there are printed statements, is that correct?
A. Yes, sir.
Corollarily, Ocampo's signature in the Deed of Real Estate Mortgage was not forged. We agree with the CA when it held that there is really no
reason to discuss forgery.41 Notably, Ocampo and Tan failed to present any evidence to disprove the genuineness or authenticity of their
signatures.42 A perusal of the Deed of Real Estate Mortgage dated September 6, 1991 revealed the signatures of Gloria Ocampo and Teresita Tan
as well as that of Zenaida Dasig and Julita Orpiano. On the acknowledgment portion were the names of Gloria Ocampo and Teresita Tan,
alongside their respective residence certificate numbers and the places and dates of issue, together with the name of Atty. Elmer Veloria, the
notary public.
It is well settled that a document acknowledged before a notary public is a public document that enjoys the presumption of regularity. It is a prima
facie evidence of the truth of the facts stated therein and a conclusive presumption of its existence and due execution. To overcome this
presumption, there must be presented evidence that is clear and convincing. Absent such evidence, the presumption must be upheld. In addition,
one who denies the due execution of a deed where one’s signature appears has the burden of proving that contrary to the recital in the jurat, one
never appeared before the notary public and acknowledged the deed to be a voluntary act. 43 We have also held that a notarized instrument is
admissible in evidence without further proof of its due execution and is conclusive as to the truthfulness of its contents, and has in its favor the
presumption of regularity.44
Ocampo denied having appeared before the notary public.45 When asked further by the RTC if she was certain, she replied that she cannot
remember if she had indeed appeared before the notary public.46 She also denied knowing Zenaida Dasig but she knew Julita Orpiano, who,
according to her, was in-charge of the loan in Land Bank.47 Contrary to Ocampo's claims, Dasig narrated that Ocampo signed the real estate
mortgage in the presence of the notary public48 because she was also present during that time.49 As Land Bank's account officer, Dasig was tasked
to evaluate loan applications and projects related thereto, for proposal as to viability and profitability, including the renewal of credit lines for
management approval. As such, she was not only vested with knowledge of banking procedures and practices, she was also acquainted with the
individuals who transact business with the Land Bank.
The real issue here is not so much on forgery, but on the fact that the Land Bank allegedly used the genuine signature of Ocampo in order to
make it appear that she had executed a real estate mortgage to secure a ₱2,000,000.00 loan. Ocampo maintained that when she signed the blank
form, she was led to believe by the Land Bank that such would be used to process her ₱5,000,000.00 loan application. She was, therefore,
surprised when she received a notice from the sheriff regarding the foreclosure of a mortgage over her properties.
Article 1338 of the Civil Code provides:
ART. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have agreed to.
26
Verily, fraud refers to all kinds of deception -- whether through insidious machination, manipulation, concealment or misrepresentation -- that
would lead an ordinarily prudent person into error after taking the circumstances into account. 50 The deceit employed must be serious. It must be
sufficient to impress or lead an ordinarily prudent person into error, taking into account the circumstances of each case. 51
Unfortunately, Ocampo was unable to establish clearly and precisely how the Land Bank committed the alleged fraud. She failed to convince Us
that she was deceived, through misrepresentations and/or insidious actions, into signing a blank form for use as security to her previous loan.
Quite the contrary, circumstances indicate the weakness of her submissions. The Court of Appeals aptly held that:
Granting, for the sake of argument, that appellant bank did not apprise the appellees of the real nature of the real estate mortgage, such stratagem,
deceit or misrepresentations employed by defendant bank are facts constitutive of fraud which is defined in Article 1338 of the Civil Code as that
insidious words or machinations of one of the contracting parties, by which the other is induced to enter into a contract which without them, he
would not have agreed to. When fraud is employed to obtain the consent of the other party to enter into a contract, the resulting contract is merely
a voidable contract, that is a valid and subsisting contract until annulled or set aside by a competent court. It must be remembered that an action to
declare a contract null and void on the ground of fraud must be instituted within four years from the date of discovery of fraud. In this case, it is
presumed that the appellees must have discovered the alleged fraud since 1991 at the time when the real estate mortgage was registered with the
Register of Deeds of Lingayen, Pangasinan. The appellees cannot now feign ignorance about the execution of the real estate mortgage.52
In fine, We hold that the Deed of Real Estate Mortgage was valid.
Anent the second issue, We also resolve the same against Ocampo and Tan and, consequently, hold that the loan obligation was not yet
extinguished.
Ocampo claimed that she had already paid the quedan loan when she assigned parcels of land covered by three (3) transfer certificates of title in
favor of Quedancor, as evidenced by the Deed of Absolute Assignment,53 to wit:
WHEREAS, the ASSIGNOR acknowledges to be justly indebted to the ASSIGNEE in the total sum of NINE MILLION NINE HUNDRED
NINETY-SIX THOUSAND ₱9,996,000.00 exclusive of interest charges.
WHEREAS, the ASSIGNOR, in full settlement thereof has voluntarily offered to assign and convey certain properties belonging to her and the
ASSIGNEE indicated his willingness to accept the same;
NOW, THEREFORE, for and in consideration of the sum of NINE MILLION NINE HUNDRED NINETY-SIX THOUSAND representing the
total obligation owing to the ASSIGNEE by the ASSIGNOR does hereby sede (sic), assign, transfer and convey in a manner absolute and
irrevocable in favor of the said ASSIGNEE the following property/ies free and clear of all liens and encumbrances, x x x
The essence of a contract of mortgage indebtedness is that a property has been identified or set apart from the mass of the property of the debtor-
mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of
payment.54 In the case before Us, the loan amount was established. It was also admitted that 80% was guaranteed by Quedancor, while the
remaining 20%, by the Deed of Real Estate Mortgage. Finally, the records show that Ocampo and Tan obtained the loan from the Land Bank and
it was the latter which released the loan proceeds.
We cannot countenance Ocampo's actions in order to justify her alleged full payment of the quedan loan. The loan was between her and the Land
Bank; yet, she did not include the latter as party to the Deed of Absolute Assignment, for the following reasons: that it was Quedancor which
collected from her and that, once, when she went to the Land Bank to pay her loan, the person she approached merely smiled at her.55 Her
justifications were flimsy and incredulous. Moreover, there are other evidence on record which she chose to ignore, showing her indebtedness to
the Land Bank, and not to Quedancor, to wit: (1) she delivered the TDs on her properties as well as the survey plan to the Land Bank; (2) the
mortgage was annotated on TD Nos. 6958 and 6959, and subsequently, on TD 317-A; (3) the Land Bank registered the mortgage with the
Register of Deeds of Lingayen, Pangasinan; (4) she used TD No. 317-A in her application for the registration of her properties before the
cadastral court; (5) the Land Bank even filed a motion in the land registration case so that the mortgage will be considered and noted as
encumbrance on the properties; and (6) she paid Land Bank, by way of debit advices, in the amount of ₱100,000.00.
All the above circumstances, notwithstanding, Ocampo hastily executed the Deed of Absolute Assignment and conveyed some of her properties
to Quedancor without prior notice to the Land Bank.
In the case of Vda. De Jayme v. Court of Appeals,56 We held that dacion en pago is the delivery and transmission of ownership of a thing by the
debtor to the creditor as an accepted equivalent of the performance of the obligation. Thus, it is a special mode of payment where the debtor
offers another thing to the creditor, who accepts it as equivalent of payment of an outstanding debt, which undertaking, in one sense, amounts to a
sale. As such, the essential elements are consent, object certain, and cause or consideration. In its modern concept, what actually takes place in
dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is
considered as the object of the contract of sale, while the debt is considered as the purchase price. In any case, common consent is an essential
prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or obligation.
The requisite consent is not present in this case, for as explained by the Court of Appeals:
27
x x x True, the plaintiffs-appellees executed a Deed of Assignment. But what does the said deed guarantee? The Deed of Assignment referred to
was entered into between Quedan [Guarantee] Fund Board and the plaintiffs-appellees. The appellant creditor bank, however, had no
participation, or much less, consented to the execution of the said deed of assignment. Hence, the deed of assignment cannot have the valid effect
of extinguishing the real estate mortgage or much less the quedan loan insofar as the creditor bank is concerned. Basic is the rule that in order to
have a valid payment, the payment shall be made to the person in whose favor the obligation is constituted, or his successor-in-interest, or any
person authorized to receive it. Why then did the plaintiff Gloria Ocampo assigned (sic) her properties to a guarantor and not directly to the
creditor bank? The pre-trial order will readily disclose that the Quedan [Guarantee] Fund Board is a mere guarantor or surety of 80% of the
quedan loan. Thus, even if the deed of assignment has the effect of a valid payment, we may reasonably conclude that the extinguishment is only
up to the extent of 80% of the quedan loan. Thus, it leaves the balance of 20% of the quedan loan which can be fully satisfied by the foreclosure
of the real estate mortgage.57
In a civil case, the burden of proof is on the plaintiff to establish his case through a preponderance of evidence. If he claims a right granted or
created by law, he must prove his claim by competent evidence.58 After considering the evidence presented by the parties, as well as their
arguments in their respective pleadings, We hold that petitioners Ocampo and Tan failed to sufficiently establish their cause of action.
Consequently, their complaint should have been dismissed by the RTC.
One more thing. Ocampo is a businesswoman and she had testified that she had availed of loans from other banks. The amount involved was not
a measly amount. Verily, she is expected to be acquainted with the banking procedures as regards to loan applications. With this premise, she
ought to have read the terms and conditions of the document that she was signing, especially so when, as claimed by her, there were still blank
spaces at that time when she affixed her signature thereon. Finally, We believe that she must also be familiar with the manner by which the loans
should be paid and settled; yet, that was not what happened here. The Court has always maintained its impartiality as early as in the case of Vales
v. Villa,59 and has warned litigants that:
x x x The law furnishes no protection to the inferior simply because he is inferior any more than it protects the strong because he is strong. The
law furnishes protection to both alike – to one no more or less than the other. It makes no distinction between the wise and the foolish, the great
and the small, the strong and the weak. The foolish may lose all they have to the wise; but that does not mean that the law will give it back to
them again. Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise investments, relieve
him from one-sided contracts, or annul the effects of foolish acts. x x x60
WHEREFORE, the Petition is DENIED. The Court of Appeals Decision dated July 21, 2004 in CA-G.R. CV No. 77683 is
hereby AFFIRMED. Costs against the petitioners.
28
G.R. No. 146942 April 22, 2003
CORAZON G. RUIZ, petitioner,

vs.
COURT OF APPEALS and CONSUELO TORRES, respondents.
PUNO, J.:
On appeal is the decision1 of the Court of Appeals in CA-G.R. CV No. 56621 dated 25 August 2000, setting aside the decision 2 of the trial court
dated 19 May 1997 and lifting the permanent injunction on the foreclosure sale of the subject lot covered by TCT No. RT-96686, as well as its
subsequent Resolution3 dated 26 January 2001, denying petitioner’s Motion for Reconsideration.
The facts of the case are as follows:
Petitioner Corazon G. Ruiz is engaged in the business of buying and selling jewelry. 4 She obtained loans from private respondent Consuelo
Torres on different occasions, in the following amounts: P100,000.00; P200,000.00; P300,000.00; and P150,000.00. 5 Prior to their maturity, the
loans were consolidated under one (1) promissory note dated March 22, 1995, which reads as follows:6
"P750,000.00 Quezon City, March 22, 1995

PROMISSORY NOTE
For value received, I, CORAZON RUIZ, as principal and ROGELIO RUIZ as surety in solidum, jointly and severally promise to pay
to the order of CONSUELO P. TORRES the sum of SEVEN HUNDRED FIFTY THOUSAND PESOS (P750,000.00) Philippine
Currency, to earn an interest at the rate of three per cent (3%) a month, for thirteen months, payable every _____ of the month, and to
start on April 1995 and to mature on April 1996, subject to renewal.
If the amount due is not paid on date due, a SURCHARGE of ONE PERCENT of the principal loan, for every month default, shall be
collected.
Remaining balance as of the maturity date shall earn an interest at the rate of ten percent a month, compounded monthly.
It is finally agreed that the principal and surety in solidum, shall pay attorney’s fees at the rate of twenty-five percent (25%) of the
entire amount to be collected, in case this note is not paid according to the terms and conditions set forth, and same is referred to a
lawyer for collection.
In computing the interest and surcharge, a fraction of the month shall be considered one full month.
In the event of an amicable settlement, the principal and surety in solidum shall reimburse the expenses of the plaintiff.
(Sgd.) Corazon Ruiz __________________

Principal Surety"
The consolidated loan of P750,000.00 was secured by a real estate mortgage on a 240-square meter lot in New Haven Village, Novaliches,
Quezon City, covered by Transfer Certificate of Title (TCT) No. RT-96686, and registered in the name of petitioner.7 The mortgage was signed
by Corazon Ruiz for herself and as attorney-in-fact of her husband Rogelio. It was executed on 20 March 1995, or two (2) days before the
execution of the subject promissory note.8
Thereafter, petitioner obtained three (3) more loans from private respondent, under the following promissory notes: (1) promissory note dated 21
April 1995, in the amount of P100,000.00;9 (2) promissory note dated May 23, 1995, in the amount of P100,000.00;10 and (3) promissory note
dated December 21, 1995, in the amount of P100,000.00. 11 These combined loans of P300,000.00 were secured by P571,000.00 worth of jewelry
pledged by petitioner to private respondent.12
From April 1995 to March 1996, petitioner paid the stipulated 3% monthly interest on the P750,000.00 loan, 13 amounting to P270,000.00.14 After
March 1996, petitioner was unable to make interest payments as she had difficulties collecting from her clients in her jewelry business.15
Due to petitioner’s failure to pay the principal loan of P750,000.00, as well as the interest payment for April 1996, private respondent demanded
payment not only of the P750,000.00 loan, but also of the P300,000.00 loan. 16 When petitioner failed to pay, private respondent sought the extra-
judicial foreclosure of the aforementioned real estate mortgage.17
On September 5, 1996, Acting Clerk of Court and Ex-Officio Sheriff Perlita V. Ele, Deputy Sheriff In-Charge Rolando G. Acal and Supervising
Sheriff Silverio P. Bernas issued a Notice of Sheriff’s Sale of subject lot. The public auction was scheduled on October 8, 1996.18
29
On October 7, 1996, one (1) day before the scheduled auction sale, petitioner filed a complaint with the RTC of Quezon City docketed as Civil
Case No. Q-96-29024, with a prayer for the issuance of a Temporary Restraining Order to enjoin the sheriff from proceeding with the foreclosure
sale and to fix her indebtedness to private respondent to P706,000.00. The computed amount of P706,000.00 was based on the aggregate loan of
P750,000.00, covered by the March 22, 1995 promissory note, plus the other loans of P300,000.00, covered by separate promissory notes, plus
interest, minus P571,000.00 representing the amount of jewelry pledged in favor of private respondent.19
The trial court granted the prayer for the issuance of a Temporary Restraining Order, 20 and on 29 October 1996, issued a writ of preliminary
injunction.21 In its Decision dated May 19, 1997, it ordered the Clerk of Court and Ex-Officio Sheriff to desist with the foreclosure sale of the
subject property, and it made permanent the writ of preliminary injunction. It held that the real estate mortgage is unenforceable because of the
lack of the participation and signature of petitioner’s husband. It noted that although the subject real estate mortgage stated that petitioner was
"attorney-in-fact for herself and her husband," the Special Power of Attorney was never presented in court during the trial. 22
The trial court further held that the promissory note in question is a unilateral contract of adhesion drafted by private respondent. It struck down
the contract as repugnant to public policy because it was imposed by a dominant bargaining party (private respondent) on a weaker party
(petitioner).23 Nevertheless, it held that petitioner still has an obligation to pay the private respondent. Private respondent was further barred from
imposing on petitioner the obligation to pay the surcharge of one percent (1%) per month from March 1996 onwards, and interest of ten percent
(10%) a month, compounded monthly from September 1996 to January 1997. Petitioner was thus ordered to pay the amount of P750,000.00 plus
three percent (3%) interest per month, or a total of P885,000.00, plus legal interest from date of [receipt of] the decision until the total amount of
P885,000.00 is paid.24
Aside from the foregoing, the trial court took into account petitioner’s proposal to pay her other obligations to private respondent in the amount of
P392,000.00.25
The trial court also recognized the expenses borne by private respondent with regard the foreclosure sale and attorney’s fees. As the notice of the
foreclosure sale has already been published, it ordered the petitioner to reimburse private respondent the amount of P15,000.00 plus attorney’s
fees of the same amount.26
Thus, the trial court computed petitioner’s obligation to private respondent, as follows:
Principal Loan ……………. P 750,000.00

Interest…………………….. 135,000.00
Other Loans………………. 392,000.00
Publication Fees……………. 15,000.00
Attorney’s Fees …………… 15,000.00
TOTAL…………………… P1,307,000.00
with legal interest from date of receipt of decision until payment of total amount of P1,307,000.00 has been made. 27
Private respondent’s motion for reconsideration was denied in an Order dated July 21, 1997.
Private respondent appealed to the Court of Appeals. The appellate court set aside the decision of the trial court. It ruled that the real estate
mortgage is valid despite the non-participation of petitioner’s husband in its execution because the land on which it was constituted is paraphernal
property of petitioner-wife. Consequently, she may encumber the lot without the consent of her husband. 28 It allowed its foreclosure since the
loan it secured was not paid.
Nonetheless, the appellate court declared as invalid the 10% compounded monthly interest 29 and the 10% surcharge per month stipulated in the
promissory notes dated May 23, 1995 and December 1, 1995,30 and so too the 1% compounded monthly interest stipulated in the promissory note
dated 21 April 1995,31 for being excessive, iniquitous, unconscionable, and contrary to morals. It held that the legal rate of interest of 12% per
annum shall apply after the maturity dates of the notes until full payment of the entire amount due, and that the only permissible rate of surcharge
is 1% per month, without compounding.32 The appellate court also granted attorney’s fees in the amount of P50,000.00, and not the stipulated
25% of the amount due, following the ruling in the case of Medel v. Court of Appeals.33
Now, before this Court, petitioner assigns the following errors:
(1) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE PROMISSORY NOTE OF
P750,000.00 IS NOT A CONTRACT OF ADHESION DESPITE THE CLEAR SHOWING THAT THE SAME IS A READY-
MADE CONTRACT PREPARED BY (THE) RESPONDENT CONSUELO TORRES AND DID NOT REFLECT THEIR TRUE
INTENTIONS AS IT WEIGHED HEAVILY IN FAVOR OF RESPONDENT AND AGAINST PETITIONER.
(2) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DECLARING THAT THE PROPERTY COVERED
BY THE SUBJECT DEED OF MORTGAGE OF MARCH 20, 1995 IS A PARAPHERNAL PROPERTY OF THE PETITIONER
AND NOT CONJUGAL EVEN THOUGH THE ISSUE OF WHETHER OR NOT THE MORTGAGED PROPERTY IS
PARAPHERNAL WAS NEVER RAISED, NOR DISCUSSED AND ARGUED BEFORE THE TRIAL COURT.
30
(3) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DISREGARDING THE TRIAL COURT’S
COMPUTATION OF THE ACTUAL OBLIGATIONS OF THE PETITIONER WITH (THE) RESPONDENT TORRES EVEN
THOUGH THE SAME IS BASED ON EVIDENCE SUBMITTED BEFORE IT.
The pertinent issues to be resolved are:
(1) Whether the promissory note of P750,000.00 is a contract of adhesion;
(2) Whether the real property covered by the subject deed of mortgage dated March 20, 1995 is paraphernal property of petitioner; and
(3) Whether the rates of interests and surcharges on the obligation of petitioner to private respondent are valid.
We hold that the promissory note in the case at bar is not a contract of adhesion. In Sweet Lines, Inc. vs. Teves,34 this Court discussed the nature
of a contract of adhesion as follows:
". . . there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such
contracts are called contracts of adhesion, because the only participation of the other party is the signing of his signature or his
‘adhesion’ thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this category.35
" . . . it is drafted only by one party, usually the corporation, and is sought to be accepted or adhered to by the other party . . . who
cannot change the same and who are thus made to adhere hereto on the ‘take it or leave it’ basis . . . " 36
In said case of Sweet Lines,37 the conditions of the contract on the 4 x 6 inches passenger ticket are in fine print. Thus we held:
" . . . it is hardly just and proper to expect the passengers to examine their tickets received from crowded/congested counters, more
often than not during rush hours, for conditions that may be printed thereon, much less charge them with having consented to the
conditions, so printed, especially if there are a number of such conditions in fine print, as in this case." 38
We further stressed in the said case that the questioned ‘Condition No. 14’ was prepared solely by one party which was the corporation, and the
other party who was then a passenger had no say in its preparation. The passengers have no opportunity to examine and consider the terms and
conditions of the contract prior to the purchase of their tickets.39
In the case at bar, the promissory note in question did not contain any fine print provision which could not have been examined by the petitioner.
Petitioner had all the time to go over and study the stipulations embodied in the promissory note. Aside from the March 22, 1995 promissory note
for P750,000.00, three other promissory notes of different dates and amounts were executed by petitioner in favor of private respondent. These
promissory notes contain similar terms and conditions, with a little variance in the terms of interests and surcharges. The fact that petitioner and
private respondent had entered into not only one but several loan transactions shows that petitioner was not in any way compelled to accept the
terms allegedly imposed by private respondent. Moreover, petitioner, in her complaint 40 dated October 7, 1996 filed with the trial court, never
claimed that she was forced to sign the subject note. Paragraph five of her complaint states:
"That on or about March 22, 1995 plaintiff was required by the defendant Torres to execute a promissory note consolidating her
unpaid principal loan and interests which said defendant computed to be in the sum of P750,000.00 . . ."
To be required is certainly different from being compelled. She could have rejected the conditions made by private respondent. As an experienced
businesswoman, she ought to understand all the conditions set forth in the subject promissory note. As held by this Court in Lee, et al. vs. Court
of Appeals, et al.,41 it is presumed that a person takes ordinary care of his concerns. 42 Hence, the natural presumption is that one does not sign a
document without first informing himself of its contents and consequences. This presumption acquires greater force in the case at bar where not
only one but several documents were executed at different times by petitioner in favor of private respondent.
II
We also affirm the ruling of the appellate court that the real property covered by the subject deed of mortgage is paraphernal property. The
property subject of the mortgage is registered in the name of "Corazon G. Ruiz, of legal age, married to Rogelio Ruiz, Filipinos." Thus, title is
registered in the name of Corazon alone because the phrase "married to Rogelio Ruiz" is merely descriptive of the civil status of Corazon and
should not be construed to mean that her husband is also a registered owner. Furthermore, registration of the property in the name of "Corazon G.
Ruiz, of legal age, married to Rogelio Ruiz" is not proof that such property was acquired during the marriage, and thus, is presumed to be
conjugal. The property could have been acquired by Corazon while she was still single, and registered only after her marriage to Rogelio Ruiz.
Acquisition of title and registration thereof are two different acts.43 The presumption under Article 116 of the Family Code that properties
acquired during the marriage are presumed to be conjugal cannot apply in the instant case. Before such presumption can apply, it must first be
established that the property was in fact acquired during the marriage. In other words, proof of acquisition during the marriage is a condition sine
31
qua non for the operation of the presumption in favor of conjugal ownership. 44 No such proof was offered nor presented in the case at bar. Thus,
on the basis alone of the certificate of title, it cannot be presumed that said property was acquired during the marriage and that it is conjugal
property. Since there is no showing as to when the property in question was acquired, the fact that the title is in the name of the wife alone is
determinative of its nature as paraphernal, i.e., belonging exclusively to said spouse.45 The only import of the title is that Corazon is the owner of
said property, the same having been registered in her name alone, and that she is married to Rogelio Ruiz. 46
III
We now resolve the issue of whether the rates of interests and surcharges on the obligation of petitioner to private respondent are legal.
The four (4) unpaid promissory notes executed by petitioner in favor of private respondent are in the following amounts and maturity dates:
(1) P750,000.00, dated March 22, 1995 matured on April 21, 1996;
(2) P100,000.00, dated April 21, 1995 matured on August 21, 1995;
(3) P100,000.00, dated May 23, 1995 matured on November 23, 1995; and
(4) P100,000.00, dated December 21, 1995 matured on March 1, 1996.
The P750,000.00 promissory note dated March 22, 1995 has the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity date;
(2) 10% compounded monthly interest on the remaining balance at maturity date;
(3) 1% surcharge on the principal loan for every month of default; and
(4) 25% attorney’s fees.
The P100,000.00 promissory note dated April 21, 1995 has the following provisions:
(2) 10% monthly interest on the remaining balance at maturity date;
(3) 1% compounded monthly surcharge on the principal loan for every month of default; and
The two (2) other P100,000.00 promissory notes dated May 23, 1995 and December 1, 1995 have the following provisions:
(2) 10% compounded monthly interest on the remaining balance at maturity date;
(3) 10% surcharge on the principal loan for every month of default; and
We affirm the ruling of the appellate court, striking down as invalid the 10% compounded monthly interest, the 10% surcharge per month
stipulated in the promissory notes dated May 23, 1995 and December 1, 1995, and the 1% compounded monthly interest stipulated in the
promissory note dated April 21, 1995. The legal rate of interest of 12% per annum shall apply after the maturity dates of the notes until full
payment of the entire amount due. Also, the only permissible rate of surcharge is 1% per month, without compounding. We also uphold the
award of the appellate court of attorney’s fees, the amount of which having been reasonably reduced from the stipulated 25% (in the March 22,
1995 promissory note) and 10% (in the other three promissory notes) of the entire amount due, to a fixed amount of P50,000.00. However, we
equitably reduce the 3% per month or 36% per annum interest present in all four (4) promissory notes to 1% per month or 12% per annum
interest.
32
The foregoing rates of interests and surcharges are in accord with Medel vs. Court of Appeals,47 Garcia vs. Court of Appeals,48 Bautista vs. Pilar
Development Corporation,49 and the recent case of Spouses Solangon vs. Salazar.50 This Court invalidated a stipulated 5.5% per month or 66%
per annum interest on a P500,000.00 loan in Medel51 and a 6% per month or 72% per annum interest on a P60,000.00 loan in Solangon52 for
being excessive, iniquitous, unconscionable and exorbitant. In both cases, we reduced the interest rate to 12% per annum. We held that while the
Usury Law has been suspended by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a loan agreement have
been given wide latitude to agree on any interest rate, still stipulated interest rates are illegal if they are unconscionable. Nothing in the said
circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging
of their assets.53 On the other hand, in Bautista vs. Pilar Development Corp.,54 this Court upheld the validity of a 21% per annum interest on a
P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained the agreement of the parties to a 24% per annum interest on an P8,649,250.00
loan. It is on the basis of these cases that we reduce the 36% per annum interest to 12%. An interest of 12% per annum is deemed fair and
reasonable. While it is true that this Court invalidated a much higher interest rate of 66% per annum in Medel55 and 72% in Solangon56 it has
sustained the validity of a much lower interest rate of 21% in Bautista57 and 24% in Garcia.58 We still find the 36% per annum interest rate in the
case at bar to be substantially greater than those upheld by this Court in the two (2) aforecited cases.
The 1% surcharge on the principal loan for every month of default is valid. This surcharge or penalty stipulated in a loan agreement in case of
default partakes of the nature of liquidated damages under Art. 2227 of the New Civil Code, and is separate and distinct from interest
payment.59 Also referred to as a penalty clause, it is expressly recognized by law. It is an accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. 60 The obligor would then be bound to pay the stipulated amount of indemnity without the
necessity of proof on the existence and on the measure of damages caused by the breach. 61 Although the courts 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 if it is iniquitous or unconscionable. 62 In the instant case, the 10%
surcharge per month stipulated in the promissory notes dated May 23, 1995 and December 1, 1995 was properly reduced by the appellate court.
In sum, petitioner shall pay private respondent the following:
1. Principal of loan under promissory note dated March 22, 1995 P750,000.00
a. 1% interest per month on principal from March 22, 1995 until fully paid,
less P270,000.00 paid by petitioner as interest from April 1995 to March
1996
b. 1% surcharge per month on principal from May 1996 until fully paid
2. Principal of loan under promissory note dated April 21, 1995 P100,000.00
a. 1% interest per month on principal from April 21, 1995 until fully paid
b. 1% surcharge per month on principal from September 1995 until fully

paid
3. Principal of loan under promissory note dated May 23, 1995 P100,000.00
a. 1% interest per month on principal from May 23, 1995 until fully paid
b. 1% surcharge per month on principal from December 1995 until fully

paid
4. Principal of loan under promissory note dated December 1, 1995 P100,000.00
a. 1% interest per month on principal from December 1, 1995 until fully

paid
b. 1% surcharge per month on principal from April 1996 until fully paid
5. Attorney’s fees P 50,000.00

Hence, since the mortgage is valid and the loan it secures remains unpaid, the foreclosure proceedings may now proceed.
IN VIEW WHEREOF, the appealed Decision of the Court of Appeals is AFFIRMED, subject to the MODIFICATION that the interest rate of
36% per annum is ordered reduced to 12 % per annum.
33
G.R. No. 192986 January 15, 2013
ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER, Petitioners,

vs.
BANGKO SENTRAL MONETARY BOARD, represented by its Chairman, GOVERNOR ARMANDO M. TETANGCO, JR., and its
incumbent members: JUANITA D. AMATONG, ALFREDO C. ANTONIO, PETER FA VILA, NELLY F. VILLAFUERTE, IGNACIO
R. BUNYE and CESAR V. PURISIMA, Respondents.
DECISION
REYES, J.:
Petitioners, claiming that they are raising issues of transcendental importance to the public, filed directly with this Court this Petition for
Certiorari under Rule 65 of the 1997 Rules of Court, seeking to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB),
replacing the Central Bank Monetary Board (CB-MB) by virtue of Republic Act (R.A.) No. 7653, has no authority to continue enforcing Central
Bank Circular No. 905,1 issued by the CB-MB in 1982, which "suspended" Act No. 2655, or the Usury Law of 1916.
Factual Antecedents
Petitioner "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock corporation organized to engage in pro bono concerns and
activities relating to money lending issues. It was incorporated on July 9, 2010, 2 and a month later, it filed this petition, joined by its founder and
president, Eduardo B. Olaguer, suing as a taxpayer and a citizen.
R.A. No. 265, which created the Central Bank (CB) of the Philippines on June 15, 1948, 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.
Section 109 of R.A. No. 265 reads:
Sec. 109. Interest Rates, Commissions and Charges. — The Monetary Board may fix the maximum rates of interest which banks may pay on
deposits and on other obligations.
The Monetary Board may, within the limits prescribed in the Usury Law fix the maximum rates of interest which banks may charge for different
types of loans and for any other credit operations, or may fix the maximum differences which may exist between the interest or rediscount rates
of the Central Bank and the rates which the banks may charge their customers if the respective credit documents are not to lose their eligibility for
rediscount or advances in the Central Bank.
Any modifications in the maximum interest rates permitted for the borrowing or lending operations of the banks shall apply only to future
operations and not to those made prior to the date on which the modification becomes effective.
In order to avoid possible evasion of maximum interest rates set by the Monetary Board, the Board may also fix the maximum rates that banks
may pay to or collect from their customers in the form of commissions, discounts, charges, fees or payments of any sort. (Underlining ours)
On March 17, 1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the CB-MB authority to prescribe different
maximum rates of interest which may be imposed for a loan or renewal thereof or the forbearance of any money, goods or credits, provided that
the changes are effected gradually and announced in advance. Thus, Section 1-a of Act No. 2655 now reads:
Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the
forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions:
Provided, That changes in such rate or rates may be effected gradually on scheduled dates announced in advance.
In the exercise of the authority herein granted the Monetary Board may prescribe higher maximum rates for loans of low priority, such as
consumer loans or renewals thereof as well as such loans made by pawnshops, finance companies and other similar credit institutions although
the rates prescribed for these institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe different maximum
rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans of financial intermediaries. (Underlining and
emphasis ours)
In its Resolution No. 2224 dated December 3, 1982, 3 the CB-MB issued CB Circular No. 905, Series of 1982, effective on January 1, 1983.
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, to wit:
Sec. 1. 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. (Underscoring and emphasis ours)
34
The Circular then went on to amend Books I to IV of the CB’s "Manual of Regulations for Banks and Other Financial Intermediaries" (Manual of
Regulations) by removing the applicable ceilings on specific interest rates. Thus, Sections 5, 9 and 10 of CB Circular No. 905 amended Book I,
Subsections 1303, 1349, 1388.1 of the Manual of Regulations, by removing the ceilings for interest and other charges, commissions, premiums,
and fees applicable to commercial banks; Sections 12 and 17 removed the interest ceilings for thrift banks (Book II, Subsections 2303, 2349);
Sections 19 and 21 removed the ceilings applicable to rural banks (Book III, Subsection 3152.3-c); and, Sections 26, 28, 30 and 32 removed the
ceilings for non-bank financial intermediaries (Book IV, Subsections 4303Q.1 to 4303Q.9, 4303N.1, 4303P). 4
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.
The repealing clause thereof, Section 135, reads:
Sec. 135. Repealing Clause. — Except as may be provided for in Sections 46 and 132 of this Act, Republic Act No. 265, as amended, the
provisions of any other law, special charters, rule or regulation issued pursuant to said Republic Act No. 265, as amended, or parts thereof, which
may be inconsistent with the provisions of this Act are hereby repealed. Presidential Decree No. 1792 is likewise repealed.
Petition for Certiorari
To justify their skipping the hierarchy of courts and going directly to this Court to secure a writ of certiorari, petitioners contend that the
transcendental importance of their Petition can readily be seen in the issues raised therein, to wit:
a) Whether under R.A. No. 265 and/or P.D. No. 1684, the CB-MB had the statutory or constitutional authority to prescribe the
maximum rates of interest for all kinds of credit transactions and forbearance of money, goods or credit beyond the limits prescribed
in the Usury Law;
b) If so, 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;
c) Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB Circular No. 905.5
Petitioners attached to their petition copies of several Senate Bills and Resolutions of the 10th Congress, which held its sessions from 1995 to
1998, calling for investigations by the Senate Committee on Banks and Financial Institutions into alleged unconscionable commercial rates of
interest imposed by these entities. Senate Bill (SB) Nos. 37 6 and 1860,7 filed by Senator Vicente C. Sotto III and the late Senator Blas F. Ople,
respectively, sought to amend Act No. 2655 by fixing the rates of interest on loans and forbearance of credit; Philippine Senate Resolution (SR)
No. 1053,8 10739 and 1102,10 filed by Senators Ramon B. Magsaysay, Jr., Gregorio B. Honasan and Franklin M. Drilon, respectively, urged the
aforesaid Senate Committee to investigate ways to curb the high commercial interest rates then obtaining in the country; Senator Ernesto Maceda
filed SB No. 1151 to prohibit the collection of more than two months of advance interest on any loan of money; and Senator Raul Roco filed SR
No. 114411 seeking an investigation into an alleged cartel of commercial banks, called "Club 1821", reportedly behind the regime of high interest
rates. The petitioners also attached news clippings12 showing that in February 1998 the banks’ prime lending rates, or interests on loans to their
best borrowers, ranged from 26% to 31%.
Petitioners contend that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-MB was authorized only to prescribe or set the
maximum rates of interest for a loan or renewal thereof or for the forbearance of any money, goods or credits, and to change such rates whenever
warranted by prevailing economic and social conditions, the changes to be effected gradually and on scheduled dates; that nothing in P.D. No.
1684 authorized the CB-MB to lift or suspend the limits of interest on all credit transactions, when it issued CB Circular No. 905. They further
insist that under Section 109 of R.A. No. 265, the authority of the CB-MB was clearly only to fix the banks’ maximum rates of interest, but
always within the limits prescribed by the Usury Law.
Thus, according to petitioners, CB Circular No. 905, which was promulgated without the benefit of any prior public hearing, is void because it
violated Article 5 of the New Civil Code, which provides that "Acts executed against the provisions of mandatory or prohibitory laws shall be
void, except when the law itself authorizes their validity."
They further claim that just weeks after the issuance of CB Circular No. 905, the benchmark 91-day Treasury bills (T-bills),13 then known as
"Jobo" bills14 shot up to 40% per annum, as a result. The banks immediately followed suit and re-priced their loans to rates which were even
higher than those of the "Jobo" bills. Petitioners thus assert that CB Circular No. 905 is also unconstitutional in light of Section 1 of the Bill of
Rights, which commands that "no person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied
the equal protection of the laws."
Finally, petitioners point out that R.A. No. 7653 did not re-enact a provision similar to Section 109 of R.A. No. 265, and therefore, in view of the
repealing clause in Section 135 of R.A. No. 7653, the BSP-MB has been stripped of the power either to prescribe the maximum rates of interest
which banks may charge for different kinds of loans and credit transactions, or to suspend Act No. 2655 and continue enforcing CB Circular No.
905.
Ruling
35
The petition must fail.
A. The Petition is procedurally infirm.
The decision on whether or not to accept a petition for certiorari, as well as to grant due course thereto, is addressed to the sound discretion of the
court.15 A petition for certiorari being an extraordinary remedy, the party seeking to avail of the same must strictly observe the procedural rules
laid down by law, and non-observance thereof may not be brushed aside as mere technicality. 16
As provided in Section 1 of Rule 65, a writ of certiorari is directed against a tribunal exercising judicial or quasi-judicial functions.17 Judicial
functions are exercised by a body or officer clothed with authority to determine what the law is and what the legal rights of the parties are with
respect to the matter in controversy. Quasi-judicial function is a term that applies to the action or discretion of public administrative officers or
bodies given the authority to investigate facts or ascertain the existence of facts, hold hearings, and draw conclusions from them as a basis for
their official action using discretion of a judicial nature.18
The CB-MB (now BSP-MB) was created to perform executive functions with respect to the establishment, operation or liquidation of banking
and credit institutions, and branches and agencies thereof.19 It does not perform judicial or quasi-judicial functions. Certainly, the issuance of CB
Circular No. 905 was done in the exercise of an executive function. Certiorari will not lie in the instant case.20
B. Petitioners have no locus standi to file the Petition
Locus standi is defined as "a right of appearance in a court of justice on a given question." In private suits, Section 2, Rule 3 of the 1997 Rules of
Civil Procedure provides that "every action must be prosecuted or defended in the name of the real party in interest," who is "the party who stands
to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit." Succinctly put, a party’s standing is based on
his own right to the relief sought.21
Even in public interest cases such as this petition, the Court has generally adopted the "direct injury" test that the person who impugns the validity
of a statute must have "a personal and substantial interest in the case such that he has sustained, or will sustain direct injury as a result."22 Thus,
while petitioners assert a public right to assail CB Circular No. 905 as an illegal executive action, it is nonetheless required of them to make out a
sufficient interest in the vindication of the public order and the securing of relief. It is significant that in this petition, the petitioners do not allege
that they sustained any personal injury from the issuance of CB Circular No. 905.
Petitioners also do not claim that public funds were being misused in the enforcement of CB Circular No. 905. In Kilosbayan, Inc. v.
Morato,23 involving the on-line lottery contract of the PCSO, there was no allegation that public funds were being misspent, which according to
the Court would have made the action a public one, "and justify relaxation of the requirement that an action must be prosecuted in the name of the
real party-in-interest." The Court held, moreover, that the status of Kilosbayan as a people’s organization did not give it the requisite personality
to question the validity of the contract. Thus:
Petitioners do not in fact show what particularized interest they have for bringing this suit. It does not detract from the high regard for petitioners
as civic leaders to say that their interest falls short of that required to maintain an action under the Rule 3, Sec. 2.24
C. The Petition raises no issues of transcendental importance.
In the 1993 case of Joya v. Presidential Commission on Good Government, 25 it was held that no question involving the constitutionality or
validity of a law or governmental act may be heard and decided by the court unless there is compliance with the legal requisites for judicial
inquiry, namely: (a) that the question must be raised by the proper party; (b) that there must be an actual case or controversy; (c) that the question
must be raised at the earliest possible opportunity; and (d) that the decision on the constitutional or legal question must be necessary to the
determination of the case itself.
In Prof. David v. Pres. Macapagal-Arroyo,26 the Court summarized the requirements before taxpayers, voters, concerned citizens, and legislators
can be accorded a standing to sue, viz:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity of the election law in question;
(4) for concerned citizens, there must be a showing that the issues raised are of transcendental importance which must be settled early;
and
(5) for legislators, there must be a claim that the official action complained of infringes upon their prerogatives as legislators.
36
While the Court may have shown in recent decisions a certain toughening in its attitude concerning the question of legal standing, it has
nonetheless always made an exception where the transcendental importance of the issues has been established, notwithstanding the petitioners’
failure to show a direct injury.27 In CREBA v. ERC,28 the Court set out the following instructive guides as determinants on whether a matter is of
transcendental importance, namely: (1) the character of the funds or other assets involved in the case; (2) the presence of a clear case of disregard
of a constitutional or statutory prohibition by the public respondent agency or instrumentality of the government; and (3) the lack of any other
party with a more direct and specific interest in the questions being raised. Further, the Court stated in Anak Mindanao Party-List Group v. The
Executive Secretary29 that the rule on standing will not be waived where these determinants are not established.
In the instant case, there is no allegation of misuse of public funds in the implementation of CB Circular No. 905. Neither were borrowers who
were actually affected by the suspension of the Usury Law joined in this petition. Absent any showing of transcendental importance, the petition
must fail.
More importantly, the Court notes that the instant petition adverted to the regime of high interest rates which obtained at least 15 years ago, when
the banks’ prime lending rates ranged from 26% to 31%, 30 or even 29 years ago, when the 91-day Jobo bills reached 40% per annum. In contrast,
according to the BSP, in the first two (2) months of 2012 the bank lending rates averaged 5.91%, which implies that the banks’ prime lending
rates were lower; moreover, deposit interests on savings and long-term deposits have also gone very low, averaging 1.75% and 1.62%,
respectively.31
Judging from the most recent auctions of T-bills, the savings rates must be approaching 0%.1âwphi1 In the auctions held on November 12, 2012,
the rates of 3-month, 6-month and 1-year T-bills have dropped to 0.150%, 0.450% and 0.680%, respectively.32 According to Manila Bulletin, this
very low interest regime has been attributed to "high liquidity and strong investor demand amid positive economic indicators of the country."33
While the Court acknowledges that cases of transcendental importance demand that they be settled promptly and definitely, brushing aside, if we
must, technicalities of procedure,34 the delay of at least 15 years in the filing of the instant petition has actually rendered moot and academic the
issues it now raises.
For its part, BSP-MB maintains that the petitioners’ allegations of constitutional and statutory violations of CB Circular No. 905 are really mere
challenges made by petitioners concerning the wisdom of the Circular. It explains that it was in view of the global economic downturn in the
early 1980’s that the executive department through the CB-MB had to formulate policies to achieve economic recovery, and among these policies
was the establishment of a market-oriented interest rate structure which would require the removal of the government-imposed interest rate
ceilings.35
D. 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, 36 citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury
Law but simply suspended the latter’s effectivity;"37 that "a CB Circular cannot repeal a law, [for] only a law can repeal another law;" 38 that "by
virtue of CB Circular No. 905, the Usury Law has been rendered ineffective;"39 and "Usury has been legally non-existent in our jurisdiction.
Interest can now be charged as lender and borrower may agree upon."40
In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc.41 cited in DBP v. Perez,42 we also belied the contention that the CB was
engaged in self-legislation. Thus:
Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter’s effectivity. The illegality of
usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law. x x x.43
In PNB v. Court of Appeals,44 an escalation clause in a loan agreement authorized the PNB to unilaterally increase the rate of interest to 25% per
annum, plus a penalty of 6% per annum on past dues, then to 30% on October 15, 1984, and to 42% on October 25, 1984. The Supreme Court
invalidated the rate increases made by the PNB and upheld the 12% interest imposed by the CA, in this wise:
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the
interest rate that shall accrue on a loan or forbearance of money, goods or credits. In fine, they can agree to adjust, upward or downward, the
interest previously stipulated. x x x.45
Thus, according to the Court, 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.
E. 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
37
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.
Moreover, the rule is settled that repeals by implication are not favored, because laws are presumed to be passed with deliberation and full
knowledge of all laws existing pertaining to the subject.46 An implied repeal is predicated upon the condition that a substantial conflict or
repugnancy is found between the new and prior laws. Thus, in the absence of an express repeal, a subsequent law cannot be construed as
repealing a prior law unless an irreconcilable inconsistency and repugnancy exists in the terms of the new and old laws. 47 We find no such
conflict between the provisions of Act 2655 and R.A. No. 7653.
F. 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.48 As held in Castro v. Tan:49
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. 50
Stipulations authorizing iniquitous or unconscionable interests have been invariably struck down for being contrary to morals, if not against the
law.51 Indeed, under Article 1409 of the Civil Code, these contracts are deemed inexistent and void ab initio, and therefore cannot be ratified, nor
may the right to set up their illegality as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious interest does not affect the lender’s right to recover the principal of a loan, nor affect the
other terms thereof.52 Thus, in a usurious loan with mortgage, the right to foreclose the mortgage subsists, and this right can be exercised by the
creditor upon failure by the debtor to pay the debt due. The debt due is considered as without the stipulated excessive interest, and a legal interest
of 12% per annum will be added in place of the excessive interest formerly imposed,53following the guidelines laid down in the landmark case of
Eastern Shipping Lines, Inc. v. Court of Appeals,54 regarding the manner of computing legal interest:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.55 (Citations omitted)
38
The foregoing rules were further clarified in Sunga-Chan v. Court of Appeals, 56 as follows:
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as follows: The 12% per annum
rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits, as well as to judgments involving such loan
or forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code applies "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," with the
application of both rates reckoned "from the time the complaint was filed until the [adjudged] amount is fully paid." In either instance, the
reckoning period for the commencement of the running of the legal interest shall be subject to the condition "that the courts are vested with
discretion, depending on the equities of each case, on the award of interest."57 (Citations omitted)
WHEREFORE, premises considered, the Petition for certiorari is DISMISSED.
39
G.R. No. 148325 September 3, 2007
REYNALDO P. FLOIRENDO, JR., petitioner,

vs.
METROPOLITAN BANK and TRUST COMPANY, respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the
Decision1 dated February 22, 2001 and Order2 dated May 2, 2001 rendered by the Regional Trial Court (RTC), Branch 39, Cagayan de Oro City
in Civil Case No. 98-476, entitled, "REYNALDO P. FLOIRENDO, JR., plaintiff, v. METROPOLITAN BANK AND TRUST COMPANY, ET AL.,
defendants."
Reynaldo P. Floirendo, Jr., petitioner, is the president and chairman of the Board of Directors of Reymill Realty Corporation, a domestic
corporation engaged in real estate business. On March 20, 1996, he obtained a loan of P1,000,000.00 from the Metropolitan Bank and Trust
Company, Cagayan de Oro City Branch, respondent, to infuse additional working capital for his company. As security for the loan, petitioner
executed a real estate mortgage in favor of respondent bank over his four (4) parcels of land, all situated at Barangay Carmen, Cagayan de Oro
City.
The loan was renewed for another year secured by the same real estate mortgage. Petitioner signed a promissory note dated March 14, 1997
fixing the rate of interest at "15.446% per annum for the first 30 days, subject to upward/downward adjustment every 30 days thereafter"; and a
penalty charge of 18% per annum "based on any unpaid principal to be computed from date of default until payment of the obligation." The
promissory note likewise provides that:
The rate of interest and/or bank charges herein stipulated, during the term of this Promissory Note, its extension, renewals or other
modifications, may be increased, decreased, or otherwise changed from time to time by the Bank without advance notice to me/us in
the event of changes in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines, in the
rediscount rate of member banks with the Central Bank of the Philippines, in the interest rates on savings and time deposits, in the
interest rates on the bank’s borrowings, in the reserve requirements, or in the overall costs of funding or money;
I/We hereby expressly consent to any extension and/or renewal hereof in whole or in part and/or partial payment on account which
may be requested by and/or granted to anyone of us for the payment of this note upon payment of the corresponding renewal or
extension fee.
On July 11, 1997, respondent bank started imposing higher interest rates on petitioner’s loan which varied through the months, in fact, as high as
30.244% in October 1997. As a result, petitioner could no longer pay the high interest rates charged by respondent bank. Thus, he negotiated for
the renewal of his loan. Respondent bank agreed provided petitioner would pay the arrears in interest amounting to the total sum of P163,138.33.
Despite payment by petitioner, respondent bank, instead of renewing the loan, filed with the Office of the Clerk of Court and Provincial Sheriff,
RTC, Cagayan de Oro City a petition for foreclosure of mortgage which was granted. On August 17, 1998, the auction sale was set.
Prior thereto or on August 11, 1998, petitioner filed with the RTC, Branch 39, same city, a complaint for reformation of real estate mortgage
contract and promissory note, docketed as Civil Case No. 98-476. Referring to the real estate mortgage and the promissory note as "contracts of
adhesion," petitioner alleged that the increased interest rates unilaterally imposed by respondent bank are scandalous, immoral, illegal and
unconscionable. He also alleged that the terms and conditions of the real estate mortgage and the promissory note are such that they could be
interpreted by respondent bank in whatever manner it wants, leaving petitioner at its mercy. Petitioner thus prayed for reformation of these
documents and the issuance of a temporary restraining order (TRO) and a writ of preliminary injunction to enjoin the foreclosure and sale at
public auction of his four (4) parcels of land.
On August 14, 1998, the RTC issued a TRO and on September 3, 1998, a writ of preliminary injunction.
In its answer to the complaint, respondent bank asserted that the interest stipulated by the parties in the promissory note is not per annum but on a
month to month basis. The 15.446% interest appearing therein was good only for the first 30 days of the loan, subject to upward and downward
adjustment every 30 days thereafter. The terms of the real estate mortgage and promissory note voluntarily entered into by petitioner are clear and
unequivocal. There is, therefore, no legal and factual basis for an action for reformation of instruments.
On February 22, 2001, the RTC rendered a Judgment (1) dismissing the complaint for reformation of instruments, (2) dissolving the writ of
preliminary injunction and (3) directing the sale at public auction of petitioner’s mortgaged properties. The RTC ruled:
In order that an action for reformation of an instrument may prosper, the following requisites must occur:
40
1.) There must have been a meeting of the minds upon the contract;
2.) The instrument or document evidencing the contract does not express the true agreement between the parties; and
3.) The failure of the instrument to express the agreement must be due to mistake, fraud, inequitable conduct or accident. (National
Irrigation Administration v. Gamit, G.R. No. 85869, November 5, 1992)
xxx
A perusal further of the complaint and the evidences submitted by the parties convinced the court that there was certainly a meeting of
the minds between the parties. Plaintiff and defendant bank entered into a contract of loan, the terms and conditions of which,
especially on the rates of interest, are clearly and unequivocally spelled out in the promissory note. The court believes that there was
absolutely no mistake, fraud or anything that could have prevented a meeting of the minds between the parties.
The RTC upheld the validity of the escalation clause, thus:
Escalation clauses are valid stipulations in commercial contract to maintain fiscal stability and to retain the value of money in loan
term contracts, (Llorin v. CA, G.R. No. 103592, February 4, 1993).
xxx xxx xxx
x x x the Court has no other alternative to resolve Issue No. 1 that defendant bank is allowed to impose the interest rate questioned by
plaintiff considering that Exhibit "B" and "B-1," which is Exhibit "1" and "1-A" of defendant bank is very clear that the rate of interest
is 15.446% per annum for the first 30 days subject to upward/downward adjustment every 30 days thereafter.
On the issue of the validity of the foreclosure of the real estate mortgage, the RTC ruled that:
It is a settled rule that in a real estate mortgage when the obligation is not paid when due, the mortgagee has the right to foreclose the
mortgage and to have the property seized and sold in view of applying the proceeds to the payment of the obligation (Estate
Investment House v. CA, 215 SCRA 734).
On May 2, 2001, petitioner filed a motion for reconsideration but it was denied for lack of merit.
Hence, the instant petition.
The fundamental issue for our resolution is whether the mortgage contract and the promissory note express the true agreement between the parties
herein.
Petitioner contends that the "escalation clause" in the promissory note imposing 15.446% interest on the loan "for the first 30 days subject to
upward/downward adjustment every 30 days thereafter" is illegal, excessive and arbitrary. The determination to increase or decrease such
interest rate is primarily left to the discretion of respondent bank.
We agree.
We hold that the increases of interest rate unilaterally imposed by respondent bank without petitioner’s assent are violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code3 which provides:
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
The binding effect of any agreement between the parties to a contract is premised on two settled principles: (1) that obligations arising from
contracts have the force of law between the contracting parties; and (2) that there must be mutuality between the parties based on their essential
equality to which is repugnant to have one party bound by the contract leaving the other free therefrom.4 Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or
compliance of the contract which is left solely to the will of one of the parties is likewise invalid. 5
The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from time to time the rate of interest
and/or bank charges "without advance notice" to petitioner, "in the event of change in the interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines," does not give respondent bank unrestrained freedom to charge any rate other than that which was agreed
upon. Here, the monthly upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the essence of
mutuality of the contract.
41
In Philippine National Bank v. Court of Appeals,6 and in later cases,7 we held:
In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void (Garcia v. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that
the P1.8 million loan agreement between the PNB and the private respondent gave the PNB a license (although in fact there was none)
to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the weaker party’s (the debtor) participation being reduced to the alternative "to take
it or leave it" (Qua v. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for the weaker party whom
the courts of justice must protect against abuse and imposition.
In New Sampaguita Builders Construction, Inc. (NSBCI) v. Philippine National Bank,8 we ruled that while it is true that escalation clauses are
valid in maintaining fiscal stability and retaining the value of money on long term contracts, however, giving respondent an unbridled right to
adjust the interest independently and upwardly would completely take away from petitioner the right to assent to an important modification in
their agreement, hence, would negate the element of mutuality in their contracts. Such escalation clause would make the fulfillment of the
contracts dependent exclusively upon the uncontrolled will of respondent bank and is therefore void. In the present case, the promissory note
gives respondent bank authority to increase the interest rate at will during the term of the loan. This stipulation violates the principle of mutuality
between the parties. It would be converting the loan agreement into a contract of adhesion where the parties do not bargain on equal footing, the
weaker party’s (petitioner’s) participation being reduced to the alternative "to take it or leave it. 9 While the Usury Law ceiling on interest rate was
lifted by Central Bank Circular No. 905, nothing therein could possibly be read as granting respondent bank carte blanche authority to raise
interest rate to levels which would either enslave its borrower (petitioner herein) or lead to hemorrhaging of his assets.10
In Philippine National Bank v. Court of Appeals¸11 we declared void the escalation clause in the Credit Agreement between petitioner bank and
private respondents whereby the "Bank reserves the right to increase the interest rate within the limit allowed by law at any time depending on
whatever policy it may adopt in the future xxx." We held:
It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties.
If this assent is wanting on the part of one who contracts, his act has no more efficacy than if it had been done under duress or by a
person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank’s posturing that that escalation clause at bench gives it unbridled right
to unilaterally upwardly adjust the interest on private respondents’ loan. That would completely take away from private respondents
the right to assent to an important modification in their agreement, and would negate the element of mutuality in contracts.
Under Article 1310 of the Civil Code, courts are granted authority to reduce/increase interest rates equitably, thus:
Article 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is
equitable under the circumstances.
In the other Philippine National Bank v. Court of Appeals12 case, we disauthorized petitioner bank from unilaterally raising the interest rate on the
loan of private respondent from 18% to 32%, 41% and 48%. In Almeda v. Court of Appeals,13 where the interest rate was increased from 21% to
as high as 68% per annum, we declared arbitrary "the galloping increases in interest rate imposed by respondent bank on petitioners’ loan, over
the latter’s vehement protests." In Medel v. Court of Appeals,14 the stipulated interest of 5.5% per month or 66% per annum on a loan amounting
to P500,000.00 was equitably reduced for being iniquitous, unconscionable and exorbitant. In Solangon v. Salazar,15 the stipulated interest rate of
6% per month or 72% per annum was found to be "definitely outrageous and inordinate" and was reduced to 12% per annum which we deemed
fair and reasonable. In Imperial v. Jaucian,16 we ruled that the trial court was justified in reducing the stipulated interest rate from 16% to 1.167%
or 14% per annum and the stipulated penalty charge from 5% to 1.167% per month or 14% per annum.
In this case, respondent bank started to increase the agreed interest rate of 15.446% per annum to 24.5% on July 11, 1997 and every month
thereafter; 27% on August 11, 1997; 26% on September 10, 1997; 33% on October 15, 1997; 26.5% on November 27, 1997; 27% on December
1997; 29% on January 13, 1998; 30.244% on February 7, 1998; 24.49% on March 9, 1998; 22.9% on April 18, 1998; and 18% on May 21, 1998.
Obviously, the rate increases are excessive and arbitrary. It bears reiterating that respondent bank unilaterally increased the interest rate without
petitioner’s knowledge and consent.
As mentioned earlier, petitioner negotiated for the renewal of his loan. As required by respondent bank, he paid the interests due. Respondent
bank then could not claim that there was no attempt on his part to comply with his obligation. Yet, respondent bank hastily filed a petition to
foreclose the mortgage to gain the upperhand in taking petitioner’s four (4) parcels of land at bargain prices. Obviously, respondent bank acted in
bad faith.
42
In sum, we find that the requisites for reformation of the mortgage contract and promissory note are present in this case. There has been meeting
of minds of the parties upon these documents. However, these documents do not express the parties’ true agreement on interest rates. And the
failure of these documents to express their agreement on interest rates was due to respondent bank’s inequitable conduct.
WHEREFORE, we GRANT the petition. The Judgment dated February 22, 2001 of the RTC of Cagayan de Oro City, Branch 39 in Civil Case
No. 98-476 is REVERSED. The real estate mortgage contract and the promissory note agreed upon by the parties are reformed in the sense that
any increase in the interest rate beyond 15.446% per annum should not be imposed by respondent bank without the consent of petitioner. The
interest he paid in excess of 15.446% should be applied to the payment of the principal obligation.
43
G.R. No. 149004 April 14, 2004
RESTITUTA M. IMPERIAL, petitioner,

vs.
ALEX A. JAUCIAN, respondent.
DECISION
PANGANIBAN, J.:
Iniquitous and unconscionable stipulations on interest rates, penalties and attorney’s fees are contrary to morals. Consequently, courts are granted
authority to reduce them equitably. If reasonably exercised, such authority shall not be disturbed by appellate courts.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the July 19, 2000 Decision 2 and the June 14, 2001
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 43635. The decretal portion of the Decision is as follows:
"WHEREFORE, premises considered, the appealed Decision of the Regional Trial Court, 5th Judicial Region, Branch 21, Naga City,
dated August 31, 1993, in Civil Case No. 89-1911 for Sum of Money, is hereby AFFIRMED in toto."4
The assailed Resolution denied petitioner’s Motion for Reconsideration.
The dispositive portion of the August 31, 1993 Decision, promulgated by the Regional Trial Court (RTC) of Naga City (Branch 21) and affirmed
by the CA, reads as follows:
"Wherefore, Judgment is hereby rendered declaring Section I, Central Bank Circular No. 905, series of 1982 to be of no force and
legal effect, it having been promulgated by the Monetary Board of the Central Bank of the Philippines with grave abuse of discretion
amounting to excess of jurisdiction; declaring that the rate of interest, penalty, and charges for attorney’s fees agreed upon between the
parties are unconscionable, iniquitous, and in violation of Act No. 2655, otherwise known as the Usury Law, as amended; and
ordering Defendant to pay Plaintiff the amount of FOUR HUNDRED SEVENTY-EIGHT THOUSAND, ONE HUNDRED NINETY-
FOUR and 54/100 (₱478,194.54) PESOS, Philippine currency, with regular and compensatory interests thereon at the rate of twenty-
eight (28%) per centum per annum, computed from August 31, 1993 until full payment of the said amount, and in addition, an amount
equivalent to ten (10%) per centum of the total amount due and payable, for attorney’s fees, without pronouncement as to costs."5
The Facts
The CA summarized the facts of the case in this wise:
"The present controversy arose from a case for collection of money, filed by Alex A. Jaucian against Restituta Imperial, on October
26, 1989. The complaint alleges, inter alia, that defendant obtained from plaintiff six (6) separate loans for which the former executed
in favor of the latter six (6) separate promissory notes and issued several checks as guarantee for payment. When the said loans
became overdue and unpaid, especially when the defendant’s checks were dishonored, plaintiff made repeated oral and written
demands for payment.
"Specifically, the six (6) separate loans obtained by defendant from plaintiff on various dates are as follows:
(a) November 13, 1987 ₱ 50,000.00

(b) December 28, 1987 40,000.00
(c) January 6, 1988 30,000.00
(d) January 11, 1988 50,000.00
(e) January 12, 1988 50,000.00
(f) January 13, 1988 100,000.00
Total ₱320,000.00
"The loans were covered by six (6) separate promissory notes executed by defendant. The face value of each promissory notes is
bigger [than] the amount released to defendant because said face value already include[d] the interest from date of note to date of
44
maturity. Said promissory notes, which indicate the interest of 16% per month, date of issue, due date, the corresponding guarantee
checks issued by defendant, penalties and attorney’s fees, are the following:
1. Exhibit ‘D’ – for loan of ₱40,000.00 on December 28, 1987, with face value of ₱65,000.00;
2. Exhibit ‘E’ – for loan of ₱50,000.00 on January 11, 1988, with face value of ₱82,000.00;
3. Exhibit ‘F’ – for loan of ₱50,000.00 on January 12, 1988, with face value of ₱82,000.00;
4. Exhibit ‘G’ – for loan of ₱100,000.00 on January 13, 1988, with face value of ₱164,000.00;
5. Exhibit ‘H’ – This particular promissory note covers the second renewal of the original loan of ₱50,000.00 on November
13, 1987, which was renewed for the first time on March 16, 1988 after certain payments, and which was renewed finally
for the second time on January 4, 1988 also after certain payments, with a face value of ₱56,240.00;
6. Exhibit ‘I’ – This particular promissory note covers the second renewal of the original loan of ₱30,000.00 on January 6,
1988, which was renewed for the first time on June 4, 1988 after certain payments, and which was finally renewed for the
second time on August 6, 1988, also after certain payments, with [a] face value of ₱12,760.00;
"The particulars about the postdated checks, i.e., number, amount, date, etc., are indicated in each of the promissory notes. Thus, for
Exhibit ‘D’, four (4) PB checks were issued; for Exhibit ‘E’ four (4) checks; for Exhibit ‘F’ four (4) checks; for Exhibit ‘G’ four (4)
checks; for Exhibit ‘H’ one (1) check; for Exhibit ‘I’ one (1) check;
"The arrangement between plaintiff and defendant regarding these guarantee checks was that each time a check matures the defendant
would exchange it with cash.
"Although, admittedly, defendant made several payments, the same were not enough and she always defaulted whenever her loans
mature[d]. As of August 16, 1991, the total unpaid amount, including accrued interest, penalties and attorney’s fees, [was]
₱2,807,784.20.
"On the other hand, defendant claims that she was extended loans by the plaintiff on several occasions, i.e., from November 13, 1987
to January 13, 1988, in the total sum of ₱320,000.00 at the rate of sixteen percent (16%) per month. The notes mature[d] every four
(4) months with unearned interest compounding every four (4) months if the loan [was] not fully paid. The loan releases [were] as
follows:
(a) November 13, 1987 ₱ 50,000.00

(b) December 28, 1987 40,000.00
(c) January 6, 1988 30,000.00
(d) January 11, 1988 50,000.00
(e) January 12, 1988 50,000.00
(f) January 13, 1988 100,000.00
Total ₱320,000.00
"The loan on November 13, 1987 and January 6, 1988 ha[d] been fully paid including the usurious interests of 16% per month, this is
the reason why these were not included in the complaint.
"Defendant alleges that all the above amounts were released respectively by checks drawn by the plaintiff, and the latter must produce
these checks as these were returned to him being the drawer if only to serve the truth. The above amount are the real amount released
to the defendant but the plaintiff by masterful machinations made it appear that the total amount released was ₱462,600.00. Because in
his computation he made it appear that the true amounts released was not the original amount, since it include[d] the unconscionable
interest for four months.
"Further, defendant claims that as of January 25, 1989, the total payments made by defendants [were] as follows:
a. Paid releases on November 13, 1987 of ₱50,000.00 and January 6, 1988

of ₱30,000.00 these two items were not included in the complaint affirming
the fact that these were paid ₱ 80,000.00
45
b. Exhibit ‘26’ Receipt 231,000.00
c. Exhibit ‘8-25’ Receipt 65,300.00
d. Exhibit ‘27’ Receipt 65,000.00
Total
₱441,780.00
Less: 320,000.00
Excess Payment ₱121,780.00

"Defendant contends that from all perspectives the above excess payment of ₱121,780.00 is more than the interest that could be
legally charged, and in fact as of January 25, 1989, the total releases have been fully paid.
"On 31 August 1993, the trial court rendered the assailed decision." 6
On appeal, the CA held that without judicial inquiry, it was improper for the RTC to rule on the constitutionality of Section 1, Central Bank
Circular No. 905, Series of 1982. Nonetheless, the appellate court affirmed the judgment of the trial court, holding that the latter’s clear and
detailed computation of petitioner’s outstanding obligation to respondent was convincing and satisfactory.
Hence, this Petition.7
The Issues
Petitioner raises the following arguments for our consideration:
"1. That the petitioner has fully paid her obligations even before filing of this case.
"2. That the charging of interest of twenty-eight (28%) per centum per annum without any writing is illegal.
"3. That charging of excessive attorney’s fees is hemorrhagic.
"4. Charging of excessive penalties per month is in the guise of hidden interest.
"5. The non-inclusion of the husband of the petitioner at the time the case was filed should have dismissed this case."8
The Court’s Ruling
The Petition has no merit.
First Issue:
Computation of Outstanding Obligation
Arguing that she had already fully paid the loan before the filing of the case, petitioner alleges that the two lower courts misappreciated the facts
when they ruled that she still had an outstanding balance of ₱208,430.
This issue involves a question of fact. Such question exists when a doubt or difference arises as to the truth or the falsehood of alleged facts; and
when there is need for a calibration of the evidence, considering mainly the credibility of witnesses and the existence and the relevancy of
specific surrounding circumstances, their relation to each other and to the whole, and the probabilities of the situation.9
It is a well-entrenched rule that pure questions of fact may not be the subject of an appeal by certiorari under Rule 45 of the Rules of Court, as
this remedy is generally confined to questions of law.10 The jurisdiction of this Court over cases brought to it is limited to the review and
rectification of errors of law allegedly committed by the lower court. As a rule, the latter’s factual findings, when adopted and affirmed by the
CA, are final and conclusive and may not be reviewed on appeal.11
46
Generally, this Court is not required to analyze and weigh all over again the evidence already considered in the proceedings below.12 In the
present case, we find no compelling reason to overturn the factual findings of the RTC -- that the total amount of the loans extended to petitioner
was ₱320,000, and that she paid a total of only ₱116,540 on twenty-nine dates. These findings are supported by a preponderance of evidence.
Moreover, the amount of the outstanding obligation has been meticulously computed by the trial court and affirmed by the CA. Petitioner has not
given us sufficient reason why her cause falls under any of the exceptions to this rule on the finality of factual findings.
Second Issue:
Rate of Interest
The trial court, as affirmed by the CA, reduced the interest rate from 16 percent to 1.167 percent per month or 14 percent per annum; and the
stipulated penalty charge, from 5 percent to 1.167 percent per month or 14 percent per annum.
Petitioner alleges that absent any written stipulation between the parties, the lower courts should have imposed the rate of 12 percent per annum
only.
The records show that there was a written agreement between the parties for the payment of interest on the subject loans at the rate of 16 percent
per month. As decreed by the lower courts, this rate must be equitably reduced for being iniquitous, unconscionable and exorbitant. "While the
Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets." 13
In Medel v. CA,14 the Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per annum, unconscionable. In the present
case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or
unconscionable, it is considered "contrary to morals, if not against the law. [Such] stipulation is void."15
Since the stipulation on the interest rate is void, it is as if there were no express contract thereon. 16 Hence, courts may reduce the interest rate as
reason and equity demand. We find no justification to reverse or modify the rate imposed by the two lower courts.
Third and Fourth Issue:
Penalties and Attorney’s Fees
Article 1229 of the Civil Code states thus:
"The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor.
Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable."
In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case.17 What may be
iniquitous and unconscionable in one may be totally just and equitable in another. In the present case, iniquitous and unconscionable was the
parties’ stipulated penalty charge of 5 percent per month or 60 percent per annum, in addition to regular interests and attorney’s fees. Also, there
was partial performance by petitioner when she remitted ₱116,540 as partial payment of her principal obligation of ₱320,000. Under the
circumstances, the trial court was justified in reducing the stipulated penalty charge to the more equitable rate of 14 percent per annum.
The Promissory Note carried a stipulation for attorney’s fees of 25 percent of the principal amount and accrued interests. Strictly speaking, this
covenant on attorney’s fees is different from that mentioned in and regulated by the Rules of Court.18 "Rather, the attorney’s fees here are in the
nature of liquidated damages and the stipulation therefor is aptly called a penal clause." 19 So long as the stipulation does not contravene the law,
morals, public order or public policy, it is binding upon the obligor. It is the litigant, not the counsel, who is the judgment creditor entitled to
enforce the judgment by execution.
Nevertheless, it appears that petitioner’s failure to comply fully with her obligation was not motivated by ill will or malice. The twenty-nine
partial payments she made were a manifestation of her good faith. Again, Article 1229 of the Civil Code specifically empowers the judge to
reduce the civil penalty equitably, when the principal obligation has been partly or irregularly complied with. Upon this premise, we hold that the
RTC’s reduction of attorney’s fees -- from 25 percent to 10 percent of the total amount due and payable -- is reasonable.
Fifth Issue:
Non-Inclusion of Petitioner’s Husband
Petitioner contends that the case against her should have been dismissed, because her husband was not included in the proceedings before the
RTC.
47
We are not persuaded. The husband’s non-joinder does not warrant dismissal, as it is merely a formal requirement that may be cured by
amendment.20 Since petitioner alleges that her husband has already passed away, such an amendment has thus become moot.
WHEREFORE, the Petition is DENIED. Costs against petitioner.
48
[G.R. No. 95897. December 14, 1999.]
FLORENCIA T. HUIBONHOA, Petitioner, v. COURT OF APPEALS, Spouses Rufina G. Lim and ANTHONY LIM, LORETA
GOJOCCO CHUA and Spouses SEVERINO and PRISCILLA GOJOCCO, Respondents.
[G.R. No. 102604. December 14, 1999.]
SEVERINO GOJOCCO and LORETA GOJOCCO CHUA, Petitioners, v. COURT OF APPEALS, HON. HERMOGENES R. LIWAG,
as Judge of the RTC of Manila Branch 55 and FLORENCIA HUIBONHOA, Respondents.
DECISION
PURISIMA, J.:
These two petitions for review on certiorari under Rule 45 of the Rules of Court seek the reversal of the Decisions of the Court of Appeals in
CA-G.R. CV No. 16575 and CA-G.R. SP No. 24654 which affirmed, respectively, the decision of Branch 148 of the Regional Trial Court of
Makati City, dismissing the complaint for reformation of contract, and the decision of Branch 55 of the Regional Trial Court of Manila, reversing
that of Branch 13 of the Metropolitan Trial Court of Manila, which favorably acted in the ejectment case. Both petitions involve the same
parties.chanrobles law library
Culled from the records on hand, the facts giving rise to the two cases are as follows:chanrob1es virtual 1aw library
On June 8, 1983, Florencia T. Huibonhoa entered into a memorandum of agreement with siblings Rufina Gojocco Lim, Severino Gojocco and
Loreta Gojocco Chua stipulating that Florencia T. Huibonhoa would lease from them (Gojoccos) three (3) adjacent commercial lots at Ilaya
Street, Binondo, Manila, described as lot nos. 26-A, 26-B and 26-C, covered by Transfer Certificates of Title Nos. 76098, 80728 and 155450, all
in their (Gojoccos’) names.
On June 30, 1983, pursuant to the said memorandum of agreement, the parties inked a contract of lease of the same three lots for a period of
fifteen (15) years commencing on July 1, 1983 and renewable upon agreement of the parties. Subject contract was to enable the lessee, Florencia
T. Huibonhoa, to construct a "four-storey reinforced concrete building with concrete roof deck, according to plans and specifications approved by
the City Engineer’s Office." The parties agreed that the lessee could let/sublease the building and/or its spaces to interested parties under such
terms and conditions as the lessee would determine and that all amounts collected as rents or income from the property would belong exclusively
to the lessee. The lessee undertook to complete construction of the building "within eight (8) months from the date of the execution of the
contract of lease." The contract further provided as follows:jgc:chanrobles.com.ph
"5. Good will Money and Rate of Monthly Rental: Upon the signing of this Contract of Lease, LESSEE shall pay to each of the LESSOR the sum
of P300,000.00 each or a total sum of P900,000.00, as goodwill money.
LESSEE shall pay to each of the LESSOR the sum of P15,000.00 each or a total amount of P45,000.00 as monthly rental for the leased premises,
within the first five (5) days of each calendar month, at the office of the LESSOR or their authorized agent; Provided, however, that LESSEE’s
obligation to pay the rental shall start only upon completion of the building, but if it is not completed within eight (8) months from date hereof as
provided for in par. 4 above, the monthly rental shall already accrue and shall be paid by LESSEE to LESSOR. In other words, during the period
of construction, no monthly rental shall be collected from LESSEE; Provided, Finally, that the monthly rental shall be adjusted/increased upon
the corresponding increase in the rental of sub-leasees (sic) using the percentage increase in the totality of rentals of the sub-leasees (sic) as basis
for the percentage increase of monthly rental that LESSEE will pay to LESSOR."cralaw virtua1aw library
The parties also agreed that upon the termination of the lease, the ownership and title to the building thus constructed on the said lots would
automatically transfer to the lessor, even without any implementing document therefor. Real estate taxes on the land would be borne by the lessor
while that on the building, by the lessee, but the latter was authorized to advance the money needed to meet the lessors’ obligations such as the
payment of real estate taxes on their lots. The lessors would deduct from the monthly rental due all such advances made by the lessee.
After the execution of the contract, the Gojoccos executed a power of attorney granting Huibonhoa the authority to obtain "credit facilities" in
order that the three lots could be mortgaged for a limited one-year period from July 1983. 1 Hence, on September 12, 1983, Huibonhoa obtained
from China Banking Corporation "credit facilities" not exceeding One Million (P1,000,000.00) Pesos. Simultaneously, she mortgaged the three
lots to the creditor bank. 2 Fifteen days later or on September 27, 1983, to be precise, Huibonhoa signed a contract amending the real estate
mortgage in favor of China Banking Corporation whereby the "credit facilities" were increased to the principal sum of Three Million
(P3,000,000.00) Pesos. 3
During the construction of the building which later became known as Poulex Merchandise Center, 4 former Senator Benigno Aquino, Jr. was
assassinated. The incident must have affected the country’s political and economic stability. The consequent hoarding of construction materials
and increase in interest rates allegedly affected adversely the construction of the building such that Huibonhoa failed to complete the same within
the stipulated eight-month period from July 1, 1983. Projected to be finished on February 29, 1984, the construction was completed only in
September 1984 or seven (7) months later.
Under the contract, Huibonhoa was supposed to start paying rental in March 1984 but she failed to do so. Consequently, the Gojoccos made
several verbal demands upon Huibonhoa for the payment of rental arrearages and, for her to vacate the leased premises. On December 19, 1984,
lessors sent lessee a final letter of demand to pay the rental arrearages and to vacate the leased premises. The former also notified the latter of
their intention to terminate the contract of lease. 5
49
However, on January 3, 1985, Huibonhoa brought an action for reformation of contract before Branch 148 of the Regional Trial Court in Makati.
Docketed as Civil Case No. 9402, the Complaint alleged that although there was a meeting of the minds between the parties on the lease contract,
their true intention as to when the monthly rental would accrue was not therein expressed due to mistake or accident. She (lessee) alleged that the
Gojoccos had erroneously considered the first accrual date of the rents to be March 1984 when their true intention was that during the entire
period of actual construction of the building, no rents would accrue. Thus, according to Huibonhoa, the first rent would have been due only in
October 1984. Moreover, the assassination of former Senator Benigno Aquino, Jr., an unforeseen event, caused the country’s economy to turn
from bad to worse and as a result, the prices of commodities like construction materials so increased that the building worth Six Million pesos
escalated to "something like 11 to 12 million pesos." However, she averred that by reason of mistake or accident, the lease contract failed to
provide that should an unforeseen event dramatically increase the cost of construction, the monthly rental would be reduced and the term of the
lease would be extended for such duration as may be fair and equitable to both the lessors and the lessee.
Huibonhoa then prayed that the contract of lease be reformed so as to reflect the true intention of the parties; that its terms be novated so that the
accrual of rents should be computed from October 1984; that the monthly rent of P45,000.00 be equitably reduced to P30,000.00, and the term of
the lease be extended by five (5) years. 6
Eleven days later or on January 14, 1985, to be exact, the Gojoccos filed Civil Case No. 106097 against Huibonhoa for "cancellation of lease,
ejectment and collection" with the Metropolitan Trial Court of Manila. They theorized that despite the expiration of the 8-month construction
period, Huibonhoa failed to pay the rents that had accrued since March 1, 1984, their verbal demands therefor notwithstanding; that, in their letter
of December 19, 1984, they had notified Huibonhoa of their intention to "terminate and cancel the lease for violation of its terms" and that they
demanded from her the "restitution of the land in question" and the payment of all rentals due thereunder; that Huibonhoa refused to pay the
rentals in bad faith because she had "sublet the stalls, bodegas and offices to numerous tenants and/or stallholders" from whom she had collected
"goodwill money and exorbitant rentals even prior to the completion of the building or as of March 1984;" that she was about to sublease the
vacant spaces in the building; that she was able to finish construction of the building "without utilizing her own capital or investment" on account
of the mortgages of their land in the amount of P3,700,000 (sic); that because the mortgage indebtedness with China Banking Corporation had
remained outstanding and unpaid, they had revoked the power of attorney in Huibonhoa’s favor on December 21, 1984, and that, because
Huibonhoa was about to depart from the Philippines, the rentals due and owing from the leased premises should be held to answer for their claim
by virtue of a writ of attachment.chanrobles law library
The Gojoccos prayed that Huibonhoa and all persons claiming rights under her be ordered to vacate the leased premises, to surrender to them
actual and physical possession thereof and to pay the rents due and unpaid at the agreed rate of P45,000.00 a month from March 1984 to January
1985, with legal interest thereon. They also prayed that Huibonhua be ordered to pay the fair rental value of P60,000.00 a month "beginning
February 5, 1985 and every 5th of the month until the premises shall be actually vacated and restored" to them and that, "considering the nature of
the action," the Rules on Summary Procedure be applied to prevent further losses, damages and expenses on their part. 7
Meanwhile, in Civil Case No. 9402, the Gojoccos submitted an answer to the complaint for reformation of contract; asserting that the true
intention of the parties was to obligate Huibonhoa to pay rents immediately upon the expiration of the maximum period of eight (8) months from
the execution of the lease contract, which intention was meant to avoid a situation wherein Huibonhoa would deliberately delay the completion of
the building within the 8-month period to elude payment of rental starting March 1984. They also claimed that Huibonhoa instituted the case in
anticipation of the ejectment suit they would file against her; that she was estopped from questioning the enforceability of the lease contract after
having received monetary benefits as a result of her utilization of the premises to her sole profit and advantage; that the financial reverses she
suffered after the assassination of Senator Benigno Aquino, Jr. could not be considered a fortuitous event that would justify the reduction of the
monthly rental and extension of the contract of lease for five years; and that the "principle of contract of adhesion" in interpreting the lease
contract should be strictly applied to Huibonhoa because it was her counsel who prepared it. 8
The Gojoccos prayed that Huibonhoa be ordered to pay them the sum of P495,000.00 representing unpaid rents from March 1, 1984 to January
31, 1985 and the monthly rent of P60,000.00 from February 1, 1985 until Huibonhoa shall have surrendered the premises to them, and that she be
ordered to pay attorney’s fees, moral and exemplary damages and the costs of suit.
On January 31, 1985, Rufina Gojocco Lim entered into an agreement 9 with Huibonhoa whereby, to put an end to Civil Case No. 9402, the
former agreed to extend the term of the lease by three (3) more years or for eighteen (18) years from July 1, 1983. The agreement expressly
provided that no rents would be collected unless and until the construction work was already completed or that during the construction, no
monthly rental should be collected. It also provided that "in case some unforeseen event should dramatically increase the cost of the building,
then the amount of monthly rent shall be reduced to such sum and the term of the lease extended for such duration as may be fair and equitable,
bearing in mind the actual construction cost of the building." The agreement recognized the fact that the Aquino assassination that resulted in the
"hoarding of construction materials and the skyrocketing of the interest rates" on Huibonhoa’s loans, resulted in the increase in actual cost of the
construction from P6,000,000.00 to between P11,000,000.00 and P12,000,000.00.
There is no record that Rufina Gojocco Lim was dropped as a defendant in Civil Case No. 9402 but only Loretta Gojocco Chua and the Spouses
Severino and Priscilla Gojocco filed the memorandum for the defendants in that case. 10
On March 9, 1987, the Makati RTC 11 rendered a decision holding that Huibonhoa had not presented clear and convincing evidence to justify the
reformation of the lease contract. It considered as "misplaced" her contention that the Aquino assassination was an "accident" within the purview
of Art. 1359 of the Civil Code. It held that the act of Rufina G. Lim in entering into an agreement with Huibonhoa that, in effect, "reformed" the
lease contract, was not binding upon Severino and Loretta Gojocco considering that they were separate and independent owners of the lots
subject of the lease. On this point, the trial court cited Sec. 25, Rule 130 of the Rules of Court which provides that the rights of a party cannot be
prejudiced by the act, declaration or omission of another. It thus decided Civil Case No. 9402 as follows:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered:chanrob1es virtual 1aw library
50
a) Dismissing the plaintiff’s complaint and defendant Rufina Lim’s counterclaim, with costs against them;
b) Ordering the plaintiff to pay to defendant Loretta Gojocco Chua the amount of P360,000.00, representing rentals due from March 1, 1984 to
February 28, 1987, with interests thereon at the legal rate from date of the filing of the complaint until full payment thereof, plus the sum of
P15,000.00 per month beginning March, 1987 and for as long as the plaintiff is in possession of the leased premises;
c) Ordering the plaintiff to pay to defendant Severino Gojocco Chua the amount of P360,000.00, representing rentals due from March 1, 1984 to
February 28, 1987, with interests thereon at the legal rate from date of the filing of the complaint until full payment thereof, plus the sum of
P15,000.00 per month beginning March, 1987 and for as long as the plaintiff is in possession of the leased premises;
d) Ordering the plaintiff to pay attorney’s fees in favor of the above-named defendants in the sum of P36,000.00, aside from costs of suit.
SO ORDERED."cralaw virtua1aw library
Upon motion of the Gojocco, the trial court amended the dispositive portion of its aforesaid decision in that Huibonhua was ordered to pay each
of Loretta Gojocco Chua and Severino Gojocco the amount of P540,000.00 instead of P360,000.00 and that attorney’s fees of P54,000.00, instead
of P36,000.00, be paid by Huibonhoa.
On the other hand, in Civil Case No. 102604, the Metropolitan Trial Court of Manila granted Huibonhoa’s prayer that the case be excluded from
the operation of the Rule on Summary Procedure for the reason that the unpaid rents sued upon amounted to P495,000.00. 12 Thereafter,
Huibonhoa presented a motion to dismiss or, in the alternative, to suspend proceedings in the case, contending that the pendency of the action for
reformation of contract constituted a ground of lis pendens or at the very least, posed a prejudicial question to the ejectment case. The Gojoccos
opposed such motion, pointing out that while there was identity of parties between the two cases, the causes of action, subject matter and reliefs
sought for therein were different.
On May 10, 1985, after Huibonhoa had sent in her reply to the said opposition, Rufina G. Lim, through counsel, prayed that she be dropped as
plaintiff in the case, and counsel begged leave to withdraw as the lawyer of the latter in the case. Subsequently, Severino Gojocco and Loretta
Gojocco Chua filed a motion praying for an order requiring Huibonhoa to deposit the rents. On March 25, 1986, the court below issued an
Omnibus Order denying Huibonhoa’s motion to dismiss, requiring her to pay monthly rental of P30,000.00 starting March 1984 and every month
thereafter, and denying Rufina G. Lim’s motion that she be dropped as plaintiff in the case. 13 Huibonhoa moved for reconsideration of said
order but the plaintiffs, apparently including Rufina, opposed the motion.
On July 21, 1986, Severino Gojocco and Huibonhoa entered into an agreement that altered certain terms of the lease contract in the same way that
the agreement between Huibonhoa and Rufina G. Lim "novated" the contract. 14
On March 24, 1987, the Metropolitan Trial Court of Manila issued an Order denying Huibonhoa’s motion for reconsideration and the Gojoccos’
motion for issuance of a writ of preliminary attachment, and allowing Huibonhoa a period of fifteen (15) days within which to deposit P30,000.00
a month starting March 1984 and every month thereafter. 15 Huibonhoa interposed a second motion for reconsideration of the March 25, 1986
order on the ground that she had amicably settled the case with Severino Gojocco and Rufina G. Lim. She therein alleged that only P15,000.00
was due Loretta G. Chua. She informed the court of the decision of the Makati Regional Trial Court in Civil Case No. 9402 and argued that since
that court had awarded the Gojoccos rental arrearages, it would be unjust should she be made to pay rental arrearages, once
again.chanroblesvirtual|awlibrary
On June 30, 1987, the Metropolitan Trial Court of Manila issued an Order reiterating its decision to assume jurisdiction over Civil Case No.
106097 and modified its March 24, 1987 Order by deleting the portion thereof which required Huibonhua to deposit monthly rents. It also
required Huibonhoa to file her answer within fifteen (15) days from receipt of the copy of the court’s order. Accordingly, on July 21, 1987,
Huibonhoa sent in her answer alleging that the lease contract had been novated by the agreements she had signed on January 31, 1985 and July
21, 1986, with Rufina G. Lim and Severino Gojocco, respectively. Huibonhoa added that she had paid Severino Gojocco the amount of
P228,000.00 through an Allied Bank manager’s check. 16
On August 27, 1987, the Metropolitan Trial Court of Manila issued a Pre-trial Order limiting the issues in Civil Case No. 106097 to: (a) whether
or not plaintiffs had the right to eject the defendant on the ground of violation of the conditions of the lease contract and (b) whether or not
Severino Gojocco had the right to pursue the ejectment case in view of the agreement he had entered into with Huibonhoa on July 21, 1986.
On July 30, 1990, the Metropolitan Trial Court of Manila 17 came out with a decision "in favor of plaintiffs Severino Gojocco and Loreta
Gojocco Chua and against Florencia T. Huibonhoa." It ordered Huibonhoa to vacate the lots owned by Severino Gojocco and Loreta Gojocco
Chua and to pay each of them the amounts P5,000.00 as attorney’s fees and P1,000.00 as appearance fee. All three (3) party-litigants appealed to
the Regional Trial Court of Manila.
On February 14, 1991, the Regional Trial Court of Manila, Branch 55, 18 reversed the decision of the Metropolitan Trial Court and ordered the
dismissal of the complaint in Civil Case No. 106097. The reversal of the inferior court’s decision was based primarily on its finding
that:jgc:chanrobles.com.ph
"1. The suit below is intrinsically and inherently an action for cancellation of lease or rescission of contract. In fact, the plaintiffs themselves
recognized this intrinsic nature of the action by categorizing the same action as one for cancellation of lease, ejectment and collection. The suit
cannot properly be reduced to one of simple ejectment as rights of the parties to the still existing contracts have yet to be determined and
resolved. Necessarily, to put an end to the parties’ relation, the contract between them has got to be abrogated, rescinded or resolved. The action
for the purpose is however cognizable by the Regional Trial Court as its subject-matter is incapable of pecuniary estimation (See Sec. 19(1), B.P.
129)."cralaw virtua1aw library
51
Hence, Civil Case Nos. 9402 and 106097 (that was docketed before the RTC of Manila as Civil Case No. 90-54557) were both elevated to the
Court of Appeals.
In CA-G.R. CV No. 16575, the Court of Appeals rendered a Decision 19 on May 31, 1990, affirming the decision of the Makati Regional Trial
Court in Civil Case No. 9402. Huibonhoa filed a motion for the reconsideration of such Decision and on October 18, 1990, the Court of Appeals
modified the same accordingly, by ordering that the amount of P270,825.00 paid by Huibonhoa to Severino and Priscilla Gojocco be deducted
from the total amount of unpaid rentals due the said spouses.
In CA-G.R. SP No. 24654, the Court of Appeals also affirmed the decision of the Regional Trial Court of Manila in Civil Case No. 106097 by its
Decision 20 promulgated on October 29, 1991. Considering the allegations of the complaint for cancellation of lease, ejectment and collection,
the Court of Appeals ratiocinated and concluded:jgc:chanrobles.com.ph
"These allegations, which are denied by private respondent, raised issues which go beyond the simple issue of unlawful possession in ejectment
cases. While the complaint does not seek the rescission of the lease contract, ejecting the lessee would, in effect, deprive the lessee of the income
and other beneficial fruits of the building of which she is the owner until the end of the term of the lease. Certainly this cannot be decreed in a
summary action for ejectment. The decision of the MTC, it is true, only ordered the ejectment of the private respondent from the leased premises.
But what about the building which, according to petitioners themselves, cost the private respondent P3,700,000.00 to construct? Will it be
demolished or will its ownership vest, even before the end of the 15-year term, in the petitioners as owners of the land? Indeed, inextricably
linked to the question of physical possession is the ownership of the building which the lessee was permitted to put up on the land. To evict the
lessee from the land would be to bar her not only from entering the building which she owns but also from collecting the rents from its
tenants."cralaw virtua1aw library
With respect to the contention of the Gojoccos that since Huibonhoa had submitted to the jurisdiction of the Metropolitan Trial Court, the
jurisdictional issue had been foreclosed, the Court of Appeals opined:jgc:chanrobles.com.ph
"Petitioners point out that private respondent can no longer raise the question of jurisdiction because she filed a motion to dismiss in the MTC but
she did not raise this question (Rule 15, sec. 8). But the Omnibus motion rule does not cover two grounds which, although not raised in a motion
to dismiss, are not waived. These are (1) failure to state a cause of action and (2) lack of jurisdiction over the subject matter. (Rule 9, sec. 2).
These grounds can be invoked any time. Moreover, in this case it was not really private respondent who questioned the jurisdiction over the
Metropolitan Trial Court. It was the Regional Trial Court which did so motu propio."cralaw virtua1aw library
On February 19, 1992, 21 the Court resolved that these two petitions for review on certiorari be consolidated. Although they sprang from the
same factual milieu, the petitions are to be discussed separately, however, because the issues raised are cognate yet independent from each other.
In G.R. No. 95897
Petitioner Huibonhoa contends that:chanrob1es virtual 1aw library
1. THE RESPONDENT COURT OF APPEALS COMMITTED A GRAVE AND SERIOUS ERROR, CONSTITUTING ABUSE OF
DISCRETION, IN FINDING THE AGREEMENT BETWEEN PETITIONER AND PRIVATE RESPONDENT SEVERINO GOJOCCO
(ANNEX "E") WORTHLESS AND USELESS ALTHOUGH IT HAS RECOGNIZED THE PAYMENTS WHICH RESPONDENT SEVERINO
GOJOCCO HAS RECEIVED FROM THE PETITIONER WHICH ACTUALLY CONSTITUTED AN ACT OF RATIFICATION;cralawnad
2. THE RESPONDENT COURT FAILED TO CONSIDER THE TRAGIC ASSASSINATION OF FORMER SENATOR BENIGNO AQUINO
AS A FORTUITOUS EVENT OR FORCE MAJEURE WHICH JUSTIFIES THE ADJUSTMENT OF THE TERMS OF THE CONTRACT OF
LEASE. 22
Article 1305 of the Civil Code defines a contract as "a meeting of the minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service." Once the minds of the contacting parties meet, a valid contract exists, whether it is reduced to
writing or not. When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon. As such,
there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement,
except when it fails to express the true intent and agreement of the parties. 23 In such an exception, one of the parties may bring an action for the
reformation of the instrument to the end that their true intention may be expressed. 24
Reformation is that remedy in equity by means of which a written instrument is made or construed so as to express or conform to the real
intention of the parties. 25 As to its nature, in Toyota Motor Philippines Corporation v. Court of Appeals, 26 the Court
said:jgc:chanrobles.com.ph
"An action for reformation is in personam, not in rem, . . . even when real estate is involved. . . It is merely an equitable relief granted to the
parties where through mistake or fraud, the instrument failed to express the real agreement or intention of the parties. While it is a recognized
remedy afforded by courts of equity it may not be applied if it is contrary to well-settled principles or rules. It is a long-standing principle that
equity follows the law. It is applied in the absence of and never against statutory law. . . Courts are bound by rules of law and have no arbitrary
discretion to disregard them. . . Courts of equity must proceed with outmost caution especially when rights of third parties may intervene. .
."cralaw virtua1aw library
Article 1359 of the Civil Code provides that" (w)hen, there having been a meeting of the minds of the parties to a contract, their true intention is
not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the
parties may ask for the reformation of the instrument to the end that such intention may be expressed. . . ." An action for reformation of
instrument under this provision of law may prosper only upon the concurrence of the following requisites: (1) there must have been a meeting of
the minds of the parties to the contact; (2) the instrument does not express the true intention of the parties; and (3) the failure of the instrument to
52
express the true intention of the parties is due to mistake, fraud, inequitable conduct or accident. 27
The meeting of the minds between Huibonhoa, on the one hand, and the Gojoccos, on the other, is manifest in the written lease contract duly
executed by them. The success of the action for reformation of the contract of lease at bar should therefore, depend on the presence of the two
other requisites aforementioned.
To prove that the lease contract does not evince the true intention of the parties, specifically as regards the time when Huibonhoa should start
paying rents, she presented as a witness one of the lessors, Rufina G. Lim, who testified that prior to the execution of the lease contract on June
30, 1983, the parties had entered into a Memorandum of Agreement on June 8, 1983; that on December 21, 1984, the lessors revoked the special
power of attorney in favor of Huibonhoa; that on January 31, 1985, she entered into an agreement with Huibonhoa whereby the amount of the
rent was reduced to P10,000 a month and the term of the lease was extended by three (3) years, and that Huibonhoa started paying rental in
September 1984. 28
There is no statement in such testimony that categorically points to the fact that the contract of lease has failed to express the true intention of the
parties. While it is true that paragraph 4 of the Memorandum of Agreement 29 states that the P15,000 monthly rental due each of the three lessors
shall be collected in advance within the first five (5) days of each month "upon completion of the building," the same memorandum of agreement
also provides as follows:jgc:chanrobles.com.ph
"8. This Memorandum of Agreement shall bind the SECOND PARTY only after the signing of the Contact of Lease by both parties which shall
not be later than June 30, 1983, provided, however, that should the SECOND PARTY decide not to proceed with the signing on the deadline
aforestated, the FIRST PARTY shall not hold her liable therefor."cralaw virtua1aw library
In view thereof, reliance on the provisions of the Memorandum of Agreement is misplaced considering that its provisions would bind the parties
only upon the signing of the lease contract. However, the lease contract that was later entered into by the parties qualified the time when the
lessee should start paying the monthly rentals. Paragraph 5 of the lease contract states that the "LESSEE’s" obligation to pay the rental shall start
only upon the completion of the building, but if it is not completed within eight (8) months from date hereof as provided for in par. 5 (sic) above,
the monthly rental shall already accrue and shall be paid by LESSEE to LESSOR." That qualification applies even though the next sentence states
that" (I)n other words, during the period of construction, no monthly rentals shall be collected from LESSEE." Otherwise, there was no reason for
the insertion of that qualification on the period of construction of the building the termination of which would signal the accrual of the monthly
rentals. Non-inclusion of that qualification would also give the lessee the unbridled discretion as to the period of construction of the building to
the detriment of the lessor’s right to exercise ownership thereover upon the expiration of the 15-year lease period.
In actions for reformation of contact, the onus probandi is upon the party who insists that the contract should be reformed. 30 Huibonhoa having
failed to discharge that burden of proving that the true intention of the parties has not been accurately expressed in the lease contract sought to be
reformed, the trial court correctly held that no clear and convincing proof warrants the reformation thereof.
In the complaint, Huibonhoa alleged:jgc:chanrobles.com.ph
"5.9 By reason of mistake or accident, the contract (Annex ‘A’) fails to state the true intention and real agreement of the parties to the effect that
in case some unforeseen event should dramatically increase the cost of the building, then the amount of monthly rent shall be reduced to such
sum and the term of the lease extended for such duration as may be fair and equitable to both parties, bearing in mind the actual construction cost
of the building.chanrobles law library : red
5.10. As a direct result of the tragic Aquino assassination on 21 August 1983, which the parties did not foresee and coming as it did barely two
(2) months after the contract (Annex ‘A’) had been signed, the country’s economy dramatically turned from bad to worse, and the resulting ill
effects thereof specifically the hoarding of construction materials adversely affected the plaintiff resulting, among others, in delaying the
construction work and the skyrocketing of the interest rates on plaintiff’s loans, such that instead of roughly P6 Million as originally budgeted the
building in question now actually cost the plaintiff something like 11 to 12 million pesos, more or less."cralaw virtua1aw library
In the present petition, Huibonhoa asserts that: by reason of oversight or mistake, the true intention of the parties that should some unforeseen
event dramatically increase the cost of the building, then the amount of monthly rent shall be reduced to such sum and the term of the lease
extended to such period as would be fair and equitable to both sides, bearing in mind always that petitioner was ordinary LESSEE but was an
investor-developer." She insists that" (i)n truth, the contract, while that of lease, really amounted to a common business venture of the parties." 31
On account of her failure to prove what costly mistake allegedly suppressed the true intention of the parties, Huibonhoa honestly admitted that
there was an oversight in the drafting of the contract by her own counsel. By such admission, oversight may not be attributed to all the parties to
the contract and therefore, it cannot be considered a valid reason for the reformation of the same contract. In fact, because it was Huibonhoa’s
counsel himself who drafted the contract, any obscurity therein should be construed against her. 32 Unable to substantiate her stance that the true
intention of the parties is not expressed in the lease contract in question, Huibonhoa nonetheless contends that paragraph 5 thereof should be
interpreted in such a way that she should only begin paying monthly rent in October 1984 and not in March 1984. 33
Such contention betrays Huibonhoa’s confusion on the distinction between interpretation and reformation of contracts. In National Irrigation
Administration v. Gamit, 34 the Court distinguished the two concepts as follows:jgc:chanrobles.com.ph
"‘Interpretation’ is the act of making intelligible what was before not understood, ambiguous, or not obvious. It is a method by which the
meaning of language is ascertained. The ‘interpretation’ of a contract is the determination of the meaning attached to the words written or spoken
which make the contract. On the other hand, ‘reformation’ is that remedy in equity by means of which a written instrument is made or construed
so as to express or conform to the real intention of the parties. In granting reformation, therefore, equity is not really making a new contract for
the parties, but is confirming and perpetuating the real contract between the parties which, under the technical rules of law, could not be enforced
but for such reformation. As aptly observed by the Code Commission, the rationale of the doctrine is that it would be unjust and inequitable to
53
allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties."cralaw virtua1aw
library
By bringing an action for the reformation of subject lease contract, Huibonhoa chose to reform the instrument and not the contract itself. 35 She is
thus precluded from inserting stipulations that are not extant in the lease contract itself lest the very agreement embodied in the instrument is
altered.
Neither does the Court find merit in her submission that the assassination of the late Senator Benigno Aquino, Jr. was a fortuitous event that
justified a modification of the terms of the lease contract.
A fortuitous event is that which could not be foreseen, or which even if foreseen, was inevitable. To exempt the obligor from liability for a breach
of an obligation due to an "act of God", the following requisites must concur: (a) the cause of the breach of the obligation must be independent of
the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the
creditor. 36
In the case under scrutiny, the assassination of Senator Aquino may indeed be considered a fortuitous event. However, the said incident per se
could not have caused the delay in the construction of the building. What might have caused the delay was the resulting escalation of prices of
commodities including construction materials. Be that as it may, there is no merit in Huibonhoa’s argument that the inflation borne by the
Filipinos in 1983 justified the delayed accrual of monthly rental, the reduction of its amount and the extension of the lease by three (3) years.
Inflation is the sharp increase of money or credit or both without a corresponding increase in business transaction. 37 There is inflation when
there is an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price
level. 38 While it is of judicial notice that there has been a decline in the purchasing power of the Philippine peso, this downward fall of the
currency cannot be considered unforeseeable considering that since the 1970’s we have been experiencing inflation. It is simply a universal trend
that has not spared our country. 39 Conformably, this Court upheld the petitioner’s view in Occeña v. Jabson 40 that even a worldwide increase
in prices does not constitute a sufficient cause of action for modification of an instrument.
It is only when an extraordinary inflation supervenes that the law affords the parties a relief in contractual obligations. 41 In Filipino Pipe and
Foundry Corporation v. NAWASA, 42 the Court explained extraordinary inflation thus:jgc:chanrobles.com.ph
"Extraordinary inflation exists when ‘there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or
beyond the common fluctuation in the value of said currency, and such decrease or increase could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. (Tolentino, Commentaries and
Jurisprudence on the Civil Code, Vol. IV, p. 284.)
An example of extraordinary inflation is the following description of what happened to the Deutschmark in 1920:chanrob1es virtual 1aw library
‘More recently, in the 1920’s Germany experienced a case of hyperinflation. In early 1921, the value of the German mark was 4.2 to the U.S.
dollar. By May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached
4.2 trillion to the U.S. dollar!’ (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]).
As reported, ‘prices were going up every week, then every day, then every hour. Women were paid several times a days so that they could rush
out and exchange their money for something of value before what little purchasing power was left dissolved in their hands. Some workers tried to
beat the constantly rising prices by throwing their money out of the windows to their waiting wives, who would rush to unload the nearly
worthless paper. A postage stamp cost millions of marks and a loaf of bread, billions.’ (Sidney Rutberg, ‘The Money Balloon’ New York: Simon
and Schuster, 1975, p. 19, cited in ‘Economics, An Introduction’ by Villegas & Abola, 3rd Ed.)"
No decrease in the peso value of such magnitude having occurred, Huibonhoa has no valid ground to ask this Court to intervene and modify the
lease agreement to suit her purpose. As it is, Huibonhoa even failed to prove by evidence, documentary or testimonial, that there was an
extraordinary inflation from July 1983 to February 1984. Although she repeatedly alleged that the cost of constructing the building doubled from
P6 million to P12 million, she failed to show by how much, for instance, the price index of goods and services had risen during that intervening
period. An extraordinary inflation cannot be assumed. 43 Hence, for Huibonhoa to claim exemption from liability by reason of fortuitous event
under Art. 1174 of the Civil Code, she must prove that inflation was the sole and proximate cause of the loss or destruction of the contract 44 or,
in this case, of the delay in the construction of the building. Having failed to do so, Huibonhoa’s contention is untenable.
Pathetically, if indeed a fortuitous event deterred the timely fulfillment of Huibonhoa’s obligation under the lease contract, she chose the wrong
remedy in filing the case for reformation of the contract. Instead, she should have availed of the remedy of rescission of contract in order that the
court could release her from performing her obligation under Arts. 1266 45 and 1267 46 of the Civil Code, so that the parties could be restored to
their status prior to the execution of the lease contract.
As regards Huibonhoa’s assertion that the lease contract was novated by Rufina G. Lim and Severino Gojocco who entered into an agreement
with her on January 31, 1985 and July 21, 1986, respectively, it bears stressing that the lease contract they had entered into is not a simple one. It
is unique in that while there is only one lessee, Huibonhoa, and the contract refers to a "LESSOR," there are actually three lessors with separate
certificates of title over the three lots on which Huibonhoa constructed the 4-storey building. As Huibonhoa herself ironically asserts, the lease
contract is an "indivisible" one because the lessors’ interests "cannot be separated even if they owned the lands separately under different
certificates of title." 47 Hence, the acts of Rufina G. Lim and Severino Gojocco in entering into the new agreement with Huibonhoa could have
affected only their individual rights as lessors because no new agreement was forged between Huibonhoa and all the lessors, including Loreta
Gojocco.chanrobles law library : red
54
Consequently, because the three lot owners simultaneously entered into the lease contract with Huibonhoa, novation of the contract could only be
effected by their simultaneous act of abrogating the original contract and at the same time forging a new one in writing. Although as a rule no
form of words or writing is necessary to give effect to a novation, 48 a written agreement signed by all the parties to the lease contract is required
in this case. Ordinary diligence on the part of the parties demanded that they execute a written agreement if indeed they wanted to enter into a
new one because of the 15-year life span of the lease affecting real property and the fact that third persons would be affected thereby on account
of the express agreement allowing the lessee to lease the building to third parties. 49
Under the law, novation is never presumed. The parties to a contract must expressly agree that they are abrogating their old contract in favor of a
new one. 50 Accordingly, it was held that no novation of a contract had occurred when the new agreement entered into between the parties was
intended "to give life" to the old one. 51 "Giving life" to the contract was the very purpose for which Rufina G. Lim signed the agreement on
January 31, 1986 with Huibonhoa. It was intended to graft into the lease contract provisions that would facilitate fulfillment of Huibonhoa’s
obligation therein. 52 That the new agreement was meant to strengthen the enforceability of the lease is further evidenced by the fact, although its
stipulations as to the period of the lease and as to the amount of rental were altered, the agreement with Rufina G. Lim does not even hint that the
lease itself would be abrogated. As such, even Huibonhoa’s agreement with Rufina G. Lim cannot be considered a novation of the original lease
contract. Where the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words,
the parties expressly negated the lapsing of the old obligation, there can be no novation. 53
As regards the new agreement with Severino Gojocco, it should be noted that he only disclaimed its existence when the check issued by
Huibonhoa to him, allegedly in accordance with the new agreement, was dishonored. That unfortunate fact might have led Severino Gojocco to
refuse acceptance of rents paid by Huibonhoa subsequent to the dishonor of the check. However, the non-existence of the new agreement with
Severino Gojocco is a question of fact that the courts below had properly determined. The Court of Appeals has affirmed the trial court’s finding
that "not only was Gojocco’s consent vitiated by fraud and false representation there likewise was failure of consideration in the execution of
Exhibit C, (and therefore) the said agreement is legally inefficacious." 54 In the Resolution of October 18, 1990, the Court of Appeals considered
the amount of P270,825.00 represented by the check handed by Huibonhoa to Severino Gojocco as "partial settlement" or "partial payment" 55
clearly under the terms of the original lease contract. There is no reason to depart from the findings and conclusions of the appellate court on this
matter.
Nevertheless, because Severino Gojocco repudiates the new agreement even before this Court as his consent thereto had allegedly been "vitiated
by fraud and false representation," 56 Huibonhoa may not escape complete fulfillment of her obligation under the original lease contract as far as
Severino Gojocco is concerned. She is thus contractually bound to pay him the unpaid rents.
Aside from the monthly rental that should be paid by Huibonhoa starting March 1984, Loreto Gojocco Chua is also entitled to interest at the rate
of 6% per annum from the accrual of the rent in accordance with Article 2209 57 of the Civil Code until it is fully paid because the monetary
award does not partake of a loan or forbearance in money. However, the interim period from the finality of this judgment until the monetary
award is fully satisfied, is equivalent to a forbearance of credit and therefore, during that interim period, the applicable rate of legal interest shall
be 12%. 58 As regards Severino Gojocco, he shall be entitled to such interests only from the time that Huibonhoa defaulted paying her monthly
rentals to him considering that he had already received from her the amount of P270,825.00 as rentals.
The amount of monthly rentals upon which interest shall be charged shall be that stipulated in paragraph 5 of the lease contract or P15,000.00 to
each lessor. That amount, however, shall be subject to the provision therein that the amount of rentals shall be "adjusted/increased upon the
corresponding increase in the rental of subleases using the percentage increase in the totality of rentals of the sub-lessees as basis for the
percentage increase of monthly rental that LESSEE will pay to LESSOR." Upon remand of this case therefore, the trial court shall determine the
total monetary award in favor of Loreta Gojocco Chua and of Severino Gojocco.
From the facts of the case, it is clear that what Huibonhoa aimed for in filing the action for reformation of the lease contract, is to absolve herself
from her delay in the payment of monthly rentals and to extend the term of the lease, which under the original lease contract, expired in 1988.
The ostensible reasons behind the institution of the case she alleged were the unfavorable repercussions resulting from the economic and political
upheaval on the heels of the Aquino assassination. However, a contract duly executed is the law between the parties who are obliged to comply
with its terms. Events occurring subsequent to the signing of an agreement may suffice to alter its terms only if, upon failure of the parties to
arrive at a valid compromise, the court deems the same to be sufficient reasons in law for altering the terms of the contract. This court once
said:jgc:chanrobles.com.ph
"It is a long established doctrine that the law does not relieve a party from the effects of an unwise, foolish, or disastrous contract, entered into
with all the required formalities and with full awareness of what he was doing. Courts have no power to relieve parties from obligations
voluntarily assumed, simply because their contracts turned out to be disastrous deals or unwise investments." 59
In G.R. No. 102604
Petitioners Severino Gojocco and Loreta G. Chua assail the Decision of the Court of Appeals on the following grounds;
a) RESPONDENT COURT HAS DECIDED QUESTIONS OF SUBSTANCE NOT HERETOFORE DETERMINED BY THIS HONORABLE
COURT OR HAS DECIDED THEM IN A WAY CLEARLY CONTRARY TO LAW OR THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT;
b) RESPONDENT COURT HAS SO FAR DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS
AS TO CALL FOR AN EXERCISE OF THE POWERS OF SUPERVISION BY THE HONORABLE COURT. 60
The contentions of petitioners relate to the basic issue raised in the petition — whether or not the Court of Appeals erred in affirming the decision
of the Regional Trial Court that dismissed for lack of jurisdiction the complaint for ejectment brought by petitioners before the Metropolitan Trial
Court of Manila. In other words, the issue for determination here is: whether or not the Metropolitan Trial Court had jurisdiction over the
55
complaint for "cancellation of lease, ejectment and collection" in Civil Case No. 90-54557.
The governing law on jurisdiction when the complaint was filed on January 14, 1985 was Sec. 33 (2) of Batas Pambansa Blg. 129 vesting
municipal courts with:jgc:chanrobles.com.ph
"Exclusive original jurisdiction over cases of forcible entry and unlawful detainer. Provided, That when, in such cases, the defendant raises the
question of ownership in his pleadings and the question of possession cannot be resolved without deciding the issue of ownership, the issue of
ownership should be resolved only to determine the issue of possession."cralaw virtua1aw library
Thereunder, when the issue of ownership is indispensable to the resolution of the issue of possession, the Metropolitan Trial Court is empowered
to decide it as well. 61 Explaining this jurisdictional matter, in Dizon v. Court of Appeals, 62 the Court said:chanrobles law library : red
". . . Well-settled is the rule that in an ejectment suit, the only issue is possession de facto or physical or material possession and not possession de
jure. So that, even if the question of ownership is raised in the pleadings, as in this case, the court may pass upon such issue but only to determine
the question of possession especially if the former is inseparably linked with the latter. It cannot dispose with finality the issue of ownership-such
issue being inutile in an ejectment suit except to throw light on the question of possession. This is why the issue of ownership or title is generally
immaterial and foreign to an ejectment suit.
Detainer, being a mere quieting process, questions raised on real property are incidentally discussed. In fact, any evidence of ownership is
expressly banned by Sec. 4, Rule 70 except to resolve the question of possession. Thus, all that the court may do, is to make an initial
determination of who is the owner of the property so that it can resolve who is entitled to its possession absent other evidence to resolve the latter.
But such determination of ownership is not clothed with finality. Neither will it affect ownership of the property nor constitute a binding and
conclusive adjudication on the merits with respect to the issue of ownership. . . ."cralaw virtua1aw library
The Court has consistently held that in forcible entry and unlawful detainer cases, jurisdiction is determined by the nature of the action as pleaded
in the complaint. 63 The test of the sufficiency of the facts alleged in the complaint is whether or not admitting the facts alleged therein, the court
could render a valid judgment upon the same in accordance with the prayer of the plaintiff. 64
In an ejectment case, or specifically in an action for unlawful detainer like the present case, it suffices to allege that the defendant is unlawfully
withholding possession of the property in question. 65 A complaint for unlawful detainer is therefore sufficient if it alleges that the withholding
of possession or the refusal to vacate is unlawful without necessarily employing the terminology of the law. 66 It is therefore in order to make an
inquiry into the averments of the complaint in Civil Case No. 90-54557. 67 The complaint, that was called one for "cancellation of lease,
ejectment and collection," alleged the following facts:chanrob1es virtual 1aw library
1. The parties are residents of different barangays and therefore the provisions of P.D. No. 1508 (the law on the katarungang pambarangay) are
inapplicable;
2. The plaintiffs, Rufina G. Lim, Severino Gojocco and Loreta Gojocco Chua are the registered owners of three parcels of commercial land in
Ilaya Street, Binondo, Manila.
3. On June 30, 1983, they entered into a lease contract with defendant Huibonhoa whereby the latter would construct a 4-storey building on the
three lots that, after the expiration of the 15-year period of the lease, would be owned by the lessors, and that, upon completion of construction of
the building within eight (8) months from signing of the lease contract, the lessee would start paying monthly rentals;
4. After the expiration of the 8-months period or in March 1984, the rentals of P45,000.00 a month accrued.
5. Despite "verbal demands, meetings and conferences" by which the plaintiffs demanded from demanded from defendant payment of the total
amount due on account of the lease contract, defendant failed to pay;
6. On December 19, 1984, the plaintiffs, through counsel, wrote defendant letter informing her of their intention to "terminate and cancel the
lease for violation of its terms by the defendant" at the same time demanding restitution of the lots in question and payment of all rentals due;
7. Despite such verbal and written demands, the defendant refused to comply therewith to the damage and prejudice of the plaintiffs considering
that defendant was subleasing the stalls, bodegas and offices to tenants who had paid her goodwill money and "exorbitant rentals" since March
1984 or prior to the completion of the building until the filing of the complaint in amounts totaling millions of pesos;
8. Defendant continued to sublease vacant spaces while depriving plaintiffs of reasonable compensation for the use and occupation of the
premises;
9. Defendant did not utilize her own capital in the construction of the building as she was able to mortgage the lots to the China Banking
Corporation in the total amount of P3,700,000.00 as well as collect goodwill money from tenants;
10. Plaintiffs revoked the authority given to defendant to encumber the property because of her failure of pay and liquidate the real estate loan
within the one-year period which expired on September 30, 1984;
11. That plaintiffs were forced to file the action by reason of defendant’s bad faith and unwarranted refusal to satisfy their claims; and
12. The rentals should be made to answer for plaintiffs’ monetary claims on account of defendant’s impending departure from the Philippines.
After praying for the issuance of a preliminary writ of attachment, the plaintiffs prayed as follows:jgc:chanrobles.com.ph
56
"WHEREFORE, premises considered, it is most respectfully prayed that judgment be rendered in favor of plaintiffs and against the defendant as
follows:chanrob1es virtual 1aw library
1. Ordering defendant and all persons claiming rights under her to forthwith vacate the leased premises described in this Complaint and to
surrender actual and physical possession to herein plaintiffs and/or their duly authorized representatives;
2. Ordering defendant to pay plaintiff all rentals due and unpaid at the agreed rate of P45,000.00 per month from March, 1984 to January, 1985 or
for a period of 11 months with legal interests thereon until fully paid;chanroblesvirtual|awlibrary
3. Ordering the defendant to deposit past and future rentals with this Honorable Court, or in a bank acceptable to both parties, the Passbook to be
turned over and submitted to this Honorable Court for further disposition;
4. Sentencing defendant to pay the fair rental value of, and/or reasonable compensation for, the use and occupancy of the leased premises at the
rate of P60,000 per month beginning February 5, 1985 and every 5th of the succeeding month thereafter until the premises is actually vacated and
restored to herein plaintiffs;
5. To pay plaintiffs a sum equivalent to 20% of the total amount claimed in this action for and as attorney’s fees exclusive of appearance fees and
costs of this action;
6. That pending hearing of this case, a writ of preliminary attachment be issued against the credits due defendant from the tenants or sublessees of
the premises in question to serve as security for the satisfaction of any judgment that may be recovered in this case;
7. For such other and further relief as this Honorable Court may deem proper, just and equitable;
8. Plaintiffs further respectfully pray that for expediency, considering the nature of this action and to protect plaintiffs from incurring further
losses, damages and expenses concomitant to the deprivation or loss of their possession, that notwithstanding the amount of claim involved, they
hereby respectfully invoke the applicability of the rules on Summary Procedure in the interest of justice."cralaw virtua1aw library
Undoubtedly, the complaint avers ultimate facts required for a cause of action in an unlawful detainer case. It alleges possession of the properties
by the lessee, verbal and written demands to pay rental arrearages and to vacate the leased premises, continued refusal of the lessees to surrender
possession of the premises, and the fact that the action was filed within one year from demand to vacate.
A reading of the allegations of the complaint and the reliefs prayed for indeed reveals facts that appear to be extraneous to the primary aim of
recovering possession of property in an action for unlawful detainer although these facts do not involve issue of ownership of the premises. Thus,
consonant with the allegation that defendant was leasing the spaces in the building to the tune of millions of peso, plaintiffs pray for an increase
in monthly rentals to P60,000.00 a month starting February 5, 1985 or after construction of the building had been completed. The prayer likewise
speaks of "past and future rentals" that should be deposited with the court or in an acceptable bank. In other words, the complaint seeks relief that
are not limited to payment of the rent arrearages and the eviction of defendant from the leased premises.
Although for reasons of their own the Gojoccos opted not to express in the complaint their intention to terminate the lease, such intention could
be gleaned from their prayer that the court should "sentence" Huibonhoa to pay the higher rent of P60,000.00 a month. That explains why the
complaint is captioned as one for "cancellation of the lease" aside from its being one for ejectment and "collection." In praying that the court
directs the defendant to pay the increased rental of P60,000.00 a month, plaintiffs, in effect, would want the existing contract terminated in order
that the court could substitute it with another providing for an increased monthly rental.
However, forging contracts for parties in a case is beyond the jurisdiction of courts. Otherwise, it would result in the court’s substitution of its
own volition in a contract that should express only the parties’ will. Necessarily, the Metropolitan Trial Court could not favorably act on the
prayer for cancellation of the contract with another containing terms suggested by the plaintiffs as the allegations and prayer therefor are no more
than superfluities that do not affect the main cause of action averred in the complaint. The court therefore granted only the main relief sought by
the plaintiffs-the eviction of the defendant.
The Regional Trial Court incorrectly held that the complaint was also for rescission of contract, a case that is certainly not within the jurisdiction
of the Metropolitan Trial Court. By the allegations of the complaint, the Gojoccos’ aim was to cancel or terminate the contract because they
sought its partial enforcement in praying for rental arrearages. There is a distinction in law between cancellation of a contract and its rescission.
To rescind is to declare a contract void in its inception and to put an end to it as though it never were. It is not merely to terminate it and release
parties from further obligations to each other but to abrogate it from the beginning and restore the parties to relative positions which they would
have occupied had no contract ever been made. 68
Termination of a contract is congruent with an action for unlawful detainer. The termination or cancellation of a contract would necessarily entail
enforcement of its terms prior to the declaration of its cancellation in the same way that before a lessee is ejected under a lease contract, he has to
fulfill his obligations thereunder that had accrued prior to his ejectment. However, termination of a contract need not undergo judicial
intervention. The parties themselves may exercise such option. Only upon disagreement between the parties as to how it should be undertaken
may the parties resort to courts. Hence, notwithstanding the allegations in the complaint that are extraneous or not essential in an action for
unlawful detainer, the Metropolitan Trial Court correctly assumed jurisdiction over Civil Case No. 90-54557.
The Court finds sustainable basis for the observation of the Court of Appeals that execution of the judgment ejecting Huibonhoa would cause
complications that are anathema to a peaceful resolution of the controversy between the parties. Thus, while Huibonhoa would be ejected from
the lots owned by Severino Gojocco and Loreta Gojocco Chua, she would be bound by her agreement with Rufina G. Lim to continue with the
lease. The result would be disadvantageous to both Huibonhoa and Severino Gojocco and Loreta G. Chua. The said owners would be unable to
57
exercise rights of ownership over their lots upon which the building was constructed unless they remove or buy two-thirds of the
building.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
However, an action for unlawful detainer does not preclude the lessee or ejected party from availing of other remedies provided by law. The
prevailing doctrine is that suits or actions for the annulment of sale, title or document do not abate any ejectment action respecting the same
property. 69 In fact, in this case, the lessee, as it was, "jumped the gun" over the lessors in filing the action for reformation of the lease contract.
That it proved unfavorable to her does not detract from the fact that the controversy between her and the lessors has been resolved in accordance
with law albeit not in consonance with the wishes of all the parties.
Be that as it may, the problem of ejecting Huibonhoa has been rendered moot and academic by the expiration of the lease contract litigated upon
in June 1998. The parties might have availed of the provision of paragraph 1 of the lease contract whereby the parties agreed to renew it "for a
similar or shorter period upon terms and conditions mutually agreeable" to them. If they opted to brush aside that provision, with more reason,
Huibonhoa’s eviction should ensue as a matter of enforcement of the lease contract.
WHEREFORE, judgment is hereby rendered as follows:chanrob1es virtual 1aw library
a.) In G.R. No. 95897, the decision of the Court of Appeals in CA-G.R. CV No. 16575, dismissing petitioner’s complaint for reformation of
contract, is AFFIRMED with the modifications that:chanrob1es virtual 1aw library
1] Private respondent Loreta Gojocco Chua is adjudged entitled to legal interest of 6% per annum from March, 1984, the time the rents became
due;
2] Private respondent Severino Gojocco shall receive 6% legal interest only from the time Florencia T. Huibonhoa defaulted in the payment of
her monthly rents; and
3] Legal interest of 12% per annum shall accrue from the finality of this decision until the amount due is fully paid.
b) In G.R. No. 102604, the decision of the Court of Appeals in CA-G.R. SP No. 24654, affirming the decision of the Regional Trial Court of
origin which dismissed the ejectment case instituted by the petitioners against the private respondent is SET ASIDE; the order of ejectment issued
by the Metropolitan Trial Court a quo on July 30, 1980 is UPHELD; and the private respondent and all persons claiming authority under her are
ordered to vacate the land and portion of the building corresponding to Lot No. 26-B covered by TCT No. 80728 of petitioner Severino Gojocco,
and the portion corresponding to Lot No. 26-C covered by TCT No. 155450 of petitioner Loreta Chua. No pronouncement as to costs.
58
G.R. No. 137798 October 4, 2000
LUCIA R. SINGSON, petitioner,

vs.
CALTEX (PHILIPPINES), INC. respondent.
DECISION
GONZAGA-REYES, J.:
Petitioner seeks a review on certiorari of the decision of the former Special Second Division of the Court of Appeals dated November 27,
1998,1 affirming the decision of the Regional Trial Court of Manila, Branch 25 2 which dismissed petitioner's action for reformation of contract
and adjustment of rentals.
The facts of the case are undisputed ---
Petitioner and respondent entered into a contract of lease on July 16, 1968 over a parcel of land in Cubao, Quezon City. The land, which had an
area of 1,400 square meters and was covered by Transfer Certificates of Title No. 43329 and 81636 issued by the Register of Deeds of Quezon
City, was to be used by respondent as a gasoline service station.
The contract of lease provides that the lease shall run for a period of twenty (20) years and shall abide by the following rental rates:
xxx xxx xxx
Rental. --- The LESSEE agrees to pay the following rental for said premises:
P2.50/sq.m. per month from the 1st to 10th years and P3.00/sq.m. per month from the 11th to 20th years, payable monthly in advance within the
1st 15 days of each month; provided that the rentals for the 1st 5 years less a discount of eleven (11) percent per annum computed on a monthly
diminishing balance, shall be paid to LESSOR upon compliance of the three (3) conditions provided in clause (2) above.
LESSEE also agrees to pay lessor, the sum of Six Thousand Pesos (P6,000.00) as demolition expenses, upon effectivity of this lease.
The rental herein provided for is in any event the maximum rental which LESSOR may collect during the term of this lease or any renewal or
extension thereof. LESSEE further agrees for thirty (30) days after written notice of such default has actually been delivered to the General
Manager of Caltex (Philippines), Inc. LESSOR shall then have the right to terminate this lease on thirty (30) days written notice to LESSEE. xxx
xxx xxx 3
Thus, based on the foregoing provisions of the lease contract, the monthly rental was fixed at P3,500.00 for the first ten years, and at P4,200.00
for the succeeding ten years of the lease.
On June 23, 1983, or five years before the expiration of the lease contract, petitioner asked respondent to adjust or increase the amount of rentals
citing that the country was experiencing extraordinary inflation. In a letter dated August 3, 1983, respondent refused petitioner's request and
declared that the terms of the lease contract are clear as to the rental amounts therein provided being "the maximum rental which the lessor may
collect during the term of the lease."4
On September 21, 1983, petitioner instituted a complaint before the RTC praying for, among other things, the payment by respondent of adjusted
rentals based on the value of the Philippine peso at the time the contract of lease was executed. The complaint invoked Article 1250 of the Civil
Code, stating that since the execution of the contract of lease in 1968 an extraordinary inflation had supervened resulting from the deterioration of
worldwide economic conditions, a circumstance that was not foreseen and could not have been reasonably foreseen by the parties at the time they
entered into contract.
To substantiate its allegation of extraordinary inflation, petitioner presented as witness Mr. Narciso Uy, Assistant Director of the Supervising and
Examining Sector of the Central Bank, who attested that the inflation rate increased abruptly during the period 1982 to 1985, caused mainly by
the devaluation of the peso.5 Petitioner also submitted into evidence a certification of the official inflation rates from 1966 to 1986 prepared by the
National Economic Development Authority ("NEDA") based on consumer price index, which reflected that at the time the parties entered into the
subject contract, the inflation rate was only 2.06%; then, it soared to 34.51% in 1974, and in 1984, reached a high of 50.34%.6
In a decision rendered on July 15, 1991, the RTC dismissed the complaint for lack of merit. This judgment was affirmed by the Court of Appeals.
Both courts found that petitioner was unable to prove the existence of extraordinary inflation from 1968 to 1983 (or from the year of the
execution of the contract up to the year of the filing of the complaint before the RTC) as to justify an adjustment or increase in the rentals based
upon the provisions of Article 1250 of the Civil Code.
59
The Court of Appeals declared that although, admittedly, there was an economic inflation during the period in question, it was not such as to call
for the application of Article 1250 which is made to apply only to "violent and sudden changes in the price level or uncommon or unusual
decrease of the value of the currency. (It) does not contemplate of a normal or ordinary decline in the purchasing power of the peso."7
The Court of Appeals also found similarly with the trial court that the terms of rental in the contract of lease dated July 16, 1968 are clear and
unequivocal as to the specific amount of the rental rates and the fact that the rentals therein provided shall be the "maximum rental" which
petitioner as lessor may collect. Absent any showing that such contractual provisions are contrary to law, morals, good customs, public order or
public policy, the Court of Appeals held that there was no basis for not acknowledging their binding effect upon the parties. It also upheld the
application by the trial court of the ruling in Filipino Pipe and Foundry Corporation vs. National Waterworks and Sewerage Authority, 161
SCRA 32, where the Court held that although there has been a decline in the purchasing power of the Philippine peso during the period 1961 to
1971, such downward fall of the currency could not be considered "extraordinary" and was simply a universal trend that has not spared the
Philippines.
Thus, the dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, in view of the foregoing, the appeal is hereby DISMISSED and the decision appealed from is hereby AFFIRMED.
SO ORDERED.8
Petitioner's motion for reconsideration of the above decision was denied by the Court of Appeals in a resolution dated March 10, 1999.
Aggrieved, petitioner filed this petition for review on certiorari where she assails as erroneous the decision of the Court of Appeals, specifically,
(1) in ruling that Article 1250 of the Civil Code is inapplicable to the instant case, (2) in not recognizing the applicability of the principle of rebus
sic stantibus, and (3) in applying the ruling in Filipino Pipe and Foundry Corporation vs. NAWASA.
Petitioner contends that the monthly rental of P3.00 per square meter is patently inequitable. Based on the inflation rates supplied by NEDA,
there was an unusual increase in inflation that could not have been foreseen by the parties; otherwise, they would not have entered into a
relatively long-term contract of lease. She argued that the rentals in this case should not be regarded by their quantitative or nominal value, but as
"debts of value", that is, the rental rates should be adjusted to reflect the value of the peso at the time the lease was contracted. 9
Petitioner also insists that the factual milieu of the present case is distinct from that in Filipino Pipe and Foundry Corporation vs. NAWASA. She
pointed out that the inflation experienced by the country during the period 1961 to 1971 (the pertinent time period in the Filipino Pipe case) had a
lowest of 1.35% in 1969 and a highest of 15.03% in 1971, whereas in the instant case, involving the period 1968 to 1983, there had been highly
abnormal inflation rates like 34.51% in 1974 (triggered by the OPEC oil price increases in 1973) and 50.34% in 1984 (caused by the
assassination of Benigno Aquino, Jr. in 1983). Petitioner argues that the placing of the country under martial rule in 1972, the OPEC oil price
increases in 1973, and the Aquino assassination which triggered the EDSA revolution, were fortuitous events that drastically affected the
Philippine economy and were beyond the reasonable contemplation of the parties.
To further bolster her arguments, petitioner invokes by analogy the principle of rebus sic stantibus in public international law, under which a vital
change of circumstances justifies a state's unilateral withdrawal from a treaty. In the herein case, petitioner posits that in pegging the monthly
rental rates of P2.50 and P3.00 per square meter, respectively, the parties were guided by the economic conditions prevalent in 1968, when the
Philippines faced robust economic prospects. Petitioner contends that between her and respondent, a corporation engaged in high stakes business
and employing economic and business experts, it is the latter who had the unmistakable advantage to analyze the feasibility of entering into a 20-
year lease contract at such meager rates.
The only issue crucial to the present appeal is whether there existed an extraordinary inflation during the period 1968 to 1983 that would call for
the application of Article 1250 of the Civil Code and justify an adjustment or increase of the rentals between the parties.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
Article 1250 was inserted in the Civil Code of 1950 to abate the uncertainty and confusion that affected contracts entered into or payments made
during World War II, and to help provide a just solution to future cases. 10 The Court has, in more than one occasion, been asked to interpret the
provisions of Article 1250, and to expound on the scope and limits of "extraordinary inflation".
We have held extraordinary inflation to exist when there is a decrease or increase in the purchasing power of the Philippine currency which is
unusual or beyond the common fluctuation in the value of said currency, and such increase or decrease could not have been reasonably foreseen
or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation.11
60
An example of extraordinary inflation, as cited by the Court in Filipino Pipe and Foundry Corporation vs. NAWASA, supra, is that which
happened to the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early 1921, the value of the German mark was 4.2 to the U.S.
dollar. By May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached
4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]).
As reported, "prices were going up every week, then every day, then every hour.1âwphi1 Women were paid several times a day so that they could
rush out and exchange their money for something of value before what little purchasing power was left dissolved in their hands. Some workers
tried to beat the constantly rising prices by throwing their money out of the windows to their waiting wives, who would rush to unload the nearly
worthless paper. A postage stamp cost millions of marks and a loaf of bread, billions." (Sidney Rutberg, "The Money Balloon", New York:
Simon and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd Ed.)
The supervening of extraordinary inflation is never assumed.12 The party alleging it must lay down the factual basis for the application of Article
1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records and statistics submitted by plaintiff-appellant proved that
there has been a decline in the purchasing power of the Philippine peso, but this downward fall cannot be considered "extraordinary" but was
simply a universal trend that has not spared our country.13 Similarly, in Huibonhoa vs. Court of Appeals,14 the Court dismissed plaintiff-
appellant's unsubstantiated allegation that the Aquino assassination in 1983 caused building and construction costs to double during the period
July 1983 to February 1984. In Serra vs. Court of Appeals,15 the Court again did not consider the decline in the peso's purchasing power from
1983 to 1985 to be so great as to result in an extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also raises as basis for the application of Article 1250 the Philippine economic crisis in the
early 1980s --- when, based on petitioner's evidence, the inflation rate rose to 50.34% in 1984. We hold that there is no legal or factual basis to
support petitioner's allegation of the existence of extraordinary inflation during this period, or, for that matter, the entire time frame of 1968 to
1983, to merit the adjustment of the rentals in the lease contract dated July 16, 1968. Although by petitioner's evidence there was a decided
decline in the purchasing power of the Philippine peso throughout this period, we are hard put to treat this as an "extraordinary inflation" within
the meaning and intent of Article 1250. Rather, we adopt with approval the following observations of the Court of Appeals on petitioner's
evidence, especially the NEDA certification of inflation rates based on consumer price index:
xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded 100% in any single year; (b) the highest official inflation rate
recorded was in 1984 which reached only 50.34%; (c) over a twenty one (21) year period, the Philippines experienced a single-digit inflation in
ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and 1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974,
1979, 1980, 1981, 1982, 1984 and 1989) when the Philippines experienced double-digit inflation rates, the average of those rates was only
20.88%; (e) while there was a decline in the purchasing power of the Philippine currency from the period 1966 to 1986, such cannot be
considered as extraordinary; rather, it is a normal erosion of the value of the Philippine peso which is a characteristic of most currencies.16
"Erosion" is indeed an accurate description of the trend of decline in the value of the peso in the past three to four decades. Unfortunate as this
trend may be, it is certainly distinct from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of extraordinary inflation are not to be applied without an official declaration thereof by competent
authorities.17
Lastly, the provisions on rentals in the lease contract dated July 16, 1968 between petitioner and respondent are clear and categorical, and we
have no reason to suppose that such lease contract does not reflect or express their true intention and agreement. The contract is the law between
the parties and if there is indeed reason to adjust the rent, the parties could have by themselves negotiated the amendment of the contract.18
WHEREFORE, the petition seeking the reversal of the decision of the Court of Appeals in CA-G.R. CV No. 54115 is DENIED.
61
G.R. No. 119872 July 7, 1997
REMEDIOS NAVOA RAMOS, petitioner,

vs.
COURT OF APPEALS, HON. PRESIDING JUDGE, Regional Trial Court, Branch 93, Quezon City, and SPS. MANUEL and
ESMERALDA MALAPIT, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the resolution of the Court of Appeals, dismissing the appeal of petitioner from the decision of the
Regional Trial Court, Branch 93, of Quezon City.
Petitioner is the owner of factory space No. 5 at the corner of Scout Madrinan and Scout Torillo Streets, Quezon City. On September 30, 1988,
she entered into a contract of lease with private respondents respecting the property in question.
The contract of lease contained, among other things, the following stipulations:
1(2) The Lessee agrees that on the 5th year, the Lessee shall change the principal Yakal posts into reinforced concrete
posts, all the way from the base on the ground up to the roofing holding or supporting the main trusses of the galvanized
roofing at the expense of the Lessee and no expense whatsoever to the Owner-Lessor. Failure of the Lessee to comply with
this term will automatically terminate or cancel this contract.
1(3) . . . In case of inflation or devaluation of the Philippine Peso, the monthly rental will automatically increase or
decrease depending on the devaluation or inflation rate of the pesos to a dollar.
12. The monthly rental shall be paid every first week of the month. In case of delay in the payment of monthly rental, the
Lessee will pay a penalty of 20% per annum for every month of delay; this contract is terminated if the delay reaches 3
months.
20. The Lessee agrees that on the 5th year, the Lessee shall change the roofing and the three posts located at the back part
of the lease premises into reinforced concrete post all the way from the base on the ground up to the roofing holding or
supporting the main trusses of the galvanized roofing at the expense of the Lessee and no expense whatsoever to the
Lessor.
On May 24, 1994, petitioner filed a complaint for ejectment before the Metropolitan Trial Court of Quezon City, alleging failure by respondents
to comply with their undertakings under the contract of lease without any valid or justifiable reason.
The MeTC gave judgment for petitioner, describing private respondents' defenses as "utterly flimsy." It rejected private respondents' defense that
they were not able to comply with the requirement to replace wooden posts with concrete ones because petitioner's son forbade them to do so.
The MeTC held that since petitioner's son was not a party to the contract, only petitioner's waiver could excuse private respondents from
complying with their obligation under the lease contract. As regards the failure of private respondents to pay the rents for more than three months,
the MeTC also rejected private respondents' claim that the petitioner's son refused to accept payment because even if this was true, private
respondents had a remedy of consigning the rentals in court. For these reasons, the MeTC upheld petitioner's right to rescind the contract even in
the absence of judicial pronouncement. It quoted the ruling in University of the Philippines v. De los Angeles,1 reiterated in Lim v. Court of
Appeals, 2 that a party who deems the contract violated may consider it resolved and rescinded and act accordingly without previous court action,
although it acts at its own risk as only the final judgment of a court can finally determine his right.
On appeal, the RTC reversed the decision and dismissed the case. First, with respect to the failure of private respondents to replace the yakal
posts with reinforced concrete ones, the RTC said that, as private respondents alleged, it was not only petitioner's son but petitioner as well who
prevented private respondents from replacing the wooden posts. In fact, private respondents had already engaged the services of a contractor to
undertake the work.
With respect to the alleged failure of private respondents to pay increased rent because of inflation or devaluation of the Philippine peso, the RTC
held that there had been no official declaration of inflation or devaluation of the Philippine peso. The RTC added that since the contract between
the parties already provided for an annual increase in the rent over a period of ten years and for penalty of twenty (20) per cent per annum for
every month of delay in the payment of the monthly rental, the imposition of additional rent due to inflation or devaluation of the Philippine peso
would be exceedingly unconscionable.
62
On the claim that because private respondents had been in arrears for three months, the contract was terminated, the RTC ruled that there was no
delay in the payment of rent because the case was brought on May 20, 1994, eleven (11) days before the end of three (3) months since the arrears
started, so that petitioner had no cause of action against private respondents.
The dispositive portion of the decision of the RTC reads:
Wherefore, finding reversible errors in appealed decision of the lower court, this Court hereby reverses the aforesaid
decision of the lower court and finds judgment in favor of the defendant and that the aforesaid decision is hereby dismissed
and the plaintiff is ordered to:
1. pay the defendant exemplary damages in the amount of P50,000.00;
2. pay the defendant the amount of P100,000.00 for and as attorney's fees and expenses of litigation;
3. pay actual and compensatory damages in the amount of P50,000.00; and
4. pay the costs.
On March 2, 1995, petitioner filed a petition for review in the Court of Appeals, but the appellate court dismissed her petition on March 13, 1995
for her failure to attach a certified true copy of the decision of the MeTC as well as the corrected dispositive portion of that decision, in addition
to the certified true copy of the decision of the RTC.
On March 29, 1995, petitioner filed a motion for reconsideration but her motion was denied. Hence, this petition for review on certiorari.
The petitioner assigns three (3) errors to wit: (1) the respondent Court of Appeals erred in dismissing petitioner's appeal from the decision of the
RTC and denying petitioner's motion for reconsideration; (2) the respondent RTC erred in reversing the decision of the MeTC; and (3) the
respondent RTC erred in awarding damages of P50,000.00 as exemplary damages, P100,000.00 as attorney's fees, and P50,000.00 actual and
compensatory damages.
Petitioner argues that her lawyer's failure to attach a certified true copy of the decision of the MeTC and the corrected dispositive portion of that
decision to her petition for review in the Court of Appeals was due to an honest mistake and that the mistake was made without bad faith.
The pertinent provision of the Revised Internal Rules of the Court of Appeals (hereafter RIRCA), on the basis of which the Court of Appeals
dismissed petitioner's appeal, provides:
Rule 6, §3(b). The petition shall be accompanied by a certified true copy of the disputed decisions, judgments, or orders of
the lower courts, together with true copies of the pleadings and other material portions of the record as would support the
allegations of the petition.
Petitioner's counsel claims that he thought that only a certified true copy of the decision of the RTC had to be attached to the petition for review
which he filed because the decision of the MeTC is not a "disputed decision" within the meaning of Rule 6, §3(b), it being favorable to her.
Petitioner is right that the MeTC's decision cannot be considered a "disputed decision." The phrase is the equivalent of "ruling, order or decision
appealed from" in Rule 32, §2 of the 1964 Rules made applicable to appeals from decisions of the then Courts of First Instance to the Court of
Appeals by R.A. No. 296, as amended by R.A. No. 5433. Since petitioner was not appealing from the decision of the MeTC in her favor, she was
not required to attach a certified true copy — but only a true or plain copy — of the aforesaid decision of the MeTC. The reason is that inclusion
of the decision is part of the requirement to attach to the petition for review "other material portion of the record as would support the allegations
of the petition." Indeed, petitioner referred to the MeTC decision in many parts of her petition for review in the Court of Appeals for support of
her theory.
Nonetheless, the Court of Appeals should have reconsidered its dismissal of petitioner's appeal after petitioner submitted a certified true copy of
the MeTC's decision. It was clear from the petition for review that the RTC incurred serious errors in awarding damages to private respondents
which were made without evidence to support the award and without any explanation. It should have been evident to the appellate court that the
RTC made these awards in gross disregard of the rulings of this Court that, for example, no award of attorney's fees can be made without an
express finding of the facts that bring the case within the exception in Art. 2208 of the Civil Code.3
Indeed, there was compelling reason to set aside the procedural defect in order to correct the patent injustice. "Rules of procedure are but mere
tools designed to facilitate the attainment of justice, such that when rigid application of the rules would tend to frustrate rather than promote
substantial justice, this Court empowered to suspend its operation."4
63
Coming now to the merits of the petition, we think petitioner is right that the RTC erred in giving judgment for private respondents because the
fact is that the latter violated the provisions of the lease contract, to wit: (1) failure of private respondents to change the principal yakal posts on
the fifth year of the contract of lease and (2) to pay the rent for more than three months on several occasions.
With respect to the first item (private respondents' failure to change the yakal posts on the fifth year of the contract of lease), while the MeTC
found that it was the petitioner's son who stopped the private respondents from changing the posts and, hence, private respondents should not
have felt bound to comply with the order, the RTC found that it was not petitioner's son alone but also petitioner who prevented the private
respondents from changing the yakal posts.5 The RTC relied on the letter, dated March 23, 1994, of private respondents' counsel to petitioner's
counsel in which it was claimed that private respondents did not replace the wooden posts of the building with concrete ones because petitioner,
"through one of her children stated that it was unnecessary to perform such changes at the time as it may alter the structure." Private respondents
said that they had in fact started to look for contractors to undertake the work but petitioner prevented them from doing so. This was denied by
petitioner and indeed, if it was true that petitioner did not want private respondents to replace the posts, this was a modification of their contract.
Under paragraph 10 of the contract, the alleged agreement would not be binding unless it was reduced in writing and was duly signed by both of
them. Indeed, the replacement of the yakal posts on the fifth year of the contract was deemed by the parties so important that its nonfulfillment is
a ground for the termination of the contract.
The second violation alleged (private respondents' failure to pay the rent for three consecutive months, i.e., March, April and May, 1994) was
likewise proven. As already noted, the RTC dismissed this allegation on the ground that when the complaint against private respondent was filed
on May 20, 1994 the period covered by private respondents' failure was eleven (11) days short of three months. Hence, petitioner had no cause of
action against private respondents based on this ground.
But, as petitioner correctly points out, under the contract of lease (par. 12) the monthly rental was due on the first week of the month so that,
inasmuch as the rent for May 1994 was due in the first week of May, private respondents' failure to pay then, plus their previous default in
payment of the rent for March and April 1994, made them altogether in arrears for three consecutive months. The error of the RTC lay in
assuming that the monthly rental fell due only at the end of the month, which is contrary to the express agreement of the parties. Pursuant to the
contract, the failure to pay the rent for the consecutive months resulted in the termination of the lease.
Because of these violations of the lease contract by private respondents there is ground, based on Art. 1673(3) of the Civil Code, for their
ejectment.6
But petitioner's last contention (that private respondents failed to pay increased rent despite supervening inflation or devaluation of the Philippine
peso) is untenable. The provision of Art. 1250 requires for its application a declaration of inflation by the Central Bank. Without such declaration
creditors cannot demand an increase of what is due them.7
WHEREFORE, the resolutions of the Court of Appeals dismissing the petition for review and denying reconsideration are REVERSED and the
decision of the Metropolitan Trial Court is REINSTATED.
64
G.R. No. 187678 April 10, 2013
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,

vs.
CHINA BANKING CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the February 20, 2009
Decision1 and April 27, 2009 Resolution2 of the Court of Appeals (CA) in CA G.R. CV No. 80338. The CA affirmed the April 14, 2003
Decision3 of the Regional Trial Court (RTC) of Makati City, Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation (respondent) as evidenced by two
Promissory Notes both dated October 6, 1998 and numbered 507-001051-34 and 507-001052-0,5 for the sums of !!6,216,000 and ₱4, 139,000,
respectively. The loan was secured by a Real Estate Mortgage (REM) over petitioners’ property located at 49 Greensville St., White Plains,
Quezon City covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394) PR-412086 of the Register of Deeds of Quezon City.
When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of the outstanding balance with accrued
monthly interests. On September 5, 2000, petitioners received respondent’s last demand letter7 dated August 29, 2000.
As of February 23, 2001, the amount due on the two promissory notes totaled ₱19,201,776.63 representing the principal, interests, penalties and
attorney’s fees. On the same day, the mortgaged property was sold at public auction, with respondent as highest bidder for the amount of
₱10,300,000.
On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from respondent for the payment of ₱8,901,776.63, the amount of
deficiency after applying the proceeds of the foreclosure sale to the mortgage debt. As its demand remained unheeded, respondent filed a
collection suit in the trial court. In its Complaint,10 respondent prayed that judgment be rendered ordering the petitioners to pay jointly and
severally: (1) ₱8,901,776.63 representing the amount of deficiency, plus interests at the legal rate, from February 23, 2001 until fully paid; (2) an
additional amount equivalent to 1/10 of 1% per day of the total amount, until fully paid, as penalty; (3) an amount equivalent to 10% of the
foregoing amounts as attorney’s fees; and (4) expenses of litigation and costs of suit.
In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special and affirmative defense, that the complaint
states no cause of action considering that the principal of the loan was already paid when the mortgaged property was extrajudicially foreclosed
and sold for ₱10,300,000. Petitioners contended that should they be held liable for any deficiency, it should be only for ₱55,000 representing the
difference between the total outstanding obligation of ₱10,355,000 and the bid price of ₱10,300,000. Petitioners also argued that even assuming
there is a cause of action, such deficiency cannot be enforced by respondent because it consists only of the penalty and/or compounded interest on
the accrued interest which is generally not favored under the Civil Code. By way of counterclaim, petitioners prayed that respondent be ordered
to pay ₱100,000 in attorney’s fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness. She testified that she handled the account of
petitioners and assisted them in processing their loan application. She called them monthly to inform them of the prevailing rates to be used in
computing interest due on their loan. As of the date of the public auction, petitioners’ outstanding balance was ₱19,201,776.6312 based on the
following statement of account which she prepared:
STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO
PN# 507-0010520 due on 04-07-2004
1âwphi1
Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00

Interest on ₱4,139,000.00 fr. 04-Nov-99
04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96
65
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99
Interest on ₱4,139,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27
Interest on ₱4,139,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64
Interest on ₱4,139,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86
Penalty charge @ 1/10 of 1% of the total amount due
(₱4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00
Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73
PN# 507-0010513 due on 04-07-2004
Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00
Interest on ₱6,216,000.00 fr. 06-Oct-99
04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51
Interest on ₱6,216,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86
Interest on ₱6,216,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18
Interest on ₱6,216,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07
Penalty charge @ 1/10 of 1% of the total amount due
(₱6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00
10,770,199.2
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
17,772,309.9
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Less: A/P applied to balance of principal (55,000.00)
17,456,160.5
Less: Accounts payable L & D (261,149.39) 7
Add: 10% Attorney’s Fee 1,745,616.06
19,201,776.6
Total amount due 3
10,300,000.0
Less: Bid Price 0
TOTAL DEFICIENCY AMOUNT AS OF
13
FEB. 23, 2001 8,901,776.63
Petitioners thereafter received a demand letter14 dated May 2, 2001 from respondent’s counsel for the deficiency amount of ₱8,901,776.63. Ms.
Yu further testified that based on the Statement of Account 15 dated March 15, 2002 which she prepared, the outstanding balance of petitioners
was ₱15,190,961.48.16
On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the prevailing market rate and she notified
petitioners of the prevailing rate by calling them monthly before their account becomes past due. When asked if there was any written authority
from petitioners for respondent to increase the interest rate unilaterally, she answered that petitioners signed a promissory note indicating that
they agreed to pay interest at the prevailing rate.17
Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank promissory note and was informed that the
interest rate on the loan will be based on prevailing market rates. Every month, respondent informs him by telephone of the prevailing interest
rate. At first, he was able to pay his monthly amortizations but when he started to incur delay in his payments due to the financial crisis,
66
respondent pressured him to pay in full, including charges and interests for the delay. His property was eventually foreclosed and was sold at
public auction.18
On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in the business of distributing medical supplies. He
admitted having read the promissory notes and that he is aware of his obligation under them before he signed the same. 19
In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:
WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is rendered ordering herein defendants to pay jointly and
severally to plaintiff, the following:
1. ₱8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus interest thereon at the legal rate after February
23, 2001;
2. An amount equivalent to 10% of the total amount due as and for attorney’s fees, there being stipulation therefor in the promissory
notes;
3. Costs of suit.
SO ORDERED.20
The trial court agreed with respondent that when the mortgaged property was sold at public auction on February 23, 2001 for ₱10,300,000 there
remained a balance of ₱8,901,776.63 since before foreclosure, the total amount due on the two promissory notes aggregated to ₱19,201,776.63
inclusive of principal, interests, penalties and attorney’s fees. It ruled that the amount realized at the auction sale was applied to the interest,
conformably with Article 1253 of the Civil Code which provides that if the debt produces interest, payment of the principal shall not be deemed
to have been made until the interests have been covered. This being the case, petitioners’ principal obligation subsists but at a reduced amount of
₱8,901,776.63.
The trial court further held that Ignacio’s claim that he signed the promissory notes in blank cannot negate or mitigate his liability since he
admitted reading the promissory notes before signing them. It also ruled that considering the substantial amount involved, it is unbelievable that
petitioners threw all caution to the wind and simply signed the documents without reading and understanding the contents thereof. It noted that
the promissory notes, including the terms and conditions, are pro forma and what appears to have been left in blank were the promissory note
number, date of the instrument, due date, amount of loan, and condition that interest will be at the prevailing rates. All of these details, the trial
court added, were within the knowledge of the petitioners.
When the case was elevated to the CA, the latter affirmed the trial court’s decision. The CA recognized respondent’s right to claim the deficiency
from the debtor where the proceeds of the sale in an extrajudicial foreclosure of mortgage are insufficient to cover the amount of the debt. Also, it
found as valid the stipulation in the promissory notes that interest will be based on the prevailing rate. It noted that the parties agreed on the
interest rate which was not unilaterally imposed by the bank but was the rate offered daily by all commercial banks as approved by the Monetary
Board. Having signed the promissory notes, the CA ruled that petitioners are bound by the stipulations contained therein.
Petitioners are now before this Court raising the sole issue of whether the interest rates imposed upon them by respondent are valid. Petitioners
contend that the interest rates imposed by respondent are not valid as they were not by virtue of any law or Bangko Sentral ng Pilipinas (BSP)
regulation or any regulation that was passed by an appropriate government entity. They insist that the interest rates were unilaterally imposed by
the bank and thus violate the principle of mutuality of contracts. They argue that the escalation clause in the promissory notes does not give
respondent the unbridled authority to increase the interest rate unilaterally. Any change must be mutually agreed upon.
Respondent, for its part, points out that petitioners failed to show that their case falls under any of the exceptions wherein findings of fact of the
CA may be reviewed by this Court. It contends that an inquiry as to whether the interest rates imposed on the loans of petitioners were supported
by appropriate regulations from a government agency or the Central Bank requires a reevaluation of the evidence on records. Thus, the Court
would in effect, be confronted with a factual and not a legal issue.
The appeal is partly meritorious.
The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:
Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. Article 1956 of
the Civil Code likewise ordains that "no interest shall be due unless it has been expressly stipulated in writing."
The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from
contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any
67
contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid.21
Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting parties. This Court has long
recognized that there is nothing inherently wrong with escalation clauses which are valid stipulations in commercial contracts to maintain fiscal
stability and to retain the value of money in long term contracts.22 Hence, such stipulations are not void per se.23
Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely
depriving the debtor of the right to assent to an important modification in the agreement" is void. A stipulation of such nature violates the
principle of mutuality of contracts.24 Thus, this Court has previously nullified the unilateral determination and imposition by creditor banks of
increases in the rate of interest provided in loan contracts.25
In Banco Filipino Savings & Mortgage Bank v. Navarro,26 the escalation clause stated: "I/We hereby authorize Banco Filipino to correspondingly
increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful
rates of interest that may be charged on this particular kind of loan." While escalation clauses in general are considered valid, we ruled that Banco
Filipino may not increase the interest on respondent borrower’s loan, pursuant to Circular No. 494 issued by the Monetary Board on January 2,
1976, because said circular is not a law although it has the force and effect of law and the escalation clause has no provision for reduction of the
stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board" (de-escalation clause).
Subsequently, in Insular Bank of Asia and America v. Spouses Salazar27 we reiterated that escalation clauses are valid stipulations but their
enforceability are subject to certain conditions. The increase of interest rate from 19% to 21% per annum made by petitioner bank was disallowed
because it did not comply with the guidelines adopted by the Monetary Board to govern interest rate adjustments by banks and non-banks
performing quasi-banking functions.
In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory notes authorized PNB to increase the stipulated interest per
annum "within the limits allowed by law at any time depending on whatever policy PNB may adopt in the future; Provided, that, the interest rate
on this note shall be correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by the Monetary
Board." This Court declared the increases (from 18% to 32%, then to 41% and then to 48%) unilaterally imposed by PNB to be in violation of the
principle of mutuality essential in contracts.29
A similar ruling was made in a 1994 case30 also involving PNB where the credit agreement provided that "PNB reserves the right to increase the
interest rate within the limits allowed by law at any time depending on whatever policy it may adopt in the future: Provided, that the interest rate
on this accommodation shall be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by the
Monetary Board x x x".
Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated interest rate at any time without notice, within the
limits allowed by law. The Court observed that there was no attempt made by PNB to secure the conformity of respondent borrower to the
successive increases in the interest rate. The borrower’s assent to the increases cannot be implied from their lack of response to the letters sent by
PNB, informing them of the increases.31
In the more recent case of Philippine Savings Bank v. Castillo, 32 we sustained the CA in declaring as unreasonable the following escalation
clause: "The rate of interest and/or bank charges herein stipulated, during the terms of this promissory note, its extensions, renewals or other
modifications, may be increased, decreased or otherwise changed from time to time within the rate of interest and charges allowed under present
or future law(s) and/or government regulation(s) as the PSBank may prescribe for its debtors." Clearly, the increase or decrease of interest rates
under such clause hinges solely on the discretion of petitioner as it does not require the conformity of the maker before a new interest rate could
be enforced. We also said that respondents’ assent to the modifications in the interest rates cannot be implied from their lack of response to the
memos sent by petitioner, informing them of the amendments, nor from the letters requesting for reduction of the rates. Thus:
… the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust interest rates. The adjustment should have
still been subjected to the mutual agreement of the contracting parties. In light of the absence of consent on the part of respondents to the
modifications in the interest rates, the adjusted rates cannot bind them notwithstanding the inclusion of a de-escalation clause in the loan
agreement.33
It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes an increase in the stipulated rate of
interest without the express conformity of the debtor. Such unbridled right given to creditors to adjust the interest independently and upwardly
would completely take away from the debtors the right to assent to an important modification in their agreement and would also negate the
element of mutuality in their contracts.34 While a ceiling on interest rates under the Usury Law was already lifted under Central Bank Circular
No. 905, nothing therein "grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to
a hemorrhaging of their assets."35
The two promissory notes signed by petitioners provide:
68
I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may be, the interest rate/service charge
presently stipulated in this note without any advance notice to me/us in the event a law or Central Bank regulation is passed or promulgated by
the Central Bank of the Philippines or appropriate government entities, increasing or decreasing such interest rate or service charge.36
Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan Bank and Trust Company37 where this Court ruled:
The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise change from time to time the rate of interest
and/or bank charges "without advance notice" to petitioner, "in the event of change in the interest rate prescribed by law or the Monetary Board
of the Central Bank of the Philippines," does not give respondent bank unrestrained freedom to charge any rate other than that which was agreed
upon. Here, the monthly upward/downward adjustment of interest rate is left to the will of respondent bank alone. It violates the essence of
mutuality of the contract.38
More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as valid an escalation clause which required a written
notice to and conformity by the borrower to the increased interest rate. Thus:
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of the Monetary Board of the Central Bank,
and later by Central Bank Circular No. 905 which took effect on 1 January 1983. These circulars removed the ceiling on interest rates for secured
and unsecured loans regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may be charged on a
loan. The virtual repeal of the Usury Law is within the range of judicial notice which courts are bound to take into account. Although interest
rates are no longer subject to a ceiling, the lender still does not have an unbridled license to impose increased interest rates. The lender and the
borrower should agree on the imposed rate, and such imposed rate should be in writing.
The three promissory notes between Solidbank and Permanent all contain the following provisions:
"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in this Note or Loan on the basis of, among
others, prevailing rates in the local or international capital markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us. The adjustment of the interest rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note or Loan within thirty (30) days from
the receipt by anyone of us of the written notice. Otherwise, We/I shall be deemed to have given our consent to the interest rate adjustment."
The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said stipulations; (2) repricing takes effect only
upon Solidbank’s written notice to Permanent of the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate. The phrases "irrevocably authorize," "at any time" and "adjustment of the interest rate shall be
effective from the date indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice was sent,"
emphasize that Permanent should receive a written notice from Solidbank as a condition for the adjustment of the interest rates. (Emphasis
supplied.)
In this case, the trial and appellate courts, in upholding the validity of the escalation clause, underscored the fact that there was actually no fixed
rate of interest stipulated in the promissory notes as this was made dependent on prevailing rates in the market. The subject promissory notes
contained the following condition written after the first paragraph:
With one year grace period on principal and thereafter payable in 54 equal monthly instalments to start on the second year. Interest at the
prevailing rates payable quarterly in arrears.40
In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and appellate courts in ruling for the validity of the escalation
clause in the Cardholder’s Agreement. On petitioner’s contention that the interest rate was unilaterally imposed and based on the standards and
rate formulated solely by respondent credit card company, we held:
The contractual provision in question states that "if there occurs any change in the prevailing market rates, the new interest rate shall be the
guiding rate in computing the interest due on the outstanding obligation without need of serving notice to the Cardholder other than the required
posting on the monthly statement served to the Cardholder." This could not be considered an escalation clause for the reason that it neither states
an increase nor a decrease in interest rate. Said clause simply states that the interest rate should be based on the prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it nevertheless provides a leeway for the
interest rate to be reduced in case the prevailing market rates dictate its reduction.
Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder hereby authorizes Security Diners to
correspondingly increase the rate of such interest in the event of changes in prevailing market rates x x x" is an escalation clause. However, it
cannot be said to be dependent solely on the will of private respondent as it is also dependent on the prevailing market rates.
69
Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid
grounds. Obviously, the fluctuation in the market rates is beyond the control of private respondent. 42 (Emphasis supplied.)
In interpreting a contract, its provisions should not be read in isolation but in relation to each other and in their entirety so as to render them
effective, having in mind the intention of the parties and the purpose to be achieved. The various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all of them taken jointly. 43
Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate of interest on the basis of a law or regulation
issued by the Central Bank of the Philippines, should be read together with the statement after the first paragraph where no rate of interest was
fixed as it would be based on prevailing market rates. While the latter is not strictly an escalation clause, its clear import was that interest rates
would vary as determined by prevailing market rates. Evidently, the parties intended the interest on petitioners’ loan, including any upward or
downward adjustment, to be determined by the prevailing market rates and not dictated by respondent’s policy. It may also be mentioned that
since the deregulation of bank rates in 1983, the Central Bank has shifted to a market-oriented interest rate policy.44
There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the promissory notes. In fact, petitioner
Ignacio, a physician engaged in the medical supply business, admitted having understood his obligations before signing them. At no time did
petitioners protest the new rates imposed on their loan even when their property was foreclosed by respondent.
This notwithstanding, we hold that the escalation clause is still void because it grants respondent the power to impose an increased rate of interest
without a written notice to petitioners and their written consent. Respondent’s monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing statement based on the new imposed interest with corresponding computation of the
total debt should have been provided by the respondent to enable petitioners to make an informed decision. An appropriate form must also be
signed by the petitioners to indicate their conformity to the new rates. Compliance with these requisites is essential to preserve the mutuality of
contracts. For indeed, one-sided impositions do not have the force of law between the parties, because such impositions are not based on the
parties’ essential equality.45
Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an agreement between the parties. Unless such
important change in the contract terms is mutually agreed upon, it has no binding effect. 46 In the absence of consent on the part of the petitioners
to the modifications in the interest rates, the adjusted rates cannot bind them. Hence, we consider as invalid the interest rates in excess of 15%,
the rate charged for the first year.
Based on the August 29, 2000 demand letter of China Bank, petitioners’ total principal obligation under the two promissory notes which they
failed to settle is ₱10,355,000. However, due to China Bank’s unilateral increases in the interest rates from 15% to as high as 24.50% and penalty
charge of 1/10 of 1% per day or 36.5% per annum for the period November 4, 1999 to February 23, 2001, petitioners’ balance ballooned to
₱19,201,776.63. Note that the original amount of principal loan almost doubled in only 16 months. The Court also finds the penalty charges
imposed excessive and arbitrary, hence the same is hereby reduced to 1% per month or 12% per annum.1âwphi1
Petitioners’ Statement of Account, as of February 23, 2001, the date of the foreclosure proceedings, should thus be modified as follows:
Principal ₱10,355,000.00
Interest at 15% per annum
₱10,355,000 x .15 x 477 days/365 days 2,029,863.70
Penalty at 12% per annum 1,623 ,890. 96
₱10,355,000 x .12 x 477days/365 days
Sub-Total 14,008,754.66
Less: A/P applied to balance of principal (55,000.00)
Less: Accounts payable L & D (261,149.39)
13,692,605.27
Add: Attorney's Fees 1,369,260.53
Total Amount Due 15,061,865.79
Less: Bid Price 10,300,000.00
TOTAL DEFICIENCY AMOUNT 4,761,865.79
WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20, 2009 · Decision and April 27, 2009 Resolution of
the Court of Appeals in CA G.R. CV No. 80338 are hereby MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby
ORDERED to pay jointly and severally respondent China Banking Corporation ₱4, 7 61 ,865. 79 representing the amount of deficiency inclusive
70
of interest, penalty charge and attorney's fees. Said amount shall bear interest at 12% per annum, reckoned from the time of the filing of the
complaint until its full satisfaction.
No pronouncement as to costs.
71
G.R. No. 166859 April 12, 2011
REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
SANDIGANBAYAN (FIRST DIVISION), EDUARDO M. COJUANGCO, JR., AGRICULTURAL CONSULTANCY SERVICES, INC.,
ARCHIPELAGO REALTY CORP., BALETE RANCH, INC., BLACK STALLION RANCH, INC., CHRISTENSEN PLANTATION
COMPANY, DISCOVERY REALTY CORP., DREAM PASTURES, INC., ECHO RANCH, INC., FAR EAST RANCH, INC., FILSOV
SHIPPING COMPANY, INC., FIRST UNITED TRANSPORT, INC., HABAGAT REALTY DEVELOPMENT, INC., KALAWAKAN
RESORTS, INC., KAUNLARAN AGRICULTURAL CORP., LABAYUG AIR TERMINALS, INC., LANDAIR INTERNATIONAL
MARKETING CORP., LHL CATTLE CORP., LUCENA OIL FACTORY, INC., MEADOW LARK PLANTATIONS, INC.,
METROPLEX COMMODITIES, INC., MISTY MOUNTAIN AGRICULTURAL CORP., NORTHEAST CONTRACT TRADERS,
INC., NORTHERN CARRIERS CORP., OCEANSIDE MARITIME ENTERPRISES, INC., ORO VERDE SERVICES, INC.,
PASTORAL FARMS, INC., PCY OIL MANUFACTURING CORP., PHILIPPINE TECHNOLOGIES, INC., PRIMAVERA FARMS,
INC., PUNONG-BAYAN HOUSING DEVELOPMENT CORP., PURA ELECTRIC COMPANY, INC., RADIO AUDIENCE
DEVELOPERS INTEGRATED ORGANIZATION, INC., RADYO PILIPINO CORP., RANCHO GRANDE, INC., REDDEE
DEVELOPERS, INC., SAN ESTEBAN DEVELOPMENT CORP., SILVER LEAF PLANTATIONS, INC., SOUTHERN SERVICE
TRADERS, INC., SOUTHERN STAR CATTLE CORP., SPADE ONE RESORTS CORP., UNEXPLORED LAND DEVELOPERS,
INC., VERDANT PLANTATIONS, INC., VESTA AGRICULTURAL CORP. AND WINGS RESORTS CORP., Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 169203

vs.
SANDIGANBAYAN (FIRST DIVISION), EDUARDO M. COJUANGCO, JR., MEADOW LARK PLANTATIONS, INC., SILVER
LEAF PLANTATIONS, INC., PRIMAVERA FARMS, INC., PASTORAL FARMS, INC., BLACK STALLION RANCH, INC., MISTY
MOUNTAINS AGRICULTURAL CORP., ARCHIPELAGO REALTY CORP., AGRICULTURAL CONSULTANCY SERVICES,
INC., SOUTHERN STAR CATTLE CORP., LHL CATTLE CORP., RANCHO GRANDE, INC., DREAM PASTURES, INC., FAR
EAST RANCH, INC., ECHO RANCH, INC., LAND AIR INTERNATIONAL MARKETING CORP., REDDEE DEVELOPERS, INC.,
PCY OIL MANUFACTURING CORP., LUCENA OIL FACTORY, INC., METROPLEX COMMODITIES, INC., VESTA
AGRICULTURAL CORP., VERDANT PLANTATIONS, INC., KAUNLARAN AGRICULTURAL CORP., ECJ & SONS
AGRICULTURAL ENTERPRISES, INC., RADYO PILIPINO CORP., DISCOVERY REALTY CORP., FIRST UNITED
TRANSPORT, INC., RADIO AUDIENCE DEVELOPERS INTEGRATED ORGANIZATION, INC., ARCHIPELAGO FINANCE AND
LEASING CORP., SAN ESTEBAN DEVELOPMENT CORP., CHRISTENSEN PLANTATION COMPANY, NORTHERN CARRIERS
CORP., VENTURE SECURITIES, INC., BALETE RANCH, INC., ORO VERDE SERVICES, INC., and KALAWAKAN RESORTS,
INC., Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 180702

vs.
EDUARDO M. COJUANGCO, JR., FERDINAND E. MARCOS, IMELDA R. MARCOS, EDGARDO J. ANGARA,* JOSE C.
CONCEPCION, AVELINO V. CRUZ, EDUARDO U. ESCUETA, PARAJA G. HAYUDINI, JUAN PONCE ENRILE, TEODORO D.
REGALA, DANILO URSUA, ROGELIO A. VINLUAN, AGRICULTURAL CONSULTANCY SERVICES, INC., ANGLO
VENTURES, INC., ARCHIPELAGO REALTY CORP., AP HOLDINGS, INC., ARC INVESTMENT, INC., ASC INVESTMENT, INC.,
AUTONOMOUS DEVELOPMENT CORP., BALETE RANCH, INC., BLACK STALLION RANCH, INC., CAGAYAN DE ORO OIL
COMPANY, INC., CHRISTENSEN PLANTATION COMPANY, COCOA INVESTORS, INC., DAVAO AGRICULTURAL
AVIATION, INC., DISCOVERY REALTY CORP., DREAM PASTURES, INC., ECHO RANCH, INC., ECJ & SONS AGRI. ENT.,
INC., FAR EAST RANCH, INC., FILSOV SHIPPING COMPANY, INC., FIRST MERIDIAN DEVELOPMENT, INC., FIRST
UNITED TRANSPORT, INC., GRANEXPORT MANUFACTURING CORP., HABAGAT REALTY DEVELOPMENT, INC., HYCO
AGRICULTURAL, INC., ILIGAN COCONUT INDUSTRIES, INC., KALAWAKAN RESORTS, INC., KAUNLARAN
AGRICULTURAL CORP., LABAYOG AIR TERMINALS, INC., LANDAIR INTERNATIONAL MARKETING CORP., LEGASPI
OIL COMPANY, LHL CATTLE CORP., LUCENA OIL FACTORY, INC., MEADOW LARK PLANTATIONS, INC., METROPLEX
COMMODITIES, INC., MISTY MOUNTAIN AGRICULTURAL CORP., NORTHEAST CONTRACT TRADERS, INC., NORTHERN
CARRIERS CORP., OCEANSIDE MARITIME ENTERPRISES, INC., ORO VERDE SERVICES, INC., PASTORAL FARMS, INC.,
PCY OIL MANUFACTURING CORP., PHILIPPINE RADIO CORP., INC., PHILIPPINE TECHNOLOGIES, INC., PRIMAVERA
FARMS, INC., PUNONG-BAYAN HOUSING DEVELOPMENT CORP., PURA ELECTRIC COMPANY, INC., RADIO AUDIENCE
DEVELOPERS INTEGRATED ORGANIZATION, INC., RADYO PILIPINO CORP., RANCHO GRANDE, INC., RANDY ALLIED
VENTURES, INC., REDDEE DEVELOPERS, INC., ROCKSTEEL RESOURCES, INC., ROXAS SHARES, INC., SAN ESTEBAN
DEVELOPMENT CORP., SAN MIGUEL CORPORATION OFFICERS, INC., SAN PABLO MANUFACTURING CORP.,
SOUTHERN LUZON OIL MILLS, INC., SILVER LEAF PLANTATIONS, INC., SORIANO SHARES, INC., SOUTHERN SERVICE
TRADERS, INC., SOUTHERN STAR CATTLE CORP., SPADE 1 RESORTS CORP., TAGUM AGRICULTURAL DEVELOPMENT
CORP., TEDEUM RESOURCES, INC., THILAGRO EDIBLE OIL MILLS, INC., TODA HOLDINGS, INC., UNEXPLORED LAND
72
DEVELOPERS, INC., VALHALLA PROPERTIES, INC., VENTURES SECURITIES, INC., VERDANT PLANTATIONS, INC.,
VESTA AGRICULTURAL CORP. and WINGS RESORTS CORP., Respondents.
JOVITO R. SALONGA, WIGBERTO E. TAÑADA, OSCAR F. SANTOS, VIRGILIO M. DAVID, ROMEO C. ROYANDAYAN for
himself and for SURIGAO DEL SUR FEDERATION OF AGRICULTURAL COOPERATIVES (SUFAC), MORO FARMERS
ASSOCIATION OF ZAMBOANGA DEL SUR (MOFAZS) and COCONUT FARMERS OF SOUTHERN LEYTE COOPERATIVE
(COFA-SL); PHILIPPINE RURAL RECONSTRUCTION MOVEMENT (PRRM), represented by CONRADO S. NAVARRO;
COCONUT INDUSTRY REFORM MOVEMENT, INC. (COIR) represented by JOSE MARIE T. FAUSTINO; VICENTE FABE for
himself and for PAMBANSANG KILUSAN NG MGA SAMAHAN NG MAGSASAKA (PAKISAMA); NONITO CLEMENTE for
himself and for the NAGKAKAISANG UGNAYAN NG MGA MALILIIT NA MAGSASAKA AT MANGGAGAWA SA NIYUGAN
(NIUGAN); DIONELO M. SUANTE, SR. for himself and for KALIPUNAN NG MALILIIT NA MAGNINIYOG NG PILIPINAS
(KAMMPIL), INC., Petitioners-Intervenors.
DECISION
BERSAMIN, J.:
For over two decades, the issue of whether the sequestered sizable block of shares representing 20% of the outstanding capital stock of San
Miguel Corporation (SMC) at the time of acquisition belonged to their registered owners or to the coconut farmers has remained unresolved.
Through this decision, the Court aims to finally resolve the issue and terminate the uncertainty that has plagued that sizable block of shares since
then.
These consolidated cases were initiated on various dates by the Republic of the Philippines (Republic) via petitions for certiorari in G.R. Nos.
1668591 and 169023,2 and via petition for review on certiorari in 180702,3 the first two petitions being brought to assail the following resolutions
issued in Civil Case No. 0033-F by the Sandiganbayan, and the third being brought to appeal the adverse decision promulgated on November 28,
2007 in Civil Case No. 0033-F by the Sandiganbayan.
Specifically, the petitions and their particular reliefs are as follows:
(a) G.R. No. 166859 (petition for certiorari), to assail the resolution promulgated on December 10, 2004 4 denying the Republic’s
Motion For Partial Summary Judgment;
(b) G.R. No. 169023 (petition for certiorari), to nullify and set aside, firstly, the resolution promulgated on October 8, 2003,5 and,
secondly, the resolution promulgated on June 24, 20056 modifying the resolution of October 8, 2003; and
(c) G.R. No. 180702 (petition for review on certiorari), to appeal the decision promulgated on November 28, 2007. 7
ANTECEDENTS
On July 31, 1987, the Republic commenced Civil Case No. 0033 in the Sandiganbayan by complaint, impleading as defendants respondent
Eduardo M. Cojuangco, Jr. (Cojuangco) and 59 individual defendants. On October 2, 1987, the Republic amended the complaint in Civil Case
No. 0033 to include two additional individual defendants. On December 8, 1987, the Republic further amended the complaint through its
Amended Complaint [Expanded per Court-Approved Plaintiff’s ‘Manifestation/Motion Dated Dec. 8, 1987] albeit dated October 2, 1987.
More than three years later, on August 23, 1991, the Republic once more amended the complaint apparently to avert the nullification of the writs
of sequestration issued against properties of Cojuangco. The amended complaint dated August 19, 1991, designated as Third Amended
Complaint [Expanded Per Court-Approved Plaintiff’s Manifestation/Motion Dated Dec. 8, 1987], 8 impleaded in addition to Cojuangco, President
Marcos, and First Lady Imelda R. Marcos nine other individuals, namely: Edgardo J. Angara, Jose C. Concepcion, Avelino V. Cruz, Eduardo U.
Escueta, Paraja G. Hayudini, Juan Ponce Enrile, Teodoro D. Regala, and Rogelio Vinluan, collectively, the ACCRA lawyers, and Danilo Ursua,
and 71 corporations.
On March 24, 1999, the Sandiganbayan allowed the subdivision of the complaint in Civil Case No. 0033 into eight complaints, each pertaining to
distinct transactions and properties and impleading as defendants only the parties alleged to have participated in the relevant transactions or to
have owned the specific properties involved. The subdivision resulted into the following subdivided complaints, to wit:
Subdivided Complaint Subject Matter

1. Civil Case No. Anomalous Purchase and Use of First United Bank (now United Coconut Planters Bank)
0033-A
2. Civil Case No. Creation of Companies Out of Coco Levy Funds
0033-B
3. Civil Case No. Creation and Operation of Bugsuk Project and Award of P998 Million Damages to
0033-C Agricultural Investors, Inc.
73
4. Civil Case No. Disadvantageous Purchases and Settlement of the Accounts of Oil Mills Out of Coco Levy
0033-D Funds
5. Civil Case No. Unlawful Disbursement and Dissipation of Coco Levy Funds
0033-E
6. Civil Case No. Acquisition of SMC shares of stock
0033-F
7. Civil Case No. Acquisition of Pepsi-Cola
0033-G
8. Civil Case No. Behest Loans and Contracts
0033-H
In Civil Case No. 0033-F, the individual defendants were Cojuangco, President Marcos and First Lady Imelda R. Marcos, the ACCRA lawyers,
and Ursua. Impleaded as corporate defendants were Southern Luzon Oil Mills, Cagayan de Oro Oil Company, Incorporated, Iligan Coconut
Industries, Incorporated, San Pablo Manufacturing Corporation, Granexport Manufacturing Corporation, Legaspi Oil Company, Incorporated,
collectively referred to herein as the CIIF Oil Mills, and their 14 holding companies, namely: Soriano Shares, Incorporated, Roxas Shares,
Incorporated, Arc Investments, Incorporated, Toda Holdings, Incorporated, ASC Investments, Incorporated, Randy Allied Ventures,
Incorporated, AP Holdings, Incorporated, San Miguel Corporation Officers, Incorporated, Te Deum Resources, Incorporated, Anglo Ventures,
Incorporated, Rock Steel Resources, Incorporated, Valhalla Properties, Incorporated, and First Meridian Development, Incorporated.
Allegedly, Cojuangco purchased a block of 33,000,000 shares of SMC stock through the 14 holding companies owned by the CIIF Oil Mills. For
this reason, the block of 33,133,266 shares of SMC stock shall be referred to as the CIIF block of shares.
Also impleaded as defendants in Civil Case No. 0033-F were several corporations9 alleged to have been under Cojuangco’s control and used by
him to acquire the block of shares of SMC stock totaling 16,276,879 at the time of acquisition (representing approximately 20% percent of the
capital stock of SMC). These corporations are referred to as Cojuangco corporations or companies, to distinguish them from the CIIF Oil Mills.
Reference hereafter to Cojuangco and the Cojuangco corporations or companies shall be as Cojuangco, et al., unless the context requires
individualization.
The material averments of the Republic’s Third Amended Complaint (Subdivided)10 in Civil Case No. 0033-F included the following:
12. Defendant Eduardo Cojuangco, Jr., served as a public officer during the Marcos administration. During the period of his
incumbency as a public officer, he acquired assets, funds, and other property grossly and manifestly disproportionate to his salaries,
lawful income and income from legitimately acquired property.
13. Having fully established himself as the undisputed "coconut king" with unlimited powers to deal with the coconut levy funds, the
stage was now set for Defendant Eduardo M. Cojuangco, Jr. to launch his predatory forays into almost all aspects of Philippine
economic activity namely: softdrinks, agribusiness, oil mills, shipping, cement manufacturing, textile, as more fully described below.
14. Defendant Eduardo Cojuangco, Jr. taking undue advantage of his association, influence and connection, acting in unlawful concert
with Defendants Ferdinand E. Marcos and Imelda R. Marcos, and the individual defendants, embarked upon devices, schemes and
stratagems, including the use of defendant corporations as fronts, to unjustly enrich themselves at the expense of Plaintiff and the
Filipino people, such as when he – misused coconut levy funds to buy out majority of the outstanding shares of stock of San Miguel
Corporation in order to control the largest agri-business, foods and beverage company in the Philippines, more particularly described
as follows:
(b) He entered SMC in early 1983 when he bought most of the 20 million shares Enrique Zobel owned in the Company.
The shares, worth $49 million, represented 20% of SMC;
(c) Later that year, Cojuangco also acquired the Soriano stocks through a series of complicated and secret agreements, a
key feature of which was a "voting trust agreement" that stipulated that Andres, Jr. or his heir would proxy over the vote of
the shares owned by Soriano and Cojuangco. This agreement, which accounted for 30% of the outstanding shares of SMC
and which lasted for five (5) years, enabled the Sorianos to retain management control of SMC for the same period;
(d) Furthermore, in exchange for an SMC investment of $45 million in non-voting preferred shares in UCPB, Soriano
served as the vice-chairman of the supposed bank of the coconut farmers, UCPB, and in return, Cojuangco, for investing
funds from the coconut levy, was named vice-chairman of SMC;
(e) Consequently, Cojuangco enjoyed the privilege of appointing his nominees to the SMC Board, to which he appointed
key members of the ACCRA Law Firm (herein Defendants) instead of coconut farmers whose money really funded the
sale;
74
(f) The scheme of Cojuangco to use the lawyers of the said Firm was revealed in a document which he signed on 19
February 1983 entitled "Principles and Framework of Mutual Cooperation and Assistance" which governed the rules for
the conduct of management of SMC and the disposition of the shares which he bought.
(g) All together, Cojuangco purchased 33 million shares of the SMC through the following 14 holding companies:
a) Soriano Shares, Inc. 1,249,163

b) ASC Investors, Inc. 1,562,449
c) Roxas Shares, Inc. 2,190,860
d) ARC Investors, Inc. 4,431,798
e) Toda Holdings, Inc. 3,424,618
f) AP Holdings, Inc. 1,580,997
g) Fernandez Holdings, Inc. 838,837
h) SMC Officers Corps., Inc. 2,385,987
i) Te Deum Resources, Inc. 2,674,899
j) Anglo Ventures Corp. 1,000.000
k) Randy Allied Ventures, Inc. 1,000,000
l) Rock Steel Resources, Inc. 2,432,625
m) Valhalla Properties Ltd., Inc. 1,361,033
n) First Meridian Development, Inc. 1,000,000
33,133,266
3.1. The same fourteen companies were in turn owned by the following six (6) so-called CIIF Companies which were:
a) San Pablo Manufacturing Corp. 19%

b) Southern Luzon Coconut Oil Mills, Inc. 11%
c) Granexport Manufacturing Corporation 19%
d) Legaspi Oil Company, Inc. 18%
e) Cagayan de Oro Oil Company, Inc. 18%
f) Iligan Coconut Industries, Inc. 15%
100%
(h) Defendant Corporations are but "shell" corporations owned by interlocking shareholders who have previously admitted
that they are just "nominee stockholders" who do not have any proprietary interest over the shares in their names. The
respective affidavits of the following, namely: Jose C. Concepcion, Florentino M. Herrera III, Teresita J. Herbosa, Teodoro
D. Regala, Victoria C. de los Reyes, Manuel R. Roxas, Rogelio A. Vinluan, Eduardo U. Escuete and Franklin M. Drilon,
who were all, at the time they became such stockholders, lawyers of the Angara Abello Concepcion Regala & Cruz
(ACCRA) Law Offices, the previous counsel who incorporated said corporations, prove that they were merely nominee
stockholders thereof.
(i) Mr. Eduardo M. Cojuangco, Jr., acquired a total of 16,276,879 shares of San Miguel Corporation from the Ayala group:
of said shares, a total of 8,138,440 (broken into 7,128,227 Class A and 1,010,213 Class B shares) were placed in the names
of Meadowlark Plantations, Inc. (2,034,610) and Primavera Farms, Inc. (4,069,220). The Articles of Incorporation of these
three companies show that Atty. Jose C. Concepcion of ACCRA owns 99.6% of the entire outstanding stock. The same
shareholder executed three (3) separate "Declaration of Trust and Assignment of Subscription:" in favor of a BLANK
assignee pertaining to his shareholdings in Primavera Farms, Inc., Silver Leaf Plantations, Inc. and Meadowlark
Plantations, Inc.
(k) The other respondent Corporations are owned by interlocking shareholders who are likewise lawyers in the ACCRA
Law Offices and had admitted their status as "nominee stockholders" only.
75
(k-1) The corporations: Agricultural Consultancy Services, Inc., Archipelago Realty Corporation, Balete Ranch,
Inc., Black Stallion Ranch, Inc., Discovery Realty Corporation, First United Transport, Inc., Kaunlaran
Agricultural Corporation, LandAir International Marketing Corporation, Misty Mountains Agricultural
Corporation, Pastoral Farms, Inc., Oro Verde Services, Inc. Radyo Filipino Corporation, Reddee Developers,
Inc., Verdant Plantations, Inc. and Vesta Agricultural Corporation, were incorporated by lawyers of ACCRA
Law Offices.
(k-2) With respect to PCY Oil Manufacturing Corporation and Metroplex Commodities, Inc., they are
controlled respectively by HYCO, Inc. and Ventures Securities, Inc., both of which were incorporated likewise
by lawyers of ACCRA Law Offices.
(k-3) The stockholders who appear as incorporators in most of the other Respondents corporations are also
lawyers of the ACCRA Law Offices, who as early as 1987 had admitted under oath that they were acting only
as "nominee stockholders."
(l) These companies, which ACCRA Law Offices organized for Defendant Cojuangco to be able to control more than 60%
of SMC shares, were funded by institutions which depended upon the coconut levy such as the UCPB, UNICOM, United
Coconut Planters Assurance Corp. (COCOLIFE), among others. Cojuangco and his ACCRA lawyers used the funds from 6
large coconut oil mills and 10 copra trading companies to borrow money from the UCPB and purchase these holding
companies and the SMC stocks. Cojuangco used $150 million from the coconut levy, broken down as follows:
Amount Source Purpose

(in million)
$22.26 Oil Mills equity in holding companies
$65.6 Oil Mills loan to holding companies
$61.2 UCPB loan to holding companies [164]
The entire amount, therefore, came from the coconut levy, some passing through the Unicom Oil mills, others directly from
the UCPB.
(m) With his entry into the said Company, it began to get favors from the Marcos government, significantly the lowering of
the excise taxes (sales and specific taxes) on beer, one of the main products of SMC.
(n) Defendant Cojuangco controlled SMC from 1983 until his co-defendant Marcos was deposed in 1986.
(o) Along with Cojuangco, Defendant Enrile and ACCRA also had interests in SMC, broken down as follows:
% of SMC
Owner
Cojuangco
31.3% coconut levy money
18% companies linked to Cojuangco
5.2% government
5.2% SMC employee retirement fund
Enrile & ACCRA
1.8% Enrile
1.8% Jaka Investment Corporation
1.8% ACCRA Investment Corporation
15. Defendants Eduardo Cojuangco, Jr., Edgardo J. Angara, Jose C. Concepcion, Teodoro Regala, Avelino Cruz, Rogelio Vinluan,
Eduardo U. Escueta and Paraja G. Hayudini of the Angara Concepcion Cruz Regala and Abello law offices (ACCRA) plotted,
devised, schemed, conspired and confederated with each other in setting up, through the use of coconut levy funds, the financial and
corporate framework and structures that led to the establishment of UCPB, UNICOM, COCOLIFE, COCOMARK. CIC, and more
than twenty other coconut levy-funded corporations, including the acquisition of San Miguel Corporation shares and its
institutionalization through presidential directives of the coconut monopoly. Through insidious means and machinations, ACCRA,
being the wholly-owned investment arm, ACCRA Investments Corporation, became the holder of approximately fifteen million shares
representing roughly 3.3% of the total outstanding capital stock of UCPB as of 31 March 1987. This ranks ACCRA Investments
Corporation number 44 among the top 100 biggest stockholders of UCPB which has approximately 1,400,000 shareholders. On the
other hand, the corporate books show the name Edgardo J. Angara as holding approximately 3,744 shares as of February, 1984.
16. The acts of Defendants, singly or collectively, and/or in unlawful concert with one another, constitute gross abuse of official
position and authority, flagrant breach of public trust and fiduciary obligations, brazen abuse of right and power, unjust enrichment,
76
violation of the constitution and laws of the Republic of the Philippines, to the grave and irreparable damage of Plaintiff and the
Filipino people.11
On June 17, 1999, Ursua and Enrile each filed his separate Answer with Compulsory Counterclaims.
Before filing their answer, the ACCRA lawyers sought their exclusion as defendants in Civil Case No. 0033, averring that even as they admitted
having assisted in the organization and acquisition of the companies included in Civil Case No. 0033, they had acted as mere nominees-
stockholders of corporations involved in the sequestration proceedings pursuant to office practice. After the Sandiganbayan denied their motion,
they elevated their cause to this Court, which ultimately ruled in their favor in the related cases of Regala, et al. v. Sandiganbayan, et
al.12 and Hayudini v. Sandiganbayan, et al.,13 as follows:
WHEREFORE, IN VIEW OF THE FOREGOING, the Resolutions of respondent Sandiganbayan (First Division) promulgated on March 18,
1992 and May 21, 1992 are hereby ANNULLED and SET ASIDE. Respondent Sandiganbayan is further ordered to exclude petitioners Teodoro
D. Regala, Edgardo J. Angara, Avelino V. Cruz, Jose C. Concepcion, Victor P. Lazatin, Eduardo U. Escueta and Paraja G. Hayudini as parties-
defendants in SB Civil Case No. 0033 entitled "Republic of the Philippines v. Eduardo Cojuangco, Jr., et al."
SO ORDERED.
Conformably with the ruling, the Sandiganbayan excluded the ACCRA lawyers from the case on May 24, 2000. 14
On June 23, 1999, Cojuangco filed his Answer to the Third Amended Complaint,15 averring the following affirmative defenses, to wit:
7.00. The Presidential Commission on Good Government (PCGG) is without authority to act in the name and in behalf of the
"Republic of the Philippines".
7.01. As constituted in E.O. No. 1, the PCGG was composed of "Minister Jovito R. Salonga, as Chairman, Mr. Ramon Diaz, Mr.
Pedro L. Yap, Mr. Raul Daza and Ms. Mary Concepcion Bautista, as Commissioners". When the complaint in the instant case was
filed, Minister Salonga, Mr. Pedro L. Yap and Mr. Raul Daza had already left the PCGG. By then the PCGG had become functus
officio.
7.02. The Sandiganbayan has no jurisdiction over the complaint or over the transaction alleged in the complaint.
7.03. The complaint does not allege any cause of action.
7.04. The complaint is not brought in the name of the real parties in interest, assuming any cause of action exists.
7.05. Indispensable and necessary parties have not been impleaded.
7.06. There is improper joinder of causes of action (Sec. 6, Rule 2, Rules of Civil Procedure). The causes of action alleged, if any, do
not arise out of the same contract, transaction or relation between the parties, nor are they simply for money, or are of the same nature
and character.
7.07. There is improper joinder of parties defendants (Sec. 11, Rule 3, Rules of Civil Procedure).The causes of action alleged as to
defendants, if any, do not involve a single transaction or a related series of transactions. Defendant is thus compelled to litigate in a
suit regarding matters as to which he has no involvement. The questions of fact and law involved are not common to all defendants.
7.08. In so far as the complaint seeks the forfeiture of assets allegedly acquired by defendant "manifestly out of proportion to their
salaries, to their other lawful income and income from legitimately acquired property," under R.A. 1379, the "previous inquiry similar
to preliminary investigation in criminal cases" required to be conducted under Sec. 2 of that law before any suit for forfeiture may be
instituted, was not conducted; as a consequence, the Court may not acquire and exercise jurisdiction over such a suit.
7.09. The complaint in the instant suit was filed July 31, 1987, or within one year before the local election held on January 18, 1988. If
this suit involves an action under R.A. 1379, its institution was also in direct violation of Sec. 2, R.A. No. 1379.
7.10. E.O. No. 1, E.O. No. 2, E.O. No. 14 and 14-A, are unconstitutional. They violate due process, equal protection, ex post facto and
bill of attainder provisions of the Constitution.
7.11. Acts imputed to defendant which he had committed were done pursuant to law and in good faith.
The Cojuangco corporations’ Answer16 had the same tenor as the Answer of Cojuangco.
77
In his own Answer with Compulsory Counterclaims,17 Ursua averred affirmative and special defenses.
In his own Answer with Compulsory Counterclaims, 18 Enrile specifically denied the material averments of the Third Amended Complaint and
asserted affirmative defenses.
The CIIF Oil Mills’ Answer19 also contained affirmative defenses.
On December 20, 1999, the Sandiganbayan scheduled the pre-trial in Civil Case No. 0033-F on March 8, 2000, giving the parties sufficient time
to file their Pre-Trial Briefs prior to that date. Subsequently, the parties filed their respective Pre-Trial Briefs, as follows: Cojuangco and the
Cojuangco corporations, jointly on February 14, 2000; Enrile, on March 1, 2000; the CIIF Oil Mills, on March 3, 2000; and Ursua, on March 6,
2000. However, the Republic sought several extensions to file its own Pre-Trial Brief, and eventually did so on May 9, 2000.
In the meanwhile, some non-parties sought to intervene. On November 22, 1999, GABAY Foundation, Inc. (GABAY) filed its complaint-in-
intervention. On February 24, 2000, the Philippine Coconut Producers Federation, Inc., Maria Clara L. Lobregat, Jose R. Eleazar, Jr., Domingo
Espina, Jose Gomez, Celestino Sabate, Manuel del Rosario, Jose Martinez, Jr., and Eladio Chato (collectively referred to as COCOFED,
considering that the co-intervenors were its officers) also sought to intervene, citing the October 2, 1989 ruling in G.R. No. 75713 entitled
COCOFED v. PCGG whereby the Court recognized COCOFED as the "private national association of coconut producers certified in 1971 by the
PHILCOA as having the largest membership among such producers" and as such "entrusted it with the task of maintaining continuing liaison
with the different sectors of the industry, the government and its mass base." Pending resolution of its motion for intervention, COCOFED filed a
Pre-Trial Brief on March 2, 2000.
On May 24, 2000, the Sandiganbayan denied GABAY’s intervention without prejudice because it found "that the allowance of GABAY to enter
under the special character in which it presents itself would be to open the doors to other groups of coconut farmers whether of the same kind or
of any other kind which could be considered a sub-class or a sub-classification of the coconut planters or the coconut industry of this country."20
COCOFED’s intervention as defendant was allowed on May 24, 2000, however, because "the position taken by the COCOFED is relevant to the
proceedings herein, if only to state that there is a special function which the COCOFED and the coconut planters have in the matter of the
coconut levy funds and the utilization of those funds, part of which is in dispute in the instant matter." 21
The pre-trial was actually held on May 24, 2000,22 during which the Sandiganbayan sought clarification from the parties, particularly the
Republic, on their respective positions, but at the end it found the clarifications "inadequately" enlightening. Nonetheless, the Sandiganbayan, not
disposed to reset, terminated the pre-trial:
xxx primarily because the Court is given a very clear impression that the plaintiff does not know what documents will be or whether they are
even available to prove the causes of action in the complaint. The Court has pursued and has exerted every form of inquiry to see if there is a way
by which the plaintiff could explain in any significant particularity the acts and the evidence which will support its claim of wrong-doing by the
defendants. The plaintiff has failed to do so.23
The following material portions of the pre-trial order24 are quoted to provide a proper perspective of what transpired during the pre-trial, to wit:
Upon oral inquiry from the Court, the issues which were being raised by plaintiff appear to have been made on a very generic character.
Considering that any claim for violation or breach of trust or deception cannot be made on generic statements but rather by specific acts which
would demonstrate fraud or breach of trust or deception, together with the evidence in support thereof, the same was not acceptable to the Court.
The plaintiff through its designated counsel for this morning, Atty. Dennis Taningco, has represented to this Court that the annexes to its pre-trial
brief, more particularly the findings of the COA in its various examinations, copies of which COA reports are attached to the pre-trial brief,
would demonstrate the wrong, the act or omission attributed to the defendants or to several of them and the basis, therefore, for the relief that
plaintiff seeks in its complaint. It would appear, however, that the plaintiff through its counsel at this time is not prepared to go into the specifics
of the identification of these wrongs or omissions attributed to plaintiff.
The Court has reminded the plaintiff that a COA report proves itself only in proceedings where the issue arises from a review of the
accountability of particular officers and, therefore, to show the existence of shortages or deficiencies in an examination conducted for that
purpose, provided that such a report is accompanied by its own working papers and other supporting documents.
In civil cases such as this, a COA report would not have the same independent probative value since it is not a review of the accountability of
public officers for public property in their custody as accountable officers. It has been the stated view of this Court that a COA report, to be of
significant evidence, may itself stand only on the basis of the supporting documents that upon which it is based and upon an analysis made by
those who are competent to do so. The Court, therefore, sought a more specific statement from plaintiff as to what these documents were and
which of them would prove a particular act or omission or a series of acts or omissions purportedly committed by any, by several or by all of the
defendants in any particular stage of the chain of alleged wrong-doing in this case.
The plaintiff was not in a position to do so.
78
The Court has remonstrated with the plaintiff, insofar as its inadequacy is concerned, primarily because this case was set for pre-trial as far back
as December and has been reset from its original setting, with the undertaking by the plaintiff to prepare itself for these proceedings. It appears to
this Court at this time that the failure of the plaintiff to have available responses and specific data and documents at this stage is not because the
matter has been the product of oversight or notes and papers left elsewhere; rather, the agitation of this Court arises from the fact that at this very
stage, the plaintiff through its counsel does not know what these documents are, where these documents will be and is still anticipating a
submission or a delivery thereof by COA at an undetermined time. The justification made by counsel for this stance is that this is only pre-trial
and this information and the documents are not needed yet.
The Court is not prepared to postpone the pre-trial anew primarily because the Court is given a very clear impression that the plaintiff does not
know what documents will be or whether they are even available to prove the causes of action in the complaint. The Court has pursued and has
exerted every form of inquiry to see if there is a way by which the plaintiff could explain in any significant particularity the acts and the evidence
which will support its claim of wrong-doing by the defendants. The plaintiff has failed to do so.
Defendants Cojuangco have come back and reiterated their previous inquiry as to the statement of the cause of action and the description thereof.
While the Court acknowledges that logically, that statement along that line would be primary, the Court also recognizes that sometimes the
phrasing of the issue may be determined or may arise after a statement of the evidence is determined by this Court because the Court can put
itself in a position of more clearly and perhaps more accurately stating what the issues are. The Pre-Trial Order, after all, is not so much a
reflection of merely separate submissions by all of the parties involved, witnesses by the Court, as to what the subject matter of litigation will be,
including the determination of what matters of fact remain unresolved. At this time, the plaintiff has not taken the position on any factual
statement or any piece of evidence which can be subject of admission or denial, nor any specifics of any act which could be disputed by the
defendants; what plaintiff through counsel has stated are general conclusions, general statements of abuse and misuse and opportunism.
After an extended break requested by some of the parties, the sessions were resumed and nothing anew arose from the plaintiff. The plaintiff
sought fifteen (15) days to file a reply to the comments and observations made by defendant Cojuangco to the pre-trial brief of the plaintiff. This
Court denied this Request since the submissions in preparation for pre-trial are not litigious or contentious matters. They are mere assertions or
positions which may or may not be meritorious depending upon the view of the Court of the entire case and if useful at the pre-trial. At this stage,
the plaintiff then reiterated its earlier request to consider the pre-trial terminated. The Court sought the positions of the other parties, whether or
not they too were prepared to submit their respective positions on the basis of what was before the Court at pre-trial. All of the parties, in the end,
have come to an agreement that they were submitting their own respective positions for purpose of pre-trial on the basis of the submissions made
of record.
With all of the above, the pre-trial is now deemed terminated.
This Order has been overly extended simply because there has been a need to put on record all of the events that have taken place leading to the
conclusions which were drawn herein.
The parties have indicated a desire to make their submissions outside of trial as a consequence of this terminated pre-trial, with the plea that the
transcript of the proceedings this morning be made available to them, so that they may have the basis for whatever assertions they will have to
make either before this Court or elsewhere. The Court deems the same reasonable and the Court now gives the parties fifteen (15) days after
notice to them that the transcript of stenographic notes of the proceedings herein are complete and ready for them to be retrieved. Settings for trial
or for any other proceeding hereafter will be fixed by this Court either upon request of the parties or when the Court itself shall have determined
that nothing else has to be done.
The Court has sought confirmation from the parties present as to the accuracy of the recapitulation herein of the proceedings this morning and the
Court has gotten assent from all of the parties.
xxx
SO ORDERED.25
In the meanwhile, the Sandiganbayan, in order to conform with the ruling in Presidential Commission on Good Government v. Cojuangco, et
al.,26 resolved COCOFED’s Omnibus Motion (with prayer for preliminary injunction) relative to who should vote the UCPB shares under
sequestration, holding as follows: 27
In the light of all of the above, the Court submits itself to jurisprudence and with the statements of the Supreme Court in G.R. No. 115352
entitled Enrique Cojuangco, Jr., et al. vs. Jaime Calpo, et al. dated January 27, 1997, as well as the resolution of the Supreme Court promulgated
on January 27, 1999 in the case of PCGG vs. Eduardo Cojuangco, Jr., et al., G.R. No. 13319 which included the Sandiganbayan as one of the
respondents. In these two cases, the Supreme Court ruled that the voting of sequestered shares of stock is governed by two considerations,
namely:
1. whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong to the State; and
79
2. whether there is an imminent danger of dissipation thus necessitating their continued sequestration and voting by the PCGG while
the main issue pends with the Sandiganbayan.
xxx xxx xxx
In view hereof, the movants COCOFED, et al and Ballares, et al. as well as Eduardo Cojuangco, et al. who were acknowledged to be registered
stockholders of the UCPB are authorized, as are all other registered stockholders of the United Coconut Planters Bank, until further orders from
this Court, to exercise their rights to vote their shares of stock and themselves to be voted upon in the United Coconut Planters Bank (UCPB) at
the scheduled Stockholders’ Meeting on March 6, 2001 or on any subsequent continuation or resetting thereof, and to perform such acts as will
normally follow in the exercise of these rights as registered stockholders.
xxx xxx xxx
Consequently, on March 1, 2001, the Sandiganbayan issued a writ of preliminary injunction to enjoin the PCGG from voting the sequestered
shares of stock of the UCPB.
On July 25, 2002, before Civil Case No. 0033-F could be set for trial, the Republic filed a Motion for Judgment on the Pleadings and/or for
Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and COCOFED, et al.). 28
Cojuangco, Enrile, and COCOFED separately opposed the motion. Ursua adopted COCOFED’s opposition.
Thereafter, the Republic likewise filed a Motion for Partial Summary Judgment [Re: Shares in San Miguel Corporation Registered in the
Respective Names of Defendant Eduardo M. Cojuangco, Jr. and the Defendant Cojuangco Companies].29
Cojuangco, et al. opposed the motion,30 after which the Republic submitted its reply.31
On February 23, 2004, the Sandiganbayan issued an order, 32 in which it enumerated the admitted facts or facts that appeared to be without
substantial controversy in relation to the Republic’s Motion for Judgment on the Pleadings and/or for Partial Summary Judgment [Re: Defendants
CIIF Companies, 14 Holding Companies and COCOFED, et al.].
Commenting on the order of February 23, 2004, Cojuangco, et al. specified the items they considered as inaccurate, but particularly interposed no
objection to item no. 17 (to the extent that item no. 17 stated that Cojuangco had disclaimed any interest in the CIIF block SMC shares of stock
registered in the names of the 14 corporations listed in item no. 1 of the order).33
The Republic also filed its Comment,34 but COCOFED denied the admitted facts summarized in the order of February 23, 2004. 35
Earlier, on October 8, 2003,36 the Sandiganbayan resolved the various pending motions and pleadings relative to the writs of sequestration issued
against the defendants, disposing:
IN VIEW OF THE FOREGOING, the Writs of Sequestration Nos. (a) 86-0042 issued on April 8, 1986, (b) 86-0062 issued on April 21, 1986, (c)
86-0069 issued on April 22, 1986, (d) 86-0085 issued on May 9, 1986, (e) 86-0095 issued on May 16, 1986, (f) 86-0096 dated May 16, 1986, (g)
86-0097 issued on May 16, 1986, (h) 86-0098 issued on May 16, 1986 and (i) 87-0218 issued on May 27, 1987 are hereby declared automatically
lifted for being null and void.
Despite the lifting of the writs of sequestration, since the Republic continues to hold a claim on the shares which is yet to be resolved, it is hereby
ordered that the following shall be annotated in the relevant corporate books of San Miguel Corporation:
(1) any sale, pledge, mortgage or other disposition of any of the shares of the Defendants Eduardo Cojuangco, et al. shall be subject to
the outcome of this case;
(2) the Republic through the PCGG shall be given twenty (20) days written notice by Defendants Eduardo Cojuangco, et al. prior to
any sale, pledge, mortgage or other disposition of the shares;
(3) in the event of sale, mortgage or other disposition of the shares, by the Defendants Cojuangco, et al., the consideration therefore,
whether in cash or in kind, shall be placed in escrow with Land Bank of the Philippines, subject to disposition only upon further orders
of this Court; and
(4) any cash dividends that are declared on the shares shall be placed in escrow with the Land Bank of the Philippines, subject to
disposition only upon further orders of this Court. If in case stock dividends are declared, the conditions on the sale, pledge, mortgage
and other disposition of any of the shares as above-mentioned in conditions 1, 2 and 3, shall likewise apply.
80
In so far as the matters raised by Defendants Eduardo Cojuangco, et al. in their "Omnibus Motion" dated September 23, 1996 and "Reply to
PCGG’s Comment/Opposition with Motion to Order PCGG to Complete Inventory, to Nullify Writs of Sequestration and to Enjoin PCGG from
Voting Sequestered Shares of Stock" dated January 3, 1997, considering the above conclusion, this Court rules that it is no longer necessary to
delve into the matters raised in the said Motions.
SO ORDERED.37
Cojuangco, et al. moved for the modification of the resolution,38 praying for the deletion of the conditions for allegedly restricting their rights.
The Republic also sought reconsideration of the resolution.39
Eventually, on June 24, 2005, the Sandiganbayan denied both motions, but reduced the restrictions thuswise:
WHEREFORE, the "Motion for Reconsideration (Re: Resolution dated September 17, 2003 Promulgated on October 8, 2003)" dated October 24,
2003 of Plaintiff Republic is hereby DENIED for lack of merit. As to the "Motion for Modification (Re: Resolution Promulgated on October 8,
2003)" dated October 22, 2003, the same is hereby DENIED for lack of merit. However, the restrictions imposed by this Court in its Resolution
dated September 17, 2003 and promulgated on October 8, 2003 shall now read as follows:
"Despite the lifting of the writs of sequestration, since the Republic continues to hold a claim on the shares which is yet to be resolved, it is
hereby ordered that the following shall be annotated in the relevant corporate books of San Miguel Corporation:
"a) any sale, pledge, mortgage or other disposition of any of the shares of the Defendants Eduardo Cojuangco, et al. shall be subject to the
outcome of this case.
"b) the Republic through the PCGG shall be given twenty (20) days written notice by Defendants Eduardo Cojuangco, et al. prior to any sale,
pledge, mortgage or other disposition of the shares.
"SO ORDERED."40
Pending resolution of the motions relative to the lifting of the writs of sequestration, SMC filed a Motion for Intervention with attached
Complaint-in-Intervention,41 alleging, among other things, that it had an interest in the matter in dispute between the Republic and defendants
CIIF Companies for being the owner by purchase of a portion (i.e., 25,450,000 SMC shares covered by Stock Certificate Nos. A0004129 and
B0015556 of the so-called "CIIF block of SMC shares of stock" sought to be recovered as alleged ill-gotten wealth).
Although Cojuangco, et al. interposed no objection to SMC’s intervention, the Republic opposed,42 averring that the intervention would be
improper and was a mere attempt to litigate anew issues already raised and passed upon by the Supreme Court. COCOFED similarly opposed
SMC’s intervention,43 and Ursua adopted its opposition.
On May 6, 2004, the Sandiganbayan denied SMC’s motion to intervene. 44 SMC sought reconsideration,45 and its motion to that effect was
opposed by COCOFED and the Republic.
On May 7, 2004, the Sandiganbyan granted the Republic’s Motion for Judgment on the Pleadings and/or Partial Summary Judgment (Re:
Defendants CIIF Companies, 14 Holding Companies and COCOFED, et al.) and rendered a Partial Summary Judgment,46 the dispositive portion
of which reads as follows:
WHEREFORE, in view of the foregoing, we hold that:
The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and Cocofed, et al.) filed by Plaintiff is
hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, NAMELY:
1. Southern Luzon Coconut Oil Mills (SOLCOM);
2. Cagayan de Oro Oil Co., Inc. (CAGOIL);
3. Iligan Coconut Industries, Inc. (ILICOCO);
4. San Pablo Manufacturing Corp. (SPMC);
5. Granexport Manufacturing Corp. (GRANEX); and
6. Legaspi Oil Co., Inc. (LEGOIL),
81
AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:
1. Soriano Shares, Inc.;
2. ACS Investors, Inc.;
3. Roxas Shares, Inc.;
4. Arc Investors, Inc.;
5. Toda Holdings, Inc.;
6. AP. Holdings, Inc.;
7. Fernandez Holdings, Inc.;
8. SMC Officers Corps. Inc.;
9. Te Deum Resources, Inc.;
10. Anglo Ventures, Inc.;
11. Randy Allied Ventures, Inc.;
12. Rock Steel Resources, Inc.;
13. Valhalla Properties Ltd., Inc.; and
14. First Meridian Development, Inc.
AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALING 33,133,266 SHARES AS OF 1983
TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED THEREON AS WELL AS ANY INCREMENTS THERETO
ARISING FROM, BUT NOT LIMITED TO, EXERCISE OF PRE-EMPTIVE RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT
IN-TRUST FOR ALL THE COCONUT FARMERS AND ORDERED RECONVEYED TO THE GOVERNMENT.
Let the trial of this Civil Case proceed with respect to the issues which have not been disposed of in this partial Summary Judgment, including the
determination of whether the CIIF Block of SMC Shares adjudged to be owned by the Government represents 27% of the issued and outstanding
capital stock of SMC according to plaintiff or 31.3% of said capital stock according to COCOFED, et al. and Ballares, et al.
SO ORDERED.47
In the same resolution of May 7, 2004, the Sandiganbayan considered the Motions to Dismiss filed by Cojuangco, et al. on August 2, 2000 and by
Enrile on September 4, 2000 as overtaken by the Republic’s Motion for Judgment on the Pleadings and/or Partial Summary Judgment. 48
On May 25, 2004, Cojuangco, et al. filed their Motion for Reconsideration.49
COCOFED filed its so-called Class Action Omnibus Motion: (a) Motion to Dismiss for Lack of Subject Matter Jurisdiction and Alternatively, (b)
Motion for Reconsideration dated May 26, 2004.50
The Republic submitted its Consolidated Comment.51
Relative to the resolution of May 7, 2004, the Sandiganbayan issued its resolution of December 10, 2004, 52 denying the Republic’s Motion for
Partial Summary Judgment (Re: Shares in San Miguel Corporation Registered in the Respective Names of Defendants Eduardo M. Cojuangco, Jr.
and the defendant Cojuangco Companies) upon the following reasons:
In the instant case, a circumspect review of the records show that while there are facts which appear to be undisputed, there are also genuine
factual issues raised by the defendants which need to be threshed out in a full-blown trial. Foremost among these issues are the following:
82
1) What are the "various sources" of funds, which the defendant Cojuangco and his companies claim they utilized to acquire the
disputed SMC shares?
2) Whether or not such funds acquired from alleged "various sources" can be considered coconut levy funds;
3) Whether or not defendant Cojuangco had indeed served in the governing bodies of PC, UCPB and/or CIIF Oil Mills at the time the
funds used to purchase the SMC shares were obtained such that he owed a fiduciary duty to render an account to these entities as well
as to the coconut farmers;
4) Whether or not defendant Cojuangco took advantage of his position and/or close ties with then President Marcos to obtain favorable
concessions or exemptions from the usual financial requirements from the lending banks and/or coco-levy funded companies, in order
to raise the funds to acquire the disputed SMC shares; and if so, what are these favorable concessions or exemptions?
Answers to these issues are not evident from the submissions of the plaintiff and must therefore be proven through the presentation of relevant
and competent evidence during trial. A perusal of the subject Motion shows that the plaintiff hastily derived conclusions from the defendants’
statements in their previous pleadings although such conclusions were not supported by categorical facts but only mere inferences. In the Reply
dated October 2, 2003, the plaintiff construed the supposed meaning of the phrase "various sources" (referring to the source of defendant
Cojuangco’s funds which were used to acquire the subject SMC shares), which plaintiff said was quite obvious from the defendants’ admission in
his Pre-Trial Brief, which we quote:
"According to Cojuangco’s own Pre-Trial Brief, these so-called ‘various sources’, i.e., the sources from which he obtained the funds he claimed
to have used in buying the 20% SMC shares are not in fact ‘various’ as he claims them to be. He says he obtained ‘loans’ from UCPB and
‘advances’ from the CIIF Oil Mills. He even goes as far as to admit that his only evidence in this case would have been ‘records of UCPB’ and a
‘representative of the CIIF Oil Mills’ obviously the ‘records of UCPB’ relate to the ‘loans’ that Cojuangco claims to have obtained from UCPB –
of which he was President and CEO – while the ‘representative of the CIIF Oil Mills’ will obviously testify on the ‘advances’ Cojuangco
obtained from CIIF Oil Mills – of which he was also the President and CEO."
From the foregoing premises, plaintiff went on to conclude that:
"These admissions of defendant Cojuangco are outright admissions that he (1) took money from the bank entrusted by law with the
administration of coconut levy funds and (2) took more money from the very corporations/oil mills in which part of those coconut levy funds (the
CIIF) was placed – treating the funds of UCPB and the CIIF as his own personal capital to buy ‘his’ SMC shares."
We cannot agree with the plaintiff’s contention that the defendant’s statements in his Pre-Trial Brief regarding the presentation of a possible CIIF
witness as well as UCPB records, can already be considered as admissions of the defendant’s exclusive use and misuse of coconut levy funds to
acquire the subject SMC shares and defendant Cojuangco’s alleged taking advantage of his positions to acquire the subject SMC shares.
Moreover, in ruling on a motion for summary judgment, the court "should take that view of the evidence most favorable to the party against
whom it is directed, giving such party the benefit of all inferences." Inasmuch as this issue cannot be resolved merely from an interpretation of
the defendant’s statements in his brief, the UCPB records must be produced and the CIIF witness must be heard to ensure that the conclusions
that will be derived have factual basis and are thus, valid.
WHEREFORE, in view of the forgoing, the Motion for Partial Summary Judgment dated July 11, 2003 is hereby DENIED for lack of merit.
SO ORDERED.
Thereafter, on December 28, 2004, the Sandiganbayan resolved the other pending motions,53 viz:
WHEREFORE, in view of the foregoing, the Motion for Reconsideration dated May 25, 2004 filed by defendant Eduardo M. Cojuangco, Jr., et
al. and the Class Action Omnibus Motion: (a) Motion to Dismiss for Lack of Subject Matter Jurisdiction and Alternatively, (b) Motion for
Reconsideration dated May 26, 2004 filed by COCOFED, et al. and Ballares, et al. are hereby DENIED for lack of merit.
SO ORDERED.54
COCOFED moved to set the case for trial,55 but the Republic opposed the motion.56 On their part, Cojuangco, et al. also moved to set the
trial,57 with the Republic similarly opposing the motion.58
On March 23, 2006, the Sandiganbayan granted the motions to set for trial and set the trial on August 8, 10, and 11, 2006.59
In the meanwhile, on August 9, 2005, the Republic filed a Motion for Execution of Partial Summary Judgment (re: CIIF block of SMC Shares of
Stock),60 contending that an execution pending appeal was justified because any appeal by the defendants of the Partial Summary Judgment
would be merely dilatory.
83
Cojuangco, et al. opposed the motion.61
The Sandiganbayan denied the Republic’s Motion for Execution of Partial Summary Judgment (re: CIIF block of SMC Shares of Stock),62 to wit:
WHEREFORE, the MOTION FOR EXECUTION OF PARTIAL SUMMARY JUDGMENT (RE: CIIF BLOCK OF SMC SHARES OF
STOCK) dated August 8, 2005 of the plaintiff is hereby denied for lack of merit. However, this Court orders the severance of this particular claim
of Plaintiff. The Partial Summary Judgment dated May 7, 2004 is now considered a separate final and appealable judgment with respect to the
said CIIF Block of SMC shares of stock.
The Partial Summary Judgment rendered on May 7, 2004 is modified by deleting the last paragraph of the dispositive portion which will now
read, as follows:
WHEREFORE, in view of the foregoing, we hold that:
The Motion for Partial Summary Judgment (Re: Defendants CIIF Companies, 14 Holding Companies and Cocofed, et al.) filed by Plaintiff is
hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES, NAMELY:
1. Southern Coconut Oil Mills (SOLCOM);
2. Cagayan de Oro Oil Co., Inc. (CAGOIL);
3. Iligan Coconut Industries, Inc. (ILICOCO);
4. San Pablo Manufacturing Corp. (SPMC);
5. Granexport Manufacturing Corp.
(GRANEX); and
6. Legaspi Oil Co., Inc. (LEGOIL),
AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:
1. Soriano Shares, Inc.;
2. ACS Investors, Inc.;
3. Roxas Shares, Inc.;
4. Arc Investors, Inc.;
5. Toda Holdings, Inc.;
6. AP Holdings, Inc.;
7. Fernandez Holdings, Inc.;
8. SMC Officers Corps, Inc.;
9. Te Deum Resources, Inc.;
10. Anglo Ventures, Inc.;
11. Randy Allied Ventures, Inc.;
12. Rock Steel Resources, Inc.;
84
13. Valhalla Properties Ltd., Inc.; and
14. First Meridian Development, Inc.
AND THE CIIF BLOCK OF SAN MIGUEL CORPORATION (SMC) SHARES OF STOCK TOTALING 33,133,266 SHARES AS OF 1983
TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED THEREON AS WELL AS ANY INCREMENTS THERETO
ARISING FROM, BUT NOT LIMITED TO, EXERCISE OF PRE-EMPTIVE RIGHTS ARE DECLARED OWNED BY THE GOVERNMENT
IN TRUST FOR ALL THE COCONUT FARMERS AND ORDERED RECONVEYED TO THE GOVERNMENT.
The aforementioned Partial Summary Judgment is now deemed a separate appealable judgment which finally disposes of the ownership of the
CIIF Block of SMC Shares, without prejudice to the continuation of proceedings with respect to the remaining claims particularly those
pertaining to the Cojuangco, et al. block of SMC shares.
SO ORDERED.63
During the pendency of the Republic’s motion for execution, Cojuangco, et al. filed a Motion for Authority to Sell San Miguel Corporation
(SMC) shares, praying for leave to allow the sale of SMC shares to proceed, exempted from the conditions set forth in the resolutions
promulgated on October 3, 2003 and June 24, 2005.64 The Republic opposed, contending that the requested leave to sell would be tantamount to
removing jurisdiction over the res or the subject of litigation.65
However, the Sandiganbayan eventually granted the Motion for Authority to Sell San Miguel Corporation (SMC) shares. 66
Thereafter, Cojuangco, et al. manifested to the Sandiganbayan that the shares would be sold to the San Miguel Corporation Retirement
Plan.67 Ruling on the manifestations of Cojuangco, et al., the Sandiganbayan issued its resolution of July 30, 2007 allowing the sale of the shares,
to wit:
This notwithstanding however, while the Court exempts the sale from the express condition that it shall be subject to the outcome of the case,
defendants Cojuangco, et al. may well be reminded that despite the deletion of the said condition, they cannot transfer to any buyer any interest
higher than what they have. No one can transfer a right to another greater than what he himself has. Hence, in the event that the Republic prevails
in the instant case, defendants Cojuangco, et al. hold themselves liable to their transferees-buyers, especially if they are buyers in good faith and
for value. In such eventuality, defendants Cojuangco, et al. cannot be shielded by the cloak of principle of caveat emptor because case law has it
that this rule only requires the purchaser to exercise such care and attention as is usually exercised by ordinarily prudent men in like business
affairs, and only applies to defects which are open and patent to the service of one exercising such care.
Moreover, said defendants Eduardo M. Cojuangco, et al. are hereby ordered to render their report on the sale within ten (10) days from
completion of the payment by the San Miguel Corporation Retirement Plan.
SO ORDERED.68
Cojuangco, et al. later rendered a complete accounting of the proceeds from the sale of the Cojuangco block of shares of SMC stock, informing
that a total amount of ₱ 4,786,107,428.34 had been paid to the UCPB as loan repayment. 69
It appears that the trial concerning the disputed block of shares was not scheduled because the consideration and resolution of the aforecited
motions for summary judgment occupied much of the ensuing proceedings.
At the hearing of August 8, 2006, the Republic manifested70 that it did not intend to present any testimonial evidence and asked for the marking
of certain exhibits that it would have the Sandiganbayan take judicial notice of. The Republic was then allowed to mark certain documents as its
Exhibits A to I, inclusive, following which it sought and was granted time within which to formally offer the exhibits.
On August 31, 2006, the Republic filed its Manifestation of Purposes (Re: Matters Requested or Judicial Notice on the 20% Shares in San Miguel
Corporation Registered in the Respective Names of defendant Eduardo M. Cojuangco, Jr. and the defendant Cojuangco Companies). 71
On September 18, 2006, the Sandiganbayan issued the following resolution,72 to wit:
Acting on the Manifestation of Purposes (Re: Matters Requested or Judicial Notice on the 20% Shares in San Miguel Corporation Registered in
the Respective names of Defendant Eduardo M. Cojuangco, Jr. and the Defendant Cojuangco Companies) dated 28 August 2006 filed by the
plaintiff, which has been considered its formal offer of evidence, and the Comment of Defendants Eduardo M. Cojuangco, Jr., et al. on Plaintiff’s
"Manifestation of Purposes …" Dated August 30, 2006 dated September 15, 2006, the court resolves to ADMIT all the exhibits offered, i.e.:
• Exhibit "A" – the Answer of defendant Eduardo M. Cojuangco, Jr. to the Third Amended Complaint (Subdivided) dated June 23,
1999, as well as the sub-markings (Exhibit "A-1" to "A-4";
85
• Exhibit "B" – the "Pre-Trial Brief dated January 11, 2000 of defendant CIIF Oil Mills and fourteen (14) CIIF Holding Companies, as
well as the sub-markings Exhibits "B-1" and "B-2"
• Exhibit "C" – the Pre-Trial Brief dated January 11, 2000 of defendant Eduardo M. Cojuangco, Jr. as well as the sub-markings
Exhibits "C-1", "C-1-a" and "C-1-b";
• Exhibit "D" – the Plaintiff’s Motion for Summary Judgment [Re: Shares in San Miguel Corporation Registered in the Respective
Names of Defendant Eduardo M. Cojuangco, Jr. and the Defendant Cojuangco Companies] dated July 11, 2003, as well as the sub-
markings Exhibits "D-1" to "D-4"
the said exhibits being part of the record of the case, as well as
• Exhibit "E" – Presidential Decree No. 961 dated July 11, 1976;
• Exhibit "F" – Presidential Decree No. 755 dated July 29, 1975;
• Exhibit "G" – Presidential Decree No. 1468 dated June 11, 1978;
• Exhibit "H" – Decision of the Supreme Court in Republic vs. COCOFED, et al., G.R. Nos. 147062-64, December 14, 2001, 372
SCRA 462
the aforementioned exhibits being matters of public record.
The admission of these exhibits is being made over the objection of the defendants Cojuangco, et al. as to the relevance thereof and as to the
purposes for which they were offered in evidence, which matters shall be taken into consideration by the Court in deciding the case on the merits.
The trial hereon shall proceed on November 21, 2006, at 8:30 in the morning as previously scheduled. 73
During the hearing on November 24, 2006, Cojuangco, et al. filed their Submission and Offer of Evidence of Defendants, 74 formally offering in
evidence certain documents to substantiate their counterclaims, and informing that they found no need to present countervailing evidence because
the Republic’s evidence did not prove the allegations of the Complaint. On December 5, 2006, after the Republic submitted its Comment,75 the
Sandiganbayan admitted the exhibits offered by Cojuangco, et al., and granted the parties a non-extendible period within which to file their
respective memoranda and reply-memoranda.
Thereafter, on February 23, 2007, the Sandiganbayan considered the case submitted for decision. 76
ISSUES
The various issues submitted for consideration by the Court are summarized hereunder.
G.R. No. 166859
The Republic came to the Court via petition for certiorari 77 to assail the denial of its Motion for Partial Summary Judgment through the resolution
promulgated on December 10, 2004, insisting that the Sandiganbayan thereby committed grave abuse of discretion: (a) in holding that the various
sources of funds used in acquiring the SMC shares of stock remained disputed; (b) in holding that it was disputed whether or not Cojuangco had
served in the governing bodies of PCA, UCPB, and/or the CIIF Oil Mills; and (c) in not finding that Cojuangco had taken advantage of his
position and had violated his fiduciary obligations in acquiring the SMC shares of stock in issue.
The Court will consider and resolve the issues thereby raised alongside the issues presented in G.R. No. 180702.
G.R. No. 169203
In the resolution promulgated on October 8, 2003, the Sandiganbayan declared as "automatically lifted for being null and void" nine writs of
sequestration (WOS) issued against properties of Cojuangco and Cojuangco companies, considering that: (a) eight of them (i.e., WOS No. 86-
0062 dated April 21, 1986; WOS No. 86-0069 dated April 22, 1986; WOS No. 86-0085 dated May 9, 1986; WOS No. 86-0095 dated May 16,
1986; WOS No. 86-0096 dated May 16, 1986; WOS No. 86-0097 dated May 16, 1986; WOS No. 86-0098 dated May 16, 1986; and WOS No.
87-0218 dated May 27, 1987) had been issued by only one PCGG Commissioner, contrary to the requirement of Section 3 of the Rules of the
PCGG for at least two Commissioners to issue the WOS; and (b) the ninth (i.e., WOS No. 86-0042 dated April 8, 1986), although issued prior to
the promulgation of the Rules of the PCGG requiring at least two Commissioners to issue the WOS, was void for being issued without prior
determination by the PCGG of a prima facie basis for sequestration.1avvphi1
86
Nonetheless, despite its lifting of the nine WOS, the Sandiganbayan prescribed four conditions to be still "annotated in the relevant corporate
books of San Miguel Corporation" considering that the Republic "continues to hold a claim on the shares which is yet to be resolved."78
In its resolution promulgated on June 24, 2005, the Sandiganbayan denied the Republic’s Motion for Reconsideration filed vis-a-vis the
resolution promulgated on October 8, 2003, but reduced the conditions earlier imposed to only two. 79
On September 1, 2005, the Republic filed a petition for certiorari80 to annul the resolutions promulgated on October 8, 2003 and on June 24, 2005
on the ground that the Sandiganbayan had thereby committed grave abuse of discretion:
I.
XXX IN LIFTING WRIT OF SEQUESTRATION NOS. 86-0042 AND 87-0218 DESPITE EXISTENCE OF THE BASIC REQUISITES FOR
THE VALIDITY OF SEQUESTRATION.
II.
XXX WHEN IT DENIED PETITIONER’S ALTERNATIVE PRAYER IN ITS MOTION FOR RECONSIDERATION FOR THE ISSUANCE
OF AN ORDER OF SEQUESTRATION AGAINST ALL THE SUBJECT SHARES OF STOCK IN ACCORDNCE WITH THE RULING IN
REPUBLIC VS. SANDIGANBAYAN, 258 SCRA 685 (1996).
III.
XXX IN SUBSEQUENTLY DELETING THE LAST TWO (2) CONDITIONS WHICH IT EARLIER IMPOSED ON THE SUBJECT SHARES
OF STOCK.81
G.R. No. 180702
On November 28, 2007, the Sandiganbayan promulgated its decision,82 decreeing as follows:
WHEREFORE, in view of all the foregoing, the Court is constrained to DISMISS, as it hereby DISMISSES, the Third Amended Complaint in
subdivided Civil Case No. 0033-F for failure of plaintiff to prove by preponderance of evidence its causes of action against defendants with
respect to the twenty percent (20%) outstanding shares of stock of San Miguel Corporation registered in defendants’ names, denominated herein
as the "Cojuangco, et al. block" of SMC shares. For lack of satisfactory warrant, the counterclaims in defendants’ Answers are likewise ordered
dismissed.
SO ORDERED.
Hence, the Republic appeals, positing:
I.
COCONUT LEVY FUNDS ARE PUBLIC FUNDS. THE SMC SHARES, WHICH WERE ACQUIRED BY RESPONDENTS
COJUANGCO, JR. AND THE COJUANGCO COMPANIES WITH THE USE OF COCONUT LEVY FUNDS – IN VIOLATION
OF RESPONDENT COJUANGCO, JR.’S FIDUCIARY OBLIGATION – ARE, NECESSARILY, PUBLIC IN CHARACTER AND
SHOULD BE RECONVEYED TO THE GOVERNMENT.
II.
PETITIONER HAS CLEARLY DEMONSTRATED ITS ENTITLEMENT, AS A MATTER OF LAW, TO THE RELIEFS PRAYED
FOR.83
and urging the following issues to be resolved, to wit:
I.
WHETHER THE HONORABLE SANDIGANBAYAN COMMITTED A REVERSIBLE ERROR WHEN IT DISMISSED CIVIL
CASE NO. 0033-F; AND
II.
87
WHETHER OR NOT THE SUBJECT SHARES IN SMC, WHICH WERE ACQUIRED BY, AND ARE IN THE RESPECTIVE
NAMES OF RESPONDENTS COJUANGCO, JR. AND THE COJUANGCO COMPANIES, SHOULD BE RECONVEYED TO
THE REPUBLIC OF THE PHILIPPINES FOR HAVING BEEN ACQUIRED USING COCONUT LEVY FUNDS. 84
On their part, the petitioners-in-intervention85 submit the following issues, to wit:
WHETHER OR NOT THE COURT A QUO GRAVELY ERRED AND DECIDED THE CASE A QUO IN VIOLATION OF LAW
AND APPLICABLE RULINGS OF THE HONORABLE COURT IN RULING THAT, WHILE ADMITTEDLY THE SUBJECT
SMC SHARES WERE PURCHASED FROM LOAN PROCEEDS FROM UCPB AND ADVANCES FROM THE CIIF OIL MILLS,
SAID SUBJECT SMC SHARES ARE NOT PUBLIC PROPERTY
II
WHETHER OR NOT THE COURT A QUO GRAVELY ERRED AND DECIDED THE CASE A QUO IN VIOLATION OF LAW
AND APPLICABLE RULINGS OF THE HONORABLE COURT IN FAILING TO RULE THAT, EVEN ASSUMING FOR THE
SAKE OF ARGUMENT THAT LOAN PROCEEDS FROM UCPB ARE NOT PUBLIC FINDS, STILL, SINCE RESPONDENT
COJUANGCO, IN THE PURCHASE OF THE SUBJECT SMC SHARES FROM SUCH LOAN PROCEEDS, VIOLATED HIS
FIDUCIARY DUTIES AND TOOK A COMMERCIAL OPPORTUNITY THAT RIGHTFULLY BELONGED TO UCPB (A
PUBLIC CORPORATION), THE SUBJECT SMC SHARES SHOULD REVERT BACK TO THE GOVERNMENT.
RULING
We deny all the petitions of the Republic.
Lifting of nine WOS for violation of PCGG Rules

did not constitute grave abuse of discretion
Through its resolution promulgated on June 24, 2005, assailed on certiorari in G.R. No. 169203, the Sandiganbayan lifted the nine WOS for the
following reasons, to wit:
Having studied the antecedent facts, this Court shall now resolve the pending incidents especially defendants’ "Motion to Affirm that the Writs or
Orders of Sequestration Issued on Defendants’ Properties Were Unauthorized, Invalid and Never Became Effective" dated March 5, 1999.
Section 3 of the PCGG Rules and Regulations promulgated on April 11, 1986, provides:
"Sec. 3. Who may issue. – A writ of sequestration or a freeze or hold order may be issued by the Commission upon the authority of at least two
Commissioners, based on the affirmation or complaint of an interested party or motu propio (sic) the issuance thereof is warranted."
In this present case, of all the questioned writs of sequestration issued after the effectivity of the PCGG Rules and Regulations or after April 11,
1986, only writ no. 87-0218 issued on May 27, 1987 complied with the requirement that it be issued by at least two Commissioners, the same
having been issued by Commissioners Ramon E. Rodrigo and Quintin S. Doromal. However, even if Writ of Sequestration No. 87-0218
complied with the requirement that the same be issued by at least two Commissioners, the records fail to show that it was issued with factual
basis or with factual foundation as can be seen from the Certification of the Commission Secretary of the PCGG of the excerpt of the minutes of
the meeting of the PCGG held on May 26, 1987, stating therein that:
"The Commission approved the recommendation of Dir. Cruz to sequester all the shares of stock, assets, records, and documents of Balete Ranch,
Inc. and the appointment of the Fiscal Committee with ECI Challenge, Inc./Pepsi-Cola for Balete Ranch, Inc. and the Aquacor Marketing Corp.
vice Atty. S. Occena. The objective is to consolidate the Fiscal Committee activities covering three associated entities of Mr. Eduardo
Cojuangco.Upon recommendation of Comm. Rodrigo, the reconstitution of the Board of Directors of the three companies was deferred for further
study."
Nothing in the above-quoted certificate shows that there was a prior determination of a factual basis or factual foundation. It is the absence of
a prima facie basis for the issuance of a writ of sequestration and not the lack of authority of two (2) Commissioners which renders the said writ
void ab initio. Thus, being the case, Writ of Sequestration No. 87-0218 must be automatically lifted.
As declared by the Honorable Supreme Court in two cases it has decided,
88
"The absence of a prior determination by the PCGG of a prima facie basis for the sequestration order is, unavoidably, a fatal defect which
rendered the sequestration of respondent corporation and its properties void ab initio." And
"The corporation or entity against which such writ is directed will not be able to visually determine its validity, unless the required signatures of
at least two commissioners authorizing its issuance appear on the very document itself. The issuance of sequestration orders requires the
existence of a prima facie case. The two –commissioner rule is obviously intended to assure a collegial determination of such fact. In this light, a
writ bearing only one signature is an obvious transgression of the PCGG Rules."
Consequently, the writs of sequestration nos. 86-0062, 86-0069, 86-0085, 86-0095, 86-0096, 86-0097 and 86-0098 must be lifted for not having
complied with the pertinent provisions of the PCGG Rules and Regulations, all of which were issued by only one Commissioner and after April
11, 1986 when the PCGG Rules and Regulations took effect, an utter disregard of the PCGG’s Rules and Regulations. The Honorable Supreme
Court has stated that:
"Obviously, Section 3 of the PCGG Rules was intended to protect the public from improvident, reckless and needless sequestrations of private
property. And since these Rules were issued by Respondent Commission, it should be the first entity to observe them."
Anent the writ of sequestration no. 86-0042 which was issued on April 8, 1986 or prior to the promulgation of the PCGG Rules and Regulations
on April 11, 1986, the same cannot be declared void on the ground that it was signed by only one Commissioner because at the time it was issued,
the Rules and Regulations of the PCGG were not yet in effect. However, it again appears that there was no prior determination of the existence of
a prima facie basis or factual foundation for the issuance of the said writ. The PCGG, despite sufficient time afforded by this Court to show that a
prima facie basis existed prior to the issuance of Writ No. 86-0042, failed to do so. Nothing in the records submitted by the PCGG in compliance
of the Resolutions and Order of this Court would reveal that a meeting was held by the Commission for the purpose of determining the existence
of a prima facie evidence prior to its issuance. In a case decided by the Honorable Supreme Court, wherein it involved a writ of sequestration
issued by the PCGG on March 19, 1986 against all assets, movable and immovable, of Provident International Resources Corporation and
Philippine Casino Operators Corporation, the Honorable Supreme Court enunciated:
"The questioned sequestration order was, however issued on March 19, 1986, prior to the promulgation of the PCGG Rules and Regulations. As a
consequence, we cannot reasonably expect the commission to abide by said rules, which were nonexistent at the time the subject writ was issued
by then Commissioner Mary Concepcion Bautista. Basic is the rule that no statute, decree, ordinance, rule or regulation (and even policies) shall
be given retrospective effect unless explicitly stated so. We find no provision in said Rules which expressly gives them retroactive effect, or
implies the abrogation of previous writs issued not in accordance with the same Rules. Rather, what said Rules provide is that they "shall be
effective immediately," which in legal parlance, is understood as "upon promulgation". Only penal laws are given retroactive effect insofar as
they favor the accused.
We distinguish this case from Republic vs. Sandiganbayan, Romualdez and Dio Island Resort, G.R. No. 88126, July 12, 1996 where the
sequestration order against Dio Island Resort, dated April 14, 1986, was prepared, issued and signed not by two commissioners of the PCGG, but
by the head of its task force in Region VIII. In holding that said order was not valid since it was not issued in accordance with PCGG Rules and
Regulations, we explained:
"(Sec. 3 of the PCGG Rules and Regulations), couched in clear and simple language, leaves no room for interpretation. On the basis thereof, it is
indubitable that under no circumstances can a sequestration or freeze order be validly issued by one not a commissioner of the PCGG.
xxx xxx xxx
Even assuming arguendo that Atty. Ramirez had been given prior authority by the PCGG to place Dio Island Resort under sequestration,
nevertheless, the sequestration order he issued is still void since PCGG may not delegate its authority to sequester to its representatives and
subordinates, and any such delegation is valid and ineffective."
We further said:
"In the instant case, there was clearly no prior determination made by the PCGG of a prima facie basis for the sequestration of Dio Island Resort,
Inc. x x x
xxx xxx xxx
The absence of a prior determination by the PCGG of a prima facie basis for the sequestration order is, unavoidably, a fatal defect which rendered
the sequestration of respondent corporation and its properties void ab initio. Being void ab initio, it is deemed nonexistent, as though it had never
been issued, and therefore is not subject to ratification by the PCGG.
What were obviously lacking in the above case were the basic requisites for the validity of a sequestration order which we laid down in BASECO
vs. PCGG, 150 SCRA 181, 216, May 27, 1987, thus:
89
"Section (3) of the Commission’s Rules and regulations provides that sequestration or freeze (and takeover) orders issue upon the authority of at
least two commissioners, based on the affirmation or complaint of an interested party, or motu propio (sic) when the Commission has reasonable
grounds to believe that the issuance thereof is warranted."
In the case at bar, there is no question as to the presence of prima facie evidence justifying the issuance of the sequestration order against
respondent corporations. But the said order cannot be nullified for lack of the other requisite (authority of at least two commissioners) since, as
explained earlier, such requisite was nonexistent at the time the order was issued."
As to the argument of the Plaintiff Republic that Defendants Cojuangco, et al. have not shown any contrary prima facie proof that the properties
subject matter of the writs of sequestration were legitimate acquisitions, the same is misplaced. It is a basic legal doctrine, as well as many times
enunciated by the Honorable Supreme Court that when a prima facie proof is required in the issuance of a writ, the party seeking such
extraordinary writ must establish that it is entitled to it by complying strictly with the requirements for its issuance and not the party against
whom the writ is being sought for to establish that the writ should not be issued against it.
According to the Republic, the Sandiganbayan thereby gravely abused its discretion in: (a) in lifting WOS No. 86-0042 and No. 87-0218 despite
the basic requisites for the validity of sequestration being existent; (b) in denying the Republic’s alternative prayer for the issuance of an order of
sequestration against all the subject shares of stock in accordance with the ruling in Republic v. Sandiganbayan, 258 SCRA 685, as stated in its
Motion For Reconsideration; and (c) in deleting the last two conditions the Sandiganbayan had earlier imposed on the subject shares of stock.
We sustain the lifting of the nine WOS for the reasons made extant in the assailed resolution of October 8, 2003, supra.
Section 3 of the Rules of the PCGG, promulgated on April 11, 1986, provides:
Section 3. Who may issue. – A writ of sequestration or a freeze or hold order may be issued by the Commission upon the authority of at least two
Commissioners, based on the affirmation or complaint of an interested party or motu proprio when the Commission has reasonable grounds to
believe that the issuance thereof is warranted.
Conformably with Section 3, supra, WOS No. 86-0062 dated April 21, 1986; WOS No. 86-0069 dated April 22, 1986; WOS No. 86-0085 dated
May 9, 1986; WOS No. 86-0095 dated May 16, 1986; WOS No. 86-0096 dated May 16, 1986; WOS No. 86-0097 dated May 16, 1986; and WOS
No. 86-0098 dated May 16, 1986 were lawfully and correctly nullified considering that only one PCGG Commissioner had issued them.
Similarly, WOS No. 86-0042 dated April 8, 1986 and WOS No. 87-0218 dated May 27, 1987 were lawfully and correctly nullified ̶
notwithstanding that WOS No. 86-0042, albeit signed by only one Commissioner (i.e., Commissioner Mary Concepcion Bautista), was not at the
time of its issuance subject to the two-Commissioners rule, and WOS No. 87-0218, albeit already issued under the signatures of two
Commissioners ̶ considering that both had been issued without a prior determination by the PCGG of a prima facie basis for the sequestration.
Plainly enough, the irregularities infirming the issuance of the several WOS could not be ignored in favor of the Republic and resolved against
the persons whose properties were subject of the WOS. Where the Rules of the PCGG instituted safeguards under Section 3, supra, by requiring
the concurrent signatures of two Commissioners to every WOS issued and the existence of a prima facie case of ill gotten wealth to support the
issuance, the non-compliance with either of the safeguards nullified the WOS thus issued. It is already settled that sequestration, due to its
tendency to impede or limit the exercise of proprietary rights by private citizens, is construed strictly against the State, conformably with the legal
maxim that statutes in derogation of common rights are generally strictly construed and rigidly confined to the cases clearly within their scope
and purpose.86
Consequently, the nullification of the nine WOS, being in implementation of the safeguards the PCGG itself had instituted, did not constitute any
abuse of its discretion, least of all grave, on the part of the Sandiganbayan.
Nor did the Sandiganbayan gravely abuse its discretion in reducing from four to only two the conditions imposed for the lifting of the WOS. The
Sandiganbayan thereby acted with the best of intentions, being all too aware that the claim of the Republic to the sequestered assets and
properties might be prejudiced or harmed pendente lite unless the protective conditions were annotated in the corporate books of SMC. Moreover,
the issue became academic following the Sandiganbayan’s promulgation of its decision dismissing the Republic’s Amended Complaint, which
thereby removed the stated reason – "the Republic continues to hold a claim on the shares which is yet to be resolved" – underlying the need for
the annotation of the conditions (whether four or two).
II
The Concept and Genesis of

Ill-Gotten Wealth in the Philippine Setting
A brief review of the Philippine law and jurisprudence pertinent to ill-gotten wealth should furnish an illuminating backdrop for further
discussion.
90
In the immediate aftermath of the peaceful 1986 EDSA Revolution, the administration of President Corazon C. Aquino saw to it, among others,
that rules defining the authority of the government and its instrumentalities were promptly put in place. It is significant to point out, however, that
the administration likewise defined the limitations of the authority.
The first official issuance of President Aquino, which was made on February 28, 1986, or just two days after the EDSA Revolution, was
Executive Order (E.O.) No. 1, which created the Presidential Commission on Good Government (PCGG). Ostensibly, E.O. No. 1 was the first
issuance in light of the EDSA Revolution having come about mainly to address the pillage of the nation’s wealth by President Marcos, his family,
and cronies.
E.O. No. 1 contained only two WHEREAS Clauses, to wit:
WHEREAS, vast resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and
close associates both here and abroad;
WHEREAS, there is an urgent need to recover all ill-gotten wealth;87
Paragraph (4) of E.O. No. 288 further required that the wealth, to be ill-gotten, must be "acquired by them through or as a result of improper or
illegal use of or the conversion of funds belonging to the Government of the Philippines or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of their official position, authority, relationship, connection or influence to unjustly
enrich themselves at the expense and to the grave damage and prejudice of the Filipino people and the Republic of the Philippines."
Although E.O. No. 1 and the other issuances dealing with ill-gotten wealth (i.e., E.O. No. 2, E.O. No. 14, and E.O. No. 14-A) only identified the
subject matter of ill-gotten wealth and the persons who could amass ill-gotten wealth and did not include an explicit definition of ill-gotten
wealth, we can still discern the meaning and concept of ill-gotten wealth from the WHEREAS Clauses themselves of E.O. No. 1, in that ill-gotten
wealth consisted of the "vast resources of the government" amassed by "former President Ferdinand E. Marcos, his immediate family, relatives
and close associates both here and abroad." It is clear, therefore, that ill-gotten wealth would not include all the properties of President Marcos,
his immediate family, relatives, and close associates but only the part that originated from the "vast resources of the government."
In time and unavoidably, the Supreme Court elaborated on the meaning and concept of ill-gotten wealth. In Bataan Shipyard & Engineering Co.,
Inc. v. Presidential Commission on Good Government,89 or BASECO, for the sake of brevity, the Court held that:
xxx until it can be determined, through appropriate judicial proceedings, whether the property was in truth "ill-gotten," i.e., acquired through or as
a result of improper or illegal use of or the conversion of funds belonging to the Government or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of official position, authority, relationship, connection or influence, resulting in
unjust enrichment of the ostensible owner and grave damage and prejudice to the State. And this, too, is the sense in which the term is commonly
understood in other jurisdictions.90
The BASECO definition of ill-gotten wealth was reiterated in Presidential Commission on Good Government v. Lucio C. Tan,91 where the Court
said:
On this point, we find it relevant to define "ill-gotten wealth." In Bataan Shipyard and Engineering Co., Inc., this Court described "ill-gotten
wealth" as follows:
"Ill-gotten wealth is that acquired through or as a result of improper or illegal use of or the conversion of funds belonging to the Government or
any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of official position, authority,
relationship, connection or influence, resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the State. And
this, too, is the sense in which the term is commonly understood in other jurisdiction."
Concerning respondents’ shares of stock here, there is no evidence presented by petitioner that they belong to the Government of the Philippines
or any of its branches, instrumentalities, enterprises, banks or financial institutions. Nor is there evidence that respondents, taking undue
advantage of their connections or relationship with former President Marcos or his family, relatives and close associates, were able to acquire
those shares of stock.
Incidentally, in its 1998 ruling in Chavez v. Presidential Commission on Good Government, 92 the Court rendered an identical definition of ill-
gotten wealth, viz:
xxx. We may also add that ‘ill-gotten wealth’, by its very nature, assumes a public character. Based on the aforementioned Executive Orders, ‘ill-
gotten wealth’ refers to assets and properties purportedly acquired, directly or indirectly, by former President Marcos, his immediate family,
relatives and close associates through or as a result of their improper or illegal use of government funds or properties; or their having
taken undue advantage of their public office; or their use of powers, influence or relationships, "resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the Republic of the Philippines." Clearly, the assets and properties referred to
supposedly originated from the government itself. To all intents and purposes, therefore, they belong to the people. As such, upon
reconveyance they will be returned to the public treasury, subject only to the satisfaction of positive claims of certain persons as may be
91
adjudged by competent courts. Another declared overriding consideration for the expeditious recovery of ill-gotten wealth is that it may be used
for national economic recovery.
All these judicial pronouncements demand two concurring elements to be present before assets or properties were considered as ill-gotten wealth,
namely: (a) they must have "originated from the government itself," and (b) they must have been taken by former President Marcos, his
immediate family, relatives, and close associates by illegal means.
But settling the sources and the kinds of assets and property covered by E.O. No. 1 and related issuances did not complete the definition of ill-
gotten wealth. The further requirement was that the assets and property should have been amassed by former President Marcos, his immediate
family, relatives, and close associates both here and abroad. In this regard, identifying former President Marcos, his immediate family, and
relatives was not difficult, but identifying other persons who might be the close associates of former President Marcos presented an inherent
difficulty, because it was not fair and just to include within the term close associates everyone who had had any association with President
Marcos, his immediate family, and relatives.
Again, through several rulings, the Court became the arbiter to determine who were the close associates within the coverage of E.O. No. 1.
In Republic v. Migriño,93 the Court held that respondents Migriño, et al. were not necessarily among the persons covered by the term close
subordinate or close associate of former President Marcos by reason alone of their having served as government officials or employees during the
Marcos administration, viz:
It does not suffice, as in this case, that the respondent is or was a government official or employee during the administration of former
Pres. Marcos. There must be a prima facie showing that the respondent unlawfully accumulated wealth by virtue of his close association
or relation with former Pres. Marcos and/or his wife. This is so because otherwise the respondent’s case will fall under existing general laws
and procedures on the matter. xxx
In Cruz, Jr. v. Sandiganbayan,94 the Court declared that the petitioner was not a close associate as the term was used in E.O. No. 1 just because he
had served as the President and General Manager of the GSIS during the Marcos administration.
In Republic v. Sandiganbayan,95 the Court stated that respondent Maj. Gen. Josephus Q. Ramas’ having been a Commanding General of the
Philippine Army during the Marcos administration "d[id] not automatically make him a subordinate of former President Ferdinand Marcos as this
term is used in Executive Order Nos. 1, 2, 14 and 14-A absent a showing that he enjoyed close association with former President Marcos."
It is well to point out, consequently, that the distinction laid down by E.O. No. 1 and its related issuances, and expounded by relevant judicial
pronouncements unavoidably required competent evidentiary substantiation made in appropriate judicial proceedings to determine: (a) whether
the assets or properties involved had come from the vast resources of government, and (b) whether the individuals owning or holding such assets
or properties were close associates of President Marcos. The requirement of competent evidentiary substantiation made in appropriate judicial
proceedings was imposed because the factual premises for the reconveyance of the assets or properties in favor of the government due to their
being ill-gotten wealth could not be simply assumed. Indeed, in BASECO, 96 the Court made this clear enough by emphatically observing:
6. Government’s Right and Duty to Recover All Ill-gotten Wealth
There can be no debate about the validity and eminent propriety of the Government’s plan "to recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the above described factual premises of the Executive Orders and
Proclamation No. 3 to be true, to be demonstrable by competent evidence, the recovery from Marcos, his family and his minions of the assets and
properties involved, is not only a right but a duty on the part of Government.
But however plain and valid that right and duty may be, still a balance must be sought with the equally compelling necessity that a proper respect
be accorded and adequate protection assured, the fundamental rights of private property and free enterprise which are deemed pillars of a free
society such as ours, and to which all members of that society may without exception lay claim.
xxx Democracy, as a way of life enshrined in the Constitution, embraces as its necessary components freedom of conscience, freedom of
expression, and freedom in the pursuit of happiness. Along with these freedoms are included economic freedom and freedom of enterprise within
reasonable bounds and under proper control. xxx Evincing much concern for the protection of property, the Constitution distinctly recognizes the
preferred position which real estate has occupied in law for ages. Property is bound up with every aspect of social life in a democracy as
democracy is conceived in the Constitution. The Constitution realizes the indispensable role which property, owned in reasonable quantities and
used legitimately, plays in the stimulation to economic effort and the formation and growth of a solid social middle class that is said to be the
bulwark of democracy and the backbone of every progressive and happy country.
a. Need of Evidentiary Substantiation in Proper Suit
92
Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will have to be duly established by adequate proof in
each case, in a proper judicial proceeding, so that the recovery of the ill-gotten wealth may be validly and properly adjudged and consummated;
although there are some who maintain that the fact — that an immense fortune, and "vast resources of the government have been amassed by
former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad," and they have resorted to all
sorts of clever schemes and manipulations to disguise and hide their illicit acquisitions — is within the realm of judicial notice, being of so
extensive notoriety as to dispense with proof thereof. Be this as it may, the requirement of evidentiary substantiation has been expressly
acknowledged, and the procedure to be followed explicitly laid down, in Executive Order No. 14. 97
Accordingly, the Republic should furnish to the Sandiganbayan in proper judicial proceedings the competent evidence proving who were the
close associates of President Marcos who had amassed assets and properties that would be rightly considered as ill-gotten wealth.
III.
Summary Judgment was not warranted;
The Republic should have adduced evidence

to substantiate its allegations against the Respondents
We affirm the decision of November 28, 2007, because the Republic did not discharge its burden as the plaintiff to establish by preponderance of
evidence that the respondents’ SMC shares were illegally acquired with coconut-levy funds.
The decision of November 28, 2007 fully explained why the Sandiganbayan dismissed the Republic’s case against Cojuangco, et al., viz:
Going over the evidence, especially the laws, i.e., P.D. No. 961, P.D. No. 755, and P.D. No. 1468, over which plaintiff prayed that Court to take
judicial notice of, it is worth noting that these same laws were cited by plaintiff when it filed its motion for judgment on the pleadings and/or
summary judgment regarding the CIIF block of SMC shares of stock. Thus, the Court has already passed upon the same laws when it arrived at
judgment determining ownership of the CIIF block of SMC shares of stock. Pertinently, in the Partial Summary Judgment promulgated on May 7,
2004, the Court gave the following rulings finding certain provisions of the above-cited laws to be constitutionally infirmed, thus:
In this case, Section 2(d) and Section 9 and 10, Article III, of P.D. Nos. 961 and 1468 mandated the UCPB to utilize the CIIF, an accumulation of
a portion of the CCSF and the CIDF, for investment in the form of shares of stock in corporations organized for the purpose of engaging in the
establishment and the operation of industries and commercial activities and other allied business undertakings relating to coconut and other palm
oils industry in all aspects. The investments made by UCPB in CIIF companies are required by the said Decrees to be equitably distributed for
free by the said bank to the coconut farmers (Sec. 10, P.D. No. 961 and Sec. 10, P.D. No. 1468). The public purpose sought to be served by the
free distribution of the shares of stock acquired with the use of public funds is not evident in the laws mentioned. More specifically, it is not clear
how private ownership of the shares of stock acquired with public funds can serve a public purpose. The mode of distribution of the shares of
stock also left much room for the diversion of assets acquired through public funds into private uses or to serve directly private interests, contrary
to the Constitution. In the said distribution, defendants COCOFED, et al. and Ballares, et al. admitted that UCPB followed the administrative
issuances of PCA which we found to be constitutionally objectionable in our Partial Summary Judgment in Civil Case No. 0033-A, the pertinent
portions of which are quoted hereunder:
xxx xxx xxx
The distribution for free of the shares of stock of the CIIF Companies is tainted with the above-mentioned constitutional infirmities of the PCA
administrative issuances. In view of the foregoing, we cannot consider the provision of P.D. No. 961 and P.D. No. 1468 and the implementing
regulations issued by the PCA as valid legal basis to hold that assets acquired with public funds have legitimately become private properties.
The CIIF Companies having been acquired with public funds, the 14 CIIF-owned Holding Companies and all their assets, including the CIIF
Block of SMC Shares, being public in character, belong to the government. Even granting that the 14 Holding Companies acquired the SMC
Shares through CIIF advances and UCPB loans, said advances and loans are still the obligations of the said companies. The incorporating equity
or capital of the 14 Holding Companies, which were allegedly used also for the acquisition of the subject SMC shares, being wholly owned by the
CIIF Companies, likewise form part of the coconut levy funds, and thus belong to the government in trust for the ultimate beneficiaries thereof,
which are all the coconut farmers.
xxx xxx xxx
And, with the above-findings of the Court, the CIIF block of SMC shares were subsequently declared to be of public character and should be
reconveyed to the government in trust for coconut farmers. The foregoing findings notwithstanding, a question now arises on whether the same
laws can likewise serve as ultimate basis for a finding that the Cojuangco, et al. block of SMC shares are also imbued with public character and
should rightfully be reconveyed to the government.
On this point, the Court disagrees with plaintiff that reliance on said laws would suffice to prove that defendants Cojuangco, et al.’s acquisition of
SMC shares of stock was illegal as public funds were used. For one, plaintiff’s reliance thereon has always had reference only to the CIIF block
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of shares, and the Court has already settled the same by going over the laws and quoting related findings in the Partial Summary judgment
rendered in Civil Case No. 0033-A. For another, the allegations of plaintiff pertaining to the Cojuangco block representing twenty percent (20%)
of the outstanding capital stock of SMC stress defendant Cojuangco’s acquisition by virtue of his positions as Chief Executive Officer of UCPB,
a member-director of the Philippine Coconut Authority (PCA) Governing Board, and a director of the CIIF Oil Mills. Thus, reference to the said
laws would not settle whether there was abuse on the part of defendants Cojuangco, et al. of their positions to acquire the SMC shares. 98
Besides, in the Resolution of the Court on plaintiff’s Motion for Parial Summary Judgment (Re: Shares in San Miguel Corporation Registered in
the Respective Names of Defendants Eduardo M. Cojuangco, Jr. and the defendant Cojuangco Companies), the Court already rejected plaintiff’s
reference to said laws. In fact, the Court declined to grant plaintiff’s motion for partial summary judgment because it simply contended that
defendant Cojuangco’s statements in his pleadings, which plaintiff again offered in evidence herein, regarding the presentation of a possible CIIF
witness as well as UCPB records can already be considered admissions of defendants’ exclusive use and misuse of coconut levy funds. In the said
resolution, the Court already reminded plaintiff that the issues cannot be resolved by plaintiff’s interpretation of defendant Cojuangco’s
statements in his brief. Thus, the substantial portion of the Resolution of the Court denying plaintiff’s motion for partial summary judgment is
again quoted for emphasis: 99
We cannot agree with the plaintiff’s contention that the defendant’s statements in his Pre-Trial Brief regarding the presentation of a possible CIIF
witness as well as UCPB records, can already be considered as admissions of the defendant’s exclusive use and misuse of coconut levy funds to
acquire the subject SMC shares and defendant Cojuangco’s alleged taking advantage of his positions to acquire the subject SMC shares.
Moreover, in ruling on a motion for summary judgment, the court "should take that view of the evidence most favorable to the party against
whom it is directed, giving such party the benefit of all favorable inferences." Inasmuch as this issue cannot be resolved merely from an
interpretation of the defendant’s statements in his brief, the UCPB records must be produced and the CIIF witness must be heard to ensure that
the conclusions that will be derived have factual basis and are thus, valid. 100
WHEREFORE, in view of the foregoing, the Motion for Partial Summary Judgment dated July 11, 2003 is hereby DENIED for lack of merit.
SO ORDERED.
(Emphasis supplied)
Even assuming that, as plaintiff prayed for, the Court takes judicial notice of the evidence it offered with respect to the Cojuangco block of SMC
shares of stock, as contained in plaintiff’s manifestation of purposes, still its evidence do not suffice to prove the material allegations in the
complaint that Cojuangco took advantage of his positions in UCPB and PCA in order to acquire the said shares. As above-quoted, the Court,
itself, has already ruled, and hereby stress that "UCPB records must be produced and the CIIF witness must be heard to ensure that the
conclusions that will be derived have factual basis and are thus, valid." Besides, the Court found that there are genuine factual issues raised by
defendants that need to be threshed out in a full-blown trial, and which plaintiff had the burden to substantially prove. Thus, the Court outlined
these genuine factual issues as follows:
1) What are the "various sources" of funds, which defendant Cojuangco and his companies claim they utilized to acquire the disputed
SMC shares?
2) Whether or not such funds acquired from alleged "various sources" can be considered coconut levy funds;
3) Whether or not defendant Cojuangco had indeed served in the governing bodies of PCA, UCPB and/or CIIF Oil Mills at the time
the funds used to purchase the SMC shares were obtained such that he owed a fiduciary duty to render an account to these entities as
well as to the coconut farmers;
4) Whether or not defendant Cojuangco took advantage of his position and/or close ties with then President Marcos to obtain favorable
concessions or exemptions from the usual financial requirements from the lending banks and/or coco-levy funded companies, in order
to raise the funds to acquire the disputed SMC shares; and if so, what are these favorable concessions or exemptions?101
Answers to these issues are not evident from the submissions of plaintiff and must therefore be proven through the presentation of relevant and
competent evidence during trial. A perusal of the subject Motion shows that the plaintiff hastily derived conclusions from the defendants’
statements in their previous pleadings although such conclusions were not supported by categorical facts but only mere inferences. xxx xxx xxx."
(Emphasis supplied) 102
Despite the foregoing pronouncement of the Court, plaintiff did not present any other evidence during the trial of this case but instead made its
manifestation of purposes, that later served as its offer of evidence in the instant case, that merely used the same evidence it had already relied
upon when it moved for partial summary judgment over the Cojuangco block of SMC shares. Altogether, the Court finds the same insufficient to
prove plaintiff’s allegations in the complaint because more than judicial notices, the factual issues require the presentation of admissible,
competent and relevant evidence in accordance with Sections 3 and 4, Rule 128 of the Rules on Evidence.
Moreover, the propriety of taking judicial notice of plaintiff’s exhibits is aptly questioned by defendants Cojuangco, et al. Certainly, the Court
can take judicial notice of laws pertaining to the coconut levy funds as well as decisions of the Supreme Court relative thereto, but taking judicial
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notice does not mean that the Court would accord full probative value to these exhibits. Judicial notice is based upon convenience and expediency
for it would certainly be superfluous, inconvenient, and expensive both to parties and the court to require proof, in the ordinary way, of facts
which are already known to courts. However, a court cannot take judicial notice of a factual matter in controversy. Certainly, there are genuine
factual matters in the instant case, as above-cited, which plaintiff ought to have proven with relevant and competent evidence other than the
exhibits it offered.
Referring to plaintiff’s causes of action against defendants Cojuangco, et al., the Court finds its evidence insufficient to prove that the source of
funds used to purchase SMC shares indeed came from coconut levy funds. In fact, there is no direct link that the loans obtained by defendant
Cojuangco, Jr. were the same money used to pay for the SMC shares. The scheme alleged to have been taken by defendant Cojuangco, Jr. was
not even established by any paper trail or testimonial evidence that would have identified the same. On account of his positions in the UCPB,
PCA and the CIIF Oil Mills, the Court cannot conclude that he violated the fiduciary obligations of the positions he held in the absence of proof
that he was so actuated and that he abused his positions.103
It was plain, indeed, that Cojuangco, et al. had tendered genuine issues through their responsive pleadings and did not admit that the acquisition
of the Cojuangco block of SMC shares had been illegal, or had been made with public funds. As a result, the Republic needed to establish its
allegations with preponderant competent evidence, because, as earlier stated, the fact that property was ill gotten could not be presumed but must
be substantiated with competent proof adduced in proper judicial proceedings. That the Republic opted not to adduce competent evidence thereon
despite stern reminders and warnings from the Sandiganbayan to do so revealed that the Republic did not have the competent evidence to prove
its allegations against Cojuangco, et al.
Still, the Republic, relying on the 2001 holding in Republic v. COCOFED, 104 pleads in its petition for review (G.R. No. 180702) that:
With all due respect, the Honorable Sandiganbayan failed to consider legal precepts and procedural principles vis-à-vis the records of the case
showing that the funds or "various loans" or "advances" used in the acquisition of the disputed SMC Shares ultimately came from the coconut
levy funds.
As discussed hereunder, respondents’ own admissions in their Answers and Pre-Trial Briefs confirm that the "various sources" of funds utilized
in the acquisition of the disputed SMC shares came from "borrowings" and "advances" from the UCPB and the CIIF Oil Mills. 105
Thereby, the Republic would have the Sandiganbayan pronounce the block of SMC shares of stock acquired by Cojuangco, et al. as ill-gotten
wealth even without the Republic first presenting preponderant evidence establishing that such block had been acquired illegally and with the use
of coconut levy funds.
The Court cannot heed the Republic’s pleas for the following reasons:
To begin with, it is notable that the decision of November 28, 2007 did not rule on whether coconut levy funds were public funds or not. The
silence of the Sandiganbayan on the matter was probably due to its not seeing the need for such ruling following its conclusion that the Republic
had not preponderantly established the source of the funds used to pay the purchase price of the concerned SMC shares, and whether the shares
had been acquired with the use of coconut levy funds.
Secondly, the ruling in Republic v. COCOFED106 determined only whether certain stockholders of the UCPB could vote in the stockholders’
meeting that had been called. The issue now before the Court could not be controlled by the ruling in Republic v. COCOFED, however, for even
as that ruling determined the issue of voting, the Court was forthright enough about not thereby preempting the Sandiganbayan’s decisions on the
merits on ill-gotten wealth in the several cases then pending, including this one, viz:
In making this ruling, we are in no way preempting the proceedings the Sandiganbayan may conduct or the final judgment it may promulgate in
Civil Case No. 0033-A, 0033-B and 0033-F. Our determination here is merely prima facie, and should not bar the anti-graft court from making a
final ruling, after proper trial and hearing, on the issues and prayers in the said civil cases, particularly in reference to the ownership of the subject
shares.
We also lay down the caveat that, in declaring the coco levy funds to be prima facie public in character, we are not ruling in any final manner on
their classification — whether they are general or trust or special funds — since such classification is not at issue here. Suffice it to say that the
public nature of the coco levy funds is decreed by the Court only for the purpose of determining the right to vote the shares, pending the final
outcome of the said civil cases.
Neither are we resolving in the present case the question of whether the shares held by Respondent Cojuangco are, as he claims, the result of
private enterprise. This factual matter should also be taken up in the final decision in the cited cases that are pending in the court a quo. Again,
suffice it to say that the only issue settled here is the right of PCGG to vote the sequestered shares, pending the final outcome of said cases.
Thirdly, the Republic’s assertion that coconut levy funds had been used to source the payment for the Cojuangco block of SMC shares was
premised on its allegation that the UCPB and the CIIF Oil Mills were public corporations. But the premise was grossly erroneous and overly
presumptuous, because:
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(a) The fact of the UCPB and the CIIF Oil Mills being public corporations or government-owned or government-controlled
corporations precisely remained controverted by Cojuangco, et al. in light of the lack of any competent to that effect being in the
records;
(b) Cojuangco explicitly averred in paragraph 2.01.(b) of his Answer that the UCPB was a "private corporation;" and
(c) The Republic did not competently identify or establish which ones of the Cojuangco corporations had supposedly received
advances from the CIIF Oil Mills.
Fourthly, the Republic asserts that the contested block of shares had been paid for with "borrowings" from the UCPB and "advances" from the
CIIF Oil Mills, and that such borrowings and advances had been illegal because the shares had not been purchased for the "benefit of the Coconut
Farmers." To buttress its assertion, the Republic relied on the admissions supposedly made in paragraph 2.01 of Cojuangco’s Answer in relation
to paragraph 4 of the Republic’s Amended Complaint.
The best way to know what paragraph 2.01 of Cojuangco’s Answer admitted is to refer to both paragraph 4 of the Amended Complaint and
paragraph 2.01 of his Answer, which are hereunder quoted:
Paragraph 4 of the Amended Complaint
4. Defendant EDUARDO M. COJUANGCO, JR., was Governor of Tarlac, Congressman of then First District of Tarlac and Ambassador-at-
Large in the Marcos Administration. He was commissioned Lieutenant Colonel in the Philippine Air Force, Reserve. Defendant Eduardo M.
Cojuangco, Jr., otherwise known as the "Coconut King" was head of the coconut monopoly which was instituted by Defendant Ferdinand E.
Marcos, by virtue of the Presidential Decrees. Defendant Eduardo E. Cojuangco, Jr., who was also one of the closest associates of the Defendant
Ferdinand E. Marcos, held the positions of Director of the Philippine Coconut Authority, the United Coconut Mills, Inc., President and Board
Director of the United Coconut Planters Bank, United Coconut Planters Life Assurance Corporation, and United Coconut Chemicals, Inc. He was
also the Chairman of the Board and Chief Executive Officer and the controlling stockholder of the San Miguel Corporation. He may be served
summons at 45 Balete Drive, Quezon City or at 136 East 9th Street, Quezon City.
Paragraph 2.01 of Respondent Cojuangco’s Answer
2.01. Herein defendant admits paragraph 4 only insofar as it alleges the following:
(a) That herein defendant has held the following positions in government: Governor of Tarlac, Congressman of the then First District
of Tarlac, Ambassador-at-Large, Lieutenant Colonel in the Philippine Air Force and Director of the Philippines Coconut Authority;
(b) That he held the following positions in private corporations: Member of the Board of Directors of the United Coconut Oil Mills,
Inc.; President and member of the Board of Directors of the United Coconut Planters Bank, United Coconut Planters Life Assurance
Corporation, and United Coconut Chemicals, Inc.; Chairman of the Board and Chief Executive of San Miguel Corporation; and
(c) That he may be served with summons at 136 East 9th Street, Quezon City.
Herein defendant specifically denies the rest of the allegations of paragraph 4, including any insinuation that whatever association he may have
had with the late Ferdinand Marcos or Imelda Marcos has been in connection with any of the acts or transactions alleged in the complaint or for
any unlawful purpose.
It is basic in remedial law that a defendant in a civil case must apprise the trial court and the adverse party of the facts alleged by the complaint
that he admits and of the facts alleged by the complaint that he wishes to place into contention. The defendant does the former either by stating in
his answer that they are true or by failing to properly deny them. There are two ways of denying alleged facts: one is by general denial, and the
other, by specific denial.107
In this jurisdiction, only a specific denial shall be sufficient to place into contention an alleged fact.108 Under Section 10,109 Rule 8 of the Rules of
Court, a specific denial of an allegation of the complaint may be made in any of three ways, namely: (a) a defendant specifies each material
allegation of fact the truth of which he does not admit and, whenever practicable, sets forth the substance of the matters upon which he relies to
support his denial; (b) a defendant who desires to deny only a part of an averment specifies so much of it as is true and material and denies only
the remainder; and (c) a defendant who is without knowledge or information sufficient to form a belief as to the truth of a material averment
made in the complaint states so, which has the effect of a denial.
The express qualifications contained in paragraph 2.01 of Cojuangco’s Answer constituted efficient specific denials of the averments of
paragraph 2 of the Republic’s Amended Complaint under the first method mentioned in Section 10 of Rule 8, supra. Indeed, the aforequoted
paragraphs of the Amended Complaint and of Cojuangco’s Answer indicate that Cojuangco thereby expressly qualified his admission of having
been the President and a Director of the UCPB with the averment that the UCPB was a "private corporation;" that his Answer’s allegation of his
being a member of the Board of Directors of the United Coconut Oil Mills, Inc. did not admit that he was a member of the Board of Directors of
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the CIIF Oil Mills, because the United Coconut Oil Mills, Inc. was not one of the CIIF Oil Mills; and that his Answer nowhere contained any
admission or statement that he had held the various positions in the government or in the private corporations at the same time and in 1983, the
time when the contested acquisition of the SMC shares of stock took place.
What the Court stated in Bitong v. Court of Appeals (Fifth Division)110 as to admissions is illuminating:
When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to the Amended Petition alone, clearly raises an
issue as to the legal personality of petitioner to file the complaint. Every alleged admission is taken as an entirety of the fact which makes for the
one side with the qualifications which limit, modify or destroy its effect on the other side. The reason for this is, where part of a statement of a
party is used against him as an admission, the court should weigh any other portion connected with the statement, which tends to neutralize or
explain the portion which is against interest.
In other words, while the admission is admissible in evidence, its probative value is to be determined from the whole statement and others
intimately related or connected therewith as an integrated unit. Although acts or facts admitted do not require proof and cannot be contradicted,
however, evidence aliunde can be presented to show that the admission was made through palpable mistake. The rule is always in favor of
liberality in construction of pleadings so that the real matter in dispute may be submitted to the judgment of the court.
And, lastly, the Republic cites the following portions of the joint Pre-Trial Brief of Cojuangco, et al.,111 to wit:
IV.
PROPOSED EVIDENCE
xxx
4.01. xxx Assuming, however, that plaintiff presents evidence to support its principal contentions, defendant’s evidence in rebuttal would include
testimonial and documentary evidence showing: a) the ownership of the shares of stock prior to their acquisition by respondents (listed in
Annexes ‘A" and ‘B"); b) the consideration for the acquisition of the shares of stock by the persons or companies in whose names the shares of
stock are now registered; and c) the source of the funds used to pay the purchase price.
4.02. Herein respondents intend to present the following evidence:
xxx
b. Proposed Exhibits ____, ____, ____
Records of the United Coconut Planters Bank which would show borrowings of the companies listed in Annexes "A" and "B", or companies
affiliated or associated with them, which were used to source payment of the shares of stock of the San Miguel Corporation subject of this case.
4.03. Witnesses.
xxx
(b) A representative of the United Coconut Planters Bank who will testify in regard the loans which were used to source the payment
of the price of SMC shares of stock.
(c) A representative from the CIIF Oil Mills who will testify in regard the loans or credit advances which were used to source the
payment of the purchase price of the SMC shares of stock.
The Republic insists that the aforequoted portions of the joint Pre-Trial Brief were Cojuangco, et al.’s admission that:
(a) Cojuangco had received money from the UCPB, a bank entrusted by law with the administration of the coconut levy funds; and
(b) Cojuangco had received more money from the CIIF Oil Mills in which part of the CIIF funds had been placed, and thereby used
the funds of the UCPB and the CIIF as capital to buy his SMC shares. 112
We disagree with the Republic’s posture.
97
The statements found in the joint Pre-Trial Brief of Cojuangco, et al. were noticeably written beneath the heading of Proposed Evidence. Such
location indicated that the statements were only being proposed, that is, they were not yet intended or offered as admission of any fact stated
therein. In other words, the matters stated or set forth therein might or might not be presented at all. Also, the text and tenor of the statements
expressly conditioned the proposal on the Republic ultimately presenting its evidence in the action. After the Republic opted not to present its
evidence, the condition did not transpire; hence, the proposed admissions, assuming that they were that, did not materialize.
Obviously, too, the statements found under the heading of Proposed Evidence in the joint Pre-Trial Brief were incomplete and inadequate on the
important details of the supposed transactions (i.e., alleged borrowings and advances). As such, they could not constitute admissions that the
funds had come from borrowings by Cojuangco, et al. from the UCPB or had been credit advances from the CIIF Oil Companies. Moreover, the
purpose for presenting the records of the UCPB and the representatives of the UCPB and of the still unidentified or unnamed CIIF Oil Mills as
declared in the joint Pre-Trial Brief did not at all show whether the UCPB and/or the unidentified or unnamed CIIF Oil Mills were the only
sources of funding, or that such institutions, assuming them to be the sources of the funding, had been the only sources of funding. Such
ambiguousness disqualified the statements from being relied upon as admissions. It is fundamental that any statement, to be considered as an
admission for purposes of judicial proceedings, should be definite, certain and unequivocal; 113 otherwise, the disputed fact will not get settled.
Another reason for rejecting the Republic’s posture is that the Sandiganbayan, as the trial court, was in no position to second-guess what the non-
presented records of the UCPB would show as the borrowings made by the corporations listed in Annexes A and B, or by the companies
affiliated or associated with them, that "were used to source payment of the shares of stock of the San Miguel Corporation subject of this case," or
what the representative of the UCPB or the representative of the CIIF Oil Mills would testify about loans or credit advances used to source the
payment of the price of SMC shares of stock.
Lastly, the Rules of Court has no rule that treats the statements found under the heading Proposed Evidence as admissions binding Cojuangco, et
al. On the contrary, the Rules of Court has even distinguished between admitted facts and facts proposed to be admitted during the stage of pre-
trial. Section 6 (b),114 Rule 18 of the Rules of Court, requires a Pre-Trial Brief to include a summary of admitted facts and a proposed stipulation
of facts. Complying with the requirement, the joint Pre-Trial Brief of Cojuangco, et al. included the summary of admitted facts in its paragraph
3.00 of its Item III, separately and distinctly from the Proposed Evidence, to wit:
III.
SUMMARY OF UNDISPUTED FACTS
3.00. Based on the complaint and the answer, the acquisition of the San Miguel shares by, and their registration in the names of, the companies
listed in Annexes "A" and "B" may be deemed undisputed.
3.01. All other allegations in the complaint are disputed.115
The burden of proof, according to Section 1, Rule 131 of the Rules of Court, is "the duty of a party to present evidence on the facts in issue
necessary to establish his claim or defense by the amount of evidence required by law." Here, the Republic, being the plaintiff, was the party that
carried the burden of proof. That burden required it to demonstrate through competent evidence that the respondents, as defendants, had
purchased the SMC shares of stock with the use of public funds; and that the affected shares of stock constituted ill-gotten wealth. The Republic
was well apprised of its burden of proof, first through the joinder of issues made by the responsive pleadings of the defendants, including
Cojuangco, et al. The Republic was further reminded through the pre-trial order and the Resolution denying its Motion for Summary Judgment,
supra, of the duty to prove the factual allegations on ill-gotten wealth against Cojuangco, et al., specifically the following disputed matters:
(a) When the loans or advances were incurred;
(b) The amount of the loans from the UCPB and of the credit advances from the CIIF Oil Mills, including the specific CIIF Oil Mills
involved;
(c) The identities of the borrowers, that is, all of the respondent corporations together, or separately; and the amounts of the
borrowings;
(d) The conditions attendant to the loans or advances, if any;
(e) The manner, form, and time of the payments made to Zobel or to the Ayala Group, whether by check, letter of credit, or some other
form; and
(f) Whether the loans were paid, and whether the advances were liquidated.
With the Republic nonetheless choosing not to adduce evidence proving the factual allegations, particularly the aforementioned matters, and
instead opting to pursue its claims by Motion for Summary Judgment, the Sandiganbayan became completely deprived of the means to know the
necessary but crucial details of the transactions on the acquisition of the contested block of shares. The Republic’s failure to adduce evidence
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shifted no burden to the respondents to establish anything, for it was basic that the party who asserts, not the party who denies, must
prove.116 Indeed, in a civil action, the plaintiff has the burden of pleading every essential fact and element of the cause of action and proving them
by preponderance of evidence. This means that if the defendant merely denies each of the plaintiff’s allegations and neither side produces
evidence on any such element, the plaintiff must necessarily fail in the action.117 Thus, the Sandiganbayan correctly dismissed Civil Case No.
0033-F for failure of the Republic to prove its case by preponderant evidence.
A summary judgment under Rule 35 of the Rules of Court is a procedural technique that is proper only when there is no genuine issue as to the
existence of a material fact and the moving party is entitled to a judgment as a matter of law. 118 It is a method intended to expedite or promptly
dispose of cases where the facts appear undisputed and certain from the pleadings, depositions, admissions, and affidavits on record.119 Upon a
motion for summary judgment the court’s sole function is to determine whether there is an issue of fact to be tried, and all doubts as to the
existence of an issue of fact must be resolved against the moving party. In other words, a party who moves for summary judgment has the burden
of demonstrating clearly the absence of any genuine issue of fact, and any doubt as to the existence of such an issue is resolved against the
movant. Thus, in ruling on a motion for summary judgment, the court should take that view of the evidence most favorable to the party against
whom it is directed, giving that party the benefit of all favorable inferences. 120
The term genuine issue has been defined as an issue of fact that calls for the presentation of evidence as distinguished from an issue that is sham,
fictitious, contrived, set up in bad faith, and patently unsubstantial so as not to constitute a genuine issue for trial. The court can determine this on
the basis of the pleadings, admissions, documents, affidavits, and counter-affidavits submitted by the parties to the court. Where the facts pleaded
by the parties are disputed or contested, proceedings for a summary judgment cannot take the place of a trial. 121 Well-settled is the rule that a
party who moves for summary judgment has the burden of demonstrating clearly the absence of any genuine issue of fact. 122 Upon that party’s
shoulders rests the burden to prove the cause of action, and to show that the defense is interposed solely for the purpose of delay. After the burden
has been discharged, the defendant has the burden to show facts sufficient to entitle him to defend. 123 Any doubt as to the propriety of a summary
judgment shall be resolved against the moving party.
We need not stress that the trial courts have limited authority to render summary judgments and may do so only in cases where no genuine issue
as to any material fact clearly exists between the parties. The rule on summary judgment does not invest the trial courts with jurisdiction to try
summarily the factual issues upon affidavits, but authorizes summary judgment only when it appears clear that there is no genuine issue as to any
material fact.124
IV.
Republic’s burden to establish by preponderance of evidence that respondents’ SMC shares had been illegally acquired with coconut-levy funds
was not discharged
Madame Justice Carpio Morales argues in her dissent that although the contested SMC shares could be inescapably treated as fruits of funds that
are prima facie public in character, Cojuangco, et al. abstained from presenting countervailing evidence; and that with the Republic having shown
that the SMC shares came into fruition from coco levy funds that are prima facie public funds, Cojuangco, et al. had to go forward with
contradicting evidence, but did not.
The Court disagrees. We cannot reverse the decision of November 28, 2007 on the basis alone of judicial pronouncements to the effect that the
coconut levy funds were prima facie public funds,125 but without any competent evidence linking the acquisition of the block of SMC shares by
Cojuangco, et al. to the coconut levy funds.
V.
No violation of the DOSRI and

Single Borrower’s Limit restrictions
The Republic’s lack of proof on the source of the funds by which Cojuangco, et al. had acquired their block of SMC shares has made it shift its
position, that it now suggests that Cojuangco had been enabled to obtain the loans by the issuance of LOI 926 exempting the UCPB from the
DOSRI and the Single Borrower’s Limit restrictions.
We reject the Republic’s suggestion.
Firstly, as earlier pointed out, the Republic adduced no evidence on the significant particulars of the supposed loan, like the amount, the actual
borrower, the approving official, etc. It did not also establish whether or not the loans were DOSRI126 or issued in violation of the Single
Borrower’s Limit. Secondly, the Republic could not outrightly assume that President Marcos had issued LOI 926 for the purpose of allowing the
loans by the UCPB in favor of Cojuangco. There must be competent evidence to that effect. And, finally, the loans, assuming that they were of a
DOSRI nature or without the benefit of the required approvals or in excess of the Single Borrower’s Limit, would not be void for that reason.
Instead, the bank or the officers responsible for the approval and grant of the DOSRI loan would be subject only to sanctions under the law. 127
VI.
99
Cojuangco violated no fiduciary duties
The Republic invokes the following pertinent statutory provisions of the Civil Code, to wit:
Article 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes
the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong.
Article 1456. If property is acquired through mistake or fraud, the person obtaining it s by force of law, considered a trustee of an implied trust
for the benefit of the person from whom the property comes.
and the Corporation Code, as follows:
Section 31. Liability of directors, trustees or officers.—Directors or trustees who willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any
matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable
as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.
Did Cojuangco breach his "fiduciary duties" as an officer and member of the Board of Directors of the UCPB? Did his acquisition and holding of
the contested SMC shares come under a constructive trust in favor of the Republic?
The answers to these queries are in the negative.
The conditions for the application of Articles 1455 and 1456 of the Civil Code (like the trustee using trust funds to purchase, or a person
acquiring property through mistake or fraud), and Section 31 of the Corporation Code (like a director or trustee willfully and knowingly voting
for or assenting to patently unlawful acts of the corporation, among others) require factual foundations to be first laid out in appropriate judicial
proceedings. Hence, concluding that Cojuangco breached fiduciary duties as an officer and member of the Board of Directors of the UCPB
without competent evidence thereon would be unwarranted and unreasonable.
Thus, the Sandiganbayan could not fairly find that Cojuangco had committed breach of any fiduciary duties as an officer and member of the
Board of Directors of the UCPB. For one, the Amended Complaint contained no clear factual allegation on which to predicate the application of
Articles 1455 and 1456 of the Civil Code, and Section 31 of the Corporation Code. Although the trust relationship supposedly arose from
Cojuangco’s being an officer and member of the Board of Directors of the UCPB, the link between this alleged fact and the borrowings or
advances was not established. Nor was there evidence on the loans or borrowings, their amounts, the approving authority, etc. As trial court, the
Sandiganbayan could not presume his breach of fiduciary duties without evidence showing so, for fraud or breach of trust is never presumed, but
must be alleged and proved.128
The thrust of the Republic that the funds were borrowed or lent might even preclude any consequent trust implication. In a contract of loan, one
of the parties (creditor) delivers money or other consumable thing to another (debtor) on the condition that the same amount of the same kind and
quality shall be paid.129 Owing to the consumable nature of the thing loaned, the resulting duty of the borrower in a contract of loan is to pay, not
to return, to the creditor or lender the very thing loaned. This explains why the ownership of the thing loaned is transferred to the debtor upon
perfection of the contract.130 Ownership of the thing loaned having transferred, the debtor enjoys all the rights conferred to an owner of property,
including the right to use and enjoy (jus utendi), to consume the thing by its use (jus abutendi), and to dispose (jus disponendi), subject to such
limitations as may be provided by law.131 Evidently, the resulting relationship between a creditor and debtor in a contract of loan cannot be
characterized as fiduciary.132
To say that a relationship is fiduciary when existing laws do not provide for such requires evidence that confidence is reposed by one party in
another who exercises dominion and influence. Absent any special facts and circumstances proving a higher degree of responsibility, any
dealings between a lender and borrower are not fiduciary in nature. 133 This explains why, for example, a trust receipt transaction is not classified
as a simple loan and is characterized as fiduciary, because the Trust Receipts Law (P.D. No. 115) 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. 134
Based on the foregoing, a debtor can appropriate the thing loaned without any responsibility or duty to his creditor to return the very thing that
was loaned or to report how the proceeds were used. Nor can he be compelled to return the proceeds and fruits of the loan, for there is nothing
under our laws that compel a debtor in a contract of loan to do so. As owner, the debtor can dispose of the thing borrowed and his act will not be
considered misappropriation of the thing.135 The only liability on his part is to pay the loan together with the interest that is either stipulated or
provided under existing laws.
WHEREFORE, the Court dismisses the petitions for certiorari in G.R. Nos. 166859 and 169023; denies the petition for review on certiorari in
G.R. No. 180702; and, accordingly, affirms the decision promulgated by the Sandiganbayan on November 28, 2007 in Civil Case No. 0033-F.
100
The Court declares that the block of shares in San Miguel Corporation in the names of respondents Cojuangco, et al. subject of Civil Case No.
0033-F is the exclusive property of Cojuangco, et al. as registered owners.
Accordingly, the lifting and setting aside of the Writs of Sequestration affecting said block of shares (namely: Writ of Sequestration No. 86-0062
dated April 21, 1986; Writ of Sequestration No. 86-0069 dated April 22, 1986; Writ of Sequestration No. 86-0085 dated May 9, 1986; Writ of
Sequestration No. 86-0095 dated May 16, 1986; Writ of Sequestration No. 86-0096 dated May 16, 1986; Writ of Sequestration No. 86-0097
dated May 16, 1986; Writ of Sequestration No. 86-0098 dated May 16, 1986; Writ of Sequestration No. 86-0042 dated April 8, 1986; and Writ of
Sequestration No. 87-0218 dated May 27, 1987) are affirmed; and the annotation of the conditions prescribed in the Resolutions promulgated on
October 8, 2003 and June 24, 2005 is cancelled.
101
G.R. No. 162336 February 1, 2010
HILARIO P. SORIANO, Petitioner,

vs.
PEOPLE OF THE PHILIPPINES, BANGKO SENTRAL NG PILIPINAS (BSP), PHILIPPINE DEPOSIT INSURANCE
CORPORATION (PDIC), PUBLIC PROSECUTOR ANTONIO C.BUAN, and STATE PROSECUTOR ALBERTO R.
FONACIER, Respondents.
DECISION
DEL CASTILLO, J.:
A bank officer violates the DOSRI2 law when he acquires bank funds for his personal benefit, even if such acquisition was facilitated by a
fraudulent loan application. Directors, officers, stockholders, and their related interests cannot be allowed to interpose the fraudulent nature of the
loan as a defense to escape culpability for their circumvention of Section 83 of Republic Act (RA) No. 337. 3
Before us is a Petition for Review on Certiorari4 under Rule 45 of the Rules of Court, assailing the September 26, 2003 Decision 5 and the
February 5, 2004 Resolution6 of the Court of Appeals (CA) in CA-G.R. SP No. 67657. The challenged Decision disposed as follows:
WHEREFORE, premises considered, the instant petition for certiorari is hereby DENIED.7
Factual Antecedents
Sometime in 2000, the Office of Special Investigation (OSI) of the Bangko Sentral ng Pilipinas (BSP), through its officers,8 transmitted a
letter9 dated March 27, 2000 to Jovencito Zuño, Chief State Prosecutor of the Department of Justice (DOJ). The letter attached as annexes five
affidavits,10 which would allegedly serve as bases for filing criminal charges for Estafa thru Falsification of Commercial Documents, in relation
to Presidential Decree (PD) No. 1689,11 and for Violation of Section 83 of RA 337, as amended by PD 1795,12 against, inter alia, petitioner
herein Hilario P. Soriano. These five affidavits, along with other documents, stated that spouses Enrico and Amalia Carlos appeared to have an
outstanding loan of ₱8 million with the Rural Bank of San Miguel (Bulacan), Inc. (RBSM), but had never applied for nor received such loan; that
it was petitioner, who was then president of RBSM, who had ordered, facilitated, and received the proceeds of the loan; and that the ₱8 million
loan had never been authorized by RBSM's Board of Directors and no report thereof had ever been submitted to the Department of Rural Banks,
Supervision and Examination Sector of the BSP. The letter of the OSI, which was not subscribed under oath, ended with a request that a
preliminary investigation be conducted and the corresponding criminal charges be filed against petitioner at his last known address.
Acting on the letter-request and its annexes, State Prosecutor Albert R. Fonacier proceeded with the preliminary investigation. He issued a
subpoena with the witnesses’ affidavits and supporting documents attached, and required petitioner to file his counter-affidavit. In due course, the
investigating officer issued a Resolution finding probable cause and correspondingly filed two separate informations against petitioner before the
Regional Trial Court (RTC) of Malolos, Bulacan.13
The first Information,14 dated November 14, 2000 and docketed as Criminal Case No. 237-M-2001, was for estafa through falsification of
commercial documents, under Article 315, paragraph 1(b), of the Revised Penal Code (RPC), in relation to Article 172 of the RPC and PD 1689.
It basically alleged that petitioner and his co-accused, in abuse of the confidence reposed in them as RBSM officers, caused the falsification of a
number of loan documents, making it appear that one Enrico Carlos filled up the same, and thereby succeeded in securing a loan and converting
the loan proceeds for their personal gain and benefit.15 The information reads:
That in or about the month of April, 1997, and thereafter, in San Miguel, Bulacan, and within the jurisdiction of this Honorable Court, the said
accused HILARIO P. SORIANO and ROSALINDA ILAGAN, as principals by direct participation, with unfaithfulness or abuse of confidence
and taking advantage of their position as President of the Rural Bank of San Miguel (Bulacan), Inc. and Branch Manager of the Rural Bank of
San Miguel – San Miguel Branch [sic], a duly organized banking institution under Philippine Laws, conspiring, confederating and mutually
helping one another, did then and there, willfully and feloniously falsify loan documents consisting of undated loan application/information sheet,
credit proposal dated April 14, 1997, credit proposal dated April 22, 1997, credit investigation report dated April 15, 1997, promissory note dated
April 23, 1997, disclosure statement on loan/credit transaction dated April 23, 1997, and other related documents, by making it appear that one
Enrico Carlos filled up the application/information sheet and filed the aforementioned loan documents when in truth and in fact Enrico Carlos did
not participate in the execution of said loan documents and that by virtue of said falsification and with deceit and intent to cause damage, the
accused succeeded in securing a loan in the amount of eight million pesos (PhP8,000,000.00) from the Rural Bank of San Miguel – San Ildefonso
branch in the name of Enrico Carlos which amount of PhP8 million representing the loan proceeds the accused thereafter converted the same
amount to their own personal gain and benefit, to the damage and prejudice of the Rural Bank of San Miguel – San Ildefonso branch, its creditors,
the Bangko Sentral ng Pilipinas, and the Philippine Deposit Insurance Corporation.
CONTRARY TO LAW.16
The other Information17 dated November 10, 2000 and docketed as Criminal Case No. 238-M-2001, was for violation of Section 83 of RA 337, as
amended by PD 1795. The said provision refers to the prohibition against the so-called DOSRI loans. The information alleged that, in his
102
capacity as President of RBSM, petitioner indirectly secured an ₱8 million loan with RBSM, for his personal use and benefit, without the written
consent and approval of the bank's Board of Directors, without entering the said transaction in the bank's records, and without transmitting a copy
of the transaction to the supervising department of the bank. His ruse was facilitated by placing the loan in the name of an unsuspecting RBSM
depositor, one Enrico Carlos.18 The information reads:
That in or about the month of April, 1997, and thereafter, and within the jurisdiction of this Honorable Court, the said accused, in his capacity as
President of the Rural Bank of San Miguel (Bulacan), Inc., did then and there, willfully and feloniously indirectly borrow or secure a loan with
the Rural Bank of San Miguel – San Ildefonso branch, a domestic rural banking institution created, organized and existing under Philippine laws,
amounting to eight million pesos (PhP8,000,000.00), knowing fully well that the same has been done by him without the written consent and
approval of the majority of the board of directors of the said bank, and which consent and approval the said accused deliberately failed to obtain
and enter the same upon the records of said banking institution and to transmit a copy thereof to the supervising department of the said bank, as
required by the General Banking Act, by using the name of one depositor Enrico Carlos of San Miguel, Bulacan, the latter having no knowledge
of the said loan, and one in possession of the said amount of eight million pesos (PhP8,000,000.00), accused converted the same to his own
personal use and benefit, in flagrant violation of the said law.
CONTRARY TO LAW.19
Both cases were raffled to Branch 79 of the RTC of Malolos, Bulacan.20
On June 8, 2001, petitioner moved to quash21 these informations on two grounds: that the court had no jurisdiction over the offense charged, and
that the facts charged do not constitute an offense.
On the first ground, petitioner argued that the letter transmitted by the BSP to the DOJ constituted the complaint and hence was defective for
failure to comply with the mandatory requirements of Section 3(a), Rule 112 of the Rules of Court, such as the statement of address of petitioner
and oath and subscription.22 Moreover, petitioner argued that the officers of OSI, who were the signatories to the "letter-complaint," were not
authorized by the BSP Governor, much less by the Monetary Board, to file the complaint. According to petitioner, this alleged fatal oversight
violated Section 18, pars. (c) and (d) of the New Central Bank Act (RA 7653).
On the second ground, petitioner contended that the commission of estafa under paragraph 1(b) of Article 315 of the RPC is inherently
incompatible with the violation of DOSRI law (as set out in Section 83 23 of RA 337, as amended by PD 1795),24 hence a person cannot be
charged for both offenses. He argued that a violation of DOSRI law requires the offender to obtain a loan from his bank, without complying with
procedural, reportorial, or ceiling requirements. On the other hand, estafa under par. 1(b), Article 315 of the RPC requires the offender to
misappropriate or convert something that he holds in trust, or on commission, or for administration, or under any other obligation involving
the duty to return the same.25
Essentially, the petitioner theorized that the characterization of possession is different in the two offenses. If petitioner acquired the loan as
DOSRI, he owned the loaned money and therefore, cannot misappropriate or convert it as contemplated in the offense of estafa. Conversely, if
petitioner committed estafa, then he merely held the money in trust for someone else and therefore, did not acquire a loan in violation of DOSRI
rules.
Ruling of the Regional Trial Court
In an Order26 dated August 8, 2001, the trial court denied petitioner's Motion to Quash for lack of merit. The lower court agreed with the
prosecution that the assailed OSI letter was not the complaint-affidavit itself; thus, it need not comply with the requirements under the Rules of
Court. The trial court held that the affidavits, which were attached to the OSI letter, comprised the complaint-affidavit in the case. Since these
affidavits were duly subscribed and sworn to before a notary public, there was adequate compliance with the Rules. The trial court further held
that the two offenses were separate and distinct violations, hence the prosecution of one did not pose a bar to the other.27
Petitioner’s Motion for Reconsideration was likewise denied in an Order dated September 5, 2001. 28
Aggrieved, petitioner filed a Petition for Certiorari29 with the CA, reiterating his arguments before the trial court.
The CA denied the petition on both issues presented by petitioner.
On the first issue, the CA determined that the BSP letter, which petitioner characterized to be a fatally infirm complaint, was not actually a
complaint, but a transmittal or cover letter only. This transmittal letter merely contained a summary of the affidavits which were attached to it. It
did not contain any averment of personal knowledge of the events and transactions that constitute the elements of the offenses charged. Being a
mere transmittal letter, it need not comply with the requirements of Section 3(a) of Rule 112 of the Rules of Court. 30
103
The CA further determined that the five affidavits attached to the transmittal letter should be considered as the complaint-affidavits that charged
petitioner with violation of Section 83 of RA 337 and for Estafa thru Falsification of Commercial Documents. These complaint-affidavits
complied with the mandatory requirements set out in the Rules of Court – they were subscribed and sworn to before a notary public and
subsequently certified by State Prosecutor Fonacier, who personally examined the affiants and was convinced that the affiants fully understood
their sworn statements.31
Anent the second ground, the CA found no merit in petitioner's argument that the violation of the DOSRI law and the commission of estafa thru
falsification of commercial documents are inherently inconsistent with each other. It explained that the test in considering a motion to quash on
the ground that the facts charged do not constitute an offense, is whether the facts alleged, when hypothetically admitted, constitute the elements
of the offense charged. The appellate court held that this test was sufficiently met because the allegations in the assailed informations, when
hypothetically admitted, clearly constitute the elements of Estafa thru Falsification of Commercial Documents and Violation of DOSRI law. 32
Petitioner’s Motion for Reconsideration33 was likewise denied for lack of merit.
Hence, this petition.
Issues
Restated, petitioner raises the following issues34 for our consideration:
Whether the complaint complied with the mandatory requirements provided under Section 3(a), Rule 112 of the Rules of Court and Section 18,
paragraphs (c) and (d) of RA 7653.
II
Whether a loan transaction within the ambit of the DOSRI law (violation of Section 83 of RA 337, as amended) could also be the subject of
Estafa under Article 315 (1) (b) of the Revised Penal Code.
III
Is a petition for certiorari under Rule 65 the proper remedy against an Order denying a Motion to Quash?
IV
Whether petitioner is entitled to a writ of injunction.
Our Ruling
The petition lacks merit.
First Issue:
Whether the complaint complied with the mandatory requirements provided under Section 3(a), Rule 112 of the Rules of Court and
Section 18, paragraphs (c) and (d) of
Republic Act No. 7653
Petitioner moved to withdraw the first issue from the instant petition
On March 5, 2007, the Court noted35 petitioner's Manifestation and Motion for Partial Withdrawal of the Petition36 dated February 7, 2007. In the
said motion, petitioner informed the Court of the promulgation of a Decision entitled Soriano v. Hon. Casanova,37 which also involved petitioner
and similar BSP letters to the DOJ. According to petitioner, the said Decision allegedly ruled squarely on the nature of the BSP letters and the
validity of the sworn affidavits attached thereto. For this reason, petitioner moved for the partial withdrawal of the instant petition insofar as it
involved the issue of "whether or not a court can legally acquire jurisdiction over a complaint which failed to comply with the mandatory
requirements provided under Section 3(a), Rule 112 of the Rules of Court and Section 18, paragraphs (c) and (d) of RA 7653".38
104
Given that the case had already been submitted for resolution of the Court when petitioner filed his latest motion, and that all respondents had
presented their positions and arguments on the first issue, the Court deems it proper to rule on the same.
In Soriano v. Hon. Casanova, the Court held that the affidavits attached to the BSP transmittal letter complied with the mandatory requirements
under the Rules of Court.
To be sure, the BSP letters involved in Soriano v. Hon. Casanova39 are not the same as the BSP letter involved in the instant case. However, the
BSP letters in Soriano v. Hon. Casanova and the BSP letter subject of this case are similar in the sense that they are all signed by the OSI officers
of the BSP, they were not sworn to by the said officers, they all contained summaries of their attached affidavits, and they all requested the
conduct of a preliminary investigation and the filing of corresponding criminal charges against petitioner Soriano. Thus, the principle of stare
decisis dictates that the ruling in Soriano v. Hon. Casanova be applied in the instant case – once a question of law has been examined and
decided, it should be deemed settled and closed to further argument. 40
We held in Soriano v. Hon. Casanova, after a close scrutiny of the letters transmitted by the BSP to the DOJ, that these were not intended to be
the complaint, as envisioned under the Rules. They did not contain averments of personal knowledge of the events and transactions constitutive
of any offense. The letters merely transmitted for preliminary investigation the affidavits of people who had personal knowledge of the acts of
petitioner. We ruled that these affidavits, not the letters transmitting them, initiated the preliminary investigation. Since these affidavits were
subscribed under oath by the witnesses who executed them before a notary public, then there was substantial compliance with Section 3(a), Rule
112 of the Rules of Court.
Anent the contention that there was no authority from the BSP Governor or the Monetary Board to file a criminal case against Soriano, we held
that the requirements of Section 18, paragraphs (c) and (d) of RA 7653 did not apply because the BSP did not institute the complaint but merely
transmitted the affidavits of the complainants to the DOJ.
We further held that since the offenses for which Soriano was charged were public crimes, authority holds that it can be initiated by "any
competent person" with personal knowledge of the acts committed by the offender. Thus, the witnesses who executed the affidavits clearly fell
within the purview of "any competent person" who may institute the complaint for a public crime.
The ruling in Soriano v. Hon. Casanova has been adopted and elaborated upon in the recent case of Santos-Concio v. Department of
Justice.41 Instead of a transmittal letter from the BSP, the Court in Santos-Concio was faced with an NBI-NCR Report, likewise with affidavits of
witnesses as attachments. Ruling on the validity of the witnesses’ sworn affidavits as bases for a preliminary investigation, we held:
The Court is not unaware of the practice of incorporating all allegations in one document denominated as "complaint-affidavit." It does not
pronounce strict adherence to only one approach, however, for there are cases where the extent of one’s personal knowledge may not cover the
entire gamut of details material to the alleged offense. The private offended party or relative of the deceased may not even have witnessed the
fatality, in which case the peace officer or law enforcer has to rely chiefly on affidavits of witnesses. The Rules do not in fact preclude the
attachment of a referral or transmittal letter similar to that of the NBI-NCR. Thus, in Soriano v. Casanova, the Court held:
A close scrutiny of the letters transmitted by the BSP and PDIC to the DOJ shows that these were not intended to be the complaint envisioned
under the Rules. It may be clearly inferred from the tenor of the letters that the officers merely intended to transmit the affidavits of the bank
employees to the DOJ. Nowhere in the transmittal letters is there any averment on the part of the BSP and PDIC officers of personal knowledge
of the events and transactions constitutive of the criminal violations alleged to have been made by the accused. In fact, the letters clearly stated
that what the OSI of the BSP and the LIS of the PDIC did was to respectfully transmit to the DOJ for preliminary investigation the affidavits and
personal knowledge of the acts of the petitioner. These affidavits were subscribed under oath by the witnesses who executed them before a notary
public. Since the affidavits, not the letters transmitting them, were intended to initiate the preliminary investigation, we hold that Section 3(a),
Rule 112 of the Rules of Court was substantially complied with.
Citing the ruling of this Court in Ebarle v. Sucaldito, the Court of Appeals correctly held that a complaint for purposes of preliminary
investigation by the fiscal need not be filed by the offended party. The rule has been that, unless the offense subject thereof is one that cannot
be prosecuted de oficio, the same may be filed, for preliminary investigation purposes, by any competent person. The crime of estafa is a
public crime which can be initiated by "any competent person." The witnesses who executed the affidavits based on their personal knowledge of
the acts committed by the petitioner fall within the purview of "any competent person" who may institute the complaint for a public crime. x x x
(Emphasis and italics supplied)
A preliminary investigation can thus validly proceed on the basis of an affidavit of any competent person, without the referral document, like the
NBI-NCR Report, having been sworn to by the law enforcer as the nominal complainant. To require otherwise is a needless exercise. The cited
case of Oporto, Jr. v. Judge Monserate does not appear to dent this proposition. After all, what is required is to reduce the evidence into
affidavits, for while reports and even raw information may justify the initiation of an investigation, the preliminary investigation stage can be
held only after sufficient evidence has been gathered and evaluated which may warrant the eventual prosecution of the case in court.42
Following the foregoing rulings in Soriano v. Hon. Casanova and Santos-Concio v. Department of Justice, we hold that the BSP letter, taken
together with the affidavits attached thereto, comply with the requirements provided under Section 3(a), Rule 112 of the Rules of Court and
Section 18, paragraphs (c) and (d) of RA 7653.
105
Second Issue:
Whether a loan transaction within the ambit of the DOSRI law (violation of Section 83 of RA 337, as amended) could be the subject of Estafa
under Article 315 (1) (b) of the
Revised Penal Code
The second issue was raised by petitioner in the context of his Motion to Quash Information on the ground that the facts charged do not constitute
an offense.43 It is settled that in considering a motion to quash on such ground, the test is "whether the facts alleged, if hypothetically admitted,
would establish the essential elements of the offense charged as defined by law. The trial court may not consider a situation contrary to that set
forth in the criminal complaint or information. Facts that constitute the defense of the petitioner[s] against the charge under the information must
be proved by [him] during trial. Such facts or circumstances do not constitute proper grounds for a motion to quash the information on the ground
that the material averments do not constitute the offense". 44
We have examined the two informations against petitioner and we find that they contain allegations which, if hypothetically admitted, would
establish the essential elements of the crime of DOSRI violation and estafa thru falsification of commercial documents.
In Criminal Case No. 238-M-2001 for violation of DOSRI rules, the information alleged that petitioner Soriano was the president of RBSM; that
he was able to indirectly obtain a loan from RBSM by putting the loan in the name of depositor Enrico Carlos; and that he did this without
complying with the requisite board approval, reportorial, and ceiling requirements.
In Criminal Case No. 237-M-2001 for estafa thru falsification of commercial documents, the information alleged that petitioner, by taking
advantage of his position as president of RBSM, falsified various loan documents to make it appear that an Enrico Carlos secured a loan of ₱8
million from RBSM; that petitioner succeeded in obtaining the loan proceeds; that he later converted the loan proceeds to his own personal gain
and benefit; and that his action caused damage and prejudice to RBSM, its creditors, the BSP, and the PDIC.
Significantly, this is not the first occasion that we adjudge the sufficiency of similarly worded informations. In Soriano v. People,45 involving the
same petitioner in this case (but different transactions), we also reviewed the sufficiency of informations for DOSRI violation and estafa thru
falsification of commercial documents, which were almost identical, mutatis mutandis, with the subject informations herein. We held in Soriano
v. People that there is no basis for the quashal of the informations as "they contain material allegations charging Soriano with violation of DOSRI
rules and estafa thru falsification of commercial documents".
Petitioner raises the theory that he could not possibly be held liable for estafa in concurrence with the charge for DOSRI violation. According to
him, the DOSRI charge presupposes that he acquired a loan, which would make the loan proceeds his own money and which he could neither
possibly misappropriate nor convert to the prejudice of another, as required by the statutory definition of estafa. 46 On the other hand, if petitioner
did not acquire any loan, there can be no DOSRI violation to speak of. Thus, petitioner posits that the two offenses cannot co-exist. This theory
does not persuade us.
Petitioner’s theory is based on the false premises that the loan was extended to him by the bank in his own name, and that he became the owner of
the loan proceeds. Both premises are wrong.
The bank money (amounting to ₱8 million) which came to the possession of petitioner was money held in trust or administration by him for the
bank, in his
fiduciary capacity as the President of said bank.47 It is not accurate to say that petitioner became the owner of the ₱8 million because it was the
proceeds of a loan. That would have been correct if the bank knowingly extended the loan to petitioner himself. But that is not the case here.
According to the information for estafa, the loan was supposed to be for another person, a certain "Enrico Carlos"; petitioner, through
falsification, made it appear that said "Enrico Carlos" applied for the loan when in fact he ("Enrico Carlos") did not. Through such fraudulent
device, petitioner obtained the loan proceeds and converted the same. Under these circumstances, it cannot be said that petitioner became the
legal owner of the ₱8 million. Thus, petitioner remained the bank’s fiduciary with respect to that money, which makes it capable of
misappropriation or conversion in his hands.
The next question is whether there can also be, at the same time, a charge for DOSRI violation in such a situation wherein the accused bank
officer did not secure a loan in his own name, but was alleged to have used the name of another person in order to indirectly secure a loan from
the bank. We answer this in the affirmative. Section 83 of RA 337 reads:
Section 83. No director or officer of any banking institution shall, either directly or indirectly, for himself or as the representative or agent of
others, borrow any of the deposits of funds of such bank, nor shall he become a guarantor, indorser, or surety for loans from such bank to others,
or in any manner be an obligor for moneys borrowed from the bank or loaned by it, except with the written approval of the majority of the
directors of the bank, excluding the director concerned. Any such approval shall be entered upon the records of the corporation and a copy of
such entry shall be transmitted forthwith to the Superintendent of Banks. The office of any director or officer of a bank who violates the
provisions of this section shall immediately become vacant and the director or officer shall be punished by imprisonment of not less than one year
nor more than ten years and by a fine of not less than one thousand nor more than ten thousand pesos. x x x
106
The prohibition in Section 83 is broad enough to cover various modes of borrowing.[48] It covers loans by a bank director or officer (like herein
petitioner) which are made either: (1) directly, (2) indirectly, (3) for himself, (4) or as the representative or agent of others. It applies even if the
director or officer is a mere guarantor, indorser or surety for someone else's loan or is in any manner an obligor for money borrowed from the
bank or loaned by it. The covered transactions are prohibited unless the approval, reportorial and ceiling requirements under Section 83 are
complied with. The prohibition is intended to protect the public, especially the depositors,[49] from the overborrowing of bank funds by bank
officers, directors, stockholders and related interests, as such overborrowing may lead to bank failures.[50] It has been said that "banking
institutions are not created for the benefit of the directors [or officers]. While directors have great powers as directors, they have no special
privileges as individuals. They cannot use the assets of the bank for their own benefit except as permitted by law. Stringent restrictions are placed
about them so that when acting both for the bank and for one of themselves at the same time, they must keep within certain prescribed lines
regarded by the legislature as essential to safety in the banking business".51
A direct borrowing is obviously one that is made in the name of the DOSRI himself or where the DOSRI is a named party, while an indirect
borrowing includes one that is made by a third party, but the DOSRI has a stake in the transaction. 52 The latter type – indirect borrowing – applies
here. The information in Criminal Case 238-M-2001 alleges that petitioner "in his capacity as President of Rural Bank of San Miguel – San
Ildefonso branch x x x indirectly borrow[ed] or secure[d] a loan with [RBSM] x x x knowing fully well that the same has been done by him
without the written consent and approval of the majority of the board of directors x x x, and which consent and approval the said accused
deliberately failed to obtain and enter the same upon the records of said banking institution and to transmit a copy thereof to the supervising
department of the said bank x x x by using the name of one depositor Enrico Carlos x x x, the latter having no knowledge of the said loan, and
once in possession of the said amount of eight million pesos (₱8 million), [petitioner] converted the same to his own personal use and benefit".53
The foregoing information describes the manner of securing the loan as indirect; names petitioner as the benefactor of the indirect loan; and states
that the requirements of the law were not complied with. It contains all the required elements 54 for a violation of Section 83, even if petitioner did
not secure the loan in his own name.
The broad interpretation of the prohibition in Section 83 is justified by the fact that it even expressly covers loans to third parties where the third
parties are aware of the transaction (such as principals represented by the DOSRI), and where the DOSRI’s interest does not appear to be
beneficial but even burdensome (such as in cases when the DOSRI acts as a mere guarantor or surety). If the law finds it necessary to protect the
bank and the banking system in such situations, it will surely be illogical for it to exclude a case like this where the DOSRI acted for his own
benefit, using the name of an unsuspecting person. A contrary interpretation will effectively allow a DOSRI to use dummies to circumvent the
requirements of the law.
In sum, the informations filed against petitioner do not negate each other.
Third Issue:
Is a Rule 65 petition for certiorari the proper remedy against an Order denying a Motion to Quash?
This issue may be speedily resolved by adopting our ruling in Soriano v. People, 55 where we held:
In fine, the Court has consistently held that a special civil action for certiorari is not the proper remedy to assail the denial of a motion to quash
an information. The proper procedure in such a case is for the accused to enter a plea, go to trial without prejudice on his part to present the
special defenses he had invoked in his motion to quash and if after trial on the merits, an adverse decision is rendered, to appeal therefrom in the
manner authorized by law. Thus, petitioners should not have forthwith filed a special civil action for certiorari with the CA and instead, they
should have gone to trial and reiterated the special defenses contained in their motion to quash. There are no special or exceptional circumstances
in the present case that would justify immediate resort to a filing of a petition for certiorari. Clearly, the CA did not commit any reversible error,
much less, grave abuse of discretion in dismissing the petition.56
Fourth Issue:
Whether petitioner is entitled to a writ of injunction
The requisites to justify an injunctive relief are: (1) the right of the complainant is clear and unmistakable; (2) the invasion of the right sought to
be protected is material and substantial; and (3) there is an urgent and paramount necessity for the writ to prevent serious damage. A clear legal
right means one clearly founded in or granted by law or is "enforceable as a matter of law." Absent any clear and unquestioned legal right, the
issuance of an injunctive writ would constitute grave abuse of discretion.57 Caution and prudence must, at all times, attend the issuance of an
injunctive writ because it effectively disposes of the main case without trial and/or due process.58 In Olalia v. Hizon,59 the Court held as follows:
It has been consistently held that there is no power the exercise of which is more delicate, which requires greater caution, deliberation and sound
discretion, or more dangerous in a doubtful case, than the issuance of an injunction. It is the strong arm of equity that should never be extended
unless to cases of great injury, where courts of law cannot afford an adequate or commensurate remedy in damages.
Every court should remember that an injunction is a limitation upon the freedom of action of the [complainant] and should not be granted lightly
or precipitately. It should be granted only when the court is fully satisfied that the law permits it and the emergency demands it.
107
Given this Court's findings in the earlier issues of the instant case, we find no compelling reason to grant the injunctive relief sought by petitioner.
WHEREFORE, the petition is DENIED. The assailed September 26, 2003 Decision as well as the February 5, 2004 Resolution of the Court of
Appeals in CA-G.R. SP No. 67657 are AFFIRMED. Costs against petitioner.
108
G.R. No. 178429 October 23, 2009
JOSE C. GO, Petitioner,

vs.
BANGKO SENTRAL NG PILIPINAS, Respondent.
DECISION
BRION, J.:
Through the present petition for review on certiorari,1 petitioner Jose C. Go (Go) assails the October 26, 2006 decision 2 of the Court of Appeals
(CA) in CA-G.R. SP No. 79149, as well as its June 4, 2007 resolution. 3 The CA decision and resolution annulled and set aside the May 20,
20034 and June 30, 20035 orders of the Regional Trial Court (RTC), Branch 26, Manila which granted Go’s motion to quash the Information filed
against him.
THE FACTS
On August 20, 1999, an Information6 for violation of Section 83 of Republic Act No. 337 (RA 337) or the General Banking Act, as amended by
Presidential Decree No. 1795, was filed against Go before the RTC. The charge reads:
That on or about and during the period comprised between June 27, 1996 and September 15, 1997, inclusive, in the City of Manila, Philippines,
the said accused, being then the Director and the President and Chief Executive Officer of the Orient Commercial Banking Corporation (Orient
Bank), a commercial banking institution created, organized and existing under Philippines laws, with its main branch located at C.M. Recto
Avenue, this City, and taking advantage of his position as such officer/director of the said bank, did then and there wilfully, unlawfully and
knowingly borrow, either directly or indirectly, for himself or as the representative of his other related companies, the deposits or funds of the
said banking institution and/or become a guarantor, indorser or obligor for loans from the said bank to others, by then and there using said
borrowed deposits/funds of the said bank in facilitating and granting and/or caused the facilitating and granting of credit lines/loans and, among
others, to the New Zealand Accounts loans in the total amount of TWO BILLION AND SEVEN HUNDRED FIFTY-FOUR MILLION NINE
HUNDRED FIVE THOUSAND AND EIGHT HUNDRED FIFTY-SEVEN AND 0/100 PESOS, Philippine Currency, said accused knowing
fully well that the same has been done by him without the written approval of the majority of the Board of Directors of said Orient Bank and
which approval the said accused deliberately failed to obtain and enter the same upon the records of said banking institution and to transmit a
copy of which to the supervising department of the said bank, as required by the General Banking Act.
CONTRARY TO LAW. [Emphasis supplied.]
On May 28, 2001, Go pleaded not guilty to the offense charged.
After the arraignment, both the prosecution and accused Go took part in the pre-trial conference where the marking of the voluminous evidence
for the parties was accomplished. After the completion of the marking, the trial court ordered the parties to proceed to trial on the merits.
Before the trial could commence, however, Go filed on February 26, 2003 7 a motion to quash the Information, which motion Go amended on
March 1, 2003.8 Go claimed that the Information was defective, as the facts charged therein do not constitute an offense under Section 83 of RA
337 which states:
No director or officer of any banking institution shall either directly or indirectly, for himself or as the representative or agent of
another, borrow any of the deposits of funds of such banks, nor shall he become a guarantor, indorser, or surety for loans from such bank, to
others, or in any manner be an obligor for money borrowed from the bank or loaned by it, except with the written approval of the majority of the
directors of the bank, excluding the director concerned. Any such approval shall be entered upon the records of the corporation and a copy of
such entry shall be transmitted forthwith to the appropriate supervising department. The office of any director or officer of a bank who violates
the provisions of this section shall immediately become vacant and the director or officer shall be punished by imprisonment of not less than one
year nor more than ten years and by a fine of not less than one thousand nor more than ten thousand pesos.
The Monetary Board may regulate the amount of credit accommodations that may be extended, directly or indirectly, by banking institutions to
their directors, officers, or stockholders. However, the outstanding credit accommodations which a bank may extend to each of its stockholders
owning two percent (2%) or more of the subscribed capital stock, its directors, or its officers, shall be limited to an amount equivalent to the
respective outstanding deposits and book value of the paid-in capital contribution in the bank. Provided, however, that loans and advances to
officers in the form of fringe benefits granted in accordance with rules and regulations as may be prescribed by Monetary Board shall not be
subject to the preceding limitation. (As amended by PD 1795)
In addition to the conditions established in the preceding paragraph, no director or a building and loan association shall engage in any of the
operations mentioned in said paragraphs, except upon the pledge of shares of the association having a total withdrawal value greater than the
amount borrowed. (As amended by PD 1795)
109
In support of his motion to quash, Go averred that based on the facts alleged in the Information, he was being prosecuted for borrowing the
deposits or funds of the Orient Bank and/or acting as a guarantor, indorser or obligor for the bank’s loans to other persons. The use of the word
"and/or" meant that he was charged for being either a borrower or a guarantor, or for being both a borrower and guarantor. Go claimed that the
charge was not only vague, but also did not constitute an offense. He posited that Section 83 of RA 337 penalized only directors and officers of
banking institutions who acted either as borrower or as guarantor, but not as both.
Go further pointed out that the Information failed to state that his alleged act of borrowing and/or guarantying was not among the exceptions
provided for in the law. According to Go, the second paragraph of Section 83 allowed banks to extend credit accommodations to their directors,
officers, and stockholders, provided it is "limited to an amount equivalent to the respective outstanding deposits and book value of the paid-in
capital contribution in the bank." Extending credit accommodations to bank directors, officers, and stockholders is not per se prohibited, unless
the amount exceeds the legal limit. Since the Information failed to state that the amount he purportedly borrowed and/or guarantied was beyond
the limit set by law, Go insisted that the acts so charged did not constitute an offense.
Finding Go’s contentions persuasive, the RTC granted Go’s motion to quash the Information on May 20, 2003. It denied on June 30, 2003 the
motion for reconsideration filed by the prosecution.
The prosecution did not accept the RTC ruling and filed a petition for certiorari to question it before the CA. The Information, the prosecution
claimed, was sufficient. The word "and/or" did not materially affect the validity of the Information, as it merely stated a mode of committing the
crime penalized under Section 83 of RA 337. Moreover, the prosecution asserted that the second paragraph of Section 83 (referring to the credit
accommodation limit) cannot be interpreted as an exception to what the first paragraph provided. The second paragraph only sets borrowing
limits that, if violated, render the bank, not the director-borrower, liable. A violation of the second paragraph of Section 83 – under which Go is
being prosecuted – is therefore separate and distinct from a violation of the first paragraph. Thus, the prosecution prayed that the orders of the
RTC quashing the Information be set aside and the criminal case against Go be reinstated.
On October 26, 2006, the CA rendered the assailed decision granting the prosecution’s petition for certiorari.9 The CA declared that the RTC
misread the law when it decided to quash the Information against Go. It explained that the allegation that Go acted either as a borrower or a
guarantor or as both borrower and guarantor merely set forth the different modes by which the offense was committed. It did not necessarily
mean that Go acted both as borrower and guarantor for the same loan at the same time. It agreed with the prosecution’s stand that the second
paragraph of Section 83 of RA 337 is not an exception to the first paragraph. Thus, the failure of the Information to state that the amount of the
loan Go borrowed or guaranteed exceeded the legal limits was, to the CA, an irrelevant issue. For these reasons, the CA annulled and set aside the
RTC’s orders and ordered the reinstatement of the criminal charge against Go. After the CA’s denial of his motion for reconsideration,10 Go filed
the present appeal by certiorari.
THE PETITION
In his petition, Go alleges that the appellate court legally erred in overturning the trial court’s orders. He insists that the Information failed to
allege the acts or omissions complained of with sufficient particularity to enable him to know the offense being charged; to allow him to properly
prepare his defense; and likewise to allow the court to render proper judgment.
Repeating his arguments in his motion to quash, Go reads Section 83 of RA 337 as penalizing a director or officer of a banking institution for
either borrowing the deposits or funds of the bank, or guaranteeing or indorsing loans to others, but not for assuming both capacities. He claimed
that the prosecution’s shotgun approach in alleging that he acted as borrower and/or guarantor rendered the Information highly defective for
failure to specify with certainty the specific act or omission complained of. To petitioner Go, the prosecution’s approach was a clear violation of
his constitutional right to be informed of the nature and cause of the accusation against him.
Additionally, Go reiterates his claim that credit accommodations by banks to their directors and officers are legal and valid, provided that these
are limited to their outstanding deposits and book value of the paid-in capital contribution in the bank. The failure to state that he borrowed
deposits and/or guaranteed loans beyond this limit rendered the Information defective. He thus asks the Court to reverse the CA decision to
reinstate the criminal charge.
In its Comment,11 the prosecution raises the same defenses against Go’s contentions. It insists on the sufficiency of the allegations in the
Information and prays for the denial of Go’s petition.
THE COURT’S RULING
The Court does not find the petition meritorious and accordingly denies it.
The Accused’s Right to be Informed
Under the Constitution, a person who stands charged of a criminal offense has the right to be informed of the nature and cause of the accusation
against him.12 The Rules of Court, in implementing the right, specifically require that the acts or omissions complained of as constituting the
offense, including the qualifying and aggravating circumstances, must be stated in ordinary and concise language, not necessarily in the language
used in the statute, but in terms sufficient to enable a person of common understanding to know what offense is being charged and the attendant
110
qualifying and aggravating circumstances present, so that the accused can properly defend himself and the court can pronounce judgment. 13 To
broaden the scope of the right, the Rules authorize the quashal, upon motion of the accused, of an Information that fails to allege the acts
constituting the offense.14 Jurisprudence has laid down the fundamental test in appreciating a motion to quash an Information grounded on the
insufficiency of the facts alleged therein. We stated in People v. Romualdez 15 that:
The determinative test in appreciating a motion to quash xxx is the sufficiency of the averments in the information, that is, whether the facts
alleged, if hypothetically admitted, would establish the essential elements of the offense as defined by law without considering matters aliunde.
As Section 6, Rule 110 of the Rules of Criminal Procedure requires, the information only needs to state the ultimate facts; the evidentiary and
other details can be provided during the trial.
To restate the rule, an Information only needs to state the ultimate facts constituting the offense, not the finer details of why and how the illegal
acts alleged amounted to undue injury or damage – matters that are appropriate for the trial. [Emphasis supplied]
The facts and circumstances necessary to be included in the Information are determined by reference to the definition and elements of the specific
crimes. The Information must allege clearly and accurately the elements of the crime charged. 16
Elements of Violation of
Section 83 of RA 337
Under Section 83, RA 337, the following elements must be present to constitute a violation of its first paragraph:
1. the offender is a director or officer of any banking institution;
2. the offender, either directly or indirectly, for himself or as representative or agent of another, performs any of the following acts:
a. he borrows any of the deposits or funds of such bank; or
b. he becomes a guarantor, indorser, or surety for loans from such bank to others, or
c. he becomes in any manner an obligor for money borrowed from bank or loaned by it;
3. the offender has performed any of such acts without the written approval of the majority of the directors of the bank, excluding the
offender, as the director concerned.
A simple reading of the above elements easily rejects Go’s contention that the law penalizes a bank director or officer only either for borrowing
the bank’s deposits or funds or for guarantying loans by the bank, but not for acting in both capacities. The essence of the crime is becoming an
obligor of the bank without securing the necessary written approval of the majority of the bank’s directors.
The second element merely lists down the various modes of committing the offense. The third mode, by declaring that "[no director or officer of
any banking institution shall xxx] in any manner be an obligor for money borrowed from the bank or loaned by it," in fact serves a catch-all
phrase that covers any situation when a director or officer of the bank becomes its obligor. The prohibition is directed against a bank director or
officer who becomes in any manner an obligor for money borrowed from or loaned by the bank without the written approval of the majority of
the bank’s board of directors. To make a distinction between the act of borrowing and guarantying is therefore unnecessary because in either
situation, the director or officer concerned becomes an obligor of the bank against whom the obligation is juridically demandable.
The language of the law is broad enough to encompass either act of borrowing or guaranteeing, or both. While the first paragraph of Section 83 is
penal in nature, and by principle should be strictly construed in favor of the accused, the Court is unwilling to adopt a liberal construction that
would defeat the legislature’s intent in enacting the statute. The objective of the law should allow for a reasonable flexibility in its construction.
Section 83 of RA 337, as well as other banking laws adopting the same prohibition,17 was enacted to ensure that loans by banks and similar
financial institutions to their own directors, officers, and stockholders are above board.18 Banks were not created for the benefit of their directors
and officers; they cannot use the assets of the bank for their own benefit, except as may be permitted by law. Congress has thus deemed it
essential to impose restrictions on borrowings by bank directors and officers in order to protect the public, especially the depositors.19 Hence,
when the law prohibits directors and officers of banking institutions from becoming in any manner an obligor of the bank (unless with the
approval of the board), the terms of the prohibition shall be the standards to be applied to directors’ transactions such as those involved in the
present case.
Credit accommodation limit is not an exception nor is it an element of the offense
111
Contrary to Go’s claims, the second paragraph of Section 83, RA 337 does not provide for an exception to a violation of the first paragraph
thereof, nor does it constitute as an element of the offense charged. Section 83 of RA 337 actually imposes three restrictions: approval,
reportorial, and ceiling requirements.
The approval requirement (found in the first sentence of the first paragraph of the law) refers to the written approval of the majority of the
bank’s board of directors required before bank directors and officers can in any manner be an obligor for money borrowed from or loaned by the
bank. Failure to secure the approval renders the bank director or officer concerned liable for prosecution and, upon conviction, subjects him to the
penalty provided in the third sentence of first paragraph of Section 83.
The reportorial requirement, on the other hand, mandates that any such approval should be entered upon the records of the corporation, and a
copy of the entry be transmitted to the appropriate supervising department. The reportorial requirement is addressed to the bank itself, which,
upon its failure to do so, subjects it to quo warranto proceedings under Section 87 of RA 337. 20
The ceiling requirement under the second paragraph of Section 83 regulates the amount of credit accommodations that banks may extend to
their directors or officers by limiting these to an amount equivalent to the respective outstanding deposits and book value of the paid-in capital
contribution in the bank. Again, this is a requirement directed at the bank. In this light, a prosecution for violation of the first paragraph of Section
83, such as the one involved here, does not require an allegation that the loan exceeded the legal limit. Even if the loan involved is below the legal
limit, a written approval by the majority of the bank’s directors is still required; otherwise, the bank director or officer who becomes an obligor of
the bank is liable. Compliance with the ceiling requirement does not dispense with the approval requirement.
Evidently, the failure to observe the three requirements under Section 83 paves the way for the prosecution of three different offenses, each with
its own set of elements. A successful indictment for failing to comply with the approval requirement will not necessitate proof that the other two
were likewise not observed.
Rules of Court allow amendment of insufficient Information
Assuming that the facts charged in the Information do not constitute an offense, we find it erroneous for the RTC to immediately order the
dismissal of the Information, without giving the prosecution a chance to amend it. Section 4 of Rule 117 states:
SEC. 4. Amendment of complaint or information.—If the motion to quash is based on an alleged defect of the complaint or information which can
be cured by amendment, the court shall order that an amendment be made.
If it is based on the ground that the facts charged do not constitute an offense, the prosecution shall be given by the court an opportunity to correct
the defect by amendment. The motion shall be granted if the prosecution fails to make the amendment, or the complaint or information still
suffers from the same defect despite the amendment. [Emphasis supplied]
Although an Information may be defective because the facts charged do not constitute an offense, the dismissal of the case will not necessarily
follow. The Rules specifically require that the prosecution should be given a chance to correct the defect; the court can order the dismissal only
upon the prosecution’s failure to do so. The RTC’s failure to provide the prosecution this opportunity twice21 constitutes an arbitrary exercise of
power that was correctly addressed by the CA through the certiorari petition. This defect in the RTC’s action on the case, while not central to the
issue before us, strengthens our conclusion that this criminal case should be resolved through full-blown trial on the merits.
WHEREFORE, we DENY the petitioner’s petition for review on certiorari and AFFIRM the decision of the Court of Appeals in CA-G.R. SP
No. 79149, promulgated on October 26, 2006, as well as its resolution of June 4, 2007. The Regional Trial Court, Branch 26, Manila is directed
to PROCEED with the hearing of Criminal Case No. 99-178551. Costs against the petitioner.
112
G.R. No. 103576 August 22, 1996
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY, respondents.
VITUG, J.:p
Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be
contracted or incurred? This question is the core issue in the instant petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978,
for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by
way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this
effect —
(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or
obligations above-stated according to the terms thereof, then this mortgage shall be null and void. . . .
In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as
security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a
new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any
and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the constitution of this mortgage. 1
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional
financial accommodations totalling P2,700,000.00. 2 These borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four
promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity. 3 Respondent bank thereupon applied
for an extra judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting petitioner corporation
to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of
Caloocan City (Civil Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It
held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all respects," the decision of the court a quo.
The motion for reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this Court for having been insufficient in form
and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed a compliance and an opposition to
private respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for
reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon. 5
Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court so reviews as a matter of course, an
appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical
and other procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume
the time of the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice. A deviation
from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core
reason for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and uphold the
paramount and overriding interest of justice.
Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of
the obligation by the principal debt or is secured by the personal commitment of another (the guarantor or surety). In contracts of real security,
such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in pledge, the placing of movable
property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by
law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a
written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the
payment of interest, if owing, and thereafter to the principal of his credit — upon the essential condition that if the obligation becomes due and
113
the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, 7 but that should the obligation be duly paid,
then the contract is automatically extinguished proceeding from the accessory character 8 of the agreement. As the law so puts it, once the
obligation is complied with, then the contract of security becomes, ipso facto, null and void. 9
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are
accurately described, 10 a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon,
the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel
Mortgage Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of
default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only
cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law
itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not
appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good
faith 12), the fact, however, that the statute has provided that the parties to the contract must execute an oath that —
. . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other
purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud. 13
makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel
mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner
corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered
the chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., 14 the Court
said —
. . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the
same are made and not from the date of the mortgage. 15
The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally
with the full payment of the P3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover the new loans that were
concluded thereafter.
We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the amount of
damages it has sustained "as a result of the unlawful action taken by respondent bank against it." 17 This prayer is not reflected in its complaint
which has merely asked for the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. vs. Court of Appeals, 19 we have
said:
Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person
and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience
physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it
flows from real ills, sorrows, and griefs of life — all of which cannot be suffered by respondent bank as an artificial
person. 20
While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party
in representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a source of
disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his so-called "One Final Word;" viz:
In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required
to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the clear
provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event that its
explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This
is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially members of a superior
court of appellate jurisdiction. 21 (Emphasis supplied.)
The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs. Villamor; 22 thus:
(L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect due to the courts of justice and
judicial officers and . . . (to) insist on similar conduct by others." This respectful attitude towards the court is to be
114
observed, "not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme
importance." And it is through a scrupulous preference for respectful language that a lawyer best demonstrates his
observance of the respect due to the courts and judicial officers . . . 23
The virtues of humility and of respect and concern for others must still live on even in an age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal
recourse by private respondent as may still be warranted as an unsecured creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts.
115
G.R. No. 177921 December 4, 2013
METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH YAN, SPOUSES GUILLERMO AND
MERCEDES DYCHIAO, AND SPOUSES VICENTE AND FILOMENA DYCHIAO, Petitioners,
vs.
ALLIED BANK CORPORATION, Respondent.
RESOLUTION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated February 12, 2007 and the Resolution3 dated May 10, 2007 of the Court
of Appeals (CA) in CA-G.R. CV No. 86896 which reversed and set aside the Decision 4 dated January 17, 2006 of the Regional Trial Court of
Makati, Branch 57 (RTC) in Civil Case No. 00-1563, thereby ordering petitioners Metro Concast Steel Corporation (Metro Concast), Spouses
Jose S. Dychiao and Tiu Oh Yan, Spouses Guillermo and Mercedes Dychiao, and Spouses Vicente and Filomena Duchiao (individual petitioners)
to solidarily pay respondent Allied Bank Corporation (Allied Bank) the aggregate amount of ₱51,064,094.28, with applicable interests and
penalty charges.
The Facts
On various dates and for different amounts, Metro Concast, a corporation duly organized and existing under and by virtue of Philippine laws and
engaged in the business of manufacturing steel,5 through its officers, herein individual petitioners, obtained several loans from Allied Bank. These
loan transactions were covered by a promissory note and separate letters of credit/trust receipts, the details of which are as follows:
Date Document Amount

December 13, 1996 Promissory Note No. 96-21301 6
₱2,000,000.00
November 7, 1995 Trust Receipt No. 96-202365 7
₱608,603.04
May 13, 1996 Trust Receipt No. 96-960522 8
₱3,753,777.40
May 24, 1996 Trust Receipt No. 96-960524 9
₱4,602,648.08
March 21, 1997 Trust Receipt No. 97-204724 10
₱7,289,757.79
June 7, 1996 Trust Receipt No. 96-20328011 ₱17,340,360.73
July 26, 1995 Trust Receipt No. 95-20194312 ₱670,709.24
August 31, 1995 Trust Receipt No. 95-20205313 ₱313,797.41
November 16, 1995 Trust Receipt No. 96-202439 14
₱13,015,109.87
July 3, 1996 Trust Receipt No. 96-203552 15
₱401,608.89
June 20, 1995 Trust Receipt No. 95-201710 16
₱750,089.25
December 13, 1995 Trust Receipt No. 96-379089 17
₱92,919.00
December 13, 1995 Trust Receipt No. 96/202581 18
₱224,713.58
The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per annum (p.a.), with penalty charge of 3% per month in case of
default; while the twelve (12) trust receipts uniformly provided for an interest rate of 14% p.a. and 1% penalty charge. By way of security, the
individual petitioners executed several Continuing Guaranty/Comprehensive Surety Agreements19 in favor of Allied Bank. Petitioners failed to
settle their obligations under the aforementioned promissory note and trust receipts, hence, Allied Bank, through counsel, sent them demand
letters,20 all dated December 10, 1998, seeking payment of the total amount of ₱51,064,093.62, but to no avail. Thus, Allied Bank was prompted
to file a complaint for collection of sum of money21 (subject complaint) against petitioners before the RTC, docketed as Civil Case No. 00-1563.
In their second22 Amended Answer,23 petitioners admitted their indebtedness to Allied Bank but denied liability for the interests and penalties
charged, claiming to have paid the total sum of ₱65,073,055.73 by way of interest charges for the period covering 1992 to 1997.24
They also alleged that the economic reverses suffered by the Philippine economy in 1998 as well as the devaluation of the peso against the US
dollar contributed greatly to the downfall of the steel industry, directly affecting the business of Metro Concast and eventually leading to its
cessation. Hence, in order to settle their debts with Allied Bank, petitioners offered the sale of Metro Concast’s remaining assets, consisting of
machineries and equipment, to Allied Bank, which the latter, however, refused. Instead, Allied Bank advised them to sell the equipment and
apply the proceeds of the sale to their outstanding obligations. Accordingly, petitioners offered the equipment for sale, but since there were no
takers, the equipment was reduced into ferro scrap or scrap metal over the years. In 2002, Peakstar Oil Corporation (Peakstar), represented by one
Crisanta Camiling (Camiling), expressed interest in buying the scrap metal. During the negotiations with Peakstar, petitioners claimed that Atty.
Peter Saw (Atty. Saw), a member of Allied Bank’s legal department, acted as the latter’s agent. Eventually, with the alleged conformity of Allied
Bank, through Atty. Saw, a Memorandum of Agreement25 dated November 8, 2002 (MoA) was drawn between Metro Concast, represented by
116
petitioner Jose Dychiao, and Peakstar, through Camiling, under which Peakstar obligated itself to purchase the scrap metal for a total
consideration of ₱34,000,000.00, payable as follows:
(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be paid in cash and the other ₱2,000,000.00 to be paid in two (2) post-
dated checks of ₱1,000,000.00 each;26 and
(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly installments of ₱3,000,000.00, secured by bank guarantees from
Bankwise, Inc. (Bankwise) in the form of separate post-dated checks.27
Unfortunately, Peakstar reneged on all its obligations under the MoA.1âwphi1 In this regard, petitioners asseverated that:
(a) their failure to pay their outstanding loan obligations to Allied Bank must be considered as force majeure ; and
(b) since Allied Bank was the party that accepted the terms and conditions of payment proposed by Peakstar, petitioners must
therefore be deemed to have settled their obligations to Allied Bank. To bolster their defense, petitioner Jose Dychiao (Jose Dychiao)
testified28 during trial that it was Atty. Saw himself who drafted the MoA and subsequently received 29 the ₱2,000,000.00 cash and the
two (2) Bankwise post-dated checks worth ₱1,000,000.00 each from Camiling. However, Atty. Saw turned over only the two (2)
checks and ₱1,500,000.00 in cash to the wife of Jose Dychiao.30
Claiming that the subject complaint was falsely and maliciously filed, petitioners prayed for the award of moral damages in the amount of
₱20,000,000.00 in favor of Metro Concast and at least ₱25,000,000.00 for each individual petitioner, ₱25,000,000.00 as exemplary damages,
₱1,000,000.00 as attorney’s fees, ₱500,000.00 for other litigation expenses, including costs of suit.
The RTC Ruling
After trial on the merits, the RTC, in a Decision31 dated January 17, 2006, dismissed the subject complaint, holding that the "causes of action sued
upon had been paid or otherwise extinguished." It ruled that since Allied Bank was duly represented by its agent, Atty. Saw, in all the
negotiations and transactions with Peakstar – considering that Atty. Saw
(a) drafted the MoA,
(b) accepted the bank guarantee issued by Bankwise, and
(c) was apprised of developments regarding the sale and disposition of the scrap metal – then it stands to reason that the MoA between
Metro Concast and Peakstar was binding upon said bank.
The CA Ruling
Allied Bank appealed to the CA which, in a Decision32 dated February 12, 2007, reversed and set aside the ruling of the RTC, ratiocinating that
there was "no legal basis in fact and in law to declare that when Bankwise reneged its guarantee under the [MoA], herein [petitioners] should be
deemed to be discharged from their obligations lawfully incurred in favor of [Allied Bank]." 33
The CA examined the MoA executed between Metro Concast, as seller of the ferro scrap, and Peakstar, as the buyer thereof, and found that the
same did not indicate that Allied Bank intervened or was a party thereto. It also pointed out the fact that the post-dated checks pursuant to the
MoA were issued in favor of Jose Dychiao. Likewise, the CA found no sufficient evidence on record showing that Atty. Saw was duly and
legally authorized to act for and on behalf of Allied Bank, opining that the RTC was "indulging in hypothesis and speculation"34 when it made a
contrary pronouncement. While Atty. Saw received the earnest money from Peakstar, the receipt was signed by him on behalf of Jose Dychiao.35
It also added that "[i]n the final analysis, the aforesaid checks and receipts were signed by [Atty.] Saw either as representative of [petitioners] or
as partner of the latter’s legal counsel, and not in anyway as representative of [Allied Bank]."36
Consequently, the CA granted the appeal and directed petitioners to solidarily pay Allied Bank their corresponding obligations under the
aforementioned promissory note and trust receipts, plus interests, penalty charges and attorney’s fees. Petitioners sought reconsideration37 which
was, however, denied in a Resolution38 dated May 10, 2007. Hence, this petition.
The Issue Before the Court
At the core of the present controversy is the sole issue of whether or not the loan obligations incurred by the petitioners under the subject
promissory note and various trust receipts have already been extinguished.
117
Article 1231 of the Civil Code states that obligations are extinguished either by payment or performance, the loss of the thing due, the
condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor, compensation or novation.
In the present case, petitioners essentially argue that their loan obligations to Allied Bank had already been extinguished due to Peakstar’s failure
to perform its own obligations to Metro Concast pursuant to the MoA. Petitioners classify Peakstar’s default as a form of force majeure in the
sense that they have, beyond their control, lost the funds they expected to have received from the Peakstar (due to the MoA) which they would, in
turn, use to pay their own loan obligations to Allied Bank. They further state that Allied Bank was equally bound by Metro Concast’s MoA with
Peakstar since its agent, Atty. Saw, actively represented it during the negotiations and execution of the said agreement. Petitioners’ arguments are
untenable. At the outset, the Court must dispel the notion that the MoA would have any relevance to the performance of petitioners’ obligations
to Allied Bank. The MoA is a sale of assets contract, while petitioners’ obligations to Allied Bank arose from various loan transactions. Absent
any showing that the terms and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the
MoA, said contracts should be treated separately and distinctly from each other, such that the existence, performance or breach of one would not
depend on the existence, performance or breach of the other. In the foregoing respect, the issue on whether or not Allied Bank expressed its
conformity to the assets sale transaction between Metro Concast and Peakstar (as evidenced by the MoA) is actually irrelevant to the issues
related to petitioners’ loan obligations to the bank. Besides, as the CA pointed out, the fact of Allied Bank’s representation has not been proven in
this case and hence, cannot be deemed as a sustainable defense to exculpate petitioners from their loan obligations to Allied Bank. Now, anent
petitioners’ reliance on force majeure, suffice it to state that Peakstar’s breach of its obligations to Metro Concast arising from the MoA cannot be
classified as a fortuitous event under jurisprudential formulation. As discussed in Sicam v. Jorge:39
Fortuitous events by definition are extraordinary events not foreseeable or avoidable.1âwphi1 It is therefore, not enough that the event should not
have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same. To constitute a fortuitous event, the following elements must concur: (a) the cause of the
unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must
be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence
must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and (d) the obligor must be free from any
participation in the aggravation of the injury or loss.40 (Emphases supplied)
While it may be argued that Peakstar’s breach of the MoA was unforseen by petitioners, the same us clearly not "impossible"to foresee or even an
event which is independent of human will." Neither has it been shown that said occurrence rendered it impossible for petitioners to pay their loan
obligations to Allied Bank and thus, negates the former’s force majeure theory altogether. In any case, as earlier stated, the performance or breach
of the MoA bears no relation to the performance or breach of the subject loan transactions, they being separate and distinct sources of obligations.
The fact of the matter is that petitioners’ loan obligations to Allied Bank remain subsisting for the basic reason that the former has not been able
to prove that the same had already been paid 41 or, in any way, extinguished. In this regard, petitioners’ liability, as adjudged by the CA, must
perforce stand. Considering, however, that Allied Bank’s extra-judicial demand on petitioners appears to have been made only on December 10,
1998, the computation of the applicable interests and penalty charges should be reckoned only from such date.
WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and Resolution dated May 10, 2007 of the Court of Appeals in
CA-G.R. CV No. 86896 are hereby AFFIRMED with MODIFICATION reckoning the applicable interests and penalty charges from the date of
the extrajudicial demand or on December 10, 1998. The rest of the appellate court’s dispositions stand.
118
G.R. No. 160758 January 15, 2014
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
GUARIÑA AGRICULTURAL AND REALTY DEVELOPMENT CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
The foreclosure of a mortgage prior to the mortgagor's default on the principal obligation is premature, and should be undone for being void and
ineffectual. The mortgagee who has been meanwhile given possession of the mortgaged property by virtue of a writ of possession issued to it as
the purchaser at the foreclosure sale may be required to restore the possession of the property to the mortgagor and to pay reasonable rent for the
use of the property during the intervening period.
The Case
In this appeal, Development Bank of the Philippines (DBP) seeks the reversal of the adverse decision promulgated on March 26, 2003 in C.A.-
G.R. CV No. 59491,1 whereby the Court of Appeals (CA) upheld the judgment rendered on January 6, 19982 by the Regional Trial Court, Branch
25, in Iloilo City (RTC) annulling the extra-judicial foreclosure of the real estate and chattel mortgages at the instance of DBP because the debtor-
mortgagor, Guariña Agricultural and Realty Development Corporation (Guariña Corporation), had not yet defaulted on its obligations in favor of
DBP.
Antecedents
In July 1976, Guariña Corporation applied for a loan from DBP to finance the development of its resort complex situated in Trapiche, Oton,
Iloilo. The loan, in the amount of ₱3,387,000.00, was approved on August 5, 1976. 3 Guariña Corporation executed a promissory note that would
be due on November 3, 1988.4 On October 5, 1976, Guariña Corporation executed a real estate mortgage over several real properties in favor of
DBP as security for the repayment of the loan. On May 17, 1977, Guariña Corporation executed a chattel mortgage over the personal properties
existing at the resort complex and those yet to be acquired out of the proceeds of the loan, also to secure the performance of the obligation. 5 Prior
to the release of the loan, DBP required Guariña Corporation to put up a cash equity of ₱1,470,951.00 for the construction of the buildings and
other improvements on the resort complex.
The loan was released in several instalments, and Guariña Corporation used the proceeds to defray the cost of additional improvements in the
resort complex. In all, the amount released totalled ₱3,003,617.49, from which DBP withheld ₱148,102.98 as interest. 6
Guariña Corporation demanded the release of the balance of the loan, but DBP refused. Instead, DBP directly paid some suppliers of Guariña
Corporation over the latter's objection. DBP found upon inspection of the resort project, its developments and improvements that Guariña
Corporation had not completed the construction works.7 In a letter dated February 27, 1978,8 and a telegram dated June 9, 1978,9 DBP thus
demanded that Guariña Corporation expedite the completion of the project, and warned that it would initiate foreclosure proceedings should
Guariña Corporation not do so.10
Unsatisfied with the non-action and objection of Guariña Corporation, DBP initiated extrajudicial foreclosure proceedings. A notice of
foreclosure sale was sent to Guariña Corporation. The notice was eventually published, leading the clients and patrons of Guariña Corporation to
think that its business operation had slowed down, and that its resort had already closed.11
On January 6, 1979, Guariña Corporation sued DBP in the RTC to demand specific performance of the latter's obligations under the loan
agreement, and to stop the foreclosure of the mortgages (Civil Case No. 12707).12 However, DBP moved for the dismissal of the complaint,
stating that the mortgaged properties had already been sold to satisfy the obligation of Guariña Corporation at a public auction held on January
15, 1979 at the Costa Mario Resort Beach Resort in Oton, Iloilo. 13 Due to this, Guariña Corporation amended the complaint on February 6,
197914 to seek the nullification of the foreclosure proceedings and the cancellation of the certificate of sale. DBP filed its answer on December
17, 1979,15 and trial followed upon the termination of the pre-trial without any agreement being reached by the parties.16
In the meantime, DBP applied for the issuance of a writ of possession by the RTC. At first, the RTC denied the application but later granted it
upon DBP's motion for reconsideration. Aggrieved, Guariña Corporation assailed the granting of the application before the CA on certiorari
(C.A.-G.R. No. 12670-SP entitled Guariña Agricultural and Realty Development Corporation v. Development Bank of the Philippines). After the
CA dismissed the petition for certiorari, DBP sought the implementation of the order for the issuance of the writ of possession. Over Guariña
Corporation's opposition, the RTC issued the writ of possession on June 16, 1982.17
Judgment of the RTC
On January 6, 1998, the RTC rendered its judgment in Civil Case No. 12707, disposing as follows:
119
WHEREFORE, premises considered, the court hereby resolves that the extra-judicial sales of the mortgaged properties of the plaintiff by the
Office of the Provincial Sheriff of Iloilo on January 15, 1979 are null and void, so with the consequent issuance of certificates of sale to the
defendant of said properties, the registration thereof with the Registry of Deeds and the issuance of the transfer certificates of title involving the
real property in its name.
It is also resolved that defendant give back to the plaintiff or its representative the actual possession and enjoyment of all the properties foreclosed
and possessed by it. To pay the plaintiff the reasonable rental for the use of its beach resort during the period starting from the time it (defendant)
took over its occupation and use up to the time possession is actually restored to the plaintiff.
And, on the part of the plaintiff, to pay the defendant the loan it obtained as soon as it takes possession and management of the beach resort and
resume its business operation.
Furthermore, defendant is ordered to pay plaintiff's attorney's fee of ₱50,000.00.
So ORDERED.18
Decision of the CA
On appeal (C.A.-G.R. CV No. 59491), DBP challenged the judgment of the RTC, and insisted that:
THE TRIAL COURT ERRED AND COMMITTED REVERSIBLE ERROR IN DECLARING DBP'S FORECLOSURE OF THE
MORTGAGED PROPERTIES AS INVALID AND UNCALLED FOR.
II
THE TRIAL COURT GRIEVOUSLY ERRED IN HOLDING THE GROUNDS INVOKED BY DBP TO JUSTIFY FORECLOSURE AS "NOT
SUFFICIENT." ON THE CONTRARY, THE MORTGAGE WAS FORECLOSED BY EXPRESS AUTHORITY OF PARAGRAPH NO. 4 OF
THE MORTGAGE CONTRACT AND SECTION 2 OF P.D. 385 IN ADDITION TO THE QUESTIONED PAR. NO. 26 PRINTED AT THE
BACK OF THE FIRST PAGE OF THE MORTGAGE CONRACT.
III
THE TRIAL COURT ERRED IN HOLDING THE SALES OF THE MORTGAGED PROPERTIES TO DBP AS INVALID UNDER
ARTICLES 2113 AND 2141 OF THE CIVIL CODE.
IV
THE TRIAL COURT GRAVELY ERRED AND COMMITTED [REVERSIBLE] ERROR IN ORDERING DBP TO RETURN TO PLAINTIFF
THE ACTUAL POSSESSION AND ENJOYMENT OF ALL THE FORECLOSED PROPERTIES AND TO PAY PLAINTIFF REASONABLE
RENTAL FOR THE USE OF THE FORECLOSED BEACH RESORT.
THE TRIAL COURT ERRED IN AWARDING ATTORNEY'S FEES AGAINST DBP WHICH MERELY EXERCISED ITS RIGHTS UNDER
THE MORTGAGE CONTRACT.19
In its decision promulgated on March 26, 2003,20 however, the CA sustained the RTC's judgment but deleted the award of attorney's fees,
decreeing:
WHEREFORE, in view of the foregoing, the Decision dated January 6, 1998, rendered by the Regional Trial Court of Iloilo City, Branch 25 in
Civil Case No. 12707 for Specific Performance with Preliminary Injunction is hereby AFFIRMED with MODIFICATION, in that the award for
attorney's fees is deleted.
SO ORDERED.21
DBP timely filed a motion for reconsideration, but the CA denied its motion on October 9, 2003.
120
Hence, this appeal by DBP.
Issues
DBP submits the following issues for consideration, namely:
WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS DATED MARCH 26, 2003 AND ITS RESOLUTION DATED
OCTOBER 9, DENYING PETITIONER'S MOTION FOR RECONSIDERATION WERE ISSUED IN ACCORDANCE WITH LAW,
PREVAILING JURISPRUDENTIAL DECISION AND SUPPORTED BY EVIDENCE;
WHETHER OR NOT THE HONORABLE COURT OF APPEALS ADHERED TO THE USUAL COURSE OF JUDICIAL PROCEEDINGS IN
DECIDING C.A.-G.R. CV NO. 59491 AND THEREFORE IN ACCORDANCE WITH THE "LAW OF THE CASE DOCTRINE." 22
Ruling
The appeal lacks merit.
1.
Findings of the CA were supported by the
evidence as well as by law and jurisprudence
DBP submits that the loan had been granted under its supervised credit financing scheme for the development of a beach resort, and the releases
of the proceeds would be subject to conditions that included the verification of the progress of works in the project to forestall diversion of the
loan proceeds; and that under Stipulation No. 26 of the mortgage contract, further loan releases would be terminated and the account would be
considered due and demandable in the event of a deviation from the purpose of the loan, 23 including the failure to put up the required equity and
the diversion of the loan proceeds to other purposes.24 It assails the declaration by the CA that Guariña Corporation had not yet been in default in
its obligations despite violations of the terms of the mortgage contract securing the promissory note.
Guariña Corporation counters that it did not violate the terms of the promissory note and the mortgage contracts because DBP had fully collected
the interest notwithstanding that the principal obligation did not yet fall due and become demandable. 25
The submissions of DBP lack merit and substance.
The agreement between DBP and Guariña Corporation was a loan. Under the law, a loan requires the delivery of money or any other consumable
object by one party to another who acquires ownership thereof, on the condition that the same amount or quality shall be paid.26 Loan is a
reciprocal obligation, as it arises from the same cause where one party is the creditor, and the other the debtor. 27 The obligation of one party in a
reciprocal obligation is dependent upon the obligation of the other, and the performance should ideally be simultaneous. This means that in a
loan, the creditor should release the full loan amount and the debtor repays it when it becomes due and demandable. 28
In its assailed decision, the CA found and held thusly:
xxxx
x x x It is undisputed that appellee obtained a loan from appellant, and as security, executed real estate and chattel mortgages. However, it was
never established that appellee was already in default. Appellant, in a telegram to the appellee reminded the latter to make good on its
construction works, otherwise, it would foreclose the mortgage it executed. It did not mention that appellee was already in default. The records
show that appellant did not make any demand for payment of the promissory note. It appears that the basis of the foreclosure was not a default on
the loan but appellee's failure to complete the project in accordance with appellant's standards. In fact, appellant refused to release the remaining
balance of the approved loan after it found that the improvements introduced by appellee were below appellant's expectations.
The loan agreement between the parties is a reciprocal obligation. Appellant in the instant case bound itself to grant appellee the loan amount of
₱3,387,000.00 condition on appellee's payment of the amount when it falls due. Furthermore, the loan was evidenced by the promissory note
which was secured by real estate mortgage over several properties and additional chattel mortgage. Reciprocal obligations are those which arise
from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the
obligation of the other (Areola vs. Court of Appeals, 236 SCRA 643). They are to be performed simultaneously such that the performance of one
is conditioned upon the simultaneous fulfilment of the other (Jaime Ong vs. Court of Appeals, 310 SCRA 1). The promise of appellee to pay the
loan upon due date as well as to execute sufficient security for said loan by way of mortgage gave rise to a reciprocal obligation on the part of
appellant to release the entire approved loan amount. Thus, appellees are entitled to receive the total loan amount as agreed upon and not an
incomplete amount.
121
The appellant did not release the total amount of the approved loan. Appellant therefore could not have made a demand for payment of the loan
since it had yet to fulfil its own obligation. Moreover, the fact that appellee was not yet in default rendered the foreclosure proceedings premature
and improper.
The properties which stood as security for the loan were foreclosed without any demand having been made on the principal obligation. For an
obligation to become due, there must generally be a demand. Default generally begins from the moment the creditor demands the performance of
the obligation. Without such demand, judicial or extrajudicial, the effects of default will not arise (Namarco vs. Federation of United Namarco
Distributors, Inc., 49 SCRA 238; Borje vs. CFI of Misamis Occidental, 88 SCRA 576).
xxxx
Appellant also admitted in its brief that it indeed failed to release the full amount of the approved loan. As a consequence, the real estate
mortgage of appellee becomes unenforceable, as it cannot be entirely foreclosed to satisfy appellee's total debt to appellant (Central Bank of the
Philippines vs. Court of Appeals, 139 SCRA 46).
Since the foreclosure proceedings were premature and unenforceable, it only follows that appellee is still entitled to possession of the foreclosed
properties. However, appellant took possession of the same by virtue of a writ of possession issued in its favor during the pendency of the case.
Thus, the trial court correctly ruled when it ordered appellant to return actual possession of the subject properties to appellee or its representative
and to pay appellee reasonable rents.
However, the award for attorney's fees is deleted. As a rule, the award of attorney's fees is the exception rather than the rule and counsel's fees are
not to be awarded every time a party wins a suit. Attorney's fees cannot be recovered as part of damages because of the policy that no premium
should be placed on the right to litigate (Pimentel vs. Court of Appeals, et al., 307 SCRA 38). 29
xxxx
We uphold the CA.
To start with, considering that the CA thereby affirmed the factual findings of the RTC, the Court is bound to uphold such findings, for it is
axiomatic that the trial court's factual findings as affirmed by the CA are binding on appeal due to the Court not being a trier of facts.
Secondly, by its failure to release the proceeds of the loan in their entirety, DBP had no right yet to exact on Guariña Corporation the latter's
compliance with its own obligation under the loan. Indeed, if a party in a reciprocal contract like a loan does not perform its obligation, the other
party cannot be obliged to perform what is expected of it while the other's obligation remains unfulfilled.30 In other words, the latter party does
not incur delay.31
Still, DBP called upon Guariña Corporation to make good on the construction works pursuant to the acceleration clause written in the mortgage
contract (i.e., Stipulation No. 26),32 or else it would foreclose the mortgages.
DBP's actuations were legally unfounded. It is true that loans are often secured by a mortgage constituted on real or personal property to protect
the creditor's interest in case of the default of the debtor. By its nature, however, a mortgage remains an accessory contract dependent on the
principal obligation,33 such that enforcement of the mortgage contract will depend on whether or not there has been a violation of the principal
obligation. While a creditor and a debtor could regulate the order in which they should comply with their reciprocal obligations, it is presupposed
that in a loan the lender should perform its obligation - the release of the full loan amount - before it could demand that the borrower repay the
loaned amount. In other words, Guariña Corporation would not incur in delay before DBP fully performed its reciprocal obligation.34
Considering that it had yet to release the entire proceeds of the loan, DBP could not yet make an effective demand for payment upon Guariña
Corporation to perform its obligation under the loan. According to Development Bank of the Philippines v. Licuanan, 35 it would only be when a
demand to pay had been made and was subsequently refused that a borrower could be considered in default, and the lender could obtain the right
to collect the debt or to foreclose the mortgage.1âwphi1 Hence, Guariña Corporation would not be in default without the demand.
Assuming that DBP could already exact from the latter its compliance with the loan agreement, the letter dated February 27, 1978 that DBP sent
would still not be regarded as a demand to render Guariña Corporation in default under the principal contract because DBP was only thereby
requesting the latter "to put up the deficiency in the value of improvements."36
Under the circumstances, DBP's foreclosure of the mortgage and the sale of the mortgaged properties at its instance were premature, and,
therefore, void and ineffectual.37
Being a banking institution, DBP owed it to Guariña Corporation to exercise the highest degree of diligence, as well as to observe the high
standards of integrity and performance in all its transactions because its business was imbued with public interest. 38 The high standards were also
necessary to ensure public confidence in the banking system, for, according to Philippine National Bank v. Pike: 39 "The stability of banks largely
depends on the confidence of the people in the honesty and efficiency of banks." Thus, DBP had to act with great care in applying the stipulations
122
of its agreement with Guariña Corporation, lest it erodes such public confidence. Yet, DBP failed in its duty to exercise the highest degree of
diligence by prematurely foreclosing the mortgages and unwarrantedly causing the foreclosure sale of the mortgaged properties despite Guariña
Corporation not being yet in default. DBP wrongly relied on Stipulation No. 26 as its basis to accelerate the obligation of Guariña Corporation,
for the stipulation was relevant to an Omnibus Agricultural Loan, to Guariña Corporation's loan which was intended for a project other than
agricultural in nature.
Even so, Guariña Corporation did not elevate the actionability of DBP's negligence to the CA, and did not also appeal the CA's deletion of the
award of attorney's fees allowed by the RTC.1âwphi1 With the decision of the CA consequently becoming final and immutable as to Guariña
Corporation, we will not delve any further on DBP's actionable actuations.
2.
The doctrine of law of the case
did not apply herein
DBP insists that the decision of the CA in C.A.-G.R. No. 12670-SP already constituted the law of the case. Hence, the CA could not decide the
appeal in C.A.-G.R. CV No. 59491 differently.
Guariña Corporation counters that the ruling in C.A.-G.R. No. 12670-SP did not constitute the law of the case because C.A.-G.R. No. 12670-SP
concerned the issue of possession by DBP as the winning bidder in the foreclosure sale, and had no bearing whatsoever to the legal issues
presented in C.A.-G.R. CV No. 59491.
Law of the case has been defined as the opinion delivered on a former appeal, and means, more specifically, that whatever is once irrevocably
established as the controlling legal rule of decision between the same parties in the same case continues to be the law of the case, whether correct
on general principles or not, so long as the facts on which such decision was predicated continue to be the facts of the case before the court.40
The concept of law of the case is well explained in Mangold v. Bacon,41 an American case, thusly:
The general rule, nakedly and boldly put, is that legal conclusions announced on a first appeal, whether on the general law or the law as applied to
the concrete facts, not only prescribe the duty and limit the power of the trial court to strict obedience and conformity thereto, but they become
and remain the law of the case in all other steps below or above on subsequent appeal. The rule is grounded on convenience, experience, and
reason. Without the rule there would be no end to criticism, reagitation, reexamination, and reformulation. In short, there would be endless
litigation. It would be intolerable if parties litigants were allowed to speculate on changes in the personnel of a court, or on the chance of our
rewriting propositions once gravely ruled on solemn argument and handed down as the law of a given case. An itch to reopen questions
foreclosed on a first appeal would result in the foolishness of the inquisitive youth who pulled up his corn to see how it grew. Courts are allowed,
if they so choose, to act like ordinary sensible persons. The administration of justice is a practical affair. The rule is a practical and a good one of
frequent and beneficial use.
The doctrine of law of the case simply means, therefore, that when an appellate court has once declared the law in a case, its declaration continues
to be the law of that case even on a subsequent appeal, notwithstanding that the rule thus laid down may have been reversed in other cases. 42 For
practical considerations, indeed, once the appellate court has issued a pronouncement on a point that was presented to it with full opportunity to
be heard having been accorded to the parties, the pronouncement should be regarded as the law of the case and should not be reopened on remand
of the case to determine other issues of the case, like damages. 43 But the law of the case, as the name implies, concerns only legal questions or
issues thereby adjudicated in the former appeal.
The foregoing understanding of the concept of the law of the case exposes DBP's insistence to be unwarranted.
To start with, the ex parte proceeding on DBP's application for the issuance of the writ of possession was entirely independent from the judicial
demand for specific performance herein. In fact, C.A.-G.R. No. 12670-SP, being the interlocutory appeal concerning the issuance of the writ of
possession while the main case was pending, was not at all intertwined with any legal issue properly raised and litigated in C.A.-G.R. CV No.
59491, which was the appeal to determine whether or not DBP's foreclosure was valid and effectual. And, secondly, the ruling in C.A.-G.R. No.
12670-SP did not settle any question of law involved herein because this case for specific performance was not a continuation of C.A.-G.R. No.
12670-SP (which was limited to the propriety of the issuance of the writ of possession in favor of DBP), and vice versa.
3.
Guarifia Corporation is legally entitled to the
restoration of the possession of the resort complex
and payment of reasonable rentals by DBP
Having found and pronounced that the extrajudicial foreclosure by DBP was premature, and that the ensuing foreclosure sale was void and
ineffectual, the Court affirms the order for the restoration of possession to Guarifia Corporation and the payment of reasonable rentals for the use
of the resort. The CA properly held that the premature and invalid foreclosure had unjustly dispossessed Guarifia Corporation of its properties.
Consequently, the restoration of possession and the payment of reasonable rentals were in accordance with Article 561 of the Civil Code, which
expressly states that one who recovers, according to law, possession unjustly lost shall be deemed for all purposes which may redound to his
benefit to have enjoyed it without interruption.
123
WHEREFORE, the Court AFFIRMS the decision promulgated on March 26, 2003; and ORDERS the petitioner to pay the costs of suit.
124
G.R. No. 134068 June 25, 2001
UNION BANK OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS, APOLONIA DE JESUS GREGORIO, GONZALO VINCOY, married to TRINIDAD GREGORIO VINCOY,
respondents.
DE LEON, JR., J.:
This is a motion for reconsideration of the resolution of this Court dated July 12, 1999 dismissing the petition for review on certiorari filed by
petitioner Union Bank of the Philippines which assailed the decision of the Court of Appeals (a) upholding the validity of the real estate mortgage
executed by respondents Gonzalo and Trinidad Vincoy in favor of petitioner as security for a loan in the principal amount of Two Million Pesos
(P2,000,000,00.), and (b) fixing the redemption price of the property mortgaged at Three Million Two Hundred Ninety Thousand Pesos
(P3,290,000.00) representing the purchase price of the said property at the foreclosure sale plus one percent (1%) monthly interest from April 19,
1991, the date of the foreclosure sale, until its redemption pursuant to Section 30, Rule 39 of the Rules of Court.
The following are the factual antecedents.
On March 2, 1990, respondents-spouses Gonzalo and Trinidad Vincoy mortgaged their residence in favor of petitioner to secure the payment of a
loan to Delco Industries (Phils.), Incorporated 1 in the amount of Two Million Pesos (P2,000,000.00). For failure of the respondents to pay the
loan at its date of maturity, petitioner extrajudicially foreclosed the mortgage and scheduled the foreclosure sale on April 10, 1991.
The petitioner submitted the highest bid for Three Million Two Hundred Ninety Thousand Pesos (P3,290,000.OO) at the foreclosure sale.
Accordingly, a certificate of sale was issued to petitioner and duly annotated at the back of the Transfer Certificate of Title covering the property
on May 8,1991.2
Prior to the expiration of the redemption period on May 8,1992, the respondents filed a complaint for annulment of mortgage with the lower
court. In their complaint, respondents alleged that the subject property mortgaged to petitioner had in fact been constituted as a family home as
early as October 27, 1989. Among the beneficiaries of the said family home are the sisters of respondent Trinidad Vincoy, namely Apolonia and
Luciana De Jesus Gregorio whose consent to the mortgage was not obtained. 3 Respondents thus assailed the validity of the mortgage on the
ground that Article 158 of the Family Code4 prohibits the execution, forced sale, attachment or any other encumbrance of a family home without
the written consent of majority of the beneficiaries thereof of legal age. 5 On the other hand, petitioner maintained that the mortgaged property of
the respondents could not be legally constituted as a family home because its actual value exceeded Three Hundred Thousand Pesos
(P300,000.00), the maximum value for a family home in urban areas as stipulated in Article 157 of the Family Code.6
The lower court rendered judgment declaring the constitution of the family home void and the mortgage executed in favor of the petitioner valid.
It held, among others, that Article 158 of the Family Code was not applicable to respondents' family home as the value of the latter at the time of
its alleged constitution exceeded Three Hundred Thousand Pesos (P300,000.00). 7 It also respondent Gonzalo Vincoy and/or Delco Industries
(Phils.), Inc. to pay petitioner his and/or its outstanding obligation as of February 15,1993 in the amount of Four Million Eight Hundred Sixteen
Thousand One Hundred Ninety-Four Pesos and Forty Four Centavos (p4,816,194.44) including such sums that may accrue by way of interests
and penalties.8
Aggrieved, respondents appealed to the Court of Appeals contending that the lower court erred in finding that their family home was not duly
constituted, and that the mortgage in favor of petitioner is valid. Respondents also claimed that the correct amount sufficient for the redemption of
their property as of February 15,1993 is Two Million Seven Hundred Seventy Three Thousand Seven Hundred Twelve Pesos and Eighty Seven
Centavos (P2,773,712.87)9 and not Four Million Eight Hundred Sixteen Thousand One Hundred Ninety-Four Pesos and Forty-Four Centavos
(P4,816,194.44) as found by the lower court.
In a decision promulgated on June 4, 1997, the Court of Appeals sustained the finding of the lower court that the alleged family home of the
respondents did not fall within the purview of Article 157 of the Family Code as its value at the time of its constitution was more than the
maximum value of Three Hundred Thousand Pesos (P300,000.00). Hence, the Court of Appeals upheld the validity of the mortgage executed
over the said property in favor of the petitioner.10 However, it found that the amount sufficient for the redemption of the foreclosed property is
Three Million Two Hundred Ninety Thousand Pesos (P3,290,000.00) equivalent to the purchase price at tile foreclosure sale plus one percent
(1%) monthly interest from April 19, 1991 up to the date of redemption11 pursuant to Section 30, Rule 39 of the Rules of Court.12
Dissatisfied with the ruling of the Court of Appeals, the petitioner filed a petition for review on certiorari with Court submitting the following
resolution:
I. The Court of Appeals resolves an issue of redemption which was not even directly raised by the parties and contrary to the evidence
on record.
2. Assuming without admitting that respondents are entitled to redemption, the price set by the Court of Appeals is not based on
laws.13
125
Petitioner contends, first of all, that in allowing the respondents to redeem the subject foreclosed property, the Court of Appeals completely
ignored that fact that neither respondents' complaint before the lower court nor their brief filed before the Court of Appeals prayed for the
redemption of the said property. On the contrary, respondents had consistently insisted on the nullity of the mortgage. Thus, to allow them to
redeem the property would contradict that very theory of their case. 14
Petitioner also contends that the respondents had already lost their right to redeem the foreclosed property when they failed to exercise their right
of redemption by paying the redemption price within the period provided by law. 15 In the event, however, that the Courts upholds the right of the
respondents to redeem the said property, the petitioner claims that it is not Section 30, Rule 39 of the Rules of the Court that applies in
determining the amount sufficient for redemption but Section 78 of the General Banking Act as amended by the Presidential Decree No.
182816 which provides:
"xxx. In the event of foreclosure, whether judicially or extra judicially, of any mortgage on real estate which is security for any loan
granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at
public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution,
within the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the
respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due
under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial
and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of
the said property less the income received from the property." [Italics supplied].
This Court dismissed the petition in a Resolution promulgated on July 12,1999 on the ground that the Court of Appeals did not commit any
reversible error and that the petition raises mere questions of fact already amply passed upon by the appellate court. 17 Hence, the instant motion
for reconsideration.
We are persuaded to reconsider.
First of all, it is important to note that this case was decided by the lower court on the basis only the pleadings submitted by the parties. No trial
was conducted, thus, no evidence other than submitted with the pleadings could be considered.
A careful scrutiny of the pleadings filed by the respondents before the lower court reveals that at no time did the respondents pray that they be
allowed to redeem the subject foreclosed property.18 On the other hand, respondents never wavered from the belief that the mortgage over the said
property is, in the first place, void for having been executed over a duly constituted family home without the consent of the beneficiaries thereof.
After upholding the validity of mortgage, the lower court ordered respondent Gonzalo Vincoy and/or Delco Industries, Inc. to pay petitioner the
amount of Four Million Eight Hundred Sixteen Thousand One Hundred Ninety-Four Pesos and Forty-Four Centavos (P4,816,194.44) plus
interest and penalties representing Vincoy's and/or Delco's outstanding obligation to petitioner as of February 15,1993. 19 There is no mention
whatsoever of respondents right to redeem the property.
Respondents raised the issue of redemption for the first time only on appeal in contesting the amount ordered by the lower court to be paid by
respondents to the petitioner. Thus, the actuation of the Court of Appeals in allowing the respondents to redeem the subject foreclosed property is
not legally permissible. In petitions for review or appeal under Rule 45 of the Rules of Court, the appellate tribunal is limited to the determination
of whether tile lower court committed reversible error.20
It is settled jurisprudence that an issue which was neither averred in the complain nor raised during the trial in the court below cannot be raised
for the first time on appeal as it would be offensive to the basic rules of fair play, justice and due process. 21 On this ground alone, the Court of
Appeals should have completely ignored the issue of respondents' right to redeem the subject foreclosed property. In addition, a reason just as
glaringly obvious exists for declaring the respondents' right of redemption already non-existent one year after May 8,1991, the date of the
registration of the sale at public auction.
Pursuant to Section 78 of the General Banking Act, a mortgagor whose real property has been sold at a public auction, judicially or
extrajudicially, for the full or partial payment of an obligation to any bank, shall have the right, within one year after the sale of the real estate to
redeem the property. The one-year period is actually to be reckoned from the date of registration of the sale. 22 Clearly therefore, respondents had
only until May 8, 1992 to redeem the subject foreclosed property. Their failure to exercise the right of redemption by paying the redemption price
within the period prescribed by the law effectively divested them of said right. It bears reiterating that during the one year redemption period,
respondents never attempted to redeem the subject property but instead persisted in their theory that the mortgage is null and void. To allow them
now to redeem the same property would, as petitioner aptly puts it, be letting them have their cake and eat it too.
It cannot also be argued that the action for annulment of the mortgage filed by the respondents tolled the running of the one year period of
redemption. In the case of Sumerariz v. Development Bank of the Philippines, 23 petitioners therein contented that the one-year period to redeem
the property foreclosed by respondent was suspended by the institution of an action to annul the foreclosure sale filed three (3) days before the
expiration of the period. To this we ruled that:
"We have not found, however, any statute or decision in support of this pretense. Moreover. up to now plaintiffs have not exercised
the right of redemption. Indeed. although they have intimated their wish to redeem the property in question, they have not deposited
the amount necessary therefor. It may be not a miss to note that, unlike Section 30 of Rule 39 of the Rules of Court, which permits the
126
extension of the period of redemption of mortgaged properties. Section 3 of Commonwealth Act No. 459, in relation to Section 9 of
Republic Act No. 85, which governs the redemption of property of mortgaged to the Bank does no contain a similar provision. Again
this question has been definitely settled by the previous case declaring the plaintiffs' right of redemption has already been extinguished
in view of their failure to exercise it within the statutory period."24
Also, in the more recent case of, Vaca v. Court of Appeals,25 we declared that the pendency of an action questioning the validity of a mortgage
cannot bar the issuance of the writ of possession after title to the property has been consolidated in the mortgagee.26 The implication is clear: the
period of redemption is not interrupted by the filling of an action assailing the validity of the mortgage, so that at the expiration thereof, the
mortgagee who acquires the property at the foreclosure sale can proceed to have the title consolidated in his name and a writ of possession issued
in his favor.
To rule otherwise, and allow the institution of an action questioning the validity of a mortgage to suspend the running of the one year period of
redemption would constitute a dangerous precedent. A likely off shoot of such a ruling is\ the institution of frivolous suits for annulment of
mortgage intended merely to give the mortgagor more time to redeem the mortgaged property.1âwphi1.nêt
As a final word, although the issue pertaining to the correct amount for the redemption of the subject foreclosed property has been rendered moot
by the foregoing, a point of clarification should perhaps be made as to applicable legal provision. Petitioner's contention that Section 78 of the
General Banking Act governs the determination of the redemption price of the subject property is meritorious. In Ponce de Leon v. Rehabilitation
Finance Corporation,27 this Court had occasion to rule that Section 78 of the General Banking Act had the effect of amending Section 6 of Act
313528 insofar as the redemption price is concerned when the mortgagee bank, as in this case, or a banking or credit institution. 29 The apparent
conflict between the provisions of Act No. 3135 and the General Banking Act was, therefore, resolved in favor of the latter, being a special and
subsequent legislation. This pronouncement was reiterated in the case of.Sy v..Court of Appeals30 where we held that the amount at which the
foreclosed property is redeemable is the amount due under the mortgage deed, or the outstanding obligation of the mortgagor plus interest and
expense in accordance with Section 78 of the General Banking Act. 31 It was therefore manifest error on the part of the Court of Appeals to apply
in the case at bar the provisions of Section 30 Rule 39 of the Rules of Court in fixing the redemption price of the subject foreclosed property.
WHEREFORE, the motion for reconsideration is hereby GRANTED. This Court's Resolution dated July 12, 1999 is MODIFlED insofar as
respondents are found to have lost their right to redeem the subject foreclosed property.
127
July 13, 2015
G.R. No. 181426
GAMES AND GARMENTS DEVELOPERS, INC., Petitioner,

vs.
ALLIED BANKING CORPORATION, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
Before Us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking a review of the Decision 1 dated October 23, 2007
and Resolution2 dated January 23, 2008 of the Court of Appeals in CA-G.R. CV No. 82765, which affirmed with modification the Decision 3 of
the Regional Trial Court (RTC) of Quezon City4 in Civil Case No. Q-98-34077, a Complaint for Breach of Contract and Damages instituted by
petitioner Games and Garments Developers, Inc. (GGDI) against spouses Bienvenida (Bienvenida) and Benedicto Pantaleon (together referred to
as the spouses Pantaleon), Ernesto Mercado (Mercado), and respondent Allied Banking Corporation (Allied Bank). While the RTC rendered
judgment against the spouses Pantaleon and Allied Bank, the appellate court dismissed the Complaint in so far as it pertained to Allied Bank.
The antecedent facts are as follows:
Bienvenida, married to Benedicto Pantaleon, agreed to purchase a parcel of land located at Bayanan, Muntinlupa, covered by Transfer Certificate
of Title (TCT) No. 205965 of the Register of Deeds, Makati City (subject property), in the name of petitioner Games and Garments Developers,
Inc. (GGDI), for the sums of P14,000,000.00 payable to GGDI, P4,000,000.00 payable to the Cosay Family, 5 and P1,000,000.00 as attorney’s
fees payable to GGDI VP-Legal and counsel Atty. Cesar M. Lao (Lao). The parties executed a Memorandum of Agreement 6 (MOA) dated
August 22, 1996, with the following terms and conditions:
2. [GGDI], [Cosay family] and Atty. Cesar M. Lao shall be paid in the following manner:
a) Upon signing of this Agreement, the sum of SIX MILLION PESOS (P6,000,000.00) shall be paid directly to [GGDI] by way of
Managers/Cashiers check drawn against the Allied Bank, Pasong Tamo Branch, Makati City, and the balance of EIGHT MILLION
PESOS (P8,000,000.00) together with interest at the rate of eighteen (18%) percent per annum until the same is fully paid by way of
postdated check in ninety (90) days from date of this Agreement with bank [guaranty] of paying the same by Allied Banking
Corporation;
b) Upon signing this agreement, the sum of THREE MILLION PESOS (P3,000,000.00) shall be paid directly to the [Cosay family] by
way of managers/cashiers check drawn against the Allied Bank, Pasong Tamo Branch, Makati City, and the balance of ONE
MILLION PESOS (P1,000,000.00) without interest by way of postdated check ninety (90) days from date of this agreement with the
bank [guaranty] of paying the same by Allied Banking Corporation;
c) The sum of ONE MILLION PESOS (P1,000,000.00) together with interest of eighteen (18%) percent per annum until the same is
fully paid shall be paid directly to Atty. Cesar M. Lao by way of postdated check ninety (90) days from date of this Agreement, with
bank [guaranty] of paying the same issued by Allied Banking Corporation;
3. Simultaneous upon receipt of payments as above stated in paragraph 2 hereof, [GGDI] shall submit to Allied Bank Pasong Tamo Branch,
Makati City, a Deed of Sale in favor of [Bienvenida] while the [Cosay family] their Motion for the withdrawal of the pending Civil Case
aforestated, and petition for the cancellation of lis pendens annotated in the title under Entry No. (479691) S-107492 TCT No. 205965
address[ed] to the Register of Deeds of Makati City.
xxxx
7. In case [Bienvenida] fails for any reason whatsoever to pay the balance of the amount indicated above in paragraph 2 hereof, then the sale
executed by [GGDI] in favor of Bienvenida shall be considered CANCELLED and NULL and VOID and the amount received by the respective
parties shall be deemed forfeited in their favor as liquidated damages[.]
On August 22, 1996, Mercado, Branch Manager of Allied Bank-Pasong Tamo, issued a letter addressed to Atty. Lao of GGDI and with
Bienvenida’s conforme, printed on the letterhead of Allied Bank, which reads:
This is with reference to the real property located at National Road, Bayanan, Muntinlupa City[,] a lot covered by Transfer Certificate of Title
(TCT) No. 205965.
128
Please be advised that Bienvenida Pantaleon/Sucat Import/Export who is purchasing the above-mentioned property has an approved real estate
loan with us in the amount of PESOS: ELEVEN MILLION ONLY (P11,000,000.00), the portion of the proceeds of which shall be used to
partially liquidate the account with you. Succeeding releases which is secured by the subject property will be made payable to Games and
Garments Developers, Inc.
After said Transfer Certificate of Title (TCT) covering said property is already transferred in our client’s name, our mortgage duly annotated
thereon, we guarantee to pay directly to you the amount of PESOS: EIGHT MILLION THREE HUNDRED SIXTY THOUSAND ONLY
(P8,360,000.00) ninety days from August 23, 1996 or on or before November 21, 1996.
It is understood that this guaranty is irrevocable.7
Upon the spouses Pantaleon’s request, and assured by Mercado’s letter dated August 22, 1996, GGDI, through its President Sunder Hemandas
(Hemandas), executed a Deed of Sale8 on August 23, 1996 in favor of the spouses Pantaleon. However, in the Deed of Sale, the amount of
purchase price for the subject property was reduced to P11,000,000.00, payable to GGDI thus:
1. Upon signing of this Deed, [Bienvenida] shall pay [GGDI] the sum of THREE MILLION PESOS (P3,000,000.00), Philippine Currency,
receipt of which is hereby acknowledged by [GGDI] from [Bienvenida] and the balance of the purchase price in the sum of EIGHT MILLION
PESOS (P8,000,000.00) plus interest of 18% per annum until the same is fully paid by way of post-dated check ninety (90) days from date hereof
and bank [guaranty] from [Allied Bank] to assume payment thereof.
The Deed of Sale also stipulated that:
4. In case for any reason whatsoever, [Bienvenida] fails to pay the balance of the purchase price of P8,000,000.00 then this Deed shall be deemed
cancelled and null and void and all payments previously made shall be deemed forfeited in favor of [GGDI] as liquidated damages.
Also on August 23, 1996, the same day the Deed of Sale was executed, the Register of Deeds of Makati cancelled TCT No. 205965 in the name
of GGDI and issued TCT No. 206877 in the name of Bienvenida, married to Benedicto Pantaleon; 9 and to secure her loan for P14,000,000.00
approved by Allied Bank, Bienvenida executed a Real Estate Mortgage of even date constituting a mortgage on the subject property and one
other property covered by TCT No. 205488 in favor of said bank. 10 The notice of lis pendens (concerning the civil case of the Cosay family
against GGDI) was cancelled and the Real Estate Mortgage in favor of Allied Bank was annotated on Bienvenida’s TCT No. 206877. All of the
aforementioned transactions were expedited and accomplished in a single day because of the assistance of Allied Bank.
Despite Mercado’s letter dated August 22, 1996, and unbeknownst to GGDI, Allied Bank 11 already released the proceeds of the approved loan to
the spouses Pantaleon on August 23, 1996.
In a letter12 dated November 21, 1996 to Allied Bank, thru Mercado, Atty. Lao requested for the immediate payment of the balance of the
purchase price amounting to P8,360,000.00 considering that the guaranty executed by the bank in favor of GGDI was irrevocable and the TCT
for the subject property was already transferred in Bienvenida’s name. There being no action on his previous letter, Atty. Lao wrote another
letter13 dated December 11, 1996 to Allied Bank, thru Mercado, to follow-up on the request for payment.
Bienvenida, in a letter14 dated January 6, 1997, offered to pay GGDI P1,000,000.00 on or before January 24, 1997 and the balance of
P7,360,000.00 plus interest on March 28, 1997. GGDI received the P1,000,000.00 partial payment from Bienvenida via two checks dated January
17, 1997 and January 24, 1997 for the amount of P500,000.00 each.15 Bienvenida then issued two Allied Bank postdated checks for March 28,
1997 for the amounts of P7,360,000.00 and P442,340.00, to cover the balance of the purchase price for the subject property and interest,
respectively.16
Mercado executed another letter dated January 27, 1997 addressed to Atty. Lao, similarly worded as his letter dated August 22, 1996, except for
the penultimate paragraph which states that "we guarantee to pay directly to you the amount of PESOS: SEVEN MILLION EIGHT HUNDRED
TWO THOUSAND THREE HUNDRED FORTY (P7,802,340.00) sixty days from January 27, 1997 or on or before March 28, 1997."17
When GGDI deposited the two Allied Bank checks dated March 28, 1997 issued by Bienvenida, said checks were dishonored for being "Drawn
Against Insufficient Funds."18
Atty. Lao sent a letter dated August 15, 1997 to the Head Office of Allied Bank in Makati City, copy furnished Mercado, referring to Mercado’s
letter of guaranty dated January 27, 1997 and making a final request for payment of the sum of P7,802,340.00 within seven days from receipt of
the current letter.19
Hemandas, President of GGDI, sent a fax letter dated October 7, 1997 to Aida T. Yu, Vice President of Allied Bank, also requesting payment
based on Mercado’s letter of guaranty dated January 27, 1997. In a letter dated October 13, 1997, Reynaldo A. Maclang, Senior Vice-President of
Allied Bank, replied to Hemandas’s letter in this wise:
129
We asked Mr. Mercado about this and he said that this letter [dated January 27, 1997] was not really intended as a [guaranty] for anything but
was an accommodation to a request of Atty. Cesar Lao, the Vice President of Games and Garments Developers, Inc. He even emphasized to Atty.
Lao that he was not authorized to issue such [guaranty] inasmuch as banks are not allowed to do so under the General Banking Act.
We noted that the letter dated 27 January, 1997 makes reference to a lot covered by TCT# 205965 which was supposed to be purchased, but our
records show that this title was already superseded by TCT#206877 issued to Bienvenida S. Pantaleon since 23 August, 1996 yet. 20
In a letter dated December 19, 1997 to Maclang, Hemandas inquired as to the status of the demand for payment of GGDI and sought an
opportunity to discuss the matter.21
Without any favorable action from Allied Bank, Atty. Lao, this time for Lacas, Lao & Associates, counsel for GGDI, wrote Maclang a letter
dated January 9, 1998, demanding that Allied Bank immediately pay GGDI the sum of P7,802,340.00 plus prevailing bank interest rate from
March 28, 1997 until the same is fully paid, otherwise, they would be filing the necessary case/suit before the appropriate body/court.22
On April 15, 1998, GGDI filed before the RTC a Complaint for Breach of Contract (Rescission) and Damages with prayer for Preliminary
Attachment against the spouses Pantaleon, Mercado, and Allied Bank. GGDI prayed for: (1) the payment of the balance of the purchase price for
the subject property, damages, attorney’s fees, and costs of the suit; (2) the annulment of the Deed of Sale, TCT No. 206877 in Bienvenida’s
name, and the Real Estate Mortgage constituted on the subject property by Bienvenida in favor of Allied Bank; and (3) the reconveyance of the
subject property to GGDI or the cancellation by the Register of Deeds of TCT No. 206877, as well as the annotations thereon of the mortgage in
favor of Allied Bank and the Special Power of Attorney in favor of Bienvenida. 23
After ex parte proceedings, the RTC issued an Order24 dated May 8, 1998 granting the prayer of GGDI for the issuance of a writ of preliminary
attachment. The RTC issued the writ of preliminary attachment 25 on May 22, 1998 for the real and personal properties of the spouses Pantaleon
sufficient to satisfy the demand of GGDI, but in no case to exceed P7,802,340.00. Per the Sheriff’s Report 26 dated June 15, 1998, the real
properties of the spouses Pantaleon covered by TCT Nos. 206877 and 205488 were already levied upon.
In its Answer with Compulsory Counterclaim and Crossclaim filed before the RTC, Allied Bank denied knowledge of and any liability under the
MOA and the Deed of Sale as it is not a party to both contracts. While Allied Bank admitted that the MOA and the Deed of Sale did contain
stipulations regarding the issuance of a guaranty by Allied Bank for payment of the balance of the purchase price for the subject property, Allied
Bank was not aware of said contracts until the later part of 1997 when it was provided with copies by Hemandas, long after the proceeds of the
approved loan were already released to the spouses Pantaleon. Allied Bank denied that it issued a letter of guaranty in favor of GGDI and
maintained that Mercado had no authority to issue the letters dated August 22, 1996 and January 27, 1997 because all banks were prohibited from
entering into any contract of guaranty or surety under Section 74 of the General Banking Act. Allied Bank also relayed that Mercado was already
separated from service of the bank. Allied Bank further refuted the allegation in the Complaint that it was by reason of the letter of guaranty and
the Deed of Sale that a new TCT was issued for the subject property in Bienvenida’s name. Allied Bank pointed out that a bank guaranty was not
necessary for the issuance of a new TCT and the only document needed was the Deed of Sale.
In its Cross-claim against Mercado and the spouses Pantaleon, Allied Bank alleged that it was an innocent mortgagee for value and in good faith.
Allied Bank recounted that on August 23, 1996, Bienvenida was granted through Mercado, former Manager of Allied Bank-Pasong Tamo, a loan
in the amount of P14,000,000.00 to finance the construction of a two-storey building, which was secured by a real estate mortgage over the
property covered by TCT No. 206877 in the name of Bienvenida, married to Benedicto Pantaleon. Bienvenida executed a Promissory Note and
Real Estate Mortgage in favor of Allied Bank. Because the spouses Pantaleon failed to pay the installments and interest on their due dates despite
demands by Allied Bank, the entire amount outstanding under Bienvenida’s Promissory Note became due and payable pursuant to the
acceleration clause in the said note. Allied Bank then caused the extrajudicial foreclosure of the real estate mortgage and was the sole bidder at
the public auction sale of the subject property held on March 19, 1998. The subject property was awarded to Allied Bank for the bid price of
P21,006,000.00, as evidenced by the Certificate of Sale27 issued by the Office of the Clerk of Court, RTC, Muntinlupa City.
In its prayer, Allied Bank sought the following:
On the Complaint-
1. [GGDI’s] complaint be dismissed;
On the Counterclaim –
1. A judgment be issued ordering [GGDI] to pay [Allied Bank] the following:
a) Moral damages in the amount of P2,000,000.00;
b) Exemplary damages in the amount of P2,000,000.00;
c) Attorney’s fees in the amount of P300,000.00 plus the costs of suits;
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On the Crossclaim –
1.) In the remote event that [Allied Bank] be held liable to [GGDI] by reason of the letter of guaranty executed by Mercado without
[Allied Bank’s] authority, Mercado and Sps. Pantaleon should be held jointly and severally liable to indemnify or reimburse [Allied
Bank] for whatever amount it may be held liable to [GGDI].
2.) In the remote event that the Transfer Certificate of Title No. 206877 and the Real Estate Mortgage executed by Pantaleon in favor
of [Allied Bank] be cancelled and rescinded and/or declared null and void, Mercado and Sps. Pantaleon should be held liable to pay
the value of the said property in the amount of P21,006,000.00 which was the auction sale price of the property when it was sold at
public auction pursuant to the application for extrajudicial foreclosure filed by [Allied Bank] against Pantaleon for failure of the latter
to pay its loan obligation with [Allied Bank].28
In its Reply and Answer to Counterclaim,29 GGDI contested the assertion of Allied Bank that it came to know of the existence of the Deed of Sale
only in the later part of 1997 as the bank, through Mercado, received a copy of the Deed of Sale on August 23, 1996. It was pursuant to said Deed
of Sale that Allied Bank was able to undertake, also on August 23, 1996, the cancellation of the lis pendens annotated on TCT No. 205965; the
cancellation of TCT No. 205965 in the name of GGDI and the issuance of TCT No. 206877 in the name of Bienvenida, married to Benedicto
Pantaleon; and the annotation on TCT No. 206877 of the mortgage on the subject property in favor of Allied Bank and the Special Power of
Attorney in favor of Bienvenida. GGDI explained that it had no reason not to rely on the guaranty given in the two letters dated August 22, 1996
and January 27, 1997 since these were written on official paper of Allied Bank and signed by Mercado, whose precise job as Branch Manager
was to represent Allied Bank. GGDI avowed that without the guaranty of Allied Bank, it would not have executed the Deed of Sale and
transferred ownership of the subject property to the spouses Pantaleon. GGDI likewise contradicted the claim of Allied Bank that the letters of
guaranty were merely the personal accommodation of Mercado as the contents of said letters were confirmed when Allied Bank, by virtue of the
Deed of Sale executed by GGDI, was able to transfer the TCT for the subject property in Bienvenida’s name and annotate thereon Bienvenida’s
Real Estate Mortgage in favor of the bank. GGDI lastly averred that the purchase price for the subject property was really P19,000,000.00 as
embodied in the MOA, and it was only stated as P11,000,000.00 in the Deed of Sale to lessen the amount of taxes and fees which the parties had
to pay on the sale.
The spouses Pantaleon contended in their Answer with Compulsory Counterclaim and Cross-claim30 that of the purchase price of P11,000,000.00
for the subject property, they had already paid to GGDI P6,000,000.00 with Allied Bank Check No. 85-001746 dated August 23, 1996;
P665,000.00 with Allied Bank Check No. 85-0017251 dated August 23, 1996; P1,045,000.00 with Allied Bank Check No. 85-0017250 dated
November 30, 1996; P500,000.00 with Allied Bank Manager’s Check No. MC000821 dated January 17, 1997; and P500,000.00 with Allied Bank
Check No. 85-0024530 dated January 24, 1997. The spouses Pantaleon likewise asserts that contrary to the warranty given by GGDI, there were
claimants to the subject property other than the Cosay Family. The spouses Pantaleon then reasoned that their obligation to pay the balance of the
purchase price was extinguished upon the issuance by Allied Bank of the irrevocable letter of guaranty dated August 22, 1996. For their cross-
claim against Allied Bank, the spouses Pantaleon claimed that Allied Bank failed to release the balance of P44,000,000.00 from their approved
loan of P55,000,000.00, causing the spouses Pantaleon to abandon the construction of the commercial building on the subject property and to
default on the payment of their other loan of P14,000,000.00 from the same bank; and that Allied Bank hurriedly and maliciously foreclosed on
the real estate mortgage since it intended to use the subject property as site for its Muntinlupa Branch. The spouses Pantaleon prayed of the
RTC, viz.:
WHEREFORE, under the above premises, it is most respectfully prayed that the Honorable Court, after trial, order the dismissal of the instant
case with respect to the Defendant Pantaleon Spouses; order the Plaintiff [GGDI] to pay to them moral damages in the amount of TEN MILLION
PESOS (P10,000,000.00), exemplary damages of TWO MILLION PESOS (P2,000,000,00), attorney’s fees of ONE MILLION PESOS
(P1,000,000.00) and costs of suit; and order Defendants Allied Banking Corporation and Ernesto Mercado to annul or render null and void the
foreclosure of the mortgage on the property in question and in the event the title has already been consolidate in the bank’s name, to reconvey the
same to Defendant Pantaleon Spouses and to pay jointly and severally to the Defendant Pantaleon Spouses moral damages of TWENTY
MILLION PESOS (P20,000,000.00), exemplary damages of FIVE MILLION PESOS (P5,000,000.00), attorney’s fees of ONE MILLION
PESOS (P1,000,000.00) and costs of suit.31
During the Pre-trial Conference, attended by the counsels for GGDI, Allied Bank, and spouses Pantaleon, the parties stipulated and admitted that
GGDI received the amount of P6,000,000.00 via Allied Bank Check No. 85-0017246 dated August 23, 1996 as the spouses Pantaleon’s partial
payment for the subject property.32 During trial, Hemandas, as witness for GGDI, testified that GGDI only received from the spouses Pantaleon
as partial payments for the subject property the amounts of P6,000,000.00 upon execution of the Deed of Sale on August 23, 1996 and
P1,000,000.00 through two checks of P500,000.00 each sometime in January 1997; 33 and the amounts of P1,045,000.00 and P665,000.00 were
paid by the spouses Pantaleon, not to GGDI, but to Atty. Lao as his attorney’s fees and broker’s fees, respectively.
The spouses Pantaleon failed to present any evidence, while Allied Bank only submitted documentary evidence.
On September 25, 2003, the RTC rendered its Decision in favor of GGDI and against the spouses Pantaleon and Allied Bank, but was completely
silent regarding Mercado’s liability. The RTC found that GGDI had already complied with its obligation to deliver and transfer the title of the
subject property to the spouses Pantaleon but the spouses Pantaleon and Allied Bank failed and refused to comply with their obligation to pay
GGDI the unpaid balance of the purchase price for the said property; that GGDI likewise complied with the requirements in the letter of guaranty
to transfer title to the subject property to the spouses Pantaleon and annotate on the new title the mortgage of the same property to Allied Bank,
by virtue of which, Allied Bank was subsequently able to foreclose the mortgage and acquire the subject property as the sole bidder at the public
auction sale; that Allied Bank cannot now deny Branch Manager Mercado’s authority to issue the letters of guaranty on the ground that banks are
prohibited from entering into any contract of guaranty; that there was bad faith on the part of the spouses Pantaleon and Allied Bank; that the
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criminal cases filed by GGDI against the spouses Pantaleon for the bouncing checks the latter issued to pay the balance of the purchase price for
the subject property would not bar or suspend the present civil case as these cases had different and separate causes of action and within the
jurisdiction of different trial courts; that the terms and conditions of the MOA between GGDI and the spouses Pantaleon were not onerous,
appearing to be fair and equitable to both sides; and that GGDI was entitled to the rescission of the Deed of Sale they executed in favor of the
spouses Pantaleon and to the reconveyance of the subject property free from any lien. The dispositive portion of the RTC judgment reads:
WHEREFORE, in light of the foregoing, JUDGMENT is hereby RENDERED IN FAVOR of the Plaintiff [GGDI] and against the Defendant-
Spouses Pantaleon and Defendant [Allied Bank]:
1) ORDERING the Defendant-Spouses Pantaleon and Defendant [Allied Bank] to pay jointly and severally the Plaintiff [GGDI] the
sum of SEVEN MILLION THREE HUNDRED SIXTY THOUSAND PESOS (P7,360,000.00) representing the unpaid balance on the
subject property, plus 18% interest per annum computed from March 29, 1997 (as per parties’ agreement Exh. A) until the whole
amount is fully paid; OR, in case of failure to do so within thirty (30) days from the finality of this Decision, all of the following are
hereby DECLARED cancelled, annulled, reconsidered, and voided:
a) Deed of Sale (Exh. C) null and void pursuant to paragraph 4, page 2 of the said Deed of Sale dated August 23, 1996;
b) Transfer Certificate of Title No. 206877 (Exh. E) in the name of Defendant Bienvenida Pantaleon married to Benedicto
Pantaleon;
c) Real Estate Mortgage (Exh. 2-Defendant ABC) executed by Defendants Spouses Pantaleon in favor of Defendant
[Allied Bank]; and
d) Transfer Certificate of Title issued in the name of Defendant [Allied Bank];
AND
The Defendant [Allied Bank] and/or Defendant-Spouses Pantaleons are

hereby ORDERED to reconvey the property subject matter hereof to the
plaintiff Company, [GGDI].
AND
In case of failure or refusal of said Defendant [Allied Bank] to do so, for whatsoever reason, the Registry of [Deeds] of Makati City
(now Muntinlupa City) is hereby DIRECTED to immediately cancel Transfer Certificate of Title in the name of the said Defendant
[Allied Bank], and thereafter, to issue to Plaintiff [GGDI] another title free from any liens or encumbrances whatsoever;
2) ORDERING the Defendant-Spouses Pantaleons and Defendant [Allied Bank] to pay, jointly and severally, the Plaintiff [GGDI] the
sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) as Exemplary Damages;
3) ORDERING the Defendant-Spouses Pantaleons and Defendant [Allied Bank] to pay, jointly and severally, the Plaintiff [GGDI]
Attorney’s fees of ten percent (10%) of the total amount, referred to in no.1 above; and
4) ORDERING the Defendant-Spouses Pantaleons and Defendant [Allied Bank] to pay, jointly and severally, the Costs of suit.34
The RTC, in an Order dated February 19, 2004, denied the Motion for Reconsideration of Allied Bank because the arguments raised therein were
mere repetitions and reiterations of its contentions in the pleadings which had already been amply passed upon by the trial court.35
Allied Bank appealed before the Court of Appeals. In its Decision dated October 23, 2007, the appellate court held that the appeal was partly
meritorious. Disagreeing with the RTC, the Court of Appeals adjudged that Allied Bank should not be held liable under the MOA and Deed of
Sale executed between the spouses Pantaleon and GGDI for the bank was not a party or a witness to the said documents. Neither should Allied
Bank be held liable under the letters of guaranty Mercado executed, the appellate court reasoning that:
Section 74 of the General Banking Act expressly prohibits banks or banking institutions from entering "directly or indirectly, into any contract
of guaranty or surety" or to "guarantee the interest or principal of any obligation of any person…" Considering that the Bank is prohibited from
acting as a guarantor, Ernesto Mercado, is likewise prohibited from entering into a contract where the Bank would become a guarantor as a
consequence thereof. Also, while there is no question that as the Bank’s Branch Manager, Defendant Mercado was an officer and agent of the
Bank, the Bank’s By-laws, or the law does not in any way confer upon Ernesto Mercado the authority to sign a guaranty agreement.
Consequently, when Mercado disregarded this statutory prohibition, he did not only exceed, and acted beyond, the powers and authority granted
to him by the Bank and the law, but he also violated the clear provision of the General Banking Act. As such, said letters of guaranty are
unenforceable against the corporation unless ratified by the corporation.
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However, after a careful review of the records of this case, We find that the Bank neither ratified the letters of guaranty executed by Ernesto
Mercado nor was it estopped from denying the same.36 (Citations omitted.)
The Court of Appeals likewise declared erroneous the alternative order of the RTC to cancel and nullify the certificate of title of Allied Bank in
the event that said bank and the spouses Pantaleon failed to pay GGDI the balance of the purchase price for the subject property. The appellate
court pointed out that GGDI filed a Complaint for breach of contract and/or rescission with damages, but there was no privity of contract between
GGDI and Allied Bank. The Court of Appeals further ruled that Allied Bank acquired the subject property at the public auction sale after the
mortgage on the said property was foreclosed; and absent substantial evidence to the contrary, the foreclosure and sale of the subject property are
deemed valid and existing. More importantly, according to the appellate court, the Complaint for Breach of Contract (Rescission) with Damages
of GGDI constituted a collateral attack on the title of Allied Bank over the subject property, which is prohibited by law and jurisprudence.
Finally, the Court of Appeals denied the cross-claims of Allied Bank against the spouses Pantaleon and Mercado on the following grounds: (1)
moral damages cannot be granted to a corporation which cannot experience physical suffering and mental anguish; (2) Allied Bank did not offer
any proof that the spouses Pantaleon and Mercado had debased its good reputation and caused it incalculable embarrassment; (3) without moral
damages, exemplary damages cannot be awarded; and (4) not every winning party is entitled to an automatic grant of attorney’s fees and Allied
Bank failed to show that any of the circumstances under Article 2208 of the Civil Code existed in its case.
In the end, the Court of Appeals decreed:
WHEREFORE, the instant Appeal is GRANTED IN PART. The assailed Decision, dated [September 25, 2003], and Order, dated February 19,
2004, of the Regional Trial Court of Quezon City, Branch 101, in Civil Case No. Q-98-34077, are hereby AFFIRMED with
MODIFICATIONS in that the Complaint for Breach of Contract and Damages against Defendant-Appellant Allied Banking Corporation
is DISMISSED and that the alternative order directing the nullification of Deed of Sale dated August 23, 1996, Transfer Certificate of Title No.
206877 in the name of Defendant Bienvenida Pantaleon, Real Estate Mortgage, and the Transfer Certificate of Title issued under the name of
Defendant-Appellant Allied Banking Corporation, referred to in paragraph 1(a), 1(b), 1(c) and 1(d) of the assailed Decision are
hereby DELETED.
Accordingly, the order directing the Register of Deeds of Makati to cancel the transfer certificate of title under the name of Defendant-Appellant
[Allied Bank] covering the subject property is DELETED and rendered VOID.37
The Motion for Partial Reconsideration of GGDI was denied by the Court of Appeals in a Resolution dated January 23, 2008 as all issues raised
therein were already resolved and for lack of an imperative reason to disturb or modify its Decision as regards said issues. 38
Hence, this Petition.
In its Memorandum, GGDI submits the following issues for our consideration:
3.1 Whether or not the Court of Appeals committed reversible error and /or grave abuse of discretion insofar as it concerns the
dismissal of the amended complaint in Civil Case No. Q-98-34077 against Respondent Allied Bank, but upholding the decision of the
RTC of Quezon City against Defendants Spouses Bienvenida and Benedicto Pantaleon.
3.2 Whether or not Respondent Allied Bank should be held liable for Defendant Spouses Pantaleon’s unpaid obligation because it is
not a party or a witness to the Memorandum of Agreement and Deed of Sale.
3.3 The Court of Appeals grossly erred in merely relying upon Respondent Allied Bank’s assertion that Section 74 of the General
Banking Act prohibits banks from entering directly or indirectly into any contract of guaranty or surety.
3.4 Whether or not Respondent Allied Bank is an innocent mortgagee for value of subject property.
3.5 The Court of Appeals erred in its own finding that the Branch Manager of respondent Allied Bank, Ernesto Mercado, had no
authority to sign and issue the two (2) letters of [guaranty].
3.6 The Court of Appeals grossly and erroneously failed to apply the doctrine of apparent authority in the present case.
3.7 The Court of Appeals erred in not holding Respondent Allied Bank estopped from questioning the authority of its Branch Manager
Ernesto Mercado to sign and issue the letters of [guaranty] dated 22 August 1996 and 27 January 1997.
3.8 The Court of Appeals grossly erred in not holding Respondent Allied Bank to have acted fraudulently and in bad faith in its
dealings with Petitioner [GGDI].39
Essentially, GGDI attributes error on the part of the Court of Appeals in absolving Allied Bank of any liability to GGDI.
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There is merit in the instant Petition.
Mercado’s letters are not contracts of

guaranty covered by the prohibition
in the General Banking Act, as
amended.
GGDI maintains that although Allied Bank is not a party to the Deed of Sale, it is still liable for the balance of the purchase price for the subject
property based on the letters of guaranty dated August 22, 1996 and January 27, 1997 executed by Mercado, Branch Manager of Allied Bank-
Pasong Tamo.
In its defense, Allied Bank argues that banks were prohibited from entering into contracts of guaranty under the then prevailing law, Republic Act
No. 337, otherwise known as the General Banking Act, as amended, 40 Section 74 of which explicitly provided:
Sec. 74. No bank or banking institution shall enter, directly, or indirectly, into any contract of guaranty or suretyship, or shall guarantee the
interest or principal of any obligation of any person, copartnership, association, corporation or other entity. The provisions of this section shall,
however, not apply to the following: (a) borrowing of money by banking institution through the rediscounting of receivables; (b) acceptance of
drafts or bills of exchange; (c) certification of checks; (d) transactions involving the release of documents attached to items received for
collection; (e) letters of credit transaction, including stand-by arrangements; (f) repurchase agreements; (g) shipside bonds; (h) ordinary
guarantees or indorsements in favor of foreign creditors where the principal obligation involves loans and credits extended directly by foreign
firms or persons to domestic borrowers for capital investment purposes; and (i) other transactions which the Monetary Board may, by regulation,
define or specify as not covered by the prohibition.
It is undisputed that Mercado wrote two "letters of guaranty" dated August 22, 1996 and January 27, 1997. Although Mercado’s letters used the
words "guarantee" and "guaranty," the same do not constitute contracts of guaranty covered by the prohibition under Section 74 of the General
Banking Act, as amended. Section 74 of the General Banking Act, as amended, proscribes banks from entering into "any contract of guaranty or
suretyship" without providing definitions of such contracts. Consequently, we rely on the general definitions of contracts of guaranty and
suretyship under Article 2047 of the Civil Code:
ART. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such
case the contract is called a suretyship.
While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the principal cannot pay. The former is
the insurer of the debt, the latter an insurer of the solvency of the debtor. 41 We further expounded on the nature of a contract of guaranty (vis-à-vis
a contract of surety) in E. Zobel, Inc. v. Court of Appeals,42 thus:
A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the
obligation if the debtor does not. A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter
does not pay the debt.
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both. However, under our civil law, they may
be distinguished thus: A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same
consideration. He is an original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his principal. Usually,
he will not be discharged, either by the mere indulgence of the creditor to the principal, or by want of notice of the default of the principal, no
matter how much he may be injured thereby. On the other hand, the contract of guaranty is the guarantor’s own separate undertaking, in which
the principal does not join. It is usually entered into before or after that of the principal, and is often supported on a separate consideration from
that supporting the contract of the principal. The original contract of his principal is not his contract, and he is not bound to take notice of its
nonperformance. He is often discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified of the
default of the principal. (Citations omitted.)
There was no express undertaking in Mercado’s letters dated August 22, 1996 and January 27, 1997 to pay Bienvenida’s debt to GGDI in case
Bienvenida failed to do so. In said letters, Mercado merely acknowledged that Bienvenida and/or her company had an approved real estate loan
with Allied Bank and guaranteed that subsequent releases from the loan would be made directly to GGDI provided that the certificate of title over
the subject property would be transferred to Bienvenida’s name and the real estate mortgage constituted on the subject property in favor of Allied
Bank would be annotated on the said certificate. Mercado, by the plain language of his letters, merely committed to the manner by which the
proceeds of Bienvenida’s approved loan from Allied Bank would be released, but did not obligate Allied Bank to be answerable with its own
money to GGDI should Bienvenida default on the payment of the purchase price for the subject property. For this reason, Mercado’s letters may
not be deemed as contracts of guaranty, although they may be binding as innominate contracts. The rule is settled that a contract constitutes the
law between the parties who are bound by its stipulations which, when couched in clear and plain language, should be applied according to their
literal tenor. We cannot supply material stipulations, read into the contract words it does not contain or, for that matter, read into it any other
intention that would contradict its plain import. Neither can we rewrite contracts because they operate harshly or inequitably as to one of the
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parties, or alter them for the benefit of one party and to the detriment of the other, or by construction, relieve one of the parties from the terms
which he voluntarily consented to, or impose on him those which he did not. 43
Since the undertaking in the said letters were not covered by the prohibition under Section 74 of the General Banking Act, as amended, the next
question for us to determine is whether such undertaking bound Allied Bank, thus, making the bank liable to GGDI.
Based on the doctrine of apparent

authority, Allied Bank is bound by
the undertaking in the letters dated
August 22, 1996 and January 27,
1997 executed by Mercado as
Branch Manager of Allied Bank-
Pasong Tamo.
There is no question that Allied Bank had all such powers necessary to carry on the business of commercial banking, including, among other
things, "by lending money against personal security or against securities consisting of personal property or first mortgages on improved real
estate and the insured improvements thereon."44 Allied Bank, with the prior approval of the Monetary Board, could also establish branches in and
outside the Philippines, and it would be responsible for all business conducted in such branches to the same extent and in the same manner as
though such business had all been conducted in the head office. For purposes of the General Banking Act, a bank and its branches shall be treated
as a unit.45
Mercado, as Branch Manager, is in charge of the daily administration and supervision of Allied Bank-Pasong Tamo to carry on the business of
commercial banking. To the public, Mercado is clothed with the authority to transact and contract on behalf of, not just his branch, but Allied
Bank itself. Mercado issued the letters dated August 22, 1996 and January 27, 1997 in the course of facilitating and processing Bienvenida’s loan
application, which was to be secured by the real estate mortgage on the subject property. Mercado used the letterhead of Allied Bank for the said
letters, and signed the same as Bank Manager of Allied Bank-Pasong Tamo. There was nothing to indicate to GGDI that Mercado, in issuing the
letters in question, was already acting beyond his authority as Branch Manager.
GGDI relied in good faith on the assurance stated in Mercado’s letter dated August 22, 1996 that the proceeds of Bienvenida’s approved loan
with Allied Bank would be released directly to it. Without such letter, GGDI would not have parted with its property prior to full payment of the
purchase price for the same. Confident of being paid the balance of the purchase price by virtue of Mercado’s letter dated August 22, 1996, GGDI
already executed the Deed of Sale for the subject property in Bienvenida’s favor on August 23, 1996. Based on the Deed of Sale, TCT No.
205965 in the name of GGDI was cancelled and TCT No. 206877 in the name of Bienvenida, married to Benedicto Pantaleon, was issued.
Bienvenida then constituted a real estate mortgage on the subject property in favor of Allied Bank and the bank was able to have said mortgage
annotated on TCT No. 206877. In the end, Allied Bank benefitted for it acquired security for the substantial amount of loan it approved and
released to the spouses Pantaleon. Allied Bank cannot now disclaim any liability under the letters dated August 22, 1996 and January 27, 1997 by
simply averring that Mercado had no authority to issue the same. With our ruling that the letters dated August 22, 1996 and January 27, 1997 did
not constitute contracts of guaranty prohibited under Section 74 of the General Banking Act, there is no more basis for the argument of Allied
Bank that Mercado had no authority or acted beyond his authority as Branch Manager in issuing said letters in the course of facilitating and
processing Bienvenida’s loan with real estate mortgage.
Of particular relevance herein are our pronouncements in BPI Family Savings Bank, Inc. v. First Metro Investment
Corporation,46 citing Prudential Bank v. Court of Appeals47 and Francisco v. Government Service Insurance System48:
We have held that if a corporation knowingly permits its officer, or any other agent, to perform acts within the scope of an apparent authority,
holding him out to the public as possessing power to do those acts, the corporation will, as against any person who has dealt in good faith with the
corporation through such agent, be estopped from denying such authority. We reiterated this doctrine in Prudential Bank vs. Court of Appeals,
thus:
A bank holding out its officers and agent as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to
perpetrate in the apparent scope of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit
may accrue to the bank therefrom. Accordingly, a banking corporation is liable to innocent third persons where the representation is made in the
course of its business by an agent acting within the general scope of his authority even though the agent is secretly abusing his authority and
attempting to perpetrate a fraud upon his principal or some other person for his own ultimate benefit.
In Francisco vs. Government Service Insurance System, we ruled:
Corporate transactions would speedily come to a standstill were every person dealing with a corporation held duty-bound to disbelieve every act
of its responsible officers, no matter how regular they should appear on their face. This Court has observed in Ramirez vs. Orientalist Co., 38
Phil. 634, 654-655, that –
In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it presents itself to the third
party with whom the contract is made. Naturally he can have little or no information as to what occurs in corporate meetings; and he must
necessarily rely upon the external manifestations of corporate consent. The integrity of commercial transactions can only be maintained by
135
holding the corporation strictly to the liability fixed upon it by its agents in accordance with law; and we would be sorry to announce a doctrine
which would permit the property of a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without
recourse against the corporation whose name and authority had been used in the manner disclosed in this case. As already observed, it is familiar
doctrine that if a corporation knowingly permits one of its officers, or any other agent, to do acts within the scope of an apparent authority, and
thus holds him out to the public as possessing power to do those acts, the corporation will, as against any one who has in good faith dealt with the
corporation through such agent, be estopped from denying his authority; and where it is said "if the corporation permits," this means the same as
‘if the thing is permitted by the directing power of the corporation.
Petitioner maintains that respondent should have first inquired whether the deposit of P100 Million and the fixing of the interest rate were
pursuant to its (petitioner’s) internal procedures. Petitioner’s stance is a futile attempt to evade an obligation clearly established by the intent of
the parties. What transpires in the corporate board room is entirely an internal matter. Hence, petitioner may not impute negligence on the part of
respondent’s representative in failing to find out the scope of authority of petitioner’s Branch Manager. Indeed, the public has the right to rely on
the trustworthiness of bank managers and their acts. Obviously, confidence in the banking system, which necessarily includes reliance on bank
managers, is vital in the economic life of our society.
In Prudential Bank, wherein we particularly applied the doctrine of apparent authority to banks, we stressed that the "[a]pplication of these
principles is especially necessary because banks have a fiduciary relationship with the public and their stability depends on the confidence of the
people in their honesty and efficiency. Such faith will be eroded where banks do not exercise strict care in the selection and supervision of its
employees, resulting in prejudice to their depositors."
A bank is liable to innocent third persons where representation is made in the course of its normal business by an agent like Mercado as Branch
Manager, even though such agent is abusing his authority. Clearly, persons dealing with Mercado could not be blamed for believing that he was
authorized to transact business for and on behalf of the bank.49
For its failure to comply with its

undertaking under the letters dated
August 22, 1996 and January 27,
1997, Allied Bank is liable to
GGDI for temperate/moderate,
exemplary/corrective damages, and
attorney’s fees.
As a result of our findings herein that Mercado’s letters dated August 22, 1996 and January 27, 1997 were not contracts of guaranty prohibited by
Section 74 of the General Banking Act, as amended, and that they bind Allied Bank by virtue of Mercado’s apparent authority to issue the same,
then Allied Bank is liable for not complying with its obligation under said letters to release the proceeds of Bienvenida’s approved loan,
equivalent to the balance of the purchase price for the subject property, directly to GGDI.
We cannot hold Allied Bank liable to GGDI for the balance of the purchase price for the subject property as stated in the Deed of Sale given that
Allied Bank is neither a party to the said Deed nor an assignee thereof. Granting that Mercado and the other employees of Allied Bank-Pasong
Tamo assisted in the execution of the Deed of Sale of the subject property between GGDI and Bienvenida and the transfer of the certificate of
title over the subject property to Bienvenida’s name, such acts did not make Allied Bank a party to the Deed and liable thereunder. Article 1311
of the Civil Code explicitly provides that "[c]ontracts take effect only between the parties, their assigns and heirs." Contracts take effect only
between the parties who execute them. Where there is no privity of contract, there is likewise no obligation or liability to speak about. The civil
law principle of relativity of contracts provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third
person, even if he is aware of such contract and has acted with knowledge thereof.50
Neither can we hold Allied Bank solidarily liable with the spouses Pantaleon for the balance of the purchase price for the subject property under
Mercado’s letters dated August 22, 1996 and January 27, 1997 for these did not constitute contracts of guaranty as defined by Article 2047 of the
Civil Code.
Allied Bank is liable for not fulfilling its obligation under the letters dated August 22, 1996 and January 27, 1997 to directly release the proceeds
of Bienvenida’s approved loan to GGDI, and instead releasing the proceeds to the spouses Pantaleon on August 23, 1996. GGDI already executed
a Deed of Sale for the subject property in Bienvenida’s favor and transferred title and possession of the subject property to Bienvenida on August
23, 1996, although the purchase price had not yet been fully paid and was just completely relying on the assurance stated in Mercado’s letter
dated August 22, 1996. This undeniably caused GGDI pecuniary losses because for almost two decades it had been deprived of the balance of the
purchase price for the subject property or, in the alternative, the use of and/or profits from the subject property. Such losses, however, are not
easily quantifiable.
The Civil Code allows the award of temperate or moderate damages under the following circumstances:
ART. 2224. Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be recovered when the
court finds that some pecuniary loss has been suffered but its amount can not, from the nature of the case, be proved with certainty.
ART. 2225. Temperate damages must be reasonable under the circumstances.
136
Temperate or moderate damages may be allowed in cases where from the nature of the case, definite proof of pecuniary loss cannot be adduced,
although the court is convinced that the aggrieved party suffered some pecuniary loss. 51 The computation of the amount of temperate or moderate
damages is usually left to the discretion of the courts, but the amount must be reasonable, bearing in mind that temperate damages should be more
than nominal but less than compensatory.52 In this case, we find it proper to hold Allied Bank liable to GGDI for temperate or moderate damages
in the amount of P500,000.00.53
Under Article 2229, exemplary or corrective damages may be imposed, by way of example or correction for the public good, in addition to the
moral, temperate, liquidated, or compensatory damages. We reiterate that the business of banking is impressed with public interest and great
reliance is made on the bank’s sworn profession of diligence and meticulousness in giving irreproachable service. Banks must always act in good
faith and must win the confidence of clients and people in general. 54 Because Allied Bank failed to comply with its undertaking in the letters
dated August 22, 1996 and January 27, 1997, it is ordered to pay GGDI exemplary damages in the sum of P150,000.00. 55
And since we awarded exemplary/corrective damages, we also order
Allied Bank to pay GGDI P100,000.00 as attorney’s fees based on Article 2208(1) of the Civil Code. 56
Allied Bank shall further be liable to pay, jointly and severally with the spouses Pantaleon, the costs of suit.
Allied Bank is a mortgagee in bad

faith and the foreclosure on the real
estate mortgage and public auction
sale of the subject property are null
and void.
Mercado, as Branch Manager of Allied Bank-Pasong Tamo, had facilitated and processed Bienvenida’s loan which was secured by the subject
property; executed the letters dated August 22, 1996 and January 27, 1997 undertaking the direct release to GGDI of the proceeds of
Bienvenida’s approved loan with the bank; and assisted in the execution of the Deed of Sale involving the subject property between GGDI and
Bienvenida, the transfer of the certificate of title for the subject property to Bienvenida’s name, and the annotation thereon of the real estate
mortgage in favor of Allied Bank, all on August 23, 1996. Allied Bank was well aware that the subject property was not yet fully paid for and that
the balance of the purchase price was to be paid for from the proceeds of Bienvenida’s approved loan from the bank. Allied Bank was just as
cognizant of the fact that the proceeds of the loan were already released to the spouses Pantaleon, and not to GGDI, on August 23, 1996, merely a
day after Mercado issued his letter dated August 22, 1996 and same day as the execution by GGDI in Bienvenida’s favor of the Deed of Sale for
the subject property. While it is true that on its face, Bienvenida’s TCT No. 206877 appeared clean, Allied Bank knew of the possibility that the
sale of the subject property by GGDI to Bienvenida could be rescinded for nonpayment of the balance of the purchase price and, worse, that the
bank itself was partly responsible for the nonpayment because it did not honor its letter dated August 22, 1996. Moreover, despite the repeated
notices and demands for payment made by GGDI upon Allied Bank as early as November 21, 1996, the bank proceeded with the foreclosure on
the mortgage and public auction sale of the subject property on March 19, 1998.
Based on the foregoing, Allied Bank is a mortgagee in bad faith, as we had described in Consolidated Rural Bank (Cagayan Valley), Inc. v. Court
of Appeals57:
As this Court explained in the case of Spouses Mathay v. Court of Appeals:
Although it is a recognized principle that a person dealing on a registered land need not go beyond its certificate of title, it is also a firmly settled
rule that where there are circumstances which would put a party on guard and prompt him to investigate or inspect the property being sold to him,
such as the presence of occupants/tenants thereon, it is, of course, expected from the purchaser of a valued piece of land to inquire first into the
status or nature of possession of the occupants, i.e., whether or not the occupants possess the land en concepto de dueño, in concept of owner. As
is the common practice in the real estate industry, an ocular inspection of the premises involved is a safeguard a cautious and prudent purchaser
usually takes. Should he find out that the land he intends to buy is occupied by anybody else other than the seller who, as in this case, is not in
actual possession, it would then be incumbent upon the purchaser to verify the extent of the occupant’s possessory rights. The failure of a
prospective buyer to take such precautionary steps would mean negligence on his part and would thereby preclude him from claiming or invoking
the rights of a "purchaser in good faith."
This rule equally applies to mortgagees of real property. In the case of Crisostomo v. Court of Appeals, the Court held:
It is a well-settled rule that a purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man upon his guard, and then
claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. His mere refusal to believe that
such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in the vendor's or mortgagor's title, will not make
him an innocent purchaser or mortgagee for value, if it afterwards develops that the title was in fact defective, and it appears that he had such
notice of the defects as would have led to its discovery had he acted with the measure of a prudent man in a like situation.
Banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their
dealings, even those involving registered lands. Hence, for merely relying on the certificates of title and for its failure to ascertain the status of the
137
mortgaged properties as is the standard procedure in its operations, we agree with the Court of Appeals that CRB is a mortgagee in bad faith.
(Citations omitted.)
Because Allied Bank was a mortgagee in bad faith, its foreclosure on the mortgage and the subsequent public auction sale of the subject property,
in which the bank was the highest bidder, are null and void.
Allied Bank asseverates that its title to the subject property cannot be collaterally attacked in this case, which is for breach of contract, rescission,
and damages.
We are not persuaded.
Allied Bank did not present a certificate of title for the subject property in its name, but even if it had, it would not accord the bank any
protection. As we pointed out in Erasusta, Jr. v. Court of Appeals58:
The concept of non-collateral attack of title is based on Section 48, P.D. 1529, which provides:
Certificate Not Subject to Collateral attack. – A certificate of title shall not be subject to collateral attack. It cannot be altered, modified, or
cancelled except in a direct proceeding in accordance with law.
Clear it is from the above that what cannot be collaterally attacked is the certificate of title and not the title itself. As it is, a certificate of title is
the document issued by the Register of Deeds in case of conveyance of real estates and is known as TCT. But by title, the law refers to the
ownership which a certificate of title merely represents. Apparently, respondent Bank confuses a certificate of title with the title itself. Placing a
parcel of land under the mantle of the Torrens system does not mean that ownership thereof can no longer be disputed. Ownership is different
from a certificate of title. (Citations omitted.)
We also expounded in Consolidated Rural Bank (Cagayan Valley), Inc.59 that "[w]hile certificates of title are indefeasible, unassailable and
binding against the whole world, they merely confirm or record title already existing and vested. They cannot be used to protect a usurper from
the true owner, nor can they be used for the perpetration of fraud; neither do they permit one to enrich himself at the expense of others."
If the spouses Pantaleon fail to pay

the balance of the purchase price
within the term set by the RTC
judgment, GGDI is entitled to
rescission of the Deed of Sale.
GGDI and the spouses Pantaleon are
bound by the purchase price as
stated in the Deed of Sale.
Both the RTC and the Court of Appeals found that the spouses Pantaleon failed to pay GGDI the balance of the purchase price for the subject
property. This is a finding of fact, and it is well-settled that factual findings of the trial court, particularly when affirmed by the Court of Appeals,
are generally binding upon us.60
Paragraph 4 of the Deed of Sale explicitly states that "[i]n case for any reason whatsoever, [Bienvenida] fails to pay the balance of the purchase
price x x x, then this Deed shall be deemed cancelled and null and void and all payments previously made shall be deemed forfeited in favor of
[GGDI] as liquidated damages."61 Even without such provision in the Deed of Sale, a contract of sale, being a reciprocal obligation, can be
rescinded under Article 1191 of the Civil Code:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent
upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case.
He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.1âwphi1
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with articles 1385 and 1388
and the Mortgage Law.
As to rescission of the sale of an immovable property such as a parcel of land, Article 1592 of the Civil Code further provides:
138
ART. 1592. In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon
the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for
rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new
term.
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who
violates the reciprocity between them.62 The failure of the spouses Pantaleon to pay the balance of the purchase price for the subject property
entitled GGDI to rescind the Deed of Sale. And in view of our finding that Allied Bank was a mortgagee in bad faith, the subsequent transfer in
its favor by way of foreclosure on the mortgage and purchase of the subject property at the public auction sale did not and cannot bar rescission.63
However, the RTC, in the exercise of its discretion and in accordance with Article 1592 of the Civil Code, decided to grant the spouses Pantaleon
a new term of 30 days within which to pay the balance of the purchase price so as to avoid rescission of the sale of the subject property. There is
no reason for us to set aside the term granted by the RTC but we are recomputing the balance of the purchase price which the spouses Pantaleon
are required to pay. We hold GGDI and the spouses Pantaleon bound by the purchase price for the subject property stated in the Deed of Sale –
P11,000,000.00. GGDI alleges that it should be paid a total of P14,000,000.00 for the subject property as stated in the MOA, and it only agreed
to the spouses Pantaleon’s request to reduce the purchase price stated in the Deed of Sale so that the latter could save on taxes. We cannot uphold
the P14,000,000.00 purchase price for the subject property considering that under the parol evidence rule, "[w]hen the terms of an agreement
have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written agreement."64 Even granting that the Deed of Sale between GGDI and
Bienvenida did not express the true intent and agreement of the parties, we take into account the admission of GGDI that the reduced purchase
price in the Deed of Sale was for the purpose of tax evasion, which we cannot condone. Although GGDI claims that the reduced purchase price
was the initiative and for the benefit of the spouses Pantaleon, still, GGDI agreed to it and is therefore also bound by it.
Of the purchase price of P11,000,000.00 for the subject property, GGDI already received from the spouses Pantaleon P6,000,000.00 upon
execution of the Deed of Sale on August 23, 1996 and P1,000,000.00 in January 1997, hence, leaving a balance of P4,000,000.00 which the
spouses Pantaleon must pay within 30 days from finality of this judgment, otherwise, the Deed of Sale is rescinded. The amount shall be subject
to the interest rate of 18% as stipulated in paragraph 1 of the Deed of Sale beginning March 29, 1997, when the spouses Pantaleon again failed to
comply with their promise to pay the balance of the purchase price.
In the event of rescission of the Deed of Sale, GGDI is entitled to forfeit the P7,000,000.00 it had already received as liquidated damages
pursuant to paragraph 4 of the Deed of Sale. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach
thereof.65 Absent any showing that the liquidated damages freely agreed upon by the parties herein is iniquitous or unconscionable, we shall not
reduce the same. In fact, the amount is reasonable considering that GGDI has been deprived of possession and use of the subject property for 19
years.
Because the spouses Pantaleon no longer appealed, we will not disturb the order of the RTC for the spouses Pantaleon to pay GGDI exemplary
damages in the amount of P500,000.00 and attorney’s fees equivalent to 10% of the balance of the purchase price, plus interest. The spouses
Pantaleon shall likewise be liable, jointly and severally with Allied Bank, for the costs of suit.
The cross-claims of Allied Bank and

spouses Pantaleon against each
other are dismissed.
In Londres v. Court of Appeals,66 we pronounced that "[t]he purpose of a cross-claim is to avoid multiplicity of suits. Multiplicity of suits should
be avoided if the filing of a separate and independent action to recover a claim would entail proving exactly the same claim in an existing action.
However, when the causes of action are distinct and separate from each other, as in this case, the independent interest should be pursued in
another proceeding."
Allied Bank and the spouses Pantaleon filed cross-claims against each other in Civil Case No. Q-98-34077 before the RTC but neither of them
presented satisfactory evidence in support of their respective claims; resultantly, the RTC ordered the dismissal of their cross-claims.
Nonetheless, we observe that the claims of Allied Bank and the spouses Pantaleon against each other are essentially rooted in Bienvenida’s loan
secured by the real estate mortgage on the subject property, which, although closely related to the instant case, also involve factual and legal
issues, as well as causes of action, that may be the subject of a separate and independent action between Allied Bank and the spouses Pantaleon
(i.e., the terms and conditions of Bienvenida’s loan/s with Allied Bank, Bienvenida’s default on the payments, the respective knowledge and
participation of Allied Bank and the spouses Pantaleon in the constitution of the real estate mortgage on the subject property to the prejudice of
GGDI, etc.). Furthermore, bearing in mind the substantial amounts involved in the claims of Allied Bank and the spouses Pantaleon against each
other, the parties should be allowed to fully litigate the same in appropriate proceedings. Hence, the dismissal of the cross-claims of Allied Bank
and the spouses Pantaleon against one another is without prejudice.
WHEREFORE, the Petition is PARTLY GRANTED and the Decision dated October 23, 2007 of the Court of Appeals in CA-G.R. CV No.
82765, affirming with modifications the Decision dated September 25, 2003 of the Regional Trial Court of Quezon City in Civil Case No. Q-98-
34077, is AFFIRMED with further MODIFICATIONS, to read as follows:
139
1. The spouses Bienvenida and Benedicto Pantaleon are ORDERED to pay Games and Garments Developers, Inc. within thirty (30)
days from finality of this judgment the balance of the purchase price for the subject property in the amount of FOUR MILLION
PESOS (P4,000,000.00), plus eighteen percent (18%) interest per annum from March 29, 1997 until finality of this judgment;
2. In the event that the spouses Bienvenida and Benedicto Pantaleon fail to comply with paragraph (1) hereof, then:
(a) The Deed of Sale dated August 23, 1996 is RESCINDED, the amount of SEVEN MILLION PESOS (P7,000,000.00)
previously paid by the spouses Pantaleon to Games and Garments Developers, Inc. is FORFEITED as liquidated
damages; and TCT No. 206877 in the name of Bienvenida Pantaleon, married to Benedicto Pantaleon, is CANCELLED;
(b) The real estate mortgage constituted on the subject property by Bienvenida Pantaleon in favor of Allied Banking
Corporation, the foreclosure on the mortgage by Allied Banking Corporation, and the public auction sale of the subject
property are DECLARED null and void; and the Certificate of Sale dated March 19, 1998 issued by the Office of the
Clerk of Court of the Regional Trial Court of Muntinlupa City in favor of Allied Banking Corporation and any certificate
of title for the subject property issued in the name of Allied Banking Corporation are CANCELLED;
(c) Allied Banking Corporation is ORDERED to reconvey the subject property to Games and Garments Developers, Inc.
and the Register of Deeds of Makati City (now Muntinlupa City) is DIRECTED to issue a new certificate of title, free
from any liens or encumbrances, in the name of Games and Garments Developers, Inc.;
(3) The spouses Bienvenida and Benedicto Pantaleon are ORDERED to pay Games and Garments Developers, Inc.
exemplary damages in the amount of FIVE HUNDRED THOUSAND PESOS (P500,000.00) and attorney's fees equivalent
to TEN PERCENT (10%) of the total monetary award in paragraph (1) hereof;
(4) Allied Banking Corporation is ORDERED to pay Games and Garments Developers, Inc. the amounts of FIVE
HUNDRED THOUSAND PESOS (PS00,000.00) as temperate/moderate damages, ONE HUNDRED FIFTY THOUSAND
PESOS (Pl50,000.00) as exemplary/corrective damages, and ONE HUNDRED THOUSAND PESOS (Pl00,000.00) as
attorney's fees;
(5) The spouses Bienvenida and Benedicto Pantaleon and Allied Banking Corporation are ORDERED to pay, jointly and
severally, the costs of suit;
(6) Legal interest of six percent (6%) per annum shall be IMPOSED on all the aforementioned monetary awards from date
of finality of this judgment until full satisfaction of the same; and
(7) The cross-claims of the spouses Bienvenida and Benedicto Pantaleon and Allied Banking Corporation against one
another are DISMISSED without prejudice.1âwphi1
140
G.R. No. 160324 November 15, 2005
INTERNATIONAL FINANCE CORPORATION, Petitioner,

vs.
IMPERIAL TEXTILE MILLS, INC.,* Respondent.
DECISION
PANGANIBAN, J.:
he terms of a contract govern the rights and obligations of the contracting parties. When the obligor undertakes to be "jointly and severally"
liable, it means that the obligation is solidary.
If solidary liability was instituted to "guarantee" a principal obligation, the law deems the contract to be one of suretyship.
The creditor in the present Petition was able to show convincingly that, although denominated as a "Guarantee Agreement," the Contract was
actually a surety. Notwithstanding the use of the words "guarantee" and "guarantor," the subject Contract was indeed a surety, because its terms
were clear and left no doubt as to the intention of the parties.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2002 Decision 2 and September 30, 2003
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 58471. The challenged Decision disposed as follows:
"WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the trial court is MODIFIED to read as follows:
"1. Philippine Polyamide Industrial Corporation is ORDERED to pay [Petitioner] International Finance Corporation, the following amounts:
‘(a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement;
‘(b) Interest of 12% per annum on accrued interest, which shall be counted from the date of filing of the instant action up to the actual payment;
‘(c) ₱73,340.00 as attorney’s fees;
‘(d) Costs of suit.’
"2. The guarantor Imperial Textile Mills, Inc. together with Grandtex is HELD secondarily liable to pay the amount herein adjudged to
[Petitioner] International Finance Corporation."4
The assailed Resolution denied both parties’ respective Motions for Reconsideration.
The Facts
The facts are narrated by the appellate court as follows:
"On December 17, 1974, [Petitioner] International Finance Corporation (IFC) and [Respondent] Philippine Polyamide Industrial Corporation
(PPIC) entered into a loan agreement wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in sixteen (16) semi-annual installments
of US$437,500.00 each, beginning June 1, 1977 to December 1, 1984, with interest at the rate of 10% per annum on the principal amount of the
loan advanced and outstanding from time to time. The interest shall be paid in US dollars semi-annually on June 1 and December 1 in each year
and interest for any period less than a year shall accrue and be pro-rated on the basis of a 360-day year of twelve 30-day months.
"On December 17, 1974, a ‘Guarantee Agreement’ was executed with x x x Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing
Corporation (Grandtex) and IFC as parties thereto. ITM and Grandtex agreed to guarantee PPIC’s obligations under the loan agreement.
"PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The payments due on December 1, 1978, June 1, 1979 and
December 1, 1979 were rescheduled as requested by PPIC. Despite the rescheduling of the installment payments, however, PPIC defaulted.
Hence, on April 1, 1985, IFC served a written notice of default to PPIC demanding the latter to pay the outstanding principal loan and all its
accrued interests. Despite such notice, PPIC failed to pay the loan and its interests.
141
"By virtue of PPIC’s failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on the real estate, buildings,
machinery, equipment plant and all improvements owned by PPIC, located at Calamba, Laguna, with the regional sheriff of Calamba, Laguna.
On July 30, 1985, the deputy sheriff of Calamba, Laguna issued a notice of extrajudicial sale. IFC and DBP were the only bidders during the
auction sale. IFC’s bid was for ₱99,269,100.00 which was equivalent to US$5,250,000.00 (at the prevailing exchange rate of ₱18.9084 =
US$1.00). The outstanding loan, however, amounted to US$8,083,967.00 thus leaving a balance of US$2,833,967.00. PPIC failed to pay the
remaining balance.
"Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, despite the demand made by
IFC, the outstanding balance remained unpaid.
"Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of Manila against PPIC and ITM for the payment of the outstanding balance
plus interests and attorney’s fees.
"The trial court held PPIC liable for the payment of the outstanding loan plus interests. It also ordered PPIC to pay IFC its claimed attorney’s
fees. However, the trial court relieved ITM of its obligation as guarantor. Hence, the trial court dismissed IFC’s complaint against ITM.
xxxxxxxxx
"Thus, apropos the decision dismissing the complaint against ITM, IFC appealed [to the CA]." 5
The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM from any obligation to IFC. According to the appellate court,
ITM bound itself under the "Guarantee Agreement" to pay PPIC’s obligation upon default. 6 ITM was not discharged from its obligation as
guarantor when PPIC mortgaged the latter’s properties to IFC. 7 The CA, however, held that ITM’s liability as a guarantor would arise only if and
when PPIC could not pay. Since PPIC’s inability to comply with its obligation was not sufficiently established, ITM could not immediately be
made to assume the liability.8
The September 30, 2003 Resolution of the CA denied reconsideration. 9 Hence, this Petition.10
The Issues
Petitioner states the issues in this wise:
"I. Whether or not ITM and Grandtex11 are sureties and therefore, jointly and severally liable with PPIC, for the payment of the loan.
"II. Whether or not the Petition raises a question of law.
"III. Whether or not the Petition raises a theory not raised in the lower court."12
The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan.
The Petition is meritorious.
Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following Contracts: (1) the Loan Agreement dated December 17, 1974, between IFC and PPIC;13 and (2)
the Guarantee Agreement dated December 17, 1974, between ITM and Grandtex, on the one hand, and IFC on the other. 14
IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPIC’s obligations proceeding from the Loan Agreement.15 For
its part, ITM asserts that, by the terms of the Guarantee Agreement, it was merely a guarantor 16 and not a surety. Moreover, any ambiguity in the
Agreement should be construed against IFC -- the party that drafted it.17
142
Language of the
Contract
The premise of the Guarantee Agreement is found in its preambular clause, which reads:
"Whereas,
"(A) By an Agreement of even date herewith between IFC and PHILIPPINE POLYAMIDE INDUSTRIAL CORPORATION (herein called the
Company), which agreement is herein called the Loan Agreement, IFC agrees to extend to the Company a loan (herein called the Loan) of seven
million dollars ($7,000,000) on the terms therein set forth, including a provision that all or part of the Loan may be disbursed in a currency other
than dollars, but only on condition that the Guarantors agree to guarantee the obligations of the Company in respect of the Loan as hereinafter
provided.
"(B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and in consideration of IFC entering into said Agreement, have
agreed so to guarantee such obligations of the Company."18
The obligations of the guarantors are meticulously expressed in the following provision:
"Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and unconditionally guarantee, as primary obligors and not as
sureties merely, the due and punctual payment of the principal of, and interest and commitment charge on, the Loan, and the principal of, and
interest on, the Notes, whether at stated maturity or upon prematuring, all as set forth in the Loan Agreement and in the Notes."19
The Agreement uses "guarantee" and "guarantors," prompting ITM to base its argument on those words. 20 This Court is not convinced that the
use of the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise.
Solidary Liability
Agreed to by ITM
While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was "jointly and severally" liable. To put emphasis
on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one
thing: that at bottom, and to all legal intents and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily21 liable with PPIC for the latter’s obligations under the Loan Agreement with IFC. ITM
thereby brought itself to the level of PPIC and could not be deemed merely secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITM’s liability commenced only when it guaranteed PPIC’s
obligation. It became a surety when it bound itself solidarily with the principal obligor. Thus, the applicable law is as follows:
"Article 2047. By guaranty, a person, called the guarantor binds himself to the creditor to fulfill the obligation of the principal in case the latter
should fail to do so.
"If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In
such case the contract shall be called suretyship."22
The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on "Joint and Solidary Obligations." Relevant to this case is
Article 1216, which states:
"The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them
shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected."
Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent.
No Ambiguity in the
Undertaking
143
The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by the term "jointly and severally," the use
of the word "guarantor" to refer to a "surety" does not violate the law.23 As Article 2047 provides, a suretyship is created when a guarantor binds
itself solidarily with the principal obligor. Likewise, the phrase in the Agreement -- "as primary obligor and not merely as surety" -- stresses that
ITM is being placed on the same level as PPIC. Those words emphasize the nature of their liability, which the law characterizes as a suretyship.
The use of the word "guarantee" does not ipso facto make the contract one of guaranty.24 This Court has recognized that the word is frequently
employed in business transactions to describe the intention to be bound by a primary or an independent obligation. 25 The very terms of a contract
govern the obligations of the parties or the extent of the obligor’s liability. Thus, this Court has ruled in favor of suretyship, even though contracts
were denominated as a "Guarantor’s Undertaking" 26 or a "Continuing Guaranty."27
Contracts have the force of law between the parties,28 who are free to stipulate any matter not contrary to law, morals, good customs, public order
or public policy.29 None of these circumstances are present, much less alleged by respondent. Hence, this Court cannot give a different meaning
to the plain language of the Guarantee Agreement.
Indeed, the finding of solidary liability is in line with the premise provided in the "Whereas" clause of the Guarantee Agreement. The execution
of the Agreement was a condition precedent for the approval of PPIC’s loan from IFC. Consistent with the position of IFC as creditor was its
requirement of a higher degree of liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and is
now estopped from feigning ignorance of its solidary liability. The literal meaning of the stipulations control when the terms of the contract are
clear and there is no doubt as to the intention of the parties.30
We note that the CA denied solidary liability, on the theory that the parties would not have executed a Guarantee Agreement if they had intended
to name ITM as a primary obligor.31 The appellate court opined that ITM’s undertaking was collateral to and distinct from the Loan Agreement.
On this point, the Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation. 32 Although a surety contract is
secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the
undertaking.33 A surety becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the
obligations constituted by the latter.34
ITM’s Liability as Surety
With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former secondarily liable. 35 A surety is considered in
law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter. 36 Evidently, the dispositive portion of
the assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC.
Peripheral Issues
In addition to the main issue, ITM raised procedural infirmities allegedly justifying the denial of the present Petition. Before the trial court and
the CA, IFC had allegedly instituted different arguments that effectively changed the corporation’s theory on appeal, in violation of this Court’s
previous pronouncements.37 ITM further
claims that the main issue in the present case is a question of fact that is not cognizable by this Court. 38
These contentions deserve little consideration.
Alleged Change of
Theory on Appeal
Petitioner’s arguments before the trial court (that ITM was a "primary obligor") and before the CA (that ITM was a "surety") were related and
intertwined in the action to enforce the solidary liability of ITM under the Guarantee Agreement. We emphasize that the terms "primary obligor"
and "surety" were premised on the same stipulations in Section 2.01 of the Agreement. Besides, both terms had the same legal consequences.
There was therefore effectively no change of theory on appeal. At any rate, ITM failed to show to this Court a disparity between IFC’s allegations
in the trial court and those in the CA. Bare allegations without proof deserve no credence.
Review of Factual
Findings Necessary
As to the issue that only questions of law may be raised in a Petition for Review, 39 the Court has recognized exceptions,40 one of which applies to
the present case. The assailed Decision was based on a misapprehension of facts, 41 which particularly related to certain stipulations in the
Guarantee Agreement -- stipulations that had not been disputed by the parties. This circumstance compelled the Court to review the Contract
firsthand and to make its own findings and conclusions accordingly.
144
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and Resolution MODIFIED in the sense that Imperial Textile Mills,
Inc. is declared a surety to Philippine Polyamide Industrial Corporation. ITM is ORDERED to pay International Finance Corporation the same
amounts adjudged against PPIC in the assailed Decision. No costs.
145
G.R. No. L-11964 April 28, 1962
REGISTER of DEEDS OF MANILA, petitioner-appellee,

vs.
CHINA BANKING CORPORATION, respondent-appellant.
Office of the Solicitor General for petitioner-appellee.

Sycip-Salazar, Luna and Associates for respondent-appellant.
Alfonso Ponce Enrile as Amicus Curiae.
DIZON, J.:
Appeal from a resolution of the Land Registration Commission holding "that the deed of transfer in favor of an alien bank, subject of the present
Consulta, is unregisterable for being in contravention of the Constitution of the Philippines".
In an information filed on June 16, 1953 in the Court of First Instance of Manila (Criminal Case No. 22908) Alfonso Pangilinan and one
Guillermo Chua were charged with qualified theft, the money involved amounting to P275,000.00. On September 18, 1956, Pangilinan and his
wife, Belen Sta. Ana, executed a public instrument entitled DEED OF TRANSFER whereby, after admitting his civil liability in favor of his
employer, the China Banking Corporation, in relation to the offense aforesaid, he ceded and transferred to the latter, in satisfaction thereof, a
parcel of land located in the City of Manila, registered in the name of "Belen Sta. Ana, married to Alfonso Pangilinan" (Transfer Certificate of
Title No. 32230). On October 24, 1956 the deed was presented for registration to the Register of Deeds of the City of Manila, but because the
transferee — the China Banking Corporation — was alien-owned and, as such, barred from acquiring lands in the Philippines, in accordance with
the provisions of Section 5, Article XIII of the Constitution of the Philippines, said officer submitted the matter of its registration to the Land
Registration Commission for resolution. After granting the parties concerned ample opportunity to submit their views upon the issue, the
Commission issued the resolution appealed from.
Plainly stated, the question before Us is whether appellant — an alien-owned bank — can acquire ownership of the residential lot covered by
Transfer Certificate of Title No. 32230 by virtue of the deed of transfer mentioned heretofore (Vide pages 1-6 of the Record on Appeal).
Maintaining the affirmative, appellant argues that: (a) the temporary holding of land by an alien-owned commercial bank under a public
instrument such as the deed of transfer in question "bears no reasonable connection with the constitutional purpose" underlying the provisions of
Section 5, Article XIII of the Constitution of the Philippines; hence, such holding or acquisition "was not within the contemplation of the framers
of the Constitution"; (b) by judicial as well as by executive-administrative an legislative construction, the constitutional prohibition against alien
landholding does not preclude enjoyment by aliens of temporary rights and land; (c) under the provisions of Section 25 of Republic Act No. 337
(General Banking Act) an alien or an alien-owned commercial bank may acquire land in the Philippines subject to the obligation of disposing of
it within 5 years from the date of its acquisition. 1äwphï1.ñët
Upon the other hand, the argument supporting the appealed resolution is that the privilege of acquiring real estate granted to commercial banks
under the provisions of Section 25 of Republic Act No. 337 was not intended as an amendment, much less as a nullification of the constitutional
prohibition against alien acquisition of lands in the Philippines, the same being merely an exception to the general rule, under existing banking
and corporation laws, that banks and corporations can engage only in the particular business for which they were specifically created; that a mere
statute, like the republic act relied upon by, appellant, cannot amend the Constitution; that in connection with the particular constitutional
prohibition involved herein, it is the character and nature of the possession — whether in strict ownership or otherwise — and not the length of
possession that is material, the result being that, if real property is to be held in ownership, an alien may not legally do so even for a single day.
After considering the arguments adduced by appellant in its brief, jointly with those expounded in the briefs submitted by Alfonso Ponce Enrile
and William H. Quasha and Associates, as amici curiae, on the one hand, and on the other, those relied upon in the brief submitted by the Office
of the Solicitor General on behalf of the Commission, we are inclined to uphold, as we do uphold, the appealed resolution.
To support its view appellant relies particularly upon paragraphs (c) and (d), Section 25 of Republic Act 337 which read as follows: .
SEC. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes:
xxx xxx xxx
(c) Such shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; .
(d) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to
secure debts due to it.
But no such bank shall hold the possession of any real estate under mortgage or trust deed, or the title and possession of any real estate
purchased to secure any debt due to it, for a longer period than five years.
146
Assuming, arguendo, that under the provisions of the aforesaid Act any commercial bank, whether alien-owned or controlled or not, may
purchase and hold real estate for the specific purposes and in the particular cases enumerated in Section 25 thereof, we find that the case before
Us does not fall under anyone of them.
Paragraph (c), Section 25 of Republic Act 337 allows a commercial bank to purchase and hold such real estate as shall be conveyed to it in
satisfaction of debts previously contracted in the course of its dealings, We deem it quite clear and free from doubt that the "debts" referred to in
this provision are only those resulting from previous loans and other similar transactions made or entered into by a commercial bank in the
ordinary course of its business as such. Obviously, whatever "civil liability" — arising from the criminal offense of qualified theft — was
admitted in favor of appellant bank by its former employee, Alfonso Pangilinan, was not a debt resulting from a loan or a similar transaction had
between the two parties in the ordinary course of banking business.
Neither do the provisions of paragraph (d) of the Same section apply to the present case because the deed of transfer in question can in no sense
be considered as a sale made by virtue of a judgment, decree, mortgage, or trust deed held by appellant bank. In the same manner it cannot be
said that the real property in question was purchased by appellant "to secure debts due to it", considering that, as stated heretofore, the
term debt employed in the pertinent legal provision can logically refer only to such debts as may become payable to appellant bank as a result of a
banking transaction.
That the constitutional prohibition under consideration has for its purpose the preservation of the patrimony of the nation can not be denied, but
appellant and the amici curiae claim that it should be liberally construed so that the prohibition be limited to the permanent acquisition of real
estate by aliens — whether natural or juridical persons. This, of course, would make legal the ownership acquired by appellant bank by virtue of
the deed of transfer mentioned heretofore, subject to its obligation to dispose of it in accordance with law, within 5 years from the date of its
acquisition. We can not give assent to this contention, in view of the fact that the constitutional prohibition in question is absolute in terms. We
have so held in Ong Sui Si Temple vs. The Register of Deeds of Manila (G. R. No. L-6776, prom. May 21, 1955) where we said, inter alia, the
following:
We are of the opinion that the Court below has correctly held that in view of the absolute terms of section 5, Title XIII, of the
Constitution, the provisions of Act 271 of the old Philippine Commission must be deemed repealed since the Constitution was
enacted, in so far as incompatible therewith. In providing that —
Save in cases of hereditary succession no private agricultural land shall be transferred or assigned except to individuals,
corporations or associations qualified to acquire or hold lands of the public domain in the Philippines.
the Constitution makes no exception in favor of religious associations. Neither is there any such saving found in Sections 1 and 2 of
Article XIII, restricting the acquisition of public agricultural lands and other natural resources to "corporations or associations at least
sixty per centum of the capital of which is owned by such citizens" (of the Philippines). (Emphasis ours) .
Even in the case of Smith Bell & Co. vs. Register of Deeds of Davao (50 O.G., 5239) where a lease of a parcel of land for a total period of 50
years in favor of an alien corporation was held to be registerable, the reason we gave for such ruling was that a lease — unlike a sale — does not
involve the transfer of dominion over the land, the clear implication from this being that transfer of ownership over land, even for a limited period
of time, is not permissible in view of the constitutional prohibition. The reason for this is manifestly the desire and purpose of the Constitution to
place and keep in the hands of the people the ownership over private lands in order not to endanger the integrity of the nation. Inasmuch as when
an alien buys land he acquires and will naturally exercise ownership over the same, either permanently or temporarily, to that extent his
acquisition jeopardizes the purpose of the Constitution.
Some may say that this construction is too narrow and unwise; to this we answer that it is not our privilege to determine the wisdom or lack of
wisdom of this constitutional mandate. It is, rather, Our sworn duty to enforce it free from qualifications and distinctions that tend to render futile
the constitutional intent.
WHEREFORE, the resolution appealed from is hereby affirmed, with costs.
147
G. R. No. 147074 July 15, 2005
Spouses RODRIGO PADERES and SONIA PADERES , Petitioners,

vs.
The Hon. COURT OF APPEALS,1 Hon. CARLOTA P. VALENZUELA, in her capacity as the Liquidator of Banco Filipino Savings and
Mortgage Bank,2 Respondents.
x---------------------------------------------x
G. R. No. 147075
Spouses ISABELO BERGARDO and JUANA HERMINIA BERGARDO, Petitioners,

vs.
The Hon. COURT OF APPEALS,1 Hon. CARLOTA P. VALENZUELA, in her capacity as the Liquidator of Banco Filipino Savings and
Mortgage Bank,2 Respondents.
DECISION
CARPIO MORALES, J.:
By their Petition for review on certiorari under Rule 45 of the Rules of Court, petitioners spouses Rodrigo and Sonia Paderes and spouses Isabelo
and Juana Bergado seek the reversal of the September 20, 2000 Decision 3 and February 16, 2001 Resolution of the Court of Appeals, which
dismissed their original Petition and denied their Motion for Reconsideration, respectively.
On September 14, 1982, Manila International Construction Corporation (MICC) executed a real estate mortgage4 over 21 registered parcels of
land including the improvements thereon in favor of Banco Filipino Savings and Mortgage Bank (Banco Filipino) in order to secure a loan of
₱1,885,000.00. The mortgage was registered with the Registry of Deeds of Pasay City and annotated on the corresponding transfer certificates of
title (TCTs) covering the properties on December 17, 1982.5
The 21 mortgaged properties included two lots, one with an area of 264 square meters, and the other with an area of 263, both located in the then
Municipality of Parañaque (now Parañaque City) covered by TCT Nos. 61062 6 and 61078,7 respectively.
Subsequently or in August 1983, MICC sold the lot8 covered by TCT No. 61078, together with the house9 thereon, to the petitioners in the first
case, the Paderes spouses. And on January 9, 1984, MICC sold the house10 built on the lot covered by TCT No. 61062 to the petitioners in the
second case, the Bergado spouses. Neither sale was registered, however. 11
On January 25, 1985, for failure of MICC to settle its obligations, Banco Filipino filed a verified Petition 12 for the extrajudicial foreclosure of
MICC’s mortgage. At the auction sale of the foreclosed properties on March 25, 1985, Banco Filipino submitted a bid of ₱3,092,547.82 and was
declared the highest bidder. A Certificate of Sale13 was issued in its favor which was registered with the Registry of Deeds and annotated on the
corresponding TCTs covering the mortgaged properties on July 29, 1985.
No redemption of the foreclosed mortgage having been made within the reglementary period, Carlota P. Valenzuela, the then Liquidator of Banco
Filipino, filed on October 16, 1987 an ex parte Petition14 for the issuance of a Writ of Possession of the foreclosed properties with the Regional
Trial Court (RTC) of Makati. After hearing, the Petition was granted by Order dated September 8, 1988 15 of Branch 59 of the RTC.
On November 7, 1996, copies of the Writ of Possession dated November 5, 1996, together with a notice addressed to MICC "and/or All persons
claiming rights under them" to voluntarily vacate the premises within 7 days from receipt thereof, were served on petitioners. 16
Instead of vacating the two lots, however, petitioners filed separate petitions before the Court of Appeals, docketed as C.A. G.R. Numbers 42470
and 42471 which were later consolidated,17 assailing the validity of the Writ of Possession.
On September 20, 2000, the Court of Appeals promulgated its questioned Decision 18 dismissing the consolidated petitions for lack of merit and
upholding the validity of the Writ of Possession.
Petitioners’ Motion for Reconsideration of the appellate court’s decision having been denied by Resolution of February 16, 2001, they jointly
come before this Court arguing that: (1) having purchased their respective properties in good faith from MICC, they are third parties whose right
thereto are superior to that of Banco Filipino; (2) they are still entitled to redeem the properties and in fact a binding agreement between them and
the bank had been reached; (3) their respective houses should not have been included in the auction sale of the mortgaged properties; (4) on the
contrary, as builders in good faith, they are entitled to the benefits of Article 448 of the Civil Code;
and (5) the writ of possession issued by the RTC in 1996 had already lost its validity and efficacy.
148
The petition must be denied.
In extra-judicial foreclosures of real estate mortgages, the issuance of a writ of possession, which is an order commanding the sheriff to place a
person in possession of the foreclosed property,19 is governed by Section 7 of Act No. 3135 (an act to regulate the sale of property under special
powers inserted in or annexed to real estate mortgages), as amended:
Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the
property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to
the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the
mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion
in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under the
Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a
mortgage duly registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk of the court shall,
upon the filing of such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred
and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a
writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.
That petitioners purchased their properties from MICC in good faith is of no moment. The purchases took place after MICC’s mortgage to Banco
Filipino had been registered in accordance with Article 2125 20 of the Civil Code and the provisions of P.D. 1529 (property registry decree). 21 As
such, under Articles 131222 and 212623 of the Civil Code, a real right or lien in favor of Banco Filipino had already been established, subsisting
over the properties until the discharge of the principal obligation, whoever the possessor(s) of the land might be.
In rejecting a similar argument, this Court, in Philippine National Bank v. Mallorca,24 ratiocinated:
1. Appellant’s stand is that her undivided interest consisting of 20,000 square meters of the mortgaged lot, remained
unaffected by the foreclosure and subsequent sale to PNB, and she "neither secured nor contracted a loan" with said bank. What PNB foreclosed,
she maintains, "was that portion belonging to Ruperta Lavilles only," not the part belonging to her.
Appellant’s position clashes with precepts well-entrenched in law. By Article 2126 of the Civil Code, a "mortgage directly and immediately
subjects the property on which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was
constituted." Sale or transfer cannot affect or release the mortgage. A purchaser is necessarily bound to acknowledge and respect the
encumbrance to which is subjected the purchased thing and which is at the disposal of the creditor "in order that he, under the terms of
the contract, may recover the amount of his credit therefrom." For, a recorded real estate mortgage is a right in rem, a lien on the
property whoever its owner may be. Because the personality of the owner is disregarded; the mortgage subsists notwithstanding changes
of ownership; the last transferee is just as much of a debtor as the first one; and this, independent of whether the transferee knows or not
the person of the mortgagee. So it is, that a mortgage lien is inseperable from the property mortgaged. All subsequent purchasers thereof
must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. For, the mortgage, until
discharge, follows the property.25 (Emphasis and underscoring supplied; italics in the original; citations omitted)
And in Roxas v. Buan26 this Court held:
Contending that petitioner Roxas is a party actually holding the property adversely to the debtor, Arcadio Valentin, petitioners argue that under
the provisions of Act No. 3135 they cannot be ordered to vacate the property. Hence, the question of whether, under the circumstances, petitioner
Roxas indeed is a party actually holding the property adversely to Valentin.
It will be recalled that Roxas' possession of the property was premised on its alleged sale to him by Valentin for the amount of
₱100,000.00. Assuming this to be true, it is readily apparent that Roxas holds title to and possesses the property as Valentin's transferee.
Any right he has to the property is necessarily derived from that of Valentin. As transferee, he steps into the latter's shoes. Thus, in the
instant case, considering that the property had already been sold at public auction pursuant to an extrajudicial foreclosure, the only interest
that may be transferred by Valentin to Roxas is the right to redeem it within the period prescribed by law. Roxas is therefore the successor-in-
interest of Valentin, to whom the latter had conveyed his interest in the property for the purpose of redemption [Rule 39, Sec. 29 (a) of the
Revised Rules of Court; Magno v. Viola, 61 Phil. 80 (1934); Rosete v. Prov. Sheriff of Zambales, 95 Phil. 560 (1954).] Consequently, Roxas'
occupancy of the property cannot be considered adverse to Valentin.
Thus, in Belleza v. Zandaga [98 Phil. 702 (1956)], the Court held that where the purchaser in an execution sale has already received the definitive
deed of sale, he becomes the owner of the property bought and, as absolute owner, he is entitled to its possession and cannot be excluded
therefrom by one who merely claims to be a "successor-in-interest of the judgment debtor," unless it is adjudged that the alleged successor has a
better right to the property than the purchaser at the execution sale. Stated differently, the purchaser's right of possession is recognized only as
against the judgment debtor and his successor-in-interest but not against persons whose right of possession is adverse to the latter. The
rule was reiterated in Guevara v. Ramos [G.R. No. L-24358, March 31, 1971, 38 SCRA 194].
The rule in Belleza, although relating to the possession of property sold in execution sales under what is now Sec. 35, Rule 39 of the Revised
Rules of Court, is also applicable to the possession of property sold at extrajudicial foreclosure sales pursuant to Sec. 6 of Act No. 3135 [see IFC
Service Leasing and Acceptance Corp. v. Nera, supra]. Thus, as petitioner Roxas is not a party holding the property adversely to Valentin,
149
being the latter's successor-in-interest, there was no bar to the respondent trial court's issuance of a writ of possession upon private
respondent Buan's application.
It does not matter that petitioner Roxas was not specifically named in the writ of possession, as he merely stepped into the shoes of Valentin,
being the latter's successor-in-interest. On the other hand, petitioner de Guia was occupying the house as Roxas' alleged tenant [Rollo, p. 24].
Moreover, respondent court's decision granting private respondent Buan's petition for the issuance of a writ of possession ordered the Provincial
Sheriff of Zambales or any of his deputies to remove Valentin "or any person claiming interest under him" from the property [Rollo, p. 16].
Undeniably, petitioners fell under this category.27 (Emphasis supplied)
As transferees of mortgagor MICC, petitioners merely stepped into its shoes and are necessarily bound to acknowledge and respect the mortgage
it had earlier executed in favor of Banco Filipino.
As for petitioners’ argument that they are still entitled to redeem the foreclosed properties, it must be rejected too.
The debtor in extra-judicial foreclosures under Act No. 3135, or his successor-in-interest, has, one year from the date of registration of the
Certificate of Sale with the Registry of Deeds, a right to redeem the foreclosed mortgage,28 hence, petitioners, as MICC’s successors-in-interest,
had one year from the registration of the Certificate of Sale on July 29, 1985 or until July 29, 1986 for the purpose.
Petitioners, however, failed to do so. Ownership of the subject properties was thus consolidated in favor of Banco Filipino, 29 and TCT Nos.
112352 (in lieu of TCT No. 61078) and 112353 (in lieu of TCT No. 61062) were issued in its name.
As this Court held in F. David Enterprises v. Insular Bank of Asia and America:30
It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the
period of one year after the registration of the sale. As such, he is entitled to the possession of the said property and can demand it at any
time following the consolidation of ownership in his name and the issuance to him of a new transfer certificate of title. The buyer can in
fact demand possession of the land even during the redemption period except that he has to post a bond in accordance with Section 7 of Act No.
3135 as amended. No such bond is required after the redemption period if the property is not redeemed. Possession of the land then becomes an
absolute right of the purchaser as confirmed owner. Upon proper application and proof of title, the issuance of the writ of possession
becomes a ministerial duty of the court.31 (Emphasis supplied)
Petitioners assert, however, that a binding agreement for the repurchase of the subject properties was reached with Banco Filipino as, so they
claim, reflected in the following exchange of communications:
October 17, 1996
Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Dept.
Banco Filipino Savings and Mortgage Bank
101 Paseo De Roxas cro. [sic] Dela Rosa Sts.
Makati City
Dear Madam:
I am writing to you, on behalf of spouses Sonia and Rodrigo Paderes re: TCT No. 61078 formerly owned by Manila International Construction
Corporation (MICC for short) now TCT No. 112352, registered in the name of Banco Filipino Savings and Mortgage Bank in July 30, 1996 at the
Register of Deeds of Parañaque, Metro Manila. Incidentally, the property is denominated as Block 48, Lot 5 located at Leon Florentino St., BF
Executive , Parañaque, Metro Manila.
The background facts of TCT No. 61078 are as follows:
In August 1983, the MICC executed a Deed of Absolute Sale of that lot covered by TCT No. 61078 in favor of spouses Sonia and Rodrigo
Paderes which was acknowledged before a Notary Public on October 1, 1983. The value of the lot was ₱115,720.00. In the same year, the parties
executed an addendum to the said deed of absolute sale which covered a house valued at ₱242,874.45. The net package price of the house and lot
150
was fixed at ₱329,405.75. From this amount, the spouses Sonia and Rodrigo Paderes paid MICC inclusive of equity the amount of ₱125,437.35
leaving a balance of ₱212,985.60. The spouses moved in the house in November 1983.
Unknown to the spouses, MICC mortgaged TCT No. 61078 in favor of Banco Filipino Savings and Mortgage Bank for ₱1,885.00 duly inscribed
in TCT No. 112352 on December 12, 1982. It was foreclosed by the bank for ₱3,092,547.82 pursuant to the certificate of sale executed by the
sheriff as inscribed on TCT No. 112352 [should be TCT No. 61078] on July 29, 1985 . . .
Then came the news that Banco Filipino Savings and Mortgage Bank was under conservatorship by the Board of Liquidators. On the other hand,
MICC became bankrupt and closed shop. The spouses were [sic] nowhere to go to then at the time to get the title of the property they purchased
from MICC.
Until, the spouses received a letter dated April 6, 1987 from the Board of Liquidators via Alberto Reyes, Deputy Liquidator, informing the
spouses that the property they purchased from MICC was already foreclosed by the bank. The spouses answered the letter and disclaimed any
knowledge of the foreclosure. In their answer to the said letter, they emphasized that their unpaid balance with MICC was ₱188,985.60.
We are addressing your goodself [sic] to inform the bank that the spouses Sonia and Rodrigo Paderes are exercising their right of
redemption as subrogees of the defunct MICC under special laws.
From reliable information, the bank had already made appraisal of the property and from that end, may we be informed [at] the soonest
possible time the value of the property to enable the spouses to prepare for such eventuality. And, upon receipt of the said appraisal
value we shall immediately inform you [of] our position on the matter.
Thank you very much.
Very truly yours,
[SGD.]
LUCIANO D. VALENCIA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa32
x x x (Emphasis supplied).
October 25, 1996
Mr. Luciano D. Valencia
Counsel for Sps. Paderes
JPA Subdivision, Muntinlupa
Dear Sir:
This is with regard to your letter dated October 17, 1996 concerning the property formerly owned by Manila International Construction
Corporation (MICC) foreclosed by the Bank.
Please inform Sps. Rodrigo and Sonia Paderes to come to the bank to discuss said foreclosed property directly with the bank.
Thank you.
Very truly yours,
[SGD.]
LUZ B. DACASIN
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Assistant Vice-President
Real Estate Department33
x x x (Emphasis supplied; italics in the original).
November 4, 1996
Mrs. Luz B. Dacasin
Real Estate Dept., Banco Filipino
Makati City
Dear Madam:
Thank you very much for your letter dated October 25, 1996, which was received on October 31, 1996, the contents of which had been duly
noted. Pursuant thereto I advised my clients – spouses Rodrigo and Sonia Paderes to see [you].
With your indulgence, I also advised my other clients – spouses Isabelo and Juana Herminia Bergado to go along with the spouses Paderes, who
are similarly situated with spouses Paderes property.
Incidentally, on October 28, 1996, I also wrote your goodself another letter at the behest of spouses Isabelo and Juana Herminia Bergado whose
property is equally footed with spouses Paderes.
It is hoped that, out of that conference per your invitation my clients above-named be informed formally the total amounts due the bank as a
consequence of the right of redemption extended to them. Of course, whatever appraised value arrived at by the bank on the properties
subject of redemption the same shall not be construed as my clients’ committed liability.
Thank you very much.
Very truly yours,
[SGD.]
LUCIANO D. VALENCIA
Counsel for Spouses Paderes
JPA Subdivision, City of Muntinlupa34
x x x (Emphasis supplied).
November 8, 1996
Mrs. Luz B. Dacasin
Real Estate Department
Banco Filipino Savings & Mortgage Bank
Makati City
152
Re: Lot 18, Block 48 Gamboa St.
BF Homes, Parañaque, MM (264 SQ.M.)
Occupied by Sps. Isabelo Bergado &
Juana Herminia Bergado
Lot 5, Block 48, L. Florentino St.
BF Homes, Parañaque, MM (263 SQ.M.)
Occupied by Sps. Rodrigo Paderes &
Sonia Paderes
Dear Madam Asst. Vice-President:
Pursuant to our conference this morning November 8, 1996, regarding our desire to redeem the properties above-captioned, which your good
office accommodated, and per your advi[c]e, we submit the following facts taken out and our proposals:
1. Regarding the lot, you mentioned that, the cost per square meter was ₱7,500.00. To this price we are no-committal for the said price is
high. Although, we are still to have the amount re-negotiated.
2. We appreciate very much your having excluded the house built in the said lot for purposes of fixing the redemption price.
3. Your advi[c]e to subject the properties (house and lot) to a real-estate mortgage with the bank so that the amount to be loaned will be
used as payment of the properties to be redeemed is accepted, and we are committed to it.
Thank you very much
Very truly yours,
[SGD.]
SPS. SONIA &
RODRIGO PADERES
[SGD.]
SPS. ISABELO &
JUANA HERMINIA BERGADO35
(Emphasis supplied).
Petitioners’ assertion does not pass muster.
Under Article 1318 of the Civil Code, there are three essential requisites which must concur in order to give rise to a binding contract:
(1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is
established. "Consent" is further defined in Article 1319 of the Code as follows:
Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer.
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Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place where the offer was made. (Emphasis supplied)
By "offer" is meant a unilateral proposition which one party makes to the other for the celebration of the contract. There is an "offer" in the
context of Article 1319 only if the contract can come into existence by the mere acceptance of the offeree, without any further act on the part of
the offeror. Hence, the "offer" must be definite, complete and intentional. 36
With regard to the "acceptance," a learned authority notes that:
To produce a contract, the acceptance must not qualify the terms of the offer. There is no acceptance sufficient to produce consent, when a
condition in the offer is removed, or a pure offer is accepted with a condition, or when a term is established, or changed, in the acceptance, or
when a simple obligation is converted by the acceptance into an alternative one; in other words, when something is desired which is not exactly
what is proposed in the offer. It is necessary that the acceptance be unequivocal and unconditional, and the acceptance and the proposition
shall be without any variation whatsoever; and any modification or variation from the terms of the offer annuls the latter and frees the
offeror.37 (Emphasis supplied)
A reading of the above-quoted correspondence reveals the absence of both a definite offer and an absolute acceptance of any definite offer by any
of the parties.
The letters dated October 17, 1996 and November 4, 1996, signed by petitioners’ counsel, while ostensibly proposing to redeem the foreclosed
properties and requesting Banco Filipino to suggest a price for their repurchase, made it clear that any proposal by the bank would be subject to
further action on the part of petitioners.
The letter dated October 25, 1996 signed by Luz Dacasin, Assistant Vice-President of Banco Filipino, merely invited petitioners to engage in
further negotiations and does not contain a recognition of petitioners’ claimed right of redemption or a definite offer to sell the subject properties
back to them.
Petitioners emphasize that in item no. 3 of their letter dated November 8, 1996 they committed to "subject the properties (house and lot) to a real-
estate mortgage with the bank so that the amount to be loaned will be used as payment of the properties to be redeemed." It is clear from item no.
1 of the same letter, however, that petitioners did not accept Banco Filipino’s valuation of the properties at ₱7,500.00 per square meter and
intended to "have the amount [renegotiated]."
Moreover, while purporting to be a memorandum of the matters taken up in the conference between petitioners and Banco Filipino Vice-
President Dacasin, petitioners’ letter of November 8, 1996 does not contain the concurrence of Ms. Dacasin or any other authorized agent of
Banco Filipino. Where the alleged contract document was signed by only one party and the record shows that the other party did not execute or
sign the same, there is no perfected contract.38
The Court of Appeals, therefore, committed no error in concluding that "nothing concrete came out of the meeting" between petitioners and
Banco Filipino.
Respecting petitioners’ claim that their houses should have been excluded from the auction sale of the mortgaged properties, it does not lie. The
provision of Article 44839 of the Civil Code, cited by petitioners, which pertain to those who, in good faith, mistakenly build, plant or sow on the
land of another, has no application to the case at bar.
Here, the record clearly shows that petitioners purchased their respective houses from MICC, as evidenced by the Addendum to Deed of Sale
dated October 1, 1983 and the Deed of Absolute Sale dated January 9, 1984.
Being improvements on the subject properties constructed by mortgagor MICC, there is no question that they were also covered by MICC’s real
estate mortgage following the terms of its contract with Banco Filipino and Article 2127 of the Civil Code:
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. (Underscoring supplied).
The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.40 is illustrative. In that case, this Court held:
. . . (1) That a mortgage constituted on a sugar central includes not only the land on which it is built but also the buildings, machinery, and
accessories installed at the time the mortgage was constituted as well as all the buildings, machinery and accessories belonging to the
mortgagor, installed after the constitution thereof (Bischoff vs. Pomar and Compañia General de Tabacos, 12 Phil. 690); (2) that the notice
announcing the sale at public auction of all the properties of a sugar central extends to the machinery and accessories acquired and installed in its
mill after the constitution of the mortgage; (3) that the court, that has ordered the placing of the mortgaged properties in the hands of a receiver in
154
a foreclosure suit, has jurisdiction to order the sale at public auction of the said mortgaged properties even before the termination of the
receivership; and (4) that the fact that the price at which the mortgaged properties were sold at public auction is inadequate, is not in itself
sufficient to justify the annulment of the sale.41 (Emphasis supplied)
Petitioners finally proffer that the issuance, on Banco Filipino’s mere motion, of the Writ of Possession on November 5, 1996, more than 8 years
since the promulgation of the RTC Order granting its petition on September 8, 1988, violated Section 6, Rule 39 of the Rules of Court, viz:
Sec. 6. Execution by motion or by independent action. – A final and executory judgment or order may be executed on motion within five (5) years
from the date of its entry. After the lapse of such time, and before it is barred by the statute of limitations, a judgment may be enforced by action.
The revived judgment may also be enforced by motion within five (5) years from the date of its entry and thereafter by action before it is barred
by the statute of limitations.
Hence, petitioners argue, the writ of possession had lost its validity and efficacy and should therefore be declared null and void.
Petitioners’ ultimate argument fails too. In Rodil vs. Benedicto,42 this Court categorically held that the right of the applicant or a subsequent
purchaser to request for the issuance of a writ of possession of the land never prescribes:
The respondents claim that the petition for the issuance of a writ of possession was filed out of time, the said petition having been filed more than
five years after the issuance of the final decree of registration. In support of their contention, the respondents cite the case of Soroñgon vs.
Makalintal [80 Phil. 259 (1948)], wherein the following was stated:
"It is the law and well settled doctrine in this jurisdiction that a writ of possession must be issued within the same period of time in which a
judgment in ordinary civil actions may be summarily executed (section 17, Act 496, as amended), upon the petition of the registered owner or his
successors in interest and against all parties who claim a right to or interest in the land registered prior to the registration proceeding."
The better rule, however, is that enunciated in the case of Manlapas and Tolentino vs. Lorente [48 Phil. 298 (1925)], which has not yet been
abandoned, that the right of the applicant or a subsequent purchaser to ask for the issuance of a writ of possession of the land never
prescribes. . .
xxx
In a later case [Sta. Ana v. Menla, 111 Phil. 947 (1961)], the Court also ruled that the provision in the Rules of Court to the effect that
judgment may be enforced within five years by motion, and after five years but within ten years by an action (Section 6, Rule 39) refers
to civil actions and is not applicable to special proceedings, such as land registration cases. The Court said:
"The second assignment of error is as follows:
'That the lower court erred in ordering that the decision rendered in this land registration case on November 28, 1931 or twenty six years ago, has
not yet become final and unenforceable.
We fail to understand the arguments of the appellant in support of the above assignment, except in so far as it supports his theory that after a
decision in a land registration case has become final, it may not be enforced after the lapse of a period of 10 years, except by another proceeding
to enforce the judgment or decision. Authority for this theory is the provision in the Rules of Court to the effect that judgment may be enforced
within 5 years by motion, and after five years but within 10 years, by an action (Sec. 6, Rule 39). This provision of the Rules refers to civil
actions and is not applicable to special proceedings, such as a land registration case. This is so because a party in a civil action must
immediately enforce a judgment that is secured as against the adverse party, and his failure to act to enforce the same within a
reasonable time as provided in the Rules makes the decision unenforceable against the losing party. In special proceedings the purpose is
to establish a status, condition or fact; in land registration proceedings, the ownership by a person or a parcel of land is sought to be
established. After the ownership has been proved and confirmed by judicial declaration, no further proceeding to enforce said ownership
is
necessary, except when the adverse or losing party had been in possession of the land and the winning party desires to oust him
therefrom.43 (Emphasis and underscoring supplied)
Petitioners have not supplied any cogent reason for this Court to deviate from the foregoing ruling.
The established doctrine that the issuance of a writ of possession is a ministerial function whereby the issuing court exercises neither discretion
nor judgment bears reiterating. The writ issues as a matter of course upon the filing of the proper motion and, if filed before the lapse of the
redemption period, the approval of the corresponding bond.44
Petitioners, however, are not without remedy. As reflected in the challenged Court of Appeals decision, under Section 8 45 of Act No. 3135, as
amended, petitioners, as successors-in-interest of mortgagor MICC, have 30 days from the time Banco Filipino is given possession of the subject
155
properties to question the validity of the auction sale under any of the two grounds therein stated by filing a petition to set aside the same and
cancel the writ of possession.
WHEREFORE, the petition is hereby DENIED.
Costs against petitioners.
156
G.R. No. 143896. July 8, 2005
BANCO FILIPINO SSAVINGS AND MORTGAGE BANK, Petitioners,

vs.
COURT OF APPEALS and SANTIAGO (Isabela) MEMORIAL PARK, INC., Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a petition for review on certiorari filed by petitioner seeking to annul the Decision 1 of the Court of Appeals (CA) dated March 31,
2000 in CA-G.R. CV No. 47044, which reversed the Order of the trial court dated May 10, 1994, dismissing private respondent’s complaint for
failure to state a cause of action; and the Resolution dated July 3, 2000 2
denying petitioner’s motion for reconsideration.
On December 20, 1993, private respondent Santiago (Isabela) Memorial Park, Inc. filed a complaint for redemption and specific performance
with the Regional Trial Court of Santiago, Isabela, Branch 21, against herein petitioner Banco Filipino Savings & Mortgage Bank, the material
and relevant allegations of which read as follows:
COMPLAINT
Plaintiff, by counsel, to this Honorable Court most respectfully alleges:
1. …………….
2. …………….
3. That in February 1981, plaintiff mortgaged the above described property in favor of defendant to secure a loan of ₱500,000.00 obtained by
plaintiff from defendant;
4. That due to the failure of plaintiff to pay the aforementioned loan, defendant foreclosed the mortgage and in consequence thereof Sheriff David
R. Medina of this Honorable Court issued a SHERIFF’S CERTIFICATE OF SALE in favor of defendant which is dated October 9, 1990 and
which instrument was inscribed at the back of TCT T-128647 of Isabela on January 21, 1991;
5. That in a letter of the President of plaintiff dated August 6, 1991, plaintiff made manifest its interest to exercise its right of redemption and
made an offer of ₱700,000.00 as redemption to defendant through the then Deputy Liquidator, ROSAURO NAPA; this started the negotiation for
the redemption of the above described property;
6. That in a letter of the Deputy Liquidator dated January 23, 1992, plaintiff was given up to the end of March 1992 to negotiate and make special
arrangement for any satisfactory plan of payment for the redemption;
7. That in a letter of the Deputy Liquidator dated March 12, 1992, plaintiff was directed to remit at least ₱50,000.00 to defendant which would
manifest the interest and willingness of plaintiff to redeem the property, and forthwith on March 24, 1992, plaintiff remitted the sum of
₱50,000.00 to defendant which was duly receipted by the latter under Official Receipt No. 279968 A dated March 24, 1992;
8. That in a letter of the President of plaintiff dated January 20, 1993, plaintiff amended its first offer and made an offer of ₱1,000,000.00 as
redemption which offer included a plan of payment;
9. That between January 20, 1993 to November 1993, plaintiff exerted earnest efforts in order to finally effect the redemption, but defendant dilly
dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President of defendant, dated November 5, 1993, there is a turn-around by
defendant and is now demanding ₱5,830,000.00 as purchase price of the property, instead of the original agreed redemption;
11. That the delay of the defendant in the finalization of the terms of redemption did not in any manner alter the right of plaintiff to redeem the
property from defendant;
12. That plaintiff is still in actual possession of the property and intend to remain in actual possession of the property, while defendant was never
in actual possession of said property;
157
13. That plaintiff is ready and willing to pay the redemption money, which is the total bank claim of ₱925,448.17 plus lawful interest and other
allowable expenses incident to the foreclosure proceedings:
14. That the latest actuations of defendant are indicative of the refusal of defendant to allow the exercise of redemption by herein plaintiff, reason
for which there is a need for judicial determination of the rights and obligations of the parties to this case;
15. That on account of the unlawful actuations of defendant in refusing the redemption of the property by plaintiff, the latter engaged the services
of counsel for a fee of ₱30,000.00 which defendant should pay to plaintiff.
WHEREFORE, it is respectfully prayed of this Honorable Court that, after due hearing, judgment be rendered:
a. ordering defendant to accept from plaintiff the lawful redemption amount which shall be determined by this Honorable Court;
b. ordering defendant to execute the necessary instrument in order to effect the redemption of the property;
c. ordering defendant to pay to plaintiff the sum of ₱30,000.00 by way of attorney’s fees;
AND PLAINTIFF PRAYS for further reliefs just and equitable under the premises.
Petitioner filed a motion to dismiss on the ground that the complaint does not state a cause of action. It alleges that assuming that the allegations
in the complaint are true and correct, still there was no redemption effected within one year from the date of registration of the sheriff’s certificate
of sale with the Register of Deeds on January 21, 1991, thus private respondent had lost its right to redeem the subject land. Petitioner claimed
that the letter cited in paragraph 5 of the complaint was a mere offer to redeem the property which was promptly answered by a letter dated
August 28, 1991, which categorically denied private respondent’s offer and stated that when it comes to redemption, the basis of payment is the
total claim of the bank at the time the property was foreclosed plus 12% thereof and all litigation expenses attached thereto or its present
appraised value whichever is higher; that the letter mentioned in paragraph 6 of the complaint dated January 23, 1992 of the Deputy Liquidator
was about negotiation and special arrangement and not redemption for at that stage the period of redemption had already expired; that the letter
mentioned in paragraph 7 dated March 12, 1992 was of the postponement of the consolidation of the subject property and not of any extension for
the period of redemption; that the amount of ₱50,000.00 remitted by private respondent was in consideration of the postponement of the
consolidation of the property in petitioner’s name and as manifestation of private respondent’s sincerity to repurchase the foreclosed property;
that when private respondent remitted ₱50,000.00, the Deputy Liquidator of petitioner bank requested the legal counsel of petitioner to defer
consolidation of property in petitioner’s name; that in a letter dated November 5, 1993, petitioner’s Senior Vice President declared that the
subject property is available for repurchase in the amount of ₱5,830,600.00 to which private respondent in another letter asked for an extension of
30 days to make an offer.
Private respondent filed its opposition to the motion to dismiss alleging among others that the complaint states a cause of action; that the annexes
of the motion to dismiss should not be considered in the resolution of such motion.
On May 10, 1994, the trial court rendered an Order3 dismissing the complaint. It ratiocinated that (1) the letter dated August 6, 1991 was an offer
to redeem for ₱700,000.00 without any tender of the money; (2) the reply letter of petitioner dated August 28, 1991 stated that the redemption
price is ₱1,146,837.81 representing the bank’s claim of ₱925,448.17 plus 12% interest and expenses of foreclosure or the appraised value which
was ₱1,457,650.00; (3) the March 12, 1992 letter of the petitioner categorically informed private respondent that the period for redemption had
expired, however, the bank agreed to postpone the consolidation of title of the land in the bank’s name up to the end of March 1992 if the plaintiff
shall deposit ₱50,000.00 in order to avoid consolidation. Under Section 6 of Act 3135, on redemption of foreclosed property, it is provided that a
debtor may redeem the property at anytime within one year from and after the date of sale, i.e., one year period to be reckoned from the
registration of the sheriff’s certificate of sale. The registration of sheriff’s sale was on January 21, 1991 so that the redemption period was until
January 21, 1992; that although there was an offer to redeem the property for ₱700,000.00 on August 6, 1991, which was within the redemption
period, there was no tender of redemption price and the ₱700,000.00 offered was not the correct redemption price. It found that the complaint did
not state that private respondent tendered the correct redemption price within the redemption period as required under Section 30 of Rule 39 of
the Rules of Court. Private respondent’s motion for reconsideration was denied in an Order dated July 25, 1994. 4
Private respondent filed its appeal with the CA which reversed the trial court in its assailed decision, the dispositive portion of which reads:
WHEREFORE, the Orders of the respondent trial court dated May 10, 1994, and July 25, 1994 are hereby REVERSED and SET ASIDE. The
appellants are declared entitled to repurchase the property in question within THIRTY (30) days from notice hereof which shall be effected upon
payment of the repurchase price of ₱925,448.17 less ₱50,000.00, which is the deposit on the redemption price, with legal interest from March 24,
1992, the time the contract extending the period of redemption of the property took effect until it is fully paid. 5
The CA ruled that:
A perusal of the allegations in the complaint shows that there was sufficient basis to make out a case against Banco Filipino. The complaint
alleged that as early as August 6, 1991 or about six (6) months before the statutory period for redemption would expire, the appellant had exerted
earnest efforts to effect the redemption of the property in question and that after an agreement had been reached by the parties, with the
158
corresponding deposit on the redemption price had been given by the appellant, the appellee bank led the appellant to believe that the appellee
was negotiating with the former in good faith. However, the true intention of the appellee bank was to refuse the redemption of the property as
manifested by its act of increasing the amount of the redemption price after the period for redemption had expired and after a deposit on the
redemption price had been duly accepted by it as evidenced by a receipt issued by the appellee.
Even assuming however that the appellant is now barred from exercising its right of redemption, yet it can still repurchase the property in
question based on a new contract entered into between the parties extending the period within which to purchase the property as evidenced by the
appellee’s Deputy Liquidator Rosauro Napa’s letter to Belen Jocson dated March 12, 1992 and the letter addressed to Atty. German M. Balot,
Legal Counsel, Banco Filipino – Santiago, Isabela dated April 7, 1992.
...
In the case of Philippine National Bank vs. Court of Appeals, the Court held: Indeed under Article 1482 of the Civil Code, earnest money given
in a sale transaction is considered part of the purchase price and proof of the perfection of the sale. This provision, however, gives no more than a
disputable presumption that prevails in the absence of contrary or rebuttal evidence. In the instant case, the letter-agreements themselves are the
evidence of an intention on the part of herein private parties to enter into negotiations leading to a contract of sale that is mutually acceptable as to
absolutely bind them to the performance of their obligations thereunder. The letter-agreements are replete with substantial condition precedents,
acceptance of which on the part of private respondent must first be made in order for petitioner to proceed to the next step in the negotiations.
...6
In compliance with the CA decision, private respondent on April 27, 2000, made a tender of payment and consignation with the CA in the
amount of ₱1,300,987.96 through a Philippine National Bank check which was duly receipted by the appellate court. 7
Hence, the herein petition for review on certiorari filed by petitioner alleging that the appellate court erred in holding that (1) the allegations in
the complaint of private respondent against petitioner are sufficient to constitute a cause of action for redemption and specific performance; and
(2) respondent was entitled to repurchase back from petitioner it’s foreclosed property for only ₱925,448.17.
The basic issue is whether private respondent’s complaint for redemption and specific performance states a cause of action against petitioner.
It is a well-settled rule that the existence of a cause of action is determined by the allegations in the complaint. 8 In resolving a motion to dismiss
based on the failure to state a cause of action, only the facts alleged in the complaint must be considered. The test is whether the court can render
a valid judgment on the complaint based on the facts alleged and the prayer asked for. 9 Indeed, the elementary test for failure to state a cause of
action is whether the complaint alleges facts which if true would justify the relief demanded. Only ultimate facts and not legal conclusions or
evidentiary facts, which should not be alleged in the complaint in the first place, are considered for purposes of applying the test.10
Based on the allegations in the complaint, we find that private respondent has no cause of action for redemption against petitioner.
Paragraph 4 of the complaint states:
4. That due to the failure of plaintiff to pay the aforementioned loan, defendant foreclosed the mortgage and in consequence thereof Sheriff David
R. Medina of this Honorable Court issued a SHERIFF’S CERTIFICATE OF SALE in favor of defendant which is dated October 9, 1990 and
which instrument was inscribed at the back of TCT T-128647 of Isabela on January 21, 1991;
The sheriff’s certificate of sale was registered on January 21, 1991. Section 6 of Act 3135 provides for the requisites for a valid redemption, thus:
SEC. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest
or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of
trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of sale; and such
redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of
Civil Procedure,11 insofar as these are not inconsistent with the provisions of this Act.
However, considering that petitioner is a banking institution, the determination of the redemption price is governed by Section 78 of the General
Banking Act which provides:
In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the
passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or
extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have
the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by
paying the amount fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest
thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by
reason of the execution and sale and as a result of the custody of said property less the income received from the property.
159
Clearly, the right of redemption should be exercised within the specified time limit, which is one year from the date of registration of the
certificate of sale. The redemptioner should make an actual tender in good faith of the full amount of the purchase price as provided above, i.e.,
the amount fixed by the court in the order of execution or the amount due under the mortgage deed, as the case may be, with interest thereon at
the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the
execution and sale and as a result of the custody of said property less the income received from the property.
In case of disagreement over the redemption price, the redemptioner may preserve his right of redemption through judicial action which in every
case must be filed within the one-year period of redemption.12 The filing of the court action to enforce redemption, being equivalent to a formal
offer to redeem, would have the effect of preserving his redemptive rights and "freezing" the expiration of the one-year period. In this case, the
period of redemption expired on January 21, 1992. The complaint was filed on December 20, 1992.
Moreover, while the complaint alleges that private respondent made an offer to redeem the subject property on August 6, 1991, which was within
the period of redemption, it is not alleged in the complaint that there was an actual tender of payment of the redemption price as required by the
rules. It was alleged that private respondent merely made an offer of ₱700,000.00 as redemption price, which however, as stated under paragraph
13 of the same complaint, the redemption money was the total bank claim of ₱925,448.17 plus lawful interest and other allowable expenses
incident to the foreclosure proceedings. Thus, the offer was even very much lower than the price paid by petitioner as the highest bidder in the
auction sale.
In BPI Family Savings Bank, Inc. vs. Veloso,13 we held:
The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so. The statement of intention
must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise of the right to repurchase.
...
Whether or not respondents were diligent in asserting their willingness to pay is irrelevant. Redemption within the period allowed by law is not a
matter of intent but a question of payment or valid tender of the full redemption price within said period.
Although the letter dated January 23, 1992 gave private respondent up to the end of March 1992, to negotiate and make special arrangement for a
satisfactory plan of payment for the redemption, there was no categorical allegation in the complaint that the original period of redemption had
been extended. Assuming arguendo that the period for redemption had been extended, i.e., up to end of March 1992, still private respondent
failed to exercise its right within said period. This is shown by private respondent’s allegation under paragraph 8 of its complaint that in a letter
dated January 20, 1993, private respondent’s President amended his first offer and made an offer of ₱1 million as redemption price. Notably, such
offer was made beyond the end of the March 1992 alleged extended period. Thus, private respondent has no more right to seek redemption by
force of law which petitioner was bound to accept.
We find that the CA also erred in stating that assuming appellant is now barred from exercising its right of redemption, it can still repurchase the
property in question based on a new contract entered into between the parties extending the period within which to purchase the property.
The allegations in the complaint do not show that a new contract was entered into between the parties. The March 12, 1992 letter referred to by
the CA as well as in the complaint only directed private respondent to remit at least ₱50,000.00 to petitioner as a manifestation of the former’s
interest and willingness to redeem the property. Thus, the ₱50,000.00 remitted by private respondent was only the first step to show its interest in
redeeming the property. In no way did it establish that a contract of sale, as found by the CA, had been perfected and that the ₱50,000.00 remitted
by private respondent is considered as earnest money.
The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.
From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts.
There was no showing in the complaint that private respondent and petitioner had already agreed on the purchase price of the foreclosed property.
In fact, the allegations in paragraphs 8 to 10 of the complaint show otherwise, thus:
8. That in a letter of the President of plaintiff dated January 20, 1993, plaintiff amended its first offer and made an offer of ₱1,000,000.00 as
redemption which offer included a plan of payment;
9. That between January 20, 1993 to November 1993, plaintiff exerted earnest efforts in order to finally effect the redemption, but defendant dilly
dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice President of defendant, dated November 5, 1993, there is a turn-around by
defendant and is now demanding ₱5,830,000.00 as purchase price of the property, instead of the original agreed redemption;
160
The complaint does not allege that there was already a meeting of the minds of the parties.
Based on the foregoing, there is no basis for the order of the CA to allow private respondent to repurchase the foreclosed property in the amount
of ₱925,448.17 plus the expenses incurred in the sale of the property, including the necessary and useful expenses made on the thing sold.
WHEREFORE, the decision of the Court of Appeals dated March 31, 2000 is hereby REVERSED and SET ASIDE. The Order of the Regional
Trial Court of Santiago, Isabela, Branch 21, dated May 10, 1994 in Civil Case No. 2036 dismissing the complaint for redemption and specific
performance is REINSTATED and AFFIRMED.
161
G.R. No. 164510 November 25, 2005
SPOUSES SANTIAGO and RUFINA TANCHAN, petitioners

vs.
ALLIED BANKING CORPORATION, respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
By way of Petition for Review under Rule 45 of the Rules of Court, spouses Santiago and Rufina Tanchan (petitioners) seek the modification of
the June 15, 2004 Decision1of the Court of Appeals (CA) which affirmed the August 3, 2001 Decision 2 and August 8, 2002 Order3 of Branch 137,
Regional Trial Court (RTC), Makati in Civil Case No. 98-2468.4
The relevant facts are of record.
For value received, Cebu Foremost Construction, Inc. (Foremost), through its Chairman and President Henry Tanchan (Henry) and his spouse,
Vice-President and Treasurer Ma. Julie Ann Tanchan (Ma. Julie Ann) executed and delivered to Allied Banking Corporation (respondent) seven
US$ promissory notes,5 including Promissory Note No. 0051-97-036966 (Exhibit "G") for US$379,000.00, at 9.50% interest rate per annum,
due on February 9, 1998.
Foremost also issued to respondent several Philippine peso promissory notes 7 covering various loans in the aggregate amount of
Php28,900,000.00, including Promissory Note No. 0051-97-03688 (Exhibit "H") for PhpP16,500,000.00, at an interest rate of 14.5% per annum,
due on February 9, 1998.8
All the foregoing promissory notes are secured by two Continuing Guaranty/ Comprehensive Surety Agreements (CG/CSA) executed in the
personal capacities of spouses Henry and Ma. Julie Ann (Spouses Tanchan) and Henry's brother, herein petitioner Santiago Tanchan
(Santiago),9for himself and as attorney-in-fact of his wife and co-petitioner Rufina Tanchan (Rufina) under a Special Power of Attorney, dated
April 30, 1993, which grants Santiago authority to:
x x x borrow and/or contract debts and obligations involving, affecting or creating a charge or liability on, or which may involve,
affect or create a liability on the Property and/or my interest therein, whether or not such debt/s or obligation/s contracted or to be
contracted will benefit me or the family, and to sign, execute and deliver in my name to or in favor of any party, under such terms and
conditions as my attorney-in-fact may deem necessary, appropriate or convenient, any and all documents instruments or contract/s
(including without limitations, promissory notes, loan agreements, assignments, surety or guaranty undertakings, security agreements)
involving, affecting or creating a charge or liability on the Property."10
The liability of the sureties under both CG/CSAs is limited to Php150,000,000.00. 11
Exhibit "G" and all the Philippine peso promissory notes, including Exhibit "H", are secured not only by the two CG/CSAs but also by a Real
Estate Mortgage executed on February 14, 1997 by Henry, for himself and as the legal guardian of the minors Henry Paul L. Tanchan and Don
Henry L. Tanchan; his wife Ma. Julie Ann; and Spouses Pablo and Milagros Lim, over real properties registered in their names under Transfer
Certificates of Title No. 115804, No. 111149, No. 110672 and No. 3815, all located in Cebu City. 12
In separate final demand letters, both dated May 14, 1998, respondent sought from Foremost payment of US$1,054,000.00, as the outstanding
principal balance, exclusive of interest and charges, of its obligations under the seven US$ promissory notes,and PhP28,900,000.00 under its
Philippine peso promissory notes.13 Separate demands for payment were also made upon Spouses Tanchan 14 and the petitioners15 as sureties.
In a letter dated April 6, 1998, Foremost offered to cede to respondent, by way of dacion en pago, the mortgaged real properties in full payment
of its loan obligations.16
On August 3, 1998, respondent instituted the extra-judicial foreclosure of the real estate mortgage to satisfy its claim against Foremost in the
aggregate "amount of Php55,578,826.77, inclusive of interest, other charges and attorney's fees, equivalent to 10% of the total amount due as of
May 3, 1998, plus the costs and expenses of foreclosure."17At the public auction sale, respondent's bid of only Php37,745,283.67 for all the
mortgaged properties, including the buildings and improvements thereon,18 was adjudged the sole and highest bid.
On October 13, 1998, respondent filed with the RTC a Complaint for Collection of Sum of Money with Petition for Issuance of Writ of
Preliminary Injunction against Foremost, Spouses Tanchan and herein petitioners (collectively referred to as Foremost, et al.), praying that they
be ordered to pay, jointly and severally, the following amounts:19
Promissory Note Amount
162
0051-96-09495 US$ 80,000.00 plus interest at the rate of 11.4% per annum from December 29, 1997 until fully paid and
a penalty charge on the unpaid interest at the rate of 1% per month reckoned from December 29, 1997
until fully paid and a penalty charge on the unpaid principal reckoned from May 28, 1998 until fully paid.
0051-96-17617 US$110,000.00 plus interest at the rate of 11.4% per annum and a penalty charge at the rate of 1% per
month, all reckoned from December 29, 1997 until fully paid.
month all reckoned from November 30, 1997 until fully paid.
month all reckoned from December 29, 1997 until fully paid.
0051-97-03696 US$379,000.00 plus interest at the rate of 11.4% per annum reckoned from January 8, 1998 until fully
(Exhibit "G") paid and a penalty charge at the rate of 1% per month from February 9, 1998 until fully paid.
0051-97-03688 PhpP7,466,795.67 plus interest at the rate of 20% per annum and a penalty charge at the rate of 3% per
(Exhibit "H") month from August 10, 1998. (Emphasis supplied)
Respondent also prayed for payment of attorney's fees equivalent to 25% of the total amount due, expenses and costs of suit,
In support of its application for issuance of a writ of preliminary attachment, respondent submitted an Affidavit executed by Elmer Elumbaring
(Elumbaring), Branch Cashier/Loans Supervisor, Cebu, Jakosalem Branch, stating that:
4. Defendants [Foremost, et al.] committed fraud in contracting the obligations upon which the action is brought in that: a) to induce
plaintiff [respondent] to grant the credit accommodation they represented to the plaintiff [respondent] that they were in a financial
position to pay their obligations on maturity date in consideration of which plaintiff [respondent] granted the credit accommodations.
It turned out, however, that they were not in such financial position when they failed to pay their obligations on maturity date; b) they
falsely represented that the proceeds of the Loan would be used as additional working capital in consideration of which, plaintiff
[respondent] granted the loans but when defendants [Foremost, et al.] received the said proceeds, they diverted the same to a purpose
other than that for which they were intended as shown by the fact that defendants [Foremost, et al.] were not able to fully pay the
obligations at its maturity date;
5. There is no security whatsoever for the claim plaintiff [respondent] seeks to enforce by this action, and only by the issuance of a
writ of preliminary attachment can its interest be protected.20
The application for writ of preliminary attachment was granted by the RTC in an Order dated November 3, 1998, to wit:
WHEREFORE, finding plaintiff's [respondent's] application for the issuance of a writ of preliminary attachment sufficient in form and
substance, and the ground set forth therein being among those allowed by the Rules (Rule 57, Sec. 1 [e]), let a Writ of Preliminary
Attachment issue against the properties of defendants Cebu Foremost Construction, Incorporated, Santiago Tanchan, Jr., Rufina C.
Tanchan, Henry Tanchan and Ma. Julie Ann T. Tanchan, upon plaintiff's [respondent's] filing of a bond in the amount of FIFTY-
FOUR MILLION (P54,000,000.00) PESOS, conditioned to answer for whatever damage that the said defendants [Foremost, et al.]
may suffer by reason of the issuance of said writ should the Court finally adjudge that plaintiff [respondent] was not entitled thereto.
SO ORDERED.21
Thus, armed with a writ of attachment,22 the sheriff levied several parcels of land registered in the name of Foremost, et al. 23
In their Amended Answer with Counterclaim, 24 Foremost, et al. acknowledged the authenticity and due execution of the promissory notes but
denied liability for the amounts alleged in the Complaint, the computation of which they dispute due to the arbitrariness of the imposition of new
interest rates. They impugned the cause of action of respondent to collect the amount due under Exhibit "G" and Exhibit "H" in view of the bank's
prior extra-judicial foreclosure of the securities thereon, which recourse bars collection of the amounts due on the same promissory notes.25
Foremost, et al. questioned the inclusion of Rufina as a party-defendant even when she was not bound by the CG/CSAs which her husband
Santiago signed in excess of his authority under the special power of attorney to contract loans for the family but not to guarantee loans obtained
by third persons.26
The issuance of the writ of preliminary attachment was likewise objected to by Foremost on the ground that it contracted the loans in good faith
but was prevented from paying the same only because of the economic crisis that beset the country. On the part of Spouses Tanchan and herein
petitioners, they claim that they had no personal participation or influence in the loan transactions except to ensure its payment; hence, they could
not have practiced fraud upon respondent because they did not personally contract the loans with it. 27 Thus, each sought payment of
Php100,000,000.00 as moral damages for the emotional and mental vexation visited upon them by respondent in causing the unwarranted
preliminary attachment of their properties.28
163
At the pre-trial, respondent submitted an Amended Pre-trial Brief where it admitted that Foremost's Exhibit "G" and Exhibit "H" were among
those secured by the real estate mortgage29that it earlierforeclosed, but the proceeds of the foreclosure sale satisfied only part of the amounts due
on said promissory notes and left a deficiency which is now the subject of their complaint.30
The RTC issued a Pre-trial Order which limited the issues to be resolved to the following:
1. Does the [respondent] have a cause of action with respect to the promissory notes marked as [Exhibits] G31 and H32?
2. Is [petitioner] Rufina C. Tanchan liable on the basis of the Continuing Guaranty/Comprehensive Surety Agreements because of her
authority from [sic] Santiago Tanchan, Jr. was limited to borrow money only for the benefit of the family?
3. Is the unilateral increase of the interest rate of [respondent] valid?
4. What is the amount and nature of the damages that should be adjudged against the losing party in favor of the prevailing party?33
As directed by the RTC in its Pre-trial Order, both parties presented affidavits in lieu of direct examination of their witnesses.
For respondent, Fresnido Bandilla (Bandilla), Manager, Legal Department, testified that the obligations of Foremost which were secured by the
real estate mortgage had amounted to Php61,155,339.36 as of the date of the foreclosure sale, and that with respondent's bid of only
Php37,745,283.67 being adjudged the lone and highest bid, there remained an unpaid balance of Php23,415,115.69. 34 Elumbaring corroborated
Bandilla's testimony.35
On the other hand, Henry averred that even in the wake of the Asian financial crisis, Foremost struggled to meet interest payments on its loan
obligations with respondent, but the point came when there were no more construction jobs to be had, and Foremost was constrained to default on
its obligations.36
Santiago testified that he and his spouse could not have defrauded respondent because they did not directly contract the loans with it but merely
acted as sureties. Thus, the issuance of the writ of attachment against their properties was arbitrary, and brought upon them social humiliation and
emotional torment.37
After the parties submitted their respective memoranda,38the RTC rendered its August 31, 2001 Decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering defendants Cebu Foremost Construction, Inc., Santiago Tanchan, Jr., Rufina C.
Tanchan, Henry Tanchan and Ma. Julie Ann Tanchan, solidarily, [to] pay plaintiff Allied Banking Corporation the following amounts:
(1) US $80,000.00, plus 8.75 % interest per annum from 7 June 1996 to 6 May 1997, 9.5% interest per annum from 7 May 1997 until
fully paid, and 1% penalty per month on the amount due from maturity date and until fully paid; (2) US $110,00.00, plus 8.75%
interest per annum from 24 September to 29 May 1997, 9.5% interest per annum from 30 May 1997 until fully paid, and 1% penalty
per month on the amount due from maturity date until fully paid; (3) US $570,000.00, plus 8.75% interest per annum from 8 October
1996 to 29 May 1997, 9.5% interest per annum from 30 May 1997 until fully paid, and 1% penalty per month on the amount due from
maturity date until fully paid; (4) US $115,000.00 plus 9.5% interest per month from 12 December 1996 until fully paid, and 1%
penalty per month on the amount due from maturity date until fully paid; (5) US $75,000.00, plus 9.5% interest per annum from 7
January 1997 until fully paid, and 1% penalty per month on the amount due from maturity date until fully paid; (7) US $379,000.00,
plus 9.5% interest per annum from 12 February 1997 to 8 December 1997, 11.4% interest per annum from 9 December 1997 until
fully paid, and 1% penalty per month on the amount due from maturity date until fully paid; (8) P7,582,945.85, plus 28.5% interest per
annum, and 3% penalty per month, from the foreclosure sale on 10 August 1998 until fully paid; (9) attorney's fees equivalent to 10%
of the amount due plaintiff. However, the liability of defendants' Santiago Tanchan, Jr., Rufina C. Tanchan, Henry Tanchan and Ma.
Julie Ann T. Tanchan is limited to P150,00,000.00 only.
Defendants' counterclaims are dismissed for lack of sufficient merit.
SO ORDERED.39
Foremost, et al. filed a Motion for Partial Reconsideration of Decision on the ground that respondent failed to state a cause of action for the
payment of any deficiency account under Exhibit "G" and Exhibit "H". Its Complaint does not contain any allegation regarding a deficiency
account; nor even an allusion to the foreclosure sale conducted in partial satisfaction of said promissory notes. Although in its Amended Pre-trial
Brief, respondent mentioned that a deficiency account remained after the foreclosure of the real estate mortgage, such statement did not have the
effect of amending the Complaint itself. Neither did the testimonies of Bandilla and Elumbaring about a deficiency account take the place of a
specific allegation of such cause of action in the Complaint. Thus, in the absence of an allegation in the Complaint of a cause of action for the
payment of a deficiency account, the RTC had no factual or legal basis to grant such claim.40
Spouses Tanchan and herein petitioners also filed a Motion to Lift the Writ of Preliminary Attachment. 41
164
The RTC denied the Motion to Lift the Writ of Attachment in an Order42 dated September 25, 2001, and the Motion for Partial Reconsideration,
in an Order43dated August 8, 2002.
Foremost, et al. appealedto the CA under the following assignment of errors:
1. The lower court erred in not holding that having opted to extra-judicially foreclose the real estate mortgage which was executed to
secure the promissory notes marked as Exhibits "G" and "H", the [respondent] is barred from filing an action for collection of the
same;
2. The lower court erred in not holding that Rufina Tanchan did not authorize her husband, Santiago J. Tanchan, Jr. to sign the
Continuing Guaranty/ Comprehensive Surety Agreement marked as Exhibit "I"; and
3. The lower court erred in not lifting the writ of preliminary attachment and granting the claim for damages of the individual
defendants by virtue of the wrongful issuance of the writ of preliminary attachment. 44
The CA dismissed the appeal in the June 15, 2004 Decision assailed herein.
Only petitioners took the present recourse to raise the following issues:
I. Whether or not the petitioners as mere sureties of the loans obtained by Cebu Foremost Construction, Inc. were guilty of fraud in
incurring the obligations so that a writ of preliminary attachment may be issued against them?
II. Whether or not the respondent may claim for deficiency judgment on its seventh and eight causes of action, not having alleged in
its complaint that said loans were secured by a real estate mortgage and after the foreclosure there was a deficiency as in fact in its
complaint, the respondent sought full recovery of the promissory notes subject of its seventh and eighth cause of action?
III. Whether or not the lower court and the Court of Appeals erred in not awarding petitioners damages for the wrongful issuance of a
writ of preliminary attachment against them?45
Being interrelated, the first and third issues will be resolved jointly.
The issues involve the validity of the writ of preliminary attachment as against the properties of petitioners only, but not as against the
properties of Foremost and Spouses Tanchan, neither of whom appealed before the Court. The discussion that follows, therefore, shall
pertain only to the effect of the writ on petitioners.
One of the grounds cited by the CA in refusing to discharge the writ of attachment is that "it is now too late for [petitioners] to question the
validity of the writ" because they waited three long years to have it lifted or discharged. 46
Under Section 13, Rule 57 of the Rules of Court, a party whose property has been ordered attached may file a motion "with the court in which the
action is pending" for the discharge of the attachment on the ground that it has been improperly issued or enforced. In addition, said party may
file, under Section 20, Rule 57, a claim for damages on account of improper attachment within the following periods:
Sec. 20. Claim for damages on account of improper, irregular or excessive attachment. - An application for damages on account of
improper, irregular or excessive attachment must be filed before the trial or before appeal is perfected or before the judgment
becomes executory, with due notice to the attaching obligee or his surety or sureties, setting forth the facts showing his right to
damages and the amount thereof. Such damages may be awarded only after proper hearing and shall be included in the judgment on
the main case.
If the judgment of the appellate court be favorable to the party against whom the attachment was issued, he must claim damages
sustained during the pendency of the appeal by filing an application in the appellate court with notice to the party in whose favor the
attachment was issued or his surety or sureties, before the judgment of the appellate court becomes executory. The appellate court may
allow the application to be heard and decided by the trial court. 47 (Emphasis supplied)
Records reveal that the RTC issued the writ of preliminary attachment on November 3, 1998,48 and as early as March 23, 1999, in their Amended
Answer with Counterclaim, petitioners already sought the discharge of the writ. 49 Moreover, after the RTC rendered its Decision on August 3,
2001 but before appeal therefrom was perfected, petitioners filed on August 23, 2001 a Motion to Lift the Writ of Preliminary Attachment,
reiterating their objection to the writ and seeking payment of damages for its wrongful issuance. 50
Clearly, petitioners' opposition to the writ was timely.
The question now is whether petitioner has a valid reason to have the writ discharged and to claim damages.
165
It should be borne in mind that the questioned writ of preliminary attachment was issued by the RTC under Section 1(d), Rule 57 of the Rules of
Court, to wit -
Sec. 1. Grounds upon which attachment may issue. - A plaintiff or any proper party may, at the commencement of the action or at any
time thereafter, have the property of the adverse party attached as security for the satisfaction of any judgment that may be recovered
in the following cases:
xxxx
(d) In an action against a party who has been guilty of a fraud in contracting the debt or incurring the obligation upon which the action
is brought, or in concealing or disposing of the property for the taking, detention or conversion of which the action is brought;
x x x x.
and on the basis solely of respondent's allegations in its Complaint "that defendants [Foremost, et al.] failed to pay their obligations on maturity
dates, with the amount of US$1,054,000.00 and Php7,466795.69 remaining unpaid; that defendants are disposing/concealing their properties with
intent to defraud the plaintiff and/or are guilty of fraud in the performance of their obligations; and that there is no security whatsoever for the
claim sought to be enforced."51
Petitioners argue that the foregoing allegations are not sufficient to justify issuance of the writ, especially in the absence of findings that they, as
sureties, participated in specific fraudulent acts in the execution and performance of the loan agreements with respondent. 52
In refusing to lift the writ, the RTC held that the lack of a specific factual finding of fraud in its decision is not among the grounds provided under
Sections 12 and 13, Rule 57 of the Rules of Court for the discharge of the writ. 53 The CA agreed for the reason that the RTC's affirmative action
on the complaint filed by respondent signifies its agreement with the allegations found therein that Foremost, et al., including herein petitioners,
committed fraudulent acts in procuring loans from respondent.54
Both courts are in error.
The present case fits perfectly into the mold of Allied Banking Corporation v. South Pacific Sugar Corporation, 55where a writ of preliminary
attachment issued in favor of Allied Banking Corporation was discharged by the lower courts for lack of evidence of fraud. In sustaining the
discharge of the writ, the Court held:
Moreover, even a cursory examination of the bank's complaint will reveal that it cited no factual circumstance to show fraud on the
part of respondents. The complaint only had a general statement in the Prayer for the Issuance of a Writ of Preliminary Attachment,
reproduced in the attached affidavit of petitioner's witness Go who stated as follows:
xxxx
4. Defendants committed fraud in contracting the obligations upon which the present action is based and in the
performance thereof. Among others, defendants induced plaintiff to grant the subject loans to defendant corporation by
willfully and deliberately misrepresenting that, one, the proceeds of the loans would be used as additional working capital
and, two, they would be in a financial position to pay, and would most certainly pay, the loan obligations on their maturity
dates. In truth, defendants had no intention of honoring their commitments as shown by the fact that upon their receipt of
the proceeds of the loans, they diverted the same to illegitimate purposes and then brazenly ignored and resisted plaintiff's
lawful demands for them to settle their past due loan obligations
xxxx
Such general averment will not suffice to support the issuance of the writ of preliminary attachment. It is necessary to recite in
what particular manner an applicant for the writ of attachment was defrauded x x x.
Likewise, written contracts are presumed to have been entered into voluntarily and for a sufficient consideration. Section 1, Rule 131
of the Rules of Court instructs that each party must prove his own affirmative allegations. To repeat, in this jurisdiction, fraud is never
presumed. Moreover, written contracts such as the documents executed by the parties in the present case, are presumed to have been
entered into for a sufficient consideration. (Citations omitted)
In the aforecited case -- as in the present case -- the bank presented the testimony of its account officer who processed the loan application, but
the Court discarded her testimony for it did not detail how the corporation induced or deceived the bank into granting the loans. 56
166
Also apropos is Ng Wee v. Tankiansee57 where the appellate court was questioned for discharging a writ of preliminary attachment to the extent
that it affected the properties of respondent Tankiansee, a corporate officer of Wincorp, both defendants in the complaint for damages which
petitioner Ng Wee had filed with the trial court. In holding that the appellate court correctly spared respondent Tankiansee from the writ of
preliminary attachment, the Court cited the following basis:
In the instant case, petitioner's October 12, 2000 Affidavit is bereft of any factual statement that respondent committed a fraud. The
affidavit narrated only the alleged fraudulent transaction between Wincorp and Virata and/or Power Merge, which, by the way,
explains why this Court, in G.R. No. 162928, affirmed the writ of attachment issued against the latter. As to the participation of
respondent in the said transaction, the affidavit merely states that respondent, an officer and director of Wincorp, connived with
the other defendants in the civil case to defraud petitioner of his money placements. No other factual averment or circumstance
details how respondent committed a fraud or how he connived with the other defendants to commit a fraud in the transaction sued
upon. In other words, petitioner has not shown any specific act or deed to support the allegation that respondent is guilty of fraud.
The affidavit, being the foundation of the writ, must contain such particulars as to how the fraud imputed to respondent was
committed for the court to decide whether or not to issue the writ. Absent any statement of other factual circumstances to show that
respondent, at the time of contracting the obligation, had a preconceived plan or intention not to pay, or without any showing of how
respondent committed the alleged fraud, the general averment in the affidavit that respondent is an officer and director of Wincorp
who allegedly connived with the other defendants to commit a fraud, is insufficient to support the issuance of a writ of preliminary
attachment x x x. Verily, the mere fact that respondent is an officer and director of the company does not necessarily give rise to the
inference that he committed a fraud or that he connived with the other defendants to commit a fraud. While under certain
circumstances, courts may treat a corporation as a mere aggroupment of persons, to whom liability will directly attach, this is only
done when the wrongdoing has been clearly and convincingly established. (Emphasis supplied)
Indeed, a writ of preliminary attachment is too harsh a provisional remedy to
be issued based on mere abstractions of fraud. 58 Rather, the rules require that for the writ to issue, there must be a recitation of clear and concrete
factual circumstances manifesting that the debtor practiced fraud upon the creditor at the time of the execution of their agreement in that said
debtor had a pre-conceived plan or intention not to pay the creditor.59Being a state of mind, fraud cannot be merely inferred from a bare allegation
of non-payment of debt or non-performance of obligation.60
As shown in Ng Wee, the requirement becomes all the more stringent when the application for preliminary attachment is directed against a
defendant officer of a defendant corporation, for it will not be inferred from the affiliation of one to the other that the officer participated in or
facilitated in any fraudulent practice attributed to the corporation. There must be evidence clear and convincing that the officer committed a fraud
or connived with the corporation to commit a fraud; only then may the properties of said officer, along with those of the corporation, be held
under a writ of preliminary attachment.
There is every reason to extend the foregoing rule, by analogy, to a mere surety of the defendant. A surety's involvement is marginal to the
principal agreement between the defendant and the plaintiff; hence, in order for the surety to be subject to a proceeding for issuance of a writ of
preliminary attachment, it must be shown that said surety participated in or facilitated the fraudulent practice of the defendant, such as by offering
a security solely to induce the plaintiff to enter into the agreement with the defendant.
There is neither allegation nor innuendo in the Complaint of respondent or the Affidavit of Elumbaring that petitioners as sureties or officers of
Foremost participated in or facilitated the commission of fraud by Foremost, et al. against respondent. In fact, there is no mention of petitioners,
much less a recital of their role or influence in the execution of the loan agreements. The RTC cited an allegation that petitioners are
disposing/concealing their properties with intent to defraud respondent, but there is no hint of such scheme in the five paragraphs of the
Complaint61 or in the four corners of the Affidavit of Elumbaring.62 All that is alleged is that Foremost obtained loans from respondent but failed
to pay the same, but as the Court has repeatedly held, no fraud can be inferred from a mere failure to pay a loan. 63
In fine, there was no factual basis for the issuance of a writ of preliminary attachment against the properties of petitioners. The immediate
dissolution of the writ is called for.
In so ruling, however, the Court does not go so far as to grant petitioners' claim for moral damages. A wrongful attachment may give rise to
liability for moral damages but evidence must be adduced not only of the torment and humiliation brought upon the defendant by the attaching
party but also of the latter's bad faith or malice in causing the wrongful attachment, 64 such as evidence that the latter deliberately made false
statements in its application for attachment.65Absent such evidence of malice, the attaching party cannot be held liable for moral damages. 66
In the present case, petitioners cite the allegations made by respondent in its application for attachment as evidence of bad faith. However, the
allegations in question contain nothing but the stark truth that Foremost obtained loans and that it failed to pay. The Court fails to see any malice
in such bare allegations as would make respondent liable to petitioners for moral damages.
To recapitulate, the Court partly dissolves the writ of preliminary attachment for having wrongfully issued against the properties of petitioners
who were not shown to have committed fraud in the execution of the loan agreements between Foremost and respondent, but declines to award
moral damages to petitioners in the absence of evidence that respondent acted with malice in causing the wrongful issuance of the writ.
167
The second issue involves that portion of the August 3, 2001 RTC Decision awarding respondent "(7) US $379,000.00, plus 9.5% interest per
annum from 12 February 1997 to 8 December 1997, 11.4% interest per annum from 9 December 1997 until fully paid, and 1% penalty per month
on the amount due from maturity date until fully paid" under Promissory Note No. 0051-97-03696, and "(8) P7,582,945.85, plus 28.5% interest
per annum, and 3% penalty per month, from the foreclosure sale on 10 August 1998 until fully paid" under Promissory Note No. 0051-97-03688.
Petitioners argue that respondent is barred from claiming any amount under the Promissory Notes, Exhibits "G" and "H", because it had already
elected to foreclose on the mortgage security, and it failed to allege in its pleadings that a deficiency remained after the public auction sale of the
securities and that what it is seeking is the payment of such deficiency.67
There is no question that a mortgage creditor has a single cause of action against a mortgagor debtor, which is to recover the debt; but it has the
option of either filing a personal action for collection of sum of money or instituting a real action to foreclose on the mortgage security.68An
election of the first bars recourse to the second; otherwise, there would be multiplicity of suits in which the debtor would be tossed from one
venue to another, depending on the location of the mortgaged properties and the residence of the parties.69On the other hand, a creditor who elects
to foreclose on the mortgage may yet file an independent civil action for recovery of whatever deficiency may remain in the outstanding
obligation of the debtor, after deducting the price obtained in the sale of the mortgaged properties at public auction. 70 The complaint, though,
must specifically allege that what is being sought is the recovery of the deficiency, 71 or that in the pre-trial, such claim be raised as an issue.72
Contrary to petitioners' argument, it is clear from the allegations in the Complaint that what respondent sought was the payment of the deficiency
amount under the subject promissory notes. In particular, while the Promissory Note, Exhibit "H", is for the amount of Php16,500,000.00, what
respondent sought to recover was only Php7,582,945.85, consistent with the fact that part of said promissory note has been satisfied from the
proceeds of the extra-judicial foreclosure. While the exact phrase "deficiency account" is not employed in the Complaint, the intention of
respondent to recover the same is borne out by its allegations.
More importantly, in the Pre-trial Order issued by the RTC, the right of respondent to recover the deficiency account under the subject
promissory notes was raised as a specific issue.
WHEREFORE, the petition is PARTLY GRANTED. The June 15, 2004 Decisionof the Court of Appeals is MODIFIED to the effect that the
November 3, 1998 Writ of Preliminary Attachment is LIFTED and DISSOLVED insofar as it affects the properties of petitioners Spouses
Santiago and Rufina Tanchan.
No costs.
168
G.R. No. L-23768 August 23, 1968
JOSE GARRIDO, plaintiff-appellant,

vs.
PILAR G. TUASON, defendant-appellee.
Pedro Bernardino Flores for plaintiff-appellant.

David S. Ignacio for defendant-appellee.
CONCEPCION, C.J.:
Appeal from a decision of the Court of First Instance of Manila, certified to us by the Court of Appeals, only questions of law being raised by
plaintiff-appellant.
On October 17, 1959, Jose Garrido commenced Civil Case No. 71763 of the Municipal Court of Manila, for the foreclosure of a chattel mortgage,
executed in his favor by defendant, Pilar G. Tuason, to guarantee the payment of a debt in the sum of P1,000, as well as for the recovery of
attorney's fees and the costs. After appropriate proceedings, decision was rendered, on November 14, 1959, ordering the defendant to pay to
plaintiff "the sum of P1,000 with interest thereon at the rate of 1% per month from June 30, 1959 until the whole amount is fully paid, plus the
sum of P100 for attorney's fees, and the costs."
In compliance with a writ of execution, issued on December 9, 1959, after this decision had become final, a car of the defendant was, on January
2, 1960, sold, by the Provincial Sheriff of Rizal, at public auction, to the plaintiff, as the highest bidder, for the sum of P550. On January 28,
1960, plaintiff filed two (2) motions, namely: one, praying that the sum of P165, allegedly spent by him to carry out said writ of execution, be
added to the unsatisfied portion of the aforementioned decision, presumably as part of the costs, and another, for an alias writ of execution for the
sum of P1,290.58, as the aggregate outstanding balance allegedly due under said decision. Both motions were denied in an order dated February
27, 1960. Plaintiff's motion for reconsideration of this order was denied on March 19, 1960.1äwphï1.ñët
Soon later, or on April 1, 1960, plaintiff commenced Civil Case No. 76462, of said court, against the same defendant — whose husband was
included, as her co-defendant, on May 27, 1960 — for the recovery of said alleged balance of P1,290.58. On motion of said defendants, plaintiff's
complaint in said case No. 76462 was dismissed by the Municipal Court, on August 31, 1960. Plaintiff appealed to the Court of First Instance of
Manila, which, in due course rendered its decision, on April 17, 1961, dismissing the case, without pronouncement as to costs, upon the ground
that, pursuant to Article 2115 of the Civil Code of the Philippines, plaintiff has no cause of action against the defendants. Hence, this appeal by
the plaintiff.
Article 2115 of said Code reads:1äwphï1.ñët
... The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor
shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to
recover the deficiency, notwithstanding any stipulation to the contrary.
The Court of First Instance must have applied this precept in view of Article 2141 of the same Code, pursuant to which the provisions thereof on
pledge shall be applicable to chattel mortgages "insofar as they are not in conflict with the Chattel Mortgage Law." We have already held,
however,1 that said Article 2115 is inconsistent with the provisions of the Chattel Mortgage Law, 2 and that, accordingly, the chattel mortgage
creditor may maintain an action3 for the deficiency.
Then, again, said Court would seem to have acted under the impression, that, since Case No. 71763 was one for the foreclosure of a chattel
mortgage, the decision therein rendered was for such foreclosure; but such was not the nature of said decision, for it merely ordered the defendant
to pay the sum of P1,000, with interest thereon, in addition to attorney's fees and the costs. It did not order the sale of the property mortgaged to
the plaintiff or of any other particular property, for the satisfaction of his credit against the defendant. It did not purport to enforce plaintiff's lien
over the mortgaged property. In other words, it was an ordinary money judgment, to which said Articles 2115 and 2141 were absolutely
irrelevant.
The municipal court erred, therefore, in denying plaintiff's motion of January 28, 1960, for the issuance of an alias writ of execution in Case No.
71763, less than five (5) years having elapsed since the decision therein was rendered on November 14, 1959. As a consequence, plaintiff could
have and should have appealed from the order of denial of said motion; but, he did not do so, and, instead, he brought the case at bar, thereby
allowing said order to become final. Thus, the principle of res adjudicata bars the present action, which, accordingly, was dismissed properly.
WHEREFORE, the decision appealed from is hereby affirmed, with costs against plaintiff-appellant. It is so ordered.1äwphï1.ñët
169
G.R. No. 176381 December 15, 2010
PCI LEASING AND FINANCE, INC., Petitioner,

vs.
TROJAN METAL INDUSTRIES INCORPORATED, WALFRIDO DIZON, ELIZABETH DIZON, and JOHN DOE, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 with application for the immediate issuance of a temporary restraining order and writ of preliminary injunction
assailing the 5 October 2006 Decision2 and the 23 January 2007 Resolution3 of the Court of Appeals in CA-G.R. CV No. 75855. The 5 October
2006 Decision set aside the 23 July 2002 Decision 4 of the Regional Trial Court (Branch 79) of Quezon City in Civil Case No. Q-99-37559, which
granted petitioner’s complaint for recovery of sum of money and personal property with prayer for the issuance of a writ of replevin. The 23
January 2007 Resolution denied petitioner’s motion for reconsideration.
The Facts
Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a loan.
Instead of extending a loan, PCILF offered to buy various equipment TMI owned, namely: a Verson double action hydraulic press with cushion,
a Hinohara powerpress 75-tons capacity, a USI-clearing powerpress 60-tons capacity, a Watanabe powerpress 60-tons capacity, a YMGP
powerpress 30-tons capacity, a YMGP powerpress 15-tons capacity, a lathe machine, a vertical milling machine, and a radial drill. Hard-pressed
for money, TMI agreed. PCILF and TMI immediately executed deeds of sale5 evidencing TMI’s sale to PCILF of the various equipment in
consideration of the total amount of ₱ 2,865,070.00.
PCILF and TMI then entered into a lease agreement,6 dated 8 April 1997, whereby the latter leased from the former the various equipment it
previously owned. Pursuant to the lease agreement, TMI issued postdated checks representing 24 monthly installments. The monthly rental for
the Verson double action hydraulic press with cushion was in the amount of ₱62,328.00; for the Hinohara powerpress 75-tons capacity, the USI-
clearing powerpress 60-tons capacity, the Watanabe powerpress 60-tons capacity, the YMGP powerpress 30-tons capacity, and the YMGP
powerpress 15-tons capacity, the monthly rental was in the amount of ₱49,259.00; and for the lathe machine, the vertical milling machine, and
the radial drill, the monthly rental was in the amount of ₱22,205.00.
The lease agreement required TMI to give PCILF a guaranty deposit of ₱1,030,350.00, 7 which would serve as security for the timely performance
of TMI’s obligations under the lease agreement, to be automatically forfeited should TMI return the leased equipment before the expiration of the
lease agreement.
Further, spouses Walfrido and Elizabeth Dizon, as TMI’s President and Vice-President, respectively executed in favor of PCILF a Continuing
Guaranty of Lease Obligations.8 Under the continuing guaranty, the Dizon spouses agreed to immediately pay whatever obligations would be due
PCILF in case TMI failed to meet its obligations under the lease agreement.
To obtain additional loan from another financing company,9 TMI used the leased equipment as temporary collateral.10 PCILF considered the
second mortgage a violation of the lease agreement. At this time, TMI’s partial payments had reached ₱1,717,091.00. 11 On 8 December 1998,
PCILF sent TMI a demand letter12 for the payment of the latter’s outstanding obligation. PCILF’s demand remained unheeded.
On 7 May 1999, PCILF filed in the Regional Trial Court (Branch 79) of Quezon City a complaint 13 against TMI, spouses Dizon, and John Doe
(collectively referred to as "respondents" hereon) for recovery of sum of money and personal property with prayer for the issuance of a writ of
replevin, docketed as Civil Case No. Q-99-37559.
On 7 September 1999, the RTC issued the writ of replevin 14 PCILF prayed for, directing the sheriff to take custody of the leased equipment. Not
long after, PCILF sold the leased equipment to a third party and collected the proceeds amounting to ₱1,025,000.00. 15
In their answer,16 respondents claimed that the sale with lease agreement was a mere scheme to facilitate the financial lease between PCILF and
TMI. Respondents explained that in a simulated financial lease, property of the debtor would be sold to the creditor to be repaid through rentals;
at the end of the lease period, the property sold would revert back to the debtor. Respondents prayed that they be allowed to reform the lease
agreement to show the true agreement between the parties, which was a loan secured by a chattel mortgage.
The Ruling of the RTC
170
In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its complaint. The RTC ruled that the lease agreement must be presumed
valid as the law between the parties even if some of its provisions constituted unjust enrichment on the part of PCILF. The dispositive portion of
its Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff-PCI Leasing and Finance, Inc. and against defendants Trojan Metal,
Walfrido Dizon, and Elizabeth Dizon, as follows:
1. Ordering the plaintiff to be entitled to the possession of herein machineries.
2. Ordering the defendants to pay the remaining rental obligation in the amount of Php 888,434.48 plus legal interest from the date of
filing of the complaint;
3. Ordering defendant to pay an attorneys fees in the amount of Php 50,000.00;
4. Ordering the defendant to pay the cost of suit.
SO ORDERED.17
Respondents appealed to the Court of Appeals alleging that the RTC erred in ruling that PCILF was entitled to the possession of TMI’s
equipment and that respondents still owed PCILF the balance of ₱888,423.48.
The Ruling of the Court of Appeals
The Court of Appeals ruled that the sale with lease agreement was in fact a loan secured by chattel mortgage. The Court of Appeals held that
since PCILF sold the equipment to a third party for ₱1,025,000.00 and TMI paid PCILF a guaranty deposit of ₱1,030,000.00, PCILF had in its
hands the sum of ₱2,055,250.00, as against TMI’s remaining obligation of ₱888,423.48, or an excess of ₱1,166,826.52, which should be returned
to TMI in accordance with Section 14 of the Chattel Mortgage Law.
Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the Decision of the RTC. The Court of Appeals entered a new one
dismissing PCILF’s complaint and directing PCILF to pay TMI, by way of refund, the amount of ₱1,166,826.52. The decretal part of its Decision
reads:
WHEREFORE, premises considered, the July 23, 2002 Decision of the Regional Trial Court of Quezon City, Branch 79, in Civil Case No. Q-99-
37559, is hereby REVERSED and SET ASIDE, and a new one entered DISMISSING the complaint and DIRECTING the plaintiff-appellee PCI
Leasing and Finance, Inc. to PAY, by way of REFUND, to the defendant-appellant Trojan Metal Industries, Inc., the net amount of Php
1,166,826.52.
SO ORDERED.18
The Issues
The issues for resolution are (1) whether the sale with lease agreement the parties entered into was a financial lease or a loan secured by chattel
mortgage; and (2) whether PCILF should pay TMI, by way of refund, the amount of ₱1,166,826.52.
The petition lacks merit.
PCILF contends that the transaction between the parties was a sale and leaseback financing arrangement where the client sells movable property
to a financing company, which then leases the same back to the client. PCILF insists the transaction is not financial leasing, which contemplates
extension of credit to assist a buyer in acquiring movable property which the buyer can use and eventually own. PCILF claims that the sale and
leaseback financing arrangement is not contrary to law, morals, good customs, public order, or public policy. PCILF stresses that the guaranty
deposit should be forfeited in its favor, as provided in the lease agreement. PCILF points out that this case does not involve mere failure to pay
rentals, it deals with a flagrant violation of the lease agreement.
Respondents counter that from the very beginning, transfer to PCILF of ownership over the subject equipment was never the intention of the
parties. Respondents claim that under the lease agreement, the guaranty deposit would be forfeited if TMI returned the leased equipment to
PCILF before the expiration of the lease agreement; thus, since TMI never returned the leased equipment voluntarily, but through a writ of
replevin ordered by the RTC, the guaranty deposit should not be forfeited.
171
Since the lease agreement in this case was executed on 8 April 1997, Republic Act No. 5980 (RA 5980), otherwise known as the Financing
Company Act, governs as to what constitutes financial leasing. Section 1, paragraph (j) of the New Rules and Regulations to Implement RA
598019 defines financial leasing as follows:
LEASING shall refer to financial leasing which is a mode of extending credit through a non-cancelable contract under which the lessor purchases
or acquires at the instance of the lessee heavy equipment, motor vehicles, industrial machinery, appliances, business and office machines, and
other movable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of
the purchase price or acquisition cost, including any incidental expenses and a margin of profit, over the lease period. The contract shall extend
over an obligatory period during which the lessee has the right to hold and use the leased property and shall bear the cost of repairs, maintenance,
insurance, and preservation thereof, but with no obligation or option on the part of the lessee to purchase the leased property at the end of the
lease contract.
The above definition of financial leasing gained statutory recognition with the enactment of Republic Act No. 8556 (RA 8556), otherwise known
as the Financing Company Act of 1998.20 Section 3(d) of RA 8556 defines financial leasing as:
a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee,
machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of
the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price or acquisition
cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has
the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs,
maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-
lessor at the end of the lease contract.
Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a finance company purchases on behalf of a cash-strapped lessee the
equipment the latter wants to buy but, due to financial limitations, is incapable of doing so. The finance company then leases the equipment to the
lessee in exchange for the latter’s periodic payment of a fixed amount of rental.
In this case, however, TMI already owned the subject equipment before it transacted with PCILF. Therefore, the transaction between the parties
in this case cannot be deemed to be in the nature of a financial leasing as defined by law.
The facts in the instant case are analogous to those in Cebu Contractors Consortium Co. v. Court of Appeals.21 There, Cebu Contractors
Consortium Co. (CCCC) approached Makati Leasing and Finance Corporation (MLFC) to obtain a loan. MLFC agreed to extend financial
assistance to CCCC but, instead of a loan with collateral, MLFC induced CCCC to adopt a sale and leaseback scheme. Under the scheme, several
of CCCC’s equipment were made to appear as sold to MLFC and then leased back to CCCC, which in turn paid lease rentals to MLFC. The
rentals were treated as installment payments to repurchase the equipment.
The Court held in Cebu Contractors Consortium Co. v. Court of Appeals 22 that the transaction between CCCC and MLFC was not one of
financial leasing as defined by law, but simply a loan secured by a chattel mortgage over CCCC’s equipment. The Court went on to explain that
where the client already owned the equipment but needed additional working capital and the finance company purchased such equipment with the
intention of leasing it back to him, the lease agreement was simulated to disguise the true transaction that was a loan with security. In that
instance, continued the Court, the intention of the parties was not to enable the client to acquire and use the equipment, but to extend to him a
loan.
Similarly, in Investors Finance Corporation v. Court of Appeals,23 a borrower came to Investors Finance Corporation (IFC) to secure a loan with
his heavy equipment and machinery as collateral. The parties executed documents where IFC was made to appear as the owner of the equipment
and the borrower as the lessee. As consideration for the lease, the borrower-lessee was to pay monthly amortizations over a period of 36 months.
The parties executed a lease agreement covering various equipment described in the lease schedules attached to the lease agreement. As security,
the borrower-lessee also executed a continuing guaranty.
The Court in Investors Finance Corporation v. Court of Appeals24 held that the transaction between the parties was not a true financial leasing
because the intention of the parties was not to enable the borrower-lessee to acquire and use the heavy equipment and machinery, which already
belonged to him, but to extend to him a loan to use as capital for his construction and logging businesses. The Court held that the lease agreement
was simulated to disguise the true transaction between the parties, which was a simple loan secured by heavy equipment and machinery owned by
the borrower-lessee. The Court differentiated between a true financial leasing and a loan with mortgage in the guise of a lease. The Court said that
financial leasing contemplates the extension of credit to assist a buyer in acquiring movable property which he can use and eventually own. If the
movable property already belonged to the borrower-lessee, the transaction between the parties, according to the Court, was a loan with mortgage
in the guise of a lease.
In the present case, since the transaction between PCILF and TMI involved equipment already owned by TMI, it cannot be considered as one of
financial leasing, as defined by law, but simply a loan secured by the various equipment owned by TMI.
Articles 1359 and 1362 of the Civil Code provide:
172
Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument
purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct, or accident, one of the parties may ask for the reformation
of the instrument to the end that such true intention may be expressed.
Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true
intention, the former may ask for the reformation of the instrument.
Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a written contract and for reformation of an instrument is ten
years.25 The right of action for reformation accrued from the date of execution of the lease agreement on 8 April 1997. TMI timely exercised its
right of action when it filed an answer26 on 14 February 2000 asking for the reformation of the lease agreement.
Hence, had the true transaction between the parties been expressed in a proper instrument, it would have been a simple loan secured by a chattel
mortgage, instead of a simulated financial leasing. Thus, upon TMI’s default, PCILF was entitled to seize the mortgaged equipment, not as owner
but as creditor-mortgagee for the purpose of foreclosing the chattel mortgage. PCILF’s sale to a third party of the mortgaged equipment and
collection of the proceeds of the sale can be deemed in the exercise of its right to foreclose the chattel mortgage as creditor-mortgagee.
The Court of Appeals correctly ruled that the transaction between the parties was simply a loan secured by a chattel mortgage. However, in
reckoning the amount of the principal obligation, the Court of Appeals should have taken into account the proceeds of the sale to PCILF less the
guaranty deposit paid by TMI. After deducting payments made by TMI to PCILF, the balance plus applicable interest should then be applied
against the aggregate cash already in PCILF’s hands.
Records show that PCILF paid TMI ₱2,865,070.0027 as consideration for acquiring the mortgaged equipment. In turn, TMI gave PCILF a
guaranty deposit of ₱1,030,350.00.28 Thus, the amount of the principal loan was ₱1,834,720.00, which was the net amount actually received
by TMI (proceeds of the sale of the equipment to PCILF minus the guaranty deposit). Against the principal loan of ₱1,834,720.00 plus the
applicable interest should be deducted loan payments, totaling ₱1,717,091.00. 29 Since PCILF sold the mortgaged equipment to a third party for
₱1,025,000.00,30 the proceeds of the said sale should be applied to offset the remaining balance on the principal loan plus applicable interest.
However, the exact date of the sale of the mortgaged equipment, which is needed to compute the interest on the remaining balance of the
principal loan, cannot be gleaned from the facts on record. We thus remand the case to the RTC for the computation of the total amount due from
the date of demand on 8 December 1998 until the date of sale of the mortgaged equipment to a third party, which amount due shall be offset
against the proceeds of the sale.
In the absence of stipulation, the applicable interest due on the remaining balance of the loan is the legal rate of 12% per annum, computed from
the date PCILF sent a demand letter to TMI on 8 December 1998. No interest can be charged prior to this date because TMI was not yet in default
prior to 8 December 1998. The interest due shall also earn legal interest from the time it is judicially demanded, pursuant to Article 2212 of the
Civil Code, which provides:
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point.
The foregoing provision has been incorporated in the comprehensive summary of existing rules on the computation of legal interest laid down by
the Court in Eastern Shipping Lines, Inc. v. Court of Appeals,31 to wit:
1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should
be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of
the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit. (Emphasis supplied)
Applying the rules in the computation of interest, the remaining balance of the principal loan subject of the chattel mortgage must earn the legal
interest of 12% per annum, which interest, as long as unpaid, also earns legal interest of 12% per annum, computed from the filing of the
complaint on 7 May 1999.
173
In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of Appeals,32 we derive the following formula for the RTC’s
guidance:
TOTAL AMOUNT DUE = [principal – partial payments made] + [interest + interest on interest], where
Interest = remaining balance x 12% per annum x no. of years from due date (8 December 1998 when demand was made) until date of sale to a
third party
Interest on interest = interest computed as of the filing of the complaint on 7 May 1999 x 12% x no. of years until date of sale to a third party
From the computed total amount should be deducted ₱1,025,000.00 representing the proceeds of the sale already in PCILF’s hands. The
difference represents overpayment by TMI, which the law requires PCILF to refund to TMI.1avvphi1
Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage Law, provides:
Section 14. Sale of property at public auction; officer’s return; fees; disposition of proceeds. x x x The proceeds of such sale shall be applied to
the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage,
and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to
the mortgagor or person holding under him on demand.
Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the balance of the proceeds, upon satisfaction of the principal
loan and costs. Prevailing jurisprudence33 also holds that the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the
sale proceeds.
TMI’s right to the refund accrued from the time PCILF received the proceeds of the sale of the mortgaged equipment. However, since TMI never
made a counterclaim or demand for refund due on the resulting overpayment after offsetting the proceeds of the sale against the remaining
balance on the principal loan plus applicable interest, no interest applies on the amount of refund due. Nonetheless, in accord with prevailing
jurisprudence,34 the excess amount PCILF must refund to TMI is subject to interest at 12% per annum from finality of this Decision until fully
paid.
WHEREFORE, we DENY the petition. We AFFIRM with MODIFICATION the 5 October 2006 Decision and the 23 January 2007
Resolution of the Court of Appeals in CA-G.R. CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is
hereby ORDERED to PAY respondent Trojan Metal Industries, Inc., by way of refund, the excess amount to be computed by the Regional Trial
Court based on the formula specified above, with interest at 12% per annum from finality of this Decision until fully paid.
Costs against petitioner.
174
G.R. No. 154826 July 31, 2003
ROMY AGAG,* petitioner,

vs.
ALPHA FINANCING CORPORATION, respondent.
YNARES-SANTIAGO, J.:
The rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of the title does not apply to banks and
other financial institutions.1 These entities are required to exercise more care and prudence in dealing even with registered lands for their business
is one affected with public interest.2 The ascertainment of the status and condition of properties offered to it must be a standard and indispensable
part of its operations.3
This is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure assailing the April 30, 2002 decision 4 of the Court of Appeals in
CA-G.R. SP No. 58635 which set aside the November 19, 1999 decision5 of the Regional Trial Court of Malolos, Bulacan, Branch 8, in Civil
Case No. 426-M-99, and the February 17, 1999 judgment6 of the Municipal Trial Court of San Miguel, Bulacan, in Civil Case No. 2327.
The records reveal that on March 15, 1977, petitioner Romy Agag and Teresita Vda. De Castro executed a document denominated as "Pinagtibay
na Pagpapatibay"7 whereby the latter sold to petitioner, in consideration of the amount of P36,120.00, payable on installment basis, three parcels
of land located at Camias, San Miguel, Bulacan and covered by Transfer Certificate of Title (TCT) No. T-239887, TCT No. T-239888, and TCT
No. 239889. On the same date, petitioner took possession of and occupied said lots after paying a down payment of P10,000.00. 8 He was able to
pay a total of P37,295.78, the last payment being made on November 29, 1978.9 Meanwhile, he introduced improvements on the subject lots
consisting of fruit trees and, in 1985, a residential house worth more or less P500,000.00. 10 He repeatedly demanded from De Castro the delivery
to him of the title of the lots but the latter failed to do so.11
On January 30, 1997, petitioner received a letter from respondent Alpha Financing Corporation requesting him to vacate the disputed lots.
Respondent claimed that it is the lawful owner of the subject parcels of land occupied by petitioner, having purchased the same in a foreclosure
sale after Teresita Vda. De Castro, the original owner thereof failed to pay her loan with a mortgagee bank. Thereafter, the certificates of title in
the name of De Castro were cancelled, and TCT Nos. 306607, 306608 and 306609 were issued in the name of respondent on December 4,
1986.12 In view of petitioner’s refusal to vacate the premises, respondent filed an ejectment case with the Municipal Trial Court of San Miguel,
Bulacan.13
During the preliminary conference, the parties agreed on the following stipulation of facts, to wit – "(1) That defendant (petitioner herein) has
been occupying and in possession of the lots in question since March 15, 1977; (2) That defendant received on January 30, 1997 a letter dated
November 25, 1996 where plaintiff (respondent herein) claimed to be the owner [of the lots]; and (3) That the property being claimed by the
plaintiff is the same property having been purchased on installment by the defendant from Teresita de Castro on March 15, 1977."14
On February 17, 1999, the Municipal Trial Court rendered a decision in favor of petitioner. It held that the mortgage and the foreclosure sale from
which respondent allegedly derived his rights are inferior to the prior unregistered deed of absolute sale executed by De Castro, the original
owner in favor of petitioner. Since De Castro was no longer the owner of the property at the time of the mortgage, respondent acquired no right
from her. The Municipal Trial Court further ruled that respondent was not a purchaser in good faith because it failed to exercise the degree of
diligence required of financing institutions in dealing with registered lands. The dispositive portion of the said decision, reads:
WHEREFORE, the Court finds the defendant as having a better right of possession over the subject parcels of land as against the
plaintiff and hereby orders this case be dismissed.
For lack of evidence to prove bad faith on the part of the plaintiff in the filing of this case; and in line with the Court’s policy not to
put penalty on the right to litigate, the counterclaim of the defendant is likewise dismissed.
With no pronouncement as to costs.
SO ORDERED.15
Respondent appealed16 the decision to the Regional Trial Court of Malolos, Bulacan,17 which affirmed in toto the decision of the Municipal Trial
Court.18 Thus, respondent filed a petition for review with the Court of Appeals which reversed the decision of the Regional Trial Court and
ordered petitioner to vacate the lots in favor of respondent. It held that the latter had a better right to possess the lots because the best proof of
ownership is the indefeasible and incontrovertible title registered in its name. The decretal portion of the Court of Appeals’ decision states:
WHEREFORE, finding the instant petition to be impressed with merit, the same is hereby GRANTED. The decisions of the Municipal
Trial Court and the Regional Trial Court are SET ASIDE. Respondents are ORDERED to VACATE the properties subject of this
petition in favor of the petitioner who has better right to posses the premises.
175
SO ORDERED.19
Petitioner’s motion for reconsideration was denied in a resolution dated August 20, 2002. 20 Hence, the instant petition.
The principal issue to be resolved in the instant petition is: Who, between petitioner and respondent, has a better right to possess the disputed
lots?
The settled rule is that in an action for ejectment, the only question involved is possession de facto. However, when the issue of possession cannot
be decided without resolving the issue of ownership, the court may receive evidence on the question of title to the property, 21 but the resulting
judgment would be conclusive only with respect to the possession, but not the ownership of the property.22
In the case at bar, the resolution of the issue of ownership is indispensable because respondent’s cause of action and petitioner’s defense are both
grounded on ownership of the questioned lots. Respondent invokes good faith and the indefeasibility of the transfer certificates of title issued in
its name, while petitioner anchors his claim on prior possession as well as on the unregistered sale in his favor of subject lots as embodied in the
"Pinagtibay na Pagpapatibay".
When the terms of a contract are clear and unambiguous about the intention of the contracting parties, the literal meaning of its stipulations shall
control. The real nature of a contract may be determined from the express terms of the agreement, as well as from the contemporaneous and
subsequent acts of the parties thereto.23 An examination of the "Pinagtibay na Pagpapatibay" in the case at bar shows that the document is indeed
an absolute sale and not a contract to sell. In a contract to sell, ownership is by agreement, reserved in the vendor and is not to pass to the vendee
until full payment of the purchase price. However, such is not the case here. Although the purchase price is to be paid in installments, the
"Pinagtibay na Pagpapatibay" contains no stipulation conditioning the transfer of ownership upon the full payment of the purchase price. In fact,
after paying a down payment of P10,000.00 on March 15, 1977, petitioner immediately took possession of the lots and introduced improvements
thereon. The terms of the sale having been reduced to writing is considered as containing all the stipulations agreed upon by petitioner and
Teresita Vda. De Castro, and the Court cannot add therein a proviso subjecting petitioner’s ownership to the full payment of the purchase
price.24 Hence, the Municipal Trial Court correctly found that petitioner’s actual occupation of the controverted lots vested in him ownership
thereof. Verily, ownership was transferred not by the contract alone, but by tradition or delivery, i.e., by placing the property in the control and
possession of the vendee.25
Likewise, the Municipal Trial Court did not err in sustaining the claim of petitioner that the sale of the questioned lots preceded the mortgage and
foreclosure sale claimed by respondent. Petitioner had repeatedly challenged respondent to produce documentary evidence which would
substantiate the mortgage and foreclosure sale, but the latter failed to produce any. Neither did respondent question the finding of the Municipal
Trial Court that the sale occurred prior to the mortgage, nor did it give the name of the mortgagee bank which foreclosed and sold the lots at
public auction, assuming that the said bank exists. Finally, respondent failed to show that the properties were indeed mortgaged, and that the
mortgage was foreclosed and the lots sold at public action.
Even granting that the lots were indeed mortgaged by the original owner, the sale in favor of petitioner would still be superior to the mortgage.
In Dela Merced v. Government Service Insurance System,26 a case involving a suit for annulment of a foreclosure sale instituted by the successor-
in-interest of the mortgagor, against the mortgagee and the buyer of the lots at the foreclosure sale, it was held that the unrecorded sale is
preferred for the reason that the original owner’s act of parting with his ownership of the thing sold, as in the case at bar, divested him of
ownership and free disposal of that thing so as to be able to mortgage it again. Conformably, the unregistered sale of the lots to petitioner should
be upheld over the mortgage and foreclosure sale from which respondent allegedly derived its rights.
As a general rule, where there is nothing on the certificate of title to indicate any cloud or vice in the ownership of the property, or any
encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title indicates on its face, in quest for any hidden
defect or inchoate right that may subsequently defeat his right thereto. 27 This rule, however, applies only to innocent purchasers for value and in
good faith. An innocent purchaser for value or any equivalent phrase shall be deemed, under Section 39 of Act 496 (Land Registration Act),28 to
include an innocent lessee, mortgagee or any other encumbrancer for value. 29 It excludes a purchaser or mortgagee who has knowledge of a
defect or lack of title in the vendor, or of facts sufficient to induce a reasonably prudent man to inquire into the status of the property.30
In Sunshine Finance and Investment Corp. v. Intermediate Appellate Court,31 we ruled that when the purchaser or mortgagee is a financing
institution, the general rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of the title does not
apply. Thus –
Nevertheless, we have to deviate from the general rule because of the failure of petitioner in this case to take the necessary precautions
to ascertain if there was any flaw in the title of the Nolascos and to examine the condition of the property they sought to mortgage.
The petitioner is an investment and financing corporation. We presume it is experienced in its business. Ascertainment of the status
and condition of properties offered to it as security for the loans it extends must be a standard and indispensable part of its operations.
Surely it cannot simply rely on an examination of a Torrens certificate to determine what the subject property looks like as its
condition is not apparent in the document. The land might be in a depressed area. There might be squatters on it. It might be easily
inundated. It might be an interior lot without convenient access. These and other similar factors determine the value of the property
and so should be of practical concern to the petitioner.
176
So also, in Cruz v. Bancom Finance Corporation,32 a case for reconveyance of property against a purchaser in a foreclosure sale, it was stressed
that the due diligence required of banks extended even to persons regularly engaged in the business of lending money secured by real estate
mortgages. Their expertise or experience in dealing with encumbrances on lands, not to mention the public interest affecting their business,
require them to exercise more care and prudence in dealing even with registered lands.
Respondent, being a financial institution, cannot claim good faith considering that neither it nor the alleged mortgagee bank was in possession of
the lots prior and after the foreclosure sale. Had respondent conducted an ocular inspection of the premises, this being the standard practice in the
real estate industry, it would have discovered that the land is occupied by petitioner. The failure of respondent to take such precautionary steps is
considered negligence on its part and would thereby preclude the defense of good faith. 33
In any event, judgment rendered in the instant case shall not bar an action between the same parties respecting title to the land or building, nor
shall it be conclusive as to the facts therein found in a case between the same parties upon a different cause of action involving possession. Any
pronouncement made on the question of ownership in this case is provisional in nature. 34
WHEREFORE, in view of all the foregoing, the instant petition is GRANTED and the April 30, 2002 decision of the Court of Appeals in CA-
G.R. SP No. 58635 is REVERSED and SET ASIDE. The November 19, 1999 decision of the Regional Trial Court of Malolos, Bulacan, Branch
8, in Civil Case No. 426-M-99, and the February 17, 1999 judgment of the Municipal Trial Court of San Miguel, Bulacan, in Civil Case No.
2327, declaring petitioner Romy Agag as having a better right of possession over the subject parcels of land as against respondent Alpha
Financing Corporation, and dismissing the petitioner’s counterclaim, are REINSTATED.
177
G.R. No. L-21953 March 28, 1969
ENCARNACION GATIOAN, plaintiff-appellee,

vs.
SIXTO GAFFUD ET AL., defendants,
PHILIPPINE NATIONAL BANK, defendant-appellant.
Felix Fernandez for plaintiff-appellee.

Tomas Besa and Jose B. Galang for defendant-appellant.
BARREDO, J.:
Appeal from the Court of First Instance of Isabela.
The facts as found by the said court are as follows:
The land in question was originally registered in the name of Rufina Permison under Original Certificate of Title No. L-3432, dated December
18, 1935 on the basis of a free patent. In the year 1948, Permison sold it to Sibreno Novesteras, who in turn, conveyed it to appellee Encarnacion
Gatioan on April 1, 1949. Through the initiative of appellee, the said Original Certificate of Title No. L-3432 in the name of Rufina Permison was
cancelled on June 3, 1949 and in lieu thereof Transfer Certificate of Title No. T-1212 was issued in favor of appellee.
On June 12, 1950, appellee obtained a loan in the amount of P900.00 from the appellant, Philippine National, Bank, and as security therefor,
mortgaged the land described in TCT No. T-1212. Said mortgage was duly inscribed at the back of the title but was cancelled when it was fully
paid on June 3, 1953. Using the same land and title as collateral, appellee acquired another loan in the sum of P1,100.00 from the same bank on
May 3, 1954. The annotated incumbrance covering this second loan was upon its being paid released on June 28, 1956. On July 18, 1957,
appellee secured, a third loan from the same bank, this time for a bigger amount — P2,800,00. Again, she remortgaged the same land and title.
This third loan appears as Entry No. 8511 at the back of TCT No. T-1212. The third loan not yet paid, she secured an additional loan of
P3,170.00 from the same bank on July 30, 1957, for which she, however, gave as collateral, another parcel of land covered by TCT No. T-4807.
The deed of mortgage covering the last amount was jointly and severally execution by appellee and the other registered co-owners appearing in
the last mentioned title.
On August 12, 1960, appellee paid P2,800.00, plus interest, in full payment of the last loan secured by mortgage on the land covered by TCT
No. T-1212, as per receipt No. 402272-B. Partial payment was also given for the other joint obligation secured with the joint deed of mortgage on
the other land. Despite these payments, appellant executed no instrument releasing or discharging the incumbrance on TCT No. T-1212.
In the meantime, on January 23, 1956, the defendant spouses Sixto Gaffud and Villamora Logan procured a free patent covering the identical
parcel of land described in TCT No. T-1212 of appellee, on the basis of which Original Certificate of Title No. P-6038 was issued in their favor.
On May 15, 1956 and January 8, 1957, they also obtained two loans from appellant Bank in the sum of P1,400.00 and P300.00, respectively, and
as collateral for both, they mortgaged the said land covered by OCT No. P-6038. Without paying these two obligations, a consolidated mortgage
in the sum of P2,300.00 was executed by them on June 17, 1957, for which they gave as security in addition to the land described in OCT No. P-
6038, another parcel of land described in Original Certificate of Title No. 3137, also in their names.
Subsequently, the Secretary of Agriculture and Natural Resources compared the technical descriptions, areas, lot numbers and cadastral numbers
of the land described in TCT No. T-1212 with that covered by OCT No. P-6088, and convinced that both titles covered the same identical land,
he recommended the cancellation of the latter.lâwphi1.ñet
On May 16, 1962, because of the existence of OCT No. P-6038 in the name of the defendant spouses Gaffud and Logan, containing an
annotation of the aforementioned consolidated mortgage in favor of the appellant Bank, and the annotation on TCT No. T-1212 of the mortgage
incumbrance covering the already paid loan of P2,800.00 to the appellee, which appellant Bank refused to have cancelled, appellee filed the
complaint for quieting of title in this case.
The above facts were found by the lower court from the stipulations submitted by the parties, except defendant spouses Gaffud and Logan who
were declared in default. No oral evidence was presented by any of the parties.
From a judgment favorable to the plaintiff thus:
WHEREFORE, the Court renders judgment:
(a) Declaring null and void ab initio the patent and certificate of title No. P-6038 issued in the name of the defendant spouses Sixto
Gaffud and Villamora Logan;
178
(b) Ordering the Register of Deeds of Isabela to cancel, upon payment of the fees, original certificate of title No. P-6038 in the name
of said spouses and ordering the Philippine National Bank to surrender to the Register of Deeds of Isabela the owner's duplicate
certificate of said title for its cancellation;
(c) Declaring the real estate mortgage executed by the defendant spouses Sixto Gaffud and Villamora Logan in favor of the Bank,
recorded on OCT P-6038 null and void and unenforceable as against the herein plaintiff, and ordering its cancellation, without
prejudice of the Bank's right to collect from the said spouses;
(d) Dismissing the complaint and its prayer, to order the defendant bank to immediately cancel or release the mortgage recorded on
Transfer Certificate of Title No. T-1212 in the name of the plaintiff, unless the other joint obligation secured with the joint deed of
mortgage executed by the herein plaintiff together with her co-debtors has been full paid; and
(e) The court hereby sentences the defendant spouses Sixto Gaffud and Villamora Logan to pay to the plaintiff as actual or
compensatory and exemplary or corrective damages, and attorney's fees, the total amount of ONE THOUSAND FIVE HUNDRED
PESOS (P1,500.00), and to pay the costs.
only the appellant Bank has come to Us on appeal on a sole question of law related to paragraphs (a), (b) and (c) thereof. (See Notice of Appeal,
p. 90, Record on Appeal.)
Appellant does not, however, impugn the lower court's ruling in declaring null and void and cancelling OCT No. P-6038 in favor of the
defendant spouses Gaffud and Logan; it only insists that the lower court should have declared it an innocent mortgagee in good faith and for
value as regards the mortgages executed in its favor by said defendant spouses and duly annotated on their abovementioned OCT P-6038 and that
consequently, the said mortgage annotations should be carried over to and considered as incumbrances on the land covered by TCT No. T-1212
of appellee which, as already stated, is the identical land covered by OCT P-6038 of the Gaffuds. We find no merit, whatsoever, in this
contention, because the point raised was already passed upon by this Court in no uncertain terms in Legarda v. Saleeby, 31 Phil. 590, way back
on October 2, 1915 and in subsequent cases of similar nature. 1 We unhesitatingly affirm the judgment of the lower court.
Indeed, upon the facts found by the trial court as above stated, there can be no question that the decision of this Court in Legarda v.
Saleeby, supra, is controlling herein. Therein this Court held:
We find statutory provisions which, upon first reading, seem to cast some doubt upon the rule that the vendee acquires the interest of
the vendor only. Sections 38, 56, and 112 of Act No. 496 indicate that the vendee may acquire rights and be protected against the
defenses which the vendor would not. Said sections speak of available rights in favor of third parties which are cut off by virtue of the
sale of the land to an "innocent purchaser". That is to say, persons who had had a right or interest in land wrongfully included in an
original certificate would be unable to enforce such rights against an "innocent purchaser", by virtue of the provisions of said sections.
In the present case Teus had his land, including the wall, registered in his name. He subsequently sold the same to appellee an
"innocent purchaser", as the phrase is used in said sections? May those who have been deprived of their land by reason of a mistake in
the original certificate in favor of Teus be deprived of their right to the same, by virtue of the sale by him to the appellee? Suppose the
appellants had sold their lot, including the wall, to an "innocent purchaser", would such purchaser be included in the phrase "innocent
purchaser", as the same is used in said sections? Under these examples there would be two innocent purchasers of the same land, if
said sections are to be applied. Which of the two innocent purchasers, if they are both to be regarded as innocent purchasers, should be
protected under the provisions of said sections? These questions indicate to difficulty with which we are met in giving meaning and
effect to the phrase "innocent purchaser", in said sections.
May the purchaser of the land which has been included in a "second original certificate" ever be regarded as an "innocent purchaser",
as against the rights or interest of the owner of the first original certificate, his heirs, assigns or vendee? The first original certificate is
recorded in the public registry. It is never issued until it is recorded. The record is notice to all the world. All persons are charged with
the knowledge of what it contains. All persons dealing with the land so recorded or any portion of it, must be charged with notice of
whatever it contains. The purchaser is charged with notice of every fact shown by the record and is presumed to know every fact
which the record discloses. This rule is so well established that it is scarcely necessary to cite authorities in its support (Northwestern
National Bank v. Freeman, 171 U.S. 620, 629; Delvin on Real Estate, sections 710, 710-[a]).
When a conveyance has been properly recorded such record is constructive notice of its contents and all interests, legal and equitable,
included therein. (Grandin v. Anderson, 15 Ohio State, 286, 289; Orvis v. Newell 17 Conn. 97; Buchanan v. International Bank, 78
111. 500; Youngs v. Wilson, 27 N.Y. 351; McCabe v. Grey, 20 Cal. 509; Montefiore v. Browne, 7 House of Lords Cases, 341.)
Under the rule of notice, it is presumed that the purchaser has examined every instrument of record affecting the title. Such
presumption is irrebutable. He is charged with notice of every fact shown by the record and is presumed to know every fact which an
examination of the record would have disclosed. This presumption cannot be overcome by proof of innocence or good faith.
Otherwise the very purpose and object of the law requiring a record would be destroyed. Such presumption cannot be defeated by
proof of want of knowledge of what the record contains any more than one may be permitted to show that he was ignorant of the
provisions of the law. The rule that all persons must take notice of the facts which the public record contains is a rule of law. The rule
must be absolute. Any variation would lead to endless confusion and useless litigation.
179
While there is no statutory provision in force here requiring that original deeds of conveyance of real property, be recorded, yet there
is a rule requiring mortgages to be recorded. (Arts. 1875 and 606 of the Civil Code.) The record of a mortgage is indispensable to its
validity. (Art. 1875.) In the face of that statute, would the courts allow a mortgage to be valid which had not been recorded, upon the
plea of ignorance of the statutory provision, when third parties were interested? May a purchaser of land, subsequent to the recorded
mortgage, plead ignorance of its existence, and by reason of such ignorance have the land released from such lien? Could a purchaser
of land, after the recorded mortgage, be relieved from the mortgage lien by the plea that he was a bona fide purchaser? May there be
a bona fide purchaser of said land, bona fide in the sense that he had no knowledge of the existence of the mortgage? We believe the
rule that all persons must take notice of what the public record contains is just as obligatory upon all persons as the rule that all men
must know the law: that no one can plead ignorance of the law. The fact that all men know the law is contrary to the presumption. The
conduct of men, at times, shows clearly that they do not know the law. The rule, however, is mandatory and obligatory,
notwithstanding. It would be just as logical to allow the plea of ignorance of the law of affecting a contract as to allow the defense of
ignorance of the existence and contents of a public record.
In view, therefore, of the foregoing rules of law, may the purchaser of land from the owner of the second original certificate be an
"innocent purchaser" when a part or all of such land had theretofore been registered in the name of another, not the vendor? We are of
the opinion that said sections 38, 55, and 112 should not be applied to such purchasers. We do not believe that the phrase "innocent
purchaser" should be applied to such a purchaser. He cannot be regarded as an "innocent purchaser" because of the facts contained in
the record of the first original certificate. The rule should not be applied to the purchaser of a parcel of land the vendor of which is not
the owner of the original certificate, or his successors. He, in no sense, can be an "innocent purchaser" of the portion of the land
included in another earlier original certificate. The rule of notice of what the record contains precludes the idea of innocence. By
reason of the prior registry there cannot be an innocent purchaser of land included in a prior original certificate and in a name other
than that of the vendor, or his successors. In order to minimize the difficulties we think this is the safer rule to establish. We believe
the phrase "innocent purchaser", used in said sections, should be limited only to cases where unregistered land has been wrongfully
included in a certificate under the torrens system. When land is once brought under the torrens system, the record of the original
certificate and all subsequent transfers thereof is notice to all the world. That being the rule, could Teus even be regarded as the holder
in good faith of that part of the land included in his certificate which had theretofore been included in the original certificate of the
appellants? We think not. Suppose, for example, that Teus had never had his lot registered under the torrens system. Suppose he had
sold his lot to the appellee and included in his deed of transfer the very strip of land now in question. Could his vendee be regarded as
an "innocent purchaser" of said strip? Certainly not. The record of the original certificate of the appellants precludes the possibility.
Has the appellee gained any right by reason of the registration of the strip of land in the name of his vendor? Applying the rule of
notice resulting from the record of the title of the appellants, the question must be answered in the negative. We are of the opinion that
the rules are more in harmony with the purpose of Act No. 496 than the rule contended for by the appellee. We believe that the
purchaser from the owner of the later certificate, and his successors, should be required to resort to his vendor for damages, in case of
a mistake like the present, rather than to molest the holder of the first certificate who has been guilty of no negligence. The holder of
the first original certificate and his successors should be permitted to secure in their title against one who had acquired rights in
conflict therewith and who had full and complete knowledge of their rights. The purchaser of land included in the second original
certificate, by reason of the facts contained in the public record and the knowledge with which he is charged and by reason of his
negligence should suffer the loss, if any, resulting from such purchaser case rather than he who has obtained the first certificate and
who was innocent of any act of negligence. (31 Phil. 590, 599-603)
Moreover, it is a matter of judicial notice that before a bank grants a loan on the security of land, it first undertakes a careful examination of the
title of the applicant as well as a physical and on-the-spot investigation of the land itself offered as security. Undoubtedly, had herein appellant
Bank taken such a step which is demanded by the most ordinary prudence, it would have easily discovered the flaw in the title of the defendant
spouses; and if it did not conduct such examination and investigation, it must be held to be guilty of gross negligence in granting them the loans
in question. In either case, appellant Bank cannot be considered as a mortgagee in good faith within the contemplation of the law. 2
A more factual approach would lead to the same result. From the stipulated facts, it can be seen that prior to the execution of the mortgage
between appellant and the defendant spouses, the appellee had been mortgaging the land described in TCT No. T-1212 to it. She did this first in
the year 1950 for a loan of P900.00, and again in 1954 for a loan of P1,100.00. In both instances, the appellant Bank had possession of, or at least,
must have examined appellee's title, TCT No. T-1212, wherein appear clearly the technical description, exact area, lot number and cadastral
number of the land covered by said title. In other words, by the time the defendant spouses offered OCT P-6038, in their names, for scrutiny in
connection with their own application for loan with appellant, the latter was charged with the notice of the identity of the technical descriptions,
areas, lot numbers and cadastral numbers of the lands purportedly covered by the two titles and was in a position to know, if it did not have such
knowledge actually, that they referred to one and the same lot. Under the circumstances, appellant had absolutely no excuse for approving the
application of the defendant spouses and giving the loans in question. To appellant, therefore, fittingly applies the following pronouncement of
this Court:
One who purchases real estate with knowledge of a defect or lack of, title in his vendor cannot claim that he has acquired title thereto
in good faith as against the true owner of the land or of an interest therein; and the same rule must be applied to one who has
knowledge of facts which should have put him upon such inquiry and investigation as might be necessary to acquaint him with the
defects in the title of his vendor. A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and
then claim that he acted in good faith under the belief that there was no defect in the title of the vendor. His mere refusal to believe
that such defect exists or his willful closing of his eyes to the possibility of the existence of a defect in his vendor's title will not make
him an innocent purchaser for value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice
of the defect as would have led to its discovery had be acted with that measure of precaution which may reasonably be required of a
prudent man in a like situation..... (Dayao v. Diez, supra; citing the case of Leung Yee v. Strong Machinery. Co., 37 Phil; 644.)
180
Anyway, appellant Bank is not without any remedy. It appears that, defendant spouses have another land covered by OCT 3137 which is also
mortgaged to it and which perhaps may yet be sufficient to cover the loans in question. In any event, again, the following ruling of this Court in
the recent case of De Villa v. Trinidad, G.R. No. L-24918, March 20, 1968, applies to appellant:
We have laid the rule that where two certificates of title around issued to different persons covering the same land in whole or in part,
the earlier in date must prevail as between original parties and in case of successive registrations where more than one certificate is
issued over the land, the person holding under the prior certificate is entitled to the land as against the person who rely on the second
certificate. The purchaser from the owner of the later certificate and his successors, should resort to his vendor for redress, rather
than molest the holder of the first certificate and his successors, who should be permitted to resort secure in their title. (Citing
Legarda v. Saleeby, 31 Phil. 590) [Emphasis supplied]
The recourse to the cases of Blanco, et al. v. Esquierdo, G.R. No. L-15182, December 28, 1960 and Director of Lands v. Abache, 73 Phil. 606,
made by appellant in its brief is obviously unavailing. The factual settings of those cases are entirely different from the one before Us now. In the
case of Abache, what happened was that the land which one Santiago Imperial and his mother claimed during the cadastral proceedings was
adjudicated by the cadastral court in its decision to other parties, the Adornados, who had never made any claim thereto, and when the Imperials
asked later on, after the decree and title had been issued, for the annulment of such title in the name of said non-claimants, it appeared that the
latter had already mortgaged the land to one Luis Meneses. This Court decreed that although the title of the Adornados was void and the
Imperials were entitled to the issuance of the title in their favor, the mortgage in favor of Meneses constituted a valid lien over the land; the
remedy of the Imperials was to go against the Assurance Fund. Thus, in that case, there was nothing in the title itself which could indicate to
Meneses that there was a flaw in the title of the Adornados, because the error was committed by the court in the proceedings and not in the
issuance of the title, hence it contained on its face no circumstances of suspicion at all, from any point of view, unlike in the present case wherein
an examination of the title of the defendant spouses was sufficient to put appellant on notice that the land described therein was identical with the
land it had previously dealt with under another title in the name of somebody else.
The same is true with the other cited case of Blanco, et al. v. Esquierdo, supra. The pertinent portions of said decision are as follows:
That the certificate of title issued in the name of Fructuosa Esquierdo is a nullity, the same having been secured thru fraud, is not here
in question. The only question for determine nation is whether the defendant bank is entitled to the protection accorded to "innocent
purchasers for value", which phrase, according to sec. 38 of the Land Registration Law, includes an innocent mortgagee for value. The
question, in our opinion, must be answered in the affirmative.
The trial court, in the decision complained of, made no finding that the defendant mortgagee bank was a party to the fraudulent
transfer of the land to Fructuosa Esquierdo. Indeed, there is nothing alleged in the complaint which may implicate said defendant
mortgagee in the fraud, or justify a finding that it acted in bad faith. On the other hand, the certificate of title was in the name of the
mortgagor Fructuosa Esquierdo when the land was mortgaged by her to the defendant bank. Such being the case, the said defendant
bank, as mortgagee, had the right to rely on what appeared in the certificate and, in the absence of anything to excite suspicion, was
under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate.
(De Lara, et al., vs. Ayroso, 50 Off. Gaz. 4838; Joaquin vs. Madrid, et al., G.R. No. L-13551, January 30, 1960.) Being thus an
innocent mortgagee for value, its right or lien upon the land mortgaged must be respected and protected, even if the mortgagor
obtained her title thereto thru fraud. The remedy of the persons prejudiced is to bring an action for damages against those causing the
fraud, and if the latter are insolvent, an action against the Treasurer of the Philippines may be filed for the recovery of damages against
the Assurance Fund. (De la Cruz vs. Fabie, 35 Phil. 144; Blondeau vs. Nena, 61 Phil. 625; Sumira, et al. vs. Vistan, et al., 74 Phil. 138;
Raymundo et al., vs. Mayon Realty Corp., et al., 54 Off. Gaz. 4954; Avecilla vs. Yatco, et al., 54 Off. Gaz. 6415.)
In this connection, it will be noted that the deceased Maximiano Blanco died way back in 1930 and the certificate of title pursuant to
his homestead application was issued in the name of his heirs sometime in 1934. Plaintiffs, however, took no steps for the settlement
of their late brother's estate and instead merely took possession of the land in question jointly with Fructuosa Esquierdo. They also
appear to have entrusted the owner's certificate to said Fructuosa Esquierdo thus making it possible for her to fraudulently secure a
transfer certificate of title in her name. This should be emphasized, for in several cases it is what impelled this Court to apply the
principle of equity that "as between two innocent persons, one of whom must suffer the consequences of a breach of trust, the one
who. made it possible by his act of confidence must bear the loss". (De Lara, et al. vs. Ayroso supra.)
Again, it is clear that in that case, the title examined by the bank had no indication, whatsoever, of any, defect in it, unlike, as already stated, in
this case.
By no means of reasoning, therefore, can anyone ever say that the case cited and relied upon by appellant could have modified the doctrine in
Legarda v. Saleeby, supra, and the other cases wherein it was reiterated. In fact, no mention at all is made by appellant of the Legarda v. Saleeby
case in its brief by way of explaining way said appellant had to bring this case on appeal to Us in the face of the said decision which explained
clearly and in detail the law on the point appellant now urges before Us. We are thus persuaded that appellant paid little heed to the merit or lack
of merit of this appeal which We find to be frivolous.
WHEREFORE, as appellant has not appealed from the judgment of the lower court insofar as paragraphs (d) and (e) thereof are concerned, said
paragraphs stand, and the rest of said judgment is hereby affirmed. Double costs against appellant in this instance.
181
G.R. No. 131679 February 1, 2000
CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST COMPANY, petitioners,
vs.
SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF APPEALS, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision1 of the Court of Appeals in C.A. GR CV No. 42315 and the order dated December 9,
1997 denying petitioners' motion for reconsideration.
The following facts are not in dispute.
Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company (FEBTC) are banking institutions duly organized and
existing under Philippine laws. On or about June 15, 1983, a certain Rodolfo Guansing obtained a loan in the amount of P90,000.00 from CDB,
to secure which he mortgaged a parcel of land situated at No. 63 Calavite Street, La Loma, Quezon City and covered by TCT No. 300809
registered in his name. As Guansing defaulted in the payment of his loan, CDB foreclosed the mortgage. At the foreclosure sale held on March
15, 1984, the mortgaged property was sold to CDB as the highest bidder. Guansing failed to redeem, and on March 2, 1987, CDB consolidated
title to the property in its name. TCT No. 300809 in the name of Guansing was cancelled and, in lieu thereof, TCT No. 355588 was issued in the
name of CDB.1âwphi1.nêt
On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named Remedios Gatpandan, offered to purchase the property from
CDB. The written Offer to Purchase, signed by Lim and Gatpandan, states in part:
We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, Quezon City for P300,000.00 under the
following terms and conditions:
(1) 10% Option Money;
(2) Balance payable in cash;
(3) Provided that the property shall be cleared of illegal occupants or tenants.
Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00 as Option Money, for which she was issued Official
Receipt No. 3160, dated June 17, 1988, by CDB. However, after some time following up the sale, Lim discovered that the subject property was
originally registered in the name of Perfecto Guansing, father of mortgagor Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded in
having the property registered in his name under TCT No. 300809, the same title he mortgaged to CDB and from which the latter's title (TCT No.
355588) was derived. It appears, however, that the father, Perfecto, instituted Civil Case No. Q-39732 in the Regional Trial Court, Branch 83,
Quezon City, for the cancellation of his son's title. On March 23, 1984, the trial court rendered a decision 2 restoring Perfecto's previous title (TCT
No. 91148) and cancelling TCT No. 300809 on the ground that the latter was fraudulently secured by Rodolfo. This decision has since become
final and executory.
Aggrieved by what she considered a serious misrepresentation by CDB and its mother-company, FEBTC, on their ability to sell the subject
property, Lim, joined by her husband, filed on August 29, 1989 an action for specific performance and damages against petitioners in the
Regional Trial Court, Branch 96, Quezon City, where it was docketed as Civil Case No. Q-89-2863. On April 20, 1990, the complaint was
amended by impleading the Register of Deeds of Quezon City as an additional defendant.
On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It ruled that: (1) there was a perfected contract of sale between
Lim and CDB, contrary to the latter's contention that the written offer to purchase and the payment of P30,000.00 were merely pre-conditions to
the sale and still subject to the approval of FEBTC; (2) performance by CDB of its obligation under the perfected contract of sale had become
impossible on account of the 1984 decision in Civil Case No. Q-39732 cancelling the title in the name of mortgagor Rodolfo Guansing; (3) CDB
and FEBTC were not exempt from liability despite the impossibility of performance, because they could not credibly disclaim knowledge of the
cancellation of Rodolfo Guansing's title without the admitting their failure to discharge their duties to the public as reputable banking institutions;
and (4) CDB and FEBTC are liable for damages for the prejudice caused against the Lims.3 Based on the foregoing findings, the trial court
ordered CDB and FEBTC to pay private respondents, jointly and severally, the amount of P30,000.00 plus interest at the legal rate computed
from June 17, 1988 until full payment. It also ordered petitioners to pay private respondents, jointly and severally, the amounts of P250,000.00 as
moral damages, P50,000.00 as exemplary damages, P30,000.00 as attorney's fees, and the costs of the suit. 4
Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997, affirmed in toto the decision of the Regional Trial Court.
Petitioners moved for reconsideration, but their motion was denied by the appellate court on December 9, 1997. Hence, this petition. Petitioners
contend that —
182
1. The Honorable Court of Appeals erred when it held that petitioners CDB and FEBTC were aware of the decision dated March 23,
1984 of the Regional Trial Court of Quezon City in Civil Case No. Q-39732.
2. The Honorable Court of Appeals erred in ordering petitioners to pay interest on the deposit of THIRTY THOUSAND PESOS
(P30,000.00) by applying Article 2209 of the New Civil Code.
3. The Honorable Court of Appeals erred in ordering petitioners to pay moral damages, exemplary damages, attorney's fees and costs
of suit.
I.
At the outset, it is necessary to determine the legal relation, if any, of the parties.
Petitioners deny that a contract of sale was ever perfected between them and private respondent Lolita Chan Lim. They contend that Lim's letter-
offer clearly states that the sum of P30,000,00 was given as option money, not as earnest money. 5 They thus conclude that the contract between
CDB and Lim was merely an option contract, not a contract of sale.
The contention has no merit. Contracts are not defined by the parries thereto but by principles of law. 6 In determining the nature of a contract, the
courts are not bound by the name or title given to it by the contracting parties. 7 In the case at bar, the sum of P30,000.00, although denominated in
the offer to purchase as "option money," is actually in the nature of earnest money or down payment when considered with the other terms of the
offer. In Carceler v. Court of Appeals,8 we explained the nature of an option contract, viz. —
An option contract is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions,
the power to decide, whether or not to enter into a principal contract, it binds the party who has given the option not to enter into the
principal contract with any other person during the period; designated, and within that period, to enter into such contract with the one
to whom the option was granted, if the latter should decide to use the option. It is a separate agreement distinct from the contract to
which the parties may enter upon the consummation of the option.
An option contract is therefore a contract separate from and preparatory to a contract of sale which, if perfected, does not result in the perfection
or consummation of the sale. Only when the option is exercised may a sale be perfected.
In this case, however, after the payment of the 10% option money, the Offer to Purchase provides for the payment only of the balance of the
purchase price, implying that the "option money" forms part of the purchase price. This is precisely the result of paying earnest money under Art.
1482 of the Civil Code. It is clear then that the parties in this case actually entered into a contract of sale, partially consummated as to the
payment of the price. Moreover, the following findings of the trial court based on the testimony of the witnesses establish that CDB accepted
Lim's offer to purchase:
It is further to be noted that CDB and FEBTC already considered plaintiffs' offer as good and no longer subject to a final approval. In
his testimony for the defendants on February 13, 1992, FEBTC's Leomar Guzman stated that he was then in the Acquired Assets
Department of FEBTC wherein plaintiffs' offer to purchase was endorsed thereto by Myoresco Abadilla, CDB's senior vice-president,
with a recommendation that the necessary petition for writ of possession be filed in the proper court; that the recommendation was in
accord with one of the conditions of the offer, i.e., the clearing of the property of illegal occupants or tenants (tsn, p. 12); that, in
compliance with the request, a petition for writ of possession was thereafter filed on July 22, 1988 (Exhs. 1 and 1-A); that the offer
met the requirements of the banks; and that no rejection of the offer was thereafter relayed to the plaintiffs (p. 17); which was not a
normal procedure, and neither did the banks return the amount of P30,000.00 to the plaintiffs. 9
Given CDB's acceptance of Lim's offer to purchase, it appears that a contract of sale was perfected and, indeed, partially executed because of the
partial payment of the purchase price. There is, however, a serious legal obstacle to such sale, rendering it impossible for CDB to perform its
obligation as seller to deliver and transfer ownership of the property.
Nemo dat quod non habet, as an ancient Latin maxim says. One cannot give what one does not have. In applying this precept to a contract of sale,
a distinction must be kept in mind between the "perfection" and "consummation" stages of the contract.
A contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.10 It
is, therefore, not required that, at the perfection stage, the seller be the owner of the thing sold or even that such subject matter of the sale exists at
that point in time.11 Thus, under Art. 1434 of the Civil Code, when a person sells or alienates a thing which, at that time, was not his, but later
acquires title thereto, such title passes by operation of law to the buyer or grantee. This is the same principle behind the sale of "future goods"
under Art. 1462 of the Civil Code. However, under Art. 1459, at the time of delivery or consummation stage of the sale, it is required that the
seller be the owner of the thing sold. Otherwise, he will not be able to comply with his obligation to transfer ownership to the buyer. It is at the
consummation stage where the principle of nemo dat quod non habet applies.
183
In Dignos v. Court of Appeals,12 the subject contract of sale was held void as the sellers of the subject land were no longer the owners of the same
because of a prior sale.13 Again, in Nool v. Court of Appeals,14 we ruled that a contract of repurchase, in which the seller does not have any title to
the property sold, is invalid:
We cannot sustain petitioners' view. Article 1370 of the Civil Code is applicable only to valid and enforceable contracts. The Regional
Trial Court and the Court of Appeals rules that the principal contract of sale contained in Exhibit C and the auxiliary contract of
repurchase in Exhibit D are both void. This conclusion of the two lower courts appears to find support in Dignos v. Court of Appeals,
where the Court held:
Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they were no longer owners of
the same and the sale is null and void.
In the present case, it is clear that the sellers no longer had any title to the parcels of land at the time of sale. Since Exhibit D, the
alleged contract of repurchase, was dependent on the validity of Exhibit C, it is itself void. A void contract cannot give rise to a valid
one. Verily, Article 1422 of the Civil Code provides that (a) contract which is the direct result of a previous illegal contract, is also
void and inexistent.
We should however add that Dignos did not cite its basis for ruling that a "sale is null and void" where the sellers "were no longer the
owners" of the property. Such a situation (where the sellers were no longer owners) does not appear to be one of the void contracts
enumerated in Article 1409 of the Civil Code. Moreover, the Civil Code itself recognizes a sale where the goods are to be acquired . . .
by the seller after the perfection of the contract of sale, clearly implying that a sale is possible even if the seller was not the owner at
the time of sale, provided he acquires title to the property later on.
In the present case, however, it is likewise clear that the sellers can no longer deliver the object of the sale to the buyers, as the buyers
themselves have already acquired title and delivery thereof from the rightful owner, the DBP. Thus, such contract may be deemed to
be inoperative and may thus fall, by analogy, under item No. 5 of Article 1409 of the Civil Code: Those which contemplate an
impossible service. Article 1459 of the Civil Code provides that "the vendor must have a right to transfer the ownership thereof
[subject of the sale] at the time it is delivered." Here, delivery of ownership is no longer possible. It has become impossible.15
In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must, therefore, be deemed a nullity for CDB did
not have a valid title to the said property. To be sure, CDB never acquired a valid title to the property because the foreclosure sale, by virtue of
which, the property had been awarded to CDB as highest bidder, is likewise void since the mortgagor was not the owner of the property
foreclosed.
A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the Civil Code, under which the mortgagor in
default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor
the bid price in money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale.
This is the reason Art. 208516 of the Civil Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among
other things, that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a possible foreclosure sale
should the mortgagor default in the payment of the loan.
There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the
mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy. This is the doctrine of "the mortgagee in
good faith" based on the rule that all persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not
required to go beyond what appears on the face of the title. 17 The public interest in upholding the indefeasibility of a certificate of title, as
evidence of the lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what
appears on the face of the certificate of title.
This principle is cited by petitioners in claiming that, as a mortgagee bank, it is not required to make a detailed investigation of the history of the
title of the property given as security before accepting a mortgage.
We are not convinced, however, that under the circumstances of this case, CDB can be considered a mortgagee in good faith. While petitioners
are not expected to conduct an exhaustive investigation on the history of the mortgagor's title, they cannot be excused from the duty of exercising
the due diligence required of banking institutions. In Tomas v. Tomas,18 we noted that it is standard practice for banks, before approving a loan, to
send representatives to the premises of the land offered as collateral and to investigate who are real owners thereof, noting that banks are expected
to exercise more care and prudence than private individuals in their dealings, even those involving registered lands, for their business is affected
with public interest. We held thus:
We, indeed, find more weight and vigor in a doctrine which recognizes a better right for the innocent original registered owner who
obtained his certificate of title through perfectly legal and regular proceedings, than one who obtains his certificate from a totally void
one, as to prevail over judicial pronouncements to the effect that one dealing with a registered land, such as a purchaser, is under no
obligation to look beyond the certificate of title of the vendor, for in the latter case, good faith has yet to be established by the vendee
or transferee, being the most essential condition, coupled with valuable consideration, to entitle him to respect for his newly acquired
title even as against the holder of an earlier and perfectly valid title. There might be circumstances apparent on the face of the
184
certificate of title which could excite suspicion as to prompt inquiry, such as when the transfer is not by virtue of a voluntary act of the
original registered owner, as in the instant case, where it was by means of a self-executed deed of extra-judicial settlement, a fact
which should be noted on the face of Eusebia Tomas certificate of title. Failing to make such inquiry would hardly be consistent with
any pretense of good faith, which the appellant bank invokes to claim the right to be protected as a mortgagee, and for the reversal of
the judgment rendered against it by the lower court.19
In this case, there is no evidence that CDB observed its duty of diligence in ascertaining the validity of Rodolfo Guansing's title. It appears that
Rodolfo Guansing obtained his fraudulent title by executing an Extra-Judicial Settlement of the Estate With Waiver where he made it appear that
he and Perfecto Guansing were the only surviving heirs entitled to the property, and that Perfecto had waived all his rights thereto. This self-
executed deed should have placed CDB on guard against any possible defect in or question as to the mortgagor's title. Moreover, the alleged
ocular inspection report20 by CDB's representative was never formally offered in evidence. Indeed, petitioners admit that they are aware that the
subject land was being occupied by persons other than Rodolfo Guansing and that said persons, who are the heirs of Perfecto Guansing, contest
the title of Rodolfo.21
II.
The sale by CDB to Lim being void, the question now arises as to who, if any, among the parties was at fault for the nullity of the contract. Both
the trial court and the appellate court found petitioners guilty of fraud, because on June 16, 1988, when Lim was asked by CDB to pay the 10%
option money, CDB already knew that it was no longer the owner of the said property, its title having been cancelled. 22 Petitioners contend that:
(1) such finding of the appellate court is founded entirely on speculation and conjecture; (2) neither CDB nor FEBTC was a party in the case
where the mortgagor's title was cancelled; (3) CDB is not privy to any problem among the Guansings; and (4) the final decision cancelling the
mortgagor's title was not annotated in the latter's title.
As a rule, only questions of law may be raised in a petition for review, except in circumstances where questions of fact may be properly
raised.23 Here, while petitioners raise these factual issues, they have not sufficiently shown that the instant case falls under any of the exceptions
to the above rule. We are thus bound by the findings of fact of the appellate court. In any case, we are convinced of petitioners' negligence in
approving the mortgage application of Rodolfo Guansing.
III.
We now come to the civil effects of the void contract of sale between the parties. Article 1412(2) of the Civil Code provides:
If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be
observed:
xxx xxx xxx
(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the
fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any
obligation to comply with his promise.
Private respondents are thus entitled to recover the P30,000,00 option money paid by them. Moreover, since the filing of the action for damages
against petitioners amounted to a demand by respondents for the return of their money, interest thereon at the legal rate should be computed from
August 29, 1989, the date of filing of Civil Case No. Q-89-2863, not June 17, 1988, when petitioners accepted the payment. This is in accord with
our ruling in Castillo v. Abalayan24 that in case of avoid sale, the seller has no right whatsoever to keep the money paid by virtue thereof and
should refund it, with interest at the legal rate, computed from the date of filing of the complaint until fully paid. Indeed, Art. 1412(2) which
provides that the non-guilty party "may demand the return of what he has given" clearly implies that without such prior demand, the obligation to
return what was given does not become legally demandable.
Considering CDB's negligence, we sustain the award of moral damages on the basis of Arts. 21 and 2219 of the Civil Code and our ruling in Tan
v. Court of Appeals25 that moral damages may be recovered even if a bank's negligence is not attended with malice and bad faith. We find,
however, that the sum of P250,000.00 awarded by the trial court is excessive. Moral damages are only intended to alleviate the moral suffering
undergone by private respondent, not to enrich them at the expenses of the petitioners. 26 Accordingly, the award of moral damages must be
reduced to P50,000.00.
Likewise, the award of P50,000.00 as exemplary damages, although justified under Art. 2232 of the Civil Code, is excessive and should be
reduced to P30,000.00. The award of P30,000.00 attorney's fees based on Art. 2208, pars. 1, 2, 5 and 11 of the Civil Code should similarly be
reduced to P20,000.00.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION as to the award of damages as above
stated.1âwphi1.nê
185
G.R. No. 129471 April 28, 2000
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and CARLOS CAJES, respondents.
MENDOZA, J.:
This is a petition for certiorari seeking to reverse the decision1 and resolution2 of the Court of Appeals dated August 30, 1996 and April 23, 1997,
respectively, declaring private respondent Carlos Cajes the owner of 19.4 hectares of land embraced in TCT No. 10101 and ordering the
segregation and reconveyance of said portion to him.
The antecedent facts are as follows:
The land in dispute, consisting of 19.4 hectares located in San Miguel, Province of Bohol, was originally owned by Ulpiano Mumar, whose
ownership since 1917 was evidenced by Tax Declaration No. 3840. 3 In 1950,4 Mumar sold the land to private respondent who was issued Tax
Declaration No. R-1475 that same year.5 The tax declaration was later superseded by Tax Declaration Nos. R-799 issued in 19616 and D-2247
issued in 1974.7 Private respondent occupied and cultivated the said land,8 planting cassava and camote in certain portions of the land. 9
In 1969, unknown to private respondent, Jose Alvarez succeeded in obtaining the registration of a parcel of land with an area of 1,512,468.00
square meters, 10 in his name for which he was issued OCT No. 546 on June 16, 1969. 11 The parcel of land included the 19.4 hectares occupied by
private respondent. Alvarez never occupied nor introduced improvements on said land. 12
In 1972, Alvarez sold the land to the spouses Gaudencio and Rosario Beduya to whom TCT No. 10101 was issued. 13 That same year, the spouses
Beduya obtained a loan from petitioner Development Bank of the Philippines for P526,000.00 and, as security, mortgaged the land covered by
TCT No. 10101 to the bank. 14 In 1978, the SAAD Investment Corp., and the SAAD Agro-Industries, Inc., represented by Gaudencio Beduya, and
the spouses Beduya personally executed another mortgage over the land in favor of petitioner to secure a loan of P1,430,000.00. 15
The spouses Beduya later failed to pay their loans, as a result of which, the mortgage on the property was foreclosed. 16 In the resulting
foreclosure sale held on January 31, 1985, petitioner was the highest bidder. 17 As the spouses Beduya failed to redeem the property, petitioner
consolidated its ownership. 18
It appears that private respondent had also applied for a loan from petitioner in 1978, offering his 19.4 hectare property under Tax Declaration
No. D-2247 as security for the loan. As part of the processing of the application, a representative of petitioner, Patton R. Olano, inspected the land
and appraised its value.
Private respondent's loan application was later approved by petitioner. 19 However after releasing the amount of the loan to private respondent,
petitioner found that the land mortgaged by private respondent was included in the land covered by TCT No. 10101 in the name of the spouses
Beduya. Petitioner, therefore, cancelled the loan and demanded immediate payment of the amount. 20 Private respondent paid the loan to
petitioner for which the former was issued a Cancellation of Mortgage, dated March 18, 1981, releasing the property in question from
encumbrance. 21
Sometime in April of 1986, more than a year after the foreclosure sale, a re-appraisal of the property covered by TCT No. 10101 was conducted
by petitioner's representatives. It was then discovered that private respondent was occupying a portion of said land. Private respondent was
informed that petitioner had become the owner of the land he was occupying, and he was asked to vacate the property. As private respondent
refused to do so, 22 petitioner filed a complaint for recovery of possession with damages against him. The case was assigned to Branch 1 of the
Regional Trial Court, Tagbilaran City, 23 which after trial, rendered a decision, dated August 22, 1989, declaring petitioner the lawful owner of
the entire land covered by TCT No. 10101 on the ground that the decree of registration was binding upon the land. 24 The dispositive portion of
the decision reads:
WHEREFORE, foregoing considered, the court renders judgment:
1 Declaring plaintiff bank Development Bank of the Philippines the true and legal owner of the land in question covered by TCT No.
10101 farm of Gaudencio Beduya;
2 Dismissing defendant's counterclaim;
3 Ordering defendant to vacate from the land in question; the portion of which he claims to belong to him for without basis in fact and
law;
186
4 Ordering defendant, his agents or any person representing him or those who may claim substantial rights on the land to vacate
therefrom, cease and desist from disturbing, molesting and interfering plaintiff's possession of the land in question, and from
committing any such act as would tend to mitigate, deny or deprive plaintiff of its ownership and possession over said land.
SO ORDERED.
On appeal, the Court of Appeals reversed and gave judgment for private respondent, declaring him the owner of the 19.4 hectares of land
erroneously included in TCT No. 10101. The dispositive portion of the appellate court's decision reads:
WHEREFORE, the appealed decision is hereby REVERSED AND SET ASIDE. A new decision is hereby rendered:
1. Dismissing the complaint.
2. Declaring the disputed 19.4000 hectares of land embraced in TCT 10101 as exclusively belonging to defendant-
appellant, ordering its segregation from plaintiff-appellee's title and its reconveyance to appellant.
SO ORDERED. 25
Petitioner moved for a reconsideration but its motion was denied in a resolution dated April 23, 1997. 26 Hence this petition.
Petitioner contends that:
I. THE DECISION OF THE RESPONDENT COURT IS NOT IN ACCORD WITH THE APPLICABLE PROVISIONS OF LAW
(Sections 38 and 46 of ACT 496) AND THE APPLICABLE DECISIONS OF THE SUPREME COURT, PARTICULARLY IN THE
CASE OF BENIN VS. TUASON, 57 SCRA 531.
II. THE RESPONDENT COURT OVERLOOKED THE ISSUES ABOUT THE DBP BEING AN INNOCENT MORTGAGEE FOR
VALUE OF THE LAND IN QUESTION AND OF HAVING PURCHASED LATER THE SAME DURING A PUBLIC AUCTION
SALE.
III. THE RESPONDENT COURT'S RULING DECLARING DBP IN ESTOPPEL IS ILLOGICAL. 27
First. Petitioner invokes the ruling of this Court in Benin v. Tuason 28 in support of its claim that its predecessor-in-interest, Jose Alvarez, became
the owner of the land by virtue of the decree of registration issued in his name. In Benin, three sets of plaintiffs filed separate complaints against
Mariano Severo Tuason and J.M. Tuason & Co., Inc., praying for the cancellation of OCT No. 735 covering two parcels of land called the Sta.
Mesa Estate, or Parcel 1, with an area of 8,798,617.00 square meters, and the Diliman Estate, or Parcel 2, with an area of 15,961,246.00 square
meters. They asked that they be declared the owners and lawful possessors of said lands.
Benin is distinguished from this case. In the first place, Benin involved vast tracts of lands which had already been subdivided and bought by
innocent purchasers for value and in good faith at the time the claimants obtained registration. Secondly, when the claimants' ancestors occupied
the lands in question and declared them for tax purposes in 1944, the lands were already covered by the tax declarations in the name of J. M.
Tuason & Co., Inc. In 1914, OCT No. 735 was issued in the name of Tuason so that, from that time on, no possession could defeat the title of the
registered owners of the land. Thirdly, the validity of OCT No. 735 had already been recognized by this Court in several cases 29 and, as a result
thereof, the transfer certificates of title acquired by the innocent purchasers for value were also declared valid. It was held that neither could the
claimants file an action to annul these titles for not only had these actions prescribed, but the fact was that the claimants were also barred from
doing so by laches, having filed the complaint only in 1955, or 41 years after the issuance of OCT No. 735 to J.M. Tuason & Co., Inc. Thus, it
was not solely the decree of registration which was considered in resolving the Benin case. What was considered decisive was the valid title or
right of ownership of J. M. Tuason & Co., Inc. and that of the other innocent purchasers for value and in good faith compared to the failure of the
claimants to show their right to own or possess the questioned properties.1âwphi1.nêt
Petitioner maintains that the possession by private respondent and his predecessor-in-interest of the 19.4 hectares of land for more than 30 years
cannot overcome the decree of registration issued in favor of its predecessor-in-interest Jose Alvarez. Petitioner quotes the following statement in
the Benin case:
It follows also that the allegation of prescriptive title in favor of plaintiffs does not suffice to establish a cause of action. If such
prescription was completed before the registration of the land in favor of the Tuasons, the resulting prescriptive title was cut off and
extinguished by the decree of registration. If, on the contrary, the prescription was either begun or completed after the decree of
registration, it conferred no title because, by express provision of law, prescription can not operate against the registered owner (Act
496). 30
187
Petitioner would thus insist that, by virtue of the decree of registration, Jose Alvarez and those claiming title from him (i.e., the spouses Beduya)
acquired ownership of the 19.4 hectares of land, despite the fact that they neither possessed nor occupied these lands.
This view is mistaken. A consideration of the cases shows that a decree of registration cut off or extinguished a right acquired by a person when
such right refers to a lien or encumbrance on the land — not to the right of ownership thereof — which was not annotated on the certificate of
title issued thereon. Thus, Act No. 496 provides:
Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every subsequent purchaser of
registered land who takes a certificate of title for value in good faith shall hold the same free of all encumbrances except those noted
on said certificate, and any of the following encumbrances which may be subsisting, namely:
First. Liens, claims, or rights arising or existing under the laws of Constitution of the United States or of the Philippine Islands which
the statutes of the Philippine Islands cannot require to appear of record in the Registry.
Second. Taxes within two years after the same became due and payable.
Third. Any public highway, way, private way established by law, or any Government irrigation canal or lateral thereof, where the
certificate of title does not state that the boundaries of such highway, way, or irrigation canal or lateral thereof, have been determined.
But if there are easements or other rights appurtenant to a parcel of registered land which for any reason have failed to be registered,
such easements or rights shall remain so appurtenant notwithstanding such failure, and shall be held to pass with the land until cut off
or extinguished by the registration of the servient estate, or in any other manner.
Hence, in Cid v. Javier, 31 it was held:
. . . Consequently, even conceding arguendo that such an easement has been acquired, it had been cut off and extinguished by the
registration of the servient estate under the Torrens system without the easement being annotated on the corresponding certificate of
title, pursuant to Section 39 of the Land Registration Act.
This principle was reiterated in Purugganan v. Paredes 32 which also involved an easement of light and view that was not annotated on the
certificate of title of the servient estate.
But to make this principle applicable to a situation wherein title acquired by a person through acquisitive prescription would be considered cut off
and extinguished by a decree of registration would run counter to established jurisprudence before and after the ruling in Benin. Indeed,
registration has never been a mode of acquiring ownership over immovable property. As early as 1911, in the case of City of Manila
v. Lack, 33 the Court already ruled on the purpose of registration of lands, viz.:
The Court of Land Registration was created for a single purpose. The Act is entitled "An Act to provide for the adjudication and
registration of titles to lands in the Philippine Islands." The sole purpose of the Legislature in its creation was to bring the land titles of
the Philippine Islands under one comprehensive and harmonious system, the cardinal features of which are indefeasibility of title and
the intervention of the State as a prerequisite to the creation and transfer of titles and interest, with the resultant increase in the use of
land as a business asset by reason of the greater certainty and security of title. It does not create a title nor vest one. It simply confirms
a title already created and already vested, rendering it forever indefeasible. . .
Again, in the case of Angeles v. Samia 34 where land was erroneously registered in favor of persons who neither possessed nor occupied the same,
to the prejudice of the actual occupant, the Court held:
. . . The purpose of the Land Registration Act, as this court has had occasion to so state more than once, is not to create or vest title,
but to confirm and register title already created and already vested, and of course, said original certificate of title No. 8995 could not
have vested in the defendant more title than what was rightfully due her and her coowners. It appearing that said certificate granted her
much more than she expected, naturally to the prejudice of another, it is but just that the error, which gave rise to said anomaly, be
corrected (City of Manila vs. Lack, 19 Phil., 324). The defendant and her coowners knew or, at least, came to know that it was through
error that the original certificate of title in question was issued by the court which heard cadastral case No. 11 of Bacolor, not only in
or prior to March, 1933, but from the time said certificate was issued in their favor, that is, from December 15, 1921. This is evidenced
by the fact that, ever since, they remained passive without even attempting to make the least showing of ownership over the land in
question until after the lapse of more than eleven years. The Land Registration Act as well as the Cadastral Act protects only the
holders of a title in good faith and does not permit its provisions to be used as a shield for the commission of fraud, or that one should
enrich himself at the expense of another (Gustilo vs. Maravilla, 48 Phil., 442; Angelo vs. Director of Lands, 49 Phil., 838). The above-
stated Acts do not give anybody, who resorts to the provisions thereof, a better title than he really and lawfully has. If he happened to
obtain it by mistake or to secure, to the prejudice of his neighbor, more land than he really owns, with or without bad faith on his part,
the certificate of title, which may have been issued to him under the circumstances, may and should be cancelled or corrected
(Legarda and Prieto vs. Saleeby, 31 Phil., 590). This is permitted by section 112 of Act No. 496, which is applicable to the Cadastral
Act because it is so provided expressly by the provisions of section 11 of the latter Act. It cannot be otherwise because, as stated in the
188
case of Domingo vs. Santos, Ongsiako, Lim y Cia. (55 Phil., 361), errors in the plans of lands sought to be registered in the registry
and reproduced in the certificate of title issued later, do not annul the decree of registration on the ground that it is not the plan but the
land itself which is registered in the registry. In other words, if the plan of an applicant for registration or claimant in a cadastral case
alleges that the land referred to in said plan is 100 or 1,000 hectares, and the land which he really owns and desires to register in the
registry is only 80 ares, he cannot claim to be the owner of the existing difference if afterwards he is issued a certificate of title
granting him said area of 100 or 1,000 hectares. 35
The principle laid down in this 1938 case remains the prevailing doctrine, its latest application being in the case of Reyes v. Court of
Appeals 36 wherein we ruled that the fact that a party was able to secure a title in his favor did not operate to vest ownership upon her of the
property.
In the present case, private respondent has been in actual, open, peaceful and continuous possession of the property since 1950. This fact was
corroborated by the testimony of Eleuterio Cambangay who personally knew that Ulpiano Mumar transferred the land covered by Tax
Declaration No. 3840 37 in favor of private respondent in 1950. 38 Private respondent's claim based on actual occupation of the land is bolstered by
Tax Declaration Nos. R-1475, R-799 and D-2247 39 which were issued in his name in 1950, 1961 and 1974, respectively. Together with his actual
possession of the land, these tax declarations constitute strong evidence of ownership of the land occupied by him. As we said in the case
of Republic vs. Court of Appeals: 40
Although tax declarations or realty tax payments of property are not conclusive evidence of ownership, nevertheless, they are good
indicia of possession in the concept of owner for no one in his right mind would be paying taxes for a property that is not in his actual
or at least constructive possession. They constitute at least proof that the holder has a claim of title over the property. The voluntary
declaration of a piece of property for taxation purposes manifests not only one's sincere and honest desire to obtain title to the property
and announces his adverse claim against the State and all other interested parties, but also the intention to contribute needed revenues
to the Government. Such an act strengthens one's bona fide claim of acquisition of ownership.
More importantly, it was established that private respondent, having been in possession of the land since 1950, was the owner of the property
when it was registered by Jose Alvarez in 1969, his possession tacked to that of his predecessor-in-interest, Ulpiano Mumar, which dates back to
1917. 41 Clearly, more than 30 years had elapsed before a decree of registration was issued in favor of Jose Alvarez. This uninterrupted adverse
possession of the land for more than 30 years could only ripen into ownership of the land through acquisitive prescription which is a mode of
acquiring ownership and other real rights over immovable property. Prescription requires public, peaceful, uninterrupted and adverse possession
of the property in the concept of an owner for ten (10) years, in case the possession is in good faith and with a just title. Such prescription is
called ordinary prescription, as distinguished from extraordinary prescription which requires possession for 30 years in case possession is without
just title or is not in good faith. 42
In contrast to private respondent, it has been shown that neither Jose Alvarez nor the spouses Beduya were at any time in possession of the
property in question. In fact, despite knowledge by Gaudencio Beduya that private respondent occupied this 19.4 hectares included in the area
covered by TCT No. 10101, 43 he never instituted any action to eject or recover possession from the latter. Hence, it can be concluded that neither
Jose Alvarez nor the spouses Beduya ever exercised any right of ownership over the land. The fact of registration in their favor never vested in
them the ownership of the land in dispute. "If a person obtains a title under the Torrens system, which includes by mistake or oversight land
which can no longer be registered under the system, he does not, by virtue of the said certificate alone, become the owner of the lands illegally
included." 44
Considering the circumstances pertaining in this case, therefore, we hold that ownership of the 19.4 hectares of land presently occupied by private
respondent was already vested in him and that its inclusion in OCT No. 546 and, subsequently, in TCT No. 10101, was erroneous. Accordingly,
the land in question must be reconveyed in favor of private respondent, the true and actual owner thereof, reconveyance being clearly the proper
remedy in this case.
The true owner may bring an action to have the ownership or title to the land judicially settled and the Court in the exercise of its
equity jurisdiction, without ordering the cancellation of the Torrens title issued upon the patent, may direct the defendants, the
registered owner to reconvey the parcel of land to the plaintiff who has been found to be the true owner thereof." (Vital vs. Amore, 90
Phil. 955) "The reconveyance is just and proper in order to terminate the intolerable anomaly that the patentees should have a torrens
title for the land which they and their predecessors never possessed which has been possessed by Novo in the concept of owner."
(Bustarga v. Novo, 129 SCRA 125). 45
Second. Generally, an action for reconveyance based on an implied or constructive trust, such as the instant case, prescribes in 10 years from the
date of issuance of decree of registration. 46 However, this rule does not apply when the plaintiff is in actual possession of the land. Thus, it has
been held:
. . . [A]n action for reconveyance of a parcel of land based on implied or constructive trust prescribes in ten years, the point of
reference being the date of registration of the deed or the date of the issuance of the certificate of title over the property, but this rule
applies only when the plaintiff or the person enforcing the trust is not in possession of the property, since if a person claiming to be the
owner thereof is in actual possession of the property, as the defendants are in the instant case, the right to seek reconveyance, which in
effect seeks to quiet title to the property, does not prescribe. The reason for this is that one who is in actual possession of a piece of
land claiming to be the owner thereof may wait until his possession is disturbed or his title is attacked before taking steps to vindicate
his right, the reason for the rule being, that his undisturbed possession gives him a continuing right to seek the aid of a court of equity
189
to ascertain and determine the nature of the adverse claim of a third party and its effect on his own title, which right can be claimed
only by one who is in possession. 47
Having been the sole occupant of the land in question, private respondent may seek reconveyance of his property despite the lapse of more than
10 years.
Nor is there any obstacle to the determination of the validity of TCT No. 10101. It is true that the indefeasibility of torrens titles cannot be
collaterally attacked. In the instant case, the original complaint is for recovery of possession filed by petitioner against private respondent, not an
original action filed by the latter to question the validity of TCT No. 10101 on which petitioner bases its right. To rule on the issue of validity in a
case for recovery of possession is tantamount to a collateral attack. However, it should not be overlooked that private respondent filed a
counterclaim against petitioner, claiming ownership over the land and seeking damages. Hence, we could rule on the question of the validity of
TCT No. 10101 for the counterclaim can be considered a direct attack on the same. "A counterclaim is considered a complaint, only this time, it
is the original defendant who becomes the plaintiff. . . . It stands on the same footing and is to be tested by the same rules as if it were an
independent action." 48 In an analogous case, 49 we ruled on the validity of a certificate of title despite the fact that the original action instituted
before the lower court was a case for recovery of possession. The Court reasoned that since all the facts of the case are before it, to direct the
party to institute cancellation proceedings would be needlessly circuitous and would unnecessarily delay the termination of the controversy which
has already dragged on for 20 years.
Third. Petitioner nonetheless contends that an action for reconveyance does not lie against it, because it is an innocent purchaser for value in the
foreclosure sale held in 1985.
This contention has no merit. Sec. 38 of Act No. 496, the Land Registration Act, provides:
If the court after hearing finds that the applicant or adverse claimant has title as stated in his application or adverse claim and proper
for registration, a decree of confirmation and registration shall be entered. Every decree of registration shall bind the land, and quiet
title thereto, subject only to the exceptions stated in the following section. It shall be conclusive upon and against all persons,
including the Insular Government and all the branches thereof, whether mentioned by name in the application, notice, or citation, or
included in the general description "To all whom it may concern." Such decree shall not be opened by reason of the absence, infancy,
or other disability of any person affected thereby, nor by any proceeding in any court for reversing judgments or decrees; subject,
however, to the right of any person deprived of land or of any estate or interest therein by decree of registration obtained by fraud to
file in the competent Court of First Instance a petition for review within one year after entry of the decree, provided no innocent
purchaser for value has acquired an interest. Upon the expiration of said term of one year, every decree or certificate of title issued in
accordance with this section shall be incontrovertible. If there is any such purchaser, the decree of registration shall not be opened, but
shall remain in full force and effect forever, subject only to the right of appeal hereinbefore provided: Provided, however, That no
decree or certificate of title issued to persons not parties to the appeal shall be cancelled or annulled. But any person aggrieved by such
decree in any case may pursue his remedy by action for damages against the applicant or any other person for fraud in procuring the
decree. Whenever the phrase "innocent purchaser for value" or an equivalent phrase occurs in this Act, it shall be deemed to include
an innocent lessee, mortgagee, or other encumbrancer for value. (As amended by Sec. 3, Act 3621; and Sec. 1, Act No. 3630.)
Succinctly put, §38 provides that a certificate of title is conclusive and binding upon the whole world. Consequently, a buyer need not look
behind the certificate of title in order to determine who is the actual owner of the land. However, this is subject to the right of a person deprived
of land through fraud to bring an action for reconveyance, provided that it does not prejudice the rights of an innocent purchaser for value and in
good faith. "It is a condition sine qua non for an action for reconveyance to prosper that the property should not have passed to the hands of an
innocent purchaser for value." 50 The same rule applies to mortgagees, like petitioner. Thus, we held:
Where the certificate of title is in the name of the mortgagor when the land is mortgaged, the innocent mortgagee for value has the
right to rely on what appears on the certificate of title. In the absence of anything to excite suspicion, said mortgagee is under no
obligation to look beyond the certificate and investigate the title of the mortgagor appearing on the face of said certificate. Although
Article 2085 of the Civil Code provides that absolute ownership of the mortgaged property by the mortgagor is essential, the
subsequent declaration of a title as null and void is not a ground for nullifying the mortgage right of a mortgagee in good faith. 51
The evidence before us, however, indicates that petitioner is not a mortgagee in good faith. To be sure, an innocent mortgagee is not expected to
conduct an exhaustive investigation on the history of the mortgagor's title. Nonetheless, especially in the case of a banking institution, a
mortgagee must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before
approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof.
Banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their
dealings, even those involving registered lands. 52
In this case, petitioner's representative, Patton R. Olano, admitted that he came to know of the property for the first time in 1979 when he
inspected it to determine whether the portion occupied by private respondent and mortgaged by the latter to petitioner was included in TCT No.
10101. This means that when the land was mortgaged by the spouses Beduya in 1972, no investigation had been made by petitioner. It is clear,
therefore, that petitioner failed to exercise due care and diligence in establishing the condition of the land as regards its actual owners and
possessors before it entered into the mortgage contract in 1972 with the Beduyas. Had it done so, it would not have failed to discover that private
respondent was occupying the disputed portion of 19.4 hectares. For this reason, petitioner cannot be considered an innocent purchaser for value
when it bought the land covered by TCT No. 10101 in 1985 at the foreclosure sale.
190
Indeed, two circumstances negate petitioner's claim that it was an innocent purchaser for value when it bought the land in question, including the
portion occupied by private respondent: (1) petitioner was already informed by Gaudencio Beduya that private respondent occupied a portion of
the property covered by TCT No. 10101; and (2) petitioner's representative conducted an investigation of the property in 1979 to ascertain
whether the land mortgaged by private respondent was included in TCT No. 10101. In other words, petitioner was already aware that a person
other than the registered owner was in actual possession of the land when it bought the same at the foreclosure sale. A person who deliberately
ignores a significant fact which would create suspicion in an otherwise reasonable man is not an innocent purchaser for value. "It is a well-settled
rule that a purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith
under the belief that there was no defect in the title of the vendor." 53
Petitioner deliberately disregarded both the fact that private respondent already occupied the property and that he was claiming ownership over
the same. It cannot feign ignorance of private respondent's claim to the land since the latter mortgaged the same land to petitioner as security for
the loan he contracted in 1978 on the strength of the tax declarations issued under his name. Instead of inquiring into private respondent's
occupation over the land, petitioner simply proceeded with the foreclosure sale, pretending that no doubts surround the ownership of the land
covered by TCT No. 10101. Considering these circumstances, petitioner cannot be deemed an innocent mortgagee/purchaser for value. As we
ruled:
The failure of appellees to take the ordinary precautions which a prudent man would have taken under the circumstances, specially in
buying a piece of land in the actual, visible and public possession of another person, other than the vendor, constitutes gross
negligence amounting to bad faith.
In this connection, it has been held that where, as in this case, the land sold is in the possession of a person other than the vendor, the
purchaser is required to go beyond the certificates of title and ma[k]e inquiries concerning the rights of the actual possessor. (Citations
omitted.)
xxx xxx xxx
One who purchases real property which is in the actual possession of another should, at least, make some inquiry concerning the right
of those in possession. The actual possession by other than the vendor should, at least put the purchaser upon inquiry. He can scarcely,
in the absence of such inquiry, be regarded as a bona fide purchaser as against such possessors. 54
Fourth. From the foregoing, we find that the resolution of the issue of estoppel will not affect the outcome of this case. Petitioner claims that the
fact that it approved a loan in favor of private respondent and executed a mortgage contract covering the 19.4 hectares covered by tax declarations
issued under private respondent's name does not mean that it is estopped from questioning the latter's title. Petitioner accuses private respondent
of having made misrepresentations which led it to believe in his valid title and ownership.
The claim has no basis. Private respondent made no misrepresentation with regard to the land occupied by him as he is actually the real owner
thereof. Moreover, when private respondent entered into a mortgage contract with petitioner, his claim of ownership was supported not only by
the tax declarations but also by a certification of the Clerk of Court of the Court of First Instance of Bohol that no civil, land registration or
cadastral case has been filed or instituted before the court affecting the validity of Tax Declaration No. D-2247 covering the land located in
Bugang, San Miguel, Bohol and declared in the name of Carlos Cajes. 55 These documents were relied upon by private respondent in support of
his claim of ownership. We cannot consider the submission of these documents as misrepresentations by private respondent as to the actual
ownership of the land. Rather, private respondent believed in good faith and with good reason that he was the owner of the 19.4 hectares
occupied by him.
As to the question of estoppel, we do not find petitioner to be estopped from questioning private respondent's title.1âwphi1 "Estoppel in
pais arises when one, by his acts, representations or admission, or by his own silence when he ought to speak out, intentionally or through
culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that he will be
prejudiced if the former is permitted to deny the existence of such facts." 56 In the case at bar, upon learning that the land occupied by private
respondent was also covered by TCT No. 10101, petitioner immediately demanded full payment of the loan and thereafter cancelled the mortgage
contract, a fact that is admitted by private respondent himself. 57 Indeed, nothing in record indicates that petitioner impliedly acquiesced to the
validity of private respondent's title when it found out that the latter was occupying a portion of the land covered by TCT No. 10101.1âwphi1.nêt
However, for reasons aforestated, we uphold private respondent's ownership of 19.4 hectares occupied by him. As a necessary consequence
thereof, such portion of land included in TCT No. 10101 must be segregated and reconveyed in his favor.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED in toto.
191
G.R. No. 183774 November 14, 2012
PHILIPPINE BANKING CORPORATION, Petitioner,

vs.
ARTURO DY, BERNARDO DY, JOSE DELGADO AND CIPRIANA DELGADO, Respondents.
DECISION
PERLAS-BERNABE, J.:
This Petition for Review on Certiorari assails the January 30, 2008 Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 51672, which set
aside the October 5, 1994 Decision2 of the Regional Trial Court of Cebu City, Branch 22 (RTC) and directed the Register of Deeds of Cebu City
to cancel Transfer Certificate of Title (TCT) Nos. 517683 and 519014 in the names of respondents Arturo Dy and Bernardo Dy (Dys) and to issue
the corresponding TCTs in the name of respondent Cipriana Delgado (Cipriana).
The Factual Antecedents
Cipriana was the registered owner of a 58,129-square meter (sq.m.) lot, denominated as Lot No. 6966, situated in Barrio Tongkil, Minglanilla,
Cebu, covered by TCT No. 18568. She and her husband, respondent Jose Delgado (Jose), entered into an agreement with a certain Cecilia Tan
(buyer) for the sale of the said property for a consideration of P10.00/sq.m. It was agreed that the buyer shall make partial payments from time to
time and pay the balance when Cipriana and Jose (Sps. Delgado) are ready to execute the deed of sale and transfer the title to her.
At the time of sale, the buyer was already occupying a portion of the property where she operates a noodle (bihon) factory while the rest was
occupied by tenants which Sps. Delgado undertook to clear prior to full payment. After paying the total sum of P147,000.00 and being then ready
to pay the balance, the buyer demanded the execution of the deed, which was refused. Eventually, the buyer learned of the sale of the property to
the Dys and its subsequent mortgage to petitioner Philippine Banking Corporation (Philbank), prompting the filing of the Complaint5 for
annulment of certificate of title, specific performance and/or reconveyance with damages against Sps. Delgado, the Dys and Philbank.
In their Answer, Sps. Delgado, while admitting receipt of the partial payments made by the buyer, claimed that there was no perfected sale
because the latter was not willing to pay their asking price of P17.00/sq.m. They also interposed a cross-claim against the Dys averring that the
deeds of absolute sale in their favor dated June 28, 19826 and June 30, 19827 covering Lot No. 6966 and the adjoining Lot No. 4100-A (on which
Sps. Delgado's house stands), were fictitious and merely intended to enable them (the Dys) to use the said properties as collateral for their loan
application with Philbank and thereafter, pay the true consideration of P17.00/sq.m. for Lot No. 6966. However, after receiving the loan proceeds,
the Dys reneged on their agreement, prompting Sps. Delgado to cause the annotation of an adverse claim on the Dys' titles and to inform Philbank
of the simulation of the sale. Sps. Delgado, thus, prayed for the dismissal of the complaint, with a counterclaim for damages and a cross-claim
against the Dys for the payment of the balance of the purchase price plus damages.
For their part, the Dys denied knowledge of the alleged transaction between cross-claimants Sps. Delgado and buyer. They claimed to have
validly acquired the subject property from Sps. Delgado and paid the full consideration therefor as the latter even withdrew their adverse claim
and never demanded for the payment of any unpaid balance.
On the other hand, Philbank filed its Answer8 asserting that it is an innocent mortgagee for value without notice of the defect in the title of the
Dys. It filed a cross-claim against Sps. Delgado and the Dys for all the damages that may be adjudged against it in the event they are declared
seller and purchaser in bad faith, respectively.
In answer to the cross-claim, Sps. Delgado insisted that Philbank was not a mortgagee in good faith for having granted the loan and accepted the
mortgage despite knowledge of the simulation of the sale to the Dys and for failure to verify the nature of the buyer’s physical possession of a
portion of Lot No. 6966. They thereby prayed for the cancellation of the mortgage in Philbank's favor.
Subsequently, Sps. Delgado amended their cross-claim against the Dys to include a prayer for the nullification of the deeds of absolute sale in the
latter's favor and the corresponding certificates of title, and for the consequent reinstatement of Cipriana’s title. 9
The complaints against the Dys and Philbank were subsequently withdrawn. On the other hand, both the buyer and Sps. Delgado never presented
any evidence in support of their respective claims. Hence, the RTC limited itself to the resolution of the claims of Sps. Delgado, Philbank and the
Dys against one another.
The RTC Ruling
In the Decision10 dated October 5, 1994, the RTC dismissed the cross-claims of Sps. Delgado against the Dys and Philbank. It noted that other
than Sps. Delgado's bare allegation of the Dys' supposed non-payment of the full consideration for Lot Nos. 6966 and 4100-A, they failed to
adduce competent evidence to support their claim. On the other hand, the Dys presented a cash voucher 11 dated April 6, 1983 duly signed by Sps.
Delgado acknowledging receipt of the total consideration for the two lots.
192
The RTC also observed that Sps. Delgado notified Philbank of the purported simulation of the sale to the Dys only after the execution of the loan
and mortgage documents and the release of the loan proceeds to the latter, negating their claim of bad faith. Moreover, they subsequently notified
the bank of the Dys' full payment for the two lots mortgaged to it.
The CA Ruling
However, on appeal, the CA set aside12 the RTC's decision and ordered the cancellation of the Dys' certificates of title and the reinstatement of
Cipriana's title. It ruled that there were no perfected contracts of sale between Sps. Delgado and the Dys in view of the latter's admission that the
deeds of sale were purposely executed to facilitate the latter's loan application with Philbank and that the prices indicated therein were not the true
consideration. Being merely simulated, the contracts of sale were, thus, null and void, rendering the subsequent mortgage of the lots likewise
void.
The CA also declared Philbank not to be a mortgagee in good faith for its failure to ascertain how the Dys acquired the properties and to exercise
greater care when it conducted an ocular inspection thereof. It thereby canceled the mortgage over the two lots.
The Petition
In the present petition, Philbank insists that it is a mortgagee in good faith. It further contends that Sps. Delgado are estopped from denying the
validity of the mortgage constituted over the two lots since they participated in inducing Philbank to grant a loan to the Dys.
On the other hand, Sps. Delgado maintain that Philbank was not an innocent mortgagee for value for failure to exercise due diligence in
transacting with the Dys and may not invoke the equitable doctrine of estoppel to conceal its own lack of diligence.
For his part, Arturo Dy filed a Petition-in-Intervention13 arguing that while the deeds of absolute sale over the two properties were admittedly
simulated, the simulation was only a relative one involving a false statement of the price. Hence, the parties are still bound by their true
agreement. The same was opposed/objected to by both Philbank 14 and Sps. Delgado15 as improper, considering that the CA judgment had long
become final and executory as to the Dys who neither moved for reconsideration nor appealed the CA Decision.
The Ruling of the Court
The petition is meritorious.
At the outset, the Court takes note of the fact that the CA Decision nullifying the questioned contracts of sale between Sps. Delgado and the Dys
had become final and executory. Accordingly, the Petition-in-Intervention filed by Arturo Dy, which seeks to maintain the subject contracts'
validity, can no longer be entertained. The cancellation of the Dys' certificates of title over the disputed properties and the issuance of new TCTs
in favor of Cipriana must therefore be upheld.
However, Philbank's mortgage rights over the subject properties shall be maintained. While it is settled that a simulated deed of sale is null and
void and therefore, does not convey any right that could ripen into a valid title, 16 it has been equally ruled that, for reasons of public policy,17 the
subsequent nullification of title to a property is not a ground to annul the contractual right which may have been derived by a purchaser,
mortgagee or other transferee who acted in good faith.18
The ascertainment of good faith or lack of it, and the determination of whether due diligence and prudence were exercised or not, are questions of
fact19 which are generally improper in a petition for review on certiorari under Rule 45 of the Rules of Court (Rules) where only questions of law
may be raised. A recognized exception to the rule is when there are conflicting findings of fact by the CA and the RTC, 20 as in this case.
Primarily, it bears noting that the doctrine of "mortgagee in good faith" is based on the rule that all persons dealing with property covered by a
Torrens Certificate of Title are not required to go beyond what appears on the face of the title. This is in deference to the public interest in
upholding the indefeasibility of a certificate of title as evidence of lawful ownership of the land or of any encumbrance thereon.21 In the case of
banks and other financial institutions, however, greater care and due diligence are required since they are imbued with public interest, failing
which renders the mortgagees in bad faith. Thus, before approving a loan application, it is a standard operating practice for these institutions to
conduct an ocular inspection of the property offered for mortgage and to verify the genuineness of the title to determine the real owner(s)
thereof.22 The apparent purpose of an ocular inspection is to protect the "true owner" of the property as well as innocent third parties with a right,
interest or claim thereon from a usurper who may have acquired a fraudulent certificate of title thereto.23
In this case, while Philbank failed to exercise greater care in conducting the ocular inspection of the properties offered for mortgage,24 its
omission did not prejudice any innocent third parties. In particular, the buyer did not pursue her cause and abandoned her claim on the property.
On the other hand, Sps. Delgado were parties to the simulated sale in favor of the Dys which was intended to mislead Philbank into granting the
loan application. Thus, no amount of diligence in the conduct of the ocular inspection could have led to the discovery of the complicity between
the ostensible mortgagors (the Dys) and the true owners (Sps. Delgado).1âwphi1 In fine, Philbank can hardly be deemed negligent under the
premises since the ultimate cause of the mortgagors' (the Dys') defective title was the simulated sale to which Sps. Delgado were privies.
193
Indeed, a finding of negligence must always be contextualized in line with the attendant circumstances of a particular case. As aptly held in
Philippine National Bank v. Heirs of Estanislao Militar,25 "the diligence with which the law requires the individual or a corporation at all times to
govern a particular conduct varies with the nature of the situation in which one is placed, and the importance of the act which is to be
performed."26 Thus, without diminishing the time-honored principle that nothing short of extraordinary diligence is required of banks whose
business is impressed with public interest, Philbank's inconsequential oversight should not and cannot serve as a bastion for fraud and deceit.
To be sure, fraud comprises "anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal duty or
equitable duty, trust, or confidence justly reposed, resulting in damage to another, or by which an undue and unconscientious advantage is taken
of another."27 In this light, the Dys' and Sps. Delgado's deliberate simulation of the sale intended to obtain loan proceeds from and to prejudice
Philbank clearly constitutes fraudulent conduct. As such, Sps. Delgado cannot now be allowed to deny the validity of the mortgage executed by
the Dys in favor of Philbank as to hold otherwise would effectively sanction their blatant bad faith to Philbank's detriment.
Accordingly, in the interest of public policy, fair dealing, good faith and justice, the Court accords Philbank the rights of a mortgagee in good
faith whose lien to the securities posted must be respected and protected. In this regard, Philbank is entitled to have its mortgage carried over or
annotated on the titles of Cipriana Delgado over the said properties.
WHERFORE, the assailed January 30, 2008 Decision of the Court of Appeals in CA-G.R. CV No. 51672 is hereby AFFIRMED with
MODIFICATION upholding the mortgage rights of petitioner Philippine Banking Corporation over the subject properties.
194
G.R. No. 154183 August 7, 2003
SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,

vs.
SOLID BANK CORPORATION, FIRST BUSINESS PAPER CORPORATION, KENNETH NG LI and MA. VICTORIA NG
LI, respondents.
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus line" credit facility worth P10 million in favor of
respondent First Business Paper Corporation (FBPC). The terms and conditions of the agreement as well as the checklist of documents necessary
to open the credit line were stipulated in a "letter-advise" of the Bank dated 16 May 1993 addressed to FBPC and to its President, respondent
Kenneth Ng Li.1 The "letter-advise"2 was effective upon "compliance with the documentary requirements."3
The documents essential for the credit facility and submitted for this purpose were the (a) Board Resolution or excerpts of the Board of Directors
Meeting, duly ratified by a Notary Public, authorizing the loan and security arrangement as well as designating the officers to negotiate and sign
for FBPC specifically stating authority to mortgage, pledge and/or assign the properties of the corporation; (b) agreement to purchase Domestic
Bills; and, (c) Continuing Guaranty for any and all amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-spouses
Kenneth and Ma. Victoria Ng Li.4 The spouses Luis Toh and Vicky Tan Toh were then Chairman of the Board and Vice-President, respectively,
of FBPC, while respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li were President and General Manager, respectively, of the same
corporation.5
It is not disputed that the credit facility as well as its terms and conditions was not cancelled or terminated, and that there was no prior notice of
such fact as required in the "letter-advise," if any was done.
On 10 May 1993, more than thirty (30) days from date of the "letter-advise," petitioner-spouses Luis Toh and Vicky Tan Toh and respondent-
spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the required Continuing Guaranty, which was embodied in a public document prepared
solely by respondent Bank.6 The terms of the instrument defined the contract arising therefrom as a surety agreement and provided for the
solidary liability of the signatories thereto for and in consideration of "loans or advances" and "credit in any other manner to, or at the request or
for the account" of FBPC.
The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC may incur and for which the sureties may be
liable, stating that the credit facility "covers any and all existing indebtedness of, and such other loans and credit facilities which may hereafter be
granted to FIRST BUSINESS PAPER CORPORATION." The surety also contained a de facto acceleration clause if "default be made in the
payment of any of the instruments, indebtedness, or other obligation" guaranteed by petitioners and respondents. So as to strengthen this security,
the Continuing Guaranty waived rights of the sureties against delay or absence of notice or demand on the part of respondent Bank, and gave
future consent to the Bank's action to "extend or change the time payment, and/or the manner, place or terms of payment," including renewal, of
the credit facility or any part thereof in such manner and upon such terms as the Bank may deem proper without notice to or further assent from
the sureties.
The effectivity of the Continuing Guaranty was not contingent upon any event or cause other than the written revocation thereof with notice to
the Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit facility and procure letters of credit. 7 On 17 November 1993 FBPC opened
thirteen (13) letters of credit and obtained loans totaling P15,227,510.00.8 As the letters of credit were secured, FBPC through its officers
Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories executed a series of trust receipts over the goods allegedly purchased
from the proceeds of the loans.9
On 13 January 1994 respondent Bank received information that respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had fraudulently
departed from their conjugal home.10 On 14 January 1994 the Bank served a demand letter upon FBPC and petitioner Luis Toh invoking the
acceleration clause11 in the trust receipts of FBPC and claimed payment for P10,539,758.68 as unpaid overdue accounts on the letters of credit
plus interests and penalties within twenty-four (24) hours from receipt thereof.12 The Bank also invoked the Continuing Guaranty executed by
petitioner-spouses Luis Toh and Vicky Tan Toh who were the only parties known to be within national jurisdiction to answer as sureties for the
credit facility of FBPC.13
On 17 January 1994 respondent Bank filed a complaint for sum of money with ex parte application for a writ of preliminary attachment against
FBPC, spouses Kenneth Ng Li and Ma. Victoria Ng Li, and spouses Luis Toh and Vicky Tan Toh, docketed as Civil Case No. 64047 of RTC-Br.
161, Pasig City.14 Alias summonses were served upon FBPC and spouses Luis Toh and Vicky Tan Toh but not upon Kenneth Ng Li and Ma.
Victoria Ng Li who had apparently absconded.15
Meanwhile, with the implementation of the writ of preliminary attachment resulting in the impounding of purported properties of FBPC, the trial
court was deluged with third-party claims contesting the propriety of the attachment. 16 In the end, the Bank relinquished possession of all the
attached properties to the third-party claimants except for two (2) insignificant items as it allegedly could barely cope with the yearly premiums
on the attachment bonds.17
195
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the complaint where they admitted being part of FBPC from its
incorporation on 29 August 1991, which was then known as "MNL Paper, Inc.," until its corporate name was changed to "First Business Paper
Corporation."18 They also acknowledged that on 6 March 1992 Luis Toh was designated as one of the authorized corporate signatories for
transactions in relation to FBPC's checking account with respondent Bank. 19 Meanwhile, for failing to file an answer, respondent FBPC was
declared in default.20
Petitioner-spouses however could not be certain whether to deny or admit the due execution and authenticity of the Continuing Guaranty.21 They
could only allege that they were made to sign papers in blank and the Continuing Guaranty could have been one of them.
Still, as petitioners asserted, it was impossible and absurd for them to have freely and consciously executed the surety on 10 May 1993, the date
appearing on its face22 since beginning March of that year they had already divested their shares in FBPC and assigned them in favor of
respondent Kenneth Ng Li although the deeds of assignment were notarized only on 14 June 1993.23 Petitioners also contended that through
FBPC Board Resolution dated 12 May 1993 petitioner Luis Toh was removed as an authorized signatory for FBPC and replaced by respondent-
spouses Kenneth Ng Li and Ma. Victoria Ng Li and Redentor Padilla for all the transactions of FBPC with respondent Bank. 24 They even
resigned from their respective positions in FBPC as reflected in the 12 June 1993 Secretary's Certificate submitted to the Securities and Exchange
Commission25 as petitioner Luis Toh was succeeded as Chairman by respondent Ma. Victoria Ng Li, while one Mylene C. Padilla took the place
of petitioner Vicky Tan Toh as Vice-President.26
Finally, petitioners averred that sometime in June 1993 they obtained from respondent Kenneth Ng Li their exclusion from the several surety
agreements they had entered into with different banks, i.e., Hongkong and Shanghai Bank, China Banking Corporation, Far East Bank and Trust
Company, and herein respondent Bank.27 As a matter of record, these other banks executed written surety agreements that showed respondent
Kenneth Ng Li as the only surety of FBPC's indebtedness.28
On 16 May 1996 the trial court promulgated its Decision in Civil Case No. 64047 finding respondent FBPC liable to pay respondent Solid Bank
Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum from finality of the Decision until fully paid, but
absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to respondent Bank.29 The court a quo found that petitioners
"voluntarily affixed their signature[s]" on the Continuing Guaranty and were thus "at some given point in time willing to be liable under those
forms,"30 although it held that petitioners were not bound by the surety contract since the letters of credit it was supposed to secure were opened
long after petitioners had ceased to be part of FBPC.31
The trial court described the Continuing Guaranty as effective only while petitioner-spouses were stockholders and officers of FBPC since
respondent Bank compelled petitioners to underwrite FBPC's indebtedness as sureties without the requisite investigation of their personal
solvency and capability to undertake such risk. 32 The lower court also believed that the Bank knew of petitioners' divestment of their shares in
FBPC and their subsequent resignation as officers thereof as these facts were obvious from the numerous public documents that detailed the
changes and substitutions in the list of authorized signatories for transactions between FBPC and the Bank, including the many trust receipts
being signed by persons other than petitioners, 33 as well as the designation of new FBPC officers which came to the notice of the Bank's Vice-
President Jose Chan Jr. and other officers.34
On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration of its Decision.35
On 9 October 1996 respondent Bank appealed the Decision to the Court of Appeals, docketed as CA-G.R. CV No. 55957.36 Petitioner-spouses
did not move for reconsideration nor appeal the finding of the trial court that they voluntarily executed the Continuing Guaranty.
The appellate court modified the Decision of the trial court and held that by signing the Continuing Guaranty, petitioner-spouses became
solidarily liable with FBPC to pay respondent Bank the amount of P10,539,758.68 as principal with twelve percent (12%) interest per
annum from finality of the judgment until completely paid. 37 The Court of Appeals ratiocinated that the provisions of the surety agreement did
not "indicate that Spouses Luis and Vicky Toh x x x signed the instrument in their capacities as Chairman of the Board and Vice-President,
respectively, of FBPC only."38 Hence, the court a quo deduced, "[a]bsent any such indication, it was error for the trial court to have presumed that
the appellees indeed signed the same not in their personal capacities." 39 The appellate court also ruled that as petitioners failed to execute any
written revocation of the Continuing Guaranty with notice to respondent Bank, the instrument remained in full force and effect when the letters of
credit were availed of by respondent FBPC.40
Finally, the Court of Appeals rejected petitioners' argument that there were "material alterations" in the provisions of the "letter-advise," i.e., that
only domestic letters of credit were opened when the credit facility was for importation of papers and other materials, and that marginal deposits
were not paid, contrary to the requirements stated in the "letter-advise."41 The simple response of the appellate court to this challenge was, first,
the "letter-advise" itself authorized the issuance of domestic letters of credit, and second, the several waivers extended by petitioners in the
Continuing Guaranty, which included changing the time and manner of payment of the indebtedness, justified the action of respondent Bank not
to charge marginal deposits.42
Petitioner-spouses moved for reconsideration of the Decision, and after respondent Bank's comment, filed a lengthy Reply with Motion for Oral
Argument.43 On 2 July 2002 reconsideration of the Decision was denied on the ground that no new matter was raised to warrant the reversal or
modification thereof.44 Hence, this Petition for Review.
196
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of Appeals denied them due process when it did not grant their motion for
reconsideration and without "bother[ing] to consider [their] Reply with Motion for Oral Argument." They maintain that the Continuing Guaranty
is not legally valid and binding against them for having been executed long after they had withdrawn from FBPC. Lastly, they claim that the
surety agreement has been extinguished by the material alterations thereof and of the "letter-advise" which were allegedly brought about by (a)
the provision of an acceleration clause in the trust receipts; (b) the flight of their co-sureties, respondent-spouses Kenneth Ng Li and Ma. Victoria
Ng Li; (c) the grant of credit facility despite the non-payment of marginal deposits in an amount beyond the credit limit of P10 million pesos; (d)
the inordinate delay of the Bank in demanding the payment of the indebtedness; (e) the presence of ghost deliveries and fictitious purchases using
the Bank's letters of credit and trust receipts; (f) the extension of the due dates of the letters of credit without the required 25% partial payment per
extension; (g) the approval of another letter of credit, L/C 93-0042, even after respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had
defaulted on their previous obligations; and, (h) the unmistakable pattern of fraud.
Respondent Solid Bank maintains on the other hand that the appellate court is presumed to have passed upon all points raised by
petitioners' Reply with Motion for Oral Argument as this pleading formed part of the records of the appellate court. It also debunks the claim of
petitioners that they were inexperienced and ignorant parties who were taken advantage of in the Continuing Guaranty since petitioners are astute
businessmen who are very familiar with the "ins" and "outs" of banking practice. The Bank further argues that the notarization of the Continuing
Guaranty discredits the uncorroborated assertions against the authenticity and due execution thereof, and that the Decision of the trial court in the
civil case finding the surety agreement to be valid and binding is now res judicata for failure of petitioners to appeal therefrom. As a final point,
the Bank refers to the various waivers made by petitioner-spouses in the Continuing Guaranty to justify the extension of the due dates of the
letters of credit.
To begin with, we find no merit in petitioners' claim that the Court of Appeals deprived them of their right to due process when the court a quo
did not address specifically and explicitly their Reply with Motion for Oral Argument. While the Resolution of the appellate court of 2 July 2002
made no mention thereof in disposing of their arguments on reconsideration, it is presumed that "all matters within an issue raised in a case were
laid before the court and passed upon it."45 In the absence of evidence to the contrary, we must rule that the court a quo discharged its task
properly. Moreover, a reading of the assailed Resolution clearly makes reference to a "careful review of the records," which undeniably includes
the Reply with Motion for Oral Argument, hence there is no reason for petitioners to asseverate otherwise.
This Court holds that the Continuing Guaranty is a valid and binding contract of petitioner-spouses as it is a public document that enjoys the
presumption of authenticity and due execution. Although petitioners as appellees may raise issues that have not been assigned as errors by
respondent Bank as party-appellant, i.e., unenforceability of the surety contract, we are bound by the consistent finding of the courts a quo that
petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily affixed their signature[s]" on the surety agreement and were thus "at some given
point in time willing to be liable under those forms."46 In the absence of clear, convincing and more than preponderant evidence to the contrary,
our ruling cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility thereon so long as they were corporate officers and stockholders of FBPC.
Nothing in the Continuing Guaranty restricts their contractual undertaking to such condition or eventuality. In fact the obligations assumed by
them therein subsist "upon the undersigned, the heirs, executors, administrators, successors and assigns of the undersigned, and shall inure to the
benefit of, and be enforceable by you, your successors, transferees and assigns," and that their commitment "shall remain in full force and effect
until written notice shall have been received by [the Bank] that it has been revoked by the undersigned." Verily, if petitioners intended not to be
charged as sureties after their withdrawal from FBPC, they could have simply terminated the agreement by serving the required notice of
revocation upon the Bank as expressly allowed therein.47 In Garcia v. Court of Appeals[48] we ruled –
Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the surety agreement shows that he signed the
same not in representation of WMC or as its president but in his personal capacity. He is therefore personally bound. There is no law
that prohibits a corporate officer from binding himself personally to answer for a corporate debt. While the limited liability doctrine is
intended to protect the stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless divest
himself of this protection by voluntarily binding himself to the payment of the corporate debts. The petitioner cannot therefore take
refuge in this doctrine that he has by his own acts effectively waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so must we also hold respondent Bank to its
representations in the "letter-advise" of 16 May 1993. Particularly, as to the extension of the due dates of the letters of credit, we cannot exclude
from the Continuing Guaranty the preconditions of the Bank that were plainly stipulated in the "letter-advise." Fairness and justice dictate our
doing so, for the Bank itself liberally applies the provisions of cognate agreements whenever convenient to enforce its contractual rights, such as,
when it harnessed a provision in the trust receipts executed by respondent FBPC to declare its entire indebtedness as due and demandable and
thereafter to exact payment thereof from petitioners as sureties.49 In the same manner, we cannot disregard the provisions of the "letter-advise" in
sizing up the panoply of commercial obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank "may at any time, or from time to time, in [its] discretion x x x
extend or change the time payment," this provision even if understood as a waiver is confined per se to the grant of an extension and does not
surrender the prerequisites therefor as mandated in the "letter-advise." In other words, the authority of the Bank to defer collection contemplates
only authorized extensions, that is, those that meet the terms of the "letter-advise."
Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing Guaranty, it should nonetheless comply with the
requirements that domestic letters of credit be supported by fifteen percent (15%) marginal deposit extendible three (3) times for a period of thirty
(30) days for each extension, subject to twenty-five percent (25%) partial payment per extension. This reading of the Continuing Guaranty is
197
consistent with Philippine National Bank v. Court of Appeals50 that any doubt on the terms and conditions of the surety agreement should be
resolved in favor of the surety.
Furthermore, the assurance of the sureties in the Continuing Guaranty that "[n]o act or omission of any kind on [the Bank's] part in the premises
shall in any event affect or impair this guaranty"51 must also be read "strictissimi juris" for the reason that petitioners are only accommodation
sureties, i.e., they received nothing out of the security contract they signed. 52 Thus said, the acts or omissions of the Bank conceded by petitioners
as not affecting nor impairing the surety contract refer only to those occurring "in the premises," or those that have been the subject of the waiver
in the Continuing Guaranty, and stretch to no other. Stated otherwise, an extension of the period for enforcing the indebtedness does not
by itself bring about the discharge of the sureties unless the extra time is not permitted within the terms of the waiver, i.e., where there is no
payment or there is deficient settlement of the marginal deposit and the twenty-five percent (25%) consideration, in which case
the illicit extension releases the sureties. Under Art. 2055 of the Civil Code, the liability of a surety is measured by the terms of his contract, and
while he is liable to the full extent thereof, his accountability is strictly limited to that assumed by its terms.
It is admitted in the Complaint of respondent Bank before the trial court that several letters of credit were irrevocably extended for ninety (90)
days with alarmingly flawed and inadequate consideration - the indispensable marginal deposit of fifteen percent (15%) and the twenty-five
percent (25%) prerequisite for each extension of thirty (30) days. It bears stressing that the requisite marginal deposit and security for every thirty
(30) - day extension specified in the "letter-advise" were not set aside or abrogated nor was there any prior notice of such fact, if any was done.
Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon, an account officer and manager of respondent Bank and
its lone witness in the civil case –
Q: You extended it even if there was no marginal deposit?
A: Yes.
Q: And even if partial payment is less than 25%?
A: Yes x x x x
Q: You have repeatedly extended despite the insufficiency partial payment requirement?
A: I would say yes.53
The foregoing extensions of the letters of credit made by respondent Bank without observing the rigid restrictions for exercising the privilege are
not covered by the waiver stipulated in the Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of the
Civil Code, "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty." This act of the
Bank is not mere failure or delay on its part to demand payment after the debt has become due, as was the case in unpaid five (5) letters of credit
which the Bank did not extend, defer or put off, 54 but comprises conscious, separate and binding agreements to extend the due date, as was
admitted by the Bank itself –
Q: How much was supposed to be paid on 14 September 1993, the original LC of P1,655,675.13?
A: Under LC 93-0017 first matured on 14 September 1993. We rolled it over, extended it to December 13, 1993 but they made
partial payment that is why we extended it.
Q: The question to you now is how much was paid? How much is supposed to be paid on September 14, 1993 on the basis of the
original amount of P1,655,675.13?
A: Whenever this obligation becomes due and demandable except when you roll it over so there is novation there on the original
obligations55 (underscoring supplied).
As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are relieved of their obligations as sureties of respondent
FBPC under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that militate against the enforcement of the Continuing Guaranty against the accommodation
sureties. Firstly, the guaranty was executed more than thirty (30) days from the original acceptance period as required in the "letter-advise."
Thereafter, barely two (2) days after the Continuing Guaranty was signed, corporate agents of FBPC were replaced on 12 May 1993 and other
adjustments in the corporate structure of FBPC ensued in the month of June 1993, which the Bank did not investigate although such were made
known to it.
198
By the same token, there is no explanation on record for the utter worthlessness of the trust receipts in favor of the Bank when these documents
ought to have added more security to the indebtedness of FBPC. The Bank has in fact no information whether the trust receipts were indeed used
for the purpose for which they were obtained.56 To be sure, the goods subject of the trust receipts were not entirely lost since the security officer
of respondent Bank who conducted surveillance of FBPC even had the chance to intercept the surreptitious transfer of the items under trust: "We
saw two (2) delivery vans with Plates Nos. TGH 257 and PAZ 928 coming out of the compound x x x [which were] taking out the last supplies
stored in the compound."57 In addition, the attached properties of FBPC, except for two (2) of them, were perfunctorily abandoned by respondent
Bank although the bonds therefor were considerably reduced by the trial court. 58
The consequence of these omissions is to discharge the surety, petitioners herein, under Art. 2080 of the Civil Code,59 or at the very least, mitigate
the liability of the surety up to the value of the property or lien released –
If the creditor x x x has acquired a lien upon the property of a principal, the creditor at once becomes charged with the duty of
retaining such security, or maintaining such lien in the interest of the surety, and any release or impairment of this security as a
primary resource for the payment of a debt, will discharge the surety to the extent of the value of the property or lien released x x x x
[for] there immediately arises a trust relation between the parties, and the creditor as trustee is bound to account to the surety for the
value of the security in his hands.60
For the same reason, the grace period granted by respondent Bank represents unceremonious abandonment and forfeiture of the fifteen percent
(15%) marginal deposit and the twenty-five percent (25%) partial payment as fixed in the "letter-advise." These payments are unmistakably
additional securities intended to protect both respondent Bank and the sureties in the event that the principal debtor FBPC becomes insolvent
during the extension period. Compliance with these requisites was not waived by petitioners in the Continuing Guaranty. For this unwarranted
exercise of discretion, respondent Bank bears the loss; due to its unauthorized extensions to pay granted to FBPC, petitioner-spouses Luis Toh
and Vicky Tan Toh are discharged as sureties under the Continuing Guaranty.
Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security provided by the marginal deposit and the
twenty-five percent (25%) requirement results in the material alteration of the principal contract, i.e., the "letter-advise," and consequently
releases the surety.61 This inference was admitted by the Bank through the testimony of its lone witness that "[w]henever this obligation becomes
due and demandable, except when you roll it over, (so) there is novation there on the original obligations." As has been said, "if the suretyship
contract was made upon the condition that the principal shall furnish the creditor additional security, and the security being furnished under these
conditions is afterwards released by the creditor, the surety is wholly discharged, without regard to the value of the securities released, for such a
transaction amounts to an alteration of the main contract."62
WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Appeals dated 12 December 2001 in CA-G.R. CV
No. 55957, Solid Bank Corporation v. First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh,
holding petitioner-spouses Luis Toh and Vicky Tan Toh solidarily liable with First Business Paper Corporation to pay Solid Bank Corporation
the amount of P10,539,758.68 as principal with twelve percent (12%) interest per annum until fully paid, and its Resolution of 2 July 2002
denying reconsideration thereof are REVERSED and SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No. 64047, Solid Bank Corporation v. First Business Paper
Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, finding First Business Paper Corporation liable to pay respondent
Solid Bank Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per annum until fully paid, but absolving petitioner-
spouses Luis Toh and Vicky Tan Toh of any liability to respondent Solid Bank Corporation is REINSTATED and AFFIRMED. No costs.
199
G.R. No. 138544 October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner,

vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary
debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan
agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount
or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notified
thereof, or to give consent thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major
stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel the debtor to pay
the creditor and had no more reason to bind himself anew to the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner assails the December
22, 1998 Decision1 of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. Cuenca [herein respondent]
is RELEASED from liability to pay any amount stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuenca’s counterclaim is hereby DISMISSED for lack of merit.
"In all other respect[s], the decision appealed from is AFFIRMED."2
Also challenged is the April 14, 1999 CA Resolution,3 which denied petitioner’s Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision 4 of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925,
which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and
severally, plaintiff Security Bank & Trust Company the sum of ₱39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12%
interest per annum until fully paid, and the sum of ₱100,000.00 as attorney’s fees and litigation expenses and to pay the costs.
SO ORDERED."
The Facts
The facts are narrated by the Court of Appeals as follows:5
"The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged in logging
operations. It was a holder of a Timber License Agreement issued by the Department of Environment and Natural Resources (‘DENR’).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in the
amount of [e]ight [m]llion [p]esos (₱8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its logging
operations.
"The Credit Approval Memorandum expressly stated that the ₱8M Credit Loan Facility shall be effective until 30 November 1981:
‘JOINT CONDITIONS:
‘1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.
‘2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the company’s duly authorized signatory/ies;
200
‘3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a Makati account shall be
opened prior to availment on lines;
‘4. Lines shall expire on November 30, 1981; and
‘5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.’ (Emphasis
supplied.)
"To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed a Chattel Mortgage
dated 23 December 1980 (Exhibit ‘A’) over some of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for the
payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit ‘B’) in favor of
[Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:
xxx xxx xxx
‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for the payment, upon
demand and without the benefit of excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid
credit accommodation(s) x x x .’ (Emphasis supplied).
"On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the ₱8M-Credit Loan Facility, appellant SIMC made a
first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (₱6,100,000.00).
To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit ‘C’).
"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines.
Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No.
18021 entitled ‘Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca’. Said shares were bought by Adolfo Angala who was the
highest bidder during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate
amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (₱6,369,019.50). Accordingly, SIMC executed
Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts
of the abovementioned additional loans against the credit line.
"Appellant SIMC, however, encountered difficulty6 in making the amortization payments on its loans and requested [Petitioner] SBTC for a
complete restructuring of its indebtedness. SBTC accommodated appellant SIMC’s request and signified its approval in a letter dated 18 February
1988 (Exhibit ‘G’) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to
restructure the past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines
the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (₱8,800,000.00), to be applied to liquidate the principal
portion of defendant-appellant Sta. Ines[‘] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit ‘G’, Expediente, at
Vol. II, p. 336; Exhibit ‘5-B-Cuenca’, Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (₱3,400,000.00), to be applied to liquidate the past due
interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit ‘G’, Expediente, at Vol.
II, p. 336; Exhibit ‘5-B-Cuenca’, Expediente, at Vol. II, p. 33 to 34).’
"It should be pointed out that in restructuring defendant-appellant Sta. Ines’ obligations to [Petitioner] Security Bank, Promissory Note No. TD-
TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (₱6,100,000.00), which was the only loan incurred prior to the
expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December
1980 (Exhibit ‘3-Cuenca’, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e.,
Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits ‘D’, ‘E’, and ‘F’, Expediente, at Vol. II, pp. 333 to 335)
obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.
"Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the
following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT

RL/74/596/88 ₱8,800,000.00
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RL/74/597/88 ₱3,400,000.00
TOTAL ₱12,200,000.00
(Exhibits ‘H’ and ‘I’, Expediente, at Vol. II, pp. 338 to 343).
"To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-
appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit ‘5-Cuenca’, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of
the said Loan Agreement dated 31 October 1989 provides:
‘1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO HUNDRED
THOUSAND PESOS (₱12,200,000.00), Philippines [c]urrency (the ‘Loan’). The loan shall be released in two (2) tranches of ₱8,800,000.00 for
the first tranche (the ‘First Loan’) and ₱3,400,000.00 for the second tranche (the ‘Second Loan’) to be applied in the manner and for the purpose
stipulated hereinbelow.
‘1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrower’s present total outstanding indebtedness to the
Lender (the ‘indebtedness’) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.’
(Underscoring supplied.) (cf. p. 1 of Exhibit ‘5-Cuenca’, Expediente, at Vol. I, p. 33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security Bank in the amount of
[o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits ‘8’, ‘9-P-SIMC’ up to ‘9-GG-SIMC’, Expediente,
at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon appellant SIMC
and CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit ‘K’) and 27 June 1991 (Exhibit ‘L’), respectively.
"Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum of money on
14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x from which [Respondent] Cuenca appealed."
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier
granted by the bank to Sta. Ines. Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board
chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that credit accommodation. It
noted that the 1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no longer a
stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was for a total amount of ₱8
million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30,
1981, and only for an amount not exceeding ₱8 million.
It further held that the restructuring of Sta. Ines’ obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of time to
the debtor without the consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or modify the principal
obligation after the expiry date of the credit accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our consideration:8
"A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under the Indemnity
Agreement for the payment of the principal amount of twelve million two hundred thousand pesos (₱12,200,000.00) under Promissory Note No.
RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other
charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuenca’s liability under the Indemnity
Agreement covered only availments on SIMC’s credit line to the extent of eight million pesos (P8,000,000.00) and made
on or before 30 November 1981;
202
ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMC’s indebtedness under the
₱8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuenca’s consent,
thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMC’s indebtedness under the
₱8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing Respondent
Cuenca’s liability under the indemnity agreement;
B. Whether or not Respondent Cuenca’s liability under the Indemnity Agreement was extinguished by the payments made by SIMC;
C. Whether or not petitioner’s Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure."
Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the original credit
accommodation and Cuenca’s liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give
consent to any substitution, renewal, extension, increase, amendment, conversion or revival of the said credit accommodation. As preliminary
matters, the procedural questions raised by respondent will also be addressed.
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioner’s Motion for Reconsideration of the CA Decision, in merely rehashing the arguments already passed upon by
the appellate court, was pro forma; that as such, it did not toll the period for filing the present Petition for Review.9 Consequently, the Petition was
filed out of time.10
We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by the
appellate court. The Court has explained that a movant may raise the same arguments, precisely to convince the court that its ruling was
erroneous.11
Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley Development Corporation v.
Flojo,12 the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the proceedings. Hence,
"where the circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings, our Court has refused to
characterize the motion as simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of the
statutory right of appeal, that doctrine should be applied reasonably, rather than literally. The right to appeal, where it exists, is an important and
valuable right. Public policy would be better served by according the appellate court an effective opportunity to review the decision of the trial
court on the merits, rather than by aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for
reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other papers shall be done
personally. Except with respect to papers emanating from the court, a resort to other modes must be accompanied by a written explanation why
the service or filing was not done personally. A violation of this Rule may be cause to consider the paper as not filed."
Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort13 that the aforecited rule was mandatory, and that "only when personal
service or filing is not practicable may resort to other modes be had, which must then be accompanied by a written explanation as to why personal
service or filing was not practicable to begin with."
203
In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca "by registered mail in lieu of personal
service due to limitations in time and distance."14 This explanation sufficiently shows that personal service was not practicable. In any event, we
find no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n the absence of an express agreement, novation takes place only when the old
and the new obligations are incompatible on every point."15 Indeed, the following requisites must be established: (1) there is a previous valid
obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract. 16
Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not extinguish the
earlier one. It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations
incurred. It adds that the terms of the 1989 Contract were "not more onerous."17 Since the original credit accomodation was not extinguished, it
concludes that Cuenca is still liable under the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the
obligation18 obtained under the 1980 credit accomodation. This is evident from its explicit provision to "liquidate" the principal and the interest of
the earlier indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrower’s present total outstanding Indebtedness to the
Lender (the "Indebtedness") while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the
Indebtedness."19 (Italics supplied.)
The testimony of an officer20 of the bank that the proceeds of the 1989 Loan Agreement were used "to pay-off" the original indebtedness serves to
strengthen this ruling.21
Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist.
While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed ₱8 million, 22 the 1989 Agreement provided that
the loan was ₱12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions, "positive covenants" and "negative covenants" not found in the earlier obligation. As an
example of a positive covenant, Sta. Ines undertook "from time to time and upon request by the Lender, [to] perform such further acts and/or
execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of
this Loan Agreement."23 Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired,
nor would it participate in any merger or consolidation. 24
Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was
necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they
may benefit third persons who did not give their consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the ₱8 million original accommodation; it was not a
novation.25
This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to "liquidate," not to renew or
extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended
the original ₱8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil
Code, which specifically states that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty. x x x." In an earlier case,26 the Court explained the rationale of this provision in this wise:
"The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety’s consent would
deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the
maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming
insolvent during the extended period."
204
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit accommodation was
only for ₱8 million, and that it was for a period of one year ending on November 30, 1981. Petitioner objects to the appellate court’s reliance on
that document, contending that it was not a binding agreement because it was not signed by the parties. It adds that it was merely for its internal
use.
We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to the Complaint as Annex A was
a copy thereof "evidencing the accommodation."27 Moreover, in its Petition before this Court, it alluded to the Credit Approval Memorandum in
this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted by the Bank a credit line in the aggregate amount of Eight
Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations. For this purpose,
the Bank issued a Credit Approval Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and conditions of the ₱8 million credit accommodation as contained in the very document
it presented to the courts. Indeed, it cannot take advantage of that document by agreeing to be bound only by those portions that are favorable to
it, while denying those that are disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca "impliedly gave his consent to any modification of the credit
accommodation or otherwise waived his right to be notified of, or to give consent to, the same." 28 Respondent’s consent or waiver thereof is
allegedly found in the Indemnity Agreement, in which he held himself liable for the "credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments, conversions and revival." It explains that the novation of the original credit
accommodation by the 1989 Loan Agreement is merely its "renewal," which "connotes cessation of an old contract and birth of another one x x
x."29
At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes
the latter’s obligation. As the Court held in National Bank v. Veraguth,30 "[i]t is fundamental in the law of suretyship that any agreement between
the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the
surety from liability."
In this case, petitioner’s assertion - that respondent consented to the alterations in the credit accommodation -- finds no support in the text of the
Indemnity Agreement, which is reproduced hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati
Metro Manila for and in consideration of the credit accommodation in the total amount of eight million pesos (₱8,000,000.00) granted by the
SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the laws of the Philippine,
6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP.,
x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY
NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and severally with the
CLIENT in favor of the BANK for the payment , upon demand and without benefit of excussion of whatever amount or amounts the CLIENT may
be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases,
amendment, conversions and revivals of the aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations
that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the
BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made, or may hereafter be executed
by and between the parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the
aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of
all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof by
reference."
While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context
of the ₱8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the
original credit accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking the bank’s submission to
the extreme, respondent (or his successors) would be liable for loans even amounting to, say, ₱100 billion obtained 100 years after the expiration
of the credit accommodation, on the ground that he consented to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend to more than what is stipulated. It is strictly construed against the creditor, every
doubt being resolved against enlarging the liability of the surety."31 Likewise, the Court has ruled that "it is a well-settled legal principle that if
there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous
contracts are construed against the party who caused the ambiguity."32 In the absence of an unequivocal provision that respondent waived his right
to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioner’s view that there was such a
waiver.
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It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally
change the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this condition:
"5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower." 33
We reject petitioner’s submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any modification in the
original loan accommodation.34 Following the bank’s reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but
would still be valid as to respondent to whom no notice need be given. The latter’s liability would thus be more burdensome than that of the
former. Such untenable theory is contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal. 35
The present controversy must be distinguished from Philamgen v. Mutuc,36 in which the Court sustained a stipulation whereby the surety
consented to be bound not only for the specified period, "but to any extension thereafter made, an extension x x x that could be had without his
having to be notified."
In that case, the surety agreement contained this unequivocal stipulation: "It is hereby further agreed that in case of any extension of renewal of
the bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing
another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond
which may be granted under this indemnity agreement."
In the present case, there is no such express stipulation.1âwphi1 At most, the alleged basis of respondent’s waiver is vague and uncertain. It
confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation without the consent of the surety or notice
thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was no need for respondent to
execute another surety contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal
obligation inordinately.37 In Dino v. CA,38 the Court held that "a continuing guaranty is one which covers all transactions, including those arising
in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof."
To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit accommodation: (1) that the obligation
should not exceed ₱8 million, and (2) that the accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety
only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of ₱8 million.
Accordingly, the surety of Cuenca secured only the first loan of ₱6.1 million obtained on November 26, 1991. It did not secure the subsequent
loans, purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan
Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original one,
which was covered by a continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically
provided that "each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation." Since
the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary, respondent’s liability was confined to the 1980 credit accommodation, the
amount and the expiry date of which were set down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and solidary signature") of a major stockholder or corporate officer, as an additional
security for loans granted to corporations. There are at least two reasons for this. First, in case of default, the creditor’s recourse, which is
normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the
surety. Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by
the corporation.
Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the chairman and
president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to
assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer or a stockholder of
the debtor-corporation. Verily, he was not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.
206
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of negligence on
the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having
been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the
loan. Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer connected with the corporation at the
time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a
fairly obtained surety. For its defeat in this litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 ₱8 million credit accommodation. Hence,
the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject
petitioner’s submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit
accommodation.
In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation has been
paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
207
G.R. No. 159912 August 17, 2007
UNITED COCONUT PLANTERS BANK, Petitioner,

vs.
SPOUSES SAMUEL and ODETTE BELUSO, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to annul the Court of Appeals Decision1 dated 21
January 2003 and its Resolution2 dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision and Resolution
affirmed in turn the Decision3 dated 23 March 2000 and Order4 dated 8 May 2000 of the Regional Trial Court (RTC), Branch 65 of Makati City,
in Civil Case No. 99-314, declaring void the interest rate provided in the promissory notes executed by the respondents Spouses Samuel and
Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).
The procedural and factual antecedents of this case are as follows:
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement whereby the latter could avail from the
former credit of up to a maximum amount of ₱1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other than
their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered by Transfer Certificates of Title No. T-31539 and T-
27828, as additional security for the obligation. The Credit Agreement was subsequently amended to increase the amount of the Promissory
Notes Line to a maximum of ₱2.35 Million pesos and to extend the term thereof to 28 February 1998.
The spouses Beluso availed themselves of the credit line under the following Promissory Notes:
PN # Date of PN Maturity Date Amount Secured

8314-96-00083-3 29 April 1996 27 August 1996 ₱ 700,000
8314-96-00085-0 2 May 1996 30 August 1996 ₱ 500,000
8314-96-000292-2 20 November 1996 20 March 1997 ₱ 800,000
The three promissory notes were renewed several times. On 30 April 1997, the payment of the principal and interest of the latter two promissory
notes were debited from the spouses Beluso’s account with UCPB; yet, a consolidated loan for ₱1.3 Million was again released to the spouses
Beluso under one promissory note with a due date of 28 February 1998.
To completely avail themselves of the ₱2.35 Million credit line extended to them by UCPB, the spouses Beluso executed two more promissory
notes for a total of ₱350,000.00:
PN # Date of PN Maturity Date Amount Secured

97-00363-1 11 December 1997 28 February 1998 ₱ 200,000
98-00002-4 2 January 1998 28 February 1998 ₱ 150,000
However, the spouses Beluso alleged that the amounts covered by these last two promissory notes were never released or credited to their account
and, thus, claimed that the principal indebtedness was only ₱2 Million.
In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to 34%. From 1996 to February 1998 the spouses
Beluso were able to pay the total sum of ₱763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the obligations of the spouses Beluso, as follows:
PN # Amount Secured Interest Penalty Total

97-00363-1 ₱ 200,000 31% 36% ₱ 225,313.24
97-00366-6 ₱ 700,000 30.17% 32.786% ₱ 795,294.72
(7 days) (102 days)
97-00368-2 ₱ 1,300,000 28% 30.41% ₱ 1,462,124.54
(2 days) (102 days)
98-00002-4 ₱ 150,000 33% 36% ₱ 170,034.71
(102 days)
The spouses Beluso, however, failed to make any payment of the foregoing amounts.
208
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of ₱2,932,543.00 plus 25% attorney’s fees, but the
spouses Beluso failed to comply therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure
their credit line, which, by that time, already ballooned to ₱3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and Damages against UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by [UCPB] void and the foreclosure and Sheriff’s
Certificate of Sale void. [UCPB] is hereby ordered to return to [the spouses Beluso] the properties subject of the foreclosure; to pay [the spouses
Beluso] the amount of ₱50,000.00 by way of attorney’s fees; and to pay the costs of suit. [The spouses Beluso] are hereby ordered to pay [UCPB]
the sum of ₱1,560,308.00.5
On 8 May 2000, the RTC denied UCPB’s Motion for Reconsideration, 6 prompting UCPB to appeal the RTC Decision with the Court of Appeals.
The Court of Appeals affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial Court, Branch 65, Makati City in Civil Case No.
99-314 is hereby AFFIRMED subject to the modification that defendant-appellant UCPB is not liable for attorney’s fees or the costs of suit. 7
On 9 September 2003, the Court of Appeals denied UCPB’s Motion for Reconsideration for lack of merit. UCPB thus filed the present petition,
submitting the following issues for our resolution:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON INTEREST RATE AGREED
UPON BETWEEN PETITIONER AND RESPONDENTS
II
AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF RESPONDENTS’ INDEBTEDNESS AND ORDERED RESPONDENTS
TO PAY PETITIONER THE AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT
PESOS (₱1,560,308.00)
III
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY PETITIONER OF THE SUBJECT
PROPERTIES DUE TO AN ALLEGED "INCORRECT COMPUTATION" OF RESPONDENTS’ INDEBTEDNESS
IV
AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN
LENDING ACT
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED
TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF FORUM SHOPPING8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision found in the promissory notes of the spouses Beluso is void,
as the interest rates and the bases therefor were determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE BELUSO (BORROWER), jointly and severally
promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the
209
sum of ______________ PESOS, (P_____), Philippine Currency, with interest thereon at the rate indicative of DBD retail rate or as determined
by the Branch Head.9
UCPB asserts that this is a reversible error, and claims that while the interest rate was not numerically quantified in the face of the promissory
notes, it was nonetheless categorically fixed, at the time of execution thereof, at the "rate indicative of the DBD retail rate." UCPB contends that
said provision must be read with another stipulation in the promissory notes subjecting to review the interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the prevailing financial
and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all dealings with the BORROWER. 10
In this regard, UCPB avers that these are valid reference rates akin to a "prevailing rate" or "prime rate" allowed by this Court in Polotan v. Court
of Appeals.11 Furthermore, UCPB argues that even if the proviso "as determined by the branch head" is considered void, such a declaration would
not ipso facto render the connecting clause "indicative of DBD retail rate" void in view of the separability clause of the Credit Agreement, which
reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained in this AGREEMENT, or documents executed in connection
herewith shall be declared invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions
hereof shall not in any way be affected or impaired.12
According to UCPB, the imposition of the questioned interest rates did not infringe on the principle of mutuality of contracts, because the spouses
Beluso had the liberty to choose whether or not to renew their credit line at the new interest rates pegged by petitioner. 13 UCPB also claims that
assuming there was any defect in the mutuality of the contract at the time of its inception, such defect was cured by the subsequent conduct of the
spouses Beluso in availing themselves of the credit line from April 1996 to February 1998 without airing any protest with respect to the interest
rates imposed by UCPB. According to UCPB, therefore, the spouses Beluso are in estoppel. 14
We agree with the Court of Appeals, and find no merit in the contentions of UCPB.
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals,15 where we held:
In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based
on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one
of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the P1.8 million loan agreement
between the PNB and the private respondent gave the PNB a license (although in fact there was none) to increase the interest rate at will during
the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker
party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85).
Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition.
The provision stating that the interest shall be at the "rate indicative of DBD retail rate or as determined by the Branch Head" is indeed dependent
solely on the will of petitioner UCPB. Under such provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a rate
indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB is given this choice, the rate should be categorically
determinable in both choices. If either of these two choices presents an opportunity for UCPB to fix the rate at will, the bank can easily choose
such an option, thus making the entire interest rate provision violative of the principle of mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the will of UCPB. Clearly, a rate "as determined by the Branch Head" gives
the latter unfettered discretion on what the rate may be. The Branch Head may choose any rate he or she desires. As regards the rate "indicative of
the DBD retail rate," the same cannot be considered as valid for being akin to a "prevailing rate" or "prime rate" allowed by this Court in Polotan.
The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank and Trust Company. x x x. 16
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the parties can easily determine the interest rate by applying
simple arithmetic. On the other hand, the provision in the case at bar does not specify any margin above or below the DBD retail rate. UCPB can
peg the interest at any percentage above or below the DBD retail rate, again giving it unfettered discretion in determining the interest rate.
The stipulation in the promissory notes subjecting the interest rate to review does not render the imposition by UCPB of interest rates on the
obligations of the spouses Beluso valid. According to said stipulation:
210
The interest rate shall be subject to review and may be increased or decreased by the LENDER considering among others the prevailing financial
and monetary conditions; or the rate of interest and charges which other banks or financial institutions charge or offer to charge for similar
accommodations; and/or the resulting profitability to the LENDER after due consideration of all dealings with the BORROWER. 17
It should be pointed out that the authority to review the interest rate was given UCPB alone as the lender. Moreover, UCPB may apply the
considerations enumerated in this provision as it wishes. As worded in the above provision, UCPB may give as much weight as it desires to each
of the following considerations: (1) the prevailing financial and monetary condition; (2) the rate of interest and charges which other banks or
financial institutions charge or offer to charge for similar accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after
due consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of the interest rate provision, there is no fixed
margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB as to the interest to be imposed, as both options
violate the principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited by
law or is against public policy.18
The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil Code on mutuality of contracts, but also, as
shall be discussed later, because they violate the Truth in Lending Act. Not disclosing the true finance charges in connection with the extensions
of credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of the State as stated in the Truth in Lending
Act:
Sec. 2. Declaration of Policy. – It is hereby declared to be the policy of the State to protect its citizens from a lack of awareness of the true cost of
credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national
economy.19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending provisions are found in the promissory notes
themselves, not in the credit line. In fixing the interest rates in the promissory notes to cover the renewed credit line, UCPB still reserved to itself
the same two options – (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates imposed by UCPB, both failed to include in their
computation of the outstanding obligation of the spouses Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty charges
were also deleted in the decisions of the RTC and the Court of Appeals. Section 2.04, Article II on "Interest and other Bank Charges" of the
subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this ARTICLE, any principal obligation of the CLIENT
hereunder which is not paid when due shall be subject to a penalty charge of one percent (1%) of the amount of such obligation per month
computed from due date until the obligation is paid in full. If the bank accelerates teh (sic) payment of availments hereunder pursuant to
ARTICLE VIII hereof, the penalty charge shall be used on the total principal amount outstanding and unpaid computed from the date of
acceleration until the obligation is paid in full.20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally, agree to pay an additional sum equivalent to
twenty-five percent (25%) of the total due on the Note as attorney’s fee, aside from the expenses and costs of collection whether actually incurred
or not, and a penalty charge of one percent (1%) per month on the total amount due and unpaid from date of default until fully paid.21
Petitioner further claims that it is likewise entitled to attorney’s fees, pursuant to Section 9.06 of the Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights under this AGREEMENT, the Note(s), the collaterals and other
related documents, the BANK shall be entitled to recover attorney’s fees equivalent to not less than twenty-five percent (25%) of the total
amounts due and outstanding exclusive of costs and other expenses.22
Another alleged computational error pointed out by UCPB is the negation of the Compounding Interest agreed upon by the parties under Section
2.02 of the Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal and shall be subject to the same interest rate as
herein stipulated.23 and paragraph 3 of the subject promissory notes:
211
Interest not paid when due shall be added to, and become part of the principal and shall likewise bear interest at the same rate.24
UCPB lastly avers that the application of the spouses Beluso’s payments in the disputed computation does not reflect the parties’
agreement.1avvphi1 The RTC deducted the payment made by the spouses Beluso amounting to ₱763,693.00 from the principal of ₱2,350,000.00.
This was allegedly inconsistent with the Credit Agreement, as well as with the agreement of the parties as to the facts of the case. In paragraph 7
of the spouses Beluso’s Manifestation and Motion on Proposed Stipulation of Facts and Issues vis-à-vis UCPB’s Manifestation, the parties agreed
that the amount of ₱763,693.00 was applied to the interest and not to the principal, in accord with Section 3.03, Article II of the Credit Agreement
on "Order of the Application of Payments," which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in accordance with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorney’s Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any. 25
Thus, according to UCPB, the interest charges, penalty charges, and attorney’s fees had been erroneously excluded by the RTC and the Court of
Appeals from the computation of the total amount due and demandable from spouses Beluso.
The spouses Beluso’s defense as to all these issues is that the demand made by UCPB is for a considerably bigger amount and, therefore, the
demand should be considered void. There being no valid demand, according to the spouses Beluso, there would be no default, and therefore the
interests and penalties would not commence to run. As it was likewise improper to foreclose the mortgaged properties or file a case against the
spouses Beluso, attorney’s fees were not warranted.
We agree with UCPB on this score. Default commences upon judicial or extrajudicial demand. 26 The excess amount in such a demand does not
nullify the demand itself, which is valid with respect to the proper amount. A contrary ruling would put commercial transactions in disarray, as
validity of demands would be dependent on the exactness of the computations thereof, which are too often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are considered in default with respect to the proper amount
and, therefore, the interests and the penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized that said legal interest should be imposed, thus:
"There being no valid stipulation as to interest, the legal rate of interest shall be charged." 27 It seems that the RTC inadvertently overlooked its
non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in both the body and the prayer of its petition with
the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the respondent Bank is null and void, only the legal rate of interest
which is 12% per annum can be legally charged and imposed by the bank, which would amount to only about P599,000.00 since 1996 up to
August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:
xxxx
212
2. By way of example for the public good against the Bank’s taking unfair advantage of the weaker party to their contract, declaring the legal rate
of 12% per annum, as the imposable rate of interest up to February 28, 1999 on the loan of 2.350 million. 28
All these show that the spouses Beluso had acknowledged before the RTC their obligation to pay a 12% legal interest on their loans. When the
RTC failed to include the 12% legal interest in its computation, however, the spouses Beluso merely defended in the appellate courts this non-
inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose a 12% legal interest in favor of petitioner in the case at
bar, as what we have voided is merely the stipulated rate of interest and not the stipulation that the loan shall earn interest.
We must likewise uphold the contract stipulation providing the compounding of interest. The provisions in the Credit Agreement and in the
promissory notes providing for the compounding of interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the
spouses Beluso in their petition with the RTC. The compounding of interests has furthermore been declared by this Court to be legal. We have
held in Tan v. Court of Appeals,29 that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.
As regards the imposition of penalties, however, although we are likewise upholding the imposition thereof in the contract, we find the rate
iniquitous. Like in the case of grossly excessive interests, the penalty stipulated in the contract may also be reduced by the courts if it is iniquitous
or unconscionable.30
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous considering the fact that this penalty is already over and
above the compounded interest likewise imposed in the contract. If a 36% interest in itself has been declared unconscionable by this Court,31 what
more a 30.41% to 36% penalty, over and above the payment of compounded interest? UCPB itself must have realized this, as it gave us a sample
computation of the spouses Beluso’s obligation if both the interest and the penalty charge are reduced to 12%.
As regards the attorney’s fees, the spouses Beluso can actually be liable therefor even if there had been no demand. Filing a case in court is the
judicial demand referred to in Article 116932 of the Civil Code, which would put the obligor in delay.
The RTC, however, also held UCPB liable for attorney’s fees in this case, as the spouses Beluso were forced to litigate the issue on the illegality
of the interest rate provision of the promissory notes. The award of attorney’s fees, it must be recalled, falls under the sound discretion of the
court.33 Since both parties were forced to litigate to protect their respective rights, and both are entitled to the award of attorney’s fees from the
other, practical reasons dictate that we set off or compensate both parties’ liabilities for attorney’s fees. Therefore, instead of awarding attorney’s
fees in favor of petitioner, we shall merely affirm the deletion of the award of attorney’s fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest of 12% per annum and a penalty charge of 12%
per annum. We also hold that, instead of awarding attorney’s fees in favor of petitioner, we shall merely affirm the deletion of the award of
attorney’s fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already been consolidated on 19 February 2001 and 20 March 2001 in the
name of UCPB, as the spouses Beluso failed to exercise their right of redemption which expired on 25 March 2000. The RTC, however, annulled
the foreclosure of mortgage based on an alleged incorrect computation of the spouses Beluso’s indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in the case at bar. Furthermore, the annulment of the
foreclosure proceedings and the certificates of sale were mooted by the subsequent issuance of new certificates of title in the name of said bank.
UCPB claims that the spouses Beluso’s action for annulment of foreclosure constitutes a collateral attack on its certificates of title, an act
proscribed by Section 48 of Presidential Decree No. 1529, otherwise known as the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. – A certificate of title shall not be subject to collateral attack. It cannot be altered, modified
or cancelled except in a direct proceeding in accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an excessive demand on their account, they cannot be said to be in
default for refusing to pay the same. Consequently, according to the spouses Beluso, the "enforcement of such illegal and overcharged demand
through foreclosure of mortgage" should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already found that a valid demand was made by UCPB
upon the spouses Beluso, despite being excessive, the spouses Beluso are considered in default with respect to the proper amount of their
obligation to UCPB and, thus, the property they mortgaged to secure such amounts may be foreclosed. Consequently, proceeds of the foreclosure
sale should be applied to the extent of the amounts to which UCPB is rightfully entitled.
213
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in this case. The grounds for the proper annulment of
the foreclosure sale are the following: (1) that there was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the
purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price was inadequate and the inadequacy was so great as to
shock the conscience of the court.34
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of ₱26,000.00 for UCPB’s alleged violation of Republic Act No. 3765, otherwise
known as the Truth in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act which mandates the filing of an action to recover
such penalty must be made under the following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or
any regulation issued thereunder shall be liable to such person in the amount of ₱100 or in an amount equal to twice the finance charge required
by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed ₱2,000 on any credit
transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in
any court of competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the original complaint did not explicitly allege a violation of the ‘Truth
in Lending Act’ and no action to formally admit the amended petition [which expressly alleges violation of the Truth in Lending Act] was made
either by [respondents] spouses Beluso and the lower court. x x x."35
UCPB further claims that the action to recover the penalty for the violation of the Truth in Lending Act had been barred by the one-year
prescriptive period provided for in the Act. UCPB asserts that per the records of the case, the latest of the subject promissory notes had been
executed on 2 January 1998, but the original petition of the spouses Beluso was filed before the RTC on 9 February 1999, which was after the
expiration of the period to file the same on 2 January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of the ‘Truth in Lending Act’ and no action to formally admit the amended
petition was made either by [respondents] spouses Beluso and the lower court. In such transactions, the debtor and the lending institutions do not
deal on an equal footing and this law was intended to protect the public from hidden or undisclosed charges on their loan obligations, requiring a
full disclosure thereof by the lender. We find that its infringement may be inferred or implied from allegations that when [respondents] spouses
Beluso executed the promissory notes, the interest rate chargeable thereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to
disclose in full to [respondents] Spouses Beluso the charges applicable on their loans. 36
We agree with the Court of Appeals. The allegations in the complaint, much more than the title thereof, are controlling. Other than that stated by
the Court of Appeals, we find that the allegation of violation of the Truth in Lending Act can also be inferred from the same allegation in the
complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the provision of their promissory note granting
respondent bank the power to unilaterally fix the interest rates, which rate was not determined in the promissory note but was left solely to the
will of the Branch Head of the respondent Bank, x x x.37
The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest rates certainly also means that the promissory notes
do not contain a "clear statement in writing" of "(6) the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the
finance charge bears to the amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the
obligation."38 Furthermore, the spouses Beluso’s prayer "for such other reliefs just and equitable in the premises" should be deemed to include the
civil penalty provided for in Section 6(a) of the Truth in Lending Act.
UCPB’s contention that this action to recover the penalty for the violation of the Truth in Lending Act has already prescribed is likewise without
merit. The penalty for the violation of the act is ₱100 or an amount equal to twice the finance charge required by such creditor in connection with
such transaction, whichever is greater, except that such liability shall not exceed ₱2,000.00 on any credit transaction. 39 As this penalty depends on
the finance charge required of the borrower, the borrower’s cause of action would only accrue when such finance charge is required. In the case at
bar, the date of the demand for payment of the finance charge is 2 September 1998, while the foreclosure was made on 28 December 1998. The
filing of the case on 9 February 1999 is therefore within the one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be inferred nor implied from the allegations made in
the complaint.40 Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or
any regulation issued thereunder shall be liable to such person in the amount of ₱100 or in an amount equal to twice the finance charge required
214
by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed ₱2,000 on any credit
transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in
any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable
for reasonable attorney’s fees and court costs as determined by the court.
xxxx
(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than ₱1,000 or more
than ₱5,000 or imprisonment for not less than 6 months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act gives rise to both criminal and civil
liabilities. Section 6(c) considers a criminal offense the willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both.
Section 6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any information of the required information to
any person in violation of the Act. The penalty therefor is an amount of ₱100 or in an amount equal to twice the finance charge required by the
creditor in connection with such transaction, whichever is greater, except that the liability shall not exceed ₱2,000.00 on any credit transaction.
The action to recover such penalty may be instituted by the aggrieved private person separately and independently from the criminal case for the
same offense.
In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the Truth in Lending Act had been jointly instituted with
(1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure void. This joinder is allowed under
Rule 2, Section 5 of the Rules of Court, which provides:
SEC. 5. Joinder of causes of action.—A party may in one pleading assert, in the alternative or otherwise, as many causes of action as he may
have against an opposing party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions governed by special rules;
(c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be allowed
in the Regional Trial Court provided one of the causes of action falls within the jurisdiction of said court and the venue lies therein;
and
(d) Where the claims in all the causes of action are principally for recovery of money, the aggregate amount claimed shall be the test
of jurisdiction.
In attacking the RTC’s disposition on the violation of the Truth in Lending Act since the same was not alleged in the complaint, UCPB is actually
asserting a violation of due process. Indeed, due process mandates that a defendant should be sufficiently apprised of the matters he or she would
be defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed by the spouses Beluso before the RTC, the claim for civil
sanctions for violation of the Truth in Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act in not informing the borrower in writing before the execution
of the Promissory Notes of the interest rate expressed as a percentage of the total loan, the respondent bank instead is liable to pay petitioners
double the amount the bank is charging petitioners by way of sanction for its violation. 41
In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act provision to express the interest rate as a simple
annual percentage of the loan?42
These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of the assertion of this issue in this case as to prevent
it from putting up a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and adjudicate the alleged violation of the Truth in
Lending Act, considering that the present action allegedly involved a single credit transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of the Truth in Lending Act had been jointly
instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure void. There had
been no question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the above-quoted Section 5 of the Rules of Court
on Joinder of Causes of Action provides:
215
(c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be allowed in the
Regional Trial Court provided one of the causes of action falls within the jurisdiction of said court and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan or mutuum, since the former is merely a preparatory contract to the
contract of loan or mutuum. Under such credit line, the bank is merely obliged, for the considerations specified therefor, to lend to the other party
amounts not exceeding the limit provided. The credit transaction thus occurred not when the credit line was opened, but rather when the credit
line was availed of. In the case at bar, the violation of the Truth in Lending Act allegedly occurred not when the parties executed the Credit
Agreement, where no interest rate was mentioned, but when the parties executed the promissory notes, where the allegedly offending interest rate
was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of the subject promissory notes after their execution, then they were
duly notified of the terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished prior to the
consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not
incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that
banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the
like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent
to the contract, and to properly evaluate their options in arriving at business decisions. Upholding UCPB’s claim of substantial compliance would
defeat these purposes of the Truth in Lending Act. The belated discovery of the true cost of credit will too often not be able to reverse the ill
effects of an already consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso after execution, are not sufficient notification from
UCPB. As earlier discussed, the interest rate provision therein does not sufficiently indicate with particularity the interest rate to be applied to the
loan covered by said promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City) on the ground that the spouses Beluso
instituted another case (Civil Case No. V-7227) before the RTC of Roxas City, involving the same parties and issues. UCPB claims that while
Civil Case No. V-7227 initially appears to be a different action, as it prayed for the issuance of a temporary restraining order and/or injunction to
stop foreclosure of spouses Beluso’s properties, it poses issues which are similar to those of the present case.43 To prove its point, UCPB cited the
spouses Beluso’s Amended Petition in Civil Case No. V-7227, which contains similar allegations as those in the present case. The RTC of Makati
denied UCPB’s Motion to Dismiss Case No. 99-314 for lack of merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is
raising the same issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a Petition for Injunction Against Foreclosure, is
the propriety of the foreclosure before the true account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314 before
the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso claim that Civil Case No. V-7227 has become moot
because, before the RTC of Roxas City could act on the restraining order, UCPB proceeded with the foreclosure and auction sale. As the act
sought to be restrained by Civil Case No. V-7227 has already been accomplished, the spouses Beluso had to file a different action, that of
Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati City.
216
Even if we assume for the sake of argument, however, that only one cause of action is involved in the two civil actions, namely, the violation of
the right of the spouses Beluso not to have their property foreclosed for an amount they do not owe, the Rules of Court nevertheless allows the
filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before the filing of Case No. 99-314 with the RTC of
Makati City, since the venue of litigation as provided for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following instances:
SEC. 5. Effect of dismissal.—Subject to the right of appeal, an order granting a motion to dismiss based on paragraphs (f), (h) and (i) of section 1
hereof shall bar the refiling of the same action or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1, not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.—Within the time for but before filing the answer to the complaint or pleading asserting a claim, a motion to dismiss may
be made on any of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same cause;
(f) That the cause of action is barred by a prior judgment or by the statute of limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiff’s pleading has been paid, waived, abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the provisions of the statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied with. 44 (Emphases supplied.)
When an action is dismissed on the motion of the other party, it is only when the ground for the dismissal of an action is found in paragraphs (f),
(h) and (i) that the action cannot be refiled. As regards all the other grounds, the complainant is allowed to file same action, but should take care
that, this time, it is filed with the proper court or after the accomplishment of the erstwhile absent condition precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the spouses Beluso on 15 January 1999 with the RTC
of Roxas City, which Motion had not yet been ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence,
there were allegedly two pending actions between the same parties on the same issue at the time of the filing of Civil Case No. 99-314 on 9
February 1999 with the RTC of Makati. This will still not change our findings. It is indeed the general rule that in cases where there are two
pending actions between the same parties on the same issue, it should be the later case that should be dismissed. However, this rule is not
absolute. According to this Court in Allied Banking Corporation v. Court of Appeals45 :
In these cases, it is evident that the first action was filed in anticipation of the filing of the later action and the purpose is to preempt the later suit
or provide a basis for seeking the dismissal of the second action.
Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed if the later action is the more appropriate vehicle
for the ventilation of the issues between the parties. Thus, in Ramos v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case should yield to the earlier case. What is required merely is that there be another
pending action, not a prior pending action. Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the
property involved, no error was committed by the lower court in deferring to the Bataan court's jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant considerations in determining which action should be dismissed: (1)
the date of filing, with preference generally given to the first action filed to be retained; (2) whether the action sought to be dismissed was filed
merely to preempt the later action or to anticipate its filing and lay the basis for its dismissal; and (3) whether the action is the appropriate vehicle
for litigating the issues between the parties.
217
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for injunction against a foreclosure sale that has already
been held, while Civil Case No. 99-314 before the RTC of Makati City includes an action for the annulment of said foreclosure, an action
certainly more proper in view of the execution of the foreclosure sale. The former case was improperly filed in Roxas City, while the latter was
filed in Makati City, the proper venue of the action as mandated by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-314 is
the more appropriate vehicle for litigating the issues between the parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of
Makati City was not in error in not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following MODIFICATIONS:
1. In addition to the sum of ₱2,350,000.00 as determined by the courts a quo, respondent spouses Samuel and Odette Beluso are also
liable for the following amounts:
a. Penalty of 12% per annum on the amount due46 from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due47 from date of demand;
2. The following amounts shall be deducted from the liability of the spouses Samuel and Odette Beluso:
a. Payments made by the spouses in the amount of ₱763,692.00. These payments shall be applied to the date of actual
payment of the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of the time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of ₱26,000.00. This amount shall be deducted from the liability of
the spouses Samuel and Odette Beluso on 9 February 1999 to the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the Regional Trial Court and the Court
of Appeals ordered respondents to pay, as modified in this Decision, shall be deducted from the proceeds of the foreclosure sale.
SO ORDERED.
218
G.R. No. 161397 June 30, 2005
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
FELIPE P. ARCILLA, JR., Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 161426 June 30, 2005
FELIPE P. ARCILLA, JR., Petitioner,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
DECISION
CALLEJO, SR., J.:
Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the Philippines (DBP) in October 1981. About five or six months
thereafter, he was assigned to the legal department, and thereafter, decided to avail of a loan under the Individual Housing Project (IHP) of the
bank.1 On September 12, 1983, DBP and Arcilla executed a Deed of Conditional Sale2 over a parcel of land, as well as the house to be
constructed thereon, for the price of ₱160,000.00. Arcilla borrowed the said amount from DBP for the purchase of the lot and the construction of
a residential building thereon. He obliged himself to pay the loan in 25 years, with a monthly amortization of ₱1,417.91, with 9% interest per
annum, to be deducted from his monthly salary.3
DBP obliged itself to transfer the title of the property upon the payment of the loan, including any increments thereof. It was also agreed therein
that if Arcilla availed of optional retirement, he could elect to continue paying the loan, provided that the loan/amount would be converted into a
regular real estate loan account with the prevailing interest assigned on real estate loans, payable within the remaining term of the loan account.4
Arcilla was notified of the periodic release of his loan.5 During the period of July 1984 to December 31, 1986, the monthly amortizations for the
said account were deducted from his monthly salary, for which he was issued receipts.6
The monthly amortization was increased to ₱1,468.92 in November 1984, and to ₱1,691.51 beginning January 1985. However, Arcilla opted to
resign from the bank in December 1986. Conformably with the Deed of Conditional Sale, the bank informed him, on June 11, 1987, that the
balance of his loan account with the bank had been converted to a regular housing loan, thus:
Monthly
Amount converted to PH Loan Interest Rate Remaining Term
Amortization
₱ 155,218.79 - 1 9% 22 yrs. & 6 mos< ₱1,342.72
6,802.45 - 2 9% 21 yrs. & 10 mos. 59.41
24,342.91 - 3 9% 22 yrs. 212.07
Plus: MRI at PC. 41/thousand ₱1,614.20
76.41
₱186,364.15 Total ₱1,690.617

=========
On July 24, 1987, Arcilla signed three Promissory Notes 8 for the total amount of ₱186,364.15. He was also obliged to pay service charge and
interests, as follows:
a.1 On the amount advanced or balance thereof that remains unpaid for 30 days* or less:
i. Interest on advances at 7% p.a. over DBP's borrowing cost:
ii. No 2% service charge
iii. No 8% penalty charge
a.2 On the amount advanced or balance thereof that remains unpaid for more than 30 days:
i. Interest on the advance at 7% p.a. ]
219
over DBP's borrowing cost; ]
ii. One time 2% service charge ] -- To be computed from
iii. Interest on the service charge ] the start of the 30-day
iv. 8% penalty charge on the balances ] period
of the advances and service charge.9
Arcilla also agreed to pay to DBP the following:
*Insurance Premiums - 30-day period to be computed from date of advances
Other Advances - 30-day period to be computed from date of notification
b. Taxes
b.1 One time service charge 2% of the amount advanced
b.2 Interest and penalty charge Interest - 7% p.a. over borrowing cost
Penalty charge û 8% p.a. if unpaid
after 30 days from date of advance
i. Interest of the advance at ]
7% p.a. over DBP's ]
borrowing costs; ]-- To be computed from start of 30-day period
ii. One time 2% service charge ]
iii. Interest on the service charge ]
iv. 8% penalty charge on the ]
balances of the advance and ]
service charge. ]
*Insurance Premiums - 30-day period to be computed from date of advances.
Other Advances - 30-day period to be computed from date of notification.
b. Taxes
b.1 One time service charge 2% of the amount advanced
b.2 Interest and penalty charge Interest - 7% p.a. over borrowing cost
Penalty charge û 8% p.a. if unpaid
after 30 days from date of advance
However, Arcilla also agreed to the reservation by the DBP of its right to increase (with notice to him) the "rate of interest on the loan, as well as
all other fees and charges on loans and advances pursuant to such policy as it may adopt from time to time during the period of the loan;
Provided, that the rate of interest on the loan shall be reduced by law or by the Monetary Board; Provided, further, that the adjustment in the rate
of interest shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest." 10
Upon his request, DBP agreed to grant Arcilla an additional cash advance of ₱32,000.00. Thereafter, on May 23, 1984, a Supplement to the
Conditional Sale Agreement was executed in which DBP and Arcilla agreed on the following terms of the loan:
Amount Interest Rate Per Annum Terms Amortization

₱32,000.00 Nine (9%) per cent MRI for P32,000.00 at P0.40/1,000.00 24 years ₱271.57
12.80
₱32,000.00 same to be consolidated with the original advance in (Est.
accordance with Condition No. 8 hereof.11 Amort.) ₱ 284.37
=========
The additional advance was, thus, consolidated to the outstanding balance of Arcilla's original advance, payable within the remaining term thereof
at 9% per annum. However, he failed to pay his loan account, advances, penalty charges and interests which, as of October 31, 1990, amounted to
₱241,940.93.12 DBP rescinded the Deed of Conditional Sale by notarial act on November 27, 1990. 13 Nevertheless, it wrote Arcilla, on January 3,
1992, giving him until October 24, 1992, within which to repurchase the property upon full payment of the current appraisal or updated total,
220
whichever is lesser; in case of failure to do so, the property would be advertised for bidding. 14 DBP reiterated the said offer on October 7,
1992.15 Arcilla failed to respond. Consequently, the property was advertised for sale at public bidding on February 14, 1994. 16
Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of Antipolo, Rizal, on February 21, 1994. He alleged that DBP failed
to furnish him with the disclosure statement required by Republic Act (R.A.) No. 3765 and Central Bank (CB) Circular No. 158 prior to the
execution of the deed of conditional sale and the conversion of his loan account with the bank into a regular housing loan account. Despite this,
DBP immediately deducted the account from his salary as early as 1984. Moreover, the bank applied its own formula and imposed its usurious
interests, penalties and charges on his loan account and advances. He further alleged, thus:
13. That when plaintiff could no longer cope-up with defendant's illegal and usurious impositions, the DBP unilaterally increased further the rate
of interest, without notice to the latter, and heaped-up usurious interests, penalties and charges;
---
14. That to further bend the back of the plaintiff, defendant rescinded the subject deed of conditional sale on 4 December 1990 without giving due
notice to plaintiff;
15. That much later, on 10 October 1993, plaintiff received a letter from defendant dated 19 September 1993, informing plaintiff that the subject
deed of conditional sale was already rescinded on 4 December 1990 (xerox copy of the same is hereto attached and made an integral part hereof
as Annex "C";17
In its answer to the complaint, the DBP alleged that it substantially complied with R.A. No. 3765 and CB Circular No. 158 because the details
required in said statements were particularly disclosed in the promissory notes, deed of conditional sale and the required notices sent to Arcilla. In
any event, its failure to comply strictly with R.A. No. 3765 did not affect the validity and enforceability of the subject contracts or transactions.
DBP interposed a counterclaim for the possession of the property.
On April 27, 2001, the trial court rendered judgment in favor of Arcilla and nullified the notarial rescission of the deeds executed by the parties.
The fallo of the decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant.1avvphil.zw+ Defendant is
hereby directed to furnish the disclosure statement to the plaintiff within five (5) days upon receipt hereof in the manner and form provided by
R.A. No. 3765 and submit to this Court for approval the total obligation of the plaintiff as of this date, within ten (10) days from receipt of this
order. The Notarial Rescission (Exh. "16") dated November 27, 1990 is hereby declared null and void. Costs against the defendant.
SO ORDERED.18
DBP appealed the decision to the Court of Appeals (CA) wherein it made the following assignment of errors:
4.1. The trial court erred in ruling that the provision of the details of the loan without the issuance of a "Disclosure Statement" is not
compliance with the "Truth in Lending Act;"
4.2. The trial court erred in declaring the Notarial Rescission null and void; and
4.3. The trial court erred in denying DBP's counterclaims for recovery of possession, back rentals and litigation expenses. 19
On May 29, 2003, the CA rendered judgment setting aside and reversing the decision of the RTC. In ordering the dismissal of the complaint, the
appellate court ruled that DBP substantially complied with R.A. No. 3765 and CB Circular No. 158. Arcilla filed a motion for reconsideration of
the decision. For its part, DBP filed a motion for partial reconsideration of the decision, praying that Arcilla be ordered to vacate the property.
However, the appellate court denied both motions.
The parties filed separate petitions for review on certiorari with this Court. The first petition, entitled Development Bank of the Philippines v.
Court of Appeals, was docketed as G.R. No. 161397; the second petition, entitled Felipe Arcilla, Jr. v. Court of Appeals, was docketed as G.R.
No. 161426. The Court resolved to consolidate the two cases.
The issues raised in the two petitions are the following: a) whether or not petitioner DBP complied with the disclosure requirement of R.A. No.
3765 and CB Circular No. 158, Series of 1978, in the execution of the deed of conditional sale, the supplemental deed of conditional sale, as well
as the promissory notes; and b) whether or not respondent Felipe Arcilla, Jr. is mandated to vacate the property and pay rentals for his occupation
thereof after the notarial rescission of the deed of conditional sale was rescinded by notarial act, as well as the supplement executed by DBP.
On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No. 158, the DBP, as the creditor bank, was mandated to furnish him
with the requisite information in such form prescribed by the Central Bank before the commutation of the loan transaction. He avers that the
221
disclosure of the details of the loan contained in the deed of conditional sale and the supplement thereto, the promissory notes and release sheet,
do not constitute substantial compliance with the law and the CB Circular. He avers that the required disclosure did not include the following:
à [T]he percentage of Finance Charges to Total Amount Financed (Computed in accordance with Sec. 2(i) of CB Circular 158; the Additional
Charges in case certain stipulations in the contract are not met by the debtor; Total Non-Finance Charges; Total Finance Charges, Effective
Interest Rate, etc. à20
Arcilla further posits that the failure of DBP to comply with its obligation under R.A. No. 3765 and CB Circular No. 158 forecloses its right to
rescind the transaction between them, and to demand compliance of his obligation arising from said transaction. Moreover, the bank had no right
to deduct the monthly amortizations from his salary without first complying with the mandate of R.A. No. 3765.
DBP, on the other hand, avers that all the information required by R.A. No. 3765 was already contained in the loan transaction documents. It
posits that even if it failed to comply strictly with the disclosure requirement of R.A. No. 3765, nevertheless, under Section 6(b) of the law, the
validity and enforceability of any action or transaction is not affected. It asserts that Arcilla was estopped from invoking R.A. No. 3765 because
he failed to demand compliance with R.A. No. 3765 from the bank before the consummation of the loan transaction, until the time his complaint
was filed with the trial court.
In its petition in G.R. No. 161397, DBP asserts that the RTC erred in not rendering judgment on its counterclaim for the possession of the subject
property, and the liability of Arcilla for rentals while in the possession of the property after the notarial rescission of the deeds of conditional sale.
For his part, Arcilla (in G.R. No. 161426) insists that the respondent failed to comply with its obligation under R.A. No. 3765; hence, the notarial
rescission of the deed of conditional sale and the supplement thereof was null and void. Until DBP complies with its obligation, he is not obliged
to comply with his.
The petition of Arcilla has no merit.
Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the bank, as creditor, is obliged to furnish a client with
a clear statement, in writing, setting forth, to the extent applicable and in accordance with the rules and regulations prescribed by the Monetary
Board of the Central Bank of the Philippines, the following information:
(3) the difference between the amounts set forth under clauses (1) and (2);
(6) the finance charges expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.
Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765 shall be included in the contract covering the credit
transaction or any other document to be acknowledged and signed by the debtor, thus:
The contract covering the credit transaction, or any other document to be acknowledged and signed by the debtor, shall indicate the above seven
items of information. In addition, the contract or document shall specify additional charges, if any, which will be collected in case certain
stipulations in the contract are not met by the debtor.
Furthermore, the contract or document shall specify additional charges, if any, which will be collected in case certain stipulations in the contract
are not met by the debtor.21
If the borrower is not duly informed of the data required by the law prior to the consummation of the availment or drawdown, the lender will have
no right to collect such charge or increases thereof, even if stipulated in the promissory note. 22 However, such failure shall not affect the validity
or enforceability of any contract or transaction.23
222
In the present case, DBP failed to disclose the requisite information in the disclosure statement form authorized by the Central Bank, but did so in
the loan transaction documents between it and Arcilla. There is no evidence on record that DBP sought to collect or collected any interest, penalty
or other charges, from Arcilla other than those disclosed in the said deeds/documents.1avvphi1.zw+
The Court is convinced that Arcilla's claim of not having been furnished the data/information required by R.A. No. 3765 and CB Circular No.
158 was but an afterthought. Despite the notarial rescission of the conditional sale in 1990, and DBP's subsequent repeated offers to repurchase
the property, the latter maintained his silence. Arcilla filed his complaint only on February 21, 1994, or four years after the said notarial
rescission. The Court finds and so holds that the following findings and ratiocinations of the CA are correct:
After a careful perusal of the records, We find that the appellee had been sufficiently informed of the terms and the requisite charges necessarily
included in the subject loan. It must be stressed that the Truth in Lending Act (R.A. No. 3765), was enacted primarily "to protect its citizens from
a lack of awareness of the true cost of credit to the user
by using a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy" (Emata
vs. Intermediate Appellate Court, 174, SCRA 464 [1989]; Sec. 2, R.A. No. 3765). Contrary to appellee's claim that he was not sufficiently
informed of the details of the loan, the records disclose that the required informations were readily available in the three (3) promissory notes he
executed. Precisely, the said promissory notes were executed to apprise appellee of the remaining balance on his loan when the same was
converted into a regular housing loan. And on its face, the promissory notes signed by no less than the appellee readily shows all the data required
by the Truth in Lending Act (R.A. No. 3765).
Apropos, We agree with the appellant that appellee, a lawyer, would not be so gullible or negligent as to sign documents without knowing fully
well the legal implications and consequences of his actions, and that appellee was a former employee of appellant. As such employee, he is as
well presumed knowledgeable with matters relating to appellant's business and fully cognizant of the terms of the loan he applied for, including
the charges that had to be paid.
It might have been different if the borrower was, say, an ordinary employee eager to buy his first house and is easily lured into accepting onerous
terms so long as the same is payable on installments. In such cases, the Court would be disposed to be stricter in the application of the Truth in
Lending Act, insisting that the borrower be fully informed of what he is entering into. But in the case at bar, considering appellee's education and
training, We must hold, in the light of the evidence at hand, that he was duly informed of the necessary charges and fully understood their
implications and effects. Consequently, the trial court's annulment of the rescission anchored on this ground was unjustified.24
Anent the prayer of DBP to order Arcilla to vacate the property and pay rentals therefor from 1990, a review of the records has shown that it
failed to adduce evidence on the reasonable amount of rentals for Arcilla's occupancy of the property. Hence, the Court orders a remand of the
case to the court of origin, for the parties to adduce their respective evidence on the bank's counterclaim.
IN LIGHT OF ALL THE FOREGOING, the petition in G.R. No. 161426 is DENIED for lack of merit. The petition in G.R. No. 161397 is
PARTIALLY GRANTED. The case is hereby REMANDED to the Regional Trial Court of Antipolo, Rizal, Branch 73, for it to resolve the
counterclaim of the Development Bank of the Philippines for possession of the property, and for the reasonable rentals for Felipe P. Arcilla, Jr.'s
occupancy thereof after the notarial rescission of the Deed of Conditional Sale in 1990.
Costs against petitioner Felipe P. Arcilla, Jr.
223
G.R. No. 184122 January 20, 2010
BANK OF THE PHILIPPINE ISLANDS, INC., Petitioner,

vs.
SPS. NORMAN AND ANGELINA YU and TUANSON BUILDERS CORPORATION represented by PRES. NORMAN
YU, Respondents.
DECISION
ABAD, J.:
This case is about the propriety of a summary judgment in resolving a documented claim of alleged excessive penalty charges, interest, attorney’s
fees, and foreclosure expenses imposed in an extrajudicial foreclosure of mortgage.
The Facts and the Case
Respondents Norman and Angelina Yu (the Yus), doing business as Tuanson Trading, and Tuanson Builders Corporation (Tuanson Builders)
borrowed various sums totaling ₱75 million from Far East Bank and Trust Company. For collateral, they executed real estate mortgages over
several of their properties,1 including certain lands in Legazpi City owned by Tuanson Trading. 2 In 1999, unable to pay their loans, the Yus and
Tuanson Builders requested a loan restructuring,3 which the bank, now merged with Bank of the Philippine Islands (BPI), granted. 4 By this time,
the Yus’ loan balance stood at ₱33,400,000.00. The restructured loan used the same collaterals, with the exception of Transfer Certificate of Title
40247 that secured a loan of ₱1,600,000.5
Despite the restructuring, however, the Yus still had difficulties paying their loan. They asked BPI to release some of the mortgaged lands since
their total appraised value far exceeded the amount of the remaining debt. When BPI ignored their request, the Yus withheld payments on their
amortizations. Thus, BPI extrajudicially foreclosed6 the mortgaged properties in Legazpi City and in Pili, Camarines Sur. But the Yus sought by
court action against BPI and the winning bidder, Magnacraft Development Corporation (Magnacraft), the annulment of the foreclosure sale.
In the course of the proceedings, however, the Yus and Magnacraft entered into a compromise agreement 7 that affirmed the latter’s ownership of
three out of the 10 parcels of land that were auctioned. By virtue of this agreement, the court dismissed the complaint against
Magnacraft,8 without prejudice to the Yus filing a new one against BPI.
On October 24, 2003 the Yus filed their new complaint before the Regional Trial Court (RTC) of Legazpi City, Branch 1, in Civil Case 10286
against BPI for recovery of alleged excessive penalty charges, attorney’s fees, and foreclosure expenses that the bank caused to be incorporated in
the price of the auctioned properties.91avvphi1
In its answer,10 BPI essentially admitted the foreclosure of the mortgaged properties for ₱39,055,254.95, broken down as follows: ₱33,283,758.73
as principal debt; ₱2,110,282.78 as interest; and ₱3,661,213.46 as penalty charges. 11 BPI qualified that the total of ₱39,055,254.95 corresponded
only to the Yus’ debt as of date of filing of the petition. 12 The notice of the auction sale said that the total was "inclusive of interest, penalty
charges, attorney’s fee and expenses of this foreclosure."13
BPI further admitted that its bid of ₱45,090,566.41 for all the auctioned properties was broken down as follows:14
Principal ₱ 32,188,723.07
Interest 2,763,088.93
Penalty Charges 5,568.649.09
Sub-total…………… ₱ 40,520,461.09
Add: 10% Attorney’s Fees 4,052,046.11
Litigation Expenses & Interest 446,726.74
Cost of Publication & Interest 71,332.47
TOTAL……………. ₱ 45,090,566.41
BPI also admitted that Magnacraft submitted the highest and winning bid of ₱45,500,000.00.15 The sheriff turned over this amount to
BPI.16 According to BPI, it in turn remitted to the Clerk of Court the ₱409,433.59 difference between its bid price and that of
Magnacraft’s.17 Although the proceeds of the sale exceeded the ₱39,055,254.95 stated in the notice of sale by ₱6,035,311.46, 18 the bid amount
increased because it now included litigation expenses and attorney’s fees as well as interests and penalties as recomputed.19
224
BPI admitted that it also pushed through with the second auction for the sale of a lot in Pili, Camarines Sur that secured a remaining debt of
₱5,562,000.20 BPI made the lone bid21 of ₱1,701,934.09.22
The Yus had three causes of action against BPI.
First. The bank imposed excessive penalty charges and interests: over ₱5 million in penalty charges computed at 36% per annum
compared to the 12% per annum that the Court fixed in the cases of State Investment House, Inc. v. Court of Appeals 23 and Ruiz v.
Court of Appeals.24 In addition, BPI collected a 14% yearly interest on the principal, bringing the combined penalty charges and
interest to 50% of the principal per annum.
Second. BPI also imposed a charge of ₱4,052,046.11 in attorney’s fees, the equivalent of 10% of the principal, interest, and penalty
charges.
Third. BPI did not provide documents to support its claim for foreclosure expenses of ₱446,726.74 and cost of publication of
₱518,059.21.
As an alternative to their three causes of action, the Yus claimed that BPI was in estoppel to claim more than the amount stated in its published
notices. Consequently, it must turn over the excess bid of ₱6,035,311.46.
After pre-trial, the Yus moved for summary judgment,25 pointing out that based on the answer,26 the common exhibits of the parties,27 and the
answer to the written interrogatories to the sheriff,28 no genuine issues of fact exist in the case. The Yus waived their claim for moral damages so
the RTC can dispose of the case through a summary judgment.29
Initially, the RTC granted only a partial summary judgment. It reduced the penalty charge of 36% per annum 30 to 12% per annum until the debt
would have been fully paid but maintained the attorney’s fees as reasonable considering that BPI already waived the ₱1,761,511.36 that formed
part of the attorney’s fees and reduced the rate of attorney’s fees it collected from 25% to 10% of the amount due. The RTC ruled that facts
necessary to resolve the issues on penalties and fees had been admitted by the parties thus dispensing with the need to receive evidence.31
Still, the RTC held that it needed to receive evidence for the resolution of the issues of (1) whether or not the foreclosure and publication
expenses were justified; (2) whether or not the foreclosure of the lot in Pili, Camarines Sur, was valid given that the proceeds of the foreclosure of
the properties in Legazpi City sufficiently covered the debt; and (3) whether or not BPI was entitled to its counterclaim for attorney’s fees, moral
damages, and exemplary damages.32
The Yus moved for partial reconsideration.33 They argued that, since BPI did not mark in evidence any document in support of the foreclosure
expenses it claimed, it may be assumed that the bank had no evidence to prove such expenses. As regards their right to the pro-rating of their debt
among the mortgaged properties, the Yus pointed out that BPI did not dispute the fact that the proceeds of the sale of the properties in Legazpi
City fully satisfied the debt. Thus, the court could already resolve without trial the issue of whether or not the foreclosure of the Pili property was
valid.
Further, the Yus sought reconsideration of the reduction of penalty charges and the allowance of the attorney’s fees. They claimed that the
penalty charges should be deleted for violation of Republic Act (R.A.) 3765 or the Truth in Lending Act. BPI’s disclosure did not state the rate of
penalties on late amortizations. Also, the Yus asked the court to reduce the attorney’s fees from 10% to 1% of the amount due. On January 3,
2006 the RTC reconsidered its earlier decision and rendered a summary judgment:34
1. Deleting the penalty charges imposed by BPI for non-compliance with the Truth in Lending Act;
2. Reducing the attorney’s fees to 1% of the principal and interest;
3. Upholding the reasonableness of the foreclosure expenses and cost of publication, both with interests;
4. Reiterating the turnover by the Clerk of Court to the Yus of the excess in the bid price;
5. Deleting the Yus’ claim for moral damages they having waived it;
6. Denying the Yus’ claim for attorney’s fees for lack of basis; and
7. Dismissing BPI’s counterclaim for moral and exemplary damages and for attorney’s fees for lack of merit considering that
summary judgment has been rendered in favor of the Yus.
225
BPI appealed the decision to the Court of Appeals (CA) in CA-G.R. CV 86577. But the CA rendered judgment on January 23, 2008, affirming
the RTC decision in all respects. And when BPI asked for reconsideration, 35 the CA denied it on July 14, 2008,36 hence, the bank’s recourse to
this Court.
The Issues Presented
BPI presents the following issues:
1. Whether or not the case presented no genuine issues of fact such as to warrant a summary judgment by the RTC; and
2. Where summary judgment is proper, whether or not the RTC and the CA a) correctly deleted the penalty charges because of BPI’s
alleged failure to comply with the Truth in Lending Act; b) correctly reduced the attorney’s fees to 1% of the judgment debt; and c)
properly dismissed BPI’s counterclaims for moral and exemplary damages, attorney’s fees, and litigation expenses.
The Court’s Rulings
One. A summary judgment is apt when the essential facts of the case are uncontested or the parties do not raise any genuine issue of fact.37 Here,
to resolve the issue of the excessive charges allegedly incorporated into the auction bid price, the RTC simply had to look at a) the pleadings of
the parties; b) the loan agreements, the promissory note, and the real estate mortgages between them; c) the foreclosure and bidding documents;
and d) the admissions and other disclosures between the parties during pre-trial. Since the parties admitted not only the existence, authenticity,
and genuine execution of these documents but also what they stated, the trial court did not need to hold a trial for the reception of the evidence of
the parties.
BPI contends that a summary judgment was not proper given the following issues that the parties raised: 1) whether or not the loan agreements
between them were valid and enforceable; 2) whether or not the Yus have a cause of action against BPI; 3) whether or not the Yus are proper
parties in interest; 4) whether or not the Yus are estopped from questioning the foreclosure proceeding after entering into a compromise
agreement with Magnacraft; 5) whether or not the penalty charges and fees and expenses of litigation and publication are excessive; and 6)
whether or not BPI violated the Truth in Lending Act. 38
But these are issues that could be readily resolved based on the facts established by the pleadings and the admissions of the parties. 39 Indeed, BPI
has failed to name any document or item of fact that it would have wanted to adduce at the trial of the case. A trial would have been such a great
waste of time and resources.
Two. Both the RTC and CA decisions cited BPI’s alleged violation of the Truth in Lending Act and the ruling of the Court in New Sampaguita
Builders Construction, Inc. v. Philippine National Bank40 to justify their deletion of the penalty charges. Section 4 of the Truth in Lending Act
states that:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information:
(3) the difference between the amounts set forth under clauses (1) and (2);
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation.
Penalty charge, which is liquidated damages resulting from a breach,41 falls under item (6) or finance charge. A finance charge "represents the
amount to be paid by the debtor incident to the extension of credit."42 The lender may provide for a penalty clause so long as the amount or rate of
the charge and the conditions under which it is to be paid are disclosed to the borrower before he enters into the credit agreement.
226
In this case, although BPI failed to state the penalty charges in the disclosure statement, the promissory note that the Yus signed, on the same date
as the disclosure statement, contained a penalty clause that said: "I/We jointly and severally, promise to further pay a late payment charge on any
overdue amount herein at the rate of 3% per month." The promissory note is an acknowledgment of a debt and commitment to repay it on the date
and under the conditions that the parties agreed on.43 It is a valid contract absent proof of acts which might have vitiated consent.44
The question is whether or not the reference to the penalty charges in the promissory note constitutes substantial compliance with the disclosure
requirement of the Truth in Lending Act.45 The RTC and CA relied on the ruling in New Sampaguita as authority that the non-disclosure of the
penalty charge renders its imposition illegal. But New Sampaguita is not attended by the same circumstances. What New Sampaguita disallowed,
because it was not mentioned either in the disclosure statement or in the promissory note, was the unilateral increase in the rates of penalty
charges that the creditor imposed on the borrower. Here, however, it is not shown that BPI increased the rate of penalty charge that it collected
from the Yus. 46
The ruling that is more in point is that laid down in The Consolidated Bank and Trust Corporation v. Court of Appeals, 47 a case cited in New
Sampaguita. The Consolidated Bank ruling declared valid the penalty charges that were stipulated in the promissory notes. 48 What the Court
disallowed in that case was the collection of a handling charge that the promissory notes did not contain.
The Court has affirmed that financial charges are amply disclosed if stated in the promissory note in the case of Development Bank of the
Philippines v. Arcilla, Jr.49 The Court there said, "Under Circular 158 of the Central Bank, the lender is required to include the information
required by R.A. 3765 in the contract covering the credit transaction or any other document to be acknowledged and signed by the borrower. In
addition, the contract or document shall specify additional charges, if any, which will be collected in case certain stipulations in the contract are
not met by the debtor." In this case, the promissory notes signed by the Yus contained data, including penalty charges, required by the Truth in
Lending Act. They cannot avoid liability based on a rigid interpretation of the Truth in Lending Act that contravenes its goal.
Nonetheless, the courts have authority to reduce penalty charges when these are unreasonable and iniquitous. 50 Considering that BPI had already
received over ₱2.7 million in interest and that it seeks to impose the penalty charge of 3% per month or 36% per annum on the total amount
due—principal plus interest, with interest not paid when due added to and becoming part of the principal and also bearing interest at the same
rate—the Court finds the ruling of the RTC in its original decision 51 reasonable and fair. Thus, the penalty charge of 12% per annum or 1% per
month52 is imposed.
Three. As for the award of attorney’s fee, it being part of a party’s liquidated damages, the same may likewise be equitably reduced.53 The CA
correctly affirmed the RTC Order54 to reduce it from 10% to 1% based on the following reasons: (1) attorney’s fee is not essential to the cost of
borrowing, but a mere incident of collection;55 (2) 1% is just and adequate because BPI had already charged foreclosure expenses; (3) attorney’s
fee of 10% of the total amount due is onerous considering the rote effort that goes into extrajudicial foreclosures.
WHEREFORE, the Court DENIES the petition and AFFIRMS the Court of Appeals Decision in CA-G.R. CV 86577 dated January 23, 2008
subject to the RESTORATION of the penalty charge of 12% per annum or 1% per month of the amount due computed from date of nonpayment
or November 25, 2001.
SO ORDERED.
227
Republic vs. PNB 113 Phil 828
228
July 3, 2017
G.R. No. 191458
CHINATRUST (PHILS.) COMMERCIAL BANK, Petitioner

vs.
PHILIP TURNER, Respondent
DECISION
LEONEN, J.:
Issues that were not alleged or proved before the lower court cannot be decided for the first time on appeal. This rule ensures fairness in
proceedings.
This Petition for Review assails the Court of Appeals' (a) December 14, 2009 Decision 1 affirming the Regional Trial Court's Decision dated
January 29, 2007 and (b) its March 2, 2010 Resolution 2 denying petitioner Chinatrust (Philippines) Commercial Bank's (Chinatrust) Motion for
Reconsideration.3 The Regional Trial Court set aside the Metropolitan Trial Court's dismissal4 of the complaint. It ordered Chinatrust to restore to
the account of respondent Philip Turner (Turner) the following amounts: 1) US$430 or ₱24,129.88, its peso equivalent as of September 13, 2004;
and 2) US$30 or ₱l,683.48, its peso equivalent as of September 13, 2004. It also ordered Chinatrust to pay ₱20,000.00 as moral damages,
₱l0,000.00 as exemplary damages, and ₱5,000.00 as attorney's fees.
On September 13, 2004, British national Turner initiated via Chinatrust-Ayala Branch the telegraphic transfer of US$430.00 to the account of
"MIN TRAVEL/ESMAT AZMY, Account No. 70946017, Citibank, Heliopolis Branch" in Cairo, Egypt. 5 The amount was partial payment to
Turner's travel agent for his and his wife's 11-day tour in Egypt.6 Turner paid a service fee of US$30.00. Both amounts were debited from his
dollar savings account with Chinatrust.7
On the same day, Chinatrust remitted the funds through the Union Bank of California, its paying bank, to Citibank-New York, to credit them to
the bank account of Min Travel/EsmatAzmy in Citibank-Cairo, Egypt.8
On September 17, 2004, Chinatrust received Citibank-Cairo's telexnotice about the latter's inability to credit the funds it received because the
"beneficiary name d[id] not match their books (referred to as the 'discrepancy notice')." 9 In other words, the beneficiary's name "Min
Travel/Esmat Azmy" given by Turner did not match the account name on file of Citibank-Cairo.10 Chinatrust relayed this information to Turner
on September 20, 2004, "the next succeeding business day."11
Chinatrust claimed that it relayed the discrepancy to Turner and requested him to verify from his beneficiary the correct bank account name. 12 On
September 22, 2004, Turner allegedly informed Chinatrust that he was able to contact Esmat Azmy, who acknowledged receipt of the transferred
funds. Turner, however, had to cancel his travel-tour because his wife got ill and requested from Chinatrust the refund of his money. 13
According to Chinatrust, it explained to Turner that since the funds were already remitted to his beneficiary's account, they could no longer be
withdrawn or retrieved without Citibank-Cairo's consent. Turner was, thus, advised to seek the refund of his payment directly from his travel
agency.14
Turner allegedly insisted on withdrawing the funds from Chinatrust explaining that the travel agency would forfeit fifty percent (50%) as penalty
for the cancellation of the booking, as opposed to the minimal bank fees he would shoulder if he withdrew the money through
Chinatrust.15 Hence, Chinatrust required Turner to secure, at least, his travel agency's written certification denying receipt of the funds so that it
could act on his request. However, Turner purportedly failed to submit the required certification despite repeated reminders.16
On October 28, 2004, Chinatrust received Citibank-Cairo's Swift telex reply, which confirmed receipt of Chinatrust's telegraphic funds transfer
and its credit to the bank account of Min Travel, not "Min Travel/Esmat Azmy" as indicated by the respondent, as early as September 15,
2004.17 This information was relayed to Turner on October 29, 2004.18
Despite this official confirmation, Turner allegedly continued to insist on his demand for a refund.19
On March 7, 2005, Turner filed a Complaint20 against Chinatrust before the Metropolitan Trial Court of Makati City, demanding the refund of his
telegraphic transfer of ₱24,129.88 plus damages.21
Upon further queries, Chinatrust received another telex on September 28, 2005 from Citibank-Cairo confirming again and acknowledging receipt
of Turner's remittance and its credit to the account of Min Travel on September 15, 2004. 22
229
After the parties had submitted their respective position papers in accordance with the Rules on Summary Procedure, the Metropolitan Trial
Court of Makati City, Branch 61 rendered a Decision23 on January 15, 2006, dismissing Turner's complaint for lack of merit as well as
Chinatrust's counterclaim. The Metropolitan Trial Court found sufficient evidence to prove that Chinatrust complied with its contractual
obligation to transmit the funds to Citibank-Cairo and that these funds were actually credited to the intended beneficiary's account. 24
Turner filed an appeal. On the substantive matters, Turner argued that the Metropolitan Trial Court erred in ruling that he had no basis in claiming
a refund from Chinatrust and in not awarding him damages and attorney's fees.25
Branch 137, Regional Trial Court of Makati City rendered a Decision 26 on January 29, 2007, reversing and setting aside the decision of the
Metropolitan Trial Court. While it agreed with the Metropolitan Trial Court's findings that the funds had been deposited to the account of the
beneficiary as early as September 15, 2004, the Regional Trial Court ruled that this was not sufficient basis to absolve Chinatrust of any
responsibility.27 The trial court found insufficient evidence to show that Chinatrust was not negligent in the performance of its obligation under
the telegraphic transfer agreement. It held that no "discrepancy notice" from Citibank-Cairo was even presented in evidence.28
The Regional Trial Court further held that Chinatrust failed to render its services in a manner that could have mitigated, if not prevented, the
monetary loss, emotional stress, and mental anguish that Turner suffered for six (6) weeks while waiting for his intended beneficiary's
confirmation of receipt of his money.29 Hence, Chinatrust was found liable for the monetary loss suffered by Turner and for damages. The
Decision disposed as follows:
WHEREFORE, in view of all the foregoing, the Decision of the Metropolitan Trial Court of Makati City, Branch 61, in Civil Case No. 87471, is
hereby REVERSED and SET ASIDE, and a new one entered finding for plaintiff-appellant PHILIP TURNER, and against defendant-appellee
CHINA TRUST (PHILS.) COMMERCIAL BANK CORPORATION by ordering the latter to pay, or restore to PHILIP TURNER's account with
said Bank, the following amounts:
(1) US $ 430.00 or ₱24,129.88, the Peso equivalent at the rate of ₱56.l160/US $1.00, as of 13 September 2004; and
(2) US $ 30.00 or ₱l,683.48, the Peso equivalent at the rate of ₱56.1160/US $1.00, as of 13 September 2004.
The defendant-appellee bank is further ordered to pay plaintiff-appellant Philip Turner ₱20,000.00 as and for moral damages; ₱10,000.00 as and
for exemplary damages; and ₱5,000.00 as and for reasonable attorney's fees.
SO ORDERED.30
Chinatrust filed a motion for reconsideration, but it was denied by the Regional Trial Court in a Resolution 31 dated June 4, 2007.
On July 4, 2007, Chinatrust filed a Petition for Review32 under Rule 42 of the 1997 Rules of Civil Procedure before the Court of Appeals.
In its Decision33 dated December 14, 2009, the Court of Appeals dismissed the petition and upheld the decision of the Regional Trial Court.
Chinatrust's subsequent Motion for Reconsideration34 was likewise denied in the Court of Appeals' Resolution35 dated March 2, 2010.
Hence, this Petition36 was filed. In compliance with this Court's directive, respondent filed his Comment, 37 to which petitioner filed its Reply.38
Petitioner stresses that based on the allegations in the Complaint, the real issue is "whether or not the petitioner-bank has legally complied with its
contractual obligation with respondent in remitting his telegraphic fund to the latter's beneficiary account with Citibank-Cairo."39 It reasons that
as respondent has failed to prove his allegation that his telegraphic transfer funds were not received or credited to his intended beneficiary's
Citibank-Cairo account, the Court of Appeals should have dismissed respondent's complaint. 40
Instead, the Court of Appeals adjudged petitioner liable for negligence: (1) when it did not immediately refund the telexed funds to respondent
upon receipt of the discrepancy notice from Citibank-Cairo; and (2) when it did not immediately relay to Citibank-Cairo respondent's demand for
the cancellation of the transaction.41 According to petitioner, this was erroneous because the Court of Appeals ruled upon matters not alleged in
the complaint or raised as an issue42 and awarded damages not prayed for in the complaint.43
Petitioner further argues that respondent demanded for the return of his money long after-and not immediately after-he was informed of the
discrepancy in the beneficiary's name. Moreover, respondent made the demand (1) only because he had changed his mind about the tour because
his wife was ill, (2) after he had personally known that his beneficiary had received the transferred funds, and (3) to avoid the 50% forfeiture
penalty.44
Petitioner adds that Article 1172 of the Civil Code was erroneously applied by the Court of Appeals because this provision refers to an obligor's
negligence in performing the obligation. Here, the "acts of negligence" attributed to petitioner were those that transpired after it had fully
performed its obligation to transfer the funds.45
230
Finally, petitioner contends that the Court of Appeals erred "when it unjustly enriched the respondent by making the petitioner liable to refund the
amount already legally transferred to, and received by respondent's beneficiary, for his benefit."46
Respondent counters that the issues raised by petitioner are factual, which are not reviewable by this Court. 47 He further denies that he disclosed
to the petitioner that he was able to contact his travel agency, which admitted that it had received the funds. On the contrary, respondent avers that
he "demanded for the return of his money when the petitioner informed him that the funds could not be deposited to the beneficiary account."48
The issues for resolution are:
First, whether the Court of Appeals erred in affirming the Regional Trial Court's Decision, granting the refund of respondent's US$430.00
telegraphic funds transfer despite its successful remittance and credit to respondent's beneficiary Min Travel's account with Citibank-Cairo;
Second, whether petitioner Chinatrust (Philippines) Commercial Bank was negligent in the performance of its obligation under the telegraphic
transfer agreement; and
Finally, whether the subsequent acts of petitioner after compliancewith its obligation can be considered "negligent" to justify the award of
damages by the Regional Trial Court, as affirmed by the Court of Appeals.
The Regional Trial Court and the Court of Appeals erred in holding that petitioner was negligent in failing to immediately address respondent's
queries and return his money and was consequently liable for the anguish suffered by respondent. They ruled on an issue that was not raised by
respondent in the lower court, thereby violating petitioner's right to due process.
It is an established principle that "courts cannot grant a relief not prayed for in the pleadings or in excess of what is being sought by the
party."49 The rationale for the rule was explained in Development Bank of the Philippines v. Teston,50 where this Court held that it is improper to
enter an order which exceeds the scope of the relief sought by the pleadings:
The Court of Appeals erred in ordering [Development Bank of the Philippines] to return to respondent "the ₱l,000,000.00" alleged down
payment, a matter not raised in respondent's Petition for Review before it. In Jose Clavano, Inc. v. Housing and Land Use Regulatory Board, this
Court held:
It is elementary that a judgment must conform to, and be supported by, both the pleadings and the evidence, and must be in accordance with the
theory of the action on which the pleadings are framed and the case was tried. The judgment must be secudum allegata et probata.
Due process considerations justify this requirement. It is improper to enter an order which exceeds the scope of relief sought by the pleadings,
absent notice which affords the opposing party an opportunity to be heard with respect to the proposed relief. The fundamental purpose of the
requirement that allegations of a complaint must provide the measure of recovery is to prevent surprise to the defendant.51 (Emphasis supplied,
citations omitted)
The bank's supposed negligence in the handling of respondent's concerns was not among respondent's causes of action and was never raised in the
Metropolitan Trial Court. Respondent's cause of action was based on the theory that the telexed funds transfer did not materialize, and the relief
sought was limited to the refund of his money and damages as a result of the purported non-remittance of the funds to the correct beneficiary
account.52
"[T]he purpose of an action ... and the law to govern it ... is to be determined . . . by the complaint itself, its allegations and the prayer for
relief."53 The complaint states "the theory of a cause of action which forms the bases of the plaintiff's claim of liability."54
A review of the Complaint filed before the Metropolitan Trial Court reveals that respondent originally sued upon a breach of contract consisting
in the alleged failure of petitioner to remit the funds to his travel agency's account in Cairo-Egypt.
Respondent's cause of action was based on paragraphs 5 and 6 of his Complaint:
5. That after a few days, the plaintiff verified from the defendant whether the telegraphic transfer was sent but the plaintiff was told that the fund
was not applied to the intended account number and name as "THE BENE TITLE DOES NOT MATCH WITH THEIR BOOKS";
6. That the plaintiff talked with the President of the defendant and asked what was meant by that and was told that they did not succeed in sending
the telegraphic transfer to the beneficiary account[.] 55
Respondent further alleged:
231
10. That because of the refusal of the defendant to return the amounts given by the plaintiff, the latter suffered sleepless nights, worry and anxiety
because of his fear that he lost the money that he entrusted to the defendant for transfer to the beneficiary account for which the plaintiff should
be awarded moral damages on the amount of ₱20,000.00;
11. That the defendant was guilty of gross negligence in failing to comply with its obligation to send the telegraphic transfer to the intended
beneficiary account;
12. That by way of example, the defendant should be ordered to pay exemplary damages in the amount of ₱20,000.00. 56 (Emphasis supplied)
In both his Complaint and Position Paper,57 respondent anchored his claim for refund and damages on the "discrepancy notice" and the manager's
explanation that the funds were not successfully credited to the beneficiary's account. Respondent demanded for the return of his money having
the impression that the bank was not successful in remitting it.
The parties' pleadings and position papers submitted before the Metropolitan Trial Court raised the factual issue of whether petitioner had
complied with its obligation to remit the funds of the respondent to his intended beneficiary's account with Citibank-Cairo. They likewise raised
the legal issue of whether respondent was entitled to rescind the contract.
Furthermore, during the preliminary conference, the following issues were defined: (a) "whether or not the amount was remitted to the correct
beneficiary's account," and (b) "whether or not the parties are entitled to their respective claims." 58 This does not include the issue of negligence
on the part of petitioner in attending to respondent's queries or the purported one (1)-month delay in the confirmation of the remittance.
The case was decided by the Metropolitan Trial Court pursuant to the Revised Rules on Summary Procedure.59 Accordingly, no trial was
conducted as, after the conduct of a preliminary conference, the parties were made to submit their position papers.60 There was, thus, no
opportunity to present witnesses during an actual trial. However, Section 9 of the Revised Rules on Summary Procedure calls for the submission
of witnesses' affidavits together with a party's position paper after the conduct of a preliminary conference:
Section 9. Submission of Affidavits and Position Papers. - Within ten (10) days from receipt of the order mentioned in the next preceding section,
the parties shall submit the affidavits of their witnesses and other evidence on the factual issues defined in the order, together with their position
papers setting forth the law and the facts relied upon by them.
The determination of issues at the preliminary conference bars the consideration of other questions on appeal. 61 This is because under Section 9
above, the parties were required to submit their affidavits and other evidence on the factual issues as defined in the preliminary conference
order. Thus, either of the parties cannot raise a new factual issue on appeal, otherwise it would be unfair to the adverse party, who had no
opportunity to present evidence against it.
II
The Metropolitan Trial Court correctly absolved petitioner from liability and dismissed the complaint upon its finding that the bank had duly
proven that it had complied with its obligation under the telegraphic transfer. It found that despite the earlier advice of Citibank-Cairo that the
beneficiary name did not match their files, Chinatrust and respondent Turner were subsequently informed that the amount sent had been credited
to the account of the beneficiary as early as September 15, 2004.62
However, on appeal, the Regional Trial Court reversed the dismissal of the complaint. While the Regional Trial Court affirmed the court a quo's
ruling that indeed the funds were credited to the intended beneficiary's account, it went further and touched upon an issue that was beyond the
cause of action framed by the respondent. It adjudged petitioner liable not because it failed to perform its obligation to remit the funds but
because it purportedly did not exercise due diligence in attending to respondent's queries and demands with regard to the telegraphic funds
transfer. Specifically, it found petitioner negligent in its failure to promptly inform respondent that the money was, in fact, credited to the account
of the beneficiary.63 According to the Regional Trial Court, "it is but right that the [petitioner] bank be held liable for the monetary loss, as well as
the emotional stresses and mental anguish that [respondent] Turner had to go through as a result thereof." 64 Hence, the Regional Trial Court
awarded respondent's claims for refund and damages.
The Regional Trial Court also faulted the petitioner for not submitting in evidence the "discrepancy notice," which according to the trial court
"puts the ... bank's position in a cloud of doubt."65
Contrary to the observation of the Regional Trial Court, however, the discrepancy notice's existence and content were not the core of the
controversy. In fact, they were never put in issue. The discrepancy notice only came up because it was the basis for Turner's claim for refund
insisting that the funds were not credited to his travel agency's account. Hence, it is understandable that both parties did not present it in evidence.
Similarly, the purported negligence of the bank personnel in attending to his concerns was neither raised by respondent in any of his pleadings
nor asserted as an issue in the preliminary conference. Hence, it was improper for the Regional Trial Court to consider this issue on negligence in
determining the respective claims of the parties.
232
Basic rules of fair play, justice, and due process require that arguments or issues not raised in the trial court may not be raised for the first time on
appeal.66
In Philippine Ports Authority v. City of Iloilo:67
As a rule, a party who deliberately adopts a certain theory upon which the case is tried and decided by the lower court will not be permitted to
change theory on appeal. Points of law, theories, issues and arguments not brought to the attention of the lower court need not be, and ordinarily
will not be, considered by a reviewing court, as these cannot be raised for the first time at such late stage. Basic considerations of due process
underlie this rule. It would be unfair to the adverse party who would have no opportunity to present further evidence material to the new theory,
which it could have done had it been aware of it at the time of the hearing before the trial court. To permit petitioner in this case to change its
theory on appeal would thus be unfair to respondent, and offend the basic rules of fair play, justice and due process. 68 (Citations omitted)
There is more reason for a reviewing court to refrain from resolving motu proprio an issue that was not even raised by a party. This Court has
previously declared that:
"[C]ourts of justice have no jurisdiction or power to decide a question not in issue" and that a judgment going outside the issues and purporting to
adjudicate something upon which the parties were not heard is not merely irregular, but extrajudicial and invalid. 69 (Citations omitted)
As pointed out earlier, respondent's cause of action was anchored on the alleged non-remittance of the funds to his travel agency's account
or based on a breach of contract.
On appeal, however, the Regional Trial Court motu proprio found that petitioner was negligent in addressing respondent's concerns, which
justified the award of damages against it. This was unfair to petitioner who had no opportunity to introduce evidence to counteract this new issue.
The factual bases of this change of theory would certainly require presentation of further evidence by the bank in order to enable it to properly
meet the issue raised.
III
The Regional Trial Court and the Court of Appeals erred in awarding damages to respondent.
Petitioner was not remiss in the performance of its contractual obligation to remit the funds. It was established that the funds were credited to the
account of Min Travel on September 15, 2004, or two (2) days from respondent's application. 70
Petitioner cannot likewise be faulted for the discrepancy notice sent by Citibank-Cairo, assuming there was a mistake in its sending. It merely
relayed its contents to respondent. Citibank-Cairo is not an agent of petitioner but a beneficiary bank designated by respondent, upon the
instruction of the beneficiary, Min Travel.
The Regional Trial Court, as affirmed by the Court of Appeals, found petitioner negligent in addressing the concerns and queries of respondent. It
specifically faulted petitioner for failure to submit any letters, tracers, cables, or other evidence of communication sent to Citibank-Cairo to
inquire about the status of the remittance and adjudged petitioner liable for the anxieties suffered by respondent.71
The rule that factual findings of the Court of Appeals are not reviewable by this Court is subject to certain exceptions such as when there is a
misapprehension of facts and when the conclusions are contradicted by the evidence on record. 72 Here, there is insufficient evidence to show
negligence on the part of petitioner.
The one (1 )-month delay in receiving the telex reply from Citibank-Cairo does not sufficiently prove petitioner's fault or negligence, especially
since "[p]etitioner's communications were coursed thru a third-party-correspondent bank, Union Bank of Califomia."73
Furthermore, the lower courts overlooked the fact that respondent knew all along, or as early as September 22, 2004, that his funds were already
received by his beneficiary. Despite this, he insisted on demanding the retrieval of the funds after he opted not to pursue with his travel abroad.
Respondent did not specifically deny paragraphs 8 and 9 of petitioner's Answer with Counterclaims, which alleged the following:
8. However, on September 22, 2004, the Plaintiff, despite being aware that his foregoing remittance was already received by the beneficiary MIN
TRAVEL, changed his mind, and stated that he will no longer push though with his tour travel, and thus, requested for the retrieval of said funds.
Defendant relayed said request through the foregoing channel to Citibank-Cairo. Considering that said fund was already transferred, Citibank-
Cairo refused to honor said request, and consider the transmittal closed and accomplished;
9. Plaintiff, however, insisted on demanding refund of said amount from the Defendant, who politely denied such demand, and repeatedly
explained to the Plaintiff that Citibank-Cairo will not honor such request, and that there is nothing that the Defendant can do under the
circumstances[.]74
233
The Affidavit of Rosario C. Astrologo (Astrologo), Branch Service Head, Chinatrust-Ayala Branch, was never rebutted by respondent by
submitting his counter evidence. Portions of it stated:
7. On September 22, 2004, when he visited our branch office, which he has been doing almost everyday, he mentioned to our Ms. Rina Chua, the
bank's Senior Service Assistant, Ayala Branch, that he [was] able to contact Mr. Esmat Azmy who already confirmed having received the said
remittance;
8. When I also talked to him, also on the same date, he, stated that he changed his mind and will no longer push through with his said travel
because his wife, who is supposed to accompany him, became sick, injured, or something to such effect. He also mentioned that if he will cancel
his travel agreement, the travel agency will only return to him fifty [percent] (50%) of his foregoing down-payment, but if he will be able to
retrieve and withdraw such remittance from the bank, he will only pay the bank charges, which is minimal. He, therefore, insisted, that said fund
be withdrawn and returned to him by the bank;
9. He was also told that if such fund was already received by the travel agency and credited to its bank account of said travel agency at Citibank,
it cannot be returned anymore, and I advised him to contact his travel agency and negotiate for the refund of his entire proceeds. I do not know if
he later made such plea to his travel agency for we were not told what happened later. I promised, however, that we will relay his request for its
retrieval of such fund to Citibank, which we did thru various telexes[.]75
The successful remittance was later confirmed by the telex-reply from Citibank-Cairo on October 28, 2004, stating that the funds were credited to
the account of Min Travel on September 15, 2004.76 This telex-reply confirms that petitioner indeed made a follow up with Citibank-Cairo
regarding the status of respondent's funds.
Moreover, the refusal of petitioner's personnel to accede to respondent's demand for a refund cannot be considered an actionable wrong. Their
refusal was due primarily to lack of information or knowledge of the effective cancellation of the remittance and not from a deliberate intent to
ignore or disregard respondent's rights. When respondent insisted on asking for the refund, he was repeatedly requested to submit a certification
or, at least, a written denial from his beneficiary that the funds were not in fact received. They cannot be faulted for wanting to verify with
Citibank-Cairo the status of the remittance before acting upon his request, especially since the funds have actually been received by Citibank-
Cairo. The written denial would also be the basis for petitioner's demand upon Citibank-Cairo.
The Court of Appeals erred in ruling that petitioner had the duty to immediately return the money to Turner together with the service fee upon the
first instance that it relayed the discrepancy notice to him. Turner could no longer rescind the telegraphic transfer agreement.
In Republic of the Philippines v. Philippine National Bank,77 thisCourt described the nature of a telegraphic transfer agreement:
"[C]redit" 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.
....
[A]s the transaction is for the establishment of a telegraphic or cable transfer, the agreement to remit creates a contractual obligation and 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.78
Thus, once the amount represented by the telegraphic transfer order is credited to the account of the payee or appears in the name of the payee in
the books of the receiving bank, the ownership of the telegraphic transfer order is deemed to have been transmitted to the receiving bank. The
local bank is deemed to have fully executed the telegraphic transfer and is no longer the owner of this telegraphic transfer order.
It is undisputed that on September 13, 2004, the funds were remitted to Citibank-New York through petitioner's paying bank, Union Bank of
California. Citibank-New York, in turn, credited Citibank-Cairo, Egypt, Heliopolis Branch.
Moreover, it was established that the amount of US$430.00 was actually credited to the account of Min Travel on September 15, 2004,79 or
merely two (2) days after respondent applied for the telegraphic transfer and even before petitioner received its "discrepancy notice" on
September 17, 2004. Chinatrust is, thus, deemed to have fully executed the telegraphic transfer agreement and its obligation to respondent was
extinguished.80 Hence, respondent could no longer ask for rescission of the agreement' on September 22, 2004.
When the funds were credited to the account of Min Travel at Citibank-Cairo, ownership and control of these funds were transferred to Min
Travel.1âwphi1 Thus, the funds could not be withdrawn without its consent.
The Court of Appeals, in affirming the decision of the Regional Trial Court, held that petitioner was obliged to immediately return the money to
respondent as early as September 17, 2004 when it received the "discrepancy notice" from Citibank-Cairo.81 It held that petitioner's failure to do
so even upon respondent's demand constituted an actionable negligence under Article 1172. 82
234
The Court of Appeals misappreciated the true import of the discrepancy notice when it held that the notice was an "effective cancellation of the
remittance by the Citibank-Cairo"83 that gave rise to the legal obligation of petitioner to return the funds to respondent.
The discrepancy notice does not mean that the funds were not received by the beneficiary bank. On the contrary, what it implies is that these
funds were actually received by Citibank-Cairo but it could not apply it because the account name of the beneficiary indicated in the telex
instruction does not match the account name in its books. In short, it cannot find in its file the beneficiary account name "Min Travel/Esmat
Azmy" pursuant to the telex instruction, for which reason, Citibank-Cairo asked for clarifications. Petitioner, in turn, had to clarify from
respondent, because it was respondent himself, upon instruction of his travel agency, who indicated such beneficiary's name in his telegraphic
transfer form. True enough, as later shown, the beneficiary account name was not '"Min Travel/Esmat Azmy" but only "Min Travel." Petitioner,
therefore, had nothing to do with the mismatch of the beneficiary name and could not be made liable for it.
The information initially relayed by Citibank-Cairo and received by petitioner on September 17, 2004-that the funds were not applied to the
intended account because the beneficiary name did not match its books-proved to be no longer true. This is because Citibank-Cairo later
confirmed that respondent's remittance was duly credited to the account of Min Travel on September 15, 2004.
As stated earlier, respondent's request for retrieval of the funds was because he changed his mind about the travel rather than the discrepancy
notice sent by Citibank-Cairo. The Affidavit of Astrologo was never refuted.
The tour travel arrangement, which brought about the remittance of the funds, is a separate and private arrangement between respondent and Min
Travel. Respondent's change of mind and claim for refund, therefore, should have been properly addressed to Min Travel: which already had
possession of the funds and not to petitioner, who was not privy to the arrangement.
WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision dated December 14, 2009 and Resolution dated March 2, 2010 are
set aside and the Decision dated January 15, 2006 of the Metropolitan Trial Court, Branch 61, Makati City is reinstated.
235
G.R. No. 173207 February 14, 2008
PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK (now BANCO DE ORO–EPCI, INC.), petitioner,
vs.
DENNIS CUSTODIO, WILFREDO D. GLIANE, and ROLANDO FRANCISCO, respondents.
DECISION
CARPIO MORALES, J.:
At the time material to the present case, respondent Dennis Custodio (Custodio) had a door-to-door dollar remittance business. Respondent
Wilfredo D. Gliane (Gliane) was one of his agents in Saudi Arabia.
As agent of Custodio, Gliane collected dollars from overseas workers in Saudi Arabia to be remitted to their beneficiaries in the Philippines.
In their transactions, Custodio and Gliane availed of the services of the Express Padala desk of petitioner Philippine Commercial and
International Bank (PCIB), now Banco de Oro-EPCI, Inc.,1 at its affiliate bank, the Al Rahji Bank in Saudi Arabia. The procedure they adopted in
remitting dollars was to course them through regular clients of PCIB who, having established a good relationship with the bank, enjoyed special
foreign exchange rates with it. One of those clients was respondent Rolando Francisco (Francisco) who maintained joint accounts, including
those with his wife and Erlinda Chua (Erlinda).
On March 12, 1997, Francisco and his wife,2 purportedly on behalf of ROL-ED Traders Group Corporation (ROL-ED), a company said to be
owned and controlled by Francisco, entered into a Foreign Bills Purchase Line Agreement (FBPLA)3 in the amount of P70 Million Pesos with the
PCIB-Greenhills bank which would purchase checks and demand drafts, among other things, drawn on "U.S. Bank," the proceeds of which would
be advanced to Francisco by the bank without going through the regular 23-day clearing period. Under the FBPLA, the spouses made the
following undertaking:
If a check is returned/dishonored for any reason whatsoever, we shall immediately, without need of demand, pay [the bank] the
amount of the check, together with the interest at the rate of ** percent (%) per annum x x x and penalty at the rate of twelve percent
(12%) per annum, computed from the date of purchase of the check to the date of full payment.
** - prevailing market rate
The amount of returned and dishonored checks, together with interest, penalty and other charges, shall be debited from any of our
accounts with any of [the bank’s] branches, and if the credit balance thereof is insufficient, we undertake to pay [the bank] the
deficiency immediately.4 (Underscoring supplied)
And they authorized the PCIB-Greenhills
x x x at [its] option and without notice, to set-off or apply to the payment of any dishonored/returned check, interest, penalty and other
charges, any and all monies which may be in [its] hands on deposit or otherwise belonging to us.5 (Underscoring supplied)
Francisco deposited four dollar checks totaling US$651,000 in his joint account with Erlinda at the PCIB-Greenhills. The checks were cleared
and paid by Chase Manhattan Bank, but they were subsequently dishonored for insufficient funds. 6 Chase Manhattan Bank thus debited the
amount of the dishonored checks from the account of PCIB-Greenhills which it maintained with it.7
Having received notice of the debiting by Chase Manhattan Bank of US$651,000 from its account, PCIB-Greenhills debited US$85,000 from
Francisco and Erlinda’s joint account as partial payment of the US$651,000 dishonored checks. 8
In the meantime or on May 17, 1998, Gliane remitted US$42,300 to the above-said joint account of Francisco at the PCIB-Greenhills. Before
that, however, Francisco himself had asked Custodio to desist from remitting dollars to him from Saudi Arabia because PCIB-Greenhills had
imposed a higher exchange rate on him (Francisco).
Having gotten wind of Gliane’s remittance of dollars to the joint account of Francisco, Custodio instructed Gliane to request, as the latter did, for
the amendment of the designated beneficiary from Francisco to Belarmino Cortez and/or Rhodora Cruz who maintained a joint account in PCIB-
Greenhills. PCIB’s affiliate bank in Saudi Arabia transmitted the request to PCIB-Ermita, Manila which in turn transmitted it to PCIB-Greenhills.
At the time the request for change of beneficiary was received, however, PCIB-Greenhills had set off the US$42,300 remitted by Gliane against
Francisco’s remaining balance of his obligation under the FBPLA (US$651,000 minus the US$85,000 earlier debited or US$566,000).
236
The Area Manager for PCIB-Chinese Banking Group, Marilyn Tan (Marilyn), to whom Custodio attributed the instruction to set-off the
US$42,300 remittance against Francisco’s obligation to PCIB-Greenhills, explained to Custodio that the amendment was no longer feasible as the
US$42,300 remitted by Gliane had already been applied as partial payment of his (Francisco’s) outstanding obligation with PCIB-Greenhills. She
thus advised Custodio to take the matter up with Francisco as she did not know of any arrangement between him and Francisco.
Custodio and Gliane thereafter filed on July 1, 1998 a complaint against PCIB, Marilyn and Francisco, for specific performance and damages
before the Regional Trial Court (RTC) of Makati, to recover the US$42,300, damages and attorney’s fees.9 They alleged that PCIB failed to
perform its obligation to deliver the sum of money they remitted through it to their beneficiaries,10 and that Francisco wrongfully appropriated or
consented to the appropriation of the aforesaid remittance as payment of his loan account with the bank.11
PCIB and Marilyn filed their Answer12 with Cross-claim against Francisco. Francisco did file his Answer with Compulsory
Counterclaim13 beyond the reglementary period but the trial court admitted it in the interest of substantial justice.14
Francisco and his counsel did not participate in the pre-trial15 and in the trial on the merits. He was thereupon deemed to have waived his right to
present evidence.16
By Decision of January 30, 2002, Branch 134 of the Makati RTC, finding that PCIB was negligent and that Francisco, albeit not negligent, may
not be unjustly enriched, found them jointly and severally liable to pay Custodio and Gliane damages, attorney’s fees and costs. Thus the decision
disposed:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against defendants PCIB and
Francisco. Defendants PCIB and Francisco are hereby directed to pay the plaintiffs, jointly and severally, as follows:
1. US$42,300.00 as actual damages;
2. P50,000.00 as exemplary damages;
3. P30,000.00 as attorney’s fees;
4. cost of suit.
Defendants’ counterclaim is dismissed.
SO ORDERED.17 (Emphasis and underscoring supplied)
PCIB at once filed a Notice of Appeal.18
Francisco surfaced and filed a Motion for Reconsideration, 19 raising the following arguments why he could not be held solidarily liable with
PCIB:
Defendant FRANCISCO cannot be held liable under the transaction in question considering that it was found out in the decision itself
that there was no finding of fault or negligence on the part of FRANCISCO. (see decision p. 8.) 20
It cannot also be said that FRANCISCO benefited from the said act of PCIBank because, according to the findings of this Honorable
Court, the payment of the obligation of the defendant FRANCISCO out of US $4[2],300.00 is void. And if such application of
payment by PCIBank is void, no valid payment was made. Therefore, FRANCISCO was never benefited from the invalid and void
payment. The decision further state[s]: "There being no objection as to the beneficiary of the US $42,300.00 which was erroneously
credited to the account of defendant FRANCISCO who was unauthorized to receive the same, no valid payment was made and the
defendant PCIB as debtor was not released from its obligation to return the equivalent amount. (see decision p. 7.)21 (Emphasis in the
original; underscoring supplied)
Custodio and Gliane filed a Motion for Partial Reconsideration22 of the trial court’s decision, praying for an additional monetary award of legal
interest "on the amount of US$42,3000 from May 17, 1998 up to the date PCIB, Inc. actually settles the same, and reasonable amount in the
award of damages and attorney’s fees."23
By Order of April 26, 2002, the trial court granted the respective motions for reconsideration of Francisco and of Custodio and Gliane, disposing
as follows:
WHEREFORE, modified as indicated above, the dispositive portion of this Court’s Decision dated January 30, 2002 should be read as
follows:
237
"WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against
defendants PCIB and Francisco, as follows:
1) Defendant PCIB is hereby directed to pay the plaintiffs the amount of US$ 42,300.00 plus 12% interest
per annum from May 29, 1988 as actual damages with the right of reimbursement of the amount of
US$42,300.00 against defendant Francisco; and
2) Defendant PCIB is likewise adjudged to pay plaintiffs further sums of:
a) Php 50,000.00 as exemplary damages;
b) Php 30,000.00 as attorney’s fees;
c) Cost of suit.
Defendants’ counterclaim is dismissed.
SO ORDERED."
SO ORDERED.24 (Emphasis in the original; italics and underscoring supplied)
It bears noting that while the trial court, in the above-quoted dispositive portion of the order modifying its original decision, held PCIB solely
liable to pay US$42,300 to Custodio and Gliane, it decreed that PCIB had the right of reimbursement of the amount from Francisco.
PCIB filed a Notice of Appeal Ad Cautelam,25 indicating therein that it was likewise appealing the trial court’s April 26, 2002 Order modifying
its original decision.
The Court of Appeals, by Decision26 of August 11, 2004, granted the appeal of PCIB and accordingly reversed the trial court’s April 26, 2002
Order-modified decision. It freed PCIB of any liability and held Francisco solely liable to Custodio and Gliane. And it deleted the award of
exemplary damages, attorney’s fees and costs. In so deciding, the trial court ruled:
The record belies [the] finding of negligence on the part of appellant bank. Defendant Francisco and appellees are privy to an
agreement whereby appellee’s dollar remittance shall be coursed through Francisco’s account to obtain higher exchange rates. In his
testimony before the trial Court, appellee Custodio admitted using defendant Francisco as a pretend-beneficiary to enjoy higher
exchange rates on his remittances.27
xxxx
x x x Defendant Francisco was unjustly enriched when the US$42,300.00 remittance was credited in his favor by appellant bank. The
obligation to restitute the said amount clearly falls on him.28 x x x
xxxx
Anent the imposition of exemplary damages, We find the award to be sorely lacking in basis. There is no showing that appellant PCIB
or defendant Francisco acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. Neither is there any showing of bad
faith. x x x29
xxxx
The award of attorney’s fees and costs of suit likewise finds no factual and legal support. x x x30 (Emphasis and underscoring
supplied)
Thus the appellate court disposed in its August 11, 2004 Decision:
WHEREFORE, the appealed judgment is hereby REVERSED and SET ASIDE. A new one is entered ordering defendant Rolando
Francisco to pay the plaintiffs-appellees Dennis Custodio and Alfredo Gliane the sum of US$42,300.00 or its peso equivalent at the
time of payment with legal interest at 6% per annum from finality of this Decision until its satisfaction. 31 (Underscoring supplied)
238
Francisco filed a Motion for Reconsideration32 of the appellate court’s decision in which he, for the first time on appeal, claimed that it was ROL-
ED which entered into the FBPLA with PCIB-Greenhills:
A close examination of the FBLA xxx shows that the said agreement is one between ROL-ED Traders Group Corporation (ROL-ED)
and the bank and not with Francisco. This is also true in the other agreements presented by the bank as its evidence. As such,
defendant Francisco is not a party to these agreements. They cannot be used against him. He has a separate and distinct personality
from that of ROL-ED. Consequently, the funds of the appellees could not be applied to Francisco[‘s] debt on the basis of the Foreign
Bills Purchase Line Agreement because the latter is not a party thereto.
True, it was defendant Francisco who signed for the corporation as its signatory but his participation therein is only in a representative
capacity and binds only the corporation and not his own private affairs such as a conduit of appellees’ funds. The funds were
originally directed to "Rolando Francisco" not to "ROL-ED TRADERS GROUP CORPORATION."33 (Emphasis and underscoring
supplied);
In the same motion, Francisco argued that no evidence was presented to prove that the bank indeed credited the amount of US$42,300 to his bank
account and applied it against his obligation.34
Custodio and Gliane filed too a Motion for Reconsideration,35 arguing that
I. THE DEBTOR-CREDITOR RELATIONSHIP BETWEEN THE BANK AND HEREIN PLAINTIFFS-APPELLEES

EMANATE[S] NOT ONLY FROM THE AMENDMENT REQUEST BUT ALSO FROM THE BANK’S UNDERTAKING UNDER
THE "EXPRESS PADALA" SCHEME.
II. PLAINTIFF-APPELLEES SHOULD STILL BE CONSIDERED THE OWNER OF THE FUNDS IN THE LIGHT OF THE
AMENDMENT REQUEST.36
Custodio and Gliane later filed a Supplemental Motion for Reconsideration 37 questioning the appellate court’s reduction of the interest and
deletion of the award of exemplary damages, attorney’s fees, and costs.
Crediting Francisco’s argument that it was ROL-ED, which he merely represented, that entered into the FBPLA with PCIB, the appellate court,
by AMENDED DECISION38 of October 25, 2005, set aside its earlier decision and reinstated the trial court’s January 30, 2002 decision, as
amended by its Order dated April 26, 2002.
PCIB filed a Motion for Reconsideration39 which the Court of Appeals denied. 40 Hence, its present Petition for Review41 on Certiorari,
contending that the Court of Appeals erred
A. x x x in issuing an Amended Decision without any Motion for Reconsideration to prompt it;
B. x x x in taking into consideration new matters which were not put to fore before the lower court and in lending credence
to Francisco’s bare assertions that he and ROL-ED are not one and the same[;]
C. x x x in ruling that [E]PCIB was negligent in carrying out its obligations under the Express Padala facility;
D. x x x in not ruling that PCIB compensation took place between [E]PCIB and Francisco;
E. x x x in disregarding that the root cause of this case was the deceitful scheme hatched by Gliane, Custodio, and Francisco against
[E]PCIB.42 (Emphasis and underscoring supplied)
To PCIB, it was error for the appellate court to entertain Francisco’s motion for reconsideration of its original decision, he not having appealed
the modified decision of the trial court, hence, the same had, to him, become final.
While a party who has not appealed cannot obtain from the appellate court any affirmative relief other than the ones granted in the appealed
decision,43 an appellee, like Francisco in the appellate court level, can advance any argument that he may deem necessary to defeat the appellant’s
claim or to uphold the decision that is being disputed.44 It bears recalling at this juncture that while the modified decision of the trial court held
PCIB solely liable to Custodio and Gliane, it went on to hold that PCIB had the "right of reimbursement of the amount of US$42,300.00
against defendant Francisco."45
No doubt, PCIB prayed in its Cross-Claim46 against Francisco that, among other things, "[i]n the unlikely event that PCIB and [Marilyn] are
adjudged liable for the claims of the plaintiff[s], the other defendant herein, Rolando Francisco, should be held liable to reimburse PCIBank and
[Marilyn] for whatever amounts they may be required to pay the plaintiffs." The trial court did not, however, order Francisco to reimburse PCIB.
It merely stated that PCIB had the right of reimbursement from Francisco.
239
Parenthetically, the Court of Appeals erred in considering Francisco’s belated invocation of his separate personality from ROL-ED to justify his
freedom from liability.
As earlier noted, Francisco raised this argument for the first time in his motion for reconsideration of the appellate court’s original Decision.
Points of law, theories, issues and arguments not adequately brought to the attention of the trial court ordinarily will not be considered by a
reviewing court as they cannot be raised for the first time on appeal because this would be offensive to the basic rules of fair play, justice, and due
process.47 It would be unfair to the adverse party who would have no opportunity to present further evidence material to the new theory which it
could have done had it been aware of it at the time of the hearing before the trial court.48
Furthermore, in his Answer with Compulsory Counterclaim, Francisco claimed that "[h]e never instructed nor authorized the defendant bank to
apply the U.S. dollar remittances to pay his loan obligation with the said bank"49 (emphasis and underscoring supplied). He echoed this claim in
his Motion for Reconsideration that he filed also before the trial court, viz:
A close and serious reading of the aforesaid decision will clearly show that there is absolutely no evidence that FRANCISCO directed
nor authorized PCIBank to apply the US $42,300.00 remitted by the plaintiffs through PCIBank to his own loan account with
PCIBank.
xxxx
It cannot also be said that FRANCISCO benefited from the said act of PCIBank because, according to the findings of this Honorable
Court, the payment of the obligation of the defendant FRANCISCO out of US $ 4[2],300.00 is void. x x x50 (Emphasis in the
Francisco thus virtually admitted in these two cited pleadings that the loan to which the US$42,300 remittance was applied was his. As the object
of pleadings is to draw the lines of battle, so to speak, between the litigants and to indicate fairly the nature of the claims or defenses of both
parties, a party cannot subsequently take a position contrary to, or inconsistent, with his pleadings. 51 Unless a party alleges palpable mistake or
denies such admission, judicial admissions cannot be controverted.52
Therefore, as the US$42,300 remittance was applied to, by his own admission, Francisco’s loan, the set-off was valid.
Parenthetically too, while Francisco claims that the loan in question was that of ROL-ED and not his, he, as earlier stated, deposited the
US$651,000 checks in his joint account with Erlinda and not in the account of ROL-ED.53
At all events, while a corporation is clothed with a personality separate and distinct from the persons composing it, the veil of separate corporate
personality may be lifted when it is used as a shield to confuse legitimate issues, or where lifting the veil is necessary to achieve equity or for the
protection of the creditors.54 In the case at bar, there can be no mistake that Francisco belatedly invoked the separate identity of ROL-ED to evade
his liability to PCIB.
On the failure of PCIB to comply with Gliane’s request for amendment of beneficiary, Gliane and Custodio failed to prove that the request for
amendment was communicated to PCIB within reasonable time. The testimonies 55 of Marilyn and Allen Alcantara (Alcantara), the PCIB
Remittance Officer for the Middle East, that PCIB received the amendatory request after the set-off was not refuted. Thus, Alcantara explained
that PCIB-Greenhills received the amendatory request on May 19, 1998, local time, after the said request underwent authentication procedures.
The entry reflecting the debiting of the US$85,000 against Francisco’s account with PCIB-Greenhills is dated May 19, 1998, 4:45 P.M, local
time.56 Gliane and Custodio argue that "it is of standard operating policy of any banking institutions that the regular "holding period" of money
transfers is more or less three (3) days."57 They failed to prove, however, that PCIB had that policy, or that the contract under the Express
Padala service of PCIB provided for a three-day holding period. Furthermore, PCIB could not be faulted for the dispatch with which it credited
the US$42,300 to Francisco’s account. As it argued:
Equitable agrees with [the Court of Appeals] that the services offered by a banking institution are imbued with public interest. It is
precisely with this principle in mind that Equitable effected the transfer of funds the quickest time practicable. Equitable is mindful
of the fact that any delay in the remittance of money could be disastrous for the beneficiaries interest.
It is unfortunate for the plaintiffs-appellees, however, that their beneficiary – and by May 19, 1998, after the transfer had been
effected, the rightful owner of the amounts remitted – had several outstanding obligations with Equitable. Obligations which
Equitable, as Francisco’s creditor, had the right to seek payment for.58 (Emphasis and underscoring supplied)
Gliane and Custodio themselves admit that time was of the essence in PCIB’s discharge of its obligation under its Express Padala service:
x x x [W]hen petitioner’s personnel in Saudi Arabia [marketed] and [e]nticed respondents Custodio and Gliane to course their money
remittances through petitioner bank, they fully assured respondents of a special privilege, one of which is the speed of transfer and as a
240
matter of fact respondents’ money transfers are always noted with the word "PRIORITY".59 (Capitalization and emphasis in the
WHEREFORE, the petition is GRANTED. The Amended Decision of the Court of Appeals dated October 25, 2005 is REVERSED and SET
ASIDE, and its August 11, 2004 Decision REINSTATED.
241
April 19, 2017
G.R. No. 202573
BANKARD, INC., Petitioner,

vs.
LUZ P. ALARTE, Respondent.
DECISION
DEL CASTILLO, J.:
This Petition for Review on Certiorari1 assails the September 28, 2011 Decision2 of the Court of Appeals (CA) denying the Petition for Review
in CAG. R. SP No. 114345, and its July 4, 2012 Resolution 3 denying herein petitioner's Motion for Reconsideration 4 in said case.
Factual Antecedents
Petitioner Bankard, Inc. (Bankard, now RCBC Bankard Services Corporation) is a duly constituted domestic corporation doing business as a
credit card provider, extending credit accommodations to its member-cardholders for the purchase of goods and services obtained from Bankard-
accredited business establishments, to be paid later on by the member-cardholders following billing.
In 2007, petitioner filed a collection case against respondent Luz P. Alarte before the Metropolitan Trial Court of Pasig City (MeTC). The case
was docketed as Civil Case No. 13956 and ultimately assigned to Branch 72. In its Complaint,5 petitioner alleged that respondent applied for and
was granted credit accommodations under Bankard myDream JCB Card.No. 3562-8688-5155-1006; that respondent, using the said Bankard
myDream JCB credit card, availed herself of credit acconunodations by "purchasing various products"; 6 that per Statement of Account7 dated July
9, 2006, respondent's credit availments amounted to a total of ₱67,944.82, inclusive of unbilled mont1Uy installments, charges and penalties or at
least the minimum amount due under the credit card; and that respondent failed and refuses to pay her obligations despite her receipt of a written
demand.8 Thus, it prayed that respondent be ordered to pay the amount of ₱67,944.82, with interest, attorney's fees equivalent to 25% of the sum
due, and costs of suit.
Despite service of summons, respondent failed to file her answer. For this reason, petitioner filed a Motion to Render Judgment 9 which was
granted.
Ruling of the Metropolitan Trial Court
On July 15, 2009, the MeTC issued its Decision 10 dismissing the case, thus:
Inasmuch as this case falls under the Rule on Summary Procedure, judgment shall be rendered as may be warranted by the facts alleged in the
complaint and limited to what was prayed for.
For decision is whether x x x plaintiff is entitled to its claims against herein defendant.
It bears stressing that in civil cases; the party having the burden of proof must establish his case by preponderance of evidence.1âwphi1 As
mentioned in the case of Amoroso vs. Alegre (G.R. No. 142766, June 15, 2007), "Preponderance of evidence" is the weight, credit, and value of
the aggregate evidence on either side and is usually considered to be synonymous with the term "greater weight of the evidence" or "greater
weight of the credible evidence." If plaintiff claims a right granted or created by law, he must prove his claim by competent evidence. He must
rely on the strength of his own evidence and not upon the weakness of that of his opponent.
Seratiny of the pieces of evidence submitted by plaintiff, particularly the single statement of account dated July 7. 2006, discloses that what were
merely reflected therein are the amounts imposed as late charges and interest charges and interest charges. Nothing in the said document would
indicate the alleged purchases made by defendant. Considering that there is sans [sic] of evidence showing that defendant made use [sic]
plaintiff's credit facilities, it could no [sic] be said then that the amount of ₱ 67,944.82 alleged to be defendant's outstanding balance was the
result of the latter's availment of plaintiff's credit card.
WHEREFORE, judgment is hereby rendered, DISMISSING herein complaint for lack of preponderance of evidence.
SO ORDERED.11
Ruling of the Regional Trial Court
242
Petitioner appealed before the Regional Trial Court (RTC) which, in a May 6, 2010 Decision, 12 affirmed the MeTC. It held:
In essence, Appellarit argued that the Lower Court erred in dismissing the case on the ground of insufficiency of evidence. Accordingly, the
evidence presented by Appellant is enough to pass the requirement of preponderance of evidence based on the disputable presumption enunciated
under Rule 131, Section 3 (q) of1he Revised Rules of Court. Appellant added that the account of the defendant-appellee Luz Ala.rte x x x could
not have incurred penalties and interest charges if no purchases were made thereon. That likewise, Appellee was deemed to have admitted her
obligation when she did not object to the amounts stated on the statement of accounts sent by the Appellant in the regular course of its business
and as well, upon receiving the demand letter dated 03 October 2007 for the payment of Php 67 ,944.82.
A careful review of the Decision appealed from reveals that there really was no clear proof on how the amount claimed by the Appellant was
incurred by the Appellee. This is so because if ever, the disputable presumption under the Rule only showed to the Court that the statement of
accounts were indeed sent by the Appellant to the Appellee on a "regular basis" but not the details itself of the purchase transactions showing the
fact that Appellee made use of the Appellant's credit facilities up to the amount claimed together with the imposition of unconsionable interest
and penalties as basis for the grant thereof. In short, the presumed existence of the statement of accounts cannot be considered as repository of the
truth of the facts stated in the single statement of account dated 07 July 2006 presented by the Appellant considering that only the presentation of
the detailed purchase transactions had by the Appellee in using the credit card facilities of the Appellant can show that the amountt claimed by the
latter was actually incurred by the former.
Appellant further argued that the Lower Court should have issued an order setting a clarificatory hearing to establish the principal amount due
and required the plaintiff to submit affidavits on that matter pursuant to Section 10 of the Rules on Summary Procedure.
Section 10 of the Revised Rules of Summary Procedure speaks of matters that requires [sic] clarification in the affidavits and position papers
which the Court might require the parties through an order, [sic] it does not in any way speak of the appreciation of evidence by the Court as
subject matter for clarificatory hearing. Be that as it may, the Order of the Lower Court dated 29 April 2009 was enough in giving the Appellant
the opportunity to submit supporting details of the monthly statement to prove its case.
WHEREFORE, premises considered, finding no reversible en-or on [sic] the Decision of the Court a qou, being supported by substantial
evidence as basis thereof, the same is hereby AFFJRMED in toto. Costs against the Plaintiff-Appellant.
SO ORDERED.13
Petitioner filed a Petition for Review14 before the CA docketed as CA-G.R. SP No. 114345. In a September 28, 2011 Decision, however, the CA
affirmed the Decisions of the MeTC and RTC. It held:
Petitioner posits that the RTC erred in sustaining the [MeTC] in dismissing the case for lack of evidence since it was able to prove its claim by
preponderance of evidence.
Section 1, Rule 133 of the Revised Rules of Court provides:
'SECTION 1. Preponderance of evidence, how determined. - In civil cases, the party having the burden of proof must establish his case by a
preponderance of evidence. In determining where the preponderance or superior weight of evidence on the issues involved lies, the court may
consider all the facts and circumstances of the case, x x x.'
Based on the facts and circumstances in this case, there is indeed no basis for the claim. As aptly observed by the RTC, there was no clear proof
on how the an1ount claimed by petitioner was incurred by respondent, thus:
xxx xxx xxx
A careful review of the Decision appealed from reveals that there really was no clear proof on how the amount claimed by the Appellant was
incurred by the appellee. This is so because if ever, the disputable presumption under the Rule only showed to the Court that the statement of
accounts were indeed sent by the Appellant to the Appellee on a 'regular basis’ but not the details itself of the purchase transactions showing the
fact that Appellee made use of the Appellant's credit facilities up to the amount claimed together with the imposition of unconscionable interest
and penalties as basis for the grant thereof In short, the presumed existence of the statement of accounts cannot be considered as repository of the
truth of the facts stated in the single statement of account dated 07 July 2006 presented by the Appellant considering that only the presentation of
the detailed purchase transactions had by the Appellee in using the credit card facilities of the Appellant can show that the amount claimed by the
latter was actually incurred by the former.
xxx xxx xxx
243
Burden of proof is the duty of a party to present evidence to establish his claim or defense by the amount of evidence required by law, which is
preponderance of evidence in civil cases. As a rule, he who alleges the affirmative of the issue has the burden of proof. Here, the burden of proof
lies with the petitioner. As such, it has the obligation to present such quantum of evidence necessary to prove its claim. Unfortunately, the
petitioner not only failed to ove1ium this burden but also failed to adduced [sic] the evidence required to prove such claim. While it may be true
that respondent applied for and was granted a credit accommodation by petitioner, the latter failed to adduce enough evidence to establish that it
is entitled to the payment of the amount of Php67,944.82. The Statement of Account submitted by petitioner showing the alleged obligation of the
respondent merely states the late charges and penalty incurred but did not enumerate the alleged purchases/transactions made by the respondent
while using the credit card· issued by the petitioner. Thus, having failed to establish its claim by preponderance of evidence, the dismissal of the
petition is warranted.
WHEREFORE, premises considered, the petition under consideration is DISMISSED and the assailed Decision dated May 06, 2010 of Regional
Trial Court of Pasig, Branch 167 is hereby AFFIRMED.
SO ORDERED.15
Petitioner moved to reconsider, but in a July 4, 2012 Resolution, the CA held its ground. Hence, the present Petition.
The Court notes that all throughout the proceedings, respondent did not participate. She did not file her answer in the MeTC. Nor did she file any
comment or position paper in the RTC appeal, as well as the CA petition for review. Just as well, she failed to submit her Comment to the instant
Petition for which reason fine was imposed upon her by the Court on two occasions. And in an August 27, 2015 Manifestation, 16 petitioner
declared that it is submitting the instant case for resolution on the basis of the pleadings on record.
Issue and Arguments
Petitioner simply submits that it has presented sufficient evidence to support its pecuniary claim. It claims that the July 9, 2006 Statement of
Account17 properly reflected the respondent's obligation; that respondent is estopped from questioning the said statement of account as it contains
a waiver, stating that if respondent does not question the same within 20 days from receipt, "Bankard, Inc. will deem the Statement true and
correct"; 18 that respondent's failure to file her Answer in the MeTC and Comment before the RTC and the CA likewise results in the validation of
the statement of account; that with her failure to answer, all the material allegations in the Complaint are deemed admitted, especially the
statement of account which should have been specifically denied under oath; that if judgment is not rendered in its favor, this would result in the
unjust enrichment of respondent at its expense; and that if the MeTC, RTC, and CA are affirmed, this would result in a situation where credit card
holders could evade their obligations by simply ignoring cases filed against them, as in this case where, despite proper notice, respondent failed
and refused to file her Answer to the Complaint, her respective comments to the RTC appeal, CA petition, and the instant Petition.
Petitioner thus prays that the questioned CA dispositions be reversed and set aside, and that judgment be rendered granting its prayer as stated in
its Complaint, that is, that respondent be ordered to pay the amount of ₱67,944.82, with interest; attorney's fees equivalent to 25% of the sum due;
and costs of suit.
Our Ruling
The Petition is partially granted.
A perusal of the July 9, 2006 Statement of Account sent to respondent would indeed show that it does not contain the particulars of purchase
transactions entered into by the latter; it merely contains the following information:
PREVIOUS STATEMENT BALANCE [₱]64,615.64

3562-8688-5155-1006 LUZ TATEL ALARTE
07/04/06 07/047/0 LATE CHARGES 1,484.84
07/07/06 07/07/06 INTEREST CHARGES 1,844.34
SUB TOTAL 3,329.18
BALANCE END [₱]67,944.82
***END OF STATEMENT-PAGE 1 ***19
However, the manner in which the statement of account is worded indicates that it is a running balance, a continuing and mounting bill of charges
consisting of a combined principal amount with finance and penalty charges imposed, which respondent appears to have failed to pay in the past.
This is shown by the fact that respondent has failed to pay a past bill amounting to ₱64,615.64 - the "previous statement balance" in the very first
line of the above-quoted statement of account. This could mean that there really were no immediate purchase transactions made by respondent for
the month that needed to be specified in the July 9, 2006 Statement of Account; that instead, she simply repeatedly failed and continues to fail to
244
pay her credit card debt arising out of past credit card purchase transactions to petitioner, which thus resulted in a mounting pile of charges
imposed upon her outstanding account as reflected in a statement or bill of charges or accounts regularly sent to her.
Petitioner's fault appears to lie in the fact that its Complaint was not well-prepared, and its cause is not well-argued; for this reason, the courts
below misunderstood both. Upon being apprised of the MeTC's Decision dismissing the case for failure to "indicate the alleged purchases made
by"20 respondent, petitioner could have simply included in its RTC appeal a simple summary of respondent's account; the source of her debt, such
as the credit card transactions she made in the past and, her past statements of account to prove that the July 9, 2006 statement of account was
merely a running or accumulated balance and did not necessarily involve immediate credit card purchases. Instead, petitioner made the mistake of
laying blame upon the MeTC and RTC for not conducting a clarificatory hearing and for not requiring it to submit affidavits "on that
matter",21 when enlightenment should have come primarily from it as it is precisely engaged in the credit card business and is therefore presumed
to be an expert on the subject.
While it can be said that, from the point of view of petitioner's business dealings with respondent, the former is not obliged, each and eve1y time,
to send a statement of account to the latter containing a detailed list of all the credit card transactions she made in the past which remain unsettled
and outstanding as of the date of issuance of the latest statement of account, as she is presumed to know these from past statements of account
received. The matter, however, is not so simple from the viewpoint of someone who is not privy to their transactions, such as the courts.
This Court cannot completely blame the MeTC, RTC, and CA for their failure to understand or realize the fact that a monthly credit card
statement of account does not always necessarily involve purchases or transactions made immediately prior to the issuance of such statement;
certainly, it may be that the card holder did not at all use the credit card for the month, and the statement of account sent to him or her refers to
principal, interest, and penalty charges incurred from past transactions which are too multiple or cumbersome to enumerate but nonetheless
remain unsettled by the card holder. This Court cannot judge them for their lack of experience or practical understanding of credit card
arrangements, although it would have helped if they just endeavored to derive such an understanding of the process.
Thus, it would not hurt the cause of justice to remand the case to the Me TC where petitioner would be required to amend its Complaint and
adduce additional evidence to prove its case; that way, the lower court can better understand the nature of the claim, and this time it may arrive at
a just resolution of the case. This is to say that while the Court believes that petitioner's claim may be well-founded, it is not enough as to allow
judgment in its favor on 1he basis of extant evidence. It must prove the validity of its claim; this it may do by amending its Complaint and
adducing additional evidence of respondent's credit history and proving the loan transactions between them. After all, credit card arrangements
are simple loan arrangements between the card issuer and the card holder.
Simply put, every credit card transaction involves three contracts, namely: (a) the sales contract between the credit card holder and the merchant
or the business establishment which accepted the credit card; (b) the loan agreement between the credit card issuer and the credit card holder; and
lastly, (c) the promise to pay between the credit card issuer and the merchant or business establishment. 22
WHEREFORE, the Petition is PARTIALLYGRANTED. The September 28, 2011 Decision and July 4, 2012 Resolution of the Court of
Appeals in CA-G.R. SP No. 114345 are REVERSED and SETASIDE.
Civil Case No. 13956 is reinstated, and the Metropolitan Trial Court of Pasig City, Branch 72 is ORDERED to conduct further proceedings in
accordance with the foregoing disquisition of the Court and allow petitioner Bankard, Inc. (now RCBC Bankard Services Corporation) to amend
its Complaint and/or present additional evidence to prove its case.
245
G.R. No. 190102 July 11, 2012
ACCENTURE, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
SERENO, J.:
This is a Petition filed under Rule 45 of the 1997 Rules of Civil Procedure, praying for the reversal of the Decision of the Court of Tax Appeals
En Banc (CTA En Banc ) dated 22 September 2009 and its subsequent Resolution dated 23 October 2009. 1
Accenture, Inc. (Accenture) is a corporation engaged in the business of providing management consulting, business strategies development, and
selling and/or licensing of software.2 It is duly registered with the Bureau of Internal Revenue (BIR) as a Value Added Tax (VAT) taxpayer or
enterprise in accordance with Section 236 of the National Internal Revenue Code (Tax Code). 3
On 9 August 2002, Accenture filed its Monthly VAT Return for the period 1 July 2002 to 31 August 2002 (1st period). Its Quarterly VAT Return
for the fourth quarter of 2002, which covers the 1st period, was filed on 17 September 2002; and an Amended Quarterly VAT Return, on 21 June
2004.4 The following are reflected in Accenture’s VAT Return for the fourth quarter of 2002: 5
1âwphi1
Purchases Amount Input VAT
Domestic Purchases- Capital Goods ₱12,312,722.00 ₱1,231,272.20
Domestic Purchases- Goods other than capital Goods ₱64,789,507.90 ₱6,478,950.79
Domestic Purchases- Services ₱16,455,868.10 ₱1,645,586.81
Total Input Tax ₱9,355,809.80
Zero-rated Sales ₱316,113,513.34

Total Sales ₱335,640,544.74
Accenture filed its Monthly VAT Return for the month of September 2002 on 24 October 2002; and that for October 2002, on 12 November
2002. These returns were amended on 9 January 2003. Accenture’s Quarterly VAT Return for the first quarter of 2003, which included the period
1 September 2002 to 30 November 2002 (2nd period), was filed on 17 December 2002; and the Amended Quarterly VAT Return, on 18 June
2004. The latter contains the following information:6
Purchases Amount Input VAT

Domestic Purchases- Capital Goods ₱80,765,294.10 ₱8,076,529.41
Domestic Purchases- Goods other than capital Goods ₱132,820,541.70 ₱13,282,054.17
Domestic Purchases-Services ₱63,238,758.00 ₱6,323,875.80
Total Input Tax ₱27,682,459.38
Zero-rated Sales ₱545,686,639.18

Total Sales ₱ ₱572,880,982.68
The monthly and quarterly VAT returns of Accenture show that, notwithstanding its application of the input VAT credits earned from its zero-
rated transactions against its output VAT liabilities, it still had excess or unutilized input VAT credits. These VAT credits are in the amounts of
P9,355,809.80 for the 1st period and P27,682,459.38 for the 2nd period, or a total of P37,038,269.18. 7
Out of the P37,038,269.18, only P35,178,844.21 pertained to the allocated input VAT on Accenture’s "domestic purchases of taxable goods
which cannot be directly attributed to its zero-rated sale of services."8 This allocated input VAT was broken down to P8,811,301.66 for the 1st
period and P26,367,542.55 for the 2nd period.9
The excess input VAT was not applied to any output VAT that Accenture was liable for in the same quarter when the amount was earned—or to
any of the succeeding quarters. Instead, it was carried forward to petitioner’s 2nd Quarterly VAT Return for 2003. 10
246
Thus, on 1 July 2004, Accenture filed with the Department of Finance (DoF) an administrative claim for the refund or the issuance of a Tax
Credit Certificate (TCC). The DoF did not act on the claim of Accenture. Hence, on 31 August 2004, the latter filed a Petition for Review with
the First Division of the Court of Tax Appeals (Division), praying for the issuance of a TCC in its favor in the amount of P35,178,844.21.
The Commissioner of Internal Revenue (CIR), in its Answer,11 argued thus:
1. The sale by Accenture of goods and services to its clients are not zero-rated transactions.
2. Claims for refund are construed strictly against the claimant, and Accenture has failed to prove that it is entitled to a refund, because
its claim has not been fully substantiated or documented.
In a 13 November 2008 Decision,12 the Division denied the Petition of Accenture for failing to prove that the latter’s sale of services to the
alleged foreign clients qualified for zero percent VAT.13
In resolving the sole issue of whether or not Accenture was entitled to a refund or an issuance of a TCC in the amount of P35,178,844.21, 14 the
Division ruled that Accenture had failed to present evidence to prove that the foreign clients to which the former rendered services did business
outside the Philippines.15 Ruling that Accenture’s services would qualify for zero-rating under the 1997 National Internal Revenue Code of the
Philippines (Tax Code) only if the recipient of the services was doing business outside of the Philippines, 16 the Division cited Commissioner of
Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (Burmeister) 17 as basis.
Accenture appealed the Division’s Decision through a Motion for Reconsideration (MR). 18 In its MR, it argued that the reliance of the Division
on Burmeister was misplaced19 for the following reasons:
1. The issue involved in Burmeister was the entitlement of the applicant to a refund, given that the recipient of its service was doing
business in the Philippines; it was not an issue of failure of the applicant to present evidence to prove the fact that the recipient of its
services was a foreign corporation doing business outside the Philippines. 20
2. Burmeister emphasized that, to qualify for zero-rating, the recipient of the services should be doing business outside the Philippines,
and Accenture had successfully established that.21
3. Having been promulgated on 22 January 2007 or after Accenture filed its Petition with the Division, Burmeister cannot be made to
apply to this case.22
Accenture also cited Commissioner of Internal Revenue v. American Express (Amex)23 in support of its position. The MR was denied by the
Division in its 12 March 2009 Resolution.24
Accenture appealed to the CTA En Banc. There it argued that prior to the amendment introduced by Republic Act No. (R.A.) 9337, 25 there was
no requirement that the services must be rendered to a person engaged in business conducted outside the Philippines to qualify for zero-rating.
The CTA En Banc agreed that because the case pertained to the third and the fourth quarters of taxable year 2002, the applicable law was the
1997 Tax Code, and not R.A. 9337.26 Still, it ruled that even though the provision used in Burmeister was Section 102(b)(2) of the earlier 1977
Tax Code, the pronouncement therein requiring recipients of services to be engaged in business outside the Philippines to qualify for zero-rating
was applicable to the case at bar, because Section 108(B)(2) of the 1997 Tax Code was a mere reenactment of Section 102(b)(2) of the 1977 Tax
Code.
The CTA En Banc concluded that Accenture failed to discharge the burden of proving the latter’s allegation that its clients were foreign-based.27
Resolute, Accenture filed a Petition for Review with the CTA En Banc, but the latter affirmed the Division’s Decision and Resolution.28 A
subsequent MR was also denied in a Resolution dated 23 October 2009.
Hence, the present Petition for Review29 under Rule 45.
In a Joint Stipulation of Facts and Issues, the parties and the Division have agreed to submit the following issues for resolution:
1. Whether or not Petitioner’s sales of goods and services are zero-rated for VAT purposes under Section 108(B)(2)(3) of the 1997
Tax Code.
2. Whether or not petitioner’s claim for refund/tax credit in the amount of P35,178,884.21 represents unutilized input VAT paid on its
domestic purchases of goods and services for the period commencing from 1 July 2002 until 30 November 2002.
247
3. Whether or not Petitioner has carried over to the succeeding taxable quarter(s) or year(s) the alleged unutilized input VAT paid on
its domestic purchases of goods and services for the period commencing from 1 July 2002 until 30 November 2002, and applied the
same fully to its output VAT liability for the said period.
4. Whether or not Petitioner is entitled to the refund of the amount of P35,178,884.21, representing the unutilized input VAT on
domestic purchases of goods and services for the period commencing from 1 July 2002 until 30 November 2002, from its sales of
services to various foreign clients.
5. Whether or not Petitioner’s claim for refund/tax credit in the amount of P35,178,884.21, as alleged unutilized input VAT on
domestic purchases of goods and services for the period covering 1 July 2002 until 30 November 2002 are duly substantiated by
proper documents.30
For consideration in the present Petition are the following issues:
1. Should the recipient of the services be "doing business outside the Philippines" for the transaction to be zero-rated under Section
108(B)(2) of the 1997 Tax Code?
2. Has Accenture successfully proven that its clients are entities doing business outside the Philippines?
Recipient of services must be doing business outside the Philippines for the transactions to qualify as zero-rated.
Accenture anchors its refund claim on Section 112(A) of the 1997 Tax Code, which allows the refund of unutilized input VAT earned from zero-
rated or effectively zero-rated sales. The provision reads:
SEC. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within
two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied
against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and
(2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely
attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. Section 108(B) referred to in the
foregoing provision was first seen when Presidential Decree No. (P.D.) 1994 31 amended Title IV of P.D. 1158,32 which is also known as the
National Internal Revenue Code of 1977. Several Decisions have referred to this as the 1986 Tax Code, even though it merely amended Title IV
of the 1977 Tax Code.
Two years thereafter, or on 1 January 1988, Executive Order No. (E.O.) 273 33 further amended provisions of Title IV. E.O. 273 by transferring
the old Title IV provisions to Title VI and filling in the former title with new provisions that imposed a VAT.
The VAT system introduced in E.O. 273 was restructured through Republic Act No. (R.A.) 7716. 34 This law, which was approved on 5 May
1994, widened the tax base. Section 3 thereof reads:
SECTION 3. Section 102 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:
"SEC. 102. Value-added tax on sale of services and use or lease of properties. x x x
xxx xxx xxx
"(b) Transactions subject to zero-rate. — The following services performed in the Philippines by VAT-registered persons shall be subject to 0%:
"(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP).
"(2) Services other than those mentioned in the preceding sub-paragraph, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)."
Essentially, Section 102(b) of the 1977 Tax Code—as amended by P.D. 1994, E.O. 273, and R.A. 7716—provides that if the consideration for the
services provided by a VAT-registered person is in a foreign currency, then this transaction shall be subjected to zero percent rate.
248
The 1997 Tax Code reproduced Section 102(b) of the 1977 Tax Code in its Section 108(B), to wit:
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT- registered persons shall be
subject to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are
and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); x x x.
On 1 November 2005, Section 6 of R.A. 9337, which amended the foregoing provision, became effective. It reads:
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. -
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are
and regulations of the Bangko Sentral ng Pilipinas (BSP);
"(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the
Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP); x x x." (Emphasis supplied)
The meat of Accenture’s argument is that nowhere does Section 108(B) of the 1997 Tax Code state that services, to be zero-rated, should be
rendered to clients doing business outside the Philippines, the requirement introduced by R.A. 9337. 35 Required by Section 108(B), prior to the
amendment, is that the consideration for the services rendered be in foreign currency and in accordance with the rules of the Bangko Sentral ng
Pilipinas (BSP). Since Accenture has complied with all the conditions imposed in Section 108(B), it is entitled to the refund prayed for.
In support of its claim, Accenture cites Amex, in which this Court supposedly ruled that Section 108(B) reveals a clear intent on the part of the
legislators not to impose the condition of being "consumed abroad" in order for the services performed in the Philippines to be zero-rated.36
The Division ruled that this Court, in Amex and Burmeister, did not declare that the requirement—that the client must be doing business outside
the Philippines—can be disregarded, because this requirement is expressly provided in Article 108(2) of the Tax Code. 37
Accenture questions the Division’s application to this case of the pronouncements made in Burmeister. According to petitioner, the provision
applied to the present case was Section 102(b) of the 1977 Tax Code, and not Section 108(B) of the 1997 Tax Code, which was the law effective
when the subject transactions were entered into and a refund was applied for.
In refuting Accenture’s theory, the CTA En Banc ruled that since Section 108(B) of the 1997 Tax Code was a mere reproduction of Section
102(b) of the 1977 Tax Code, this Court’s interpretation of the latter may be used in interpreting the former, viz:
In the Burmeister case, the Supreme Court harmonized both Sections 102(b)(1) and 102(b)(2) of the 1977 Tax Code, as amended, pertaining to
zero-rated transactions. A parallel approach should be accorded to the renumbered provisions of Sections 108(B)(2) and 108(B)(1) of the 1997
NIRC. This means that Section 108(B)(2) must be read in conjunction with Section 108(B)(1). Section 108(B)(2) requires as follows: a) services
other than processing, manufacturing or repacking rendered by VAT registered persons in the Philippines; and b) the transaction paid for in
acceptable foreign currency duly accounted for in accordance with BSP rules and regulations. The same provision made reference to Section
108(B)(1) further imposing the requisite c) that the recipient of services must be performing business outside of Philippines. Otherwise, if both
the provider and recipient of service are doing business in the Philippines, the sale transaction is subject to regular VAT as explained in the
Burmeister case x x x.
xxx xxx xxx
249
Clearly, the Supreme Court’s pronouncements in the Burmeister case requiring that the recipient of the services must be doing business outside
the Philippines as mandated by law govern the instant case.38
Assuming that the foregoing is true, Accenture still argues that the tax appeals courts cannot be allowed to apply to Burmeister this Court’s
interpretation of Section 102(b) of the 1977 Tax Code, because the Petition of Accenture had already been filed before the case was even
promulgated on 22 January 2007,39 to wit:
x x x. While the Burmeister case forms part of the legal system and assumes the same authority as the statute itself, however, the same cannot be
applied retroactively against the Petitioner because to do so will be prejudicial to the latter. 40
The CTA en banc is of the opinion that Accenture cannot invoke the non-retroactivity of the rulings of the Supreme Court, whose interpretation
of the law is part of that law as of the date of its enactment.41
We rule that the recipient of the service must be doing business outside the Philippines for the transaction to qualify for zero-rating under Section
108(B) of the Tax Code.
This Court upholds the position of the CTA en banc that, because Section 108(B) of the 1997 Tax Code is a verbatim copy of Section 102(b) of
the 1977 Tax Code, any interpretation of the latter holds true for the former.
Moreover, even though Accenture’s Petition was filed before Burmeister was promulgated, the pronouncements made in that case may be applied
to the present one without violating the rule against retroactive application. When this Court decides a case, it does not pass a new law, but
merely interprets a preexisting one.42 When this Court interpreted Section 102(b) of the 1977 Tax Code in Burmeister, this interpretation became
part of the law from the moment it became effective. It is elementary that the interpretation of a law by this Court constitutes part of that law from
the date it was originally passed, since this Court's construction merely establishes the contemporaneous legislative intent that the interpreted law
carried into effect.43
Accenture questions the CTA’s application of Burmeister, because the provision interpreted therein was Section 102(b) of the 1977 Tax Code. In
support of its position that Section 108 of the 1997 Tax Code does not require that the services be rendered to an entity doing business outside the
Philippines, Accenture invokes this Court’s pronouncements in Amex. However, a reading of that case will readily reveal that the provision
applied was Section 102(b) of the 1977 Tax Code, and not Section 108 of the 1997 Tax Code. As previously mentioned, an interpretation of
Section 102(b) of the 1977 Tax Code is an interpretation of Section 108 of the 1997 Tax Code, the latter being a mere reproduction of the former.
This Court further finds that Accenture’s reliance on Amex is misplaced.
We ruled in Amex that Section 102 of the 1977 Tax Code does not require that the services be consumed abroad to be zero-rated. However,
nowhere in that case did this Court discuss the necessary qualification of the recipient of the service, as this matter was never put in question. In
fact, the recipient of the service in Amex is a nonresident foreign client.
The aforementioned case explains how the credit card system works. The issuance of a credit card allows the holder thereof to obtain, on credit,
goods and services from certain establishments. As proof that this credit is extended by the establishment, a credit card draft is issued. Thereafter,
the company issuing the credit card will pay for the purchases of the credit card holders by redeeming the drafts. The obligation to collect from
the card holders and to bear the loss—in case they do not pay—rests on the issuer of the credit card.
The service provided by respondent in Amex consisted of gathering the bills and credit card drafts from establishments located in the Philippines
and forwarding them to its parent company's regional operating centers outside the country. It facilitated in the Philippines the collection and
payment of receivables belonging to its Hong Kong-based foreign client.
The Court explained how the services rendered in Amex were considered to have been performed and consumed in the Philippines, to wit:
Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the performance or "successful
completion of a contractual duty, usually resulting in the performer’s release from any past or future liability x x x." The services rendered by
respondent are performed or successfully completed upon its sending to its foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines. 44
The effect of the place of consumption on the zero-rating of the transaction was not the issue in Burmeister.1âwphi1 Instead, this Court addressed
the squarely raised issue of whether the recipient of services should be doing business outside the Philippines for the transaction to qualify for
zero-rating. We ruled that it should. Thus, another essential condition for qualification for zero-rating under Section 102(b)(2) of the 1977 Tax
Code is that the recipient of the business be doing that business outside the Philippines. In clarifying that there is no conflict between this
pronouncement and that laid down in Amex, we ruled thus:
x x x. As the Court held in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), the place of payment
is immaterial, much less is the place where the output of the service is ultimately used. An essential condition for entitlement to 0% VAT under
250
Section 102 (b) (1) and (2) is that the recipient of the services is a person doing business outside the Philippines. In this case, the recipient of the
services is the Consortium, which is doing business not outside, but within the Philippines because it has a 15-year contract to operate and
maintain NAPOCOR’s two 100-megawatt power barges in Mindanao. (Emphasis in the original)45
In Amex we ruled that the place of performance and/or consumption of the service is immaterial. In Burmeister, the Court found that, although
the place of the consumption of the service does not affect the entitlement of a transaction to zero-rating, the place where the recipient conducts
its business does.
Amex does not conflict with Burmeister. In fact, to fully understand how Section 102(b)(2) of the 1977 Tax Code—and consequently Section
108(B)(2) of the 1997 Tax Code—was intended to operate, the two aforementioned cases should be taken together. The zero-rating of the
services performed by respondent in Amex was affirmed by the Court, because although the services rendered were both performed and
consumed in the Philippines, the recipient of the service was still an entity doing business outside the Philippines as required in Burmeister.
That the recipient of the service should be doing business outside the Philippines to qualify for zero-rating is the only logical interpretation of
Section 102(b)(2) of the 1977 Tax Code, as we explained in Burmeister:
This can only be the logical interpretation of Section 102 (b) (2). If the provider and recipient of the "other services" are both doing business in
the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102 (a) can avoid
paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. To interpret Section 102 (b) (2)
to apply to a payer-recipient of services doing business in the Philippines is to make the payment of the regular VAT under Section 102 (a)
dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment in
foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section 102 (a) as a tax measure in the Tax Code, an
interpretation this Court cannot sanction. A tax is a mandatory exaction, not a voluntary contribution.
xxx xxx xxx
Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls squarely under Section 102
(a) governing domestic sale or exchange of services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless
of course the transaction falls under the other provisions of Section 102 (b).
Thus, when Section 102 (b) (2) speaks of "services other than those mentioned in the preceding subparagraph," the legislative intent is that only
the services are different between subparagraphs 1 and 2. The requirements for zero-rating, including the essential condition that the recipient of
services is doing business outside the Philippines, remain the same under both subparagraphs. (Emphasis in the original) 46
Lastly, it is worth mentioning that prior to the promulgation of Burmeister, Congress had already clarified the intent behind Sections 102(b)(2) of
the 1977 Tax Code and 108(B)(2) of the 1997 Tax Code amending the earlier provision. R.A. 9337 added the following phrase: "rendered to a
person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines
when the services are performed."
Accenture has failed to establish that the recipients of its services do business outside the Philippines.
Accenture argues that based on the documentary evidence it presented, 47 it was able to establish the following circumstances:
1. The records of the Securities and Exchange Commission (SEC) show that Accenture’s clients have not established any branch
office in which to do business in the Philippines.
2. For these services, Accenture bills another corporation, Accenture Participations B.V. (APB), which is likewise a foreign
corporation with no "presence in the Philippines."
3. Only those not doing business in the Philippines can be required under BSP rules to pay in acceptable currency for their purchase of
goods and services from the Philippines. Thus, in a domestic transaction, where the provider and recipient of services are both doing
business in the Philippines, the BSP cannot require any party to make payment in foreign currency. 48
Accenture claims that these documentary pieces of evidence are supported by the Report of Emmanuel Mendoza, the Court-commissioned
Independent Certified Public Accountant. He ascertained that Accenture’s gross billings pertaining to zero-rated sales were all supported by zero-
rated Official Receipts and Billing Statements. These documents show that these zero-rated sales were paid in foreign exchange currency and
duly accounted for in the rules and regulations of the BSP.49
In the CTA’s opinion, however, the documents presented by Accenture merely substantiate the existence of the sales, receipt of foreign currency
payments, and inward remittance of the proceeds of these sales duly accounted for in accordance with BSP rules. Petitioner presented no
evidence whatsoever that these clients were doing business outside the Philippines. 50
251
Accenture insists, however, that it was able to establish that it had rendered services to foreign corporations doing business outside the
Philippines, unlike in Burmeister, which allegedly involved a foreign corporation doing business in the Philippines. 51
We deny Accenture’s Petition for a tax refund.
The evidence presented by Accenture may have established that its clients are foreign.1âwphi1 This fact does not automatically mean, however,
that these clients were doing business outside the Philippines. After all, the Tax Code itself has provisions for a foreign corporation engaged in
business within the Philippines and vice versa, to wit:
SEC. 22. Definitions - When used in this Title:
xxx xxx xxx
(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the Philippines.
(I) The term ‘nonresident foreign corporation’ applies to a foreign corporation not engaged in trade or business within the Philippines.
(Emphasis in the original)
Consequently, to come within the purview of Section 108(B)(2), it is not enough that the recipient of the service be proven to be a foreign
corporation; rather, it must be specifically proven to be a nonresident foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. We ruled thus in Commissioner of Internal
Revenue v. British Overseas Airways Corporation:52
x x x. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the
light of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and contemplates, to
that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character."53
A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual basis of that claim.1âwphi1 Tax refunds, like tax
exemptions, are construed strictly against the taxpayer.54
Accenture failed to discharge this burden. It alleged and presented evidence to prove only that its clients were foreign entities. However, as found
by both the CTA Division and the CTA En Banc, no evidence was presented by Accenture to prove the fact that the foreign clients to whom
petitioner rendered its services were clients doing business outside the Philippines.
As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests, Billing Statements, Memo Invoices-Receivable, Memo
Invoices-Payable, and Bank Statements presented by Accenture merely substantiated the existence of sales, receipt of foreign currency payments,
and inward remittance of the proceeds of such sales duly accounted for in accordance with BSP rules, all of these were devoid of any evidence
that the clients were doing business outside of the Philippines.55
WHEREFORE, the instant Petition is DENIED. The 22 September 2009 Decision and the 23 October 2009 Resolution of the Court of Tax
Appeals En Banc in C.T.A. EB No. 477, dismissing the Petition for the refund of the excess or unutilized input VAT credits of Accenture, Inc.,
are AFFIRMED.
252
February 24, 2016
G.R. No. 183486
THE HONGKONG & SHANGHAI BANKING CORPORATION, LIMITED, Petitioner,

vs.
NATIONAL STEEL CORPORATION and CITYTRUST BANKING CORPORATION (NOW BANK OF THE PHILIPPINE
ISLANDS), Respondents.
DECISION
JARDELEZA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner The Hongkong & Shanghai Banking Corporation,
Limited (HSBC) filed this petition to assail the Decision of the Court of Appeals (CA) dated November 19, 2007 (Assailed Decision) which
reversed the ruling of the Regional Trial Court, Branch 62 of Makati City (RTC Makati) and its Resolution denying HSBC's Motion for
Reconsideration dated June 23, 2008 (Assailed Resolution).
The Facts
Respondent National Steel Corporation (NSC) entered into an Export Sales Contract (the Contract) with Klockner East Asia Limited (Klockner)
on October 12, 1993. 1 NSC sold 1,200 metric tons of prime cold rolled coils to Klockner under FOB ST Iligan terms. In accordance with the
requirements in the Contract, Klockner applied for an irrevocable letter of credit with HSBC in favor of NSC as the beneficiary in the amount of
US$468,000. On October 22, 1993, HSBC issued an irrevocable and onsight letter of credit no. HKH 239409 (the Letter of Credit) in favor of
NSC.2 The Letter of Credit stated that it is governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary
Credits, Publication No. 400 (UCP 400). Under UCP 400, HSBC as the issuing bank, has the obligation to immediately pay NSC upon
presentment of the documents listed in the Letter of Credit.3 These documents are: (1) one original commercial invoice; (2) one packing list; (3)
one non-negotiable copy of clean on board ocean bill of lading made out to order, blank endorsed marked 'freight collect and notify applicant;' (4)
copy of Mill Test Certificate made out 'to whom it may concern;' (5) copy of beneficiary's telex to applicant (Telex No. 86660 Klock HX)
advising shipment details including DIC No., shipping marks, name of vessel, port of shipment, port of destination, bill of lading date, sailing and
ETA dates, description of goods, size, weight, number of packages and value of goods latest two days after shipment date; and (6) beneficiary's
certificate certifying that (a) one set of non-negotiable copies of documents (being those listed above) have been faxed to applicant (FAX No.
5294987) latest two days after shipment date; and (b) one set of documents including one copy each of invoice and packing list, 3/3 original bills
of lading plus one non-negotiable copy and three original Mill Test Certificates have been sent to applicant by air courier service latest two days
after shipment date. 4
The Letter of Credit was amended twice to reflect changes in the terms of delivery. On November 2, 1993, the Letter of Credit was first amended
to change the delivery terms from FOB ST Iligan to FOB ST Manila and to increase the amount to US$488,400. 5 It was subsequently amended
on November 18, 1993 to extend the expiry and shipment date to December 8, 1993.6 On November 21, 1993, NSC, through Emerald Forwarding
Corporation, loaded and shipped the cargo of prime cold rolled coils on board MV Sea Dragon under China Ocean Shipping Company Bill of
Lading No. HKG 266001. The cargo arrived in Hongkong on November 25, 1993. 7
NSC coursed the collection of its payment from Klockner through CityTrust Banking Corporation (CityTrust). NSC had earlier obtained a loan
from CityTrust secured by the proceeds of the Letter of Credit issued by HSBC. 8
On November 29, 1993, CityTrust sent a collection order (Collection Order) to HSBC respecting the collection of payment from Klockner. The
Collection Order instructed as follows: (1) deliver documents against payment; (2) cable advice of non-payment with reason; (3) cable advice
payment; and (4) remit proceeds via TELEX. 9 The Collection Order also contained the following statement: "Subject to Uniform Rules for the
Collection of Commercial Paper Publication No. 322." 10 Further, the Collection Order stated that proceeds should be remitted to Standard
Chartered Bank of Australia, Ltd., Offshore Branch Manila (SCB-M) which was, in turn, in charge of remitting the amount to CityTrust. 11 On the
same date, CityTrust also presented to HSBC the following documents: (1) Letter of Credit; (2) Bill of Lading; (3) Commercial Invoice; ( 4)
Packing List; (5) Mill Test Certificate; (6) NSC's TELEX to Klockner on shipping details; (7) Beneficiary's Certificate of facsimile transmittal of
documents; (8) Beneficiary's Certificate of air courier transmittal of documents; and (9) DHL Receipt No. 669988911 and Certificate of Origin. 12
On December 2, 1993, HSBC sent a cablegram to CityTrust acknowledging receipt of the Collection Order. It also stated that the documents will
be presented to "the drawee against payment subject to UCP 322 [Uniform Rules for Collection (URC) 322] as instructed ... " 13 SCB-M then sent
a cablegram to HSBC requesting the latter to urgently remit the proceeds to its account. It further asked that HSBC inform it "if unable to
pay" 14 and of the "reasons thereof." 15 Neither CityTrust nor SCB-M objected to HSBC's statement that the collection will be handled under the
Uniform Rules for Collection (URC 322).
On December 7, 1993, HSBC responded to SCB-M and sent a cablegram where it repeated that "this bill is being handled subject to [URC] 322
as instructed by [the] collecting bank." 16 It also informed SCB-M that it has referred the matter to Klockner for payment and that it will revert
upon the receipt of the amount. 17 On December 8, 1993, the Letter of Credit expired.18
253
On December 10, 1993, HSBC sent another cablegram to SCB-M advising it that Klockner had refused payment. It then informed SCB-M that it
intends to return the documents to NSC with all the banking charges for its account. 19 In a cablegram dated December 14, 1993, CityTrust
requested HSBC to inform it of Klockner's reason for refusing payment so that it may refer the matter to NSC. 20 HSBC did not respond and
CityTrust thus sent a follow-up cablegram to HSBC on December 17, 1993. In this cablegram, CityTrust insisted that a demand for payment must
be made from Klockner since the documents "were found in compliance with LC terms and conditions." 21 HSBC replied on the same day stating
that in accordance with CityTrust's instruction in its Collection Order, HSBC treated the transaction as a matter under URC 322. Thus, it
demanded payment from Klockner which unfortunately refused payment for unspecified reasons. It then noted that under URC 322, Klockner has
no duty to provide a reason for the refusal. Hence, HSBC requested for further instructions as to whether it should continue to press for payment
or return the documents.22 CityTrust responded that as advised by its client, HSBC should continue to press for payment. 23
Klockner continued to refuse payment and HSBC notified CityTrust in a cablegram dated January 7, 1994, that should Klockner still refuse to
accept the bill by January 12, 1994, it will return the full set of documents to CityTrust with all the charges for the account of the drawer. 24
Meanwhile, on January 12, 1994, CityTrust sent a letter to NSC stating that it executed NSC's instructions "to send, ON COLLECTION BASIS,
the export documents ... "25 CityTrust also explained that its act of sending the export documents on collection basis has been its usual practice in
response to NSC's instructions in its transactions.26
NSC responded to this in a letter dated January 18, 1994. 27 NSC expressed its disagreement with CityTrust's contention that it sent the export
documents to HSBC on collection basis. It highlighted that it "negotiated with CityTrust the export documents pertaining to LC No. HKH 239409
of HSBC and it was CityTrust, which wrongfully treated the negotiation, as 'on collection basis."' 28 NSC further claimed that CityTrust used its
own mistake as an excuse against payment under the Letter of Credit. Thus, NSC argued that CityTrust remains liable under the Letter of Credit.
It also stated that it presumes that CityTrust has preserved whatever right of reimbursement it may have against HSBC. 29
On January 13, 1994, CityTrust notified HSBC that it should continue to press for payment and to hold on to the document until further notice. 30
However, Klockner persisted in its refusal to pay. Thus, on February 17, 1994, HSBC returned the documents to CityTrust. 31 In a letter
accompanying the returned documents, HSBC stated that it considered itself discharged of its duty under the transaction. It also asked for
payment of handling charges.32 In response, CityTrust sent a cablegram to HSBC dated February 21, 1994 stating that it is "no longer possible for
beneficiary to wait for you to get paid by applicant."33 It explained that since the documents required under the Letter of Credit have been
properly sent to HSBC, Citytrust demanded payment from it. CityTrust also stated, for the first time in all of its correspondence with HSBC, that
"re your previous telexes, ICC Publication No. 322 is not applicable."34 HSBC responded in cablegram dated February 28, 1994.35 It insisted that
CityTrust sent documents which clearly stated that the collection was being made under URC 322. Thus, in accordance with its instructions,
HSBC, in the next three months, demanded payment from Klockner which the latter eventually refused. Hence, HSBC stated that it opted to
return the documents. It then informed CityTrust that it considered the transaction closed save for the latter's obligation to pay the handling
charges.36
Disagreeing with HSBC' s position, CityTrust sent a cablegram dated March 9, 1994.37 It insisted that HSBC should pay it in accordance with the
terms of the Letter of Credit which it issued on October 22, 1993. Under the Letter of Credit, HSBC undertook to reimburse the presenting bank
under "ICC 400 upon the presentment of all necessary documents."38 CityTrust also stated that the reference to URC 322 in its Collection Order
was merely in fine print. The Collection Order itself was only pro-forma. CityTrust emphasized that the reference to URC 322 has been
"obviously superseded by our specific instructions to 'deliver documents against payment/cable advice non-payment with reason/cable advice
payment/remit proceeds via telex' which was typed in on said form."39 CityTrust also claimed that the controlling document is the Letter of Credit
and not the mere fine print on the Collection Order.40 HSBC replied on March 10, 1994.41 It argued that CityTrust clearly instructed it to collect
payment under URC 322, thus, CityTrust can no longer claim a contrary position three months after it made its request. HSBC repeated that the
transaction is closed except for CityTrust's obligation to pay for the expenses which HSBC incurred. 42
Meanwhile, on March 3, 1994, NSC sent a letter to HSBC where it, for the first time, demanded payment under the Letter of Credit. 43 On March
11, 1994, the NSC sent another letter to HSBC through the Office of the Corporate Counsel which served as its final demand. These demands
were made after approximately four months from the expiration of the Letter of Credit.
Unable to collect from HSBC, NSC filed a complaint against it for collection of sum of money (Complaint) 44 docketed as Civil Case No. 94-2122
(Collection Case) of the RTC Makati. In its Complaint, NSC alleged that it coursed the collection of the Letter of Credit through CityTrust.
However, notwithstanding CityTrust's complete presentation of the documents in accordance with the requirements in the Letter of Credit, HSBC
unreasonably refused to pay its obligation in the amount of US$485,767.93.45
HSBC filed its Answer46 on January 6, 1995. HSBC denied any liability under the Letter of Credit. It argued in its Answer that CityTrust
modified the obligation when it stated in its Collection Order that the transaction is subject to URC 322 and not under UCP 400.47 It also filed a
Motion to Admit Attached Third-Party Complaint48 against CityTrust on November 21, 1995.49 It claimed that CityTrust instructed it to collect
payment under URC 322 and never raised that it intended to collect under the Letter of Credit.50 HSBC prayed that in the event that the court
finds it liable to NSC, CityTrust should be subrogated in its place and be made directly liable to NSC.51 The RTC Makati granted the motion and
admitted the third party complaint. CityTrust filed its Answer52 on January 8, 1996. CityTrust denied that it modified the obligation. It argued that
as a mere agent, it cannot modify the terms of the Letter of Credit without the consent of all the parties. 53 Further, it explained that the supposed
instruction that the transaction is subject to URC 322 was merely in fine print in a pro forma document and was superimposed and pasted over by
a large pink sticker with different remittance instructions.54
254
After a full-blown trial,55 the RTC Makati rendered a decision (RTC Decision) dated February 23, 2000. 56 It found that HSBC is not liable to pay
NSC the amount stated in the Letter of Credit. It ruled that the applicable law is URC 322 as it was the law which CityTrust intended to apply to
the transaction. Under URC 322, HSBC has no liability to pay when Klockner refused payment. The dispositive portion states -
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Plaintiffs Complaint against HSBC is DISMISSED; and, HSBC's Counterclaims against NSC are DENIED.
2. Ordering Third-Party Defendant CityTrust to pay Third-Party Plaintiff HSBC the following:
2.1 US$771.21 as actual and consequential damages; and
2.2 Pl00,000 as attorney's fees.
3. No pronouncement as to costs.
SO ORDERED.57
NSC and CityTrust appealed the RTC Decision before the CA. In its Assailed Decision dated November 19, 2007, 58 the CA reversed the RTC
Makati. The CA found that it is UCP 400 and not URC 322 which governs the transaction. According to the CA, the terms of the Letter of Credit
clearly stated that UCP 400 shall apply. Further, the CA explained that even if the Letter of Credit did not state that UCP 400 governs, it
nevertheless finds application as this Court has consistently recognized it under Philippine jurisdiction. Thus, applying UCP 400 and principles
concerning letters of credit, the CA explained that the obligation of the issuing bank is to pay the seller or beneficiary of the credit once the draft
and the required documents are properly presented. Under the independence principle, the issuing bank's obligation to pay under the letter of
credit is separate from the compliance of the parties in the main contract. The dispositive portion held -
WHEREFORE, in view of the foregoing, the assailed decision is hereby REVERSED and SET ASIDE. HSBC is ordered to pay its obligation
under the irrevocable letter of credit in the amount of US$485,767.93 to NSC with legal interest of six percent (6%) per annum from the filing of
the complaint until the amount is fully paid, plus attorney's fees equivalent to 10% of the principal. Costs against appellee HSBC.
SO ORDERED.59
HSBC filed a Motion for Reconsideration of the Assailed Decision which the CA denied in its Assailed Resolution dated June 23, 2008.60
Hence, HSBC filed this Petition for Review on Certiorari61 before this Court, seeking a reversal of the CA' s Assailed Decision and Resolution. In
its petition, HSBC contends that CityTrust's order to collect under URC 322 did not modify nor contradict the Letter of Credit. In fact, it is
customary practice in commercial transactions for entities to collect under URC 322 even if there is an underlying letter of credit. Further,
CityTrust acted as an agent of NSC in collecting payment and as such, it had the authority to instruct HSBC to proceed under URC 322 and not
under UCP 400. Having clearly and expressly instructed HSBC to collect under URC 322 and having fully intended the transaction to proceed
under such rule as shown by the series of correspondence between CityTrust and HSBC, CityTrust is estopped from now claiming that the
collection was made under UCP 400 in accordance with the Letter of Credit.
NSC, on the other hand, claims that HSBC's obligation to pay is clear from the terms of the Letter of Credit and under UCP 400. It asserts that the
applicable rule is UCP 400 and HSBC has no basis to argue that CityTrust's presentment of the documents allowed HSBC to vary the terms of
their agreement. 62
The Issues
The central question in this case is who among the parties bears the liability to pay the amount stated in the Letter of Credit. This requires a
determination of which between UCP 400 and URC 322 governs the transaction. The obligations of the parties under the proper applicable rule
will, in turn, determine their liability.
The Ruling of the Court
We uphold the CA.
The nature of a letter of credit
255
A letter of credit is a commercial instrument developed to address the unique needs of certain commercial transactions. It is recognized in our
jurisdiction and is sanctioned under Article 56763 of the Code of Commerce and in numerous jurisprudence defining a letter of credit, the
principles relating to it, and the obligations of parties arising from it.
In Bank of America, NT & SA v. Court of Appeals, 64 this Court defined a letter of credit as " ... a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants to have control of the goods before paying."65 Through a letter of credit, a buyer obtains
the credit of a third party, usually a bank, to provide assurance of payment. 66
This, in turn, convinces a seller to part with his or her goods even before he or she is paid, as he or she is insured by the third party that he or she
will be paid as soon as he or she presents the documents agreed upon. 67
A letter of credit generally arises out of a separate contract requiring the assurance of payment of a third party. In a transaction involving a letter
of credit, there are usually three transactions and three parties. The first transaction, which constitutes the underlying transaction in a letter of
credit, is a contract of sale between the buyer and the seller. The contract may require that the buyer obtain a letter of credit from a third party
acceptable to the seller. The obligations of the parties under this contract are governed by our law on sales.
The second transaction is the issuance of a letter of credit between the buyer and the issuing bank. The buyer requests the issuing bank to issue a
letter of credit naming the seller as the beneficiary. In this transaction, the issuing bank undertakes to pay the seller upon presentation of the
documents identified in the letter of credit. The buyer, on the other hand, obliges himself or herself to reimburse the issuing bank for the payment
made. In addition, this transaction may also include a fee for the issuing bank's services. 68 This transaction constitutes an obligation on the part of
the issuing bank to perform a service in consideration of the buyer's payment. The obligations of the parties and their remedies in cases of breach
are governed by the letter of credit itself and by our general law on obligations, as our civil law finds suppletory application in commercial
documents. 69
The third transaction takes place between the seller and the issuing bank. The issuing bank issues the letter of credit for the benefit of the seller.
The seller may agree to ship the goods to the buyer even before actual payment provided that the issuing bank informs him or her that a letter of
credit has been issued for his or her benefit. This means that the seller can draw drafts from the issuing bank upon presentation of certain
documents identified in the letter of credit. The relationship between the issuing bank and the seller is not strictly contractual since there is no
privity of contract nor meeting of the minds between them. 70 It also does not constitute a stipulation pour autrui in favor of the seller since the
issuing bank must honor the drafts drawn against the letter of credit regardless of any defect in the underlying contract. 71 Neither can it be
considered as an assignment by the buyer to the seller-beneficiary as the buyer himself cannot draw on the letter. 72 From its inception, only the
seller can demand payment under the letter of credit. It is also not a contract of suretyship or guaranty since it involves primary liability in the
event of default. 73 Nevertheless, while the relationship between the seller-beneficiary and the issuing bank is not strictly contractual, strict
payment under the terms of a letter of credit is an enforceable right. 74 This enforceable right finds two legal underpinnings. First, letters of credit,
as will be further explained, are governed by recognized international norms which dictate strict compliance with its terms. Second, the issuing
bank has an existing agreement with the buyer to pay the seller upon proper presentation of documents. Thus, as the law on obligations applies
even in commercial documents, 75 the issuing bank has a duty to the buyer to honor in good faith its obligation under their agreement. As will be
seen in the succeeding discussion, this transaction is also governed by international customs which this Court has recognized in this
jurisdiction. 76
In simpler terms, the various transactions that give rise to a letter of credit proceed as follows: Once the seller ships the goods, he or she obtains
the documents required under the letter of credit. He or she shall then present these documents to the issuing bank which must then pay the
amount identified under the letter of credit after it ascertains that the documents are complete. The issuing bank then holds on to these documents
which the buyer needs in order to claim the goods shipped. The buyer reimburses the issuing bank for its payment at which point the issuing bank
releases the documents to the buyer. The buyer is then able to present these documents in order to claim the goods. At this point, all the
transactions are completed. The seller received payment for his or her performance of his obligation to deliver the goods. The issuing bank is
reimbursed for the payment it made to the seller. The buyer received the goods purchased.
Owing to the complexity of these contracts, there may be a correspondent bank which facilitates the ease of completing the transactions. A
correspondent bank may be a notifying bank, a negotiating bank or a confirming bank depending on the nature of the obligations assumed. 77 A
notifying bank undertakes to inform the seller-beneficiary that a letter of credit exists. It may also have the duty of transmitting the letter of credit.
As its obligation is limited to this duty, it assumes no liability to pay under the letter of credit. 78 A negotiating bank, on the other hand, purchases
drafts at a discount from the seller-beneficiary and presents them to the issuing bank for payment. 79 Prior to negotiation, a negotiating bank has
no obligation. A contractual relationship between the negotiating bank and the seller-beneficiary arises only after the negotiating bank purchases
or discounts the drafts. 80 Meanwhile, a confirming bank may honor the letter of credit issued by another bank or confirms that the letter of credit
will be honored by the issuing bank. 81 A confirming bank essentially insures that the credit will be paid in accordance with the terms of the letter
of credit.82 It therefore assumes a direct obligation to the seller-beneficiary. 83
Parenthetically, when banks are involved in letters of credit transactions, the standard of care imposed on banks engaged in business imbued with
public interest applies to them. Banks have the duty to act with the highest degree of diligence in dealing with clients. 84 Thus, in dealing with the
parties in a letter of credit, banks must also observe this degree of care.
The value of letters of credit in commerce hinges on an important aspect of such a commercial transaction. Through a letter of credit, a seller-
beneficiary is assured of payment regardless of the status of the underlying transaction. International contracts of sales are perfected and
256
consummated because of the certainty that the seller will be paid thus making him or her willing to part with the goods even prior to actual receipt
of the amount agreed upon. The legally demandable obligation of an issuing bank to pay under the letter of credit, and the enforceable right of the
seller-beneficiary to demand payment, are indispensable essentials for the system of letters of credit, if it is to serve its purpose of facilitating
commerce. Thus, a touchstone of any law or custom governing letters of credit is an emphasis on the imperative that issuing banks respect their
obligation to pay, and that seller-beneficiaries may reasonably expect payment, in accordance with the terms of a letter of credit.
Rules applicable to letters of credit
Letters of credit are defined and their incidences regulated by Articles 567 to 572 85 of the Code of Commerce. These provisions must be read with
Article 286 of the same code which states that acts of commerce are governed by their provisions, by the usages and customs generally observed
in the particular place and, in the absence of both rules, by civil law. In addition, Article 50 87 also states that commercial contracts shall be
governed by the Code of Commerce and special laws and in their absence, by general civil law.
The International Chamber of Commerce (ICC)88 drafted a set of rules to govern transactions involving letters of credit. This set of rules is known
as the Uniform Customs and Practice for Documentary Credits (UCP). Since its first issuance in 1933, the UCP has seen several revisions, the
latest of which was in 2007, known as the UCP 600. However, for the period relevant to this case, the prevailing version is the 1993 revision
called the UCP 400. Throughout the years, the UCP has grown to become the worldwide standard in transactions involving letters of credit. 89 It
has enjoyed near universal application with an estimated 95% of worldwide letters of credit issued subject to the UCP. 90
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,91 this Court applied a provision from the UCP in resolving a case pertaining
to a letter of credit transaction. This Court explained that the use of international custom in our jurisdiction is justified by Article 2 of the Code of
Commerce which provides that acts of commerce are governed by, among others, usages and customs generally observed. Further, in Feati Bank
& Trust Company v. Court of Appeals,92 this Court ruled that the UCP should be applied in cases where the letter of credit expressly states that it
is the governing rule.93 This Court also held in Feati that the UCP applies even if it is not incorporated into the letter of the credit. 94 The
application of the UCP in Bank of Philippine Islands and in Feati was further affirmed in Metropolitan Waterworks and Sewerage System v.
Daway95 where this Court held that "[l]etters of credit have long been and are still governed by the provisions of the Uniform Customs and
Practice for Documentary Credit[s] of the International Chamber of Commerce." 96 These precedents highlight the binding nature of the UCP in
our jurisdiction.
Thus, for the purpose of clarity, letters of credit are governed primarily by their own provisions, 97 by laws specifically applicable to them, 98 and
by usage and custom. 99 Consistent with our rulings in several cases, 100 usage and custom refers to UCP 400. When the particular issues are not
covered by the provisions of the letter of credit, by laws specifically applicable to them and by UCP 400, our general civil law finds suppletory
app1ication.101
Applying this set of laws and rules, this Court rules that HSBC is liable under the provisions of the Letter of Credit, in accordance with usage and
custom as embodied in UCP 400, and under the provisions of general civil law.
HSBC 's Liability
The Letter of Credit categorically stated that it is subject to UCP 400, to wit:
Except so far as otherwise expressly stated, this documentary credit is subject to uniform Customs and Practice for Documentary Credits (1983
Revision), International Chamber of Commerce Publication No. 400.102
From the moment that HSBC agreed to the terms of the Letter of Credit - which states that UCP 400 applies - its actions in connection with the
transaction automatically became bound by the rules set in UCP 400. Even assuming that URC 322 is an international custom that has been
recognized in commerce, this does not change the fact that HSBC, as the issuing bank of a letter of credit, undertook certain obligations dictated
by the terms of the Letter of Credit itself and by UCP 400. In Feati, this Court applied UCP 400 even when there is no express stipulation in the
letter of credit that it governs the transaction. 103 On the strength of our ruling in Feati, we have the legal duty to apply UCP 400 in this case
independent of the parties' agreement to be bound by it.
UCP 400 states that an irrevocable credit payable on sight, such as the Letter of Credit in this case, constitutes a definite undertaking of the
issuing bank to pay, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied
with. 104 Further, UCP 400 provides that an issuing bank has the obligation to examine the documents with reasonable care. 105 Thus, when
CityTrust forwarded the Letter of Credit with the attached documents to HSBC, it had the duty to make a determination of whether its obligation
to pay arose by properly examining the documents.
In its petition, HSBC argues that it is not UCP 400 but URC 322 that should govern the transaction. 106 URC 322 is a set of norms compiled by
the ICC. 107 It was drafted by international experts and has been adopted by the ICC members. Owing to the status of the ICC and the
international representation of its membership, these rules have been widely observed by businesses throughout the world. It prescribes the
collection procedures, technology, and standards for handling collection transactions for banks. 108 Under the facts of this case, a bank acting in
accordance with the terms of URC 322 merely facilitates collection. Its duty is to forward the letter of credit and the required documents from the
entity seeking payment to another entity which has the duty to pay. The bank incurs no obligation other than as a collecting agent. This is
different in the case of an issuing bank acting in accordance with UCP 400. In this case, the issuing bank has the duty to pay the amount stated in
257
the letter of credit upon due presentment. HSBC claims that while UCP 400 applies to letters of credit, it is also common for beneficiaries of such
letters to seek collection under URC 322. HSBC further claims that URC 322 is an accepted custom in commerce. 109 HSBC's argument is
without merit. We note that HSBC failed to present evidence to prove that URC 322 constitutes custom and usage recognized in commerce.
Neither was there sufficient evidence to prove that beneficiaries under a letter of credit commonly resort to collection under URC 322 as a matter
of industry practice. HSBC claims that the testimony of its witness Mr. Lincoln MacMahon (Mr. MacMahon) suffices for this
purpose. 110 However, Mr. MacMahon was not presented as an expert witness capable of establishing the existing banking and commercial
practice relating to URC 322 and letters of credit. Thus, this Court cannot hold that URC 322 and resort to it by beneficiaries of letters of credit
are customs that
demand application in this case.111
HSBC's position that URC 322 applies, thus allowing it, the issuing bank, to disregard the Letter of Credit, and merely demand collection from
Klockner cannot be countenanced. Such an argument effectively asks this Court to give imprimatur to a practice that undermines the value and
reliability of letters of credit in trade and commerce. The entire system of letters of credit rely on the assurance that upon presentment of the
proper documents, the beneficiary has an enforceable right and the issuing bank a demandable obligation, to pay the amount agreed upon. Were a
party to the transaction allowed to simply set this aside by the mere invocation of another set of norms related to commerce - one that is not
established as a custom that is entitled to recognition by this Court - the sanctity of letters of credit will be jeopardized. To repeat, any law or
custom governing letters of credit should have, at its core, an emphasis on the imperative that issuing banks respect their obligation to pay and
that seller-beneficiaries may reasonably expect payment in accordance with the terms of a letter of credit. Thus, the CA correctly ruled, to wit:
At this juncture, it is significant to stress that an irrevocable letter of credit cannot, during its lifetime, be cancelled or modified without the
express permission of the beneficiary. Not even partial payment of the obligation by the applicant-buyer would amend or modify the obligation of
the issuing bank. The subsequent correspondences of [CityTrust] to HSBC, thus, could not in any way affect or amend the letter of credit, as it
was not a party thereto. As a notifying bank, it has nothing to do with the contract between the issuing bank and the buyer regarding the issuance
of the letter of credit. 112 (Citations omitted)
The provisions in the Civil Code and our jurisprudence apply suppletorily in this case. 113 When a party knowingly and freely binds himself or
herself to perform an act, a juridical tie is created and he or she becomes bound to fulfill his or her obligation. In this case, HSBC's obligation
arose from two sources. First, it has a contractual duty to Klockner whereby it agreed to pay NSC upon due presentment of the Letter of Credit
and the attached documents. Second, it has an obligation to NSC to honor the Letter of Credit. In complying with its obligation, HSBC had the
duty to perform all acts necessary. This includes a proper examination of the documents presented to it and making a judicious inquiry of whether
CityTrust, in behalf of NSC, made a due presentment of the Letter of Credit.
Further, as a bank, HSBC has the duty to observe the highest degree of diligence. In all of its transactions, it must exercise the highest standard of
care and must fulfill its obligations with utmost fidelity to its clients. Thus, upon receipt of CityTrust's Collection Order with the Letter of Credit,
HSBC had the obligation to carefully examine the documents it received. Had it observed the standard of care expected of it, HSBC would have
discovered that the Letter of Credit is the very same document which it issued upon the request of Klockner, its client. Had HSBC taken the time
to perform its duty with the highest degree of diligence, it would have been alerted by the fact that the documents presented to it corresponded
with the documents stated in the Letter of Credit, to which HSBC freely and knowingly agreed. HSBC ought to have noticed the discrepancy
between CityTrust's request for collection under URC 322 and the terms of the Letter of Credit. Notwithstanding any statements by CityTrust in
the Collection Order as to the applicable rules, HSBC had the independent duty of ascertaining whether the presentment of the Letter of Credit
and the attached documents gave rise to an obligation which it had to Klockner (its client) and NSC (the beneficiary). Regardless of any error that
CityTrust may have committed, the standard of care expected of HSBC dictates that it should have made a separate detennination of the
significance of the presentment of the Letter of Credit and the attached documents. A bank exercising the appropriate degree of diligence would
have, at the very least, inquired if NSC was seeking payment under the Letter of Credit or merely seeking collection under URC 322. In failing to
do so, HSBC fell below the standard of care imposed upon it.
This Court therefore rules that CityTrust's presentment of the Letter of Credit with the attached documents in behalf of NSC, constitutes due
presentment.1avvphi1 Under the terms of the Letter of Credit, HSBC undertook to pay the amount of US$485,767.93 upon presentment of the
Letter of Credit and the required documents.114 In accordance with this agreement, NSC, through CityTrust, presented the Letter of Credit and the
following documents: (1) Letter of Credit; (2) Bill of Lading; (3) Commercial Invoice; (4) Packing List; (5) Mill Test Certificate; (6) NSC's
TELEX to Klockner on shipping details; (7) Beneficiary's Certificate of facsimile transmittal of documents; (8) Beneficiary's Certificate of air
courier transmittal of documents; and (9) DHL Receipt No. 669988911 and Certificate of Origin. 115
In transactions where the letter of credit is payable on sight, as in this case, the issuer must pay upon due presentment. This obligation is imbued
with the character of definiteness in that not even the defect or breach in the underlying transaction will affect the issuing bank's liability. 116 This
is the Independence Principle in the law on letters of credit. Article 17 of UCP 400 explains that under this principle, an issuing bank assumes no
liability or responsibility "for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or
particular conditions stipulated in the documents or superimposed thereon ... " Thus, as long as the proper documents are presented, the issuing
bank has an obligation to pay even if the buyer should later on refuse payment. Hence, Klockner's refusal to pay carries no effect whatsoever on
HSBC's obligation to pay under the Letter of Credit. To allow HSBC to refuse to honor the Letter of Credit simply because it could not collect
first from Klockner is to countenance a breach of the Independence Principle.
HSBC's persistent refusal to comply with its obligation notwithstanding due presentment constitutes delay contemplated in Article 1169 of the
Civil Code. 117 This provision states that a party to an obligation incurs in delay from the time the other party makes a judicial or extrajudicial
258
demand for the fulfillment of the obligation. We rule that the due presentment of the Letter of Credit and the attached documents is tantamount to
a demand. HSBC incurred in delay when it failed to fulfill its obligation despite such a demand.
Under Article 1170 of the Civil Code, 118 a party in delay is liable for damages. The extent of these damages pertains to the pecuniary loss duly
proven. 119 In this case, such damage refers to the losses which NSC incurred in the amount of US$485,767.93 as stated in the Letter of Credit.
We also award interest as indemnity for the damages incurred in the amount of six percent (6%) from the date of NSC's extrajudicial
demand. 120 An interest in the amount of six percent (6%) is also awarded from the time of the finality of this decision until full payment. 121
Having been remiss in its obligations under the applicable law, rules and jurisprudence, HSBC only has itself to blame for its consequent liability
to NSC.
However, this Court finds that there is no basis for the CA's grant of attorney's fees in favor of NSC. Article 2208 of the Civil Code122
enumerates the grounds for the award of attorney's fees. This Court has explained that the award of attorney's fees is an exception rather than the
rule. 123 The winning party is not automatically entitled to attorney's fees as there should be no premium on the right to litigate. 124 While courts
may exercise discretion in granting attorney's fees, this Court has stressed that the grounds used as basis for its award must approximate as closely
as possible the enumeration in Article 2208. 125 Its award must have sufficient factual and legal justifications. 126 This Court rules that none of the
grounds stated in Article 2208 are present in this case. NSC has not cited any specific ground nor presented any particular fact to warrant the
award of attorney's fees.
CityTrust's Liability
When NSC obtained the services of CityTrust in collecting under the Letter of Credit, it constituted CityTrust as its agent. Article 1868 of the
Civil Code states that a contract of agency exists when a person binds himself or herself "to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter." In this case, CityTrust bound itself to collect under the Letter of
Credit in behalf of NSC.
One of the obligations of an agent is to carry out the agency in accordance with the instructions of the principal. 127 In ascertaining NSC's
instructions to CityTrust, its letter dated January 18, 1994 is determinative. In this letter, NSC clearly stated that it "negotiated with CityTrust the
export documents pertaining to LC No. HKH 239409 of HSBC and it was CityTrust which wrongfully treated the negotiation as 'on collection
basis."' 128 HSBC persistently communicated with CityTrust and consistently repeated that it will proceed with collection under URC 322. At no
point did CityTrust correct HSBC or seek clarification from NSC. In insisting upon its course of action, CityTrust failed to act in accordance with
the instructions given by NSC, its principal. Nevertheless while this Court recognizes that CityTrust committed a breach of its obligation to NSC,
this carries no implications on the clear liability of HSBC. As this Court already mentioned, HSBC had a separate obligation that it failed to
perform by reason of acts independent of CityTrust's breach of its obligation under its contract of agency. If CityTrust has incurred any liability, it
is to its principal NSC. However, NSC has not raised any claim against CityTrust at any point in these proceedings. Thus, this Court cannot make
any finding of liability against CityTrust in favor of NSC.
WHEREFORE, in view of the foregoing, the Assailed Decision dated November 19, 2007 is AFFIRMED to the extent that it orders HSBC to
pay NSC the amount of US$485,767.93. HSBC is also liable to pay legal interest of six percent (6%) per annum from the time of extrajudicial
demand. An interest of six percent (6%) is also awarded from the time of the finality of this decision until the amount is fully paid. We delete the
award of attorney's fees. No pronouncement as to cost.
259
G.R. No. 116863 February 12, 1998
KENG HUA PAPER PRODUCTS CO. INC., petitioner,

vs.
COURT OF APPEALS; REGIONAL TRIAL COURT OF MANILA, BR. 21; and SEA-LAND SERVICE, INC., respondents.
PANGANIBAN, J.:
What is the nature of a bill of lading? When does a bill of lading become binding on a consignee? Will an alleged overshipment justify the
consignee's refusal to receive the goods described in the bill of lading? When may interest be computed on unpaid demurrage charges?
Statement of the Case
These are the main questions raised in this petition assailing the Decision 1 of the Court of Appeals 2 promulgated on May 20, 1994 in C.A.-G.R.
CV No. 29953 affirming in toto the decision 3 dated September 28, 1990 in Civil Case No. 85-33269 of the Regional Trial Court of Manila,
Branch 21. The dispositive portion of the said RTC decision reads:
WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has proved its cause of action and right to
relief. Accordingly, judgment is hereby rendered in favor of the Plaintiff and against Defendant, ordering the Defendant to
pay plaintiff:
1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date of the extrajudicial demand
until fully paid;
2. A sum equivalent to ten (10%) percent of the total amount due as Attorney's fees and litigation expenses.
Send copy to respective counsel of the parties.
SO ORDERED.4
The Facts
The factual antecedents of this case as found by the Court of Appeals are as follows:
Plaintiff (herein private respondent), a shipping company, is a foreign corporation licensed to do business in the
Philippines. On June 29, 1982, plaintiff received at its Hong Kong terminal a sealed container, Container No. SEAU
67523, containing seventy-six bales of "unsorted waste paper" for shipment to defendant (herein petitioner), Keng Hua
Paper Products, Co. in Manila. A bill of lading (Exh. A) to cover the shipment was issued by the plaintiff.
On July 9, 1982, the shipment was discharged at the Manila International Container Port. Notices of arrival were
transmitted to the defendant but the latter failed to discharge the shipment from the container during the "free time" period
or grace period. The said shipment remained inside the plaintiff's container from the moment the free time period expired
on July 29, 1982 until the time when the shipment was unloaded from the container on November 22, 1983, or a total of
four hundred eighty-one (481) days. During the 481-day period, demurrage charges accrued. Within the same period,
letters demanding payment were sent by the plaintiff to the defendant who, however, refused to settle its obligation which
eventually amounted to P67,340.00. Numerous demands were made on the defendant but the obligation remained unpaid.
Plaintiff thereafter commenced this civil action for collection and damages.
In its answer, defendant, by way of special and affirmative defense, alleged that it purchased fifty (50) tons of waste paper
from the shipper in Hong Kong, Ho Kee Waste Paper, as manifested in Letter of Credit No. 824858 (Exh. 7. p. 110.
Original Record) issued by Equitable Banking Corporation, with partial shipment permitted; that under the letter of credit,
the remaining balance of the shipment was only ten (10) metric tons as shown in Invoice No. H-15/82 (Exh. 8, p. 111,
Original Record); that the shipment plaintiff was asking defendant to accept was twenty (20) metric tons which is ten (10)
metric tons more than the remaining balance; that if defendant were to accept the shipment, it would be violating Central
Bank rules and regulations and custom and tariff laws; that plaintiff had no cause of action against the defendant because
the latter did not hire the former to carry the merchandise; that the cause of action should be against the shipper which
contracted the plaintiff's services and not against defendant; and that the defendant duly notified the plaintiff about the
wrong shipment through a letter dated January 24, 1983 (Exh. D for plaintiff, Exh. 4 for defendant, p. 5. Folder of
Exhibits).
260
As previously mentioned, the RTC found petitioner liable for demurrage; attorney's fees and expenses of litigation. The petitioner appealed to the
Court of Appeals, arguing that the lower court erred in (1) awarding the sum of P67,340 in favor of the private respondent, (2) rejecting
petitioner's contention that there was overshipment, (3) ruling that petitioner's recourse was against the shipper, and (4) computing legal interest
from date of extrajudicial demand.5
Respondent Court of Appeals denied the appeal and affirmed the lower court's decision in toto. In a subsequent resolution,6 it also denied the
petitioner's motion for reconsideration.
Hence, this petition for review.7
The Issues
In its memorandum, petitioner submits the following issues:
I. Whether or not petitioner had accepted the bill of lading;
II. Whether or not the award of the sum of P67,340.00 to private respondent was proper;
III. Whether or not petitioner was correct in not accepting the overshipment;
IV. Whether or not the award of legal interest from the date of private respondent's extrajudicial
demand was proper;8
In the main, the case revolves around the question of whether petitioner bound by the bill of lading. We shall, thus, discuss the above four issues
as they intertwine with this main question.
The Court's Ruling
The petition is partly meritorious. We affirm petitioner's liability for demurrage, but modify the interest rate thereon.
Main Issue: Liability Under the Bill of Lading
A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second, it is a contract by which three parties, namely, the
shipper, the carrier, and the consignee undertake specific responsibilities and assume stipulated obligations. 9 A "bill of lading delivered and
accepted constitutes the contract of carriage even though not signed," 10 because the "(a)cceptance of a paper containing the terms of a proposed
contract generally constitutes an acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or constructive
notice." 11 In a nutshell, the acceptance of a bill of lading by the shipper and the consignee, with full knowledge of its contents, gives rise to the
presumption that the same was a perfected and binding contract. 12
In the case at bar, both lower courts held that the bill of lading was a valid and perfected contract between the shipper (Ho Kee), the consignee
(Petitioner Keng Hua), and the carrier (Private Respondent Sea-Land). Section 17 of the bill of lading provided that the shipper and the consignee
were liable for the payment of demurrage charges for the failure to discharge the containerized shipment beyond the grace period allowed by
tariff rules. Applying said stipulation, both lower courts found petitioner liable. The aforementioned section of the bill of lading reads:
17. COOPERAGE FINES. The shipper and consignee shall be liable for, indemnify the carrier and ship and hold them
harmless against, and the carrier shall have a lien on the goods for, all expenses and charges for mending cooperage,
baling, repairing or reconditioning the goods, or the van, trailers or containers, and all expenses incurred in protecting,
caring for or otherwise made for the benefit of the goods, whether the goods be damaged or not, and for any payment,
expense, penalty fine, dues, duty, tax or impost, loss, damage, detention, demurrage, or liability of whatsoever nature,
sustained or incurred by or levied upon the carrier or the ship in connection with the goods or by reason of the goods being
or having been on board, or because of shipper's failure to procure consular or other proper permits, certificates or any
papers that may be required at any port or place or shipper's failure to supply information or otherwise to comply with all
laws, regulations and requirements of law in connection with the goods of from any other act or omission of the shipper or
consignee: (Emphasis supplied.)
Petitioner contends, however, that it should not be bound by the bill of lading because it never gave its consent thereto. Although petitioner
admits "physical acceptance" of the bill of lading, it argues that its subsequent actions belie the finding that it accepted the terms and conditions
printed therein. 13 Petitioner cites as support the "Notice of Refused or On Hand Freight" it received on November 2, 1982 from private
respondent, which acknowledged that petitioner declined to accept the shipment. Petitioner adds that it sent a copy of the said notice to the
shipper on December 23, 1982. Petitioner points to its January 24, 1983 letter to the private respondent, stressing "that its acceptance of the bill of
lading would be tantamount to an act of smuggling as the amount it had imported (with full documentary support) was only (at that time) for
10,000 kilograms and not for 20,313 kilograms as stated in the bill of lading" and "could lay them vulnerable to legal sanctions for violation of
261
customs and tariff as well as Central Bank laws." 14 Petitioner further argues that the demurrage "was a consequence of the shipper's mistake" of
shipping more than what was bought. The discrepancy in the amount of waste paper it actually purchased, as reflected in the invoice vis-a-vis the
excess amount in the bill of lading, allegedly justifies its refusal to accept the shipment. 15
Petitioner Bound by
the Bill of Lading
We are not persuaded. Petitioner admits that it "received the bill of lading immediately after the arrival of the shipment" 16 on July 8,
1982. 17 Having been afforded an opportunity to examine the said document, petitioner did not immediately object to or dissent from any term or
stipulation therein. It was only six months later, on January 24, 1983, that petitioner sent a letter to private respondent saying that it could not
accept the shipment. Petitioner's inaction for such a long period conveys the clear inference that it accepted the terms and conditions of the bill of
lading. Moreover, said letter spoke only of petitioner's inability to use the delivery permit, i.e. to pick up the cargo, due to the shipper's failure to
comply with the terms and conditions of the letter of credit, for which reason the bill of lading and other shipping documents were returned by the
"banks" to the shipper. 18 The letter merely proved petitioner's refusal to pick up the cargo, not its rejection of the bill of lading.
Petitioner's reliance on the Notice of Refused or On Hand Freight, as proof of its nonacceptance of the bill of lading, is of no consequence. Said
notice was not written by petitioner; it was sent by private respondent to petitioner in November 1982, or four months after petitioner received the
bill of lading. If the notice has any legal significance at all, it is to highlight petitioner's prolonged failure to object to the bill of lading. Contrary
to petitioner's contention, the notice and the letter support — not belie — the findings of the two lower courts that the bill of lading was impliedly
accepted by petitioner.
As aptly stated by Respondent Court of Appeals:
In the instant case, (herein petitioner) cannot and did not allege non-receipt of its copy of the bill of lading from the
shipper. Hence, the terms and conditions as well as the various entries contained therein were brought to its knowledge.
(Herein petitioner) accepted the bill of lading without interposing any objection as to its contents. This raises the
presumption that (herein petitioner) agreed to the entries and stipulations imposed therein.
Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6) months to be exact, before notifying (herein
private respondent) of the "wrong shipment". It was only on January 24, 1983 that (herein petitioner) sent (herein private
respondent) such a letter of notification (Exh D for plaintiff, Exh. 4 for defendant; p. 5, Folder of Exhibits). Thus, for the
duration of those six months (herein private respondent never knew the reason for (herein petitioner's) refusal to discharge
the shipment.
After accepting the bill of lading, receiving notices of arrival of the shipment, failing to object thereto, (herein petitioner)
cannot now deny that it is bound by the terms in the bill of lading. If it did not intend to be bound, (herein petitioner) would
not have waited for six months to lapse before finally bringing the matter to (herein private respondent's attention. The
most logical reaction in such a case would be to immediately verify the matter with the other parties involved. In this case,
however, (herein petitioner) unreasonably detained (herein private respondent's) vessel to the latter's prejudice. 19
Petitioner's attempt to evade its obligation to receive the shipment on the pretext that this may cause it to violate customs, tariff and central bank
laws must likewise fail. Mere apprehension of violating said laws, without a clear demonstration that taking delivery of the shipment has become
legally impossible, 20 cannot defeat the petitioner's contractual obligation and liability under the bill of lading.
In any event, the issue of whether petitioner accepted the bill of lading was raised for the first time only in petitioner's memorandum before this
Court. Clearly, we cannot now entertain an issue raised for the very first time on appeal, in deference to the well-settled doctrine that "(a)n issue
raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. Questions raised on appeal
must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on
appeal."21
In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo from the private respondent's vessel constitutes a violation
of the terms of the bill of lading. It should thus be liable for demurrage to the former.
In The Apollon, 22 Justice Story made the following relevant comment on the nature of demurrage:
In truth, demurrage is merely an allowance or compensation for the delay or detention of a vessel. It is often a matter of
contract, but not necessarily so. The very circumstance that in ordinary commercial voyages, a particular sum is deemed by
the parties a fair compensation for delays, is the very reason why it is, and ought to be, adopted as a measure of
compensation, in cases ex delicto. What fairer rule can be adopted than that which founds itself upon mercantile usage as to
indemnity, and fixes a recompense upon the deliberate consideration of all the circumstances attending the usual earnings
and expenditures in common voyages? It appears to us that an allowance, by way of demurrage, is the true measure of
damages in all cases of mere detention, for that allowance has reference to the ship's expenses, wear and tear, and common
employment.23
262
Amount of Demurrage Charges
Petitioner argues that it is not obligated to pay any demurrage charges because, prior to the filing of the complaint, private respondent made no
demand for the sum of P67,340. Moreover, private respondent's loss and prevention manager, Loi Gillera, demanded P50,260; but its counsel,
Sofronio Larcia, subsequently asked for a different amount of P37,800.
Petitioner's position is puerile. The amount of demurrage charges in the sum of P67,340 is a factual conclusion of the trial court that was affirmed
by the Court of Appeals and, thus, binding on this Court. 24 Besides, such factual finding is supported by the extant evidence. 25 The apparent
discrepancy was a result of the variance of the dates when the two demands were made. Necessarily, the longer the cargo remained unclaimed,
the higher the demurrage. Thus, while in his letter dated April 24, 1983, 26 private respondent's counsel demanded payment of only P37,800, the
additional demurrage incurred petitioner due to its continued refusal to receive delivery of the cargo ballooned to P67,340 by November 22, 1983.
The testimony of Counsel Sofronio Larcia as regards said letter of April 24, 1983 elucidates, viz:
Q Now, after you sent this letter, do you know what happened?
A Defendant continued to refuse to take delivery of the shipment and the shipment stayed at the port
for a longer period.
Q So, what happened to the shipment?
A The shipment incurred additional demurrage charges which amounted to P67,340.00 as of

November 22, 1983 or more than a year after — almost a year after the shipment arrived at the port.
Q So, what did you do?
A We requested our collection agency to pursue the collection of this amount. 27
Bill of Lading Separate from

Other Letter of Credit Arrangements
In a letter of credit, there are three distinct and independent contracts:
(1) the contract of sale between the buyer and the seller, (2) the contract of the buyer with the issuing bank, and (3) the letter of credit proper in
which the bank promises to pay the seller pursuant to the terms and conditions stated therein. "Few things are more clearly settled in law than that
the three contracts which make up the letter of credit arrangement are to be maintained in a state of perpetual separation." 28 A transaction
involving the purchase of goods may also require, apart from a letter of credit, a contract of transportation specially when the seller and the buyer
are not in the same locale or country, and the goods purchased have to be transported to the latter.
Hence, the contract of carriage, as stipulated in the bill of lading in the present case, must be treated independently of the contract of sale between
the seller and the buyer, and the contract for the issuance of a letter of credit between the buyer and the issuing bank. Any discrepancy between
the amount of the goods described in the commercial invoice in the contract of sale and the amount allowed in the letter of credit will not affect
the validity and enforceability of the contract of carriage as embodied in the bill of lading. As the bank cannot be expected to look beyond the
documents presented to it by the seller pursuant to the letter of credit, 29 neither can the carrier be expected to go beyond the representations of the
shipper in the bill of lading and to verify their accuracy vis-a-viz the commercial invoice and the letter of a credit. Thus, the discrepancy between
the amount of goods indicated in the invoice and the amount in the bill of lading cannot negate petitioner's obligation to private respondent
arising from the contract of transportation. Furthermore, private respondent, as carrier, had no knowledge of the contents of the container. The
contract of carriage was under the arrangement known as "Shipper's Load And Count," and shipper was solely responsible for the loading of the
container while carrier was oblivious to the contents of the shipment. Petitioner's remedy in case of overshipment lies against the seller/shipper,
not against the carrier.
Payment of Interest
Petitioner posits that it "first knew" of the demurrage claim of P67,340 only when it received, by summons, private respondent's complaint.
Hence, interest may not be allowed to run from the date of private respondent's extrajudicial demands on March 8, 1983 for P50,260 or on April
24, 1983 for P37,800, considering that, in both cases, "there was no demand for interest." 30 We agree.
Jurisprudence teaches us:
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the
263
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base
for the computation of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. 31
The case before us involves an obligation not arising from a loan or forbearance of money; thus, pursuant to Article 2209 of the Civil Code, the
applicable interest rate is six percent per annum. Since the bill of lading did not specify the amount of demurrage, and the sum claimed by private
respondent increased as the days went by, the total amount demanded cannot be deemed to have been established with reasonable certainty until
the trial court rendered its judgment. Indeed, "(u)nliquidated damages or claims, it is said, are those which are not or cannot be known until
definitely ascertained, assessed and determined by the courts after presentation of proof. " 32 Consequently, the legal interest rate is six percent, to
be computed from September 28, 1990, the date of the trial court's decision. And in accordance with Philippine National Bank 33 and Eastern
Shipping, 34 the rate of twelve percent per annum shall be charged on the total then outstanding, from the time the judgment becomes final and
executory until its satisfaction.
Finally, the Court notes that the matter of attorney's fees was taken up only in the dispositive portion of the trial court's decision. This falls short
of the settled requirement that the text of the decision should state the reason for the award of attorney's fees, for without such justification, its
award would be a "conclusion without a premise, its basis being improperly left to speculation and conjecture." 35
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that the legal interest of six percent per annum shall be
computed from September 28, 1990 until its full payment before finality of judgment. The rate of interest shall be adjusted to twelve percent per
annum, computed from the time said judgment became final and executory until full satisfaction. The award of attorney's fees is DELETED.
264
G.R. No. 94209 April 30, 1991
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), petitioner,
vs.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents.
Pelaez, Adriano & Gregorio for petitioner.

Ezequiel S. Consulta for private respondent.
GUTIERREZ, JR., J.:
This is a petition for review seeking the reversal of the decision of the Court of Appeals dated June 29, 1990 which affirmed the decision of the
Regional Trial Court of Rizal dated October 20, 1986 ordering the defendants Christiansen and the petitioner, to pay various sums to respondent
Villaluz, jointly and severally.
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per cubic
meter FOB.
After inspecting the logs, Christiansen issued purchase order No. 76171.
On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa Ana, California, the Security
Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268 available at sight in favor of Villaluz for the
sum of $54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the latter that it "forward the enclosed
letter of credit to the beneficiary." (Records, Vol. I, p. 11)
The letter of credit further provided that the draft to be drawn is on Security Pacific National Bank and that it be accompanied by the following
documents:
1. Signed Commercial Invoice in four copies showing the number of the purchase order and certifying that —
a. All terms and conditions of the purchase order have been complied with and that all logs are fresh cut and quality equal
to or better than that described in H.A. Christiansen's telex #201 of May 1, 1970, and that all logs have been marked "BEV-
EX."
b. One complete set of documents, including 1/3 original bills of lading was airmailed to Consignee and Parties to be
advised by Hans-Axel Christiansen, Ship and Merchandise Broker.
c. One set of non-negotiable documents was airmailed to Han Mi Trade Development Company and one set to Consignee
and Parties to be advised by Hans-Axel Christiansen, Ship and Merchandise Broker.
2. Tally sheets in quadruplicate.
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to be advised by Hans Axel Christiansen, showing
Freight Prepaid and marked Notify:
Han Mi Trade Development Company, Ltd., Santa Ana, California.
Letter of Credit No. 46268 dated June 7, 1971
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California 92711 and Han Mi Trade Development
Company, Ltd., Seoul, Korea.
4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating that logs have been approved prior to shipment in
accordance with terms and conditions of corresponding purchase Order. (Record, Vol. 1 pp. 11-12)
265
Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits (1962 Revision).
The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before its loading, the logs were inspected by
custom inspectors Nelo Laurente, Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and representatives
Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I, pp. 16-17) all of whom certified to the good condition and
exportability of the logs.
After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate receipt of the cargo which stated the same are in good
condition (Records, Vol. I, p. 363). However, Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit,
despite several requests made by the private respondent.
Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company refused to advance the payment on the letter of
credit.
The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without the private respondent receiving any certification
from Christiansen.
The persistent refusal of Christiansen to issue the certification prompted the private respondent to bring the matter before the Central Bank. In a
memorandum dated August 16, 1971, the Central Bank ruled that:
. . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in all log exports, the certification of the lumber
inspectors of the Bureau of Forestry . . . shall be considered final for purposes of negotiating documents. Any provision in any letter of
credit covering log exports requiring certification of buyer's agent or representative that said logs have been approved for shipment as
a condition precedent to negotiation of shipping documents shall not be allowed. (Records, Vol. I, p. 367)
Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development Company, to whom Christiansen
sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company, on the other
hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
Since the demands by the private respondent for Christiansen to execute the certification proved futile, Villaluz, on September 1, 1971, instituted
an action for mandamus and specific performance against Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then
Court of First Instance of Rizal. The petitioner was impleaded as defendant before the lower court only to afford complete relief should the
court a quo order Christiansen to execute the required certification.
The complaint prayed for the following:
1. Christiansen be ordered to issue the certification required of him under the Letter of Credit;
2. Upon issuance of such certification, or, if the court should find it unnecessary, FEATI BANK be ordered to accept negotiation of
the Letter of Credit and make payment thereon to Villaluz;
3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
On or about 1979, while the case was still pending trial, Christiansen left the Philippines without informing the Court and his counsel. Hence,
Villaluz, filed an amended complaint to make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.
After trial, the lower court found:
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs right to demand payment is absolute. Defendant
CHRISTIANSEN having accepted delivery of the logs by having them loaded in his chartered vessel the "Zenlin Glory" and shipping
them to the consignee, his buyer Han Mi Trade in Inchon, South Korea (Art. 1585, Civil Code), his obligation to pay the purchase
order had clearly arisen and the plaintiff may sue and recover the price of the goods (Art. 1595, Id).
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit and with intent to defraud the plaintiff, reflected
in and aggravated by, not only his refusal to issue the certification that would have enabled without question the plaintiff to negotiate
the letter of credit, but his accusing the plaintiff in his answer of fraud, intimidation, violence and deceit. These accusations said
defendant did not attempt to prove, as in fact he left the country without even notifying his own lawyer. It was to the Court's mind a
pure swindle.
266
The defendant Feati Bank and Trust Company, on the other hand, must be held liable together with his (sic) co-defendant for having,
by its wrongful act, i.e., its refusal to negotiate the letter of credit in the absence of CHRISTIANSEN's certification (in spite of the
Central Bank's ruling that the requirement was illegal), prevented payment to the plaintiff. The said letter of credit, as may be seen on
its face, is irrevocable and the issuing bank, the Security Pacific National Bank in Los Angeles, California, undertook by its terms that
the same shall be honored upon its presentment. On the other hand, the notifying bank, the defendant Feati Bank and Trust Company,
by accepting the instructions from the issuing bank, itself assumed the very same undertaking as the issuing bank under the terms of
the letter of credit.
xxx xxx xxx
The Court likewise agrees with the plaintiff that the defendant BANK may also be held liable under the principles and laws on both
trust and estoppel. When the defendant BANK accepted its role as the notifying and negotiating bank for and in behalf of the issuing
bank, it in effect accepted a trust reposed on it, and became a trustee in relation to plaintiff as the beneficiary of the letter of credit. As
trustee, it was then duty bound to protect the interests of the plaintiff under the terms of the letter of credit, and must be held liable for
damages and loss resulting to the plaintiff from its failure to perform that obligation.
Furthermore, when the defendant BANK assumed the role of a notifying and negotiating BANK it in effect represented to the plaintiff
that, if the plaintiff complied with the terms and conditions of the letter of credit and presents the same to the BANK together with the
documents mentioned therein the said BANK will pay the plaintiff the amount of the letter of credit. The Court is convinced that it
was upon the strength of this letter of credit and this implied representation of the defendant BANK that the plaintiff delivered the logs
to defendant CHRISTIANSEN, considering that the issuing bank is a foreign bank with whom plaintiff had no business connections
and CHRISTIANSEN had not offered any other Security for the payment of the logs. Defendant BANK cannot now be allowed to
deny its commitment and liability under the letter of credit:
A holder of a promissory note given because of gambling who indorses the same to an innocent holder for value and who
assures said party that the note has no legal defect, is in estoppel from asserting that there had been an illegal consideration
for the note, and so, he has to pay its value. (Rodriguez v. Martinez, 5 Phil. 67).
The defendant BANK, in insisting upon the certification of defendant CHRISTIANSEN as a condition precedent to negotiating the
letter of credit, likewise in the Court's opinion acted in bad faith, not only because of the clear declaration of the Central Bank that
such a requirement was illegal, but because the BANK, with all the legal counsel available to it must have known that the condition
was void since it depended on the sole will of the debtor, the defendant CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 29-31)
On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private respondent. The dispositive portion of its decision
reads:
WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the defendants to pay the plaintiff, jointly and severally, the
following sums:
a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time payment is actually made, representing the purchase
price of the logs;
b) P17,340.00, representing government fees and charges paid by plaintiff in connection with the logs shipment in question;
c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).
All three foregoing sums shall be with interest thereon at 12% per annum from September 1, 1971, when the complaint was filed, until
fully paid:
d) P70,000.00 as moral damages;
e) P30,000.00 as exemplary damages; and
f) P30,000.00 as attorney's fees and litigation expense.
(Rollo, p. 28)
The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or on November 5, 1986, it filed a notice of appeal.
On November 10, 1986, the private respondent filed a motion for the immediate execution of the judgment on the ground that the appeal of the
petitioner was frivolous and dilatory.
267
The trial court ordered the immediate execution of its judgment upon the private respondent's filing of a bond.
The petitioner then filed a motion for reconsideration and a motion to suspend the implementation of the writ of execution. Both motions were,
however, denied. Thus, petitioner filed before the Court of Appeals a petition for certiorari and prohibition with preliminary injunction to enjoin
the immediate execution of the judgment.
The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the order of execution, the dispositive portion of the
decision states:
WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of execution dated December 29, 1986, as well as his
order dated January 14, 1987 denying the petitioner's urgent motion to suspend the writ of execution against its properties are hereby
annulled and set aside insofar as they are sought to be enforced and implemented against the petitioner Feati Bank & Trust Company,
now Citytrust Banking Corporation, during the pendency of its appeal from the adverse decision in Civil Case No. 15121. However,
the execution of the same decision against defendant Axel Christiansen did not appeal said decision may proceed unimpeded. The
Sheriff s levy on the petitioner's properties, and the notice of sale dated January 13, 1987 (Annex M), are hereby annulled and set
aside. Rollo p. 44)
A motion for reconsideration was thereafter filed by the private respondent. The Court of Appeals, in a resolution dated June 29, 1987 denied the
motion for reconsideration.
In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due course. In its decision dated June 29, 1990, the
Court of Appeals affirmed the decision of the lower court dated October 20, 1986 and ruled that:
1. Feati Bank admitted in the "special and negative defenses" section of its answer that it was the bank to negotiate the letter of credit
issued by the Security Pacific National Bank of Los Angeles, California. (Record, pp. 156, 157). Feati Bank did notify Villaluz of
such letter of credit. In fact, as such negotiating bank, even before the letter of credit was presented for payment, Feati Bank had
already made an advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As the negotiating bank, Feati Bank,
by notifying Villaluz of the letter of credit in behalf of the issuing bank (Security Pacific), confirmed such letter of credit and made the
same also its own obligation. This ruling finds support in the authority cited by Villaluz:
A confirmed letter of credit is one in which the notifying bank gives its assurance also that the opening bank's obligation will be
performed. In such a case, the notifying bank will not simply transmit but will confirm the opening bank's obligation by making it also
its own undertaking, or commitment, or guaranty or obligation. (Ward & Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978
edition, p. 77).
Feati Bank argues further that it would be considered as the negotiating bank only upon negotiation of the letter of credit. This stance
is untenable. Assurance, commitments or guaranties supposed to be made by notifying banks to the beneficiary of a letter of credit, as
defined above, can be relevant or meaningful only with respect to a future transaction, that is, negotiation. Hence, even before actual
negotiation, the notifying bank, by the mere act of notifying the beneficiary of the letter of credit, assumes as of that moment the
obligation of the issuing bank.
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the latter's principal or client, i.e. Hans Axel-
Christiansen. (sic) Such being the case, when Christiansen refused to issue the certification, it was as though refusal was made by
Feati Bank itself. Feati Bank should have taken steps to secure the certification from Christiansen; and, if the latter should still refuse
to comply, to hale him to court. In short, Feati Bank should have honored Villaluz's demand for payment of his logs by virtue of the
irrevocable letter of credit issued in Villaluz's favor and guaranteed by Feati Bank.
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which contained the statement "Since Villaluz" draft was not
drawn strictly in compliance with the terms of the letter of credit, Feati Bank's refusal to negotiate it was justified," did not dispose of
this question on the merits. In that case, the question involved was jurisdiction or discretion, and not judgment. The quoted
pronouncement should not be taken as a preemptive judgment on the merits of the present case on appeal.
4. The original action was for "Mandamus and/or specific performance." Feati Bank may not be a party to the transaction between
Christiansen and Security Pacific National Bank on the one hand, and Villaluz on the other hand; still, being guarantor or agent of
Christiansen and/or Security Pacific National Bank which had directly dealt with Villaluz, Feati Bank may be sued properly on
specific performance as a procedural means by which the relief sought by Villaluz may be entertained. (Rollo, pp. 32-33)
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal is hereby dismissed. Costs against the petitioner.
(Rollo, p. 33)
Hence, this petition for review.
268
The petitioner interposes the following reasons for the allowance of the petition.
First Reason
THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE ESTABLISHED FACTS AND INDEED, WENT
AGAINST THE EVIDENCE AND DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS LIABLE ON
THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS NON-COMPLIANCE WITH THE TERMS THEREOF,
Second Reason
THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT HELD THAT PETITIONER BANK, BY
NOTIFYING PRIVATE RESPONDENT OF THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE THE SAME
ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.
Third Reason
THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW WHEN IT AFFIRMED THE TRIAL COURT'S
DECISION. (Rollo, p. 12)
The principal issue in this case is whether or not a correspondent bank is to be held liable under the letter of credit despite non-compliance by the
beneficiary with the terms thereof?
The petition is impressed with merit.
It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter
of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which
departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter
be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary Thus the rule of strict
compliance.
In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In the Philippines, the same
holds true. The same rule must also be followed.
The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded clearly on the rule of strict compliance.
We have heretofore held that these letters of credit are to be strictly complied with which documents, and shipping documents must be
followed as stated in the letter. There is no discretion in the bank or trust company to waive any requirements. The terms of the letter
constitutes an agreement between the purchaser and the bank. (p. 743)
Although in some American decisions, banks are granted a little discretion to accept a faulty tender as when the other documents may be
considered immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank deals only with documents, it is not in a
position to determine whether or not the documents required by the letter of credit are material or superfluous. The mere fact that the document
was specified therein readily means that the document is of vital importance to the buyer.
Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit (U.C.P. for short) in the letter of credit resulted in the
applicability of the said rules in the governance of the relations between the parties.
And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the affirmative as to the applicability of the U.C.P. in
cases before us.
In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the U.C.P. in this jurisdiction is justified by Article 2 of
the Code of Commerce. Article 2 of the Code of Commerce enunciates that in the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by the usages and customs generally observed.
There being no specific provision which governs the legal complexities arising from transactions involving letters of credit not only between the
banks themselves but also between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.
269
An irrevocable credit is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the
beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance
or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of
that bank, but when an issuing bank authorizes or requests another bank to confirm its irrevocable credit and the latter does so, such
confirmation constitutes a definite undertaking of the confirming bank. . . .
Article 7.
Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms
and conditions of the credit,"
Article 8.
Payment, acceptance or negotiation against documents which appear on their face to be in accordance with the terms and conditions
of a credit by a bank authorized to do so, binds the party giving the authorization to take up documents and reimburse the bank which
has effected the payment, acceptance or negotiation. (Emphasis Supplied)
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if the documents tendered to it are on their face in
accordance with the terms and conditions of the documentary credit. And since a correspondent bank, like the petitioner, principally deals only
with documents, the absence of any document required in the documentary credit justifies the refusal by the correspondent bank to negotiate,
accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the completeness of the documents
tendered by the beneficiary.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that the petitioner is not a notifying bank but a confirming bank,
we find the same erroneous.
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its decision, the trial court ruled that the
petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has been transmitted to the petitioner on behalf of the
private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types of letters
have different meanings and the legal relations arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed
credit or vice-versa.
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not without the consent of the
beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to revoke the
credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation assumed by the correspondent bank. In this case, the
correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its own according to the
terms and conditions of the credit. (Agbayani, Commercial Laws of the Philippines, Vol. 1, pp. 81-83)
Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of
the issuing bank has also confirmed the letter of credit. Another error which the lower court and the Court of Appeals made was to confuse the
obligation assumed by the petitioner.
In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified according to the obligations
taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the
letter of credit. (Kronman and Co., Inc. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292,
cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A negotiating bank, on the other hand, is a correspondent bank which
buys or discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no
liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller.
(Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293, cited in Agbayani, Commercial
Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the
Philippines, Vol. 1, p. 77)
270
In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." (Records, Vol. I, p. 11)
Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the petitioner
is only a notifying bank and not a confirming bank as ruled by the courts below.
If the petitioner was a confirming bank, then a categorical declaration should have been stated in the letter of credit that the petitioner is to honor
all drafts drawn in conformity with the letter of credit. What was simply stated therein was the instruction that the petitioner forward the original
letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to the private
respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to
accept the draft drawn under the documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and
not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner refused to negotiate with the private
respondent, the latter has no cause of action against the petitioner for the enforcement of his rights under the letter. (See Kronman and Co., Inc. v.
Public National Bank of New York, supra)
In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit. The only evidence in
this case, and upon which the private respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him.
The private respondent relies on this loan to advance his contention that the letter of credit was confirmed by the petitioner. He claims that the
loan was granted by the petitioner to him, "in anticipation of the presentment of the letter of credit."
The proposition advanced by the private respondent has no basis in fact or law. That the loan agreement between them be construed as an act of
confirmation is rather far-fetched, for it depends principally on speculative reasoning.
As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will undertake the issuing bank's obligation as its
own. Verily, the loan agreement it entered into cannot be categorized as an emphatic assurance that it will carry out the issuing bank's obligation
as its own.
The loan agreement is more reasonably classified as an isolated transaction independent of the documentary credit.
Of course, it may be presumed that the petitioner loaned the money to the private respondent in anticipation that it would later be paid by the
latter upon the receipt of the letter. Yet, we would have no basis to rule definitively that such "act" should be construed as an act of confirmation.
The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin Glory" and the only way to satisfy this need was to
borrow money from the petitioner which the latter granted. From these circumstances, a logical conclusion that can be gathered is that the letter
of credit was merely to serve as a collateral.
At the most, when the petitioner extended the loan to the private respondent, it assumed the character of a negotiating bank. Even then, the
petitioner will still not be liable, for a negotiating bank before negotiation has no contractual relationship with the seller.
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty toward the person for whose benefit
the letter is written to discount or purchase any draft drawn against the credit. No relationship of agent and principal, or of trustee and
cestui, between the receiving bank and the beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable. Absent any definitive proof that it has
confirmed the letter of credit or has actually negotiated with the private respondent, the refusal by the petitioner to accept the tender of the private
respondent is justified.
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private respondent) as the beneficiary of the letter of
credit," the same has no legal basis.
A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment of property the legal title to which is vested to
another." (89 C.J.S. 712)
271
The concept of a trust presupposes the existence of a specific property which has been conferred upon the person for the benefit of another. In
order therefore for the trust theory of the private respondent to be sustained, the petitioner should have had in its possession a sum of money as
specific fund advanced to it by the issuing bank and to be held in trust by it in favor of the private respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted, does not involve a specific appropriation of a sum of money in favor of the beneficiary. It
only signifies that the beneficiary may be able to draw funds upon the letter of credit up to the designated amount specified in the letter. It does
not convey the notion that a particular sum of money has been specifically reserved or has been held in trust.
What actually transpires in an irrevocable credit is that the correspondent bank does not receive in advance the sum of money from the buyer or
the issuing bank. On the contrary, when the correspondent bank accepts the tender and pays the amount stated in the letter, the money that it doles
out comes not from any particular fund that has been advanced by the issuing bank, rather it gets the money from its own funds and then later
seeks reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner may not be considered a trustee. As the petitioner is only a notifying bank, its
acceptance of the instructions of the issuing bank will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a
notifying bank, its only obligation is to notify the private respondent of the existence of the letter of credit. How then can such create estoppel
when that is its only duty under the law?
We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a guarantor of the issuing bank and in effect also of the
latter's principal or client, i.e., Hans Axel Christiansen."
It is a fundamental rule that an irrevocable credit is independent not only of the contract between the buyer and the seller but also of the credit
agreement between the issuing bank and the buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The relationship
between the buyer (Christiansen) and the issuing bank (Security Pacific National Bank) is entirely independent from the letter of credit issued by
the latter.
The contract between the two has no bearing as to the non-compliance by the buyer with the agreement between the latter and the seller. Their
contract is similar to that of a contract of services (to open the letter of credit) and not that of agency as was intimated by the Court of Appeals.
The unjustified refusal therefore by Christiansen to issue the certification under the letter of credit should not likewise be charged to the issuing
bank.
As a mere notifying bank, not only does the petitioner not have any contractual relationship with the buyer, it has also nothing to do with the
contract between the issuing bank and the buyer regarding the issuance of the letter of credit.
The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The concept of guarantee vis-a-vis the concept of an
irrevocable credit are inconsistent with each other.
In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened. In the
second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely
collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a
primary obligation. (See National Bank of Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])
The relationship between the issuing bank and the notifying bank, on the contrary, is more similar to that of an agency and not that of a guarantee.
It may be observed that the notifying bank is merely to follow the instructions of the issuing bank which is to notify or to transmit the letter of
credit to the beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify the beneficiary. It does
not undertake any assurance that the issuing bank will perform what has been mandated to or expected of it. As an agent of the issuing bank, it
has only to follow the instructions of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under the letter of credit, may refuse to negotiate or accept the
drafts drawn thereunder and it will still not be held liable for its only engagement is to notify and/or transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to pay the amount under the letter. As we have
previously explained, there was a failure on the part of the private respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case.1âwphi1 The U.C.P. which is incorporated in the letter of credit ordains that the
bank may only pay the amount specified under the letter if all the documents tendered are on their face in compliance with the credit. It is not
tasked with the duty of ascertaining the reason or reasons why certain documents have not been submitted, as it is only concerned with the
documents. Thus, whether or not the buyer has performed his responsibility towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private respondent but we are deciding the controversy on the basis of what the
law is, for the law is not meant to favor only those who have been oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people in our justice system may be eroded if we are to decide not what the
law states but what we believe it should declare. Dura lex sed lex.
272
Considering the foregoing, the materiality of ruling upon the validity of the certificate of approval required of the private respondent to submit
under the letter of credit, has become insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard to the petition before it for certiorari and
prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification required in condition No. 4 of the letter of credit was "patently
illegal." At the time the letter of credit was issued there was no Central Bank regulation prohibiting such a condition in the letter of
credit. The letter of credit (Exh. C) was issued on June 7, 1971, more than two months before the issuance of the Central Bank
Memorandum on August 16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit had already expired on
July 30, 1971 when the Central Bank memorandum was issued. In any event, it is difficult to see how such a condition could be
categorized as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could and should have done was to refuse to
load the logs on the vessel "Zenlin Glory", unless Christiansen first issued the required certification that the logs had been approved by
him to be in accordance with the terms and conditions of his purchase order. Apparently, Villaluz was in too much haste to ship his
logs without taking all due precautions to assure that all the terms and conditions of the letter of credit had been strictly complied with,
so that there would be no hitch in its negotiation. (Rollo, p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and SETS ASIDE the decision of the Court of
Appeals dated June 29, 1990. The amended complaint in Civil Case No. 15121 is DISMISSED.
273
G.R. No. 146717 November 22, 2004
TRANSFIELD PHILIPPINES, INC., petitioner,

vs.
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK
CORPORATION, respondents.
DECISION
TINGA, J.:
Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international trade. A creation of
commerce and businessmen, the letter of credit is also unique in the number of parties involved and its supranational character.
Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 entitled "Transfield Philippines, Inc. v. Hon. Oscar
Pimentel, et al.," promulgated on 31 January 2001.2
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey Contract 3 whereby petitioner,
as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in
the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project.4
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later date as may be agreed
upon between petitioner and respondent LHC or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to
claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and delays caused
by LHC itself.5 Further, in case of dispute, the parties are bound to settle their differences through mediation, conciliation and such other means
enumerated under Clause 20.3 of the Turnkey Contract. 6
To secure performance of petitioner's obligation on or before the target completion date, or such time for completion as may be determined by the
parties' agreement, petitioner opened in favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as "the
Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand Banking Group
Limited (ANZ Bank)7 and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC)8 each in the amount of
US$8,988,907.00.9
In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions were requested allegedly
due to several factors which prevented the completion of the Project on target date, such as force majeure occasioned by typhoon Zeb, barricades
and demonstrations. LHC denied the requests, however. This gave rise to a series of legal actions between the parties which culminated in the
instant petition.
The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration Commission (CIAC) on 1
June 1999.10 This was followed by another Request for Arbitration, this time filed by petitioner before the International Chamber of Commerce
(ICC)11 on 3 November 2000. In both arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its
associated events constituted force majeure to justify the extension of time sought by petitioner; and [2) whether LHC had the right to terminate
the Turnkey Contract for failure of petitioner to complete the Project on target date.
Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey Contract,12 petitioner—in two
separate letters13 both dated 10 August 2000—advised respondent banks of the arbitration proceedings already pending before the CIAC and ICC
in connection with its alleged default in the performance of its obligations. Asserting that LHC had no right to call on the Securities until the
resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the Securities in
favor of LHC or any person claiming under LHC would constrain it to hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.2 14 of the Turnkey Contract, it failed to
comply with its obligation to complete the Project. Despite the letters of petitioner, however, both banks informed petitioner that they would pay
on the Securities if and when LHC calls on them.15
LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in default/delay in the performance of
its obligations under the Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for each day of delay beginning 28 June
2000 until actual completion of the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would
call on the securities for the payment of liquidated damages for the delay.16
274
On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining order and writ of preliminary
injunction, against herein respondents as defendants before the Regional Trial Court (RTC) of Makati. 17 Petitioner sought to restrain respondent
LHC from calling on the Securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities or any
renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on the same day. The case was docketed as
Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary restraining order for a period of
seventeen (17) days or until 26 November 2000.18
The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of preliminary injunction. It ruled that petitioner had
no legal right and suffered no irreparable injury to justify the issuance of the writ. Employing the principle of "independent contract" in letters of
credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It debunked petitioner's contention that
the principle of "independent contract" could be invoked only by respondent banks since according to it respondent LHC is the ultimate
beneficiary of the Securities. The trial court further ruled that the banks were mere custodians of the funds and as such they were obligated to
transfer the same to the beneficiary for as long as the latter could submit the required certification of its claims.
Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction, petitioner elevated the case to the Court of Appeals
via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary restraining order and writ of preliminary
injunction.20 Petitioner submitted to the appellate court that LHC's call on the Securities was premature considering that the issue of its default
had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had no right
to draw on the Securities for liquidated damages.
Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call on and use of the Securities as payment for
liquidated damages. It averred that the Securities are independent of the main contract between them as shown on the face of the two Standby
Letters of Credit which both provide that the banks have no responsibility to investigate the authenticity or accuracy of the certificates or the
declarant's capacity or entitlement to so certify.
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order, enjoining LHC from calling on the
Securities or any renewals or substitutes thereof and ordering respondent banks to cease and desist from transferring, paying or in any manner
disposing of the Securities.
However, the appellate court failed to act on the application for preliminary injunction until the temporary restraining order expired on 27 January
2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby
reducing the balance in ANZ Bank to US$1,852,814.00.
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed conformity with the trial court's
decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit itself is independent of the underlying
transaction and that as long as the beneficiary complied with the credit, it was of no moment that he had not complied with the underlying
contract. Further, the appellate court held that even assuming that the trial court's denial of petitioner's application for a writ of preliminary
injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari, unlike error of jurisdiction.
Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution:
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT MAY BE INVOKED BY A BENEFICIARY

THEREOF WHERE THE BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT.
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF
PETITIONER'S AND LHC'S DISPUTES BY THE APPROPRIATE TRIBUNAL.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER THE
SECURITIES DESPITE BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL.
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT THAT:
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED TO
RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE
DISPUTES BETWEEN PETITIONER AND LHC.
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM THE SECURITIES. 21
275
Petitioner contends that the courts below improperly relied on the "independence principle" on letters of credit when this case falls squarely
within the "fraud exception rule." Respondent LHC deliberately misrepresented the supposed existence of delay despite its knowledge that the
issue was still pending arbitration, petitioner continues.
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle against unjust enrichment and that,
under the premises, injunction was the appropriate remedy obtainable from the competent local courts.
On 25 August 2003, petitioner filed a Supplement to the Petition 22 and Supplemental Memorandum,23 alleging that in the course of the
proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out through the use of different modes of discovery
available in the ICC Arbitration. It contends that after the filing of the petition facts and admissions were discovered which demonstrate that LHC
knowingly misrepresented that petitioner had incurred delays— notwithstanding its knowledge and admission that delays were excused under the
Turnkey Contract—to be able to draw against the Securities. Reiterating that fraud constitutes an exception to the independence principle,
petitioner urges that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law and basic
principles of equity. It avers that it would suffer grave irreparable damage if LHC would be allowed to use the proceeds of the Securities and not
ordered to return the amounts it had wrongfully drawn thereon.
In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental pleadings filed by petitioner present erroneous and
misleading information which would change petitioner's theory on appeal.
In yet another Manifestation dated 12 April 2004, 25 petitioner alleges that on 18 February 2004, the ICC handed down its Third Partial Award,
declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled to the return of the sums wrongfully taken by LHC for
liquidated damages.
LHC filed a Counter-Manifestation dated 29 June 2004,26 stating that petitioner's Manifestation dated 12 April 2004 enlarges the scope of its
Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that the Petition for Review essentially dealt only with
the issue of whether injunction could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner
has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v. Luzon Hydro Corporation," in
which the parties made claims and counterclaims arising from petitioner's performance/misperformance of its obligations as contractor for LHC;
and (2) Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation" before Branch 56 of the RTC of Makati, which
is an action to enforce and obtain execution of the ICC's partial award mentioned in petitioner's Manifestation of 12 April 2004.
In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's Memorandum, LHC stresses that the question of whether the
funds it drew on the subject letters of credit should be returned is outside the issue in this appeal. At any rate, LHC adds that the action to enforce
the ICC's partial award is now fully within the Makati RTC's jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in
forum-shopping by keeping this appeal and at the same time seeking the suit for enforcement of the arbitral award before the Makati court.
Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court of Appeals correctly dismissed the petition for certiorari.
Invoking the independence principle, SBC argues that it was under no obligation to look into the validity or accuracy of the certification
submitted by respondent LHC or into the latter's capacity or entitlement to so certify. It adds that the act sought to be enjoined by petitioner was
already fait accompli and the present petition would no longer serve any remedial purpose.
In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 28 posits that its actions could not be regarded as unjustified
in view of the prevailing independence principle under which it had no obligation to ascertain the truth of LHC's allegations that petitioner
defaulted in its obligations. Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioner's
prayer for preliminary injunction had been rendered moot and academic.
At the core of the present controversy is the applicability of the "independence principle" and "fraud exception rule" in letters of credit. Thus, a
discussion of the nature and use of letters of credit, also referred to simply as "credits," would provide a better perspective of the case.
The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself.
The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the
minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must
honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank's customer cannot draw
on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to
order or bearer and is generally conditional, yet the draft presented under it is often negotiable. 29
In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing
with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer,
who wants to have control of the goods before paying.30 The use of credits in commercial transactions serves to reduce the risk of nonpayment of
the purchase price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk
of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits.31
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There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a
contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative
steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the
agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a
commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his
obligor has not performed the contract.32
By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a
third person and assumes responsibility for payment of debt therefor to the addressee. 33 A letter of credit, however, changes its nature as different
transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard
or relation to the underlying contract or disputes between the parties thereto.34
Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the
Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area. The vast majority of letters of
credit incorporate the UCP.35 First published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was
in 1993.36
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 37 this Court ruled that the observance of the UCP is justified by Article 2 of
the Code of Commerce which provides that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be
governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals,38 this Court ruled that
there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit, not only between or
among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable.
Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be
based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in
the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit
is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in
no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank.
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented
to it. The so-called "independence principle" assures the seller or the beneficiary of prompt payment independent of any breach of the main
contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks
assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the
general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for
the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the
good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other
person whomsoever.39
The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is
a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification
aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In
both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of
the credit.40
Can the beneficiary invoke the independence principle?
Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense available only to
respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny the benefit of an independent contract to
the very party for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle.
As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a definite
undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the conditions of the credit are
complied with.41 Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the
main contract. As the principle's nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and
originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction.
Given the nature of letters of credit, petitioner's argument—that it is only the issuing bank that may invoke the independence principle on letters
of credit—does not impress this Court. To say that the independence principle may only be invoked by the issuing banks would render nugatory
the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the
issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing bank but mainly for
the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who applied for and obtained it may
confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On the
277
other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on
the letter of credit as a security in case the commercial transaction does not push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called "beneficiary."
Petitioner's argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is
entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear
distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of
funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is
drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and
beneficial use for letters of credit in commercial transactions.
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially,
these credits are inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and
are usually triggered by a factual determination rather than by the examination of documents.
Because parties and courts should not confuse the different functions of the surety contract on the one hand and the standby credit on
the other, the distinction between surety contracts and credits merits some reflection. The two commercial devices share a common
purpose. Both ensure against the obligor's nonperformance. They function, however, in distinctly different ways.
Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's performance, usually by hiring someone to
complete that performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a matter over
which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is
obvious. He knows that the surety, often an insurance company, is a strong financial institution that will perform if the obligor does
not. The beneficiary also should understand that such performance must await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the surety's performance takes time.
The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he
will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of the
applicant's performance takes place. The standby credit has this opposite effect of the surety contract: it reverses the financial burden
of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligor's
performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the
beneficiary bears most of the cost of delay in performance.
In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation
of the required documents. It may be that the applicant has, in fact, performed and that the beneficiary's presentation of those
documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during
the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant,
holds the money. Parties that use a standby credit and courts construing such a credit should understand this allocation of burdens.
There is a tendency in some quarters to overlook this distinction between surety contracts and standby credits and to reallocate
burdens by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary. 42
While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the credit by allowing him
to draw thereon. The situation itself emasculates petitioner's posture that LHC cannot invoke the independence principle and highlights its
puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself.
Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the Securities. Owing to the
nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left with little or no alternative but to honor the
credit and both of them in fact submitted that it was "ministerial" for them to honor the call for payment. 43
Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract read, thus:
4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall on the Commencement
Date provide security to the Employer in the form of two irrevocable and confirmed standby letters of credit (the "Securities"), each in
the amount of US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the Employer. Each of the
Securities must be in form and substance acceptable to the Employer and may be provided on an annually renewable basis. 44
8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated damages
("Liquidated Damages for Delay") the amount of US$75,000 for each and every day or part of a day that shall elapse between the
Target Completion Date and the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor shall in the
278
aggregate not exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on
the following day without need of demand from the Employer.
8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies
due, or to become due to the Contractor and/or by drawing on the Security." 45
A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to all the consequences
which according to their nature, may be in keeping with good faith, usage, and law. 46 A careful perusal of the Turnkey Contract reveals the
intention of the parties to make the Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call
upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the happening of
the contingency for which the Securities have been proffered. Thus, even without the use of the "independence principle," the Turnkey Contract
itself bestows upon LHC the right to call on the Securities in the event of default.
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the Securities is wrongful because it fraudulently
misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined
by the arbitral tribunals. It asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing on the credit, fraudulently
presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are
untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion
those limits in light of the principle's purpose, which is to serve the commercial function of the credit. If it does not serve those functions,
application of the principle is not warranted, and the commonlaw principles of contract should apply.
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined with the fact of default which is the self-same issue
pending resolution before the arbitral tribunals. To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve,
among others, whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not
called upon to rule upon the issue of default—such issue having been submitted by the parties to the jurisdiction of the arbitral tribunals pursuant
to the terms embodied in their agreement.47
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate
accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment.48 The
remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud
constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable
injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.49
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two hundred fifty-three (253) days
which would move the target completion date. It argued that if its claims for extension would be found meritorious by the ICC, then LHC would
not be entitled to any liquidated damages.50
Generally, injunction is a preservative remedy for the protection of one's substantive right or interest; it is not a cause of action in itself but merely
a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure
the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this
discretion should be exercised based upon the grounds and in the manner provided by law. 51
Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and
that the acts against which the writ is to be directed are violative of the said right. 52 It must be shown that the invasion of the right sought to be
protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity
for the writ to prevent serious damage.53 Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid
injurious consequences which cannot be remedied under any standard compensation.54
In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC's call on the Securities which would justify
the issuance of preliminary injunction. By petitioner's own admission, the right of LHC to call on the Securities was contractually rooted and
subject to the express stipulations in the Turnkey Contract.55 Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC
the right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus:
4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any of the Securities, stating the nature of the default
for which the claim on any of the Securities is to be made, provided that no notice will be required if the Employer calls upon any of
the Securities for the payment of Liquidated Damages for Delay or for failure by the Contractor to renew or extend the Securities
within 14 days of their expiration in accordance with Clause 4.2.2. 56
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8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies
due, or to become due, to the Contractor and/or by drawing on the Security.57
The pendency of the arbitration proceedings would not per se make LHC's draws on the Securities wrongful or fraudulent for there was nothing
in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before
LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright
fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as
a ground to justify the issuance of an injunction.58 What petitioner did assert before the courts below was the fact that LHC's draws on the
Securities would be premature and without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance
to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought
out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal.59 The
lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud was fundamentally
interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its
pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHC's call
upon the Securities.
Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to taking action to
enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights
in accordance with the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith.60 More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil
Code,61 petitioner could have incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that
default had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live
with its inaction.
With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates
that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHC's certification that default has
occurred. Neither were they bound by petitioner's declaration that LHC's call thereon was wrongful. To repeat, respondent banks' undertaking
was simply to pay once the required documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's draws upon the Securities were wrongful due to the
non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general
principles of law.
Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully drawn. This fact
alone would have been sufficient reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an accomplished or
consummated act.63 In Ticzon v. Video Post Manila, Inc.64 this Court ruled that where the period within which the former employees were
prohibited from engaging in or working for an enterprise that competed with their former employer—the very purpose of the preliminary
injunction —has expired, any declaration upholding the propriety of the writ would be entirely useless as there would be no actual case or
controversy between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the instant petition moot—for any declaration by this Court
as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the existing controversy.65 The other issues
raised by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could properly
be threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its Counter-Manifestation dated
29 June 200466 LHC alleges that petitioner presented before this Court the same claim for money which it has filed in two other proceedings, to
wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioner's acts constitutes forum-
shopping which should be punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's Motion for Leave to File
Addendum to Petitioner's Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing
Civil Case No. 04-332—wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the Securities should be
returned—petitioner resorted to forum-shopping. In both instances, however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in different courts, simultaneously
or successively, all substantially founded on the same transactions and the same essential facts and circumstances, and all raising substantially the
same issues either pending in, or already resolved adversely, by some other court.67 It may also consist in the act of a party against whom an
adverse judgment has been rendered in one forum, of seeking another and possibly favorable opinion in another forum other than by appeal or
special civil action of certiorari, or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one
or the other court might look with favor upon the other party.68 To determine whether a party violated the rule against forum-shopping, the test
applied is whether the elements of litis pendentia are present or whether a final judgment in one case will amount to res judicata in
280
another.69 Forum-shopping constitutes improper conduct and may be punished with summary dismissal of the multiple petitions and direct
contempt of court.70
Considering the seriousness of the charge of forum-shopping and the severity of the sanctions for its violation, the Court will refrain from making
any definitive ruling on this issue until after petitioner has been given ample opportunity to respond to the charge.
WHEREFORE, the instant petition is DENIED, with costs against petitioner.
Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice.
281
G.R. No. L-46658 May 13, 1991
PHILIPPINE NATIONAL BANK, petitioner,

vs.
HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch XXI and TAYABAS
CEMENT COMPANY, INC., respondents.
The Chief Legal Counsel for petitioner.

Ortille Law Office for private respondent.
FERNAN, C.J.:
In this petition for certiorari, petitioner Philippine National Bank (PNB) seeks to annul and set aside the orders dated March 4, 1977 and May 31,
1977 rendered in Civil Case No. 24422 1 of the Court of First Instance of Rizal, Branch XXI, respectively granting private respondent Tayabas
Cement Company, Inc.'s application for a writ of preliminary injunction to enjoin the foreclosure sale of certain properties in Quezon City and
Negros Occidental and denying petitioner's motion for reconsideration thereof.
In 1963, Ignacio Arroyo, married to Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan of P580,000.00 from petitioner bank to
purchase 60% of the subscribed capital stock, and thereby acquire the controlling interest of private respondent Tayabas Cement Company, Inc.
(TCC).2 As security for said loan, the spouses Arroyo executed a real estate mortgage over a parcel of land covered by Transfer Certificate of
Title No. 55323 of the Register of Deeds of Quezon City known as the La Vista property.
Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of an eight (8) year deferred letter of credit (L/C)
for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a cement plant machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha, Ltd. for the account of TCC, the Arroyo
spouses executed the following documents to secure this loan accommodation: Surety Agreement dated August 5, 1964 3 and Covenant dated
August 6, 1964.4
The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a trust receipt agreement.
Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding drawings against the L/C as scheduled. TCC, however, failed to remit and/or
pay the corresponding amount covered by the drawings. Thus, on May 19, 1968, pursuant to the trust receipt agreement, PNB notified TCC of its
intention to repossess, as it later did, the imported machinery and equipment for failure of TCC to settle its obligations under the L/C.5
In the meantime, the personal accounts of the spouses Arroyo, which included another loan of P160,000.00 secured by a real estate mortgage over
parcels of agricultural land known as Hacienda Bacon located in Isabela, Negros Occidental, had likewise become due. The spouses Arroyo
having failed to satisfy their obligations with PNB, the latter decided to foreclose the real estate mortgages executed by the spouses Arroyo in its
favor.
On July 18, 1975, PNB filed with the City Sheriff of Quezon City a petition for extra-judicial foreclosure under Act 3138, as amended by Act
4118 and under Presidential Decree No. 385 of the real estate mortgage over the properties known as the La Vista property covered by TCT No.
55323.6 PNB likewise filed a similar petition with the City Sheriff of Bacolod, Negros Occidental with respect to the mortgaged properties
located at Isabela, Negros Occidental and covered by OCT No. RT 1615.
The foreclosure sale of the La Vista property was scheduled on August 11, 1975. At the auction sale, PNB was the highest bidder with a bid price
of P1,000,001.00. However, when said property was about to be awarded to PNB, the representative of the mortgagor-spouses objected and
demanded from the PNB the difference between the bid price of P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo spouses on
their personal account. It was the contention of the spouses Arroyo's representative that the foreclosure proceedings referred only to the personal
account of the mortgagor spouses without reference to the account of TCC.
To remedy the situation, PNB filed a supplemental petition on August 13, 1975 requesting the Sheriff's Office to proceed with the sale of the
subject real properties to satisfy not only the amount of P499,060.25 owed by the spouses Arroyos on their personal account but also the amount
of P35,019,901.49 exclusive of interest, commission charges and other expenses owed by said spouses as sureties of TCC.7 Said petition was
opposed by the spouses Arroyo and the other bidder, Jose L. Araneta.
On September 12, 1975, Acting Clerk of Court and Ex-Officio Sheriff Diana L. Dungca issued a resolution finding that the questions raised by
the parties required the reception and evaluation of evidence, hence, proper for adjudication by the courts of law. Since said questions were
prejudicial to the holding of the foreclosure sale, she ruled that her "Office, therefore, cannot properly proceed with the foreclosure sale unless
and until there be a court ruling on the aforementioned issues."8
282
Thus, in May, 1976, PNB filed with the Court of First Instance of Quezon City, Branch V a petition for mandamus9 against said Diana Dungca in
her capacity as City Sheriff of Quezon City to compel her to proceed with the foreclosure sale of the mortgaged properties covered by TCT No.
55323 in order to satisfy both the personal obligation of the spouses Arroyo as well as their liabilities as sureties of TCC.10
On September 6, 1976, the petition was granted and Dungca was directed to proceed with the foreclosure sale of the mortgaged properties
covered by TCT No. 55323 pursuant to Act No. 3135 and to issue the corresponding Sheriff's Certificate of Sale. 11
Before the decision could attain finality, TCC filed on September 14, 1976 before the Court of First Instance of Rizal, Pasig, Branch XXI a
complaint12 against PNB, Dungca, and the Provincial Sheriff of Negros Occidental and Ex-Officio Sheriff of Bacolod City seeking, inter alia, the
issuance of a writ of preliminary injunction to restrain the foreclosure of the mortgages over the La Vista property and Hacienda Bacon as well as
a declaration that its obligation with PNB had been fully paid by reason of the latter's repossession of the imported machinery and equipment. 13
On October 5, 1976, the CFI, thru respondent Judge Gregorio Pineda, issued a restraining order14 and on March 4, 1977, granted a writ of
preliminary injunction.15 PNB's motion for reconsideration was denied, hence this petition.
Petitioner PNB advances four grounds for the setting aside of the writ of preliminary injunction, namely: a) that it contravenes P.D. No. 385
which prohibits the issuance of a restraining order against a government financial institution in any action taken by such institution in compliance
with the mandatory foreclosure provided in Section 1 thereof; b) that the writ countermands a final decision of a co-equal and coordinate court; c)
that the writ seeks to prohibit the performance of acts beyond the court's territorial jurisdiction; and, d) private respondent TCC has not shown
any clear legal right or necessity to the relief of preliminary injunction.
Private respondent TCC counters with the argument that P.D. No. 385 does not apply to the case at bar, firstly because no foreclosure
proceedings have been instituted against it by PNB and secondly, because its account under the L/C has been fully satisfied with the repossession
of the imported machinery and equipment by PNB.
The resolution of the instant controversy lies primarily on the question of whether or not TCC's liability has been extinguished by the
repossession of PNB of the imported cement plant machinery and equipment.
We rule for the petitioner PNB. It must be remembered that PNB took possession of the imported cement plant machinery and equipment
pursuant to the trust receipt agreement executed by and between PNB and TCC giving the former the unqualified right to the possession and
disposal of all property shipped under the Letter of Credit until such time as all the liabilities and obligations under said letter had been
discharged.16 In the case of Vintola vs. Insular Bank of Asia and America 17 wherein the same argument was advanced by the Vintolas as
entrustees of imported seashells under a trust receipt transaction, we said:
Further, the VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch as, through no fault of their
own, they were unable to dispose of the seashells, and that they have relinquished possession thereof to the IBAA, as owner of the
goods, by depositing them with the Court.
The foregoing submission overlooks the nature and mercantile usage of the transaction involved. A letter of credit-trust receipt
arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the
Letter of Credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by
the letter of credit, and a security feature which is in the covering trust receipt.
xxx xxx xxx
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods.1âwphi1 It
secures an indebtedness and there can be no such thing as security interest that secures no obligation. As defined in our laws:
(h) "Security interest" means a property interest in goods, documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be
absolute, whenever such title is in substance taken or retained for security only.
xxx xxx xxx
Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the holder of a security
title for the advances it had made to the VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing remain their
own property and they hold it at their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter
remained a lender and creditor.
xxx xxx xxx
283
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because they have surrendered the
goods to IBAA and subsequently deposited them in the custody of the court, they are absolutely relieved of their obligation to pay
their loan because of their inability to dispose of the goods. The fact that they were unable to sell the seashells in question does not
affect IBAA's right to recover the advances it had made under the Letter of Credit.
PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the Letter of
Credit, said possession by itself cannot be considered payment of the loan secured thereby. Payment would legally result only after PNB had
foreclosed on said securities, sold the same and applied the proceeds thereof to TCC's loan obligation. Mere possession does not amount to
foreclosure for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes
the sale itself.18
Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the creditor in satisfaction
of a debt in money and the same is governed by sales.19 Dation in payment is the delivery and transmission of ownership of a thing by the debtor
to the creditor as an accepted equivalent of the performance of the obligation. 20 As aforesaid, the repossession of the machinery and equipment in
question was merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership thereof to PNB in
satisfaction of said loan. Thus, no dacion en pago was ever accomplished.
Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses Arroyo as sureties of TCC. A surety is
considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable.21 As sureties, the Arroyo spouses are primarily liable as original promissors and are bound
immediately to pay the creditor the amount outstanding.22
Under Presidential Decree No. 385 which took effect on January 31, 1974, government financial institutions like herein petitioner PNB are
required to foreclose on the collaterals and/or securities for any loan, credit or accommodation whenever the arrearages on such account amount
to at least twenty percent (20%) of the total outstanding obligations, including interests and charges, as appearing in the books of account of the
financial institution concerned.23 It is further provided therein that "no restraining order, temporary or permanent injunction shall be issued by the
court against any government financial institution in any action taken by such institution in compliance with the mandatory foreclosure provided
in Section 1 hereof, whether such restraining order, temporary or permanent injunction is sought by the borrower(s) or any third party or parties . .
."24
It is not disputed that the foreclosure proceedings instituted by PNB against the Arroyo spouses were in compliance with the mandate of P.D.
385. This being the case, the respondent judge acted in excess of his jurisdiction in issuing the injunction specifically proscribed under said
decree.
Another reason for striking down the writ of preliminary injunction complained of is that it interfered with the order of a co-equal and coordinate
court. Since Branch V of the CFI of Rizal had already acquired jurisdiction over the question of foreclosure of mortgage over the La Vista
property and rendered judgment in relation thereto, then it retained jurisdiction to the exclusion of all other coordinate courts over its judgment,
including all incidents relative to the control and conduct of its ministerial officers, namely the sheriff thereof. 25 The foreclosure sale having been
ordered by Branch V of the CFI of Rizal, TCC should not have filed injunction proceedings with Branch XXI of the same CFI, but instead should
have first sought relief by proper motion and application from the former court which had exclusive jurisdiction over the foreclosure
proceeding.26
This doctrine of non-interference is premised on the principle that a judgment of a court of competent jurisdiction may not be opened, modified or
vacated by any court of concurrent jurisdiction.27
Furthermore, we find the issuance of the preliminary injunction directed against the Provincial Sheriff of Negros Occidental and ex-officio
Sheriff of Bacolod City a jurisdictional faux pas as the Courts of First Instance, now Regional Trial Courts, can only enforce their writs of
injunction within their respective designated territories.28
WHEREFORE, the instant petition is hereby granted. The assailed orders are hereby set aside. Costs against private respondent.
284
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,

vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE CORPORATION, AND REGIONAL TRIAL COURT
OF QUEZON CITY, BRANCH XCII (92), respondents.
GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial Court of Quezon City promulgated on March 24, 1986 in Civil Case
No. Q-46517 entitled Banco de Oro Savings and Mortgage Bank versus Equitable Banking Corporation and the Philippine Clearing House
Corporation after a review of the Decision of the Board of Directors of the Philippine Clearing House Corporation (PCHC) in the case of
Equitable Banking Corporation (EBC) vs. Banco de Oro Savings and Mortgage (BCO), ARBICOM Case No. 84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August 1983, plaintiff through its Visa Card Department, drew six
crossed Manager's check (Exhibits "A" to "F", and herein referred to as Checks) having an aggregate amount of Forty Five
Thousand Nine Hundred and Eighty Two & 23/100 (P45,982.23) Pesos and payable to certain member establishments of
Visa Card. Subsequently, the Checks were deposited with the defendant to the credit of its depositor, a certain Aida
Trencio.
Following normal procedures, and after stamping at the back of the Checks the usual endorsements. All prior and/or lack of
endorsement guaranteed the defendant sent the checks for clearing through the Philippine Clearing House Corporation
(PCHC). Accordingly, plaintiff paid the Checks; its clearing account was debited for the value of the Checks and
defendant's clearing account was credited for the same amount,
Thereafter, plaintiff discovered that the endorsements appearing at the back of the Checks and purporting to be that of the
payees were forged and/or unauthorized or otherwise belong to persons other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations, plaintiff presented the Checks directly to the defendant for the
purpose of claiming reimbursement from the latter. However, defendant refused to accept such direct presentation and to
reimburse the plaintiff for the value of the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the defendant to pay the plaintiff the sum of P45,982.23 with
interest at the rate of 12% per annum from the date of the complaint plus attorney's fees in the amount of P10,000.00 as
well as the cost of the suit.
In accordance with Section 38 of the Clearing House Rules and Regulations, the dispute was presented for Arbitration; and
Atty. Ceasar Querubin was designated as the Arbitrator.
After an exhaustive investigation and hearing the Arbiter rendered a decision in favor of the plaintiff and against the
defendant ordering the PCHC to debit the clearing account of the defendant, and to credit the clearing account of the
plaintiff of the amount of P45,982.23 with interest at the rate of 12% per annum from date of the complaint and Attorney's
fee in the amount of P5,000.00. No pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner, the Board of Directors of the PCHC affirmed the decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is confirmed; and the Philippine Clearing House Corporation is
hereby ordered to debit the clearing account of the defendant and credit the clearing account of plaintiff the amount of
Forty Five Thousand Nine Hundred Eighty Two & 23/100 (P45,982.23) Pesos with interest at the rate of 12% per annum
from date of the complaint, and the Attorney's fee in the amount of Five Thousand (P5,000.00) Pesos.
Thus, a petition for review was filed with the Regional Trial Court of Quezon City, Branch XCII, wherein in due course a decision was rendered
affirming in toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
285
1. Did the PCHC have any jurisdiction to give due course to and adjudicate Arbicom Case No. 84033?
2. Were the subject checks non-negotiable and if not, does it fall under the ambit of the power of the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding controversies of this nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because the Clearing House Rules and Regulations of PCHC cover and apply
only to checks that are genuinely negotiable. Emphasis is laid on the primary purpose of the PCHC in the Articles of Incorporation, which states:
To provide, maintain and render an effective, convenient, efficient, economical and relevant exchange and facilitate service
limited to check processing and sorting by way of assisting member banks, entities in clearing checks and other clearing
items as defined in existing and in future Central Bank of the Philippines circulars, memoranda, circular letters, rules and
regulations and policies in pursuance to the provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the Central Bank, in accordance with the provisions of Section 1000 shall
serve as a basis for the clearing of checks, and the settlement of interbank balances ...
Petitioner argues that by law and common sense, the term check should be interpreted as one that fits the articles of incorporation of the PCHC,
the Central Bank and the Clearing House Rules stating that it is a negotiable instrument citing the definition of a "check" as basically a "bill of
exchange" under Section 185 of the NIL and that it should be payable to "order" or to "bearer" under Section 126 of game law. Petitioner alleges
that with the cancellation of the printed words "or bearer from the face of the check, it becomes non-negotiable so the PCHC has no jurisdiction
over the case.
The Regional Trial Court took exception to this stand and conclusion put forth by the herein petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted, the PCHC makes no distinction as to the character or nature of
the checks subject of its jurisdiction. The pertinent provisions quoted in petitioners memorandum simply refer to check(s).
Where the law does not distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R, Feb. 5, 1962) the Appellate Court categorically stated that there
are four kinds of checks in this jurisdiction; the regular check; the cashier's check; the traveller's check; and the crossed
check. The Court, further elucidated, that while the Negotiable Instruments Law does not contain any provision on crossed
checks, it is coon practice in commercial and banking operations to issue checks of this character, obviously in accordance
with Article 541 of the Code of Commerce. Attention is likewise called to Section 185 of the Negotiable Instruments Law:
Sec. 185. Check defined. — A check is a bill of exchange drawn on a bank payable on demand.
Except as herein otherwise provided, the provisions of this act applicable to a bill of exchange
payable on demand apply to a check
and the provisions of Section 61 (supra) that the drawer may insert in the instrument an express stipulation negating or
limiting his own liability to the holder. Consequently, it appears that the use of the term "check" in the Articles of
Incorporation of PCHC is to be perceived as not limited to negotiable checks only, but to checks as is generally known in
use in commercial or business transactions.
Anent Petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC Board of Directors
that:
In presenting the Checks for clearing and for payment, the defendant made an express guarantee on
the validity of "all prior endorsements." Thus, stamped at the back of the checks are the defendant's
clear warranty; ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. With. out such warranty, plaintiff would not have paid on the checks.
286
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty
has proven to be false and inaccurate, the defendant is liable for any damage arising out of the falsity
of its representation.
The principle of estoppel, effectively prevents the defendant from denying liability for any damage
sustained by the plaintiff which, relying upon an action or declaration of the defendant, paid on the
Checks. The same principle of estoppel effectively prevents the defendant from denying the
existence of the Checks. (Pp. 1011 Decision; pp. 4344, Rollo)
We agree.
As provided in the aforecited articles of incorporation of PCHC its operation extend to "clearing checks and other clearing items." No doubt
transactions on non-negotiable checks are within the ambit of its jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi lex non distinguish nec nos distinguere debemos." 2 It was enunciated in Loc Cham v.
Ocampo, 77 Phil. 636 (1946):
The rule, founded on logic is a corollary of the principle that general words and phrases in a statute should ordinarily be
accorded their natural and general significance. In other words, there should be no distinction in the application of a statute
where none is indicated.
There should be no distinction in the application of a statute where none is indicated for courts are not authorized to distinguish where the law
makes no distinction. They should instead administer the law not as they think it ought to be but as they find it and without regard to
consequences. 3
The term check as used in the said Articles of Incorporation of PCHC can only connote checks in general use in commercial and business
activities. It cannot be conceived to be limited to negotiable checks only.
Checks are used between banks and bankers and their customers, and are designed to facilitate banking operations. It is of the essence to be
payable on demand, because the contract between the banker and the customer is that the money is needed on demand. 4
The participation of the two banks, petitioner and private respondent, in the clearing operations of PCHC is a manifestation of their submission to
its jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR clearing rules and regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. — It is the general agreement and understanding that any participant in the
Philippine Clearing House Corporation, MICR clearing operations by the mere fact of their participation, thereby manifests
its agreement to these Rules and Regulations and its subsequent amendments."
Sec 36.6. (ARBITRATION) — The fact that a bank participates in the clearing operations of the PCHC shall be deemed its
written and subscribed consent to the binding effect of this arbitration agreement as if it had done so in accordance with
section 4 of the Republic Act No. 876, otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the arbitration of one or more arbitrators any controversy existing between
them at the time of the submission and which may be the subject of an action, or the parties of any contract may in such
contract agree to settle by arbitration a controversy thereafter arising between them. Such submission or contract shall be
valid and irrevocable, save upon grounds as exist at law for the revocation of any contract.
Such submission or contract may include question arising out of valuations, appraisals or other controversies which may be
collateral, incidental, precedent or subsequent to any issue between the parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or items bearing forged endorsement when such endorsement is
necessary for negotiation shall be returned by direct presentation or demand to the Presenting Bank and not through the
regular clearing house facilities within the period prescribed by law for the filing of a legal action by the returning
bank/branch, institution or entity sending the same. (Emphasis supplied)
287
Viewing these provisions the conclusion is clear that the PCHC Rules and Regulations should not be interpreted to be applicable only to checks
which are negotiable instruments but also to non-negotiable instruments and that the PCHC has jurisdiction over this case even as the checks
subject of this litigation are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of non-negotiability of the checks in question. It stamped its guarantee on the back of
the checks and subsequently presented these checks for clearing and it was on the basis of these endorsements by the petitioner that the proceeds
were credited in its clearing account.
The petitioner by its own acts and representation can not now deny liability because it assumed the liabilities of an endorser by stamping its
guarantee at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements and/or lack of endorsements" (Exh. A-2 to F-2) is now estopped from
claiming that the checks under consideration are not negotiable instruments. The checks were accepted for deposit by the petitioner stamping
thereon its guarantee, in order that it can clear the said checks with the respondent bank. By such deliberate and positive attitude of the petitioner
it has for all legal intents and purposes treated the said cheeks as negotiable instruments and accordingly assumed the warranty of the endorser
when it stamped its guarantee of prior endorsements at the back of the checks. It led the said respondent to believe that it was acting as endorser
of the checks and on the strength of this guarantee said respondent cleared the checks in question and credited the account of the petitioner.
Petitioner is now barred from taking an opposite posture by claiming that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals 5 a point relevant to the issue when it stated the doctrine of estoppel is
based upon the grounds of public policy, fair dealing, good faith and justice and its purpose is to forbid one to speak against his own act,
representations or commitments to the injury of one to whom they were directed and who reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check and which may turn out to be a forged endorsement. Whenever any bank
treats the signature at the back of the checks as endorsements and thus logically guarantees the same as such there can be no doubt said bank has
considered the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly emphasized that the collecting bank or last endorser generally suffers
the loss because it has the duty to ascertain the genuineness of all prior endorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. This is laid
down in the case of PNB vs. National City Bank. 6 In another case, this court held that if the drawee-bank discovers that the signature of the payee
was forged after it has paid the amount of the check to the holder thereof, it can recover the amount paid from the collecting bank. 7
A truism stated by this Court is that — "The doctrine of estoppel precludes a party from repudiating an obligation voluntarily assumed after
having accepted benefits therefrom. To countenance such repudiation would be contrary to equity and put premium on fraud or
misrepresentation". 8
We made clear in Our decision in Philippine National Bank vs. The National City Bank of NY & Motor Service Co. that:
Where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of
the drawers signature and his capacity to issue the instrument.
If a drawee bank pays a forged check which was previously accepted or certified by the said bank, it can not recover from a
holder who did not participate in the forgery and did not have actual notice thereof.
The payment of a check does not include or imply its acceptance in the sense that this word is used in Section 62 of the
Negotiable Instruments Act. 9
The point that comes uppermost is whether the drawee bank was negligent in failing to discover the alteration or the forgery. Very akin to the
case at bar is one which involves a suit filed by the drawer of checks against the collecting bank and this came about in Farmers State
Bank 10 where it was held:
A cause of action against the (collecting bank) in favor of the appellee (the drawer) accrued as a result of the bank
breaching its implied warranty of the genuineness of the indorsements of the name of the payee by bringing about the
presentation of the checks (to the drawee bank) and collecting the amounts thereof, the right to enforce that cause of action
was not destroyed by the circumstance that another cause of action for the recovery of the amounts paid on the checks
would have accrued in favor of the appellee against another or to others than the bank if when the checks were paid they
have been indorsed by the payee. (United States vs. National Exchange Bank, 214 US, 302, 29 S CT665, 53 L. Ed 1006, 16
Am. Cas. 11 84; Onondaga County Savings Bank vs. United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
288
Every indorser who indorsee without qualification, warrants to all subsequent holders in due course' (a) that the instrument
is genuine and in all respects what it purports to be; (b) that he has good title to it; (c) that all prior parties have capacity to
contract; and (d) that the instrument is at the time of his indorsement valid and subsisting. 11
It has been enunciated in an American case particularly in American Exchange National Bank vs. Yorkville Bank 12 that: "the drawer owes no
duty of diligence to the collecting bank (one who had accepted an altered check and had paid over the proceeds to the depositor) except of
seasonably discovering the alteration by a comparison of its returned checks and check stubs or other equivalent record, and to inform the drawee
thereof." In this case it was further held that:
The real and underlying reasons why negligence of the drawer constitutes no defense to the collecting bank are that there is
no privity between the drawer and the collecting bank (Corn Exchange Bank vs. Nassau Bank, 204 N.Y.S. 80) and the
drawer owe to that bank no duty of vigilance (New York Produce Exchange Bank vs. Twelfth Ward Bank, 204 N.Y.S. 54)
and no act of the collecting bank is induced by any act or representation or admission of the drawer (Seaboard National
Bank vs. Bank of America (supra) and it follows that negligence on the part of the drawer cannot create any liability from
it to the collecting bank, and the drawer thus is neither a necessary nor a proper party to an action by the drawee bank
against such bank. It is quite true that depositors in banks are under the obligation of examining their passbooks and
returned vouchers as a protection against the payment by the depository bank against forged checks, and negligence in the
performance of that obligation may relieve that bank of liability for the repayment of amounts paid out on forged checks,
which but for such negligence it would be bound to repay. A leading case on that subject is Morgan vs. United States
Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871 Amn. Cas. 1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to the collecting bank, the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it for the purpose of determining their genuineness and regularity. The collecting bank being
primarily engaged in banking holds itself out to the public as the expert and the law holds it to a high standard of conduct.
And although the subject checks are non-negotiable the responsibility of petitioner as indorser thereof remains.
To countenance a repudiation by the petitioner of its obligation would be contrary to equity and would deal a negative blow to the whole banking
system of this country.
The court reproduces with approval the following disquisition of the PCHC in its decision —
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's depositor nor the defendant is entitled to receive payment payable
for the Checks. As the checks are not payable to defendant's depositor, payments to persons other than payees named
therein, their successor-in-interest or any person authorized to receive payment are not valid. Article 1240, New Civil Code
of the Philippines unequivocably provides that:
"Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted,
or his successo-in-interest, or any person authorized to receive it. "
Considering that neither the defendant's depositor nor the defendant is entitled to receive payments for the Checks,
payments to any of them give rise to an obligation to return the amounts received. Section 2154 of the New Civil Code
mandates that:
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.
It is contended that plaintiff should be held responsible for issuing the Checks notwithstanding that the underlying
transactions were fictitious This contention has no basis in our jurisprudence.
The nullity of the underlying transactions does not diminish, but in fact strengthens, plaintiffs right to recover from the
defendant. Such nullity clearly emphasizes the obligation of the payees to return the proceeds of the Checks. If a failure of
consideration is sufficient to warrant a finding that a payee is not entitled to payment or must return payment already made,
with more reason the defendant, who is neither the payee nor the person authorized by the payee, should be compelled to
289
surrender the proceeds of the Checks received by it. Defendant does not have any title to the Checks; neither can it claim
any derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the bank of the checks are the defendant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would
not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false
and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation.
The principle of estoppel effectively prevents the defendant from denying liability for any damages sustained by the
plaintiff which, relying upon an action or declaration of the defendant, paid on the Checks. The same principle of estoppel
effectively prevents the defendant from denying the existence of the Checks.
Whether the Checks have been issued for valuable considerations or not is of no serious moment to this case. These Checks
have been made the subject of contracts of endorsement wherein the defendant made expressed warranties to induce
payment by the drawer of the Checks; and the defendant cannot now refuse liability for breach of warranty as a
consequence of such forged endorsements. The defendant has falsely warranted in favor of plaintiff the validity of all
endorsements and the genuineness of the cheeks in all respects what they purport to be.
The damage that will result if judgment is not rendered for the plaintiff is irreparable. The collecting bank has privity with
the depositor who is the principal culprit in this case. The defendant knows the depositor; her address and her history,
Depositor is defendant's client. It has taken a risk on its depositor when it allowed her to collect on the crossed-checks.
Having accepted the crossed checks from persons other than the payees, the defendant is guilty of negligence; the risk of
wrongful payment has to be assumed by the defendant.
On the matter of the award of the interest and attorney's fees, the Board of Directors finds no reason to reverse the decision
of the Arbiter. The defendant's failure to reimburse the plaintiff has constrained the plaintiff to regular the services of
counsel in order to protect its interest notwithstanding that plaintiffs claim is plainly valid just and demandable. In addition,
defendant's clear obligation is to reimburse plaintiff upon direct presentation of the checks; and it is undenied that up to this
time the defendant has failed to make such reimbursement.
WHEREFORE, the petition is DISMISSED for lack of merit without pronouncement as to costs. The decision of the respondent court of 24
March 1986 and its order of 3 June 1986 are hereby declared to be immediately executory.
290
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
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
291
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.)
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."
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.
292
G.R. No. 157833 October 15, 2007
BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
GREGORIO C. ROXAS, Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari assailing the Decision 1 of the Court of Appeals (Fourth Division) dated
February 13, 2003 in CA-G.R. CV No. 67980.
The facts of the case, as found by the trial court and affirmed by the Court of Appeals, are:
Gregorio C. Roxas, respondent, is a trader. Sometime in March 1993, he delivered stocks of vegetable oil to spouses Rodrigo and Marissa Cawili.
As payment therefor, spouses Cawili issued a personal check in the amount of ₱348,805.50. However, when respondent tried to encash the check,
it was dishonored by the drawee bank. Spouses Cawili then assured him that they would replace the bounced check with a cashier’s check from
the Bank of the Philippine Islands (BPI), petitioner.
On March 31, 1993, respondent and Rodrigo Cawili went to petitioner’s branch at Shaw Boulevard, Mandaluyong City where Elma Capistrano,
the branch manager, personally attended to them. Upon Elma’s instructions, Lita Sagun, the bank teller, prepared BPI Cashier’s Check No. 14428
in the amount of ₱348,805.50, drawn against the account of Marissa Cawili, payable to respondent. Rodrigo then handed the check to respondent
in the presence of Elma.
The following day, April 1, 1993, respondent returned to petitioner’s branch at Shaw Boulevard to encash the cashier’s check but it was
dishonored. Elma informed him that Marissa’s account was closed on that date.
Despite respondent’s insistence, the bank officers refused to encash the check and tried to retrieve it from respondent. He then called his lawyer
who advised him to deposit the check in his (respondent’s) account at Citytrust, Ortigas Avenue. However, the check was dishonored on the
ground "Account Closed."
On September 23, 1993, respondent filed with the Regional Trial Court, Branch 263, Pasig City a complaint for sum of money against petitioner,
docketed as Civil Case No. 63663. Respondent prayed that petitioner be ordered to pay the amount of the check, damages and cost of the suit.
In its answer, petitioner specifically denied the allegations in the complaint, claiming that it issued the check by mistake in good faith; that its
dishonor was due to lack of consideration; and that respondent’s remedy was to sue Rodrigo Cawili who purchased the check. As a counterclaim,
petitioner prayed that respondent be ordered to pay attorney’s fees and expenses of litigation.
Petitioner filed a third-party complaint against spouses Cawili. They were later declared in default for their failure to file their answer.
After trial, the RTC rendered a Decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing premises, this Court hereby renders judgment in favor of herein plaintiff and orders the defendant, Bank
of the Philippine Islands, to pay Gerardo C. Roxas:
1) The sum of ₱348,805.50, the face value of the cashier’s check, with legal interest thereon computed from April 1, 1993 until the
amount is fully paid;
2) The sum of ₱50,000.00 for moral damages;
3) The sum of ₱50,000.00 as exemplary damages to serve as an example for the public good;
4) The sum of ₱25,000.00 for and as attorney’s fees; and the
5) Costs of suit.
As to the third-party complaint, third-party defendants Spouses Rodrigo and Marissa Cawili are hereby ordered to indemnify defendant Bank of
the Philippine Islands such amount(s) adjudged and actually paid by it to herein plaintiff Gregorio C. Roxas, including the costs of suit.
293
SO ORDERED.
On appeal, the Court of Appeals, in its Decision, affirmed the trial court’s judgment.
Hence, this petition.
Petitioner ascribes to the Court of Appeals the following errors: (1) in finding that respondent is a holder in due course; and (2) in holding that it
(petitioner) is liable to respondent for the amount of the cashier’s check.
Section 52 of the Negotiable Instruments Law provides:
SEC. 52. What constitutes a holder in due course. – A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue and without notice that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of person negotiating it.
As a general rule, under the above provision, every holder is presumed prima facie to be a holder in due course. One who claims otherwise has
the onus probandi to prove that one or more of the conditions required to constitute a holder in due course are lacking. In this case, petitioner
contends that the element of "value" is not present, therefore, respondent could not be a holder in due course.
Petitioner’s contention lacks merit. Section 25 of the same law states:
SEC. 25. Value, what constitutes. – Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed as such whether the instrument is payable on demand or at a future time.
In Walker Rubber Corp. v. Nederlandsch Indische & Handelsbank, N.V. and South Sea Surety & Insurance Co., Inc.,2 this Court ruled that value
"in general terms may be some right, interest, profit or benefit to the party who makes the contract or some forbearance, detriment, loan,
responsibility, etc. on the other side." Here, there is no dispute that respondent received Rodrigo Cawili’s cashier’s check as payment for the
former’s vegetable oil. The fact that it was Rodrigo who purchased the cashier’s check from petitioner will not affect respondent’s status as a
holder for value since the check was delivered to him as payment for the vegetable oil he sold to spouses Cawili. Verily, the Court of Appeals did
not err in concluding that respondent is a holder in due course of the cashier’s check.
Furthermore, it bears emphasis that the disputed check is a cashier’s check. In International Corporate Bank v. Spouses Gueco,3 this Court held
that a cashier’s check is really the bank’s own check and may be treated as a promissory note with the bank as the maker. The check becomes
the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. In New Pacific Timber & Supply
Co. Inc. v. Señeris,4 this Court took judicial notice of the "well-known and accepted practice in the business sector that a cashier’s check is
deemed as cash." This is because the mere issuance of a cashier’s check is considered acceptance thereof.
In view of the above pronouncements, petitioner bank became liable to respondent from the moment it issued the cashier’s check. Having been
accepted by respondent, subject to no condition whatsoever, petitioner should have paid the same upon presentment by the former.1âwphi1
WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals (Fourth Division) in CA-G.R. CV No. 67980
is AFFIRMED. Costs against petitioner.
294
G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO CRUZ, petitioners,

vs.
HON. COURT OF APPEALS, and MERLE V. REYES, doing business under the name and style "Melissa's RTW," respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila Law Offices for petitioners.
Roberto B. Lugue for private respondent.
CRUZ, J.:
The sole issue raised in this case is whether or not the private respondent has a cause of action against the petitioners for their encashment and
payment to another person of certain crossed checks issued in her favor.
The private respondent is engaged in the business of ready-to-wear garments under the firm name "Melissa's RTW." She deals with, among other
customers, Robinson's Department Store, Payless Department Store, Rempson Department Store, and the Corona Bazaar.
These companies issued in payment of their respective accounts crossed checks payable to Melissa's RTW in the amounts and on the dates
indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January 19, 1982

Robinson's FEBTC 4,140.00 December 18, 1981
Robinson's FEBTC 1,650.00 December 24, 1981
Robinson's FEBTC 1,980.00 January 12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22, 1981
When she went to these companies to collect on what she thought were still unpaid accounts, she was informed of the issuance of the above-listed
crossed checks. Further inquiry revealed that the said checks had been deposited with the Associated Bank (hereinafter, "the Bank") and
subsequently paid by it to one Rafael Sayson, one of its "trusted depositors," in the words of its branch manager and co-petitioner, Conrado Cruz,
Sayson had not been authorized by the private respondent to deposit and encash the said checks.
The private respondent sued the petitioners in the Regional Trial Court of Quezon City for recovery of the total value of the checks plus damages.
After trial, judgment was rendered requiring them to pay the private respondent the total value of the subject checks in the amount of P15,805.00
plus 12% interest, P50,000.00 actual damages, P25,000.00 exemplary damages, P5,000.00 attorney's fees, and the costs of the suit. 1
The petitioners appealed to the respondent court, reiterating their argument that the private respondent had no cause of action against them and
should have proceeded instead against the companies that issued the checks. In disposing of this contention, the Court of Appeals 2 said:
The cause of action of the appellee in the case at bar arose from the illegal, anomalous and irregular acts of the appellants
in violating common banking practices to the damage and prejudice of the appellees, in allowing to be deposited and
encashed as well as paying to improper parties without the knowledge, consent, authority or endorsement of the appellee
which totalled P15,805.00, the six (6) checks in dispute which were "crossed checks" or "for payee's account only," the
appellee being the payee.
The three (3) elements of a cause of action are present in the case at bar, namely: (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to
respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of the
plaintiff or constituting a breach thereof. (Republic Planters Bank vs. Intermediate Appellate Court, 131 SCRA 631).
And such cause of action has been proved by evidence of great weight. The contents of the said checks issued by the
customers of the appellee had not been questioned. There is no dispute that the same are crossed checks or for payee's
account only, which is Melissa's RTW. The appellee had clearly shown that she had never authorized anyone to deposit the
said checks nor to encash the same; that the appellants had allowed all said checks to be deposited, cleared and paid to one
Rafael Sayson in violation of the instructions in the said crossed checks that the same were for payee's account only; and
that the appellee maintained a savings account with the Prudential Bank, Cubao Branch, Quezon City which never cleared
the said checks and the appellee had been damaged by such encashment of the same.
295
We affirm.
Under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks. The
crossing is special where the name of a bank or a business institution is written between the two parallel lines, which means that the drawee
should pay only with the intervention of that company. 3 The crossing is general where the words written between the two parallel lines are "and
Co." or "for payee's account only," as in the case at bar. This means that the drawee bank should not encash the check but merely accept it for
deposit. 4
In State Investment House vs. IAC, 5 this Court declared that "the effects of crossing a check are: (1) that the check may not be encashed but only
deposited in the bank; (2) that the check may be negotiated only once –– to one who has an account with a bank; and (3) that the act of crossing
the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the
check pursuant to that purpose."
The effects therefore of crossing a check relate to the mode of its presentment for payment. Under Sec. 72 of the Negotiable Instruments Law,
presentment for payment, to be sufficient, must be made by the holder or by some person authorized to receive payment on his behalf. Who the
holder or authorized person is depends on the instruction stated on the face of the check.
The six checks in the case at bar had been crossed and issued "for payee's account only." This could only signify that the drawers had intended
the same for deposit only by the person indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for violation of the common instruction found on the face of the checks exclusively belongs to the
issuers thereof and not to the payee. Moreover, having acted in good faith as they merely facilitated the encashment of the checks, they cannot be
made liable to the private respondent.
The subject checks were accepted for deposit by the Bank for the account of Rafael Sayson although they were crossed checks and the payee was
not Sayson but Melissa's RTW. The Bank stamped thereon its guarantee that "all prior endorsements and/or lack of endorsements (were)
guaranteed." By such deliberate and positive act, the Bank had for all legal intents and purposes treated the said checks as negotiable instruments
and, accordingly, assumed the warranty of the endorser.
The weight of authority is to the effect that "the possession of check on a forged or unauthorized indorsement is wrongful, and when the money is
collected on the check, the bank can be held 'for moneys had and received." 6 The proceeds are held for the rightful owner of the payment and
may be recovered by him. The position of the bank taking the check on the forged or unauthorized indorsement is the same as if it had taken the
check and collected without indorsement at all. The act of the bank amounts to conversion of the check. 7
It is not disputed that the proceeds of the subject checks belonged to the private respondent. As she had not at any time authorized Rafael Sayson
to endorse or encash them, there was conversion of the funds by the Bank.
When the Bank paid the checks so endorsed notwithstanding that title had not passed to the endorser, it did so at its peril and became liable to the
payee for the value of the checks. This liability attached whether or not the Bank was aware of the unauthorized endorsement. 8
The petitioners were negligent when they permitted the encashment of the checks by Sayson. The Bank should have first verified his right to
endorse the crossed checks, of which he was not the payee, and to deposit the proceeds of the checks to his own account. The Bank was by reason
of the nature of the checks put upon notice that they were issued for deposit only to the private respondent's account. Its failure to inquire into
Sayson's authority was a breach of a duty it owed to the private respondent.
As the Court stressed in Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corp., 9 "the law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high standard of conduct."
The petitioners insist that the private respondent has no cause of action against them because they have no privity of contract with her. They also
argue that it was Eddie Reyes, the private respondent's own husband, who endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed checks, we hold that the Bank would still be liable to the private respondent because he was
not authorized to make the endorsements. And even if the endorsements were forged, as alleged, the Bank would still be liable to the private
respondent for not verifying the endorser's authority. There is no substantial difference between an actual forging of a name to a check as an
endorsement by a person not authorized to make the signature and the affixing of a name to a check as an endorsement by a person not authorized
to endorse it. 10
The Bank does not deny collecting the money on the endorsement. It was its responsibility to inquire as to the authority of Rafael Sayson to
deposit crossed checks payable to Melissa's RTW upon a prior endorsement by Eddie Reyes. The failure of the Bank to make this inquiry was a
breach of duty that made it liable to the private respondent for the amount of the checks.
296
There being no evidence that the crossed checks were actually received by the private respondent, she would have a right of action against the
drawer companies, which in turn could go against their respective drawee banks, which in turn could sue the herein petitioner as collecting bank.
In a similar situation, it was held that, to simplify proceedings, the payee of the illegally encashed checks should be allowed to recover directly
from the bank responsible for such encashment regardless of whether or not the checks were actually delivered to the payee. 11 We approve such
direct action in the case at bar.
It is worth repeating that before presenting the checks for clearing and for payment, the Bank had stamped on the back thereof the words: "All
prior endorsements and/or lack of endorsements guaranteed," and thus made the assurance that it had ascertained the genuineness of all prior
endorsements.
We find that the respondent court committed no reversible error in holding that the private respondent had a valid cause of action against the
petitioners and that the latter are indeed liable to her for their unauthorized encashment of the subject checks. We also agree with the reduction of
the award of the exemplary damages for lack of sufficient evidence to support them.
WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered.
297
G.R. No. 171998 October 20, 2010
ANAMER SALAZAR, Petitioner,

vs.
J.Y. BROTHERS MARKETING CORPORATION, Respondent.
DECISION
PERALTA, J.:
Before us is a petition for review seeking to annul and set aside the Decision 1 dated September 29, 2005 and the Resolution2 dated March 2, 2006
of the Court of Appeals (CA) in CA-G.R. CV No. 83104.
The facts, as found by the Court of Appeals, are not disputed, thus:
J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling sugar, rice and other commodities. On October
15, 1996, Anamer Salazar, a freelance sales agent, was approached by Isagani Calleja and Jess Kallos, if she knew a supplier of rice. Answering
in the positive, Salazar accompanied the two to J.Y. Bros. As a consequence, Salazar with Calleja and Kallos procured from J. Y. Bros. 300
cavans of rice worth ₱214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check No. 067481 dated October
15, 1996 issued by Nena Jaucian Timario in the amount of ₱214,000.00 with the assurance that the check is good as cash. On that assurance, J.Y.
Bros. parted with 300 cavans of rice to Salazar. However, upon presentment, the check was dishonored due to "closed account."
Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross Solid Bank Check No. PA365704
dated October 29, 1996 again issued by Nena Jaucian Timario in the amount of ₱214,000.00 but which, just the same, bounced due to insufficient
funds. When despite the demand letter dated February 27, 1997, Salazar failed to settle the amount due J.Y. Bros., the latter charged Salazar and
Timario with the crime of estafa before the Regional Trial Court of Legaspi City, docketed as Criminal Case No. 7474.
After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer to evidence. On November 19, 2001, the court a
quo rendered an Order, the dispositive portion of which reads:
WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the crime charged but is hereby held liable for
the value of the 300 bags of rice. Accused Anamer D. Salazar is therefore ordered to pay J.Y. Brothers Marketing Corporation the sum of
₱214,000.00. Costs against the accused.
SO ORDERED.
Aggrieved, accused attempted a reconsideration on the civil aspect of the order and to allow her to present evidence thereon. The motion was
denied. Accused went up to the Supreme Court on a petition for review on certiorari under Rule 45 of the Rules of Court. Docketed as G.R.
151931, in its Decision dated September 23, 2003, the High Court ruled:
IN LIGHT OF ALL THE FOREGOING, the Petition is GRANTED. The Orders dated November 19, 2001 and January 14, 2002 are SET ASIDE
and NULLIFIED. The Regional Trial Court of Legaspi City, Branch 5, is hereby DIRECTED to set Criminal Case No. 7474 for the continuation
of trial for the reception of the evidence-in-chief of the petitioner on the civil aspect of the case and for the rebuttal evidence of the private
complainant and the sur-rebuttal evidence of the parties if they opt to adduce any.
SO ORDERED.3
The Regional Trial Court (RTC) of Legaspi City, Branch 5, then proceeded with the trial on the civil aspect of the criminal case.
On April 1, 2004, the RTC rendered its Decision,4 the dispositive portion of which reads:
WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D. Salazar the civil aspect of the above-entitled
case. No pronouncement as to costs.
Place into the files (archive) the record of the above-entitled case as against the other accused Nena Jaucian Timario. Let an alias (bench) warrant
of arrest without expiry dated issue for her apprehension, and fix the amount of the bail bond for her provisional liberty at 59,000.00 pesos.
SO ORDERED.5
298
The RTC found that the Prudential Bank check drawn by Timario for the amount of ₱214,000.00 was payable to the order of respondent, and
such check was a negotiable order instrument; that petitioner was not the payee appearing in the check, but respondent who had not endorsed the
check, much less delivered it to petitioner. It then found that petitioner’s liability should be limited to the allegation in the amended information
that "she endorsed and negotiated said check," and since she had never been the holder of the check, petitioner's signing of her name on the face
of the dorsal side of the check did not produce the technical effect of an indorsement arising from negotiation. The RTC ruled that after the
Prudential Bank check was dishonored, it was replaced by a Solid Bank check which, however, was also subsequently dishonored; that since the
Solid Bank check was a crossed check, which meant that such check was only for deposit in payee’s account, a condition that rendered such
check non-negotiable, the substitution of a non-negotiable Solid Bank check for a negotiable Prudential Bank check was an essential change
which had the effect of discharging from the obligation whoever may be the endorser of the negotiable check. The RTC concluded that the
absence of negotiability rendered nugatory the obligation arising from the technical act of indorsing a check and, thus, had the effect of novation;
and that the ultimate effect of such substitution was to extinguish the obligation arising from the issuance of the Prudential Bank check.
Respondent filed an appeal with the CA on the sole assignment of error that:
IN BRIEF, THE LOWER COURT ERRED IN RULING THAT ACCUSED ANAMER SALAZAR BY INDORSING THE CHECK (A) DID
NOT BECOME A HOLDER OF THE CHECK, (B) DID NOT PRODUCE THE TECHNICAL EFFECT OF AN INDORSEMENT ARISING
FROM NEGOTIATION; AND (C) DID NOT INCUR CIVIL LIABILITY. 6
After petitioner filed her appellees' brief, the case was submitted for decision. On September 29, 2005, the CA rendered its assailed Decision, the
decretal portion of which reads:
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged Decision is REVERSED and SET ASIDE, and a new
one entered ordering the appellee to pay the appellant the amount of ₱214,000.00, plus interest at the legal rate from the written demand until full
payment. Costs against the appellee.7
In so ruling, the CA found that petitioner indorsed the Prudential Bank check, which was later replaced by a Solid Bank check issued by Timario,
also indorsed by petitioner as payment for the 300 cavans of rice bought from respondent. The CA, applying Sections 63, 8 669 and 2910 of the
Negotiable Instruments Law, found that petitioner was considered an indorser of the checks paid to respondent and considered her as an
accommodation indorser, who was liable on the instrument to a holder for value, notwithstanding that such holder at the time of the taking of the
instrument knew her only to be an accommodation party.
Respondent filed a motion for reconsideration, which the CA denied in a Resolution dated March 2, 2006.
Hence this petition, wherein petitioner raises the following assignment of errors:
1. THE COURT OF APPEALS ERRED IN IGNORING THE RAMIFICATIONS OF THE ISSUANCE OF THE SOLIDBANK
CHECK IN REPLACEMENT OF THE PRUDENTIAL BANK CHECK WHICH WOULD HAVE RESULTED TO THE
NOVATION OF THE OBLIGATION ARISING FROM THE ISSUANCE OF THE LATTER CHECK.
2. THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT OF LEGASPI
CITY, BRANCH 5, DISMISSING AS AGAINST THE PETITIONER THE CIVIL ASPECT OF THE CRIMINAL ACTION ON
THE GROUND OF NOVATION OF OBLIGATION ARISING FROM THE ISSUANCE OF THE PRUDENTIAL BANK CHECK.
3. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION WHEN IT DENIED THE MOTION FOR RECONSIDERATION OF THE PETITIONER ON THE GROUND
THAT THE ISSUE RAISED THEREIN HAD ALREADY BEEN PASSED UPON AND CONSIDERED IN THE DECISION
SOUGHT TO BE RECONSIDERED WHEN IN TRUTH AND IN FACT SUCH ISSUE HAD NOT BEEN RESOLVED AS YET.11
Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the respondent, in replacement of the dishonored
Prudential Bank check, amounted to novation that discharged the latter check; that respondent's acceptance of the Solid Bank check,
notwithstanding its eventual dishonor by the drawee bank, had the effect of erasing whatever criminal responsibility, under Article 315 of the
Revised Penal Code, the drawer or indorser of the Prudential Bank check would have incurred in the issuance thereof in the amount of
₱214,000.00; and that a check is a contract which is susceptible to a novation just like any other contract.
Respondent filed its Comment, echoing the findings of the CA. Petitioner filed her Reply thereto.
We find no merit in this petition.
Section 119 of the Negotiable Instrument Law provides, thus:
SECTION 119. Instrument; how discharged. – A negotiable instrument is discharged:
299
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. (Emphasis ours)
And, under Article 1231 of the Civil Code, obligations are extinguished:
xxxx
(6) By novation.
Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the dishonored Prudential bank check resulted to novation
which discharged the latter check is unmeritorious.
In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc.,12 we stated the concept of novation, thus:
x x x Novation is done by the substitution or change of the obligation by a subsequent one which extinguishes the first, either by changing the
object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. Novation
may:
[E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is
never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their
intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the
incompatibility between the old and new obligation be total on every point such that the old obligation is completely superceded by the new one.
The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the
subsequent obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead.
This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all parties
concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation. Novation is merely
modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest
rates or an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing the first but would merely
supplement it or supplant some but not all of its provisions.)
The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds
other obligations not incompatible with the old ones or the new contract merely supplements the old one.13
In Nyco Sales Corporation v. BA Finance Corporation,14 we found untenable petitioner Nyco's claim that novation took place when the
dishonored BPI check it endorsed to BA Finance Corporation was subsequently replaced by a Security Bank check, 15 and said:
There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which
substitutes the same. First, novation must be explicitly stated and declared in unequivocal terms as novation is never presumed. Secondly, the old
and the new obligations must be incompatible on every point.1avvphi1 The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. In the instant
case, there was no express agreement that BA Finance's acceptance of the SBTC check will discharge Nyco from liability. Neither is there
incompatibility because both checks were given precisely to terminate a single obligation arising from Nyco's sale of credit to BA Finance. As
novation speaks of two distinct obligations, such is inapplicable to this case.16
In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank check, did not result to novation as
there was no express agreement to establish that petitioner was already discharged from his liability to pay respondent the amount of ₱214,000.00
as payment for the 300 bags of rice. As we said, novation is never presumed, there must be an express intention to novate. In fact, when the Solid
Bank check was delivered to respondent, the same was also indorsed by petitioner which shows petitioner’s recognition of the existing obligation
to respondent to pay ₱214,000.00 subject of the replaced Prudential Bank check.
Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility, since the two checks − Prudential and Solid
Bank checks − were precisely for the purpose of paying the amount of ₱214,000.00, i.e., the credit obtained from the purchase of the 300 bags of
300
rice from respondent. Indeed, there was no substantial change in the object or principal condition of the obligation of petitioner as the indorser of
the check to pay the amount of ₱214,000.00. It would appear that respondent accepted the Solid Bank check to give petitioner the chance to pay
her obligation.
Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being a crossed check, which replaced the
dishonored Prudential Bank check, a negotiable check, is a new obligation in lieu of the old obligation arising from the issuance of the Prudential
Bank check, since there was an essential change in the circumstance of each check.
Such argument deserves scant consideration.
Among the different types of checks issued by a drawer is the crossed check.17 The Negotiable Instruments Law is silent with respect to crossed
checks,18 although the Code of Commerce makes reference to such instruments.19 We have taken judicial cognizance of the practice that a check
with two parallel lines in the upper left hand corner means that it could only be deposited and could not be converted into cash.20 Thus, the effect
of crossing a check relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e.,
the payee named therein.21 The change in the mode of paying the obligation was not a change in any of the objects or principal condition of the
contract for novation to take place.22
Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented for payment, the same was again
dishonored; thus, the obligation which was secured by the Prudential Bank check was not extinguished and the Prudential Bank check was not
discharged. Thus, we found no reversible error committed by the CA in holding petitioner liable as an accommodation indorser for the payment
of the dishonored Prudential Bank check.
WHEREFORE, the petition is DENIED. The Decision dated September 29, 2005 and the Resolution dated March 2, 2006, of the Court of
Appeals in CA-G.R. CV No. 83104, are AFFIRMED.
301
G.R. No. 93048 March 3, 1994
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,

vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents.
Teresita Gandiongco Oledan for petitioner.
Acaban & Sabado for private respondent.
NOCON, J.:
For our review is the decision of the Court of Appeals in the case entitled "State Investment House, Inc. v. Bataan Cigar & Cigarette Factory
Inc.,"1 affirming the decision of the Regional Trial Court 2 in a complaint filed by the State Investment House, Inc. (hereinafter referred to as
SIHI) for collection on three unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI). The foregoing
decisions unanimously ruled in favor of SIHI, the private respondent in this case.
Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the
manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales
of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March
1979 in the total amount of P820,000.00.3
Relying on the supplier's representation that he would complete delivery within three months from December 5, 1978, petitioner agreed to
purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier agreement. Again
petitioner issued post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979. 4
During these times, George King was simultaneously dealing with private respondent SIHI. On July 19, 1978, he sold at a discount check TCBT
5518265 bearing an amount of P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as payee to SIHI. On
December 19 and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, 6 both in the amount of P100,000.00, post dated
September 15 & 30, 1979 respectively, drawn by petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's demand, BCCFI issued on March 30, 1979, a
stop payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on
checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as party defendant. The trial court
pronounced SIHI as having a valid claim being a holder in due course. It further said that the non-inclusion of King Tim Pua George as party
defendant is immaterial in this case, since he, as payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from the
drawer, BCCFI.
The Negotiable Instruments Law states what constitutes a holder in due course, thus:
Sec. 52 — A holder in due course is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such
was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the
person negotiating it.
Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of
any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims,
acquired the title as holder in due course.
302
The facts in this present case are on all fours to the case of State Investment House, Inc. (the very respondent in this case) v. Intermediate
Appellate Court 7 wherein we made a discourse on the effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on demand. 8 There are a variety of checks, the more
popular of which are the memorandum check, cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines
are drawn across its face or across a corner thereof. It may be crossed generally or specially.
A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed
generally when only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that the
presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article
541 9 of the Code of Commerce refers to such instruments.
According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be
negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially
crossed, by the bank mentioned between the parallel lines. 10 This is specially true in England where the Negotiable Instrument Law originated.
In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth that banks have become
quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept
second indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a)
the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once — to one who has an account with a
bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. 11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood Industries, Inc. also sold at a discount to SIHI
three post dated crossed checks, issued by Anita Peña Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a
holder in due course, we then said:
The three checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc.
which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named
therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper
presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not
become liable. Consequently, no right of recourse is available to petitioner (SIHI) against the drawer of the subject checks,
private respondent wife (Anita), considering that petitioner is not the proper party authorized to make presentment of the
checks in question.
xxx xxx xxx
That the subject checks had been issued subject to the condition that private respondents (Anita and her husband) on due
date would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the
non-consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc.,
constitutes a good defense against petitioner who is not a holder in due course. 12
It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the
check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good
faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as such the consensus of authority is to the effect that the holder of the
check is not a holder in due course.
In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with
the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in
due course. Consequently, BCCFI cannot be obliged to pay the checks.
The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder
in due course is that the instrument is subject to defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King.
WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is hereby GRANTED. The decision of the
Regional Trial Court as affirmed by the Court of Appeals is hereby REVERSED. Cost against private respondent.
303
G.R. No. 75954 October 22, 1992
PEOPLE OF THE PHILIPPINES, petitioner,

vs.
HON. DAVID G. NITAFAN, Presiding Judge, Regional Trial Court, Branch 52, Manila, and K.T. LIM alias MARIANO
LIM, respondents.
BELLOSILLO, J.:
Failing in his argument that B.P. 22, otherwise known as the "Bouncing Check Law", is unconstitutional, 1 private respondent now argues that the
check he issued, a memorandum check, is in the nature of a promissory note, hence, outside the purview of the statute. Here, his argument must
also fail.
The facts are simple. Private respondent K.T. Lim was charged before respondent court with violation of B.P. 22 in an Information alleging ––
That on . . . January 10, 1985, in the City of Manila . . . the said accused did then and there wilfully, unlawfully and
feloniously make or draw and issue to Fatima Cortez Sasaki . . . Philippine Trust Company Check No. 117383 dated
February 9, 1985 . . . in the amount of P143,000.00, . . . well knowing that at the time of issue he . . . did not have sufficient
funds in or credit with the drawee bank . . . which check . . . was subsequently dishonored by the drawee bank for
insufficiency of funds, and despite receipt of notice of such dishonor, said accused failed to pay said Fatima Cortez Sasaki
the amount of said check or to make arrangement for full payment of the same within five (5) banking days after receiving
said notice. 2
On 18 July 1986, private respondent moved to quash the Information of the ground that the facts charged did not constitute a felony as B.P. 22
was unconstitutional and that the check he issued was a memorandum check which was in the nature of a promissory note, perforce, civil in
nature. On 1 September 1986, respondent judge, ruling that B.P. 22 on which the Information was based was unconstitutional, issued the
questioned Order quashing the Information. Hence, this petition for review on certiorari filed by the Solicitor General in behalf of the
government.
Since the constitutionality of the "Bouncing Check Law" has already been sustained by this Court in Lozano v. Martinez 3 and the seven (7) other
cases decided jointly with it, 4 the remaining issue, as aptly stated by private respondent in his Memorandum, is whether a memorandum check
issued postdated in partial payment of a pre-existing obligation is within the coverage of B.P. 22.
Citing U.S. v. Isham, 5 private respondent contends that although a memorandum check may not differ in form and appearance from an ordinary
check, such a check is given by the drawer to the payee more in the nature of memorandum of indebtedness and, should be sued upon in a civil
action.
We are not persuaded.
A memorandum check is in the form of an ordinary check, with the word "memorandum", "memo" or "mem" written across its face, signifying
that the maker or drawer engages to pay the bona fide holder absolutely, without any condition concerning its presentment. 6 Such a check is an
evidence of debt against the drawer, and although may not be intended to be presented, 7 has the same effect as an ordinary check, 8 and if passed
to the third person, will be valid in his hands like any other check. 9
From the above definition, it is clear that a memorandum check, which is in the form of an ordinary check, is still drawn on a bank and should
therefore be distinguished from a promissory note, which is but a mere promise to pay. If private respondent seeks to equate memorandum check
with promissory note, as he does to skirt the provisions of B.P. 22, he could very well have issued a promissory note, and this would be have
exempted him form the coverage of the law. In the business community a promissory note, certainly, has less impact and persuadability than a
check.
Verily, a memorandum check comes within the meaning of Sec. 185 of the Negotiable Instruments Law which defines a check as "a bill of
exchange drawn on a bank payable on demand." A check is also defined as " [a] written order or request to a bank or persons carrying on the
business of banking, by a party having money in their hands, desiring them to pay, on presentment, to a person therein named or bearer, or to
such person or order, a named sum of money," citing 2 Dan. Neg. Inst. 528; Blair v. Wilson, 28 Gratt. (Va.) 170; Deener v. Brown, 1 MacArth.
(D.C.) 350; In re Brown, 2 Sto. 502, Fed. Cas. No. 1,985. See Chapman v. White, 6 N.Y. 412, 57 Am. Dec 464. 10 Another definition of check is
that is "[a] draft drawn upon a bank and payable on demand, signed by the maker or drawer, containing an unconditional promise to pay a sum
certain in money to the order of the payee," citing State v. Perrigoue, 81 Wash, 2d 640, 503 p. 2d 1063, 1066. 11
A memorandum check must therefore fall within the ambit of B.P. 22 which does not distinguish but merely provides that "[a]ny person who
makes or draws and issues any check knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank . . .
which check is subsequently dishonored . . . shall be punished by imprisonment . . ." (Emphasis supplied ). 12 Ubi lex no distinguit nec nos
distinguere debemus.
304
But even if We retrace the enactment of the "Bouncing Check Law" to determine the parameters of the concept of "check", We can easily glean
that the members of the then Batasang Pambansa intended it to be comprehensive as to include all checks drawn against banks. This was
particularly the ratiocination of Mar. Estelito P. Mendoza, co-sponsor of Cabinet Bill No. 9 which later became B.P. 22, when in response to the
interpellation of Mr. Januario T. Seño, Mr. Mendoza explained that the draft or order must be addressed to a bank or depository, 13 and accepted
the proposed amendment of Messrs. Antonio P. Roman and Arturo M. Tolentino that the words "draft or order", and certain terms which
technically meant promissory notes, wherever they were found in the text of the bill, should be deleted since the bill was mainly directed against
the pernicious practice of issuing checks with insufficient or no funds, and not to drafts which were not drawn against banks. 14
A memorandum check, upon presentment, is generally accepted by the bank. Hence it does not matter whether the check issued is in the nature of
a memorandum as evidence of indebtedness or whether it was issued is partial fulfillment of a pre-existing obligation, for what the law punishes
is the issuance itself of a bouncing check 15 and not the purpose for which it was issuance. The mere act of issuing a worthless check, whether as a
deposit, as a guarantee, or even as an evidence of a pre-existing debt, is malum prohibitum. 16
We are not unaware that a memorandum check may carry with it the understanding that it is not be presented at the bank but will be redeemed by
the maker himself when the loan fall due. This understanding may be manifested by writing across the check "Memorandum", "Memo" or
"Mem." However, with the promulgation of B.P. 22, such understanding or private arrangement may no longer prevail to exempt it from penal
sanction imposed by the law. To require that the agreement surrounding the issuance of check be first looked into and thereafter exempt such
issuance from the punitive provision of B.P. 22 on the basis of such agreement or understanding would frustrate the very purpose for which the
law was enacted — to stem the proliferation of unfunded checks. After having effectively reduced the incidence of worthless checks changing
hands, the country will once again experience the limitless circulation of bouncing checks in the guise of memorandum checks if such checks will
be considered exempt from the operation of B.P. 22. It is common practice in commercial transactions to require debtors to issue checks on which
creditors must rely as guarantee of payment. To determine the reasons for which checks are issued, or the terms and conditions for their issuance,
will greatly erode the faith the public responses in the stability and commercial value of checks as currency substitutes, and bring about havoc in
trade and in banking communities. 17
WHEREFORE, the petition is GRANTED and the Order of respondent Judge of 1 September 1986 is SET ASIDE. Consequently, respondent
Judge, or whoever presides over the Regional Trial Court of Manila, Branch 52, is hereby directed forthwith to proceed with the hearing of the
case until terminated.
305
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit box with respect to its contents
placed by the latter one of bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into an agreement whereby the
former purchased from the latter two (2) parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was paid as
downpayment while the balance was covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a
Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the petitioner upon full
payment of the purchase price and that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and
292434, shall be deposited in a safety deposit box of any bank. The same could be withdrawn only upon the joint signatures of a representative of
the petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety
Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking corporation hereinafter referred to as the
respondent Bank. For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no
liability in connection therewith.1
After the execution of the contract, two (2) renter's keys were given to the renters — one to Aguirre (for the petitioner) and the other to the
Pugaos. A guard key remained in the possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for the guard key and
the other for the renter's key, and can be opened only with the use of both keys. Petitioner claims that the certificates of title were placed inside
the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00 per square meter which, as
petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire property. Mrs. Ramos
demanded the execution of a deed of sale which necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates of
title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates. Because of the delay in the
reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed to
realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a complaint 2 for damages against the respondent Bank
with the Court of First Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim,3 respondent Bank alleged that the petitioner has no cause of action because of paragraphs 13 and 14 of the
contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained in the box could not give rise to an action against it. It
then interposed a counterclaim for exemplary damages as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an
answer to the counterclaim.4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro Manila, rendered a
decision5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the amount of FIVE
THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff.6
306
The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of lease, the Bank has no liability
for the loss of the certificates of title. The court declared that the said provisions are binding on the parties.
Its motion for reconsideration7 having been denied, petitioner appealed from the adverse decision to the respondent Court of Appeals which
docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the challenged decision because the trial court
erred in (a) absolving the respondent Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law, public order
and public policy, the provisions in the contract for lease of the safety deposit box absolving the Bank from any liability for loss, (c) not
concluding that in this jurisdiction, as well as under American jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to
the Bank and denying the petitioner's prayer for nominal and exemplary damages and attorney's fees.8
In its Decision promulgated on 4 July 1989,9 respondent Court affirmed the appealed decision principally on the theory that the contract (Exhibit
"2") executed by the petitioner and respondent Bank is in the nature of a contract of lease by virtue of which the petitioner and its co-renter were
given control over the safety deposit box and its contents while the Bank retained no right to open the said box because it had neither the
possession nor control over it and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a
price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall
be valid.
It invoked Tolentino vs. Gonzales 11 — which held that the owner of the property loses his control over the property leased during the
period of the contract — and Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest shall be bound to collect
the latter when it becomes due, and to take such steps as may be necessary in order that the securities may preserve their
value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents of the box. The stipulation
absolving the defendant-appellee from liability is in accordance with the nature of the contract of lease and cannot be regarded as
contrary to law, public order and public policy." 12 The appellate court was quick to add, however, that under the contract of lease of
the safety deposit box, respondent Bank is not completely free from liability as it may still be made answerable in case unauthorized
persons enter into the vault area or when the rented box is forced open. Thus, as expressly provided for in stipulation number 8 of the
contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the
Bank will not be responsible for the contents of any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15 petitioner took this recourse under
Rule 45 of the Rules of Court and urges Us to review and set aside the respondent Court's ruling. Petitioner avers that both the respondent Court
and the trial court (a) did not properly and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of
jurisdiction amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents adhered to and affirmed by
decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the respondent Court and the motion to reconsider the latter's decision. In a nutshell,
petitioner maintains that regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of
deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title pursuant to Article 1972 of the
said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the depositor, or to his heirs
and successors, or to the person who may have been designated in the contract. His responsibility, with regard to the
safekeeping and the loss of the thing, shall be governed by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that the depositary must
observe.
Petitioner then quotes a passage from American Jurisprudence 17 which is supposed to expound on the prevailing rule in the United
States, to wit:
The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or safe and the lessee takes
possession of the box or safe and places therein his securities or other valuables, the relation of bailee and bail or is created
between the parties to the transaction as to such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the character or description of the
307
property which is deposited in such safe-deposit box or safe does not change that relation. That access to the contents of the
safe-deposit box can be had only by the use of a key retained by the lessee ( whether it is the sole key or one to be used in
connection with one retained by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in
such a case, a delivery of exclusive possession and control to the deposit company, and that therefore the situation is
entirely different from that of ordinary bailment, has been generally rejected by the courts, usually on the ground that as
possession must be either in the depositor or in the company, it should reasonably be considered as in the latter rather than
in the former, since the company is, by the nature of the contract, given absolute control of access to the property, and the
depositor cannot gain access thereto without the consent and active participation of the company. . . . (citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety deposit box in consideration of a
fixed amount at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy and should be declared null
and void. In support thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract 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.
After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to simultaneously submit their
respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary contract of lease as defined in
Article 1643 of the Civil Code. However, We do not fully subscribe to its view that the same is a contract of deposit that is to be strictly governed
by the provisions in the Civil Code on deposit; 19 the contract in the case at bar is a special kind of deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not given to the
joint renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the
renters could open the box. On the other hand, the respondent Bank could not likewise open the box without the renter's key. In this case, the said
key had a duplicate which was made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also relied upon by the respondent
Court, be invoked as an argument against the deposit theory. Obviously, the first paragraph of such provision cannot apply to a depositary of
certificates, bonds, securities or instruments which earn interest if such documents are kept in a rented safety deposit box. It is clear that the
depositary cannot open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support even in American jurisprudence. We agree with
the petitioner that under the latter, the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its customer with
respect to the contents of the box is that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view
because:
There is, however, some support for the view that the relationship in question might be more properly characterized as that
of landlord and tenant, or lessor and lessee. It has also been suggested that it should be characterized as that of licensor and
licensee. The relation between a bank, safe-deposit company, or storage company, and the renter of a safe-deposit box
therein, is often described as contractual, express or implied, oral or written, in whole or in part. But there is apparently no
jurisdiction in which any rule other than that applicable to bailments governs questions of the liability and rights of the
parties in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this jurisdiction, the prevailing
rule in the United States has been adopted. Section 72 of the General Banking Act 23 pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions other than building
and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the
safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as depositories or as
agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in custody of funds, documents and
other valuable objects for safekeeping. The renting out of the safety deposit boxes is not independent from, but related to or in conjunction with,
308
this principal function. A contract of deposit may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties
thereto 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. The depositary's responsibility for the safekeeping of the objects deposited in the case at bar
is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of
fraud, negligence, delay or contravention of the tenor of the agreement. 26 In the absence of any stipulation prescribing the degree of diligence
required, that of a good father of a family is to be observed. 27 Hence, any stipulation exempting the depositary from any liability arising from the
loss of the thing deposited on account of fraud, negligence or delay would be void for being contrary to law and public policy. In the instant case,
petitioner maintains that conditions 13 and 14 of the questioned contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no
liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said
provisions are inconsistent with the respondent Bank's responsibility as a depositary under Section 72(a) of the General Banking Act.
Both exempt the latter from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the
Bank will not be responsible for the contents of any safe rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that
the Bank has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its
premises and is under its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier,
renters cannot open their respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the
extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the
relation is a contractual one, may by special contract define their respective duties or provide for increasing or limiting the
liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear
that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the
relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning.
The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its
agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for
the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents
thereof through its own negligence, the view has been taken that such a lessor may limits its liability to some extent by
agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed, but on grounds quite
different from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of
the Court of Appeals, be based on or proceed from a characterization of the impugned contract as a contract of lease, but rather on the fact that no
competent proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the Pugaos to the effect that
the certificates of title were withdrawable from the safety deposit box only upon both parties' joint signatures, and that no evidence was submitted
to reveal that the loss of the certificates of title was due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's
determination that the contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one (1) renter's
key, it was obvious that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own
guard key, could open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had been established, the trial court
erred in condemning the petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision (dispositive portion) of public
respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4 July 1989 Decision of the
respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made above on the nature of the
relationship between the parties in a contract of lease of safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED
and the instant Petition for Review is otherwise DENIED for lack of merit.
309
August 16, 2016
G.R. No. 198756
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY,
PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK, AND
PLANTERS DEVELOPMENT BANK, Petitioners
vs.
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-Intervenors
x-----------------------x
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intevenor,

vs.
REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER, AND BUREAU OF
TREASURY, Respondents.
RESOLUTION
LEONEN, J.:
This resolves separate motions for reconsideration and clarification filed by the Office of the Solicitor General 1 and petitioners-intervenors Rizal
Commercial Banking Corporation and RCBC Capital Corporation 2 of our Decision dated January 13, 2015, which: (1) granted the Petition and
Petitions-in-Intervention and nullified Bureau of Internal Revenue (BIR) Ruling Nos. 370-2011 and DA 378-2011; and (2) reprimanded the
Bureau of Treasury for its continued retention of the amount corresponding to the 20% final withholding tax that it withheld on October 18, 2011,
and ordered it to release the withheld amount to the bondholders.
In the notice to all Government Securities Eligible Dealers (GSEDs) entitled Public Offering of Treasury Bonds3 (Public Offering) dated October
9, 2001, the Bureau of Treasury announced that "P30.0 [billion] worth of 10- year Zero[-]Coupon Bonds [would] be auctioned on October 16,
2001[.]"4 It stated that "the issue being limited to 19 lenders and while taxable shall not be subject to the 20% final withholding [tax]."5
On October 12, 2001, the Bureau of Treasury released a memo on the Formula for the Zero-Coupon Bond. 6 The memo stated in part that the
formula, in determining the purchase price and settlement amount, "is only applicable to the zeroes that are not subject to the 20% final
withholding due to the 19 buyer/lender limit."7
On October 15, 2001, one (1) day before the auction date, the Bureau of Treasury issued the Auction Guidelines for the 10-year Zero-Coupon
Treasury Bond to be Issued on October 16, 2001 (Auction Guidelines). 8 The Auction Guidelines reiterated that the Bonds to be auctioned are
"[n]ot subject to 20% withholding tax as the issue will be limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue
Regulation No. 020 2001 )."9
At the auction held on October 16, 2001, Rizal Commercial Banking Corporation (RCBC) participated on behalf of Caucus of Development
NGO Networks (CODE-NGO) and won the bid. 10 Accordingly, on October 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds
at yield-tomaturity of 12.75% to RCBC for approximately P10.17 billion, 11 resulting in a discount of approximately P24.83 billion.
Likewise, on October 16, 2001, RCBC Capital entered into an underwriting agreement 12 with CODE-NGO, where RCBC Capital was appointed
as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds. 13 RCBC Capital agreed to underwrite14 on a firm basis the
offering, distribution, and sale of the P3 5 billion Bonds at the price of Pll,995,513,716.51. 15 In Section 7(r) of the underwriting agreement,
CODE-NGO represented that "[a]ll income derived from the Bonds, inclusive of premium on redemption and gains on the trading of the same,
are exempt from all forms of taxation as confirmed by [the] Bureau of Internal Revenue . . . letter rulings dated 31 May 2001 and 16 August
2001, respectively." 16
RCBC Capital sold and distributed the Government Bonds for an issue price of Pll,995,513,716.51. 17 Banco de Oro, et al. purchased the PEACe
Bonds on different dates. 18
On October 7, 2011, barely 11 days before maturity of the PEACe Bonds, the Commissioner of Internal Revenue issued BIR Ruling No. 370-
201119 declaring that the PEACe Bonds, being deposit substitutes, were subject to 20% final withholding tax. 20 Under this ruling, the Secretary
of Finance directed the Bureau of Treasury to withhold a 20% final tax from the face value of the PEACe Bonds upon their payment at maturity
on October 18, 2011.21
On October 17, 2011, replying to an urgent query from the Bureau of Treasury, the Bureau of Internal Revenue issued BIR Ruling No. DA 378-
201122 clarifying that the final withholding tax due on the discount or interest earned on the PEACe Bonds should "be imposed and withheld not
only on RCBC/CODE NGO but also [on] 'all subsequent holders of the Bonds. "' 23
310
On October 17, 2011, petitioners filed before this Court a Petition for Certiorari, Prohibition, and/or Mandamus (with urgent application for a
temporary restraining order and/or writ of preliminary injunction). 24
On October 18, 2011, this Court issued a temporary restraining order25 "enjoining the implementation of BIR Ruling No. 370-2011 against the
[PEACe Bonds,] ... subject to the condition that the 20% final withholding tax on interest income therefrom shall be withheld by the petitioner
banks and placed in escrow pending resolution of [the] petition."26
RCBC and RCBC Capital, as well as CODE-NGO separately moved for leave of court to intervene and to admit the Petition-in-Intervention. The
Motions were granted by this Court. 27
Meanwhile, on November 9, 2011, petitioners filed their Manifestation with Urgent Ex Parte Motion to Direct Respondents to Comply with the
TR0.28
On November 15, 2011, this Court directed respondents to: "(1) show cause why they failed to comply with the October 18, 2011 resolution; and
(2) comply with the Court's resolution in order that petitioners may place the corresponding funds in escrow pending resolution of the petition.
" 29
On December 6, 2011, this Court noted respondents' compliance. 30
On November 27, 2012, petitioners filed their Manifestation with Urgent Reiterative Motion [To Direct Respondents to Comply with the
Temporary Restraining Order]. 31
On December 4, 2012, this Court noted petitioners' Manifestation with Urgent Reiterative Motion and required respondents to
comment. 32 Respondents filed their Comment, 33 to which petitioners filed their Reply. 34
On January 13, 2015, this Court promulgated the Decision 35 granting the Petition and the Petitions-in-Intervention. Applying Section 22(Y) of the
National Internal Revenue Code, we held that the number of lenders/investors at every transaction is determinative of whether a debt instrument
is a deposit substitute subject to 20% final withholding tax. When at any transaction, funds are simultaneously obtained from 20 or more
lenders/investors, there is deemed to be a public borrowing and the bonds at that point in time are deemed deposit substitutes. Consequently, the
seller is required to withhold the 20% final withholding tax on the imputed interest income from the bonds. We further declared void BIR Rulings
Nos. 370-2011 and DA 378-2011 for having disregarded the 20-lender rule provided in Section 22(Y). The Decision disposed as follows:
WHEREFORE, the petition for review and petitions-in- intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA 378- 2011
are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount corresponding to the 20% final
withholding tax despite this court's directive in the temporary restraining order and in the resolution dated November 15, 2011 to deliver the
amounts to the banks to be placed in escrow pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay to the bondholders the amount corresponding to the 20%
final withholding tax that it withheld on October 18, 2011. 36
On March 13, 2015, respondents filed by registered mail their Motion for Reconsideration and Clarification. 37
On March 16, 2015, petitioners-intervenors RCBC and RCBC Capital moved for clarification and/or partial reconsideration.38
On July 6, 2015, petitioners Banco de Oro, et al. filed their
Consolidated Comment39 on respondents' Motion for Reconsideration and Clarification and petitioners-intervenors RCBC and RCBC Capital
Corporation's Motion for Clarification and/or Partial Reconsideration.
On October 29, 2015, petitioners Banco de Oro, et al. filed their Urgent Reiterative Motion [to Direct Respondents to Comply with the
Temporary Restraining Order].40
The issues raised in the motions revolve around the following:
First, the proper interpretation and application of the 20-lender rule under Section 22(Y) of the National Internal Revenue Code, particularly in
relation to issuances of government debt instruments;
311
Second, whether the seller in the secondary market can be the proper withholding agent of the final withholding tax due on the yield or interest
income derived from government debt instruments considered as deposit substitutes;
Third, assuming the PEACe Bonds are considered "deposit substitutes," whether government or the Bureau of Internal Revenue is estopped from
imposing and/or collecting the 20% final withholding tax from the face value of these Bonds. Further:
(a) Will the imposition of the 20% final withholding tax violate the non-impairment clause of the Constitution?
(b) Will it constitute a deprivation of property without due process of law?
Lastly, whether the respondent Bureau of Treasury is liable to pay 6% legal interest.
Before going into the substance of the motions for reconsideration, we find it necessary to clarify on the procedural aspects of this case. This is
with special emphasis on the jurisdiction of the Court of Tax Appeals in view of the previous conflicting rulings of this Court.
Earlier, respondents questioned the propriety of petitioners' direct resort to this Court. They argued that petitioners should have challenged first
the 2011 Bureau of Internal Revenue rulings before the Secretary of Finance, consistent with the doctrine on exhaustion of administrative
remedies.
In the assailed Decision, we agreed that interpretative rulings of the Bureau of Internal Revenue are reviewable by the Secretary of Finance under
Section 441 of the National Internal Revenue Code. However, we held that because of the special circumstances availing in this case-namely: the
question involved is purely legal; the urgency of judicial intervention given the impending maturity of the PEA Ce Bonds; and the futility of an
appeal to the Secretary of Finance as the latter appeared to have adopted the challenged Bureau of Internal Revenue rulings-there was no need for
petitioners to exhaust all administrative remedies before seeking judicial relief.
We also stated that:
[T]he jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The questioned BIR
Ruling Nos. 370-2011 and DA 378-2011 were issued in connection with the implementation of the 1997 National Internal Revenue Code on the
taxability of the _interest income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No. 9282, such rulings of the
Commissioner of Internal Revenue are appealable to that court, thus:
SEC. 7. Jurisdiction. -The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or inaction of the
Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry or the Secretary
of Agriculture or the Central Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty (30) days
after the receipt of such decision or ruling or after the expiration of the period fixed by law for action as referred to in Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the National Internal Revenue Code,
the Tariff and Customs Code or the Local Government Code shall be maintained, except as ·herein provided, until and unless an appeal has been
previously filed with the CTA and disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal, citing Rodriguez v. Blaquera, this court emphasized the jurisdiction of the Court of Tax Appeals
over rulings of the Bureau of Internal Revenue, thus:
312
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that the jurisdiction to review the
rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax Code on the
taxability of pawnshops.
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. - The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax under certain category
enumerated in Section 163 and 165 of this Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make rulings
or opinions in connection with the implementation of the provisions of internal revenue laws, including ruling on the classification of articles of
sales and similar purposes."
....
The Court, in Rodriguez etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an attempt to nullify General Circular
No. V-148, which does not adjudicate or settle any controversy, and that, accordingly, this case is not within the jurisdiction of the Court of Tax
Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes and license fees to adhere
strictly to the interpretation given by the defendant to the statutory provisions above mentioned, as set forth in the Circular. The same
incorporates, therefore, a decision of the Collector of Internal Revenue (now Commissioner of Internal Revenue) on the manner of enforcement
of the said statute, the administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview of
Republic Act No. 1125, Section 7 of which provides that the Court of Tax Appeals 'shall exercise exclusive appellate jurisdiction to review by
appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising under the National Internal Revenue Code or other law or part of
the law administered by the Bureau of Internal Revenue. "[['42]]
In Commissioner of Internal Revenue v. Leal, 43 the Commissioner issued Revenue Memorandum Order (RMO) No. 15-91 imposing 5% lending
investors tax on pawnshops, and Revenue Memorandum Circular (RMC) No. 43-91 subjecting the pawn ticket to documentary stamp tax.44 Leal,
a pawnshop owner and operator, asked for reconsideration of the revenue orders, but it was denied by the Commissioner in BIR Ruling No. 221-
91.45 Thus, Leal filed before the Regional Trial Court a petition for prohibition seeking to prohibit the Commissioner from implementing the
revenue orders. 46 This Court held that Leal should have filed her petition for prohibition before the Court of Tax Appeals, not the Regional Trial
Court, because "the questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner implementing the Tax
Code on the taxability of pawnshops."47 This Court held that such rulings in connection with the implementation of internal revenue laws are
appealable to the Court of Tax Appeals under Republic Act No. 1125, as amended. 48
Likewise, in Asia International Auctioneers, Inc. v. Hon. Parayno, Jr., 49 this Court upheld the jurisdiction of the Court of Tax Appeals over the
Regional Trial Courts, on the issue of the validity of revenue memorandum circulars. 50 It explained that "the assailed revenue regulations and
revenue memorandum circulars [were] actually rulings or opinions of the [Commissioner of Internal Revenue] on the tax treatment of motor
vehicles sold at public auction within the [Subic Special Economic Zone] to implement Section 12 of [Republic Act] No. 7227." This Court
further held that the taxpayers' invocation of this Court's intervention was premature for its failure to first ask the Commissioner of Internal
Revenue for reconsideration of the assailed revenue regulations and revenue memorandum circulars.
However, a few months after the promulgation of Asia International Auctioneers, British American Tobacco v. Camacho51 pointed out that
although Section 7 of Republic Act No. 1125, as amended, confers on the Court of Tax Appeals jurisdiction to resolve tax disputes in general,
this does not include cases where the constitutionality of a law or rule is challenged. Thus:
The jurisdiction of the Court of Tax Appeals is defined in Republic Act No. 1125, as amended by Republic Act No. 9282. Section 7 thereof
states, in pertinent part:
....
While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not include cases where the constitutionality
of a law or rule is challenged. Where what is assailed is the validity or constitutionality of a law, or a rule or regulation issued by the
administrative agency in the performance of its quasi-legislative function, the regular courts have jurisdiction to pass upon the same. The
313
determination of whether a specific rule or set of rules issued by an administrative agency contravenes the law or the constitution is within the
jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or
executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts. This is
within the scope of judicial power, which includes the authority of the courts to determine in an appropriate action the validity of the acts of the
political departments. Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally
demandable and enforceable, and to determin whether or not there has been a grave abuse of dicretion amounting to lack or execss of jurisdiction
on the part of any branch or instrumentality of the Government.
In Drilon v. Lim, it was held:
We stress at the outset that the lower court had jurisdiction to consider the constitutionality of Section 187, this authority being embraced in the
general definition of the judicial power to determine what are the valid and binding laws by the criterion of their conformity to the fundamental
law. Specifically, B.P. 129 vests in the regional trial courts jurisdiction over all civil cases in which the subject of the litigation is incapable of
pecuniary estimation, even as the accused in a criminal action has the right to question in his defense the constitutionality of a law he is charged
with violating and of the proceedings taken against him, particularly as they contravene the Bill of Rights. Moreover, Article X, Section 5(2), of
the Constitution vests in the Supreme Court appellate jurisdiction over final judgments and orders of lower courts in all cases in which the
constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction,
ordinance, or regulation is in question.
The petition for injunction filed by petitioner before the RTC is a direct attack on the constitutionality of Section 145(C) of the NIRC, as
amended, and the validity of its implementing rules and regulations. In fact, the RTC limited the resolution of the subject case to the issue of the
constitutionality of the assailed provisions. The determination of whether the assailed law and its implementing rules and regulations contravene
the Constitution is within the jurisdiction of regular courts. The Constitution vests the power of judicial review or the power to declare a law,
treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or regulation in the courts, including the regional
trial courts. Petitioner, therefore, properly filed the subject case before the RTC. 52 (Citations omitted)
British American Tobacco involved the validity of: (1) Section 145 of Republic Act No. 8424; (2) Republic Act No. 9334, which further
amended Section 145 of the National Internal Revenue Code on January 1, 2005; (3) Revenue Regulations Nos. 1-97, 9-2003, and 22-2003; and
(4) RMO No. 6- 2003.53
A similar ruling was made in Commissioner of Customs v. Hypermix Feeds Corporation. 54 Central to the case was Customs Memorandum Order
(CMO) No. 27-2003 issued by the Commissioner of Customs. This issuance provided for the classification of wheat for tariff purposes. In
anticipation of the implementation of the CMO, Hypermix filed a Petition for Declaratory Relief before the Regional Trial Court. Hypermix
claimed that said CMO was issued without observing the provisions of the Revised Administrative Code; was confiscatory; and violated the equal
protection clause of the 1987 Constitution. 55 The Commissioner of Customs moved to dismiss on the ground of lack of jurisdiction. 56 On the
issue regarding declaratory relief, this Court ruled that the petition filed by Hypermix had complied with all the requisites for an action of
declaratory relief to prosper. Moreover:
Indeed, the Constitution vests the power of judicial review or the power to declare a law, treaty, international or executive agreement, presidential
decree, order, instruction, ordinance, or regulation in the courts, including the regional trial courts. This is within the scope of judicial power,
which includes the authority of the courts to determine in an appropriate action the validity of the acts of the political departments. 57
We revert to the earlier rulings in Rodriguez, Leal, and Asia International Auctioneers, Inc. The Court of Tax Appeals has exclusive jurisdiction
to determine the constitutionality or validity of tax laws, rules and regulations, and other administrative issuances of the Commissioner of Internal
Revenue.
Article VIII, Section 1 of the 1987 Constitution provides the general definition of judicial power:
ARTICLE VIII
JUDICIAL DEPARTMENT
Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as may be established by law.
Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and
enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of
any branch or instrumentality of the Government. (Emphasis supplied)
Based on this constitutional provision, this Court recognized, for the first time, in The City of Manila v. Hon. Grecia-Cuerdo,58 the Court of Tax
Appeals' jurisdiction over petitions for certiorari assailing interlocutory orders issued by the Regional Trial Court in a local tax case. Thus:
[W]hile there is no express grant of such power, with respect to the CTA, Section 1, Article VIII of the 1987 Constitution provides, nonetheless,
that judicial power shall be vested in one Supreme Court and in such lower courts as may be established by law and that judicial power includes
the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine
314
whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government.
On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the CTA includes that of determining whether
or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order
in cases falling within the exclusive appellate jurisdiction of the tax court. It, thus, fo1lows that the CTA, by constitutional mandate, is vested
with jurisdiction to issue writs of certiorari in these cases. 59 (Emphasis in the original)
This Court further explained that the Court of Tax Appeals' authority to issue writs of certiorari is inherent in the exercise of its appellate
jurisdiction.
A grant of appellate jurisdiction implies that there is included in it the power necessary to exercise it effectively, to make all orders that will
preserve the subject of the action, and to give effect to the final determination of the appeal. It carries with it the power to protect that jurisdiction
and to make the decisions of the court thereunder effective. The court, in aid of its appellate jurisdiction, has authority to control all auxiliary and
incidental matters necessary to the efficient and proper exercise of that jurisdiction. For this purpose, it may, when necessary, prohibit or restrain
the performance of any act which might interfere with the proper exercise of its rightful jurisdiction in cases pending before it.
Lastly, it would not be amiss to point out that a court which is endowed with a particular jurisdiction should have powers which are necessary to
enable it to act effectively within such jurisdiction. These should be regarded as powers which are inherent in its jurisdiction and the court must
possess them in order to enforce its rules of practice and to suppress any abuses of its process and to defeat any attempted thwarting of such
process.
In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as the CA and shall possess all the inherent powers of a court
of justice.
Indeed, courts possess certain inherent powers which may be said to be implied from a general grant of jurisdiction, in addition to those expressly
conferred on them. These inherent powers are such powers as are necessary for the ordinary and efficient exercise of jurisdiction; or are essential
to the existence, dignity and functions of the courts, as well as to the due administration of justice; or are directly appropriate, convenient and
suitable to the execution of their granted powers; and include the power to maintain the court's jurisdiction and render it effective in behalf of the
litigants.
Thus, this Court has held that "while a court may be expressly granted the incidental powers necessary to effectuate its jurisdiction, a grant of
jurisdiction, in the absence of prohibitive legislation, implies the necessary and usual incidental powers essential to effectuate it, and, subject to
existing laws and constitutional provisions, every regularly constituted court has power to do all things that are reasonably necessary for the
administration of justice within the scope of its jurisdiction and for the enforcement of its judgments and mandates." Hence, demands, matters or
questions ancillary or incidental to, or growing out of, the main action, and coming within the above principles, may be taken cognizance of by
the court and determined, since such jurisdiction is in aid of its authority over the principal matter, even though the court may thus be called on to
consider and decide matters which, as original causes of action, would not be within its cognizance.60 (Citations omitted)
Judicial power likewise authorizes lower courts to determine the constitutionality or validity of a law or regulation in the first instance.61 This is
contemplated in the Constitution when it speaks of appellate review of final judgments of inferior courts in cases where such constitutionality is
in issue.62
On, June 16, 1954, Republic Act No. 1125 created the Court of Tax Appeals not as another superior administrative agency as was its predecessor-
the former Board of Tax Appeals-but as a part of the judicial system63 with exclusive jurisdiction to act on appeals from:
(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue;
(2) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges; seizure, detention or
release of property affected fines, forfeitures or other penalties imposed in relation thereto; or other matters arising under the Customs Law or
other law or part of law administered by the Bureau of Customs; and
(3) Decisions of provincial or city Boards of Assessment Appeals in cases involving the assessment and taxation of real property or other matters
arising under the Assessment Law, including rules and regulations relative thereto.
Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction over all matters involving assessments that were previously
cognizable by the Regional Trial Courts (then courts of first instance). 64
In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction of the Court of Tax Appeals and elevated its rank to the level of a
collegiate court with special jurisdiction. Section 1 specifically provides that the Court of Tax Appeals is of the same level as the Court of
Appeals and possesses "all the inherent powers of a Court of Justice."65
315
Section 7, as amended, grants the Court of Tax Appeals the exclusive jurisdiction to resolve all tax-related issues:
Section 7. Jurisdiction - The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue;
2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a
denial;
3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their
original or appellate jurisdiction;
4) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other money charges, seizure, detention or
release of property affected, fines, forfeitures or other penalties in relation thereto, or other matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
5) Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases involving the assessment and
taxation of real property originally decided by the provincial or city board of assessment appeals;
6) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from decisions of the Commissioner of
Customs which are adverse to the Government under Section 2315 of the Tariff and Customs Code;
7) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or article, and the Secretary of Agriculture
in the case of agricultural product, commodity or article, involving dumping and countervailing duties under Section 301 and 302, respectively, of
the Tariff and Customs Code, and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose or not
to impose said duties.
The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or validity of a tax law or regulation when raised by the
taxpayer as a defense in disputing or contesting an assessment or claiming a refund. It is only in the lawful exercise of its power to pass upon all
matters brought before it, as sanctioned by Section 7 of Republic Act No. 1125, as amended.
This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of cases directly challenging the constitutionality or
validity of a tax law or regulation or administrative issuance (revenue orders, revenue memorandum circulars, rulings).
Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes, appeals from the decisions of quasi-judicial
agencies66 (Commissioner of Internal Revenue, Commissioner of Customs, Secretary of Finance, Central Board of Assessment Appeals,
Secretary of Trade and Industry) on tax-related problems must be brought exclusively to the Court of Tax Appeals.
In other words, within the judicial system, the law intends the Court of Tax Appeals to have exclusive jurisdiction to resolve all tax problems.
Petitions for writs of certiorari against the acts and omissions of the said quasi-judicial agencies should, thus, be filed before the Court of Tax
Appeals. 67
Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129 68 provides an exception to the original jurisdiction of the Regional
Trial Courts over actions questioning the constitutionality or validity of tax laws or regulations. Except for local tax cases, actions directly
challenging the constitutionality or validity of a tax law or regulation or administrative issuance may be filed directly before the Court of Tax
Appeals.
Furthermore, with respect to administrative issuances (revenue orders, revenue memorandum circulars, or rulings), these are issued by the
Commissioner under its power to make rulings or opinions in connection
with the implementation of the provisions of internal revenue laws. Tax rulings, on the other hand, are official positions of the Bureau on
inquiries of taxpayers who request clarification on certain provisions of the National Internal Revenue Code, other tax laws, or their
implementing regulations.69 Hence, the determination of the validity of these issuances clearly falls within the exclusive appellate jurisdiction of
the Court of Tax Appeals under Section 7(1) of Republic Act No. 1125, as amended, subject to prior review by the Secretary of Finance, as
required under Republic Act No. 8424.70
316
We now proceed to the substantive aspects.
II
Respondents contend that the 20-lender rule should not strictly apply to issuances of government debt instruments, which by nature, are
borrowings from the public. 71 Applying the rule otherwise leads to an absurd result. 72 They point out that in BIR Ruling No. 007-0473 dated July
16, 2004 (the precursor of BIR Ruling Nos. 370-2011 and DA 378-2011), the Bureau of Treasury's admitted intent to make the government
securities freely tradable to an unlimited number of lenders/investors in the secondary market was considered in place of an actual head count of
lenders/investors due to the limitations brought about by the absolute confidentiality of investments in government bonds under Section 2 of
Republic Act No. 1405, otherwise known as the Bank Secrecy Law. 74
Considering that the PEACe Bonds were intended to be freely tradable in the secondary market to 20 or more lenders/investors, respondents
contend. that they, like other similarly situated government securities-awarded to 19 or less GSEDs in the primary market but freely tradable to
20 or more lenders/investors in the secondary market-should be treated as deposit substitutes subject to the 20% final withholding tax. 75
Petitioners and petitioners-intervenors RCBC and RCBC Capital counter that Section 22(Y) of the National Internal Revenue Code applies to all
types of securities, including those issued by government. They add that under this provision, it is the actual number of lenders at any one time
that is material in determining whether an issuance is to be considered a deposit substitute and not the intended distribution plan of the issuer.
Moreover, petitioners and petitioners-intervenors RCBC and RCBC Capital argue that the real intent behind the issuance of the PEACe Bonds, as
reflected by the representations and assurances of government in various issuances and rulings, was to limit the issuance to 19 lenders and below.
Hence, they contend that government cannot now take an inconsistent position.
We find respondents' proposition to consider the intended public distribution of government securities-in this case, the PEACe Bonds-in place of
an actual head count to be untenable.
The general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a
taxing act are not to be extended by implication. 76
The definition of deposit substitutes in Section 22(Y) specifically defined "public" to mean "twenty (20) or more individual or corporate lenders
at any one time."77 The qualifying phrase for public introduced78 by the National Internal Revenue Code shows that a change in the meaning of
the provision was intended, and this Court should construe the provision as to give effect to the amendment.79 Hence, in light of Section 22(Y),
the reckoning of whether there are 20 or more individuals or corporate lenders is crucial in determining the tax treatment of the yield from the
debt instrument. In other words, if there are 20 or more lenders, the debt instrument is considered a deposit substitute and subject to 20% final
withholding tax.
II.A
The definition of deposit substitutes under the National Internal Revenue Code was lifted from Section 95 of Republic Act No. 7653, otherwise
known as the New Central Bank Act:
SEC. 95. Definition of Deposit Substitutes. The term "deposit substitutes" is defined as an alternative form of obtaining funds from the public.
other than deposits. through the issuance. endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose
ofrelending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, bankers' acceptances,
promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. The Monetary
Board shall determine what specific instruments shall be considered as deposit substitutes for the purposes of Section 94 of this Act: Provided,
however, That deposit substitutes of commercial, industrial and other nonfinancial companies issued for the limited purpose of financing their
own needs or the needs of their agents or dealers shall not be covered by the provisions of Section 94 of this Act. (Emphasis supplied)
Banks are entities engaged in the lending of funds obtained from the public in the form of deposits. 80 Deposits of money in banks and similar
institutions are considered simple loans. 81 Hence, the relationship between a depositor and a bank is that of creditor and debtor. The ownership of
the amount deposited is transmitted to the bank upon the perfection of the contract and it can make use of the amount deposited for its own
transactions and other banking operations. Although the bank has the obligation to return the amount deposited, it has no obligation to return or
deliver the same money that was deposited.82
The definition of deposit substitutes in the banking laws was brought about by an observation that banks and non-bank financial intermediaries
have increasingly resorted to issuing a variety of debt instruments, other than bank deposits, to obtain funds from the public. The definition also
laid down the groundwork for the supervision by the Central Bank of quasi-banking functions.83
As defined in the banking sector, the term "public" refers to 20 or more lenders. 84 "What controls is the actual number of persons or entities to
whom the products or instruments are issued. If there are at least twenty (20) lenders or creditors, then the funds are considered obtained from the
public."85
317
If a bank or non-bank financial intermediary sells debt instruments to 20 or more lenders/placers at any one time, irrespective of outstanding
amounts, for the purpose of releI].ding or purchasing of receivables or obligations, it is considered to be performing a quasi-banking function and
consequently subject to the appropriate regulations of the Bangko Sentral ng Pilipinas (BSP).
11.B
Under the National Internal Revenue Code, however, deposit substitutes include not only the issuances and sales of banks and quasi-banks for
relending or purchasing receivables and other similar obligations, but also debt instruments issued by commercial, industrial, and other
nonfinancial companies to finance their own needs or the needs of their agents or dealers. This can be deduced from a reading together of Section
22(X) and (Y):
Section 22. Definitions - When used in this Title:
....
(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or more personal or corporate lenders at any one time, through
the issuance, endorsement, or acceptance of debt instruments of any kind other than deposits for the borrower's own account, or through the
issuance of certificates of assignment or similar instruments, with recourse, or of repurchase agreements for purposes of re-lending or purchasing
receivables and other similar obligations: Provided, however, That commerciali industrial and other non-financial companies, which borrow
funds through any of these means for the limited purpose of financing their own needs or the needs of their agents or dealers, shall not be
considered as performing quasi-banking functions.
(Y) The term 'deposit substitutes' shall mean an alternative form of
obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time),
other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the purpose
of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. (Emphasis
supplied)
For internal re.venue tax purposes, therefore, even debt instruments issued and sold to 20 or more lenders/investors by commercial or industrial
companies to finance their own needs are considered deposit substitutes, taxable as such.
11.C
The interest income on bank deposits was subjected for the first time to the withholding tax system under Presidential Decree No. 1156,86 which
was promulgated in 1977. The whereas clauses spell the reasons for the law:
[I]nterest on bank deposit is one of the items includible in gross income .... [M]any bank depositors fail to declare interest income in their income
tax returns. . . . [I]n order to maximize the collection of the income tax on interest on bank deposits, it is necessary to apply the withholdings
system on this type of fixed or determinable income.
In the same year, Presidential Decree No. 115487 was also promulgated. It imposed a 35% transaction tax (final tax) on interest income from
every commercial paper issued in the primary market, regardless of whether they are issued to the public or not. 88 Commercial paper was defined
as "an instrument evidencing indebtedness of any person or entity, including banks and non-banks performing quasi-banking functions, which is
issued, endorsed, sold, transferred or in any manner conveyed to another person or entity, either with or without recourse and irrespective of
maturity." The imposition of a final tax on commercial papers was "aimed primarily to improve the administrative provisions of the National
Internal Revenue Code to ensure the collection on the tax on interest on commercial papers used as principal instruments issued in the primary
market."89 It was reported that "the [Bureau of Internal Revenue had] no means of enforcing strictly the taxation on interest income earned in the
money market transactions. " 90
These presidential decrees, as well as other new internal revenue laws and various laws and decrees that have so far amended the provisions of
the 1939 National Internal Revenue Code were consolidated and codified into the 1977 National Internal Revenue Code. 91
In 1980, Presidential Decree No. 173992 was promulgated, which further amended certain provisions of the 1977 National Internal Revenue Code
and repealed Section 210 (the provision embodying the percentage tax on commercial paper transactions). The Decree imposed a final tax of 20%
on interests from yields on deposit substitutes issued to the public. 93 The tax was required to be withheld by banks and non-bank financial
intermediaries and paid to the Bureau of Internal Revenue in accordance with Section 54 of the 1977 National Internal Revenue Code.
Presidential Decree No. 1739, as amended by Presidential Decree No. 1959 in 1984 (which added the definition of deposit substitutes) was
subsequently incorporated in the National Internal Revenue Code.
These developments in the National Internal Revenue Code reflect the rationale for the application of the withholding system to yield from
deposit substitutes, which is essentially to maximize and expedite the collection of income taxes by requiring its payment at the source, 94 as with
318
the case of the interest on bank deposits. When banks sell deposit substitutes to the public, the final withholding tax is imposed on the interest
income because it would be difficult to collect from the public. Thus, the incipient scheme in the final withholding tax is to achieve an effective
administration in capturing the interest-income windfall from deposit substitutes as a source of revenue.
It must be emphasized, however, that withholding tax is merely a method of collecting income tax in advance. The perceived tax is collected at
the source of income payment to ensure collection. Consequently, those subjected to the final withholding tax are no longer subject to the regular
income tax.
III
Respondents maintain that the phrase "at any one time" must be given its ordinary meaning, i.e. "at any given time" or "during any particular
point or moment in the day."95 They submit that the correct interpretation of Section 22(Y) does .not look at any specific transaction concerning
the security; instead, it considers the existing number of lenders/investors of such security at any moment in time, whether in the primary or
secondary market.96 Hence, when during the lifetime of the security, there was any one instance where twenty or more individual or corporate
lenders held the security, the borrowing becomes "public" in character and is ipso facto subject to 20% final withholding tax.97
Respondents further submit that Section 10.1(k) of the Securities Regulation Code and its Implementing Rules and Regulations may be applied
by analogy, such that if at any time, (a) the lenders/investors number 20 or more; or (b) should the issuer merely offer the securities publicly or to
20 or more lenders/investors, these securities should be deemed deposit substitutes.98
On the other hand, petitioners-intervenors RCBC and RCBC Capital insist that the phrase "at any one time" only refers to transactions made in
the primary market.1âwphi1 According to them, the PEACe Bonds are not deposit substitutes since CODE-NGO, through petitioner-intervenor
RCBC, is the sole lender in the primary market, and all subsequent transactions in the secondary market merely pertain to a sale and/or
assignment of credit and not borrowings from the public.99
Similarly, petitioners contend that for a government security, such as the PEACe Bonds, to be considered as deposit substitutes, it is an
indispensable requirement that there is "borrowing" between the issuer and the lender/investor in the primary market and between the transferee
and the transferor in the secondary market. Petitioners submit that in the secondary market, the transferee/buyer must have recourse to the selling
investor as required by Section 22(Y) of the National Internal Revenue Code so that a borrowing "for the borrower's (transferor's) own account"
is created between the buyer and the seller. Should the transferees in the secondary market who have recourse to the transferor reach 20 or more,
the transaction will be subjected to a-final withholding tax. 100
Petitioners and petitioners-intervenors RCBC and RCBC Capital contend that respondents' proposed application of Section 10.l(k) of the
Securities Regulation Code and its Implementing Rules is misplaced because: (1) the National Internal Revenue Code clearly provides the
conditions when a security issuance should qualify as a deposit substitute subject to the 20% final withholding tax; and (2) the two laws govern
different matters.
III.A
Generally, a corporation may obtain funds for capital expenditures by floating either shares of stock (equity) or bonds (debt) in the capital market.
Shares of stock or equity securities represent ownership, interest, or participation in the issuer-corporation. On the other hand, bonds or debt
securities are evidences of indebtedness of the issuer-corporation.
New securities are issued and sold to the investing public for the first time in the primary market. Transactions in the primary market involve an
actual transfer of funds from the investor to the issuer of the new security. The transfer of funds is evidenced by a security, which becomes a
financial asset in the hands of the buyer/investor.
New issues are usually sold through a registered underwriter, which may be an investment house or bank registered as an underwriter of
securities.101 An underwriter helps the issuer find buyers for its securities. In some cases, the underwriter buys the whole issue from the issuer and
resells this to other security dealers and the public. 102 When a group of underwriters pool together their resources to underwrite an issue, they are
called the "underwriting syndicate."103
On the other hand, secondary markets refer to the trading of outstanding or already-issued securities. In any secondary market trade, the cash
proceeds normal_ly go to the selling investor rather than to the issuer.
To illustrate: A decides to issue bonds to raise capital funds. X buys and is issued A bonds. The proceeds of the sale go to A, the issuer. The sale
between A and Xis a primary market transaction.
Before maturity, X trades its A bonds to Y. The A bonds sold by X are not X's indebtedness. The cash paid for the bonds no longer go to A, but
remains with X, the s_elling investor/holder. The transfer of A bonds from X to Y is considered a secondary market transaction. Any difference
between the purchase price of the assets (A bonds) and the sale price is a trading gain subject to a different tax treatment, as will be explained
later.
319
When Y trades its A bonds to Z, the sale is still considered a secondary market transaction. In other words, the trades from X to Y, Y to Z, and Z
to subsequent holders/investors are considered secondary market transactions. If Z holds on to the bonds and the bonds mature, Z will receive
from A the face value of the bonds.
A bond is similar to a bank deposit in the sense that the investor lends money to the issuer and the issuer pays interest on the invested amount.
However, unlike bank deposits, bonds are marketable securities. The market mechanism provides quick mobility of money and
securities. 104 Thus, bondholders can sell their bonds before they mature to other investors, in tum converting their· financial assets to cash. In
contrast, deposits, in the form of savings accounts for instance, can only be redeemed by the issuing bank.
111.B
An investor in bonds may derive two (2) types of income:
First, the interest or the amount paid by the borrower to the lender/investor for the use of the lender’s money. 105 For interest-bearing bonds,
interest is normally earned at the coupon date. In zero-coupon bonds, the discount is an interest amortized up to maturity.
Second, the gain, if any, that is earned when the bonds are traded before maturity date or when redeemed at maturity.
The 20% final withholding tax imposed on interest income or yield from deposit substitute does not apply to the gains derived from trading,
retirement, or redemption of the instrument.
It must be stressed that interest income, derived by individuals from long-term deposits or placements made with banks in the form of deposit
substitutes, is exempt from income tax. Consequently, it is likewise exempt from the final withholding tax under Sections 24(B)(l) and 25(A)(2)
of the National Internal Revenue Code. However, when it is pre-terminated by the individual investor, graduated rates of 5%, 12%, or 20%,
depending on the remaining maturity of the instrument, will apply on the entire income, to be deducted and withheld by the depository bank.
With respect to gains derived from long-term debt instruments, Section 32(B)(7)(g) of the National Internal Revenue Code provides:
Sec. 32. Gross Income. –
....
(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this
title:
....
(7) Miscellaneous Items. -
....
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the sale or exchange or retirement of
bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years.
Thus, trading gains, or gains realized from the sale or transfer of bonds (i.e., those with a maturity of more than five years) in the secondary
market, are exempt from income tax. These "gains" refer to the difference between the selling price of the bonds in the secondary market and the
price at which the bonds were purchased by the seller. For discounted instruments such as the zero-coupon bonds, the trading gain is the excess of
the selling price over the book value or accreted value (original issue price plus accumulated discount from the time of purchase up to the time of
sale) of the instruments.106
Section 32(B)(7)(g) also includes gains realized by the last holder of the bonds when the bonds are redeemed at maturity, which is the difference
between the proceeds from the retirement of the bonds and the price at which the last holder acquired the bonds.
On the other hand, gains realized from the trading of short-term bonds (i.e., those with a maturity of less than five years) in the secondary market
are subject to regular income tax rates (ranging from 5% to 32% for individuals, and 30% for corporations) under Section 32107 of the National
Internal Revenue Code.
111.C
320
The Secretary of Finance, through the Bureau of Treasury, 108 is authorized under Section 1 of Republic Act No. 245, as amended, to issue
evidences of indebtedness such as treasury bills and bonds to meet public expenditures or to provide for the purchase, redemption, or refunding of
any obligations.
These treasury bills and bonds are issued and sold by the Bureau of Treasury to lenders/investors through a network of licensed dealers (called
Government Securities Eligible Dealers or GSEDs ). 109 GSEDs are classified into primary and ordinary dealers. 110 A primary dealer enjoys
certain privileges such as eligibility to participate in the competitive bidding of regular issues, eligibility to participate in the issuance of special
issues such as zero-coupon treasury bonds, and access to tap facility window. 111 On the other hand, ordinary dealers are only allowed to
participate in the noncompetitive bidding. 112 Moreover, primary dealers are required to meet the following obligations:
a. Must submit at least one competitive bid in each scheduled auction.
b. Must have total awards of at least 2% of the total amount of bills or bonds awarded within a particular quarter. This requirement does not cover
special issues.
c. Must be active in the trading of GS [government securities] in the secondary market. 113
A primary dealer who fails to comply with its obligations will be dropped from the roster of primary dealers and classified as an ordinary dealer.
The auction method is the main channel used for originating government securities. 114 Under this method, the Bureau of Treasury issues a public
notice offering treasury bills and bonds for sale and inviting tenders. 115 The GSEDs tender their bids electronically; 116 after the cut-off time, the
Auction Committee deliberates on the bids and decide on the award. 117
The Auction Committee then downloads the awarded securities to the winning bidders' Principal Securities Account in the Registry of Scrip less
Securities (RoSS). The RoSS, an electronic book-entry system established by the Bureau of Treasury, is the official Registry of ownership of or
interest in government securities. 118 All government securities floated/originated by the National Government under its scripless policy, as well
as subsequent transfers of the same in the secondary market, are recorded in the RoSS in the Principal Securities Account of the GSED. 119
A GSED is required to open and maintain Client Securities Accounts in the name of its respective clients for segregating government securities
acquired by such clients from the GSED' s own securities holdings. A GSED may also lump all government securities sold to clients in one
account, provided ·that the GSED maintains complete records of ownership/other titles of its clients in the GSED's own books. 120
Thus, primary issues of treasury bills and bonds are supposed to be issued only to GSEDs. By participating in auctions, the GSED acts as a
channel between the Bureau of Treasury and investors in the primary market. The winning GSED bidder acquires the privilege to on-sell
government securities to other financial institutions or final investors who need not be GSEDs. 121 Further, nothing in the law or the rules of the
Bureau of Treasury prevents the GSED from entering into contract with another entity to further distribute government securities.
In effecting a sale or distribution of government securities, a GSED acts in a certain sense as the "agent" of the Bureau of Treasury. In Doles v.
Angeles, 122 the basis of an agency is representation. 123 The question of whether an agency has been created may be established by direct or
circumstantial evidence. 124 For an agency to arise, it is not necessary that the princi~al personally encounter the third person with whom the agent
interacts. 125 The law contemplates impersonal dealings where the principal need not personally know or meet the third person with whom the
agent transacts: precisely, the purpose of agency is to extend the personality of the principal through the facility of the agent. 126 It was also
stressed that the manner in which the parties designate the relationship is not controlling. 127 If an act done by one person on behalf of another is
in its essential nature one of agency, the former is the agent of the latter, notwithstanding he or she is not caled. 128
Through the use of GSEDs, particularly primary dealers, government is able to ensure the absorption of newly issued securities and promote
activity in the government securities market. The primary dealer system allows government to access potential investors in the market by taking
advantage of the GSEDs' distribution capacity. The sale transactions executed by the GSED are indirectly for the benefit of the issuer. An
investor who purchases bonds from the GSED becomes an indirect lender to government. The financial asset in the hand of the investor
represents a claim to future cash, which the borrower-government must pay at maturity date. 129
Accordingly, the existence of 20 or more lenders should be reckoned at the time when the successful GSED-bidder distributes (either by itself or
through an underwriter) the government securities to final holders. When the GSED sells the · government securities to 20 or more investors, the
government securities are deemed to be in the nature of a deposit substitute, taxable as such.
On the other hand, trading of bonds between two (2) investors in the secondary market involves a purchase or sale transaction. The transferee of
the bonds becomes the new owner, who is entitled to recover the face value of the bonds from the issuer at maturity date. Any profit realized from
the purchase or sale transaction is in the nature of a trading gain subject to a different tax treatment, as explained above.
Respondents contend that the literal application of the "20 or more lenders at any one time" to government securities would lead to: (1)
impossibility of tax enforcement due to limitations imposed by the Bank Secrecy Law; (2) possible uncertainties 130; and (3) loopholes.131These
concerns, however, are not sufficient justification for us to deviate from the text of the law.132 Determining the wisdom, policy, or expediency of a
321
statute is outside the realm of judicial power.133 These are matters that should be addressed to the legislature. Any other interpretation looking into
the purported effects of the law would be tantamount to judicial legislation.
IV
Section 57 prescribes the withholding tax on interest or yield on deposit substitutes, among others, and the person obligated to withhold the same.
Section 57 reads:
Section 57. Withholding of Tax at Source. -
(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations, the Secretary of Finance may promulgate, upon the
recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by
Sections 24(B)(l), 24(B)(2), 24(C), 24(D)(l); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(l), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(l), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c), 33 and 282 of the
Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.
Likewise, Section 2.57 of Revenue Regulations No. 2-98 (implementing the National Internal Revenue Code relative to the Withholding on
Income subject to the Expanded Withholding Tax and Final Withholding Tax) states that the liability for payment of the tax rests primarily on the
payor as a withholding agent. Section 2.57 reads:
Sec. 2.57. WITHHOLDING OF TAX AT SOURCE. -
(A) Final Withholding Tax - Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted
as a full and final payment of the income tax due from the payee of said income. The liability for payment of the tax rests primarily on the payor
as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withhp;ding the deficiency tax shall be collected from
the payor/witholding agent[.] (Emphasis supplied)
From these provisions, it is the payor-borrower who primarily has the duty to withhold and remit the 20% final tax on interest income or yield
from deposit substitutes.
This does not mean, however, that only the payor-borrower can be constituted as withholding agent. Under Section 59 of the National Internal
Revenue Code, any person who has control, receipt, custody, or disposal of the income may be constituted as withholding agent:
SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed under this Title upon gains, profits, and income not
falling under the foregoing and not returned and paid by virtue of the foregoing or as otherwise provided by law shall be assessed by personal
return under rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. The intent and
purpose of the Title is that all gains, profits and income of a taxable class, as defined in this Title, shall be charged and assessed with the
corresponding tax prescribed by this Title, and said tax shall be paid by the owners of such gains, profits and income, or the proper person having
the receipt, custody, control or disposal of the same. For purposes of this Title, ownership of such gains, profits and income or liability to pay the
tax shall be determined as of the year for which a return is required to be rendered. (Emphasis supplied)
The intent and purpose of the National Internal Revenue Code provisions on withholding taxes is also explicitly stated, i.e., that all gains, profits,
and income "re charged and assessed with the corresponding tax" 134 and said tax paid by "the owners of such gains, profits and income, or the
proper person having the receipt, custody, control or disposal of the same." 135
The obligation to deduct and withhold tax at source arises at the time an income subject to withholding is paid or payable, whichever comes
first. 136 In interest-bearing bonds, the interest is taxed at every instance that interest is paid (and income is earned) on the bond. However, in a
zerocoupon bond, it is expected that no periodic interest payments will be made. Rather, the investor will be paid the principal and interest
(discount) together when the bond reaches maturity.
As explained by respondents, "the discount is the imputed interest earned on the security, and since paymnet is made at maturity, there is an
accreted interest that causes the price of a zero coupon instrument to accordingly increase with time, all things being constant." 137
In a 10-year zero-coupon bond, for instance, the discount (or interest) is not earned in the first period, i.e., the value of the instrument does not
equal par at the end of the first period. The total discount is earned over the life of the instrument. Nonetheless, the total discount is considered
earned on the year of sale based on current value. 138
In view of this, the successful GSED-bidder, as agent of the Bureau of Treasury, has the primary responsibility to withhold the 20% final
withholding tax on the interest valued at present value, when its sale and distribution of the government securities constitutes a deposit substitute
transaction. The 20% final tax is deducted by the buyer from the discount of the bonds and included in the remittance of the purchase price.
322
The final tax withheld by the withholding agent is considered as a "full and final payment of the income tax due from the payee on the said
income [and the] payee is not required to file an income tax return for the particular income." 139 Section 10 of Department of Finance
Department Order No. 020-10140 in relation to the National Internal Revenue Code also provides that no other tax shall be collected on
subsequent trading of the securities that have been subjected to the final tax.
In this case, the PEACe Bonds were awarded to petitionersintervenors RCBC/CODE-NGO as the winning bidder in the primary auction. At the
same time, CODE-NGO got RCBC Capital as underwriter, to distribute and sell the bonds to the public.
The Underwriting Agreement141 and RCBC Term Sheet142 for the sale of the PEACe bonds show that the settlement dates for the issuance by the
Bureau of Treasury of the Bonds to petitioners-intervenors RCBC/CODENGO and the distribution by petitioner-intervenor RCBC Capital of the
PEA Ce Bonds to various investors fall on the same day, October 18, 2001.
This implies that petitioner-intervenor RCBC Capital was authorized to perform a book-building process, 143 a customary method of initial
distribution of securities by underwriters, where it could collate orders for the securities ahead of the auction or before the securities were actually
issued. Through this activity, the underwriter obtains information about market conditions and preferences ahead of the auction of the
government securities.
The reckoning of the phrase "20 or more lenders" should be at the time when petitioner-intervenor RCBC Capital sold the PEACe bonds to
investors. Should the number of investors to whom petitioner-intervenor RCBC Capital distributed the PEACe bonds, therefore, be found to be
20 or more, the PEACe Bonds are considered deposit substitutes subject to the 20% final withholding tax. Petitioner-intervenors RCBC/CODE-
NGO and RCBC Capital, as well as the final bondholders who have recourse to government upon maturity, are liable to pay the 20% final
withholding tax.
We note that although the originally intended negotiated sale of the bonds by government to CODE-NGO did not materialize, CODE-NGO, a
private entity-still through the participation of petitioners-intervenors RCBC and RCBC Capital-ended up as the winning bidder for the
government securities and was able to use for its projects the profit earned from the sale of the government securities to final investors.
Giving unwarranted benefits, advantage, or preference to a party and causing undue injury to government expose the perpetrators or responsible
parties to liability under Section 3(e) of Republic Act No. 3019. Nonetheless, this is not the proper venue to determine and settle any such
liability.
VI
Petitioners-intervenors RCBC and RCBC Capital contend that they cannot be held liable for the 20% final withholding should have been made,
their obligation was not clear since BIR Ruling Nos. 370-2011 and DA 378-2011 stated that the 20% final withholding tax does not apply to
PEACe Bonds. 144 Second, to punish them under the circumstances (i.e., when they secured the PEACe Bonds from the Bureau of Treasury and
sold the Bonds to the lenders/investors, they had no obligation to remit the 20% final withholding tax) would violate due process of law and the
constitutional proscription on ex facto law.145
Petitioner-intervenor RCBC Capital further posits that it cannot be held liable for the 20% final withholding tax even as a taxpayer because it
never earned interest income from the PEACe Bonds, and any income earned is deemed in the nature of an underwriting
fee. 146 Petitionersintervenors RCBC and RCBC Capital instead argue that the liability falls on the Bureau of Treasury and CODE-NGO, as
withholding agent and taxpayer, respectively, considering their explicit representation that the PEACe Bonds are exempt from the final
withholding tax. 147
Petitioners-intervenors RCBC and RCBC Capital add that the Bureau of Internal Revenue is barred from assessing and collecting the 20% final
withholding tax, assuming it was due, on the ground of prescription. 148 They contend that the three (3)-year prescriptive period under Section
203, rather than the 10-year assessment period under Section 222, is applicable because they were compliant with the requirement of filing
monthly returns that reflect the final withholding taxes due or remitted for the relevant period. No false or fraudulent return was made because
they relied on the 2001 BIR Rulings and on the representations made by the Bureau of Treasury and CODE-NGO that the PEACe Bonds were
not subject to the 20% final withholding tax. 149
Finally, petitioners-intervenors RCBC and RCBC Capital argue that this Court's interpretation of the phrase "at any one time" cannot be applied
to the PEACe Bonds and should be given prospective application only because it would cause prejudice to them, among others. They cite Section
246 of the National Internal Revenue Code on non-retroactivity of rulings, as well as Commissioner of Internal Revenue v. San Roque Power
Corporation, 150 which held that taxpayers may rely upon a rule or ruling issued by the Commissioner from the time it was issued up to its
reversal by the Commissioner or the court. According to them, the retroactive application of the court's decision would impair their vested rights,
violate the constitutional prohibition on non-impairment of contracts, and constitute a substantial breach of obligation on the part of
govemment. 151 In addition, the imposition of the 20% final withholding tax on the PEA Ce Bonds would allegedly have pernicious effects on the
integrity of existing securities that is I contrary to the state policies of stabilizing the financial system and of developing the capital markets. 152
323
CODE-NGO likewise contends that it merely relied in good faith on the 2001 BIR Rulings confirming that the PEA Ce Bonds were not subject to
the 20% final withholding tax. 153 Therefore, it should not be prejudiced if the BIR Rulings are found to be erroneous and reversed by the
Commissioner or this court.154 CODE-NGO argues that this Court's Decision construing the phrase "at any one time" to determine the phrase "20
or more lenders" to include both the primary and secondary market should be applied prospectively. 155
Assuming it is liable for the 20% final withholding tax, CODE-NGO argues that the collection of the final tax was barred by
prescription.156 CODE-NGO points out that under Section 203 of the National Internal Revenue Code, internal revenue taxes such as the final tax,
should be assessed within three (3) years after the last day prescribed by law for the filing of the return. 157 It further argues that Section 222(a) on
exceptions to the prescribed period. for tax assessment and collection does not apply. 158 It claims that there is no fraud or intent to evade taxes as
it relied in good faith on the assurances of the Bureau of Internal Revenue and Bureau of Treasury the PEACe Bonds are not subject to the 20%
final withholding tax. 159 We find merit on the claim of petitioners-intervenors RCBC, RCBC Capital, and CODE-NGO for prospective
application of our Decision.
The phrase "at any one time" is ambiguous in the context of the financial market. Hence, petitioner-intervenor RCBC and the rest of the investors
relied on the opinions of the Bureau of Internal Revenue in BIR Ruling Nos. 020-2001, 035-2001 160 dated August 16, 2001, and DA-175-
01161 dated September 29, 2001 to vested their rights in the exemption from the final withholding tax. In sum, these rulings pronounced that to
determine whether the financial assets, i.e., debt instruments and securities, are deposit substitutes, the "20 or more individual or corporate
lenders" rule must apply. Moreover, the determination of the phrase "at any one time" to determine the "20 or more lenders" is to be determined
at the time of the original issuance. This being the case, the PEACe Bonds were not to be treated as deposit substitutes.
In ABS-CBN Broadcasting Corp. v. Court of Tax Appeals,162 the Commissioner demanded from petitioner deficiency withholding income tax on
film rentals remitted to foreign corporations for the years 1965 to 1968. The assessment was made under Revised Memo Circular No. 4-71 issued
in 1971, which used gross income as tax basis for the required withholding tax, instead of one-half of the film rentals as provided under General
Circular No. V-334. In setting aside the assessment, this Court ruled that in the interest of justice and fair play, rulings or circulars promulgated
by the Commissioner of Internal Revenue have no retroactive application where applying them would prove prejudicial to taxpayers who relied in
good faith on previous issuances of the Commissioner. This Court further held that Section 24(b) of then National Internal Revenue Code sought
to be implemented by General Circular No. V-334 was neither too plain nor simple to understand and was capable of different interpretations.
Thus:
The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha[ d] been determined that the tax is still imposed on
income derived from capital, or labor, or both combined, in accordance with the basic principle of income taxation ... and that a mere return of
capital or investment is not income .... " "A part of the receipts of a non-resident foreign film distributor derived from said film represents,
therefore, a return of investment." The circular thus fixed the return of capital at 50% to simplify the administrative chore of determining the
portion of the rentals covering the return of capital.
Were the "gross income" base clear from Sec. 24(b), perhaps, the ratiocination of the Tax Court could be upheld. It should be noted,
however, that said Section was not too plain and simple to understand. The fact that the issuance of the General Circular in question was
rendered necessary leads to no other conclusion than that it was not easy of comprehension and could be subjected to different
interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General Circular No. V-334, was just one in a series of
enactments regarding Sec. 24(b) of the Tax Code. Republic Act No. 3825 came next on June 22, 1963 without changing the basis but merely
adding a proviso (in bold letters).
(b) Tax on foreign corporation. - (1) Non-resident corporations. - There shall be levied, collected, and paid for each taxable year, in lieu of the
tax imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits and income, a tax equal to thirty per centum of such
amount: PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS." (double emphasis ours)
Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso and inserting some words (also in bold letters).
"(b) Tax on foreign corporations. - (1) Nonresident corporations. - There shall be levied, collected and paid for each taxable year, in lieu of the
tax imposed by the preceding paragraph, upon the amount received by every foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or periodical OR CASUAL gains, profits and income, AND CAP IT AL
GAINS, a tax equal to thirty per centum of such amount."
The principle of legislative approval of administrative interpretation by re-enactment clearly obtains in this case. It provides that "the re-
enactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of a prior executive construction." Note
should be taken of the fact that this case involves not a mere opinion of the Commissioner or ruling rendered on a mere query, but a Circular
formally issued to "all internal revenue officials" by the then Commissioner of Internal Revenue.
324
It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of Revenue Memorandum Circular No. 4-71, that Sec.
24(b2 was amended to refer specifically to 35% of the "gross income."163 (Emphasis supplied)
San Roque has held that the 120-day and the 30-day periods under Section 112 of the National Internal Revenue Code are mandatory and
jurisdictional. Nevertheless, San Roque provided an exception to the rule, such that judicial claims filed by taxpayers who relied on BIR Ruling
No. DA-489-03-from its issuance on December 10, 2003 until its reversal by this Court in Commissioner of Internal Revenue v. Aichi Forging
Company of Asia, Inc. 164 on October 6, 2010-are shielded from the vice of prematurity. The BIR Ruling declared that the "taxpayer-claimant
need not wait for the lapse of the 120-day period before it could seek judicial relief with the C[ourt] [of] T[ax] A[ppeals] by way of Petition for
Review." The Court reasoned that:
Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult question of law. The
abandonment of the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or credit
is a difficult question of law. The abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being made to
return the tax refund or credit they received or could have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi
prospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court of a general interpretative rule issued by the Commissioner,
like the reversal of a specific BIR ruling under Section 246, should also apply prospectively ....
....
Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a specific ruling
applicable only to a particular taxpayer.
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a particular taxpayer, but by a
government agency tasked with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of
the Department of Finance. This government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while
this government agency mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the
agency was in fact asking the Commissioner what to do in cases like the tax claim of Lazi Bay Resources Development, Inc., where the taxpayer
did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of
its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods
are mandatory and jurisdictional.165 (Emphasis supplied)
The previous interpretations given to an ambiguous law by the Commissioner of Internal Revenue, who is charged to carry out its provisions, are
entitled to great weight, and taxpayers who relied on the same should not be prejudiced in their rights. 166 Hence, this Court's construction should
be prospective; otherwise, there will be a violation of due process for failure to accord persons, especially the parties affected by it, fair notice of
the special burdens imposed on them.
VII
Urgent Reiterative Motion [to Direct Respondents to Comply with the

Temporary Restraining Order]
Petitioners Banco de Oro, et al. allege that the temporary restraining order issued by this Court on October 18, 2011 continues to be effective
under Rule 58, Section 5 of the Rules of Court and the Decision dated January 13, 2015. Thus, considering respondents' refusal to comply with
their obligation under the temporary restraining order, petitioners ask this Court to issue a resolution directing respondents, particularly the
Bureau of Treasury, "to comply with its order by immediately releasing to the petitioners during the pendency of the case the 20% final
withholding tax" so that the monies may be placed in escrow pending resolution of the case. 167
We recall that in its previous pleadings, respondents remain firm in its stance that the October 18, 2011 temporary restraining order could no
longer be implemented because the acts sought to be enjoined were already fait accompli. 168 They allege that the amount withheld was already
remitted by the Bureau of Treasury to the Bureau of Internal Revenue. Hence, it became part of the General Fund, which required legislative
appropriation before it could validly be disbursed. 169 Moreover, they argue that since the amount in question pertains to taxes alleged to be
erroneously withheld and collected by government, the proper recourse was for the taxpayers to file an application for tax refund before the
Commissioner of Internal Revenue under Section 204 of the National Internal Revenue Code. 170
In our January 13, 2015 Decision, we rejected respondents' defense of fait accompli. We held that the amount withheld were yet to be remitted to
the Bureau of Internal Revenue, and the evidence Gournal entry voucher) submitted by respondents was insufficient to prove the fact of
remittance. Thus:
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both the withholding and remittance of
the 20% final withholding tax to the Bureau of Internal Revenue. Even though the Bureau of Treasury had already withheld the 20% final
withholding tax when they received the temporary restraining order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue,
325
a remittance which"was due only on November 10, 2011. The act enjoined by the temporary restraining order had not yet been fully satisfied and
was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A dated July 31, 2001 which prescribes to national government agencies such as the Bureau of
Treasury the procedure for the remittance of all taxes they withheld to the Bureau of Internal Revenue, a national agency shall file before the
Bureau of Internal Revenue a Tax Remittance Advice (TRA) supported by withholding tax returns on or before the 1 oth day of the following
month after the said taxes had been withheld. The Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of
Treasury, which shall be the basis in recording the remittance of the tax collection. The Bureau of Internal Revenue will then record the amount
of taxes reflected in the TRA as tax collection in the Journal of Tax Remittance by government agencies based on its copies of the TRA.
Respondents did not submit any withholding tax return or TRA to prove that the 20% final withholding tax was indeed remitted by the Bureau of
Treasury to the Bureau oflnternal Revenue on October 18, 2011.
Respondent Bureau of Treasury's Journal Entry Voucher No. 11-10- 10395 dated October 18, 2011 submitted to this court shows:
Account Code Debit Amount Credit Amount

Bonds Payable-UT, Dom-Zero 442-360 35,000,000,000.00
Coupon I/Bonds (Peace Bonds)- 10 yr Sinking
Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002 4,966,207,796.41
To record redemption of 10yr Zero coupon
(Peace Bond) net of the 20% final withholding
tax pursuant to BIR Ruling No. 378-2011, value
date, October 18, 2011 per BTr letter authority
and BSP Bank Statements.
The foregoing journal entry, however, does not prove that the amount of P4,966,207, 796.41, representing the 20% final withholding tax on the
PEACe Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on October 18, 2011. The entries merely show that the monies
corresponding to 20% final withholding tax was set aside for remittance to the Bureau of Internal Revenue. 171
Respondents did not submit any withholding tax return or tax remittance advice to prove that the 20% final withholding tax was, indeed, remitted
by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011, and consequently became part of the general fund of the
government. The corresponding journal entry in the books of both the Bureau of Treasury and Bureau of Internal Revenue showing the transfer of
the withheld funds to the Bureau of Internal Revenue was likewise not submitted to this Court. The burden of proof lies on them to show their
claim of remittance. Until now, respondents have failed to submit sufficient supporting evidence to prove their claim.
In Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation, 172 this Court upheld the right of a
withholding agent to file a claim for refund of the withheld taxes of its foreign parent company. This Court, citing Philippine Guaranty Company,
Inc. v. Commissioner of Internal Revenue, 173 ruled that inasmuch as it is an agent of government for the withholding of the proper amount of tax,
it is also an agent of its foreign parent company with respect to the filing of the necessary income tax return and with respect to actual payment of
the tax to the government. Thus:
The term "taxpayer" is defined in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on Income]." It thus becomes
important to note that under Section 53(c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made
"personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish to make in
questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent,
P&G-Phil., is directly and independently liable for the correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld
be finally found to be less than the amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms "liable for tax" and
"subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is
statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a
person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, this Court pointed out that a withholding agent is in fact the agent
both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:
326
The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold
the tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is concentrated upon the
person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the agent of both the Government and the
taxpayer. With respect to the collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary
income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent, therefore, is no ordinary
government agent especially because under Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas the
Commissioner and his deputies are not made liable by law.
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the dividends with respect to the filing
of the necessary income tax return and with respect to actual payment of the tax to the government, such authority may reasonably be held to
include the authority to file a claim for refund and to bring an action for recovery of such claim. This implied authority is especially warranted
where, as in the instant case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the implied authority of P&G-
Phil. to claim a refund and to commence an action for such refund.
....
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer" within the meaning of Section
309, NIRC, and as impliedly authorized to file the claim for refund and the suit to recover such claim.174 (Emphasis supplied, citations omitted)
In Commissioner of Internal Revenue v. Smart Communication, Inc.;175
[W]hile the withholding agent has the right to recover the taxes erroneously or illegally collected, he nevertheless has the obligation to remit the
same to the principal taxpayer. As an agent of the taxpayer, it is his duty to return what he has recovered; otherwise, he would be unjustly
enriching himself at the expense of the principal taxpayer from whom the taxes were withheld, and from whom he derives his legal right to file a
claim for refund. 176
Since respondents have not sufficiently shown the actual remittance of the 20% final withholding taxes withheld from the proceeds of the PEACe
bonds to the Bureau of Internal Revenue, there was no legal impediment for the Bureau of Treasury (as agent of petitioners) to release the monies
to petitioners to be placed in escrow, pending resolution of the motions for reconsideration filed in this case by respondents and petitioners-
intervenors RCBC and RCBC Capital.
Moreover, Sections 204 and 229 of the National Internal Revenue Code are not applicable since the Bureau of Treasury's act of withholding the
20% final withholding tax was done after the Petition was filed.
Petitioners also urge177 us to hold respondents liable for 6% legal interest reckoned from October 19, 2011 until they fully pay the amount
corresponding to the 20% final withholding tax. This Court has previously granted interest in cases where patent arbitrariness on the part of the
revenue authorities has been shown, or where the collection of tax was illegal.178
In Philex Mining Corp. v. Commissioner of Internal Revenue: 179
[T]he rule is that no interest on refund of tax can be awarded unless authorized by law or the collection of the tax was attended by arbitrariness.
An action is not arbitrary when exercised honestly and upon due consideration where there is room for two opinions, however much it may be
believed that an erroneous conclusion was reached. Arbitrariness presupposes inexcusable or obstinate disregard of legal
provisions.180 (Emphasis supplied, citations omitted)
Here, the Bureau of Treasury made no effort to release the amount of ₱4,966,207,796.41, corresponding to the 20% final withholding tax, when it
could have done so.
In the Court's temporary restraining order dated October 18, 2011,181 which respondent received on October 19, 2011, we "enjoin[ed] the
implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] ... subject to the condition that the 20% final withholding tax on
interest income there.from shall be withheld by the petitioner banks and placed in escrow pending resolution of [the} petition." 182
Subsequently, in our November 15, 2011 Resolution, we directed respondents to "show cause why they failed to comply with the [temporary
restraining order]; and [to] comply with the [temporary restraining order] in order that petitioners may place the corresponding funds in escrow
pending resolution of the petition."183
Respondent did not heed our orders.
In our Decision dated January 13, 2015, we reprimanded the Bureau of Treasury for its continued retention of the amount corresponding to the
20% final withholding tax, in wanton disregard of the orders of this Court.
327
We further ordered the Bureau of Treasury to immediately release and pay the bondholders the amount corresponding to the 20% final
withholding tax that it withheld on October 18, 2011.
However, respondent remained obstinate in its refusal to release the monies and exhibited.utter disregard and defiance of this Court.
As early as October 19, 2011, petitioners could have deposited the amount of ₱4,966,207, 796.41 in escrow and earned interest, had respondent
Bureau of Treasury complied with the temporary restraining order and
released the funds. It was inequitable for the Bureau of Treasury to have withheld the potential earnings of the funds in escrow from petitioners.
Due to the Bureau of Treasury's unjustified refusal to release the funds to be deposited in escrow, in utter disregard of the orders of the Court, it is
held liable to pay legal interest of 6% per annum 184 on the amount of ₱4,966,207, 796.41 representing the 20% final withholding tax on the
PEACe Bonds.
WHEREFORE, respondents' Motion for Reconsideration and Clarification is DENIED, and petitioners-intervenors RCBC and RCBC Capital
Corporation's Motion for Clarification and/or Partial Reconsideration is PARTLY GRANTED.
Respondent Bureau of Treasury is hereby ORDERED to immediately release and pay the bondholders the amount of P4,966,207, 796.41,
representing the 20% final withholding tax on the PEACe Bonds, with legal interest of 6% per annum from October 19, 2011 until full payment.
328
G.R. No. 74521 November 11, 1986
BANK OF AMERICA NT & SA, petitioner,

vs.
THE HON. FIRST CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT and AIR CARGO AND TRAVEL
CORPORATION, respondents.
Agcaoili & Associates for petitioner.
Marcelo P. Villanuea for respondents.
MELENCIO-HERRERA, J.:
As the Petition and the Comment submitted by private respondent Air Cargo and Travel Corporation (ACTC) have sufficiently argued the legal
question involved in this case, the Court has resolved to give due course to the Petition, with private respondent's Comment being its Answer, and
to consider this case submitted for decision.
The basic relevant facts have been stated by respondent Appellate Court as follows:
Shorn of non-essentials, the facts are: Plaintiff Air Cargo and Travel Corporation is the owner of Account Number 19842-
01-2 with defendant Bank of America. Defendant Toshiyuki Minami, President of plaintiff corporation in Japan, is the
owner of Account Number 24506-01-7 with defendant Bank.
On March 10, 1981, the Bank received a tested telex advise from Kyowa Bank of Japan stating,
ADVISE PAY USDLS 23,595. — TO YOUR A/C NBR 24506-01-7 OF A. C. TRAVEL CORPORATION MR.
TOSHIYUKO MINAMI.
and the Bank Credited the amount of US$23,595.00 to Account Number 24506-07-1 (should be 24506-01-7) owned, as
aforesaid, by Minami.
On March 12, 1981, Minami withdrew the sum of P180,000.00 the equivalent in Philippine Pesos of the sum of
US$23,595.00 from the Bank on his Account Number 24506-07-1 (should be 24506-01-7)
It may be explained that the "tested" telex advice is a message signed in "code". Evidently, there was a previous contractual agreement between
Kyowa Bank of Japan (KYOWA) and Petitioner (BANKAMERICA) that, from time to time, KYOWA can ask BANKAMERICA to pay
amounts to a third party (beneficiary) with BANKAMERICA afterwards billing KYOWA the indicated amount given to the beneficiary. To
assure itself that an Order received from KYOWA really comes from KYOWA, it is usually agreed that KYOWA's signature will be in
accordance with a confidential code.
According to ACTC in its Comment, in the early part of 1981, it was Tokyo Tourist Corporation in Japan which applied with Kyowa Bank, Ltd.
also based in Tokyo, Japan, for telegraphic transfer of the sum of US$23,595.00 payable to ACTC's account with BANKAMERICA, Manila.
When the tested telex was received on May 10, 1981, employees of BANKAMERICA noted its patent ambiguity. Notwithstanding, on the
following day, BANKAMERICA credited the amount of US$23,595.00 to the account of Minami. ACTC claimed that the amount should have
been credited to its account and demanded restitution, but BANKAMERICA refused.
On February 18, 1982, ACTC filed suit for damages against BANKAMERICA and Minami before the Trial Court in Pasig for the failure of
BANKAMERICA to restitute. Minami was declared in default. Thereafter, judgment was rendered with the following dispositive part:
IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court upon a judicious and fair assessment of the testimonial
and documentary evidences submitted by the parties is of the opinion and so holds that defendant Bank and defendant
Minami must pay plaintiff, jointly and severally the following.
1. The sum of US$23,595.00 or in Philippine Currency at the current guiding rate of exchange which is P14.00 to the
dollar, as and by way of actual damages with interest at the rate of twelve (12%) per cent per annum from the filing of the
complaint until fully paid;
2. The sum of P50,000.00 as temperate and exemplary damages;
329
3. The sum of P10,000.00 as attorney's fees;;
4. The costs of this suit.
SO ORDERED.
Upon appeal taken by BANKAMERICA, Respondent Court "affirmed in toto, " except that the dollar-peso rate of ex-change would be that "at
the time of payment." Said respondent Court:
We must say that the Bank personnel were in fact confused or in doubts as to the real payee.
The Senior Clerk who initially received the tested telex had called up Mr. Colegado, Mr. Ichiban, Miss Mayagama and
Atty. Villanueva, all of plaintiff-appellee, but he received "no answer."(Exh. 3; pp. 9-10, t.s.n., Dec. 2, 1982).
Thereupon, the processor checked the alphabetical listings and he saw that the payee, Account Number 24506-01-7,
matched the name appearing in the tested telex advise (p. 10, t.s.n., Dec. 2, 1981).
The gross negligence then of appellant Bank may be sum (sic) up as follows; The words "A.C. TRAVEL CORPORATION
MR. TOSHIYUKO MINAMI" engendered or cast doubt
on the part of the Senior Clerk as to the real payee despite the "A.C. NBR 24506-01-7" and
should have consulted higher officials of plaintiff before giving the advise to the processor who sent the same to the
computer center for ultimate processing (p. 11, Appellant's Brief).
The processor verified that Account Number 24506-01-7 belonged to TOSHIYUKO MINAMI' only and not to "A.C.
TRAVEL CORPORATION MR. TOSHIYUKO MINAMI" and this circumstance should have moved the processor to be
more prudent and to consult higher officials instead of sending the advise to the computer center for processing or crediting
the remittance to the account of Toshiyuko Minami, (Emphasis supplied)
We are constrained to reverse.
It is our considered opinion that, in the tested telex, considered either as a patent ambiguity or as a latent ambiguity, the beneficiary is Minami.
The mention of Account No. 24506-01-7, as well as the name of Minami, has to be given more weight than the mention of the name of ACTC.
BANKAMERICA could not have very well disregarded that account number. It could also be that the mention of ACTC's name was a further
identification of Minami, to prevent payment to a possible another "Toshiyuko Minami" who may not be connected with ACTC. On the other
hand, it should be difficult to concede that, in the tested telex, Account No. 24506-01-7 was erroneously written and should be substituted by
Account No. 19842-01-2 in the name of ACTC.
In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "the opening of a letter of credit in favor of the exporter becomes ultimately but
the result of a stipulation pour autrui" (27 SCRA 84 [1969]). Similarly, when KYOWA asked BANK-AMERICA to pay an amount to a
beneficiary (either ACTC or Minami), the contract was between KYOWA and BANK-AMERICA and it had a stipulation pour autrui.
It should be recalled that the tested telex originated from KYOWA at the behest of Tokyo Tourist Corporation with whom ACTC had business
dealings. Minami, on the other hand, was the liaison officer of ACTC in Japan. As the entity responsible for the tested telex was Tokyo Tourist
Corporation, it can reasonably be concluded that if it had intended that the US$23,595.00 should be credited to ACTC, upon learning that the
amount was credited to Minami, it should have gone, together with the representatives of ACTC, in protest to KYOWA and lodged a protest.
Since that was not done, it could well be that Tokyo Tourist Corporation had really intended its remittance to be credited to Minami. The identity
of the beneficiary should be in accordance with the identification made by KYOWA, and ACTC cannot question that identification as it is not a
party to the arrangement between KYOWA and BANKAMERICA (see Manila Railroad Co. vs. Compañia Trasatlantica, 38 Phil. 875 [1918]).
WHEREFORE, the Decision of Respondent Court, in its case AC-G.R. CV No. 03985, is hereby reversed in so far as Bank of America, NT &
SA is concerned.
Without pronouncement as to costs.
330
G.R. No. 108052 July 24, 1996
PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS and RAMON LAPEZ,1 doing business under the name and style SAPPHIRE SHIPPING, respondents.
PANGANIBAN, J.:p
Does a local bank, while acting as local correspondent bank, have the right to intercept funds being coursed through it by its
foreign counterpart for transmittal and deposit to the account of an individual with another local bank, and apply the said
funds to certain obligations owed to it by the said individual?
Assailed in this petition is the Decision of respondent Court of Appeals 2 in CA-G.R. CV No. 27926 rendered on June 16,
1992 affirming the decision of the Regional Trial Court, Branch 107 of Quezon City, the dispositive portion of which read: 3
WHEREFORE, judgment is hereby rendered:
1) In the main complaint, ordering the defendant (herein petitioner PNB) to

pay the plaintiff (private respondent herein) the sum of US$2,627.11 or its
equivalent in Philippine currency with interest at the legal rate from January
13, 1987, the date of judicial demand;
2) The plaintiff's supplemental complaint is hereby dismissed (sic);
3) The defendant's counterclaims are likewise dismissed.
The Facts
The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the same being undisputed by the parties: 4
The body of the decision reads:
After a close scrutiny and analysis of the pleadings as well as the evidence of both parties, the Court
makes the following conclusions:
(a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from remittances of the plaintiff's
principals (sic) abroad. These were admitted by the defendant, subject to the affirmative defense of compensation for what
is owing to it on the principle of solution (sic) indebiti.
(b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to the credited to his account at
Citibank, Greenhills Branch; the second was from Libya, and was intended to be deposited at the plaintiff's account with
the defendant, No. 830-2410;
(c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of $2,627.11 by means of a
letter dated December 4, 1986 (Exh. D). This was answered by the defendant on December 22, 1986 (Exh. 13), inviting the
plaintiff to come for a conference;
(d) There were indeed two instances in the past, one in November 1980 and the other in January 1981 when the plaintiff's
account No. 830-2410 was doubly credited with the equivalents of $5,679.23 and $5,885.38, respectively, which amounted
to an aggregate amount of P87,380.44. The defendant's evidence on this point (Exhs. 1 thru 11, 14 and 15; see also
Annexes C and E to defendant's Answer), were never refuted nor impugned by the plaintiff. He claims, however, that
plaintiff's claim has prescribed.
(e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated credits erroneously made on
plaintiff's account, by means of a letter (Exh. 12) dated October 23, 1986 or 5 years and 11 months from November 1980,
and 5 years and 9 months from January 1981. Such letter was answered by the plaintiff on December 2, 1986 (Annex C,
Complaint). This plaintiff's letter was likewise replied to by the defendant through Exh. 13;
331
(f) The deduction of P34,340.58 was made by the defendant not without the knowledge and consent of the plaintiff, who
was issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by the defendant.
There is no question that the two erroneous double payments made to plaintiff's accounts in 1980 and 1981 created an
extra-contractual obligation on the part of the plaintiff in favor of the defendant, under the principle of solutio indebiti, as
follows:
If something is received when there is no right to demand it, and it was unduly delivered through
(sic) mistake, the obligation to return it arises. (Article 2154, Civil Code of the Phil.)
Two issues were raised before the trial court, namely, first, whether the herein petitioner was legally justified in making the
compensation or set-off against the two remittances coursed through it in favor of private respondent to recover on the double credits
it erroneously made in 1980 and 1981, based on the principle solutio indebiti, and second, whether or not petitioner's claim is barred
by the statute of limitations. The trial court's ratiocination, as quoted by the appellate Court, follows: 5
In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are consumable, they be of the same kind, and also of
the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there by any retention or controversy, commenced by third persons and communicated in due
time to the debtor.
In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both debts consist in a sum of money,
are both due, liquidated and demandable, and over neither of them is there a retention or controversy commenced by third
persons and communicated in due time to the debtor. The question, however, is, where both of the obligors bound
principally, and was each one of them a debtor and creditor of the other at the same time?
Analyzing now the relationship between the parties, it appears that:
(a) With respect to the plaintiff's being a depositor of the defendant bank, they are creditor and debtor respectively
(Guingona, et.al. vs. City Fiscal, et. al., 128 SCRA 577);
(b) As to the relationship created by the telexed fund transfers from abroad: A contract between a foreign bank and local
bank asking the latter to pay an amount to a beneficiary is a stipulation pour autrui. (Bank of America NT & SA vs. IAC,
145 SCRA 419).
A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. Encarnacion, 79 SCRA 193; Bonifacio
Brothers vs. Mora, 20 SCRA 261; Uy Tam vs. Leonard, 30 Phils. 475).
Thus between the defendant bank (as the local correspondent of the National Commercial Bank of Jeddah) and the plaintiff
as beneficiary, there is created an implied trust pursuant to Art. 1453 of the Civil Code, quoted as follows:
When the property is conveyed to a person in reliance upon his declared intention to hold it for, or
transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is
contemplated (sic).
(c) By the principle of solutio indebiti (Art. 2154, Civil Code), the plaintiff who unduly, received something (sic) by
mistake (i.e., the 2 double credits, although he had no right to demand it), became obligated to the defendant to return what
he unduly received. Thus, there was created between them a relationship of obligor and obligee, or of debtor and creditor
under a quasi-contract.
332
In view of the foregoing, the Court is of the opinion that the parties are not both principally bound with respect to the
$2,627.11 from Jeddah; neither are they at the same time principal creditor of the other. Therefore, as matters stand, the
parties' obligations are not subject to compensation or set off under Art. 1279 of the Civil Code, for the reason that the
defendant is not a principal debtor nor is the plaintiff a principal creditor insofar as the amount of $2,627.11 is concerned.
They are debtor and creditor only with respect to the double payments; but are trustee-beneficiary as to the fund transfer of
$2,627.11.
Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double credits. On the other hand,
the defendant was an implied trustee, who was obliged to deliver to the Citibank for the benefit of the plaintiff the sum of
$2,627.11.
Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the sums of $5,179.23 and $5,885.38
erroneously doubly credited to his account, the defendant's actuation in intercepting the amount of $2,627.11 supposed to
be remitted to another bank is not only improper; it will also erode the trust and confidence of the international banking
community in the banking system of the country, something we can ill afford at this time when we need to attract and
invite deposits of foreign currencies.
It would have been different has the telex advice from NCB of Jeddah been for deposit of $2,627.11 to plaintiff's account
No. 830-2410 with the defendant bank. However, the defendant alleged this for the first time in its Memorandum (Pls. see
par. 16, p. 6 of defendant's Memorandum). There was neither any allegation thereof in its pleadings, nor was there any
evidence to prove such fact. On the contrary, the defendant admitted that the telex advice was for credit of the amount of
$2,627.11 to plaintiff's account with Citibank, Greenhills, San Juan, Metro-Manila (Pls. see par. of defendant's Answer
with Compulsary Counterclaim, in relation to plaintiff's Complaint). Hence, it is submitted that the set-off or compensation
of $2,627.11 against the double payments to plaintiff's account is not in accordance with law.
On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing, there was no express contract
of agency. On the other hand, were we to infer that there was an implied agency, the same would not be between the
plaintiff and defendant, but rather, between the National Commercial Bank of Jeddah as principal on the one hand, and the
defendant as agent on the other. Thus, in case of violation of the agency, the cause of action would accrue to the NCB and
not to the plaintiff.
The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's Exh. "E", which is a receipt
issued to the plaintiff by the defendant for the amount of P34,340.00 in "full settlement of accounts receivables with RICB
Fund Transfer Department, PNB-Escolta base on Legal Department Memo dated February 28, 1987" seems to uphold the
defendant's theory that the said amount was voluntarily delivered by the plaintiff to the defendant as alleged in the last
paragraph of defendant's memorandum. The same is in accordance with the defendant's answer, as follows:
The retention and application of the amount of P34,340.58 was done in a manner consonant with
basic due process considering that plaintiff was not only furnished documented proof of the cause
but was also given the opportunity to con(tro)vert such proof .
Moreover, plaintiff, through counsel, communicated his unequivocal and unconditional consent to
the retention and application of the amount in question. (Pls. see paragraphs 8-9, defendant's Answer
with Compulsary Counterclaim to Plaintiff's Supplemental Complaint).
This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating that such receipt was handed
over to the plaintiff when he "paid" or allowed the deduction from the amount of $28,392.38 from Libya.
At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from Brega Petroleum Marketing
Company of Libya (from where the P34,340.38 was deducted) was intended for credit and deposit in plaintiff's account at
the defendant's Bank CA No. 830-2410 (per par. 1, page 2, Memorandum for the plaintiff). Such being the case, the Court
believes that insofar as the amount of P34,340.38 is concerned, all the requirements of Art. 1279 of the Civil Code are
present, and the said amount may properly be the subject of compensation or set-off. And since all the requisites of Art.
1279 of the Civil Code are present (insofar as the amount of P34,392.38 is concerned), compensation takes place by
operation of law (Art. 1286, Ibid.), albeit only partial with respect to plaintiff's indebtedness of P7,380.44.
Now, on the question of prescription, the Court believes that Art. 1149 as cited by the plaintiff is not applicable in this case.
Rather, the applicable law is Art. 1145, which fixes the prescriptive period for actions upon a quasi contract (such as
solution indebiti) at six years.
In the dispositive portion of its decision, the trial court ruled that the herein petitioner was obligated to pay private respondent the
amount of US$2,627.11 or its peso equivalent, with interest at the legal rate. The court dismissed all other claims and counterclaims.
333
On appeal to the respondent Court, petitioner bank continued to insist that it validly retained the US$2,627.11 in payment of the
private respondent's indebtedness by way of compensation or set-off, as provided under Art. 1279 of the Civil Code.
The respondent Court of Appeals rejected such argument, saying:
The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi Arabia, thru the National
Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for the credit/account of plaintiff with the Citibank,
Greenhills Branch, San Juan, Metro Manila, coursed thru the PNB's head office, the NCB's corresponden(t) bank in the
Philippines.
The credit account, or simply account means that the amount stated in the telegraphic money transfer is to be credited in
the account of plaintiff with the Citibank, and, in that sense, presupposes a creditor-debtor relationship between the
plaintiff, as creditor and the Citibank, as debtor. Withal the telegraphic money transfer, no such creditor-debtor
relationship could have been created between the plaintiff and defendant.
The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the IBN from the NCB in Saudi Arabia,
and since the PNB is the NCB's corresponden(t) bank in the Philippines, there is created between the two banks a sort of
communication exchange for the corresponden(t) bank to transmit and/or remit and/or pay the value of the telegraphic
transfer in accordance with the dictate of the correspondence exchange. Some such responsibility of the corresponden(t)
bank is akin to section 7 of the Rules and Regulations Implementing E.O. 857, as amended by E.O. 925, ". . . to take charge
of the prompt payment" of the telegraphic transfer, that is, by transmitting the telegraphic money transfer to the Citibank
so that the amount can be promptly credited to the account of the plaintiff with the said bank. That is all that the PNB can
do under the remittance arrangement that it has with the NCB. With its responsibility as defined as well as by the nature of
its banking business and the responsibility attached to it, and through which the industry, trade and commerce of all
countries and communities are carried on, the PNB's liability as corresponden(t) bank continues until it has completely
(sic) performed and discharged it(s) obligation thereunder." (emphasis ours)
Hence, the respondent Court affirmed the trial court's holding in toto.
Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed Decision.
The Issue
Petitioner's arguments revolve around one single issue:6
WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT LEGALLY BOUND
(UNDER THE PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF US$2,627.11, IT ERRED
IN NOT RULING THAT LEGAL COMPENSATION HAS TAKEN PLACE WHEN PNB WAS ORDERED BY THE
TRIAL COURT TO RETURN TO PRIVATE RESPONDENT THE SAME AMOUNT. SUCH COURSE OF ACTION IS
IN CONSONANCE WITH SPEEDY AND SUBSTANTIAL JUSTICE, AND WOULD PREVENT THE
UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB FOR THE COLLECTION OF THE SAME AMOUNT
FROM PRIVATE RESPONDENT.
The Court's Ruling
We note that in framing the issue in the manner aforecited, the petitioner implicity admits the correctness of the respondent Court's
affirmance of the trial court's ruling finding herein petitioner liable to private respondent for the sum of US$2,627.11 or its peso
equivalent. And it could not have done otherwise. After a careful scrutiny of both the decision of the trial court and that of the
appellate court, we find no reversible error whatsoever in either ruling, and see no need to add to the extensive discussions already
made regarding the non-existence of all the requisites for legal compensation to take place.
But petitioner has adopted a novel theory, contending that since respondent Court found that private respondent is "an obligor of PNB
and the latter, as aforesaid, has become an obligor of private respondent (resulting in legal compensation), the (h)onorable respondent
court should have ordered private respondent to pay PNB what the latter is bound by the trial court's decision to return the former."7
By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the trial court and the appellate Court, and
have this Court validate its original misdeed, thereby making a mockery of the entire judicial process of this country. What the
petitioner bank is effectively saying is that since the respondent Court of Appeals ruled that petitioner bank could not do a shortcut
and simply intercept funds being coursed through it, for transmittal to another bank, and eventually to be deposited to the account of
an individual who happens to owe some amount of money to the petitioner, and because respondent Court order petitioner bank to
return intercepted amount to said individual, who in turn was found by the appellate Court to be indebted to petitioner bank,
THEREFORE, there must now be legal compensation of the amounts each owes the other, and hence, there is no need for petitioner
bank to actually return the amount, and finally, that petitioner bank ends up in exactly the same position as when it first took the
334
improper and unwarranted shortcut by intercepting the said money transfer, notwithstanding the assailed Decision saying that this
could not be done!
We see in this petition a clever ploy to use this Court to validate or legalize an improper act of the petitioner bank, with the not
impossible intention of using this case as a precedent for similar acts of interception in the future. This piratical attitude of the nation's
premier bank deserves a warning that it should not abuse the justice system in its collection efforts, particularly since we are aware
that if the petitioner bank had been in good faith, it could have easily disposed of this controversy in ten minutes flat by means of an
exchange of checks with private respondent for the same amount. The litigation could have ended there, but it did not. Instead, this
plainly unmeritorious case had to clog our docket and take up the valuable time of this Court.
WHEREFORE, the instant petition is herewith DENIED for being plainly unmeritorious, and the assailed Decision is AFFIRMED in
toto. Costs against petitioner.
SO ORDERED.
335
336

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Banking 6 10

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[ G.R. No.

148753, July 30, 2004 ]

The facts are narrated by the CA as follows:

'1) MWSS Watermain;

'Check No. Date Amount

'WHEREFORE, the case is hereby DISMISSED, without costs.'"[9]

Ruling of the Court of Appeals

Hence this Petition.[10]

Petitioners submit the following issues for our consideration:

The Court's Ruling

The Petition is partly meritorious.

First Main Issue:

Increases in Interest Baseless

Other Charges Unwarranted

Attorney's Fees Equitably Reduced

Debt Relief Package

Entries in Subsidiary Ledgers

Second Main Issue:

Auction Price Adequate

No Deficiency Claim Receivable

SCHEDULE 1: PN (1) drawdown amount on

SCHEDULE 2: PN (2) drawdown

SCHEDULE 3: PN (3) drawdown

SCHEDULE 4: Application of Payments Upon Interest

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

CALLEJO, SR., J.:

P231,000.00 Makati, Metro Manila, May 6, 1982

On loan with amortizations or portions thereof in arrears irrespective of age.

SIGNED IN THE PRESENCE OF:

illegible SGD. SGD.

illegible BONITA ANG ORDIALES ALFREDO PEREZ

The Present Petition

The petitioner raises the following grounds in the instant petition:

The petition is partly meritorious.

We agree with the petitioner.

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows:

A. To accept the payment equivalent to the three checks amounting to a total

B. To release/cancel the mortgage on the car . . . upon payment of the amount

C. To pay the cost of suit.

II. On The Counterclaim.

A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as moral

B. RCBC to pay P100,000.00 as exemplary damages.

C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty. Lustre is

We do not subscribe to petitioner's theory.

What did you do?

(a) Moral damages — from P200,000.00 to P100,000.00

(b) Exemplary damages — from P100,000.00 to P75,000.00

(c) Attorney's fees — from P50,000.00 to P 30,000.00

GLORIA OCAMPO and TERESITA TAN, Petitioners,

DEL CASTILLO, J.:

The facts, as culled from the records, follow.

ATTY. TANOPO: DIRECT EXAMINATION

A. That is my signature, sir.

A. Because they made me sign a blank form, sir.

Q. Why were you made to sign a blank form by the bank?

Article 1338 of the Civil Code provides:

CORAZON G. RUIZ, petitioner,

The facts of the case are as follows:

"P750,000.00 Quezon City, March 22, 1995

(Sgd.) Corazon Ruiz __________________

Principal Loan ……………. P 750,000.00

Now, before this Court, petitioner assigns the following errors: