CREDIT RECIT READY DIGESTS

SIMPLE LOAN-INTEREST AND THE USURY LAW

SAURA-TAN

SAURA IMPORT and EXPERT CO., INC., vs DBP 

[G.R. No. L-24968, April 27, 1972] MAKALINTAL, J.

FACTS:

 In July 1952, Saura, Inc., applied to Rehabilitation Finance Corp., now

DBP, for an industrial loan of P500,000 to be used for the construction of a factory
building, to pay the balance of the jute mill machinery and equipment and as
additional working capital.  In Resolution No.145, the loan application was
approved to be secured first by mortgage on the factory buildings, the land site,
and machinery and equipment to be installed.
 The mortgage was registered and documents for the promissory note were
executed. But then, later on, was cancelled to make way for the registration of a
mortgage contract over the same property in favor of Prudential Bank and Trust
Co., the latter having issued Saura letter of credit for the release of the jute
machinery. As security, Saura execute a trust receipt in favor of the Prudential.
For failure of Saura to pay said obligation, Prudential sued Saura.
 After almost 9 years, Saura Inc, commenced an action against RFC,
alleging failure on the latter to comply with its obligations to release the loan
applied for and approved, thereby preventing the plaintiff from completing or
paying contractual commitments it had entered into, in connection with its jute mill
project.
 The trial court ruled in favor of Saura, ruling that there was a perfected
contract between the parties and that the RFC was guilty of breach thereof.
ISSUE: Whether or not there was a perfected contract between the parties. YES. There was
indeed a perfected consensual contract.

HELD:
·Article 1934 provides: An accepted promise to deliver something by way of commodatum or
simple loan is binding upon the parties, but the commodatum or simple loan itself shall not
be perfected until delivery of the object of the contract.
· There was undoubtedly offer and acceptance in the case. The application of Saura, Inc. for
a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. The defendant failed to fulfill its obligation and the
plaintiff is therefore entitled to recover damages.
· When an application for a loan of money was approved by resolution of the respondent
corporation and the responding mortgage was executed and registered, there arises a
perfected consensual contract.
· However, it should be noted that RFC imposed two conditions (availability of raw materials
and increased production) when it restored the loan to the original amount of P500,000.00.
· Saura, Inc. obviously was in no position to comply with RFC’s conditions. So instead of
doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the
mortgage be cancelled.The action thus taken by both parties was in the nature of
mutual desistance which is a mode of extinguishing obligations. It is a concept that
derives from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment.
·WHEREFORE, the judgment appealed from is reversed and the complaint dismissed.

BPI Investment Corporation v CA

GR No. 133632, 15 February 2002
377 SCRA 117

FACTS
Frank Roa obtained a loan from Ayala Investment and Development Corporation (AIDC), for
the construction of his house. Said house and lot were mortgaged to AIDC to secure the
loan. Roa sold the properties to ALS and Litonjua, the latter paid in cash and assumed the
balance of Roa’s indebtedness wit AIDC. AIDC was not willing to extend the old interest to
private respondents and proposed a grant of new loan of P500,000 with higher interest to be
applied to Roa’s debt, secured by the same property. Private respondents executed a
mortgage deed containing the stipulation. The loan contract was signed on 31 March 1981
and was perfected on 13 September 1982, when the full loan was released to private
respondents.

BPIIC, AIDC’s predecessor, released to private respondents P7,146.87, purporting to be

what was left of their loan after full payment of Roa’s loan. BPIIC filed for foreclosure
proceedings on the ground that private respondents failed to pay the mortgage
indebtedness. Private respondents maintained that they should not be made to pay
amortization before the actual release of the P500,000 loan. The suit was dismissed and
affirmed by the CA.

ISSUE
Whether or not a contract of loan is a consensual contract.

HELD
The Court held in the negative. A loan contract is not a consensual contract but a real
contract. It is perfected only upon delivery of the object of the contract. A contract o loan
involves a reciprocal obligation, wherein the obligation or promise of each party is the
consideration for that of the other; it is a basic principle in reciprocal obligations that neither
party incurs in delay, if the other does not comply or is not ready to comply is a proper
manner with what is incumbent upon him

CELESTINA T. NAGUIAT, petitioner, vs. COURT OF APPEALS and AURORA QUEAÑO,

respondents.
G.R. No. 118375             October 3, 2003

Facts: Queaño applied with Naguiat for a loan in the amount of P200,000.00, which
Naguiat granted. Naguiat indorsed to Queaño Associated Bank Check for the amount
P95,000.00, which was earlier issued to Naguiat by the Corporate Resources Financing
Corporation. She also issued her own Filmanbank Check, to the order of Queaño, and for
the amount of P95,000.00. The proceeds of these checks were to constitute the loan granted
by Naguiat to Queaño. To secure the loan, Queaño executed a Deed of Real Estate
Mortgage in favor of Naguiat, and surrendered to the latter the owner’s duplicates of the titles
covering the mortgaged properties. Queaño issued to Naguiat a promissory note for the
amount of P200,000.00, with interest at 12% per annum. Queaño also issued a Security
Bank and Trust Company check, postdated for the amount of P200,000.00 and payable to
the order of Naguiat.

Upon presentment on its maturity date, the Security Bank check was dishonored for
insufficiency of funds. Queaño received a letter from Naguiat’s lawyer, demanding settlement
of the loan. Queaño and one Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At the
meeting, Queaño told Naguiat that she did not receive the proceeds of the loan, adding that
the checks were retained by Ruebenfeldt, who purportedly was Naguiat’s agent. Naguiat
applied for the extrajudicial foreclosure of the mortgage. Before the scheduled sale, Queaño
filed annulment of the mortgage deed.

Issues: (1) Whether or not petitioner can foreclose the mortgage properties.
(2) Agency by estoppel between petitioner and Ruebenfeldt.

Rulings: (1) Absolutely no evidence was submitted by Naguiat that the checks she
issued or endorsed were actually encashed or deposited. The mere issuance of the checks
did not result in the perfection of the contract of loan. For the Civil Code provides that the
delivery of bills of exchange and mercantile documents such as checks shall produce the
effect of payment only when they have been cashed. It is only after the checks have
produced the effect of payment that the contract of loan may be deemed perfected. A loan
contract is a real contract, not consensual, and, as such, is perfected only upon the delivery
of the object of the contract. In this case, the objects of the contract are the loan proceeds
which Queaño would enjoy only upon the encashment of the checks signed or indorsed by
Naguiat. Since Naguiat presented no such proof, it follows that the checks were not
encashed or credited to Queaño’s account. No compelling reason to disturb the finding of the
courts a quo that the lender did not remit and the borrower did not receive the proceeds of
the loan. That being the case, it follows that the mortgage which is supposed to secure the
loan is null and void.

(2) The existence of an agency relationship between Naguiat and Ruebenfeldt is

supported by ample evidence. Naguiat instructed Ruebenfeldt to withhold from Queaño the
checks she issued or indorsed to Queaño, pending delivery by the latter of additional
collateral. It was also Ruebenfeldt who accompanied Queaño in her meeting with Naguiat.

There is an existence of an "agency by estoppels citing Article 1873 of the Civil Code.
Apparently, it considered that at the very least, as a consequence of the interaction between
Naguiat and Ruebenfeldt, Queaño got the impression that Ruebenfeldt was the agent of
Naguiat, but Naguiat did nothing to correct Queaño’s impression. In that situation, the rule is
clear. One who clothes another with apparent authority as his agent, and holds him out to
the public as such, cannot be permitted to deny the authority of such person to act as his
agent, to the prejudice of innocent third parties dealing with such person in good faith, and in
the honest belief that he is what he appears to be.

CEBU INTERNATIONAL FINANCE CORPORATION VS. COURT of APPEALS

 
G. R. No. 123031. October 12, 1999 
316 SCRA 488 

FACTS: Cebu International Finance Corporation (CIFC) is a quasi-banking institution

engaged in money market operations. On April 25, 1991, private respondent Vicente Alegre
invested with CIFC P500, 000.00 in cash. Petitioner issued a promissory note to mature on
May 27, 1991. The note for P516, 238. 67 covered private respondent’s placement plus
interest at 20.5% for 32 days. On May 27, 1991, CIFC issued BPI Check No. 513397 for
P514, 390.94 in favor of the private respondent as proceeds of his mature investment plus
interest. The check was drawn from petitioner’s current account maintained with Bank of the
Philippine Islands (BPI) main branch at Makati City. On June 17, 1991, private respondent’s
wife deposited the check with Rizal Commercial Banking Corp. (RCBC) in Puerto Princesa,
Palawan. BPI dishonored the check, that the check is subject of an investigation. BPI took
custody of the check pending an investigation of several counterfeit checks drawn against
CIFC’s checking account. BPI used the check to trace the perpetrators of the forgery.
Immediately, private respondent notified CIFC of the dishonored check and demanded that
he be paid in cash. CIFC denied the request and instead instructed private respondent to
wait for its ongoing bank reconciliation with BPI. Private respondent made a formal demand
of his money market placement. In turn, CIFC promised to replace the check but required an
impossible condition that the original check must first be surrendered. 

On February 25, 1992, Alegre filed a complaint for recovery of sum of money against
petitioner. On July 13, 1992, CIFC sought to recover its lost funds and formally filed against
BPI a separate civil action for collection of a sum of money with RTC- Makati Branch. It
alleged that BPI unlawfully deducted from CIFC’s checking account, counterfeit checks
amounting to P1, 724, 364. 58. The action included the prayer to collect the amount of the
check paid to Alegre but dishonored by BPI. CIFC in its response to Alegre’s complaint filed
for leaver of court and impleaded BPI to enforce a right, for contribution and indemnity. The
court granted CIFC’s motion but upon the motion to dismiss the third-party complaint filed by
BPI, the court dismissed the third-party complaint. During the hearing, BPI through its
Manager, testified that on July 16, 1993, BPI encashed and deducted the said amount from
the account of CIFC, but the proceeds, as well as the check remained in BPI’s custody. This
was alleged in accordance with the Compromise Agreement it entered with CIFC to end the
litigation in RTC-Makati Branch. On July 27, 1993, BPI filed a separate collection suit against
Alegre, alleging that he had connived with other persons to forge several checks of BPI’s
client, amounting to P1, 724, 364.58. On September 27, 1993, RTC-Makati Branch rendered
its judgment in favor of private respondent. CIFC appealed from the said decision, but the
appellate court affirmed in toto the decision of the lower court. 

ISSUE: Whether or not the petitioner is still liable for the payment of check even though BPI
accepted the instrument 

RULING: The Supreme Court held that the money market transaction between the petitioner
and private respondent is in the nature of loan. In a loan transaction, the obligation to pay a
sum certain in money may be paid in money, which is the legal tender or, by the use of a
check. A check is not a legal tender, and therefore cannot constitute valid tender of payment.
In effect, CIFC has not yet tendered a valid payment of its obligation to the private
respondent. Tender of payment involves a positive and unconditional act by the obligor of
offering legal tender currency as payment to the obligee for the former’s obligation and
demanding that the latter accept the same. Tender of payment cannot be presumed by a
mere inference from surrounding circumstances. Hence, CIFC is still liable for the payment
of the check. 

Wherefore, the assailed decision is affirmed and the petition is denied.

BPI FAMILY BANK VS. FRANCO

G.R. No. 123498 November 23, 2007
J. Nachura

FACTS:
         On August 15, 1989, Tevesteco opened a savings and current account with BPI-FB.
Soon thereafter, FMIC also opened a time deposit account with the same branch of BPI-FB
 
On August 31, 1989, Franco opened three accounts, namely, a current, savings, and time
deposit, with BPI-FB.  The total amount of P2,000,000.00 used to open these accounts is
traceable to a check issued by Tevesteco allegedly in consideration of Franco’s introduction
of Eladio Teves, to Jaime Sebastian, who was then BPI-FB SFDM’s Branch Manager.  In
turn, the funding for the P2,000,000.00 check was part of the P80,000,000.00 debited by
BPI-FB from FMIC’s time deposit account and credited to Tevesteco’s current account
pursuant to an Authority to Debit purportedly signed by FMIC’s officers.
 
            It appears, however, that the signatures of FMIC’s officers on the Authority to Debit
were forged. BPI-FB, debited Franco’s savings and current accounts for the amounts
remaining therein. In the meantime, two checks drawn by Franco against his BPI-FB current
account were dishonored and stamped with a notation “account under garnishment.”
Apparently, Franco’s current account was garnished by virtue of an Order of
 
Notably, the dishonored checks were issued by Franco and presented for payment at
BPI-FB prior to Franco’s receipt of notice that his accounts were under garnishment. It was
only on May 15, 1990, that Franco was impleaded in the Makati case. Immediately, upon
receipt of such copy, Franco filed a Motion to Discharge Attachment. On May 17, 1990,
Franco pre-terminated his time deposit account.

BPI-FB deducted the amount of P63,189.00 from the remaining balance of the time
deposit account representing advance interest paid to him. Consequently, in light of BPI-FB’s
refusal to heed Franco’s demands to unfreeze his accounts and release his deposits therein,
Franco filed on June 4, 1990 with the Manila RTC the subject suit.

ISSUE: WON BPI-FB had better right to the deposits in the subject accounts which are part
of the proceeds of a forged Authority to Debit

HELD: NO
There is no doubt that BPI-FB owns the deposited monies in the accounts of Franco,
but not as a legal consequence of its unauthorized transfer of FMIC’s deposits to
Tevesteco’s account. BPI-FB conveniently forgets that the deposit of money in banks is
governed by the Civil Code provisions on simple loan or mutuum. As there is a debtor-
creditor relationship between a bank and its depositor, BPI-FB ultimately acquired ownership
of Franco’s deposits, but such ownership is coupled with a corresponding obligation to pay
him an equal amount on demand. Although BPI-FB owns the deposits in Franco’s accounts,
it cannot prevent him from demanding payment of BPI-FB’s obligation by drawing checks
against his current account, or asking for the release of the funds in his savings account. 
Thus, when Franco issued checks drawn against his current account, he had every right as
creditor to expect that those checks would be honored by BPI-FB as debtor. 
 
More importantly, BPI-FB does not have a unilateral right to freeze the accounts of
Franco based on its mere suspicion that the funds therein were proceeds of the multi-million
peso scam Franco was allegedly involved in. To grant BPI-FB, or any bank for that matter,
the right to take whatever action it pleases on deposits which it supposes are derived from
shady transactions, would open the floodgates of public distrust in the banking industry.
 
          Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty bound to know
the signatures of its customers. Having failed to detect the forgery in the Authority to Debit
and in the process inadvertently facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now
shift liability thereon to Franco and the other payees of checks issued by Tevesteco, or
prevent withdrawals from their respective accounts without the appropriate court writ or a
favorable final judgment.

TOLENTINO(plaintiff-apellant) v GONZALES SY CHIAM (defendant-appellee)

G.R. No. 26085             August 12, 1927

FACTS:
1. Before Nov 28, 1922, Severino Tolentino and Potenciana Manio purchased Luzon
Rice Mills, Inc., parcel of land in Tarlac for P25,000.00 to be paid in three
installments.
a. First installment is P2,000 due on or before May 2, 1921
b. Second installment is P8,000 due on or before May 31, 1921
c. Third installment of P15,000 at 12% interest due on or before Nov 30, 1922
One of the conditions of the contract of purchase was that if Tolentino and Manio
failed to pay the balance of any of the installments on the date agreed upon, the
property bought would revert to the original owner.
The first and second installments were paid but the balance was paid on Dec 1, 1922
2. On Nov 7, 1922, a representative of vendor of said property wrote Manio , notifying
her that if the balance of said indebtedness was not paid, they would recover the
property with damages for non compliance with the condition of the contract of
purchase.
3. Tolentino and Manio borrowed money from Benito Gonzales Sy Chiam to satisfy their
indebtedness to the vendor.
4. Gonzales agreed to loan the P17,500 upon condition that they execute and deliver to
him a pacto de retro of the property.
5. The contract includes a contract of lease on the property whereby the lessees as
vendors apparently bind themselves to pay rent at the rate of P375 per month and
whereby "Default in the payment of the rent agreed for two consecutive months will
terminate this lease and will forfeit our right of repurchase, as though the term had
expired naturally"
6. Upon maturation of loan, Tolentino defaulted payment and Gonzales demanded
recovery of land.
Tolentino’s argument: that the pacto de retro sale is a mortgage and not an absolute sale
and that the rental price paid during the period of the existence of the right to repurchase,
or the sum of P375 per month, based upon the value of the property, amounted to usury.

ISSUE: WoN the contract in question is a mortgage

HELD: No.

RATIO: The contract is a pacto de retro and not a mortgage. There is not a word, a phrase, a
sentence or a paragraph in the entire record, which justifies this court in holding that the
said contract of pacto de retro is a mortgage and not a sale with the right to repurchase.

The purpose of the contract is expressed clearly that there can certainly be no doubt as to
the purpose of the Tolentino to sell the property in question, reserving the right only to
repurchase the same:

Second. That is a condition of this sale that if in the course of five (5) years
from the 1st of December, 1922, we return to Don Benito Gonzales Sy Chiam
the above-mentioned price of seventeen thousand five hundred (P17,500),
Mr. Benito Gonzales Sy Chiam is forced to return the farm; but if it passes the
 above mentioned term of five (5) years without exercising to the right of
redemption that we have saved ourselves, then this sale will be absolute and
irrevocable.

From the foregoing, we are driven to the following conclusions: First, that the contract of
pacto de retro is an absolute sale of the property with the right to repurchase and not a
mortgage; and, second, that by virtue of the said contract the vendor became the tenant of
the purchaser, under the conditions mentioned in paragraph 3 of said contact. When the
vendor of property under a pacto de retro rents the property and agrees to pay a rental value
for the property during the period of his right to repurchase, he thereby becomes a "tenant"
and in all respects stands in the same relation with the purchaser as a tenant under any
other contract of lease.

In the present case the property in question was sold. It was an absolute sale with the right
only to repurchase. During the period of redemption the purchaser was the absolute owner
of the property. During the period of redemption the vendor was not the owner of the
property. During the period of redemption the vendor was a tenant of the purchaser. During
the period of redemption the relation which existed between the vendor and the vendee was
that of landlord and tenant. That relation can only be terminated by a repurchase of the
property by the vendor in accordance with the terms of the said contract. The contract was
one of rent. The contract was not a loan, as that word is used in Act No. 2655.

Loan v Rent as discussed under Usury Law in relation to Act No. 2655 "An Act fixing rates of
interest upon 'loans' and declaring the effect of receiving or taking usurious rates."

Usury, generally speaking, may be defined as contracting for or receiving something in

excess of the amount allowed by law for the loan or forbearance of money—the taking of
more interest for the use of money than the law allows.

It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any
money, goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of
interest on "loans." A contract of "loan," is very different contract from that of "rent". A "loan,"
as that term is used in the statute, signifies the giving of a sum of money, goods or credits to
another, with a promise to repay, but not a promise to return the same thing. To "loan," in
general parlance, is to deliver to another for temporary use, on condition that the thing or its
equivalent be returned; or to deliver for temporary use on condition that an equivalent in kind
shall be returned with a compensation for its use. The word "loan," however, as used in the
statute, has a technical meaning. It never means the return of the same thing. It means the
return of an equivalent only, but never the same thing loaned. A "loan" has been properly
defined as an advance payment of money, goods or credits upon a contract or stipulation to
repay, not to return, the thing loaned at some future day in accordance with the terms of the
contract. Under the contract of "loan," as used in said statute, the moment the contract is
completed the money, goods or chattels given cease to be the property of the former owner
and becomes the property of the obligor to be used according to his own will, unless the
contract itself expressly provides for a special or specific use of the same. At all events, the
money, goods or chattels, the moment the contract is executed, cease to be the property of
the former owner and becomes the absolute property of the obligor.

A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the
owner of the property does not lose his ownership. He simply loses his control over the
property rented during the period of the contract. In a contract of "loan" the thing loaned
becomes the property of the obligor. In a contract of "rent" the thing still remains the property
of the lessor. He simply loses control of the same in a limited way during the period of the
contract of "rent" or lease. In a contract of "rent" the relation between the contractors is that
of landlord and tenant. In a contract of "loan" of money, goods, chattels or credits, the
relation between the parties is that of obligor and obligee. "Rent" may be defined as the
compensation either in money, provisions, chattels, or labor, received by the owner of the
soil from the occupant thereof. It is defined as the return or compensation for the possession
of some corporeal inheritance, and is a profit issuing out of lands or tenements, in return for
their use. It is that, which is to paid for the use of land, whether in money, labor or other thing
agreed upon. A contract of "rent" is a contract by which one of the parties delivers to the
other some nonconsumable thing, in order that the latter may use it during a certain period
and return it to the former; whereas a contract of "loan", as that word is used in the statute,
signifies the delivery of money or other consumable things upon condition of returning an
equivalent amount of the same kind or quantity, in which cases it is called merely a "loan." In
the case of a contract of "rent," under the civil law, it is called a "commodatum."

JARDENIL V. SOLAS
G.R. No. L-47878
24 July 1942
Article 1956: No interest shall be due unless it has been expressly stipulated in
writing. (1755a)

FACTS:
The case is an action for foreclosure of mortgage. Paragraph 4 of the mortgage deed
between the parties states that Solas agrees to pay Jardenil on or before 31 March 1934 the
amount of P 2,400 with the interests of the sum at the rate of 12% per year starting from the
date of execution until its maturity date on 31 March 1934. The mortgage also includes an
extension note of one year from the date of maturity within which to make payment, without
making any mention of any interest which the mortgagor should pay during the additional
period.

ISSUE:
Whether or not defendant-appellee (Solas) is bound to pay the stipulated interest
continuously up to the date of payment, regardless whether the actual date of payment is
beyond the stipulated maturity date

HELD/RATIO:
No.
The Court ruled that Solas clearly agreed to pay interest only up to the date of
maturity, or until March 31, 1934. As the contract is silent as to whether after that date, in the
event of non-payment, the debtor would continue to pay interest, the Court cannot in law,
indulge in any presumption as to such interest; otherwise, the Court would be imposing upon
the debtor an obligation that the parties have not chosen to agree upon. Article 1755 of the
(old) Civil Code provides that "interest shall be due only when it has been expressly
stipulated."
There is nothing in the mortgage deed to show that the terms stipulated go against
the intention of the parties. Neither has either of the parties shown that, by mutual mistake,
the deed of mortgage fails to express their agreement since the plaintiff, Jardenil, did not
adduce evidence to establish such mistake. Since the parties included an extension note of
one year within which to make payment without mentioning that additional interests should
be paid during that extended period, it can be deduced that parties intended that no interest
should be paid during the period of grace.
The contract is clear and unmistakable and the terms employed therein have not
been shown to belie or otherwise fail to express the true intention of the parties and that the
deed has not been assailed on the ground of mutual mistake which would require its
reformation, same should be given its full force and effect.
 Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan
of P2,400 from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial
demands have been made on the expiration of the year of grace, he shall be entitled to legal
interest upon the principal and the accrued interest from April 1, 1935, until full payment.

Cu Un Jing Hijos vs. Mabalacat Sugar Co.

GR 97412

Facts:

Mabalacat was indebted to Hijos, with mortgage and interest. Hijos now seeks payment. He
imposed compounded interest charges in estimating the amount of indebtedness.

Argument:

Hijos: In the mortgage, there had been a stipulation that, “Interest, to be computed upon the
still unpaid capital of the loan, shall be paid monthly, at the end of each month.” Thus, this
justifies the imposition of compounded interest charges.

Issue: WON the imposition of compounded interest charges is justified.

Held:

No. The provision in the mortgage quoted by Hijos merely requires the debtor to pay interest
monthly at the end of each month, such interest to be computed upon the capital of the loan
not already paid.

In the absence of express stipulation for the accumulation of compound interest, no interest
can be collected upon interest until the debt is judicially claimed, and then the rate at which
interest upon accrued interest must be computed is fixed at 6 per cent per annum.

**************

Where interest is improperly charged, at an unlawful rate, the mere voluntary payment of it to
the creditor by the debtor is not binding. Such payment, in the case before us, was usurious,
being in excess of 12 per cent which is allowed to be charged, under section 2 of the Usury
Law, when a debt is secured by mortgage upon real property.

GSIS vs. CA

GR L-52478 October 30, 1986

Usury Law applies only to interest by way of compensation for the use or forbearance of
money. Interest by way of damages is governed by Article 2209 of the Civil Code of the
Philippines which provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, …

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

Facts

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

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

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

 Another loan was approved by GSIS for the amount of P230k on the secuiryt of
the same mortgaged properties and to bear interest at 9%/annum.
 Medinas defaulted in their payment of the monthly amortization and their fire
insurance premium. GSIS then imposed 9%/12% interest on installment due and
unpaid. GSIS notified and demanded payment from Medinas otherwise it would
foreclose the mortgage.

 GSIS filed an application for Foreclosure of Mortgage with the Sheriff of Manila.
Medinas then file with CFI Manila a complaint praying for the issuance of TRO
and writ of preliminary injunction but no TRO/writ of preliminary injunction was
issued.
 Properties of Medinas were sols at public auction to GSIS as the highest bidder.
Medina then filed and Amended Complaint with CFI praying for the declaration of
nullity of their two real estate mortgage contract with GSIS as well as the extra-
judicial foreclosure.
 RTC: Extra-judicial foreclosure null and void and Certificate of Title in favor of
GSIS is of no legal force and effect. Medinas to pay P1, 611.12 in full payment of
their obligation with interest of 9%/annum.
  GSIS and Medinas both appealed to CA.
 CA: RTC judgment affirmed. GSS to reimburse P9, 580.00 as overpayment to
Medinas.
 Petition of review on certiorari to SC by GSIS.

I. Issues

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

II. Held

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

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

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

CA decision reversed and set aside.

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON.

COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents. G.R.
No. 138677 February 12, 2002

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

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

On 28 October 1998, the Court of Appeals resolved the two motions thusly:

"We find merit in plaintiff-appellee’s claim that the principal sum of P114,416.00 with interest
thereon must commence not on the date of filing of the complaint as we have previously held
in our decision but on the date when the obligation became due. Default generally begins
from the moment the creditor demands the performance of the obligation. However, demand
is not necessary to render the obligor in default when the obligation or the law so provides. In
the case at bar, defendants-appellants executed a promissory note where they undertook to
pay the obligation on its maturity date 'without necessity of demand.' They also agreed to
pay the interest in case of non-payment from the date of default.
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their
case to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the
Rules of Court, submitting thusly -

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

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

ISSUE:
Whether the penalty imposed is reasonable

HELD: Yes
The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factors as, but not necessarily confined
to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is addressed to the sound
discretion of the court. In any event, the interest stipulation, on its face, does not appear as
being that excessive. The essence or rationale for the payment of interest, quite often
referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that
effect, the two being distinct concepts which may separately be demanded.What may justify
a court in not allowing the creditor to impose full surcharges and penalties, despite an
express stipulation therefor in a valid agreement, may not equally justify the non-payment or
reduction of interest. Indeed, the interest prescribed in loan financing arrangements is a
fundamental part of the banking business and the core of a bank's existence.
Ligutan vs. CA G.R#138677

Facts:

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of

P120,000.00 from respondent Security Bank and Trust Company.  Petitioners executed a
promissory note binding themselves, jointly and severally, with an interest of 15.189% per
annum upon maturity and to pay a penalty of 5% every month on the outstanding principal
and interest in case of default and also a 10% attorney’s fees if the matter were indorsed to a
lawyer for collection.  

The obligation matured, the petitioners were not able to settle the obligation; The bank gave
an extension, still the same happened. Since the petitioners still defaulted, the former filed a
complaint for recovery of the due amount.

Issue:
Whether the interest and penalty charge imposed by private respondent bank on petitioners’
loan are manifestly exorbitant, iniquitous and unconscionable?

Ruling:
The obligor would then be bound to pay the stipulated indemnity without the necessity of
proof on the existence and on the measure of damages caused by the breach. Although a
court may not at liberty ignore the freedom of the parties to agree on such terms and
conditions as they see fit that contravene neither law nor morals, good customs, public order
or public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if
it is iniquitous or unconscionable or if the principal obligation has been partly or irregularly
complied with.
The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective.  Its resolution would depend on such factors as, but not necessarily confined
to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is addressed to the sound
discretion of the court.  
The CA exercised good judgment in reducing the stipulated penalty interest from 5% to 3% a
month. It was also been held that the 15.189% per annum stipulated interest and the 10%
attorney’s is reasonable and not excessive. The interest prescribed in loan financing
arrangements is a fundamental part of the banking business and the core of a bank's
existence.

ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL CENTER
OF THE PHILIPPINES, respondents.
G.R. No. 116285 | 2001-10-19

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

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

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

HELD:

1. Yes. Article 1226 of NCC provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of non-compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses
to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty
may be enforced only when it is demandable in accordance with the provisions of this
Code. The PNs expressly provides for the imposition of both interest and penalties in
case of default on the part of the petitioner in the payment of the subject restructured
loan. Penalty on delinquent loans may take different forms. In GSIS v. CA, this Court
has ruled that the NCC permits an agreement upon a penalty apart from the
monetary interest. If the parties stipulate this kind of agreement, the penalty does not
include the monetary interest, and as such the two are different and distinct from
each other and may be demanded separately. Quoting Equitable Banking Corp. v.
Liwanag, the GSIS case went on to state that such a stipulation about payment of an
additional interest rate partakes of the nature of a penalty clause which is sanctioned
by law, more particularly under Article 2209 of the NCC which provides that: If the
obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.
2. Yes. Penalty clauses can be in the form of penalty or compensatory interest. Thus,
the compounding of the penalty or compensatory interest is sanctioned by and
allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code
considering that: First, there is an express stipulation in the PN permitting the
compounding of interest. Second, Article 2212 of the New Civil Code provides that
"Interest due shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent upon this point." In the instant case, interest likewise
began to run on the penalty interest upon the filing of the complaint in court by CCP.