FIRST DIVISION

[G.R. No. 194922. January 30, 2019.]

ANTONIO FELICIANO, SR. [DECEASED], HEIRS AND

SUCCESSORS-IN-INTERESTS NAMED: RAOUL, KRISTINE AND
CATHERINE, ALL SURNAMED FELICIANO, AND SURVIVING
SPOUSE [CONTINUING CO-PLAINTIFF] AND HEREIN CO-
PETITIONER IN THIS PETITION, MARIETTA * N.
FELICIANO, petitioners, vs. ANTONIO E. FELICIANO, JR. AND MA.
ISABEL C. FELICIANO, respondents.

NOTICE

Sirs/Mesdames :

Please take notice that the Court, First Division, issued a Resolution
dated January 30, 2019 which reads as follows:
"G.R. No. 194922 (Antonio Feliciano, Sr. [deceased], heirs and
successors-in-interests named: Raoul, Kristine and Catherine, all surnamed
Feliciano, and surviving spouse [continuing co-plaintiff] and herein co-
petitioner in this petition, Marietta N. Feliciano v. Antonio E. Feliciano, Jr. and
Ma. Isabel C. Feliciano). — This is a petition for review 1 assailing the June 23,
2010 Decision 2 and January 10, 2011 Resolution 3 of the Court of Appeals (CA) in
CA-G.R. CV. No. 76670. The CA reversed and set aside the March 2, 2000
Decision 4 of Branch 135 of the Regional Trial Court (RTC), Makati City in Civil Case
No. 93-2207 and sustained the validity of the Deed of Assignment subject of the
case due to petitioners' failure to prove the existence of a resulting trust.
Petitioner Dr. Antonio N. Feliciano, Sr. (Feliciano, Sr.) married Norma
Espinosa (Norma) in 1950. Respondent Antonio E. Feliciano, Jr. (Feliciano, Jr.) was
born from this union. In 1952, however, the couple divorced and Feliciano, Sr. did
not have the opportunity to see his son. 5
In 1964, while Feliciano, Sr. was in Africa as a missionary doctor, his mother
informed him that his son, Feliciano, Jr., had been abandoned by Norma. Feliciano,
Sr. immediately went home and invited Feliciano, Jr. to live with him. Thereafter,
Feliciano, Jr. lived with Feliciano, Sr. except during the times when there were
personal conflicts between father and son. 6
In the meantime, Feliciano, Sr. married Marietta Nousiainen (Marietta), a
Canadian citizen, with whom he had three children. Sometime in 1988, Marietta
purchased two condominium units from Marina Bayhomes, Asiaworld City in
Parañaque City (Marina) on installment, payable in five years at a monthly
amortization of P42,061.68. On December 12, 1989, however, Marietta paid the
purchase price in full. 7
Afterwards, Marietta allegedly entrusted one of the units to Feliciano, Jr.,
upon the latter's request. 8 In 1992, Marietta executed a Deed of Assignment 9 over
the unit in favor of Feliciano, Jr., in consideration of the amount of P2,268,000.00.
That same year, Marina executed a deed of sale over the unit in favor of Feliciano,
Jr. The latter paid taxes and other fees to facilitate the transfer of title in his name.
Subsequently, Condominium Certificate of Title (CCT) No. 2061 was issued by the
Registry of Deeds of Parañaque City in the name of Feliciano, Jr. 10 CAIHTE
On April 14, 1993, Feliciano, Jr. obtained a loan in the sum of P3,000,000.00
from Patrocino Margolles. 11 He executed a Deed of Real Estate Mortgage 12 over
the unit to secure the obligation.
When Marietta learned of the mortgage, she sent a letter to Feliciano, Jr.
demanding reconveyance of the unit and for Feliciano, Jr. to clear its title of
encumbrances. She likewise caused the annotation of an Adverse Claim over the
title on May 10, 1993 and a lis pendens on July 13, 1993. 13
The parties having failed to reach a settlement on the matter, Marietta, joined
by Feliciano, Sr., filed on July 5, 1993 a complaint for reconveyance with
damages 14 against Feliciano, Jr. and his wife, Ma. Isabel C. Feliciano (Isabel). The
complaint alleged that even if the CCT is in the name of Feliciano, Jr., petitioners
remained to be the unit's absolute owners, being its original buyers. The CCT was
issued in the name of Feliciano, Jr. by reason of the Deed of Assignment, but even if
the deed stated that it was being executed in consideration of the sum of
P2,268,000.00, no such consideration was actually given by Feliciano, Jr. to
petitioners. Hence, the deed is void and of no effect. 15 Petitioners further alleged
that respondents are actually mere trustees of the unit who violated the trust by
mortgaging the unit without their permission. The mortgage was additionally made
for an amount higher than the acquisition cost of the unit and in favor of Feliciano,
Jr.'s aunt who knew of the existence of the trust. Thus, it is simulated and
void. 16 Petitioners consequently sought an order from the RTC: 1) commanding
respondents to reconvey the condominium unit, and in case of their refusal, ordering
the Register of Deeds of Parañaque City to cancel CCT No. 2061 and issue a new
title in the name of petitioners; and 2) declaring the Deed of Real Estate Mortgage
as simulated and void and authorizing the Register of Deeds of Parañaque City to
cancel its registration. 17
In their answer with counterclaim, 18 respondents denied that they were mere
trustees of the subject condominium unit. Instead, they claimed that they were its
absolute owners for which they possess all the rights of an owner including the right
to mortgage it. While respondents admitted that petitioners were the ones who
originally purchased the unit, they alleged that even before a deed of sale was
executed between Marina and petitioners, the latter already assigned their rights
over the unit to Feliciano, Jr. for the consideration of P2,268,000.00, which the latter
paid in cash. The Deed of Assignment was executed and signed by Marietta as
assignor and Feliciano, Jr. as assignee, with the consent of both their spouses and
Marina. Respondents claimed that petitioners did not have a cause of action against
them since they already relinquished their interests over the unit. 19
On March 2, 2000, the RTC rendered a Decision 20 in favor of petitioners, the
dispositive portion of which states:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants Antonio E. Feliciano, Jr[.] and Ma.
[]Isabel E. Feliciano to CONVEY the subject
condominium unit designated [as] Unit G-119, Marina
Bayhouse, Asiaworld City, E. Aguinaldo Boulevard,
Para[ñ]aque, Metro Manila and covered by Condominium
Certificate of Title No. 2061 of the Register of Deeds of
Parañaque to plaintiffs Antonio Feliciano, Sr. and
Marietta N. Feliciano;
2. In the event that said defendants fail or refuse to convey the
subject property, declaring the condominium title registered
in the name of defendants deemed null and void and the
Register of Deeds of Para[ñ]aque shall issue a new title
thereof in favor of plaintiffs; and,
3. Declaring the deed of real estate mortgage over the subject
condominium unit null and void.
SO ORDERED. 21 (Emphasis in the original.)
The RTC ruled that petitioners were able to prove by preponderant evidence
that no money passed from respondents to petitioners as consideration for the
execution of the Deed of Assignment since respondents do not appear to be in a
financial position to pay petitioners the amount of P2,268,000.00. Respondents'
allegation that part of the money was remitted by Norma, Feliciano, Jr.'s mother, was
not supported by evidence. Instead, the RTC held that a resulting trust was
established because the true intention of the parties when the Deed of Assignment
was executed was to allow respondents to temporarily occupy the unit, subject to
return or payment should Marietta demand it. 22 Petitioners' acts of having their
adverse claim annotated on the condominium title and filing a complaint for
reconveyance indicate their assertion of ownership over the unit. Respondents did
not repudiate the trust nor performed acts adverse to it, but only claimed payment
which was not substantiated. It is therefore respondents' equitable duty to convey
the unit to petitioners. 23 DETACa
On appeal, the CA reversed the RTC. In its June 23, 2010 Decision, 24 the
CA disagreed with the RTC's finding that a resulting trust existed between Marietta
and Feliciano, Jr. It found that it was incumbent upon petitioners to prove the
existence of a trust relationship, but the only evidence they presented to support the
existence of a resulting trust were their own self-serving testimonies. Moreover, the
CA held that Marietta failed to explain why she transferred the title of the property in
Feliciano, Jr.'s name through the Deed of Assignment, when she could own a
condominium unit in her name without violating the constitutional proscription
against aliens acquiring real properties in the country. Further, the existence of the
Deed of Assignment was openly admitted by petitioners. If Marietta's purpose was
merely for Feliciano, Jr. to temporarily use the unit, she could have allowed him to
stay without granting full ownership or title of the property. Similarly, she could have
easily executed an express trust over the unit so that the rights of the parties are
clearly delineated. 25 The CA also found that, at the time of the execution of the
Deed of Assignment, Feliciano, Jr. was already a licensed doctor of medicine,
receiving not only income from Feliciano, Sr.'s three clinics but also monetary
assistance from his mother. His financial capability to purchase the unit cannot
therefore be an issue. 26
The CA moreover gave primacy to the intention of the parties, as evinced by
the language of the Deed of Assignment, and the fact that it was a notarized
document which carries the presumption of regularity. 27 Finally, it held that there
are recognized exceptions to the establishment of an implied trust, one of which is
contained in the last sentence of Article 1448 of the Civil Code, to wit: "x x x
However, if the person to whom the title is conveyed is a child, legitimate or
illegitimate, of the one paying the price of the sale, no trust is implied by law, it being
disputably presumed that there is a gift in favor of the child." 28 In this case where
Marietta paid the purchase price of the condominium unit and title is conveyed by
deed of conveyance to Feliciano, Jr. over whom Marietta stood in loco parentis, a
trust does not result, the presumption being that a gift was intended. The other
exception to the creation of an implied trust, i.e., when the actual contrary intention
of the parties is proved, is also present in this case. 29 The dispositive portion of the
CA Decision states:
WHEREFORE, premises considered, the decision of the court a
quo is hereby REVERSED and SET ASIDE sustaining the validity of
the Deed of Assignment as plaintiffs-appellees failed to prove the
existence of a resulting trust.
SO ORDERED. 30 (Emphasis and italics in the original.)
Petitioners moved for the reconsideration of the CA Decision, but the same
was denied in a Resolution 31 dated January 10, 2011.
Hence, the present petition where petitioners insist that from the facts and
nature of the transaction, a resulting trust was created by operation of law. Thus,
Feliciano, Jr., as the trustee, and his wife Isabel, should return under equity the unit
to Marietta, as the cestui que trust, to prevent unjust enrichment since they acquired
the unit worth P2,268,000.00 for free and enjoyed its use and rental income since
September 1992 to the prejudice of Marietta. 32 Petitioners also criticize the CA
Decision for evaluating the validity of the Deed of Assignment instead of inquiring on
the nature of the transaction between the parties, which induced a resulting
trust. 33 They likewise deny the application of Article 1448 of the Civil Code which
exempts from the creation of an implied trust the conveyance of title by a legitimate
or illegitimate parent to his child, arguing that Feliciano, Jr. is neither a legitimate nor
illegitimate child of Marietta. 34
 In their comment, 35 respondents maintain that the petition must be
summarily dismissed for failure of petitioners to attach a certification of non-forum
shopping. 36 On the merits, they assert that petitioners' verbal allegations do not
suffice to overcome the legal presumption of the existence of a lawful and valid
consideration for the Deed of Assignment. Marietta is moreover estopped from
claiming that she did not receive any payment from respondents after she admitted
executing the Deed of Assignment and having it notarized thereafter. 37 The Deed
of Assignment is a notarized document which has in its favor the presumption of
regularity and should be sustained in full force and effect absent complete and
conclusive proof of its falsity or nullity on account of some flaws or defects provided
by law. 38 Further, the CA correctly held that no implied or resulting trust was
established, as petitioners failed to prove its existence. 39 Also, since the unit
formed part of the conjugal partnership of gains of Marietta and Feliciano, Sr. and
the latter is Feliciano, Jr.'s biological father, the conveyance of title over the unit
through the Deed of Assignment signed by Feliciano, Sr. negates the existence of
an implied trust under Article 1448 of the Civil Code. 40 aDSIHc
We deny the petition.
First, we rule on the perceived failure of petitioners to attach to the petition a
certificate of non-forum shopping. Respondents allege that such failure is cause for
the outright dismissal of the petition. We perused the record, however, and found
that such requirement had been complied with after all. Indeed, attached to the
record is a Jurat 41 signed on February 7, 2011 by Edna May Grecia-Lazaro, Consul
at the Philippine Consulate General in Toronto, Ontario, Canada with the
accompanying one-page "Verification" and "Non-Forum Shopping" 42 signed by
Marietta and one of her children, Christine, supposedly on behalf of Feliciano, Sr.
who has died. The certificate of non-forum shopping contains the standard recitals
and appears to have been filed on the same day as the petition. It is of no
consequence that the certificate had been signed by only one of the petitioners. We
have held that under reasonable or justifiable circumstances — as where petitioners
share a common interest and invoke a common cause of action — the rule requiring
all petitioners to sign the certification against forum shopping may be relaxed. The
requirement of strict compliance with the provisions on certification against forum
shopping merely underscores its mandatory nature to the effect that the certification
cannot altogether be dispensed with or its requirements completely disregarded. It
does not prohibit substantial compliance with the rules under justifiable
circumstances, as in this case. 43
Given this, We are baffled by petitioners' statement in their reply, explaining
the non-submission of a certificate of non-forum shopping and submitting one which
was signed, not by petitioners, but by their son who is not a party to the
case. 44 However, since We already found substantial compliance with the said
requirement, the Court will no longer belabor this matter.
On the merits, petitioners' arguments fail to persuade.
Petitioners mainly argue that the Deed of Assignment is void for lack of
consideration and failure to reflect the true agreement of the parties regarding the
subject condominium unit. According to petitioners, they merely allowed Feliciano,
Jr. to temporarily stay in the unit and did not intend to relinquish their title over it by
the execution of the deed. Moreover, they claim that, contrary to the terms of the
deed, no consideration actually passed between the parties, thereby giving rise to a
resulting trust.
On the other hand, respondents rely on the recitals of the Deed of
Assignment and the deed of absolute sale executed by petitioners in Feliciano, Jr.'s
favor to prove their ownership over the unit. They claim that petitioners were not able
to present competent evidence to overcome the legal presumption that the Deed of
Assignment was supported by sufficient consideration. Likewise, respondents assert
that the CA was correct in ruling that petitioners failed to present sufficient evidence
to prove the existence of a trust relationship.
We agree with respondents.
It must be borne in mind that the subject Deed of Assignment is a notarized
document. Settled is the rule that a document acknowledged before a notary public
is a public document that enjoys the presumption of regularity. 45 A notarial
document is, by law, entitled to full faith and credit upon its face; it must be sustained
in full force and effect so long as he who impugns it shall not have presented strong,
complete and conclusive proof of its falsity or nullity on account of some flaw or
defect provided against by law. 46 We have also consistently held that a public
document, executed with all the legal formalities, is entitled to a presumption of truth
as to the recitals contained therein. Mere preponderance of evidence will not suffice
to overthrow a certificate of a notary public to the effect that a party executed a
certain document and acknowledged the fact of its execution before him. The
evidence must be so clear, strong and convincing as to exclude all reasonable
dispute on the falsity of the certificate. When the evidence is conflicting, the
certificate will be upheld. 47
Here, petitioners failed to present clear, strong and convincing evidence to
overcome the presumption of truth accorded by law to the notarized Deed of
Assignment. While petitioners assert that the Deed of Assignment does not embody
the true intent and agreement of the parties, they failed to present sufficient proof to
refute its contents. The only evidence they proffered were their own testimonies,
unsupported by any independent evidence that would have established the real
intent of the parties. Their self-serving testimonies do not amount to the clear and
convincing evidence required by law to dispute the said presumption. 48
Likewise, petitioners were unable to overcome the disputable presumption
under Section 3 (r), Rule 131 of the Rules of Court that there was sufficient
consideration to support a contract, i.e., the Deed of Assignment in this case. To
overcome this presumption, the alleged lack of consideration must be shown by
preponderance of evidence. 49 The presumption cannot be overthrown by the bare,
uncorroborated and self-serving assertion of petitioners that no such consideration
was given. ETHIDa
Petitioners questioned the financial capacity of both Feliciano, Jr. and his
mother, Norma, to purchase the condominium unit, but with scant effort. Fact is,
petitioners even disclosed that Feliciano, Jr. criticized Marietta for not being as rich
as his mother. 50 On the part of respondents, they were able to present another
witness, Patrocino Margolles, who testified that she personally facilitated the transfer
of the money used as consideration for the Deed of Assignment in July or August
1992, from Norma. 51 We also note, as found by the CA, that at the time of the
execution of the Deed of Assignment, Feliciano, Jr. was already a licensed doctor of
medicine. He was also receiving 75% to 80% of the income from Feliciano, Sr.'s
three clinics with an approximate value of P120,000.00. Hence, Feliciano, Jr.'s
financial capability could not be an issue. 52 As it stands, therefore, petitioners were
unable to trounce the presumption that the Deed of Assignment was executed for
value.
We likewise find no reason to disturb the CA's finding that petitioners were
unable to prove the existence of a resulting trust. A trust is the legal relationship
between one person having an equitable ownership in property and another person
owning the legal title to such property, the equitable ownership of the former entitling
him to the performance of certain duties and the exercise of certain powers by the
latter. 53 Trusts may either be express or implied. A resulting trust is a form of
implied trust, arising from the nature or circumstances of the consideration involved
in a transaction, whereby one person becomes invested with legal title but is
obligated in equity to hold his title for the benefit of another. 54
In this case, petitioners claim that a resulting trust as contemplated in Article
1448 of the Civil Code exists between Marietta and Feliciano, Jr. since it was
Marietta who purchased the condominium unit with her own money, but it was
registered in the name of Feliciano, Jr. They claim that a resulting trust was
established in favor of the one furnishing the consideration for the transfer. 55
As a rule, the burden of proving the existence of a trust is on the party
asserting it. Such proof must be clear and must satisfactorily show the existence of
the trust and its elements. 56 The Civil Code authorizes the admission of parole
evidence to prove the existence of a trust, but such evidence has to be trustworthy
and cannot rest on loose, equivocal or indefinite declarations. 57 Here, as held by
the CA, the only evidence to support the claim that a resulting trust existed and was
contemplated by Marietta and Feliciano, Jr. were petitioners' self-serving
testimonies. 58
Moreover, to prove the existence of a resulting trust, intent, as inferred from
the acts or conduct of the parties, is always an indispensable element.  59 In this
regard, we concur with the CA's finding that Marietta was unable to adequately
explain why she transferred the title of the property in Feliciano, Jr.'s name for value
through the execution of the Deed of Assignment if she merely intended a trust to be
established. If her purpose was merely to allow Feliciano, Jr. to temporarily use the
property, she could have done so without ceding ownership. She could have easily
executed an express trust over the unit so that the rights of the parties are clearly
delineated. 60 This, she did not do. Instead, Marietta opted to surrender her rights,
title and interest over the unit in favor of Feliciano, Jr. These circumstances negate
the existence of a resulting trust.
 In sum, since petitioners were unable to rebut the presumption that the
contents set forth in the Deed of Assignment contain the true agreement of the
parties and that the deed itself was supported by sufficient consideration, their
argument that a resulting trust was created may not be upheld. Consequently, the
petition must fail.
WHEREFORE, the petition is DENIED. The June 23, 2010 Decision and the
January 10, 2011 Resolution of the Court of Appeals in CA-G.R. CV. No. 76670
are AFFIRMED. cSEDTC
SO ORDERED."
 SECOND DIVISION

[G.R. No. 228355. August 28, 2019.]

ENGR. RICARDO O. VASQUEZ, petitioner, vs. PHILIPPINE

NATIONAL BANK AND NOTARY PUBLIC JUDE * JOSE F.
LATORRE, JR., PUBLIC AUCTION OFFICER, respondents.

[G.R. No. 228397. August 28, 2019.]

PHILIPPINE NATIONAL BANK, petitioner, vs. ENGR. RICARDO O.

VASQUEZ, respondent.

DECISION

CAGUIOA, J p:

Before the Court are two consolidated petitions.

In G.R. No. 228355, petitioner Engr. Ricardo O. Vasquez (Vasquez) filed a
Petition for Review on Certiorari 1 under Rule 45 dated January 6, 2017 (Vasquez
Petition) against Philippine National Bank (PNB), partially assailing the
Decision 2 dated April 29, 2016 (assailed Decision) and Resolution 3 dated
November 8, 2016 (assailed Resolution) rendered by the Court of Appeals (CA) in
CA-G.R. CV No. 102669.
G.R. No. 228397, in turn, is the Petition for Review on Certiorari 4 under Rule
45 dated January 12, 2017, filed by PNB (PNB Petition) against Vasquez, also
praying for the reversal of the CA's assailed Decision and Resolution.
The Facts and Antecedent Proceedings
As culled from the CA's recital of the facts in the assailed Decision, as well as
from the records of the instant case, the pertinent facts and antecedent proceedings
are as follows:
 Engineer Ricardo Vasquez x x x applied for and was granted a
loan by the Philippine National Bank x x x [on November 8, 1996]
under the latter's Pangkabuhayan ng Bayan Program, in the amount of
Six Hundred Thousand Pesos (P600,000.00)[, as evidenced by
Promissory Note No. (PN) 009/96PNB 5 dated November 8, 1996.]
Later on, [Vasquez] again obtained another loan under the Revolving
Credit Line (RCL) in the sum of Eight Hundred Thousand Pesos
(P800,000.00)[, as evidenced by PN 031/96RCL 6 dated November 8,
1996.] The aforesaid loans[, having a total amount of P1,400,000.00]
were secured by four (4) parcels of land [(subject properties)] located
in Trece Martirez, Province of Cavite covered by [Transfer Certificates
of Title (TCT)] Nos. 295114, 7 295115, 8 322380 9 and
322381 10 owned and registered [under the name of Vasquez] by way
of [a] Real Estate Mortgage Agreement. 11 [A Credit
Agreement 12 dated November 8, 1996, with the General Conditions
(For Individual Borrower) attached as its Annex "A," was executed by
the parties.]
On June 21, 1999, however, [Vasquez] filed
a Complaint 13 against [PNB and the notary public who was assigned
by PNB as the public auction sale officer, Jude Jose F. Latorre, Jr.
(Latorre, Jr.), before the Regional Trial Court of Imus, Cavite, Branch
20 (RTC)] for specific performance, annulment of foreclosure
proceedings and damages with prayer for the issuance of a preliminary
injunction. [The case was docketed as Civil Case No. 1927-99.] In his
[C]omplaint, [Vasquez] alleged the following, among others:
"3. The rate of interest agreed upon by the parties
in these loan agreements is only 17% (and up to 18% for
3 years) and to liquidate these accounts, [Vasquez] in
fact made partial payments totalling (sic) P221,991.36
but he subsequently suspended further payment when
[PNB] unilaterally escalated upwardly the interest rate
from [the] stipulated [rate of] 17% to 33.00% to 24%, to
34%, to 29% to 21.70% and 20.186% even without prior
knowledge and conformity of [Vasquez] as borrower. This
is shown by the Sept. 15, 1998 statement of account sent
by [PNB] to [Vasquez] depicting the overcharging and
excessive interest imposed upon including imposition of
23% penalties that the REM did not provide.
"4. Alarmed by [PNB's] unbrindled (sic) upward
unilateral escalation of interest that balooned to
staggering P2,071,189.64 (as of Sept. 22, 1998) and
lately P2,363,315.40 (per notice of Auction Sale) as early
as April 05, 1998, and Oct. 17, 1998, [Vasquez] sent
[PNB] tow (sic) letter-requests for recomputation of his
 account to delete the excess interest and penalties that
the parties did not agree in the first place.["]
In support of his prayer of issuance of a preliminary injunction,
[Vasquez] claimed that due to the unilateral escalation of interest rates,
it resulted to a rapid surge of his actual monetary obligation, thus,
placing him in a situation where he could no longer pay his obligations
with the bank. As he could no longer comply with his mounting
monetary obligation, his properties were being subjected to foreclosure
proceedings which might later result to his ejectment.
[Vasquez] prayed that the interest in excess of [the] stipulated
[rate of] 17% x x x be declared x x x illegal. He further prayed for
payment of P250,000.00 representing moral damages, P100,000.00 as
actual damages and P100,000.00 attorney's fees.
[The evidence on record reveals that a Notice of Sale 14 dated
May 24, 1999 was issued by Latorre, Jr., evidencing that, upon the
extra-judicial petition for sale under Act No. 3135, as amended, filed by
PNB, a public auction of the subject properties registered in the name
of Vasquez to satisfy the indebtedness, which PNB pegged at
P2,363,315.40, was set on June 24, 1999.]
On July 29, 1999, [PNB] filed its Answer with
Counterclaim 15 which denied all the allegations cited by [Vasquez].
In its Answer, [PNB] prayed for the dismissal of the complaint for lack
of merit and legal basis. It likewise prayed the [RTC] for [Vasquez] to
pay the bank exemplary, moral, nominal and temperate damages of
P500,000.00 each, P500,000.00 litigation expenses and P200,000.00
attorney's fees.
[PNB] averred that [Vasquez] had no cause of action against the
bank because the purported increases in the interest rate in the loan
agreements [were] freely, voluntarily and mutually agreed upon by the
parties. Furthermore, the penalty charges imposed to [Vasquez were]
provided for in the Credit Agreement to which the former agreed and
signed.
On August 9, 1999, the [RTC] issued an Order 16 setting the
pre-trial on September 17, 1999. The same Order denied the prayer of
[Vasquez] for a writ of preliminary injunction for being moot and
academic inasmuch as the act to be enjoined was already
consummated.
The original pre-trial date was however cancelled and reset
several times mostly for possible settlement. After almost eight years,
pre-trial finally proceeded and was terminated on May 22, 2007.
Thereafter, the parties presented their witnesses and evidence in
support of their respective claims.
 At the onset of [Vasquez'] direct examination, the [RTC] had the
chance to elucidate the following facts:
1. The subject properties [of] the Real Estate
Mortgage have already been foreclosed and [Vasquez]
failed to intervene in the foreclosure proceedings.
2. [Vaquez] also failed to secure a writ of
preliminary injunction as he filed the case on June 21,
1999 or three (3) days before the foreclosure
proceedings on June 24, 1999.
To support his claim, [Vasquez] testified that he secured a loan
from [PNB] through its Pangkabuhayan ng Bayan Program amounting
to Six Hundred Thousand Pesos (P600,000.00) which was later
increased. The aforesaid loans were secured by parcels of land
located at Tanza, Cavite. [Vasquez] averred that the initial stipulated
interest for the loans was seventeen (17%) percent.
On cross-examination, [Vasquez] said that he voluntarily signed
the loan agreements and that he fully understood the terms and
conditions set forth therein, including the payment of interest rates and
penalty charges in case of default. [Vasquez] further stated that while
he recognized the right of the bank to increase or decrease the interest
rate, he insisted that no notice was given by the bank before it actually
increased the interest rate. [Vasquez] claimed that he tried to tender
his payment to the bank but the same was not accepted. He, however,
admitted that when the same was declined by the bank, he did not
make any efforts to consign any amount to the Court pending payment
with the bank.
For its part, [PNB] presented the testimonies of Atty. Ariston
Flores and Glenda Agbayani.
Atty. Flores' testimony was offered in order to prove that
[Vasquez] obtained loans from PNB and that the latter failed to fully
satisfy his obligation with the bank. As a consequence of such failure,
the bank imposed penalties and charges as stated in the loan
agreements. Atty. Flores stated that the bank only imposes the penalty
charge of thirty-six (36%) percent in addition to interest rate when the
borrower failed to settle his or her obligation with the bank.
On cross-examination, Atty. Flores clarified that the interest rate
imposed under the Pangkabuhayan ng Bayan Program was 16.5% for
one year while an 18% interest rate for 90 days was imposed to
[Vasquez] under the Revolving Credit Line and promissory note.
[PNB's] second witness Glenda Agbayani was the Loan
Processor at the time [Vasquez] obtained the loans. Agbayani
corroborated the testimony of Atty. Flores as to the rate of interest
imposed under the Pangkabuhayan ng Bayan Program and Revolving
 Credit Line. She likewise denied that the bank unilaterally increased
the interest rate[.]
On October 2, 2013 the [RTC] rendered a
[Decision] 17 dismissing the [C]omplaint of [Vasquez], to wit:
"Wherefore, premises considered, judgment [is]
hereby rendered as follows, viz.:
1. DENYING plaintiffs' complainant for lack of
factual and legal basis; and
2. DENYING defendant's counterclaim for lack of
merit.
"No pronouncement as to costs.
"SO ORDERED."
[In sum, the RTC held that the Credit Agreement and the
Promissory Notes were executed by the parties willfully and
voluntarily. 18 Further, there was no evidence presented to support
Vasquez' assertion that he had already partially paid the loan
obligations.] 19
[Vasquez] filed a Motion for Reconsideration 20 but was
likewise denied by the [RTC]. 21
The Ruling of the CA
In the assailed Decision, the CA modified the RTC's Decision. The CA held
that the RTC was correct in holding that Vasquez failed to discharge the burden of
showing that the obligation has already been discharged. 22 As to the issue of the
validity of the foreclosure proceedings, the CA held that the "record is bereft of any
allegation and/or evidence that could aid this Court in resolving this issue." 23
However, the CA found that the evidence presented during the trial
established that the subject loan obligations involved the unilateral imposition of
increased interest rates. The CA held that the unilateral imposition of increased
interest rates is violative of the principle of mutuality of contracts and declared the
same void. Hence, the CA imposed the applicable legal rate of interest of 12%
per annum. The CA also held that the penalty interest of 36% is unconscionable.
The penalty charge was reduced to 12% per annum.
Hence, the dispositive portion of the assailed Decision reads:
WHEREFORE, in view of the foregoing premises, the assailed
Decision of the court a quo is
hereby AFFIRMED with MODIFICATIONS. The plaintiff-appellant is
hereby ordered to pay the principal loan amount
of P1,400,000.00 plus interest rate of 12% per annum and penalty
rate of 12% per annum from the time of the maturity of the loans
until the obligations are fully paid.
 No pronouncement as to costs.
SO ORDERED. 24
PNB filed its Motion for Partial Reconsideration 25 on May 25, 2016, while
Vasquez filed his Motion for Reconsideration 26 on May 25, 2016 and his
Supplemental Motion for Reconsideration 27 on June 13, 2016. The CA denied the
Motions for Reconsideration of both PNB and Vasquez in the assailed Resolution.
Hence, the instant appeal filed by both parties.
Issues
In the Vasquez Petition, Vasquez raises three grounds for the Court's
consideration. First, Vasquez argues that while the CA was correct in holding that
the interest rates imposed by PNB on the subject loans were void because PNB
unilaterally imposed increased interest rates, the CA erred in imposing a 12%
per annum interest on the subject loans as the interest rate should be 6%
per annum based on applicable jurisprudence. Second, Vasquez alleges that he had
already made partial payments on the subject loan obligations, i.e., P983,343.38.
Lastly, Vasquez maintains that the CA erred in not ordering the nullity of the
foreclosure of the subject properties. 28
In the PNB Petition, PNB likewise raised three grounds in support of the said
Petition. First, PNB argues that the CA committed a serious and reversible error in
arriving at the conclusion that the interests applied on the subject loans were void
and that the stipulated penalty interest of 36% per annum is unconscionable.
Second, assuming arguendo that the interests and penalties imposed on the subject
loans were void, the principal amounts of the subject loans should be subjected to
the stipulated rates of interests and penalty. And lastly, PNB alleges that, having
been in default, it acted accordingly when it foreclosed the subject properties. 29
In essence, the critical issues that must be resolved by the Court which are
determinative in resolving the above-mentioned issues identified by the parties are
the following:
(1) Whether the interest rate scheme imposed by PNB under the Credit
Agreement and other loan documents is valid, and
(2) If PNB's imposition of interest rates is found to be null and void, what are
the implications of such holding on the foreclosure of the mortgaged
properties and the principal loan obligation of Vasquez.
The Court's Ruling
The Validity of the Unilateral
Determination of Interest Rates by
PNB
The instant case is centered on two loans procured by Vasquez from PNB. It
is undisputed that Vasquez procured a loan from PNB under the Pangkabuhayan ng
Bayan Program in the amount of P600,000.00 (Pangkabuhayan Loan). The said
loan is evidenced by PN 009/96PNB dated November 8, 1996.
 Vasquez also procured another loan from PNB under the Revolving Credit
Line (RCL) in the sum of P800,000.00, which is evidenced by PN 031/96RCL, which
was also executed on November 8, 1996.
It is also not disputed that the parties executed a Real Estate Mortgage to
secure Vasquez' aforementioned loans. The Real Estate Mortgage covers the
subject properties located in Trece Martirez, Cavite and covered by TCT Nos.
295114, 295115, 322380 and 322381 registered under the name of Vasquez.
To recall, both loans are covered under the Credit Agreement, which was
similarly executed on November 8, 1996. The Credit Agreement contains the various
terms and conditions that govern the loan agreement between Vasquez and PNB.
Under the Credit Agreement, it was made clear that the principal loan obligation of
Vasquez totaled P1,400,000.00.
What are the conventional or monetary interest rates fixed by the parties that
were imposed upon the two loans procured by Vasquez? PNB asserts that the
interest rates imposed upon the loan obligations were fixed and stipulated.
According to PNB, the Pangkabuhayan Loan amounting to P600,000.00 has a
stipulated interest rate of 16.5% per annum fixed for one year, while the RCL
amounting to P800,000.00 has a stipulated interest rate of 18% per annum.
After a close examination of the evidence on record, contrary to the position
of PNB, the Court finds that the interest rates imposed by PNB on the subject loans
are not, in reality, fixed to 16.5% and 18% per annum.
As seen on the first page of the Credit Agreement, in the proviso on the
interest rate to be imposed on the Pangkabuhayan Loan, instead of identifying a
fixed and specific rate of interest, it indicated that "the Borrower agrees to pay
interest on the Loan at the rate per annum of Prime Rate plus Spread [i]nterest
rate." 30 The loan documents on record do not elaborate as to how the "Prime
Rate plus Spread" is determined. There is no reference rate on which the
"Prime Rate plus Spread" is based. On the other hand, the proviso on the specific
interest rate to be imposed on the RCL obligation was left blank. 31
Further, on the face of PN 009/96PNB evidencing the Pangkabuhayan Loan,
it merely states that the P600,000.00 principal obligation shall be paid together with
interest at the "applicable" 32 interest rate. As to the RCL, PN 031/96RCL similarly
indicates that the interest rate to be paid is the "applicable" 33 interest rate, without
indicating what exactly is the applicable interest rate.
In Spouses Silos v. Philippine National Bank, 34 PNB implemented
an identical interest rate scheme, wherein PNB imposed on the petitioners therein
interest to be determined based on the "prime rate plus applicable spread in
effect." 35
In the aforesaid case, the Court invalidated the imposition of interest as it
found that such method of fixing interest rates based on the "prime rate plus
applicable spread in effect" is based on a "one-sided, indeterminate, and
subjective criteria such as profitability, cost of money, bank costs, etc.[, that]
is arbitrary for there is no fixed standard or margin above or below these
considerations." 36
In the fairly recent case of Security Bank Corp. v. Spouses Mercado, 37 the
petitioner therein likewise implemented a similar interest rate scheme wherein the
respondents therein were made to pay "Security Bank's prevailing lending rate[.]" 38
In the said case, likening Security Bank's imposition of the "prevailing lending
rate" to the "prime rate plus applicable spread" which was deemed invalid
in Spouses Silos v. Philippine National Bank, the Court held that imposing the
"prevailing lending rate" is not synonymous with the usual banking practice of
imposing the "prevailing market rate." The Court explained that the latter is valid
"because it cannot be said to be dependent solely on the will of the bank as it is also
dependent on the prevailing market rates. The fluctuation in the market rates is
beyond the control of the bank." 39 However, when banks impose "prevailing
lending rates," such imposition is considered one-sided, arbitrary, and potestative as
the bank is "still the one who determines its own prevailing lending rate." 40
But even assuming for the sake of argument that the parties indeed came into
an agreement in the Pangkabuhayan Loan and RCL and were able to specifically
stipulate on the applicable monetary interest rates at 16.5% per annum and 18%
per annum, and not at "prime rate plus spread," the Court finds that the monetary
interest rates imposed in the instant case may still not be considered as fixed.
A key provision of the Credit Agreement readily reveals that even if the
parties were able to stipulate on the aforementioned interest rates, such rates were
still subject to unilateral modification by PNB. Simply stated, under the Credit
Agreement entered into by the parties, a supposedly fixed and specified rate of
interest is, in reality, never really fixed. The interest rates are beholden to the sole
will of PNB.
According to Section 6.02 (b) of the General Conditions (for Individual
Borrower) of the Credit Agreement, in a situation wherein there is a fixed interest
rate, PNB still reserves the right to unilaterally modify the said interest rate at any
time depending on whatever policy PNB adopts in the future:
"(b) In case of fixed interest rate, the Bank reserves the
right to increase at any time the interest rate on the
Loan/Availments/Advances/Trust Receipt/s within the limits
allowed by Law depending on whatever policy the Bank may
adopt in the future; x x x." 41
The one-side imposition of interest in favor of PNB is made even more
pronounced under Section 6.02 (a) of the Credit Agreement's General Conditions,
which state that "the Bank reserves the right to increase or decrease the
interest rate should the Bank's cost of money to fund or maintain such
Loans/Availments/Advances/Trust Receipt/s while outstanding increase or
decrease, respectively." 42
Also, Section 6.02 (c) of the same document states that "[t]he Bank's
determination of the amount of interest payable hereunder shall be conclusive and
binding on the Borrower/s in the absence of manifest error in the
computation." 43 Hence, under the Credit Agreement, PNB is allowed to modify the
rate of interest even without the consent of Vasquez as PNB's determination of the
applicable interest rates is deemed conclusive and binding.
Aside from the foregoing, on the first page of the Credit Agreement itself, it
also unequivocally states that PNB "reserves the right to increase or decrease x x x
the rate of interest x x x in the event of changes in x x x the Bank's overall cost of
funds." 44
The two promissory notes covering the subject loans also contain the
same proviso, 45 providing that the stipulated interest rate, assuming there was any,
may be increased or decreased by PNB even without Vasquez's consent if there is
change in the overall cost of the loans.
Even the Real Estate Mortgage provided that "[t]he rate of interest charged on
the obligation secured by this mortgage x x x shall be subject during the life of this
contract to such an increase within the rate allowed by law, as the Board of Directors
of the MORTGAGEE [PNB] may prescribe for its debtors." 46
When PNB extrajudicially demanded the payment of the loan obligations on
September 22, 1998 through its demand letter 47 of even date, it based the demand
of payment on the Statement of Account 48 as of September 15, 1998, which
details all the amounts of interest imposed upon Vasquez's loans, from the inception
of the loan up to September 15, 1998. The Statement of Account is instructive as to
how PNB actually applied the interest rate scheme upon Vasquez.
The Statement of Account reveals that PNB imposed varying interest rates on
the loan obligations. As to the Pangkabuhayan Loan, the monetary interest rate was
increased from 16%, which was applied from August 7, 1997 to November 7, 1997,
to 33%, which was applied from November 7, 1997 to September 15, 1998. 49 With
respect to the RCL, from a period spanning November 3, 1997 to September 15,
1998, the interest rates were modified, from 34% to 29%, from 29% to 21.70%, and
from 21.70% to 20.189%. 50 The Court finds that PNB clearly failed to
sufficiently explain exactly how PNB arrived at such increased rates.
It also did not escape the attention of the Court that during the trial, when the
RTC pressed PNB on the issue of whether there was a notice of escalation issued
by PNB before applying the interest rates on the subject loans, the counsel of PNB,
Atty. Dennis Somera (Somera), admitted that there were no notices of escalation
sent to Vasquez:
ATTY. SOMERA:
 There was no notice of escalation from the bank. It was just a statement
of account, your Honor. 51
Hence, it is crystal clear that PNB decided on its own to modify and increase
the rates of interest, without notifying and informing Vasquez before it modified the
monetary interest rates, and the basis for such modification. PNB merely sent
statements of accounts already imposing the interest rates unilaterally determined
by PNB.
 Interestingly, PNB itself, in its Petition, readily acknowledged in no uncertain
terms that, even without prior notice, "PNB may modify interest rates depending on
future policy adopted by it[.]" 52 In effect, PNB has recognized that the interest rates
it imposed are not fixed in nature and that it modified interest rates depending on its
own policy without prior notice.
As explained by the Court in Spouses Silos v. Philippine National Bank, the
Court has, in a long line of cases, repeatedly struck down provisions in credit
documents issued by PNB, which are completely identical or similar to the provisions
found in the loan documents in the instant case:
 

Decisions of the Court where PNB's Subject provisions of the loan

imposition of interest rates was documents imposing interest rate
declared invalid that were invalidated by the Court

Philippine National Bank v. Court of "The Borrowers hereby agree to be

Appeals 53 bound by the rules and regulations of
the Central Bank and the current and
general policies of the Bank and those
which the Bank may adopt in the future,
which may have relation to or in any
way affect the Line, which rules,
regulations and policies are
incorporated herein by reference as if
set forth herein in full." 54

Philippine National Bank v. Court of "The BANK reserves the right to

Appeals, 55 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. In either case, the
adjustment in the interest rate agreed
upon shall take effect on the effectivity
date of the increase or decrease in the
maximum interest rate." 56

Sps. Almeda v. CA, 57 "The Bank 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/these
accommodations shall be
correspondingly decreased in the event
that the applicable maximum interest
rate is reduced by law or by the
Monetary Board. In either case, the
adjustment in the interest rate agreed
upon shall take effect on the effectivity
date of the increase or decrease of the
maximum interest rate." 58

Philippine National Bank v. Court of "For value received, I/we, [private

Appeals, 59 respondents] jointly and severally
promise to pay to the ORDER of the
PHILIPPINE NATIONAL BANK, at its
office in San Jose City, Philippines, the
sum of FIFTEEN THOUSAND ONLY
(P15,000.00), Philippine Currency,
together with interest thereon at the
rate of 12% per annum until
paid, which interest rate the Bank may
at any time without notice, raise within
the limits allowed by law, and I/we also
agree to pay jointly and severally __%
per annum penalty charge, by way of
liquidated damages should this note be
unpaid or is not renewed on due
date." 60

New Sampaguita Builders "[W]ithin the limits allowed by law at

Construction, Inc. (NSBCI) v. PNB, 61 any time depending on whatever policy
it may adopt in the future." 62

Philippine National Bank v. Spouses "For value received, we, jointly and
Rocamora, 63 severally, promise to pay to the
ORDER of the PHILIPPINE NATIONAL
BANK, at its office in Pto. Princesa
City, Philippines, the sum of x x x
together with interest thereon at the
rate of 12% per annum until
paid, which interest rate the Bank
may at any time, without notice,
raise within the limits allowed by
law, and I/we also agree to pay jointly
and severally, 5% per annum penalty
 charge, by way of liquidated damages,
should this note be unpaid or is not
renewed on due date." 64
 

The foregoing shows that the nullity of PNB's unilateral determination of

interest rates in the instant case follows a long line of judicial precedent.
At this juncture, the Court clarifies that there may be instances wherein an
interest rate scheme which does not specifically indicate a particular interest rate
may be validly imposed. Such interest rate scheme refers to what is typically called
a floating interest rate system.
In Security Bank Corp. v. Spouses Mercado, the Court explained that floating
rates of interest refer to the variable interest rates stated on a market-based
reference rate agreed upon by the parties. Stipulations on floating rate of interest
differ from escalation clauses. Escalation clauses are stipulations which allow for the
increase of the original fixed interest rate. In contrast, a floating rate of interest
pertains to the interest rate itself that is not fixed as it is dependent on a market-
based reference that was agreed upon by the parties. 65
In the aforesaid case, citing the Manual of Regulations of Banks (MORB) of
the Bangko Sentral ng Pilipinas (BSP), the Court explained that the BSP allows
banks and borrowers to agree on a floating rate of interest, provided that it must be
based on market-based reference rates:
§ X305.3 Floating rates of interest. — The rate of interest on
a floating rate loan during each interest period shall be stated on
the basis of Manila Reference Rates (MRRs), T-Bill Rates or other
market based reference rates plus a margin as may be agreed
upon by the parties. 66
The Court explained that "[t]his BSP requirement is consistent with the
principle that the determination of interest rates cannot be left solely to the will of one
party. It further emphasizes that the reference rate must be stated in writing,
and must be agreed upon by the parties." 67 Hence, in order for the concept of a
floating rate of interest to apply, it presupposes that a market-based reference rate is
indicated in writing and agreed upon by the parties. In the aforesaid case, the Court
did not deem the interest rate imposed therein as an imposable floating rate of
interest because the "reference rates are not contained in writing as required by law
and the BSP." 68
Applying the foregoing in the instant case, a perusal of the loan documents
reveals that PNB did not envision a rate scheme wherein a non-fixed interest rate is
made dependent on a market-based reference rate. There is absolutely no
market-based reference rate indicated in the loan documents. On the contrary,
PNB admits that under the Credit Agreement, the interest rates are made dependent
on "whatever policy it may adopt in the future," 69 and not on MRRs, T-Bill Rates or
other similar market-based reference rates as required by the BSP. The fact alone
that there is no market-based reference rate stipulated in writing negates any idea
that a floating rate of interest system is applicable in the instant case.
Moreover, the witnesses for PNB testified that the interest rate scheme
envisioned by PNB was one wherein specific rates were pegged, i.e., 16.5% and
18% per annum, subject to subsequent increase and the imposition of penalty
charges in case of default. 70 As already explained, stipulating a specific rate of
interest is antithetical to the concept of a floating rate of interest because in a floating
interest rate system, the specific interest rate is not fixed and is dictated by a market-
based reference rate. In the instant case, a floating rate of interest system was
clearly not agreed upon by the parties as PNB alleges that it applied fixed interest
rates subject to escalation.
But, as already extensively explained, the specific and fixed interest rates
supposedly imposed by PNB, aside from not having any clear support on the face of
the loan documents submitted into evidence, are not, in reality, fixed because the
rates are subject to modification based on the unilateral determination of PNB.
The Court also clarifies that not all escalation clauses are invalid. As
explained in Sps. Almeda v. CA, "[e]scalation clauses are not basically wrong or
legally objectionable so long as they are not solely potestative but based on
reasonable and valid grounds. Here, as clearly demonstrated above, not only the
increases of the interest rates on the basis of the escalation clause patently
unreasonable and unconscionable, but also there are no valid and reasonable
standards upon which the increases are anchored." 71
Applying the foregoing in the instant case, to reiterate once more, PNB itself
readily admits in its Petition that the modification of the applicable interest rates
under the Credit Agreement is made dependent "on [the] future policy adopted by
[PNB]." 72 It has been indubitably established that the escalation of interest rates in
the instant case is solely potestative on the part of the creditor and not
anchored on valid and reasonable standards.
Considering the foregoing, without a doubt, the interest rate scheme imposed
upon Vasquez under the loan agreement is clearly one-sided, unilateral, and
violative of one of the fundamental characteristics of contracts — which is the
essential equality of the contracting parties, oftentimes called the principle of
mutuality of contracts. 73 Therefore, the interest rate scheme provided under the
Credit Agreement and the promissory notes is null and void.
The principle of mutuality of contracts is pronounced in Article 1308 of the
Civil Code, which states that a contract "must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them." The principle of
mutuality of contracts dictates that a contract must be rendered void when the
execution of its terms is skewed in favor of one party. 74 As explained by recognized
Civil Law Commentator, former CA Justice Eduardo P. Caguioa, the reason for this
principle "is in order to maintain the enforceability of contracts, for otherwise the
same would be illusory." 75
 As applied to the imposition of monetary interest, the Court has held that
"[t]here is no mutuality of contracts when the determination or imposition of interest
rates is at the sole discretion of a party to the contract. Further, escalation clauses in
contracts are void when they allow the creditor to unilaterally adjust the interest rates
without the consent of the debtor." 76 Jurisprudence holds that provisions in a loan
agreement that grant 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 reek of unilateral authority that is anathema to
the mutuality of contracts and enable lenders to take undue advantage of
borrowers. 77 The rate of interest is a principal condition, if not the most important
component, of a loan agreement. Thus, "any modification thereof must be mutually
agreed upon; otherwise, it has no binding effect." 78
In Security Bank Corp. v. Spouses Mercado, "[s]tipulations as to the payment
of interest are subject to the principle of mutuality of contracts. As a principal
condition and an important component in contracts of loan, interest rates are only
allowed if agreed upon by express stipulation of the parties, and only when reduced
into writing. Any change to it must be mutually agreed upon, or it produces no
binding effect." 79
Illustrative is the case of Sps. Limso v. Philippine National Bank. 80 The said
case, which also features PNB, involved loan agreements that merely provided the
imposition of interest rates. However, the specific interest rates were not clearly
stipulated in the loan documents. Subsequent increases in the interest rates were
made at the sole discretion of PNB. The Court held therein that the interest rates
were null and void and struck them down for being unreasonable and for being
violative of the principle of the mutuality of contracts, even if the debtors therein
readily consented to the arrangement. 81
The exact same situation presented in the aforesaid case is present here.
While providing the payment of interest on the subject loans, the loan
documents executed by the parties, on their face, failed to clearly and definitively fix
the specific interest rates to be applied on the subject loans. Further, under the
Credit Agreement, PNB reserved its unilateral right to increase or decrease the
interest rate, should PNB's cost of money to fund or maintain the loan change. Then,
as proven by the Statement of Account on record, subsequent increases in the
monetary interest were unilaterally made by PNB which were admittedly without
notifying Vasquez beforehand. Hence, the interest rates imposed by PNB in the
instant case should be deemed null and void for being violative of the principle of
mutuality of contracts, even assuming arguendo that Vasquez intelligently consented
to the interest rates provisos found in the Credit Agreement and the other loan
documents.
Therefore, considering the foregoing discussion, the Court finds no error in
the CA's finding in the assailed Decision that the interest rate scheme imposed by
PNB on Vasquez' loan obligation was unilateral in nature, and, necessarily, null
and void.
The Effect of the Nullity of the
Interest Rates Imposed by PNB on
the Foreclosure of the Mortgaged
Properties
The record shows that the four parcels of lands registered in the name of
Vasquez were already foreclosed by PNB, with the auction sale having been
conducted on June 24, 1999.
Now that the Court has ruled that the interest rates imposed by PNB on the
principal loan obligation of P1,400,000.00 are null and void for being unilateral
impositions that violate the principle of mutuality of contracts, what is the effect of
such holding on the foreclosure sale of the subject properties?
Jurisprudence has held that in a situation wherein a debtor was not given an
opportunity to settle his/her debt at the correct amount due to the imposition of a null
and void interest rate scheme, no foreclosure proceedings may be instituted. The
registration of such foreclosure sale has been held to be invalid and cannot vest title
over the mortgaged property.
In a situation wherein null and void interest rates are imposed under a
contract of loan, the non-payment of the principal loan obligation does not place the
debtor in a state of default, considering that under Article 1252 of the Civil Code, if a
debt produces interest, payment of the principal shall not be deemed to have been
made until the interests have been covered. Necessarily, since the obligation of
making interest payments in the instant case is illegal and thus non-demandable, the
payment of the principal loan obligation was likewise not yet demandable on the part
of PNB. With Vasquez not being in a state of default, the foreclosure of the subject
properties should not have proceeded.
In Heirs of Zoilo Espiritu v. Sps. Landrito, 82 the loan obligation involved,
which was secured by a mortgage, was marred by an iniquitous imposition of
monetary interest because the creditors omitted to specifically identify the imposable
interest rate, just as in the instant case. Because of the failure of the debtors to pay
back the loan, the mortgaged property was foreclosed. The debtors failed to redeem
the foreclosed property. The Court in that case held that the foreclosure proceedings
should not be given effect, viz.:
x x x If the foreclosure proceedings were considered valid, this
would result in an inequitable situation wherein the Spouses Landrito
will have their land foreclosed for failure to pay an over-inflated loan
only a small part of which they were obligated to pay.
xxx xxx xxx
Since the Spouses Landrito, the debtors in this case, were not
given an opportunity to settle their debt, at the correct amount and
without the iniquitous interest imposed, no foreclosure proceedings
may be instituted. A judgment ordering a foreclosure sale is
conditioned upon a finding on the correct amount of the unpaid
obligation and the failure of the debtor to pay the said amount. In this
 case, it has not yet been shown that the Spouses Landrito had already
failed to pay the correct amount of the debt and, therefore, a
foreclosure sale cannot be conducted in order to answer for the unpaid
debt. The foreclosure sale conducted upon their failure to pay
P874,125 in 1990 should be nullified since the amount demanded as
the outstanding loan was overstated; consequently it has not been
shown that the mortgagors — the Spouses Landrito, have failed to pay
their outstanding obligation. Moreover, if the proceeds of the sale
together with its reasonable rates of interest were applied to the
obligation, only a small part of its original loans would actually remain
outstanding, but because of the unconscionable interest rates, the
larger part corresponded to said excessive and iniquitous interest.
As a result, the subsequent registration of the foreclosure sale
cannot transfer any rights over the mortgaged property to the Spouses
Espiritu. The registration of the foreclosure sale, herein declared
invalid, cannot vest title over the mortgaged property. The Torrens
system does not create or vest title where one does not have a rightful
claim over a real property. It only confirms and records title already
existing and vested. It does not permit one to enrich oneself at the
expense of another. Thus, the decree of registration, even after the
lapse of one (1) year, cannot attain the status of indefeasibility. 83
Similarly, in Sps. Albos v. Sps. Embisan, 84 the extra-judicial foreclosure sale
of a mortgaged property, which was foreclosed due to the non-payment of a loan,
was invalidated because the interest rates imposed on the loan were found to be null
and void due to their unconscionability.
In Sps. Castro v. Tan, 85 on the basis of the nullity of the imposed interest
rates due to their iniquity, the Court nullified the foreclosure proceedings "since the
amount demanded as the outstanding loan was overstated. Consequently, it has not
been shown that the respondents have failed to pay the correct amount of their
outstanding obligation. Accordingly, we declare the registration of the foreclosure
sale invalid and cannot vest title over the mortgaged property." 86
Also, in Sps. Andal v. PNB, 87 the Court upheld the nullification of the
foreclosure sale, affirming the appellate court's holding that "since the interest rates
are null and void, [respondent] bank has no right to foreclose [petitioners-spouses']
properties and any foreclosure thereof is illegal. x x x. Since there was no default
yet, it is premature for [respondent] bank to foreclose the properties subject of the
real estate mortgage contract." 88
Hence, based on established jurisprudence, the fact that the interest rate
scheme imposed upon Vasquez was null and void inevitably leads to the invalidity of
the foreclosure sale. It would be unjust if the foreclosure sale of the subject
properties was considered valid, as this would result in an inequitable situation
wherein Vasquez would have his properties foreclosed for failure to pay a loan that
was unduly inflated due to the unilateral and one-sided imposition of monetary
interest.
 Therefore, the CA was incorrect in finding that there is no evidence presented
that warrants the nullification of the foreclosure sale of the subject properties. The
Court rules that the foreclosure sale of the subject properties is null and void.
Necessarily, the said foreclosure sale cannot be deemed to have transferred the
right of ownership and possession to PNB and its successors-in-interest.
The Effect of the Nullity of the
Interest Rates Imposed by PNB on
the Loan Obligation of Vasquez
Despite the foregoing, the Court stresses that Vasquez is not completely off
the hook.
The Court has held that in a situation wherein the interest rate scheme
imposed by the bank was struck down because the bank was allowed under the loan
agreement to unilaterally determine and increase the imposable interest rate, thus
being null and void, "only the interest rate imposed is nullified; hence, it is
deemed not written in the contract. The agreement on payment of interest on the
principal loan obligation remains." 89 Hence, Vasquez is still obligated to pay
back the principal loan obligation of P1,400,000.00 with interest.
The Court cannot give credence to Vasquez's argument that he has already
made considerable partial payments that warrant the significant reduction of the
principal loan balance. A perusal of the documents offered into evidence by Vasquez
that purportedly support the assertion that substantial partial payments had been
made reveals that none of the cash vouchers and receipts of payment referred to the
subject loans. None of the documents referred to payments made in satisfaction of
the loans evidenced by PN 009/96PNB and PN 031/96RCL.
The Court notes, however, that Check Voucher No. RCP-97-012 evidences
the payment of P24,266.68 with respect to PN 009/96, referring to
the Pangkabuhayan Loan. The Court notes that the said voucher bears the receiving
stamp of PNB dated February 7, 1997. Hence, this amount should be deducted from
the outstanding principal loan obligation of Vasquez. The outstanding principal loan
obligation is P1,375,733.32.
What then would be the conventional or monetary interest rate to be imposed
on the outstanding principal loan obligation?
Jurisprudence has held that in a similar situation wherein an interest rate on a
loan has been declared null and void due to the violation of the mutuality of
contracts, the Court shall apply the applicable legal rate of interest, which
refers to "the prevailing rate at the time when the agreement was entered
into." 90 In the instant case, the legal rate of interest prevailing at the time of the
entering of the Credit Agreement is 12%. Hence, the CA did not err in imposing
monetary interest of 12% on the outstanding principal loan obligation. Although, in
accordance with Nacar v. Gallery Frames, 91 the monetary interest rate of 12%
per annum should be applied from the time the agreement was entered into until
June 30, 2013. Starting July 1, 2013 until the finality of this Decision, the monetary
interest rate that shall be applied to the principal loan obligation is 6% per annum.
 Vasquez argues that the imposable monetary interest should be pegged at
6% per annum all throughout, citing Nacar v. Gallery Frames. 92 In arguing that 6%
should be the imposable interest rate all throughout, Vasquez cites the aforesaid
case, which states that "[i]n the absence of stipulation, the rate of interest shall be
6% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil Code." 93
Vasquez's argument is erroneous.
It must be recalled that there are two types of interest — monetary interest
and compensatory interest. Interest as a compensation fixed by the parties for the
use or forbearance of money is referred to as monetary interest, while interest that
may be imposed by law or by courts as penalty for damages is referred to as
compensatory interest. 94
The 6% per annum to be computed from default cited by Vasquez, referring
to Nacar v. Gallery Frames, 95 refers to an award of interest in the concept of actual
and compensatory damages when a loan obligation is breached. But the 12%
per annum interest imposed by the CA on the principal loan obligation, which is
pegged at the legal rate of interest prevailing at the time the agreement was entered
into, 96 refers to monetary or conventional interest, and not compensatory interest.
Again, jurisprudence holds that when the provision on the loan agreement on
monetary or conventional interest is struck down for being null and void, the courts
shall replace the null and void interest rate with the legal rate of interest prevailing at
the time the agreement was entered into. As stated earlier, such legal rate is 12%
per annum, to be applied from the time the loan agreement was entered into until
June 30, 2013. Then, from July 1, 2013 until the finality of this Decision, the
monetary interest rate that shall be applied to the principal loan obligation is 6%
per annum. To arrest the incurring of interest pending litigation, an option that would
have been available to the debtor was to consign the amount of the principal loan
obligation before the RTC. This was not done by Vasquez.
For its part, PNB argues that, upon the declaration of nullity of the interest
adjustment clauses of the loan documents, the originally stipulated interest rates of
16.5% per annum for the Pangkabuhayan Loan and 18% per annum for the RCL
should be imposed, and not the legal rate of 12% per annum.
PNB's argument is likewise erroneous.
The Court has previously held that when an escalation clause has been
annulled, ordinarily, the principal amount of the loan should be subjected to the
original or stipulated interest rate of interest. 97 However, such rule does not find
any application in the instant case. As already explained extensively, the Court finds
that the loan documents, on their face, are ambiguous and unclear as to the real
stipulated rate of interest. Further, the Court has also found that the original interest
rate scheme envisioned under the Credit Agreement, owing to its unilateral nature
that violates the principle of mutuality of contracts, is null and void. Hence, with
respect to the imposition of monetary or conventional interest, the Court cannot refer
back to the allegedly stipulated interest rate scheme. It shall resort to the imposition
of the legal rate of interest at the time of the entering of the loan agreement, i.e.,
12% per annum.
Now, with respect to the imposition of interest in the nature of a penalty or
compensatory interest, the Court holds that the imposition of penalty interest on
Vasquez prior to the finality of this Decision would be inequitable, bearing in mind
that the interest rate scheme previously imposed by PNB upon the subject loans
was null and void. Vasquez cannot be considered in default as PNB had no right to
demand and Vasquez had no obligation to pay illegal monetary interest.
As illustrated in Sps. Andal v. PNB, a debtor whose loan was subjected to a
null and void interest rate scheme cannot be considered in default for his/her inability
to pay arbitrary, illegal and unconscionable interest rates and penalty charges
unilaterally imposed:
It is worth mentioning that both the RTC and the CA are one in
saying that '[petitioners-spouses] cannot be considered in default
for their inability to pay the arbitrary, illegal and unconscionable
interest rates and penalty charges unilaterally imposed by
[respondent] bank.' This is precisely the reason why the foreclosure
proceedings involving petitioners-spouses' properties were invalidated.
As pointed out by the CA, 'since the interest rates are null and void,
[respondent] bank has no right to foreclose [petitioners-spouses']
properties and any foreclosure thereof is illegal. x x x. Since there was
no default yet, it is premature for [respondent] bank to foreclose the
properties subject of the real estate mortgage contract. 98
In accordance with the aforesaid case, Vasquez is considered in default only
upon failure to pay the obligation here stated upon finality of this Decision. However,
according to Nacar v. Gallery Frames, 99 when the judgment of the court awarding a
sum of money becomes final and executory, legal interest shall be imposed on the
sum with a rate of 6% per annum from such finality until its full satisfaction.
Hence, bearing in mind the foregoing, legal interest, with the rate of 6%
per annum, shall be imposed upon the outstanding principal loan obligation and the
monetary interest imposed on the said amount upon the finality of this Decision until
full satisfaction.
WHEREFORE, in view of the foregoing, the Petition in G.R. No. 228355
is PARTIALLY GRANTED, while the Petition in G.R. No. 228397 is DENIED. The
Decision dated April 29, 2016 and Resolution dated November 8, 2016 of the Court
of Appeals in CA-G.R. CV No. 102669 is REVERSED and SET ASIDE.
Petitioner Vasquez is ORDERED TO PAY respondent PNB the outstanding
principal loan obligation of P1,375,733.32. Monetary or conventional interest on the
aforesaid principal obligation shall be imposed at the rate of 12%
per annum computed from the date of availment of the subject loans as borne by the
loan documents, i.e., November 8, 1996, up to June 30, 2013, and at the rate of 6%
per annum from July 1, 2013 until full payment.
 The foreclosure sale of the subject properties is hereby declared NULL AND
VOID. Ownership and possession over the subject properties are REVERTED to
petitioner Ricardo O. Vasquez. The certificates of title covering the subject
properties issued and registered as a consequence of the foreclosure sale are
hereby ordered CANCELLED. Transfer Certificates of Title Nos. 295114, 295115,
322380 and 322381 are hereby ordered RECONSTITUTED in the name of petitioner
Ricardo O. Vasquez.
Let a copy of this Decision be furnished to the Register of Deeds of Trece
Martirez, Province of Cavite.
SO ORDERED.

THIRD DIVISION

[G.R. No. 196888. July 19, 2017.]

AURELIA NARCISE, GLORIA A. DELA CRUZ, MARITESS O.

GARCIA, PHILIP FALCON, ENRICO M. VITUG, LYNETTE C.
PONTRERAS, BONIFACIO BARRAMEDA, RAMON S. MORADA,
MANUEL G. VIOLA, ZENAIDA LANUZA, CIRILO G. SALTO,
TEODORO DEL ROSARIO, NANCY G. INSIGNE, MELANIE G. VIANA,
ROMEO TICSAY, AMY J. FRANCISCO, MARIE J. FRANCISCO,
ZENAIDA LANUZA, MIGUELITO B. MARTINEZ, APOLONIO
SANTOS, MARIVIC TAN, JANE CLOR DILEMA, VALENTINO
DILEMA, JOSE L. PANGAN, ANTONIA M. MANGELEN, IMELDA
MANALASTAS, TEODORICO N. ANDRADE, AIDA L. CRUZ, MANUEL
YAMBOT, JAIME SERDENA, ARIEL PALACIOS, EVE BOLNEO,
LIBETINE MODESTO, MA. AILEEN VERDE, BENNY ILAGAN,
MICHELLE ROMANA, DANILO VILLANUEVA, LEO NALUGON,
ROSSANA MARASIGAN, NELIE BINAY and ISABELITA
MENDOZA, petitioners, vs. VALBUECO, INC., respondent.

DECISION
TIJAM, J p:

Before Us is a Petition for Review on Certiorari under Rule 45, which seeks to

reverse and set aside the Decision 1 dated December 21, 2010 and
Resolution 2 dated May 11, 2011 of the Court of Appeals (CA) in CA-G.R. CV No.
89616. HTcADC
Facts
On March 8, 2005, respondent Valbueco, Inc. filed an action for Annulment of
the Free Patents, Certificates of Title and Damages, docketed as Civil Case No.
8144, 3 against petitioners Narcise, et al., the Department of Natural Resources
(DENR) and the Register of Deeds of Bataan before the Regional Trial Court (RTC)
of Balanga City, Branch 1.
In said Complaint, respondent alleged that it is the possessor of the subject
lots in an actual, peaceful, adverse and peaceful possession since
1970. 4 Respondent averred that from 1977 until 1999, Original Certificates of Title,
Free Patents and Transfer Certificates of Title covering the lots in question were
issued in the name of petitioners. 5
Instead of filing their respective Answer, petitioners filed several Motions to
Dismiss on the ground of lack of cause of action, failure to state cause of action,
defect in the certificate of non-forum shopping and prescription.
On December 7, 2006, the RTC issued an Order, 6 granting petitioners'
motions. The RTC ruled that the instant case is an action for reversion because
petitioners are not qualified to be issued said free patents. As such, the land must
revert back to the State. Thus, it is the Office of the Solicitor General (OSG) who is
the real party-in-interest, and not the respondent. The dispositive portion of the same
reads:
WHEREFORE, in view of the foregoing, let the instant complaint
be dismissed and the motion to declare some defendants in default is
necessarily denied.
SO ORDERED. 7
Respondent filed a motion for reconsideration, which was denied by the RTC
in its Order 8 dated March 7, 2017.
Undaunted, respondent filed an appeal 9 before the CA. In a
Decision 10 dated December 21, 2010, the CA reversed and set aside the ruling of
the RTC. The CA maintained that respondent alleged all the facts necessary to seek
the nullification of the subject free patents. The fallo thereof reads:
WHEREFORE, premises considered, the instant appeal is
hereby GRANTED. The Orders of the Regional Trial Court of Balanga
City, Branch 1 dated December 7, 2006 and March 7, 2007 are
hereby REVERSED and SET ASIDE. This case is REMANDED to the
trial court for further proceedings.
SO ORDERED. 11
 Petitioners filed a Motion for Reconsideration, 12 which was denied in a
Resolution 13 dated May 11, 2011.
Hence, this petition.
Issues
Petitioners interposed the following grounds for review:
I.
Whether or not the instant case is actually a reversion case, and
not a case for annulment of free patents and certificates of title;
II.
Whether or not respondent is the real party-in-interest; and
III.
Whether or not the instant case had already prescribed. 14
Our Ruling
The petition is denied.
An action for reversion, a remedy provided under Commonwealth Act No.
141, seeks to cancel the original certificate of registration, and nullify the original
certificate of title, including the transfer of certificate of title of the successors-in-
interest because the same were all procured through fraud and
misrepresentation. 15 In cancelling and nullifying such title, it restores the public land
fraudulently awarded and disposed of to private individuals or corporations to the
mass of public domain. Such action is filed by the OSG pursuant to its authority
under the Administrative Code. 16
On the other hand, an action for annulment of free patents and certificates of
title also seeks for the cancellation and nullification of the certificate of title, but once
the same is granted, it does not operate to revert the property back to the State, but
to its lawful owner. In such action, the nullity arises not from fraud or deceit, but from
the fact that the director of the Land Management Bureau had no jurisdiction to
bestow title; hence, the issued patent or certificate of title was void ab initio. 17
Thus, the difference between them lies in the allegations as to the character
of ownership of the realty whose title is sought to be nullified. In an action for
reversion, the pertinent allegations in the complaint would admit State ownership of
the disputed land, while in an action for annulment of patent and certificate of title,
pertinent allegations deal with plaintiff's ownership of the contested land prior to the
issuance of the same as well as defendant's fraud or mistake in successfully
obtaining these documents of title over the parcel of land claimed by the plaintiff. 18
A careful perusal of respondent's complaint reads:
3. That the herein plaintiff has been in the actual, peaceful, adverse,
continuous and peaceful possession since sometime in 1970 and
up to the present time, by itself and its predecessor-in-interest, some
of which it acquired by transfer of rights, claims, interest as
 evidence [sic] by the documents x x x and the rest by occupation and
planting of root crops and other including trees x x x. aScITE
4. That the plaintiff and its workers and employees of its ranches and
the cultivation and planting of different root crops and trees were
always in the premises since 1970 or thereabouts, and their presence
were never disturbed nor molested by anybody until sometime in the
year 2000 x x x. 19 (Emphasis ours)
In this view, We hold that the action is one of annulment of patents and titles.
The allegations in the complaint show that respondent asserts its ownership over the
subject properties by acquisitive prescription.
Acquisitive prescription is a mode of acquiring ownership of a real or
immovable property by possessor through the requisite lapse of time. In order to
ripen into ownership, possession must be in the concept of an owner, public,
peaceful and uninterrupted. 20 The possession contemplated as foundation for
prescriptive right must be one under claim of title or adverse to or in prescription. 21
On this note, acquisitive prescription may either be extraordinary, which
requires uninterrupted adverse possession for 30 years, 22 or ordinary, which
requires possession in good faith and with a just title for a period of ten years. 23
Without going into the merits of the case, We hold that the allegations in the
complaint sufficiently show that respondent claims its ownership right by expounding
on its uninterrupted possession of the same for a period of at least 35 years. Also,
respondent's claim of its possession in a public, peaceful and uninterrupted manner
constitutes an allegation of ownership by acquisitive prescription.
Being an action for annulment of patents and titles, it is the respondent who is
the real party-in-interest for it is the one claiming title or ownership adverse to that of
the registered owner. 24
Moreover, We agree with the CA when it declared that petitioners' argument
of failure to exhaust administrative remedies is misguided.
It must be noted that the trial court has jurisdiction over an action of an owner
of a piece of land to recover it, if the Director of Lands, thinking that it is still
disposable public land, grants a free patent to the one who has occupancy and
cultivation. 25 The jurisdiction of the Director of Lands, contrary to petitioners' claim,
covers those issues between two or more applicants for a free patent, 26 which is
not the case here. Here, respondent claims to be the owner of the subject properties
prior to the issuance of the patents and the corresponding certificates of title. Thus,
the trial court has jurisdiction to hear the case.
Lastly, the defense of prescription is evidentiary in nature which could not be
established by mere allegations in the pleadings and must not be resolved in a
motion to dismiss. Such issue must be resolved at the trial of the case on the merits
wherein both parties will be given ample opportunity to prove their respective claims
and defenses. 27
 Verily, the CA did not err in considering the instant case as an action for
annulment of patents and titles.
WHEREFORE, the instant appeal is DENIED. Accordingly, the Decision
dated December 21, 2010 and the Resolution dated May 11, 2011 of the Court of
Appeals in CA-G.R. CV No. 89616 are AFFIRMED in toto.
SO ORDERED.