II.

LOAN

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 154878             March 16, 2007

CAROLYN M. GARCIA, Petitioner,
vs.
RICA MARIE S. THIO, Respondent.

DECISION

CORONA, J.:

Assailed in this petition for review on certiorari 1 are the June 19, 2002 decision2 and August 20, 2002
resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28, 1997
decision of the Regional Trial Court (RTC) of Makati City, Branch 58.

Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia a
crossed check4 dated February 24, 1995 in the amount of US$100,000 payable to the order of a certain
Marilou Santiago.5 Thereafter, petitioner received from respondent every month (specifically, on March
24, April 26, June 26 and July 26, all in 1995) the amount of US$3,000 6 and ₱76,5007 on July 26,8 August
26, September 26 and October 26, 1995.

In June 1995, respondent received from petitioner another crossed check 9 dated June 29, 1995 in the
amount of ₱500,000, also payable to the order of Marilou Santiago. 10 Consequently, petitioner received
from respondent the amount of ₱20,000 every month on August 5, September 5, October 5 and
November 5, 1995.11

According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000 and
₱500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of money
and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the sums of
US$100,000, with interest thereon at 3% a month from October 26, 1995 and ₱500,000, with interest
thereon at 4% a month from November 5, 1995, plus attorney’s fees and actual damages. 12

Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000
with interest thereon at the rate of 3% per month, which loan would mature on October 26, 1995. 13 The
amount of this loan was covered by the first check. On June 29, 1995, respondent again borrowed the
amount of ₱500,000 at an agreed monthly interest of 4%, the maturity date of which was on November
5, 1995.14 The amount of this loan was covered by the second check. For both loans, no promissory note
was executed since petitioner and respondent were close friends at the time. 15 Respondent paid the
stipulated monthly interest for both loans but on their maturity dates, she failed to pay the principal
amounts despite repeated demands.161awphi1.nét
Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou
Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to give the
crossed checks to Santiago.17 She issued the checks for ₱76,000 and ₱20,000 not as payment of interest
but to accommodate petitioner’s request that respondent use her own checks instead of Santiago’s. 18

In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. 19 It found that respondent
borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and ₱500,000 at a
monthly interest of 4%:20

WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby
rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:

1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October
26, 1995 until fully paid;

2. ₱500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.

3. ₱100,000.00 as and for attorney’s fees; and

4. ₱50,000.00 as and for actual damages.

For lack of merit, [respondent’s] counterclaim is perforce dismissed.

With costs against [respondent].

IT IS SO ORDERED.21

On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan
between the parties:

A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows that
[respondent] received money from [petitioner]. What is evident is the fact that [respondent] received a
MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the order
of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of ₱500,000.00,
again payable to the order of Marilou Santiago, both of which were issued by [petitioner]. The checks
received by [respondent], being crossed, may not be encashed but only deposited in the bank by the
payee thereof, that is, by Marilou Santiago herself.

It must be noted that crossing a check has the following effects: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only once—to one who has an account with
the bank; (c) and the act of crossing the check serves as warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.

Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the
payee in contemplation of law since the latter is not the person who could take the checks as a holder,
i.e., as a payee or indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as
an agent of Marilou Santiago with respect to the checks because she was merely facilitating the
transactions between the former and [petitioner].

With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan
that existed between the parties. x x x (emphasis supplied) 22

Hence this petition.23

As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of the
Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual findings of the
CA (which held that there were no  contracts of loan between petitioner and respondent) and the RTC
(which held that there were contracts of loan) are contradictory. 24

The petition is impressed with merit.

A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of
the contract.25 This is evident in Art. 1934 of the Civil Code which 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 the delivery of the
object of the contract. (Emphasis supplied)

Upon delivery of the object of the contract of loan (in this case the money received by the debtor when
the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound
to pay the creditor an equal amount. 26

It is undisputed that the checks were delivered to respondent. However, these checks were crossed and
payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the main
question to be answered is: who borrowed money from petitioner — respondent or Santiago?

Petitioner insists that it was upon respondent’s instruction that both checks were made payable to
Santiago.27 She maintains that it was also upon respondent’s instruction that both checks were delivered
to her (respondent) so that she could, in turn, deliver the same to Santiago. 28 Furthermore, she argues
that once respondent received the checks, the latter had possession and control of them such that she
had the choice to either forward them to Santiago (who was already her debtor), to retain them or to
return them to petitioner.29

We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the
actual or constructive possession or control of another. 30 Although respondent did not physically receive
the proceeds of the checks, these instruments were placed in her control and possession under an
arrangement whereby she actually re-lent the amounts to Santiago.

Several factors support this conclusion.

First, respondent admitted that petitioner did not personally know Santiago. 31 It was highly improbable
that petitioner would grant two loans to a complete stranger without requiring as much as promissory
notes or any written acknowledgment of the debt considering that the amounts involved were quite big.
Respondent, on the other hand, already had transactions with Santiago at that time. 32

Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both
parties’ list of witnesses) testified that respondent’s plan was for petitioner to lend her money at a
monthly interest rate of 3%, after which respondent would lend the same amount to Santiago at a
higher rate of 5% and realize a profit of 2%. 33 This explained why respondent instructed petitioner to
make the checks payable to Santiago. Respondent has not shown any reason why Ruiz’ testimony should
not be believed.

Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of ₱76,000
each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the ₱500,000
loan, she also issued her own checks in the amount of ₱20,000 each for four months. 34 According to
respondent, she merely accommodated petitioner’s request for her to issue her own checks to cover the
interest payments since petitioner was not personally acquainted with Santiago. 35 She claimed,
however, that Santiago would replace the checks with cash. 36 Her explanation is simply incredible. It is
difficult to believe that respondent would put herself in a position where she would be compelled to pay
interest, from her own funds, for loans she allegedly did not contract. We declared in one case that:

In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to
be believed, it must not only proceed from the mouth of a credible witness, but must be credible in
itself such as the common experience of mankind can approve as probable under the circumstances. We
have no test of the truth of human testimony except its conformity to our knowledge, observation, and
experience. Whatever is repugnant to these belongs to the miraculous, and is outside of juridical
cognizance.37

Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner,
who was listed as one of her (Santiago’s) creditors. 38

Last, respondent inexplicably never presented Santiago as a witness to corroborate her story. 39 The
presumption is that "evidence willfully suppressed would be adverse if produced." 40 Respondent was
not able to overturn this presumption.

We hold that the CA committed reversible error when it ruled that respondent did not borrow the
amounts of US$100,000 and ₱500,000 from petitioner. We instead agree with the ruling of the RTC
making respondent liable for the principal amounts of the loans.

We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and ₱500,000 loans respectively. There was no written proof of the interest payable except
for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the
Civil Code provides that "[n]o interest shall be due unless it has been expressly stipulated in writing."

Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to
Article 2209 of the Civil Code. It is well-settled that:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.41

Hence, respondent is liable for the payment of legal interest per annum to be computed from November
21, 1995, the date when she received petitioner’s demand letter. 42 From the finality of the decision until
it is fully paid, the amount due shall earn interest at 12% per annum, the interim period being deemed
equivalent to a forbearance of credit. 43

The award of actual damages in the amount of ₱50,000 and ₱100,000 attorney’s fees is deleted since
the RTC decision did not explain the factual bases for these damages.

WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20, 2002
resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The February
28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with
the MODIFICATION that respondent is directed to pay petitioner the amounts of US$100,000 and
₱500,000 at 12% per annum interest from November 21, 1995 until the finality of the decision. The total
amount due as of the date of finality will earn interest of 12% per annum  until fully paid. The award of
actual damages and attorney’s fees is deleted.

SO ORDERED.

RENATO C. CORONA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

ANGELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA

Associate Justice Asscociate Justice

CANCIO C. GARCIA
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above decision
had been reached in consultation before the case was assigned to the writer of the opinion of the
Court’s Division.

REYNATO S. PUNO
Chief Justice
 SECOND DIVISION

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

SAURA IMPORT & EXPORT CO., INC., Plaintiff-Appellee, v. DEVELOPMENT BANK OF THE

PHILIPPINES, Defendant-Appellant.

Mabanag, Eliger & Associates & Saura, Magno & Associates for Plaintiff-Appellee.

Jesus A. Avaceña and Hilario G. Orsolino, for Defendant-Appellant.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS; PERFECTION UPON ACCEPTANCE OF

PROMISE TO DELIVER SOMETHING BY WAY OF SIMPLE LOAN; ART. 1954 OF THE CIVIL CODE. — Where
the application of Saura Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and
the corresponding mortgage executed and registered, there is undoubtedly offer and acceptance and
We hold that there was indeed a perfected consensual contract as recognized in Article 1954 of the Civil
Code.

2. ID.; ID.; ID.; ID.; DEFENDANT DID NOT DEVIATE FROM PERFECTED CONTRACT IN CASE AT BAR. — The
terms laid down in RFC Resolution No. 145 passed on Jan. 7, 1954 which resolution approved the loan
application state that: "the proceeds of the loan shall be utilized exclusively for the following purposes:
for construction of factory building — P250,000.00; for payment of the balance of purchase price of
machinery and equipment — P240,900.00, for working capital — P9,100.00." There is no serious dispute
that RFC entertained the loan application of Saura Inc., on the assumption that the factory to be
constructed would utilize locally grown raw materials principally kenaf . It was in line with such
assumption that when RFC, by Resolution 9083 approved on December 17, 1954, restored the loan to
the original amount of P500,000.00, it imposed two conditions to wit: (1) that the raw materials needed
by the borrower-corporation to carry out its operation are available in the immediate vicinity and (2)
that there is prospect of increased production thereof to provide adequately for the requirements of the
factory." The imposition of those conditions was by no means a deviation from the terms of the
agreement, but rather a step in its implementation. There was nothing in said conditions that
contradicted RFC Resolution No. 145.

3. ID.; ID.; ID.; ID.; DEVIATION MADE BY PLAINTIFF. — Evidently Saura Inc., realized that it could not
meet the conditions required by RFC in Resolution 9083, and so wrote its letter of January 21, 1955,
stating that local jute "will not be available in sufficient quantity this year or probably next year," and
asking that out of the loan agreed upon, the sum of P67,586.09 be released "for raw materials and
labor." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the
mortgage contract, implying as it did a diversion of part of the proceeds of the loan to purposes other
than those agreed upon.

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

DECISION

MAKALINTAL, J.:

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

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

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

On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be
secured by a first mortgage on the factory buildings to be constructed, the land site thereof, and the
machinery and equipment to be installed. Among the other terms spelled out in the resolution were the
following:jgc:chanrobles.com.ph
"1. That the proceeds of the loan shall be utilized exclusively for the following purposes:chanrob1es
virtual 1aw library

For construction of factory building P250,000.00

For payment of the balance of purchase

price of machinery & equipment 240,900.00

For working capital 9,100.00

—————

T O T A L P500,000.00

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

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

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

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the
members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the
aspects of this approved loan . . . with special reference as to the advisability of financing this particular
project based on present conditions obtaining in the operations of jute mills, and to submit his findings
thereon at the next meeting of the Board."cralaw virtua1aw library

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer
for the loan, and asked that the necessary documents be prepared in accordance with the terms and
conditions specified in Resolution No. 145 In connection with the re-examination of the project to be
financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake the necessary
studies, although in appointing its own committee Saura, Inc. made the observation that the same
"should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the
agreement already entered into," referring to its acceptance of the terms and conditions mentioned in
Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling,
representing China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage,
which was duly registered on the following April 17.

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

"RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution
No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-
examination of all the various aspects of the loan granted the Saura Import & Export Co. under
Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with
special reference as to the advisability of financing this particular project based on present conditions
obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive
discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan
granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to
P100,000 may be authorized as may be necessary from time to time to place the factory in actual
operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent
herewith, shall remain in full force and effect."cralaw virtua1aw library

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

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The
request was denied by RFC, which added in its letter-reply that it was "constrained to consider as
cancelled the loan of P300,000.00 . . . in view of a notification . . . from the China Engineers, Ltd.,
expressing their desire to consider the loan cancelled insofar as they are concerned."cralaw virtua1aw
library

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China
Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us
the P500,000.00 originally approved by you."cralaw virtua1aw library

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

"That in view of observations made of the shortage and high cost of imported raw materials, the
Department of Agriculture and Natural Resources shall certify to the following:chanrob1es virtual 1aw
library
1. That the raw materials needed by the borrower-corporation to carry out its operation are available in
the immediate vicinity; and

2. That there is prospect of increased production thereof to provide adequately for the requirements of
the factory."cralaw virtua1aw library

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954,
wherein it was explained that the certification by the Department of Agriculture and Natural Resources
was required "as the intention of the original approval (of the loan) is to develop the manufacture of
sacks on the basis of locally available raw materials." This point is important, and sheds light on the
subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao
was for the manufacture of bags from local raw materials. The cover page of its brochure (Exh. M)
describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the
Saura Import and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture
copra and corn bags, runners, floor mattings, carpets, draperies, out of 100% local raw materials,
principal kenaf." The explanatory note on page 1 of the same brochure states that the venture "is the
first serious attempt in this country to use 100% locally grown raw materials notably kenaf which is
presently grown commercially in the Island of Mindanao where the proposed jutemill is
located . . ."cralaw virtua1aw library

This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first
place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and
Natural Resources as to the availability of local raw materials to provide adequately for the
requirements of the factory. Saura, Inc. itself confirmed the defendant’s stand impliedly in its letter of
January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry "kenaf will
not be available in sufficient quantity this year or probably even next year;" (2) requesting "assurances
(from RFC) that my company and associates will be able to bring in sufficient jute materials as may be
necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as
follows:chanrob1es virtual 1aw library

a) For the payment of the receipt for jute mill

machineries with the Prudential Bank &

Trust Company P250,000.00

(For immediate release)

b) For the purchase of materials and equipment

per attached list to enable the jute

mill to operate P182,413.91

c) For raw materials and labor 67,586.09

1) P25,000.00 to be released on the opening

of the letter of credit for raw jute

for $25,000 00.

2) P25,000.00 to be released upon arrival

of raw jute.

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

mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:jgc:chanrobles.com.ph

"Dear Sirs:chanrob1es virtual 1aw library

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

With respect to our requirement that the Department of Agriculture and Natural Resources certify that
the raw materials needed are available in the immediate vicinity and that there is prospect of increased
production thereof to provide adequately the requirements of the factory, we wish to reiterate that the
basis of the original approval is to develop the manufacture of sacks on the basis of the locally available
raw materials. Your statement that you will have to rely on the importation of jute and your request that
we give you assurance that your company will be able to bring in sufficient jute materials as may be
necessary for the operation of your factory, would not be in line with our principle in approving the
loan."cralaw virtua1aw library

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

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

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

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

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

"ART. 1954. An accepted promise to deliver something by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of
the object of the contract."cralaw virtua1aw library

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

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the
factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious
dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9033 approved
on December 17, 1954, restored the loan to the original amount of P500,000.00, it imposed two
conditions, to wit:" (1) that the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and (2) that there is prospect of increased production
thereof to provide adequately for the requirements of the factory." The imposition of those conditions
was by no means a deviation from the terms of the agreement, but rather a step in its implementation.
There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145,
passed on January 7, 1954, namely — "that the proceeds of the loan shall be utilized exclusively for the
following purposes: for construction of factory building — P250,000.00; for payment of the balance of
purchase price of machinery and equipment — P240,900.00; for working capital — P9,100.00." Evidently
Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of
January 21, 1955, stating that local jute "will not be available in sufficient quantity this year or probably
next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw
materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and
embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to
purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been
going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no
position to comply with RFC’s conditions. So instead of doing so and insisting that the loan be released
as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955.
The action thus taken by both parties was in the nature of mutual desistance — what Manresa terms
"mutuo disenso" 1 — which is a mode of extinguishing obligations. It is a concept that derives from the
principle that since mutual agreement can create a contract, mutual disagreement by the parties can
cause its extinguishment. 2

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

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

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

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

Makasiar, J., took no part.

SECOND DIVISION

G.R. No. 133632               February 15, 2002

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

DECISION

QUISUMBING, J.:

This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of
the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage
by petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS
Management and Development Corporation and Antonio K. Litonjua, 1 consolidated with (b) Civil Case
No. 52093, for damages with prayer for the issuance of a writ of preliminary injunction by the private
respondents against said petitioner.

The trial court had held that private respondents were not in default in the payment of their monthly
amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad
faith. It awarded private respondents the amount of ₱300,000 for moral damages, ₱50,000 for
exemplary damages, and ₱50,000 for attorney’s fees and expenses for litigation. It likewise dismissed
the foreclosure suit for being premature.

The facts are as follows:

Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on
his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the
loan. Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua for
₱850,000. They paid ₱350,000 in cash and assumed the ₱500,000 balance of Roa’s indebtedness with
AIDC. The latter, however, was not willing to extend the old interest rate to private respondents and
proposed to grant them a new loan of ₱500,000 to be applied to Roa’s debt and secured by the same
property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding
principal balance payable within ten years in equal monthly amortization of ₱9,996.58 and penalty
interest at the rate of 21% per annum per day from the date the amortization became due and payable.

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

On August 13, 1982, ALS and Litonjua updated Roa’s arrearages by paying BPIIC the sum of ₱190,601.35.
This reduced Roa’s principal balance to ₱457,204.90 which, in turn, was liquidated when BPIIC applied
thereto the proceeds of private respondents’ loan of ₱500,000.

On September 13, 1982, BPIIC released to private respondents ₱7,146.87, purporting to be what was
left of their loan after full payment of Roa’s loan.

In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that
they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to
Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos (₱475,585.31). A
notice of sheriff’s sale was published on August 13, 1984.

On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among
others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30,
1984. They maintained that they should not be made to pay amortization before the actual release of
the ₱500,000 loan in August and September 1982. Further, out of the ₱500,000 loan, only the total
amount of ₱464,351.77 was released to private respondents. Hence, applying the effects of legal
compensation, the balance of ₱35,648.23 should be applied to the initial monthly amortization for the
loan.

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

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

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

a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages;

c) P50,000.00 as and for attorney’s fees and expenses of litigation.

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

Costs against BPI.

SO ORDERED.2

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

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

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

SO ORDERED.3

In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of
the object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only on
September 13, 1982, the date when BPIIC released the purported balance of the ₱500,000 loan after
deducting therefrom the value of Roa’s indebtedness. Thus, payment of the monthly amortization
should commence only a month after the said date, as can be inferred from the stipulations in the
contract. This, despite the express agreement of the parties that payment shall commence on May 1,
1981. From October 1982 to June 1984, the total amortization due was only ₱194,960.43. Evidence
showed that private respondents had an overpayment, because as of June 1984, they already paid a
total amount of ₱201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the
mortgage and cause the publication in newspapers concerning private respondents’ delinquency in the
payment of their loan. This fact constituted sufficient ground for moral damages in favor of private
respondents.

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

I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE RULE
LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.

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

On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple
loan is perfected upon the delivery of the object of the contract, the loan contract in this case was
perfected only on September 13, 1982. Petitioner claims that a contract of loan is a consensual contract,
and a loan contract is perfected at the time the contract of mortgage is executed conformably with our
ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the loan contract was
perfected on March 31, 1981, the date when the mortgage deed was executed, hence, the amortization
and interests on the loan should be computed from said date.

Petitioner also argues that while the documents showed that the loan was released only on August
1982, the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage
of Frank Roa’s loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute
Sale executed by Roa in favor of ALS, transferring the title of the property to ALS, and ALS executing the
Mortgage Deed in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan should
be attributed to private respondents. As BPIIC only agreed to extend a ₱500,000 loan, private
respondents were required to reduce Frank Roa’s loan below said amount. According to petitioner,
private respondents were only able to do so in August 1982.

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

Private respondents further maintain that even granting, arguendo,  that the loan contract was
perfected on March 31, 1981, and their payment did not start a month thereafter, still no default took
place. According to private respondents, a perfected loan agreement imposes reciprocal obligations,
where the obligation or promise of each party is the consideration of the other party. In this case, the
consideration for BPIIC in entering into the loan contract is the promise of private respondents to pay
the monthly amortization. For the latter, it is the promise of BPIIC to deliver the money. In reciprocal
obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. Therefore, private respondents conclude, they did not
incur in delay when they did not commence paying the monthly amortization on May 1, 1981, as it was
only on September 13, 1982 when petitioner fully complied with its obligation under the loan contract.

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

In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines,  44 SCRA 445, petitioner
applied for a loan of ₱500,000 with respondent bank. The latter approved the application through a
board resolution. Thereafter, the corresponding mortgage was executed and registered. However,
because of acts attributable to petitioner, the loan was not released. Later, petitioner instituted an
action for damages. We recognized in this case, a perfected consensual contract which under normal
circumstances could have made the bank liable for not releasing the loan. However, since the fault was
attributable to petitioner therein, the court did not award it damages.

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

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

We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein
the obligation or promise of each party is the consideration for that of the other. 8 As averred by private
respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and
Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed
release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the
other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him.9 Only when a party has performed his part of the contract can he demand that the other party also
fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only
demand for the payment of the monthly amortization after September 13, 1982 for it was only then
when it complied with its obligation under the loan contract. Therefore, in computing the amount due
as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is
October 13, 1982 and not May 1, 1981.

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

On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages
for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right
under the mortgage contract because private respondents were irregular in their monthly
amortization.1âwphi1 It invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA 707,
where we said:

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

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

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

However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually released
to private respondents and the date when it was released. Such negligence resulted in damage to
private respondents, for which an award of nominal damages should be given in recognition of their
rights which were violated by BPIIC. 12 For this purpose, the amount of ₱25,000 is sufficient.

Lastly, as in SSS  where we awarded attorney’s fees because private respondents were compelled to
litigate, we sustain the award of ₱50,000 in favor of private respondents as attorney’s fees.

WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated
April 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and
exemplary damages in favor of private respondents is DELETED, but the award to them of attorney’s
fees in the amount of ₱50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private
respondents ₱25,000 as nominal damages. Costs against petitioner.

SO ORDERED.

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

 SPECIAL SECOND DIVISION

[G.R. No. 174269 : August 25, 2010]

POLO S. PANTALEON, PETITIONER, VS. AMERICAN EXPRESS INTERNATIONAL, INC., RESPONDENT.

RESOLUTION

BRION, J.:

We resolve the motion for reconsideration filed by respondent American Express International, Inc.
(AMEX) dated June 8, 2009,[1] seeking to reverse our Decision dated May 8, 2009 where we ruled that
AMEX was guilty of culpable delay in fulfilling its obligation to its cardholder -petitioner Polo Pantaleon. 
Based on this conclusion, we held AMEX liable for moral and exemplary damages, as well as attorney's
fees and costs of litigation.[2]

FACTUAL ANTECEDENTS

The established antecedents of the case are narrated below.

AMEX is a resident foreign corporation engaged in the business of providing credit services through the
operation of a charge card system. Pantaleon has been an AMEX cardholder since 1980. [3]

In October 1991, Pantaleon, together with his wife (Julialinda), daughter (Regina), and son (Adrian
Roberto), went on a guided European tour. On October 25, 1991, the tour group arrived in Amsterdam.
Due to their late arrival, they postponed the tour of the city for the following day. [4]

The next day, the group began their sightseeing at around 8:50 a.m. with a trip to the Coster Diamond
House (Coster).  To have enough time for take a guided city tour of Amsterdam before their departure
scheduled on that day, the tour group planned to leave Coster by 9:30 a.m. at the latest.

While at Coster, Mrs. Pantaleon decided to purchase some diamond pieces worth a total of
US$13,826.00. Pantaleon presented his American Express credit card to the sales clerk to pay for this
purchase.  He did this at around 9:15 a.m. The sales clerk swiped the credit card and asked Pantaleon to
sign the charge slip, which was then electronically referred to AMEX's Amsterdam office at 9:20 a.m. [5]

At around 9:40 a.m., Coster had not received approval from AMEX for the purchase so Pantaleon asked
the store clerk to cancel the sale. The store manager, however, convinced Pantaleon to wait a few more
minutes. Subsequently, the store manager informed Pantaleon that AMEX was asking for bank
references; Pantaleon responded by giving the names of his Philippine depository banks.

At around 10 a.m., or 45 minutes after Pantaleon presented his credit card, AMEX still had not approved
the purchase. Since the city tour could not begin until the Pantaleons were onboard the tour bus, Coster
decided to release at around 10:05 a.m. the purchased items to Pantaleon even without AMEX's
approval.

When the Pantaleons finally returned to the tour bus, they found their travel companions visibly
irritated.  This irritation intensified when the tour guide announced that they would have to cancel the
tour because of lack of time as they all had to be in Calais, Belgium by 3 p.m. to catch the ferry to
London.[6]

From the records, it appears that after Pantaleon's purchase was transmitted for approval to AMEX's
Amsterdam office at 9:20 a.m.; was referred to AMEX's Manila office at 9:33 a.m.; and was approved by
the Manila office at 10:19 a.m. At 10:38 a.m., AMEX's Manila office finally transmitted the Approval
Code to AMEX's Amsterdam office.  In all, it took AMEX a total of 78 minutes to approve Pantaleon's
purchase and to transmit the approval to the jewelry store. [7]

After the trip to Europe, the Pantaleon family proceeded to the United States. Again, Pantaleon
experienced delay in securing approval for purchases using his American Express credit card on two
separate occasions.  He experienced the first delay when he wanted to purchase golf equipment in the
amount of US$1,475.00 at the Richard Metz Golf Studio in New York on October 30, 1991.  Another
delay occurred when he wanted to purchase children's shoes worth US$87.00 at the Quiency Market in
Boston on November 3, 1991.

Upon return to Manila, Pantaleon sent AMEX  a letter demanding an apology for the humiliation and
inconvenience he and his family experienced due to the delays in obtaining approval for his credit card
purchases. AMEX responded by explaining that the delay in Amsterdam was due to the amount involved
- the charged purchase of US$13,826.00 deviated from Pantaleon's established charge purchase
pattern.  Dissatisfied with this explanation, Pantaleon filed an action for damages against the credit card
company with the Makati City Regional Trial Court (RTC).

On August 5, 1996, the RTC found AMEX guilty of delay, and awarded Pantaleon P500,000.00 as moral
damages, P300,000.00 as exemplary damages, P100,000.00 as attorney's fees, and P85,233.01 as
litigation expenses.

On appeal, the CA reversed the awards. [8]  While the CA recognized that delay in the nature of mora
accipiendi or creditor's default attended AMEX's approval of Pantaleon's purchases, it disagreed with the
RTC's finding that AMEX had breached its contract, noting that the delay was not attended by bad faith,
malice or gross negligence.  The appellate court found that AMEX exercised diligent efforts to effect the
approval of Pantaleon's purchases; the purchase at Coster posed particularly a problem because it was
at variance with Pantaleon's established charge pattern.  As there was no proof that AMEX breached its
contract, or that it acted in a wanton, fraudulent or malevolent manner, the appellate court ruled that
AMEX could not be held liable for any form of damages.

Pantaleon questioned this decision via a petition for review on certiorari with this Court.
In our May 8, 2009 decision, we reversed the appellate court's decision and held that AMEX was guilty
of  mora solvendi, or debtor's default.  AMEX, as debtor, had an obligation as the credit provider to act
on Pantaleon's purchase requests, whether to approve or disapprove them, with "timely dispatch."
Based on the evidence on record, we found that AMEX failed to timely act on Pantaleon's purchases.

Based the testimony of AMEX's credit authorizer Edgardo Jaurique, the approval time for credit card
charges would be three to four seconds under regular circumstances.  In Pantaleon's case, it took AMEX
78 minutes to approve the Amsterdam purchase.  We attributed this delay to AMEX's Manila credit
authorizer, Edgardo Jaurique, who had to go over Pantaleon's past credit history, his payment record
and his credit and bank references before he approved the purchase.  Finding this delay unwarranted,
we reinstated the RTC decision and awarded Pantaleon moral and exemplary damages, as well as
attorney's fees and costs of litigation.

THE MOTION FOR RECONSIDERATION

In its motion for reconsideration, AMEX argues that this Court erred when it found AMEX guilty of
culpable delay in complying with its obligation to act with timely dispatch on Pantaleon's purchases.
While AMEX admits that it normally takes seconds to approve charge purchases, it emphasizes that
Pantaleon experienced delay in Amsterdam because his transaction was not a normal one.  To recall,
Pantaleon sought to charge in a single transaction jewelry items purchased from Coster in the total
amount of US$13,826.00 or P383,746.16. While the total amount of Pantaleon's previous purchases
using his AMEX credit card did exceed US$13,826.00, AMEX points out that these purchases were made
in a span of more than 10 years, not in a single transaction.

Because this was the biggest single transaction that Pantaleon ever made using his AMEX credit card,
AMEX argues that the transaction necessarily required the credit authorizer to carefully review
Pantaleon's credit history and bank references.  AMEX maintains that it did this not only to ensure
Pantaleon's protection (to minimize the possibility that a third party was fraudulently using his credit
card), but also to protect itself from the risk that Pantaleon might not be able to pay for his purchases
on credit. This careful review, according to AMEX, is also in keeping with the extraordinary degree of
diligence required of banks in handling its transactions.  AMEX concluded that in these lights, the
thorough review of Pantaleon's credit record was motivated by legitimate concerns and could not be
evidence of any ill will, fraud, or negligence by AMEX.

AMEX further points out that the proximate cause of Pantaleon's humiliation and embarrassment was
his own decision to proceed with the purchase despite his awareness that the tour group was waiting
for him and his wife. Pantaleon could have prevented the humiliation had he cancelled the sale when he
noticed that the credit approval for the Coster purchase was unusually delayed.

In his Comment dated February 24, 2010, Pantaleon maintains that AMEX was guilty of mora solvendi,
or delay on the part of the debtor, in complying with its obligation to him. Based on jurisprudence, a just
cause for delay does not relieve the debtor in delay from the consequences of delay; thus, even if AMEX
had a justifiable reason for the delay, this reason would not relieve it from the liability arising from its
failure to timely act on Pantaleon's purchase.
In response to AMEX's assertion that the delay was in keeping with its duty to perform its obligation
with extraordinary diligence, Pantaleon claims that this duty includes the timely or prompt performance
of its obligation.

As to AMEX's contention that moral or exemplary damages cannot be awarded absent a finding of
malice, Pantaleon argues that evil motive or design is not always necessary to support a finding of bad
faith; gross negligence or wanton disregard of contractual obligations is sufficient basis for the award of
moral and exemplary damages.

OUR RULING

We GRANT the motion for reconsideration.

Brief historical background

A credit card is defined as "any card, plate, coupon book, or other credit device existing for the purpose
of obtaining money, goods, property, labor or services or anything of value on credit." [9] It traces its
roots to the charge card first introduced by the Diners Club in New York City in 1950. [10]  American
Express followed suit by introducing its own charge card to the American market in 1958. [11]

In the Philippines, the now defunct Pacific Bank was responsible for bringing the first credit card into the
country in the 1970s.[12] However, it was only in the early 2000s that credit card use gained wide
acceptance in the country, as evidenced by the surge in the number of credit card holders then. [13]

Nature of Credit Card Transactions

To better understand the dynamics involved in credit card transactions, we turn to the United States
case of Harris Trust & Savings Bank v. McCray[14] which explains:

The bank credit card system involves a tripartite relationship between the issuer bank, the cardholder,
and merchants participating in the system. The issuer bank establishes an account on behalf of the
person to whom the card is issued, and the two parties enter into an agreement which governs their
relationship. This agreement provides that the bank will pay for cardholder's account the amount of
merchandise or services purchased through the use of the credit card and will also make cash loans
available to the cardholder. It also states that the cardholder shall be liable to the bank for advances and
payments made by the bank and that the cardholder's obligation to pay the bank shall not be affected or
impaired by any dispute, claim, or demand by the cardholder with respect to any merchandise or service
purchased.

The merchants participating in the system agree to honor the bank's credit cards. The bank irrevocably
agrees to honor and pay the sales slips presented by the merchant if the merchant performs his
undertakings such as checking the list of revoked cards before accepting the card. x  x  x.

These slips are forwarded to the member bank which originally issued the card. The cardholder receives
a statement from the bank periodically and may then decide whether to make payment to the bank in
full within a specified period, free of interest, or to defer payment and ultimately incur an interest
charge.

We adopted a similar view in CIR v. American Express International, Inc. (Philippine branch),[15] where we
also recognized that credit card issuers are not limited to banks.  We said:

Under RA 8484, the credit card that is issued by banks in general, or by non-banks in particular, refers to
"any card x  x  x  or other credit device existing for the purpose of obtaining  x  x  x  goods x  x  x or
services  x  x  x  on credit;" and is being used "usually on a revolving basis." This means that the
consumer-credit arrangement that exists between the issuer and the holder of the credit card enables
the latter to procure goods or services "on a continuing basis as long as the outstanding balance does
not exceed a specified limit." The card holder is, therefore, given "the power to obtain present control of
goods or service on a promise to pay for them in the future."

Business establishments may extend credit sales through the use of the credit card facilities of a non-
bank credit card company to avoid the risk of uncollectible accounts from their customers.Under this
system, the establishments do not deposit in their bank accounts the credit card drafts that arise from
the credit sales. Instead, they merely record their receivables from the credit card company and
periodically send the drafts evidencing those receivables to the latter.

The credit card company, in turn, sends checks as payment to these business establishments, but it does
not redeem the drafts at full price. The agreement between them usually provides for discounts to be
taken by the company upon its redemption of the drafts. At the end of each month, it then bills its credit
card holders for their respective drafts redeemed during the previous month. If the holders fail to pay
the amounts owed, the company sustains the loss.

Simply put, every credit card transaction involves three contracts, namely: (a) the sales
contract between the credit card holder and the merchant or the business establishment which
accepted the credit card; (b) the loan agreement between the credit card issuer and the credit card
holder; and lastly, (c) the promise to pay between the credit card issuer and the merchant or business
establishment.[16]

Credit card issuer - cardholder relationship

When a credit card company gives the holder the privilege of charging items at establishments
associated with the issuer,[17] a necessary question in a legal analysis is - when does this relationship
begin?  There are two diverging views on the matter.  In City Stores Co. v. Henderson,[18]  another U.S.
decision, held that:

The issuance of a credit card is but an offer to extend a line of open account credit. It is unilateral and
supported by no consideration. The offer may be withdrawn at any time, without prior notice, for any
reason or, indeed, for no reason at all, and its withdrawal breaches no duty - for there is no duty to
continue it - and violates no rights.
Thus, under this view, each credit card transaction is considered a separate offer and acceptance.

Novack v. Cities Service Oil Co. [19] echoed this view, with the court ruling that the mere issuance of a
credit card did not create a contractual relationship with the cardholder.

On the other end of the spectrum is Gray v. American Express Company[20] which recognized the card
membership agreement itself as a binding contract between the credit card issuer and the card holder.
Unlike in the Novack and the City Stores cases, however, the cardholder in Gray paid an annual fee for
the privilege of being an American Express cardholder.

In our jurisdiction, we generally adhere to the Gray ruling, recognizing the relationship between the
credit card issuer and the credit card holder as a contractual one that is governed by the terms and
conditions found in the card membership agreement. [21] This contract provides the rights and liabilities
of a credit card company to its cardholders and vice versa.

We note that a card membership agreement is a contract of adhesion as its terms are prepared solely by
the credit card issuer, with the cardholder merely affixing his signature signifying his adhesion to these
terms.[22] This circumstance, however, does not render the agreement void; we have uniformly held that
contracts of adhesion are "as binding as ordinary contracts, the reason being that the party who adheres
to the contract is free to reject it entirely." [23] The only effect is that the terms of the contract are
construed strictly against the party who drafted it. [24]

On AMEX's obligations to Pantaleon

We begin by identifying the two privileges that Pantaleon assumes he is entitled to with the issuance of
his AMEX credit card, and on which he anchors his claims. First, Pantaleon presumes that since his credit
card has no pre-set spending limit, AMEX has the obligation to approve all his charge requests.
Conversely, even if AMEX has no such obligation, at the very least it is obliged to act on his charge
requests within a specific period of time.

i.  Use of credit card a mere offer to enter into loan agreements

Although we recognize the existence of a relationship between the credit card issuer and the credit card
holder upon the acceptance by the cardholder of the terms of the card membership agreement
(customarily signified by the act of the cardholder in signing the back of the credit card), we have to
distinguish this contractual relationship from the creditor-debtor relationship which only
arises after the credit card issuer has approved the cardholder's purchase request. The first relates
merely to an agreement providing for credit facility to the cardholder.  The latter involves the actual
credit on loan agreement involving three contracts, namely: the sales contract between the credit card
holder and the merchant or the business establishment which accepted the credit card; the loan
agreement between the credit card issuer and the credit card holder; and the promise to pay between
the credit card issuer and the merchant or business establishment.
From the loan agreement perspective, the contractual relationship begins to exist only upon the
meeting of the offer[25] and acceptance of the parties involved. In more concrete terms, when
cardholders use their credit cards to pay for their purchases, they merely offer to enter into loan
agreements with the credit card company. Only after the latter approves the purchase requests that the
parties enter into binding loan contracts, in keeping with Article 1319 of the Civil Code, which provides:

Article 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.

This view finds support in the reservation found in the card membership agreement itself, particularly
paragraph 10, which clearly states that AMEX "reserve[s] the right to deny authorization for any
requested Charge." By so providing, AMEX made its position clear that it has no obligation to approve
any and all charge requests made by its card holders.

ii.  AMEX not guilty of culpable delay

Since AMEX has no obligation to approve the purchase requests of its credit cardholders, Pantaleon
cannot claim that AMEX defaulted in its obligation. Article 1169 of the Civil Code, which provides the
requisites to hold a debtor guilty of culpable delay, states:

Article 1169.Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.  x  x  x.

The three requisites for a finding of default are: (a) that the obligation is demandable and liquidated; (b)
the debtor delays performance; and (c) the creditor judicially or extrajudicially requires the debtor's
performance.[26]

Based on the above, the first requisite is no longer met because AMEX, by the express terms of the
credit card agreement, is not obligated to approve Pantaleon's purchase request. Without a
demandable obligation, there can be no finding of default.

Apart from the lack of any demandable obligation, we also find that Pantaleon failed to make the
demand required by Article 1169 of the Civil Code.

As previously established, the use of a credit card to pay for a purchase is only an offer to the credit card
company to enter a loan agreement with the credit card holder. Before the credit card issuer accepts
this offer, no obligation relating to the loan agreement exists between them. On the other hand, a
demand is defined as the "assertion of a legal right; xxx an asking with authority, claiming or challenging
as due."[27] A demand presupposes the existence of an obligation between the parties.

Thus, every time that Pantaleon used his AMEX credit card to pay for his purchases, what the stores
transmitted to AMEX were his offers to execute loan contracts. These obviously could not be classified
as the demand required by law to make the debtor in default, given that no obligation could arise on the
part of AMEX until after AMEX transmitted its acceptance of Pantaleon's offers. Pantaleon's act of
"insisting on and waiting for the charge purchases to be approved by AMEX" [28] is not the demand
contemplated by Article 1169 of the Civil Code.

For failing to comply with the requisites of Article 1169, Pantaleon's charge that AMEX is guilty of
culpable delay in approving his purchase requests must fail.

iii. On AMEX's obligation to act on the offer within a specific period of time

Even assuming that AMEX had the right to review his credit card history before it approved his purchase
requests, Pantaleon insists that AMEX had an obligation to act on his purchase requests, either to
approve or deny, in "a matter of seconds" or "in timely dispatch." Pantaleon impresses upon us the
existence of this obligation by emphasizing two points: (a) his card has no pre-set spending limit; and (b)
in his twelve years of using his AMEX card, AMEX had always approved his charges in a matter of
seconds.

Pantaleon's assertions fail to convince us.

We originally held that AMEX was in culpable delay when it acted on the Coster transaction, as well as
the two other transactions in the United States which took AMEX approximately 15 to 20 minutes to
approve.  This conclusion appears valid and reasonable at first glance, comparing the time it took to
finally get the Coster purchase approved (a total of 78 minutes), to AMEX's "normal" approval time of
three to four seconds (based on the testimony of Edgardo Jaurigue, as well as Pantaleon's previous
experience).  We come to a different result, however, after a closer look at the factual and legal
circumstances of the case.

AMEX's credit authorizer, Edgardo Jaurigue, explained that having no pre-set spending limit in a credit
card simply means that the charges made by the cardholder are approved based on his ability to pay, as
demonstrated by his past spending, payment patterns, and personal resources. [29]  Nevertheless, every
time Pantaleon charges a purchase on his credit card, the credit card company still has to determine
whether it will allow this charge, based on his past credit history. This right to review a card holder's
credit history, although not specifically set out in the card membership agreement, is a necessary
implication of AMEX's right to deny authorization for any requested charge.

As for Pantaleon's previous experiences with AMEX (i.e., that in the past 12 years, AMEX has always
approved his charge requests in three or four seconds), this record does not establish that Pantaleon
had a legally enforceable obligation to expect AMEX to act on his charge requests within a matter of
seconds. For one, Pantaleon failed to present any evidence to support his assertion that AMEX acted on
purchase requests in a matter of three or four seconds as an established practice. More importantly,
even if Pantaleon did prove that AMEX, as a matter of practice or custom, acted on its customers'
purchase requests in a matter of seconds, this would still not be enough to establish a legally
demandable right; as a general rule, a practice or custom is not a source of a legally demandable or
enforceable right.[30]
We next examine the credit card membership agreement, the contract that primarily governs the
relationship between AMEX and Pantaleon. Significantly, there is no provision in this agreement that
obligates AMEX to act on all cardholder purchase requests within a specifically defined period of time.
Thus, regardless of whether the obligation is worded was to "act in a matter of seconds" or to "act in
timely dispatch," the fact remains that no obligation exists on the part of AMEX to act within a specific
period of time. Even Pantaleon admits in his testimony that he could not recall any provision in the
Agreement that guaranteed AMEX's approval of his charge requests within a matter of minutes. [31]

Nor can Pantaleon look to the law or government issuances as the source of AMEX's alleged obligation
to act upon his credit card purchases within a matter of seconds. As the following survey of Philippine
law on credit card transactions demonstrates, the State does not require credit card companies to act
upon its cardholders' purchase requests within a specific period of time.

Republic Act No. 8484 (RA 8484), or the Access Devices Regulation Act of 1998, approved on February
11, 1998, is the controlling legislation
that regulates the issuance and use of access devices, [32] including credit cards.  The more salient
portions of this law include the imposition of the obligation on a credit card company to disclose certain
important financial information[33] to credit card applicants, as well as a definition of the acts that
constitute access device fraud.

As financial institutions engaged in the business of providing credit, credit card companies fall under the
supervisory powers of the Bangko Sentral ng Pilipinas (BSP).[34]  BSP Circular No. 398 dated August 21,
2003 embodies the BSP's policy when it comes to credit cards -

The Bangko Sentral ng Pilipinas (BSP) shall foster the development of consumer credit through
innovative products such as credit cards under conditions of fair and sound consumer credit practices.
The BSP likewise encourages competition and transparency to ensure more efficient delivery of services
and fair dealings with customers. (Emphasis supplied)

Based on this Circular, "x  x  x  [b]efore issuing credit cards, banks and/or their subsidiary credit card
companies must exercise proper diligence by ascertaining that applicants possess good credit standing
and are financially capable of fulfilling their credit commitments." [35] As the above-quoted policy
expressly states, the general intent is to foster "fair and sound consumer credit practices."

Other than BSP Circular No. 398, a related circular is BSP Circular No. 454, issued on September 24,
2004, but this circular merely enumerates the unfair collection practices of credit card companies - a
matter not relevant to the issue at hand.

In light of the foregoing, we find and so hold that AMEX is neither contractually bound nor legally
obligated to act on its cardholders' purchase requests within any specific period of time, much less a
period of a "matter of seconds" that Pantaleon uses as his standard. The standard therefore is implicit
and, as in all contracts, must be based on fairness and reasonableness, read in relation to the Civil Code
provisions on human relations, as will be discussed below.
AMEX acted with good faith

Thus far, we have already established that: (a) AMEX had neither a contractual nor a legal obligation to
act upon Pantaleon's purchases within a specific period of time; and (b) AMEX has a right to review a
cardholder's credit card history. Our recognition of these entitlements, however, does not give AMEX
an unlimited right to put off action on cardholders' purchase requests for indefinite periods of time. In
acting on cardholders' purchase requests, AMEX must take care not to abuse its rights and cause injury
to its clients and/or third persons. We cite in this regard Article 19, in conjunction with Article 21, of the
Civil Code, which provide:

Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due and observe honesty and good faith.

Article 21. Any person who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.

Article 19 pervades the entire legal system and ensures that a person suffering damage in the course of
another's exercise of right or performance of duty, should find himself without relief. [36] It sets the
standard for the conduct of all persons, whether artificial or natural, and requires that everyone, in the
exercise of rights and the performance of obligations, must: (a) act with justice, (b) give everyone his
due, and (c) observe honesty and good faith. It is not because a person invokes his rights that he can do
anything, even to the prejudice and disadvantage of another. [37]

While Article 19 enumerates the standards of conduct, Article 21 provides the remedy for the person
injured by the willful act, an action for damages. We explained how these two provisions correlate with
each other in GF Equity, Inc. v. Valenzona:[38]

[Article 19], known to contain what is commonly referred to as the principle of abuse of rights, sets
certain standards which must be observed not only in the exercise of one's rights but also in the
performance of one's duties. These standards are the following: to act with justice; to give everyone his
due; and to observe honesty and good faith. The law, therefore, recognizes a primordial limitation on all
rights; that in their exercise, the norms of human conduct set forth in Article 19 must be observed. A
right, though by itself legal because recognized or granted by law as such, may nevertheless become
the source of some illegality. When a right is exercised in a manner which does not conform with the
norms enshrined in Article 19 and results in damage to another, a legal wrong is thereby committed
for which the wrongdoer must be held responsible. But while Article 19 lays down a rule of conduct for
the government of human relations and for the maintenance of social order, it does not provide a
remedy for its violation. Generally, an action for damages under either Article 20 or Article 21 would be
proper.

In the context of a credit card relationship, although there is neither a contractual stipulation nor a
specific law requiring the credit card issuer to act on the credit card holder's offer within a definite
period of time, these principles provide the standard by which to judge AMEX's actions.
According to Pantaleon, even if AMEX did have a right to review his charge purchases, it abused this
right when it unreasonably delayed the processing of the Coster charge purchase, as well as his
purchase requests at the Richard Metz' Golf Studio and Kids' Unlimited Store; AMEX should have known
that its failure to act immediately on charge referrals would entail inconvenience and result in
humiliation, embarrassment, anxiety and distress to its cardholders who would be required to wait
before closing their transactions.[39]

It is an elementary rule in our jurisdiction that good faith is presumed and that the burden of proving
bad faith rests upon the party alleging it. [40] Although it took AMEX some time before it approved
Pantaleon's three charge requests, we find no evidence to suggest that it acted with deliberate intent to
cause Pantaleon any loss or injury, or acted in a manner that was contrary to morals, good customs or
public policy. We give credence to AMEX's claim that its review procedure was done to ensure
Pantaleon's own protection as a cardholder and to prevent the possibility that the credit card was being
fraudulently used by a third person.

Pantaleon countered that this review procedure is primarily intended to protect AMEX's interests, to
make sure that the cardholder making the purchase has enough means to pay for the credit extended.
Even if this were the case, however, we do not find any taint of bad faith in such motive. It is but natural
for AMEX to want to ensure that it will extend credit only to people who will have sufficient means to
pay for their purchases. AMEX, after all, is running a business, not a charity, and it would simply be
ludicrous to suggest that it would not want to earn profit for its services. Thus, so long as AMEX
exercises its rights, performs its obligations, and generally acts with good faith, with no intent to cause
harm, even if it may occasionally inconvenience others, it cannot be held liable for damages.

We also cannot turn a blind eye to the circumstances surrounding the Coster transaction which, in our
opinion, justified the wait. In Edgardo Jaurigue's own words:

Q 21: With reference to the transaction at the Coster Diamond House covered by Exhibit H, also Exhibit
4 for the defendant, the approval came at 2:19 a.m. after the request was relayed at 1:33 a.m., can you
explain why the approval came after about 46 minutes, more or less?

A21: Because we have to make certain considerations and evaluations of [Pantaleon's] past spending
pattern with [AMEX] at that time before approving plaintiff's request because [Pantaleon] was at that
time making his very first single charge purchase of US$13,826 [this is below the US$16,112.58 actually
billed and paid for by the plaintiff because the difference was already automatically approved by [AMEX]
office in Netherland[s] and the record of [Pantaleon's] past spending with [AMEX] at that time does
not favorably support his ability to pay for such purchase. In fact, if the foregoing internal policy of
[AMEX] had been strictly followed, the transaction would not have been approved at all considering that
the past spending pattern of the plaintiff with [AMEX] at that time does not support his ability to pay for
such purchase.[41]

x x  x  x

Q: Why did it take so long?

A: It took time to review the account on credit, so, if there is any delinquencies [sic] of the cardmember.
There are factors on deciding the charge itself which are standard measures in approving the
authorization. Now in the case of Mr. Pantaleon although his account is single charge purchase of
US$13,826. [sic] this is below the US$16,000. plus actually billed x  x x  we would have already declined
the charge outright and asked him his bank account to support his charge. But due to the length of his
membership as cardholder we had to make a decision on hand. [42]

As Edgardo Jaurigue clarified, the reason why Pantaleon had to wait for AMEX's approval was because
he had to go over Pantaleon's credit card history for the past twelve months. [43] It would certainly be
unjust for us to penalize AMEX for merely exercising its right to review Pantaleon's credit history
meticulously.

Finally, we said in Garciano v. Court of Appeals that "the right to recover [moral damages] under Article
21 is based on equity, and he who comes to court to demand equity, must come with clean hands. Article
21 should be construed as granting the right to recover damages to injured persons who are not
themselves at fault."[44] As will be discussed below, Pantaleon is not a blameless party in all this.

Pantaleon's action was the

proximate cause for his injury

Pantaleon mainly anchors his claim for moral and exemplary damages on the embarrassment and
humiliation that he felt when the European tour group had to wait for him and his wife for
approximately 35 minutes, and eventually had to cancel the Amsterdam city tour. After thoroughly
reviewing the records of this case, we have come to the conclusion that Pantaleon is the proximate
cause for this embarrassment and humiliation.

As borne by the records, Pantaleon knew even before entering Coster that the tour group would have to
leave the store by 9:30 a.m. to have enough time to take the city tour of Amsterdam before they left the
country. After 9:30 a.m., Pantaleon's son, who had boarded the bus ahead of his family, returned to the
store to inform his family that they were the only ones not on the bus and that the entire tour group
was waiting for them. Significantly, Pantaleon tried to cancel the sale at 9:40 a.m. because he did not
want to cause any inconvenience to the tour group. However, when Coster's sale manager asked him
to wait a few more minutes for the credit card approval, he agreed, despite the knowledge that he had
already caused a 10-minute delay and that the city tour could not start without him.

In Nikko Hotel Manila Garden v. Reyes,[45] we ruled that a person who knowingly and voluntarily exposes
himself to danger cannot claim damages for the resulting injury:

The doctrine of volenti non fit injuria ("to which a person assents is not esteemed in law as injury")
refers to self-inflicted injury or to the consent to injury which precludes the recovery of damages by one
who has knowingly and voluntarily exposed himself to danger, even if he is not negligent in doing so.

This doctrine, in our view, is wholly applicable to this case.  Pantaleon himself testified that the most
basic rule when travelling in a tour group is that you must never be a cause of any delay because the
schedule is very strict.[46] When Pantaleon made up his mind to push through with his purchase, he must
have known that the group would become annoyed and irritated with him. This was the natural,
foreseeable consequence of his decision to make them all wait.

We do not discount the fact that Pantaleon and his family did feel humiliated and embarrassed when
they had to wait for AMEX to approve the Coster purchase in Amsterdam. We have to acknowledge,
however, that Pantaleon was not a helpless victim in this scenario - at any time, he could have cancelled
the sale so that the group could go on with the city tour. But he did not.

More importantly, AMEX did not violate any legal duty to Pantaleon under the circumstances under the
principle of damnum absque injuria, or damages without legal wrong, loss without injury. [47] As we held
in BPI Express Card v. CA:[48]

We do not dispute the findings of the lower court that private respondent suffered damages as a result
of the cancellation of his credit card. However, there is a material distinction between damages and
injury.  Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm which results from
the injury; and damages are the recompense or compensation awarded for the damage suffered. 
Thus, there can be damage without injury in those instances in which the loss or harm was not the
result of a violation of a legal duty. In such cases, the consequences must be borne by the injured
person alone, the law affords no remedy for damages resulting from an act which does not amount to a
legal injury or wrong.  These situations are often called damnum absque injuria.

In other words, in order that a plaintiff may maintain an action for the injuries of which he complains, he
must establish that such injuries resulted from a breach of duty which the defendant owed to the
plaintiff - a concurrence of injury to the plaintiff and legal responsibility by the person causing it. The
underlying basis for the award of tort damages is the premise that an individual was injured in
contemplation of law.  Thus, there must first be a breach of some duty and the imposition of liability for
that breach before damages may be awarded; and the breach of such duty should be the proximate
cause of the injury.

Pantaleon is not entitled to damages

Because AMEX neither breached its contract with Pantaleon, nor acted with culpable delay or the willful
intent to cause harm, we find the award of moral damages to Pantaleon unwarranted.

Similarly, we find no basis to award exemplary damages. In contracts, exemplary damages can only be
awarded if a defendant acted "in a wanton, fraudulent, reckless, oppressive or malevolent
manner."[49] The plaintiff must also show that he is entitled to moral, temperate, or compensatory
damages before the court may consider the question of whether or not exemplary damages should be
awarded.[50]

As previously discussed, it took AMEX some time to approve Pantaleon's purchase requests because it
had legitimate concerns on the amount being charged; no malicious intent was ever established here. In
the absence of any other damages, the award of exemplary damages clearly lacks legal basis.
Neither do we find any basis for the award of attorney's fees and costs of litigation. No premium should
be placed on the right to litigate and not every winning party is entitled to an automatic grant of
attorney's fees.[51] To be entitled to attorney's fees and litigation costs, a party must show that he falls
under one of the instances enumerated in Article 2208 of the Civil Code. [52] This, Pantaleon failed to do.
Since we eliminated the award of moral and exemplary damages, so must we delete the award for
attorney's fees and litigation expenses.

Lastly, although we affirm the result of the CA decision, we do so for the reasons stated in this
Resolution and not for those found in the CA decision.

WHEREFORE, premises considered, we SET ASIDE our May 8, 2009 Decision and GRANT the present

motion for reconsideration. The Court of Appeals Decision dated August 18, 2006 is
hereby AFFIRMED. No costs.

SO ORDERED.

Carpio Morales, (Acting Chairperson), Velasco, Jr., Leonardo-De Castro, and *Bersamin, JJ., concur.

FIRST DIVISION

[G.R. No. 103576. August 22, 1996.]

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, Petitioners, v. HON. COURT OF
 APPEALS, PRODUCERS BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN
CITY, Respondents.

SYLLABUS

1. REMEDIAL LAW; ACTIONS; APPEALS; APPEAL FROM JUDGMENT OF LOWER COURTS, NOT A MATTER
OF RIGHT BUT OF SOUND JUDICIAL DISCRETION. — Except in criminal cases where the penalty
of reclusion perpetua or death is imposed which the Court so reviews as a matter of course, an appeal
from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of
the Court prescribing technical and other procedural requirements are meant to weed out
unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the
Court. These technical and procedural rules, however, are intended to help secure, not suppress,
substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the
prime objective for, after all, the dispensation of justice is the core reason For the existence of courts.

2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS OF SECURITY, CONSTRUED. — Contracts of

security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship,
the faithful performance of the obligation by the principal debtor is secured by the personal
commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a
mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in pledge, the
placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of
the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the
execution of a public instrument encumbering the real property covered thereby; and in antichresis, by
a written instrument granting to the creditor the right to receive the fruits of an immovable property
with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the
principal of his credit — upon the essential condition that if the principal obligation becomes due and
the debtor defaults, then the property encumbered can be alienated for the payment of the obligation,
but that should the obligation be duly paid, then the contract is automatically extinguished proceeding
from the accessory character of the agreement. As the law so puts it, once the obligation is complied
with, then the contract of security becomes, ipso facto, null and void.

3. ID.; ID.; CONTRACTS OF SECURITY; CHATTEL MORTGAGE; COVERS OBLIGATION EXISTING AT TIME
MORTGAGE IS CONSTITUTED; EFFECT OF PROMISE TO INCLUDE DEBTS THAT ARE TO BE CONTRACTED.
— While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however, can
only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in
a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can
be compelled upon, the security itself, however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted debt is executed either by concluding a
fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the
Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the
after-incurred obligation can constitute an act of default on the part of the borrower of the financing
agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the
debts extant at the time of constitution and during the life of the chattel mortgage sought to be
foreclosed. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage
contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3
of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel
mortgage void or terminated. (Belgian Catholic Missionaries, Inc., v. Magallanes Press, Inc., Et. Al.) The
significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had
ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, there no longer was any
chattel mortgage that could cover the new loans that were concluded thereafter.

4. ID.; CHATTEL MORTGAGE LAW; EXECUTION OF AFFIDAVIT OF GOOD FAITH, A CLEAR MANIFESTATION
THAT DEBT REFERRED TO IS CURRENT. — A chattel mortgage, as hereinbefore so intimated, must
comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites,
under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is
not appended to the agreement, the chattel mortgage would still be valid between the parties (not
against third persons acting in good faith), the fact, however, that the statute has provided that the
parties to the contract must execute an oath makes it obvious that the debt referred to in the law is a
current, not an obligation that is yet merely contemplated.

5. ID.; DAMAGES; MORAL DAMAGES; NOT RECOVERABLE BY A JURIDICAL PERSON. — We find no merit
in petitioner corporation’s other prayer that the case should be remanded to the trial court for a specific
finding on the amount of damages it has sustained "as a result of the unlawful action taken by
respondent bank against it." This prayer is not reflected in its complaint which has merely asked for the
amount of P3,000,000.00 by way of moral damages. In LBC Express, Inc. v. Court of Appeals, we have
said: "Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A
corporation, being an artificial person and having existence only in legal contemplation, has no feelings,
no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only be one having a nervous system and it flows from real ills, sorrows,
and griefs of life — all of which cannot be suffered by respondent bank as an artificial person." While
Chua Pac is included in the case, the complaints, however, clearly states that he has merely been so
named as a party in representation of petitioner corporation.

6. LEGAL ETHICS; ATTORNEYS; SHOULD BE CIRCUMSPECT IN DEALING WITH COURTS. — Petitioner

corporation’s counsel could be commended for his zeal in pursuing his client’s cause. It instead turned
out to be, however, a source of disappointment for this Court to read in petitioner’s reply to private
respondent’s comment on the petition his so-called "One Final Word;" viz: "In simply quoting in toto the
patently erroneous decision of the trial court, respondent Court of Appeals should be required to justify
its decision which completely disregarded the basic laws on obligations and contracts, as well as the
clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court;
that in the event that its explation is wholly unacceptable, this Honorable Court should impose
appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of
incompetent and dishonest magistrates especially members of a superior court of appellate jurisdiction.
The statement is not called for. The Court invites counsel’s attention to the admonition in Guerrero v.
Villamor; thus:" (L)awyers . . . should bear in mind their basic duty ‘to observe and maintain the respect
due to the courts of justice and judical officers and . . . (to) insist on similar conduct by others.’ This
respectful attitude towards the court is to be observed, ‘not for the sake of the temporary incumbent of
the judical office, but for the maintenance of its supreme importance.’ And it is ‘through a scrupulous
preference for respectful language that a lawyer best demonstrates his observance of the respect due to
the courts and judicial officers . . .’" The virtues of humility and of respect and concern for others must
still live on even in an age of materialism. Atty. Francisco R. Sotto, counsel for petitioners, is admonished
to be circumspect in dealing with the courts.

DECISION

VITUG, J.:

Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant
petition for review on certiorari.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic
Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor
of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for
petitioner’s corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage
agreement was to this effect —

"(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full
obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null
and void. . . .

"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the
former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations
such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on
Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory
note or notes and/or accommodations without the necessity of executing a new contract and this
mortgage shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as security for said
obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind
and nature, whether such obligations have been contracted before, during or after the constitution of
this mortgage." 1
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations totalling P2,700,000.00. 2 These
borrowings were on due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million
pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial
constraints, the loan was not settled at maturity. 3 Respondent bank thereupon applied for an
extrajudicial foreclosure of the chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City,
prompting petitioner corporation to forthwith file an action for injunction, with damages and a prayer
for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-
12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel
mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel
mortgage.

Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all
respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January
1992.

The instant petition interposed by petitioner corporation was initially denied on 04 March 1992 by this
Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss
the petition while petitioner corporation filed a compliance and an opposition to private respondent’s
motion to dismiss. The Court denied petitioner’s first motion for reconsideration but granted a second
motion for reconsideration, thereby reinstating the petition and requiring private respondent to
comment thereon. 5

Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court
so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but
of sound judicial discretion. The circulars of the Court prescribing technical and other procedural
requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and
needlessly consume the time of the Court. These technical and procedural rules, however, are intended
to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may
thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason
for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in
order to give way to and uphold the paramount and overriding interest of justice.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal
commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a
mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in pledge, the
placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of
the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the
execution of a public instrument encumbering the real property covered thereby; and in antichresis, by
a written instrument granting to the creditor the right to receive the fruits of an immovable property
with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the
principal of his credit — upon the essential condition that if the principal obligation becomes due and
the debtor defaults, then the property encumbered can be alienated for the payment of the obligation,
7 but that should the obligation be duly paid, then the contract is automatically extinguished proceeding
from the accessory character 8 of the agreement. As the law so puts it, once the obligation is complied
with, then the contract of security becomes, ipso facto, null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations
so long as these future debts are accurately described, 10 a chattel mortgage, however, can only cover
obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel
mortgage to include debts that are yet to be contracted can be a binding commitment that can be
compelled upon, the security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel
Mortgage Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover the
after-incurred obligation can constitute an at of default on the part of the borrower of the financing
agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the
debts extant at the time of constitution and during the life of the chattel mortgage sought to be
foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed
by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good
faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel
mortgage would still be valid between the parties (not against third persons acting in good faith 12), the
fact, however, that the statute has provided that the parties to the contract must execute an oath that
—

". . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions
thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered
into for the purpose of fraud." 13

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely
contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel
mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of
Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel
mortgage void or terminated. In Belgian Catholic Missionaries, Inc., v. Magallanes Press, Inc., Et Al., 14
the Court said—

". . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only
from the date the same are made and not from the date of the mortgage." 15

The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had
ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, 16 there no longer was
any chattel mortgage that could cover the new loans that were concluded thereafter.
We find no merit in petitioner corporation’s other prayer that the case should be remanded to the trial
court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action
taken by respondent bank against it." 17 This prayer is not reflected in its complaint which has merely
asked for the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. v. Court of
Appeals, 19 we have said:jgc:chanrobles.com.ph

"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A
corporation, being an artificial person and having existence only in legal contemplation, has no feelings,
no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows,
and griefs of life — all of which cannot be suffered by respondent bank as an artificial person." 20

While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been
so named as a party in representation of petitioner corporation.

Petitioner corporation’s counsel could be commended for his zeal in pursuing his client’s cause. It
instead turned out to be, however, a source of disappointment for this Court to read in petitioner’s reply
to private respondent’s comment on the petition his so-called "One Final Word;"
viz:jgc:chanrobles.com.ph

"In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of
Appeals should be required to justify its decision which completely disregarded the basic laws on
obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled
jurisprudence of this Honorable Court; that in the event that its explanation is wholly unacceptable, this
Honorable Court should impose appropriate sanctions on the erring justices. This is one positive step in
ridding our courts of law of incompetent and dishonest magistrates especially members of a superior
court of appellate jurisdiction." 21 (Emphasis supplied.)

The statement is not called for. The Court invites counsel’s attention to the admonition in Guerrero v.
Villamor; 22 thus:jgc:chanrobles.com.ph

"(L)awyers . . . should bear in mind their basic duty ‘to observe and maintain the respect due to the
courts of justice and judicial officers and . . . (to) insist on similar conduct by others.’ This respectful
attitude towards the court is to be observed, ‘not for the sake of the temporary incumbent of the
judicial office, but for the maintenance of its supreme importance.’ And it is ‘through a scrupulous
preference for respectful language that a lawyer best demonstrates his observance of the respect due to
the courts and judicial officers . . ..’" 23

The virtues of humility and of respect and concern for others must still live on even in an age of
materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without
prejudice to the appropriate legal recourse by private respondent as may still be warranted as an
unsecured creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the
courts.

SO ORDERED.

Kapunan and Hermosisima, Jr., JJ., concur.

Padilla, J., took no part.

Bellosillo, J., is on leave.

FIRST DIVISION

[G.R. No. L-59255. December 29, 1995.]

OLIVIA M. NAVOA and ERNESTO NAVOA, Petitioners, v. COURT OF APPEALS, TERESITA DOMDOMA

and EDUARDO DOMDOMA, Respondents.

DECISION

BELLOSILLO, J.:

Petitioners Olivia M. Navoa and Ernesto Navoa seek reversal of the decision of the Court of Appeals 1
which "modified" the order of the trial court dismissing the complaint for lack of cause of action. The
appellate court remanded the case to the court a quo for private respondents to file their responsive
pleading and for trial on the merits.

On 17 December 1977 private respondents filed with the Regional Trial Court of Manila an action
against petitioners for collection of various sums of money based on loans obtained by the latter. On 3
January 1978 petitioners filed a motion to dismiss the complaint on the ground that the complaint
stated no cause of action and that plaintiffs had no capacity to sue.

After private respondents submitted their opposition to the motion to dismiss on 9 January 1978 the
trial court dismissed the case. A motion to reconsider the dismissal was denied.
On 27 March 1978 private respondents appealed to the Court of Appeals which on 11 December 1980
modified the order of dismissal "by returning the records of this case for trial on the merits, upon filing
of an answer subject to the provisions of Articles 1182 and 1197 of the Civil Code for the first cause of
action. The other causes of action should be tried on the merits subject to the defenses the defendants
may allege in their answer."cralaw virtua1aw library

The instant petition alleges that respondent court erred: (a) in not dismissing the appeal for lack of
appellate jurisdiction over the case which involves merely a question of law; (b) in not affirming the
order of dismissal for lack of cause of action; and, (c) in holding that private respondents have a cause of
action under the second to the sixth causes of action of the complaint. 2

We cannot sustain the petition. Petitioners are now estopped from assailing the appellate jurisdiction of
the Court of Appeals after receiving an adverse judgment therefrom. 3 Having participated actively in
the proceedings before the appellate court, petitioners can no longer question its authority.

Petitioners submit that private respondents failed to specify in their complaint a fixed period within
which petitioners should pay their obligations; that instead of stating that petitioners failed to discharge
their obligations upon maturity private respondents sought to collect on the checks which were issued
to them merely as security for the loans; and, that private respondents failed to make a formal demand
on petitioners to satisfy their obligations before filing the action.

For a proper determination of whether the complaint filed by private respondents sufficiently stated a
cause of action, we shall examine the relevant allegations in the complaint, to wit:chanrob1es virtual
1aw library

Allegations Common To All Causes of Actions

x              x              x

3. That sometime in . . . February, 1977, when the Reycard Duet was in Manila, plaintiff Teresita got
acquainted with defendant Olivia in the jewelry business, the former selling the jewelries of the latter;
that to the Reycard Duet alone, plaintiff Teresita sold jewelries worth no less than ONE HUNDRED
TWENTY THOUSAND (P120,000.00) PESOS in no less than twenty (20) transactions; that even when the
Reycards have already left, their association continued, and up to the month of August, 1977, plaintiff
Teresita sold for defendant Olivia jewelries worth no less than TWENTY THOUSAND (P20,000.00) PESOS,
in ten (10) transactions more or less;

x              x              x

5. That sometime in the months of June and July of 1977, defendant Olivia, on two occasions, asked for
a loan from plaintiff Teresita, for the purpose of investing the same in the purchase of jewelries, which
loan were secured by personal checks of the former; that in connection with these loans, defendant
promised plaintiff a participation in an amount equivalent to one half (1/2) of the profit to be realized;
that on these loans, plaintiff was given a share in the amount of P1,200.00 in the first transaction, and in
the second transaction, the sum of P950.00;

First Cause of Action

6. That on August 15, 1977, defendant Olivia got from plaintiff Teresita, one diamond ring, one and one
half (1-1/2) karats, heart shape, valued in the amount of Fifteen thousand (P15,000.00) Pesos; that as a
security for the said ring, Olivia issued a Philippine Commercial and Industrial Bank Check, San Sebastian
Branch, dated August 15, 1977, No. 13894, copy of which is hereto attached and made a part hereof as
Annex "A" ;

7. That the condition of the issuance of the check was — if the ring is not returned within fifteen (15)
days from August 15, 1977, the ring is considered sold; that after fifteen days, plaintiff Teresita asked
defendant Olivia if she could deposit the check, and the answer of defendant Olivia was — hold it for
sometime, until I tell you to deposit the same; that the check was held until the month of November,
1977, and when deposited, it was dishonored for lack of sufficient funds; that for the reason that the
aforementioned check was not honored when deposited, defendant Olivia should be held liable for
interest at the rate of one percent a month, from date of issue, until the same is fully paid;

Second Cause of Action

8. That on August 25, 1977, plaintiff Teresita extended a loan to the herein defendant Olivia in the
amount of TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine Commercial and Industrial Bank
Check, PCIBANK Singalong Branch, No. 14307, dated Sept. 25, 1977, photo copy of which is hereto
attached and made a part hereof as Annex "B" ;

9. That this loan was extended upon representation of defendant Olivia that she needed money to pay
for jewelries which she can resell for a big profit; that having established her goodwill, by reason of the
transaction mentioned in par. "5" hereof, the loan was extended by plaintiff;

10. That this check, Annex "B", when deposited was dishonored; that for the reason that the check was
dishonored when deposited, defendant Olivia should be held liable for interest at the rate of one
percent (1%) per month, from the date of issue until fully paid;

Third Cause of Action

11. That on August 27, 1977, plaintiff extended to defendant Olivia a loan in the amount of FIVE
THOUSAND PESOS (P5,000.00), secured by a Philippine Commercial & Industrial Bank check, PCIBANK
Singalong Branch, No. 14308, dated Sept. 27, 1977, photo copy of which is hereto attached and made a
part hereof as Annex "C" ;

12. That this loan was extended on the same representation made by defendant Olivia, stated in par.
"9", under the terms and conditions stated in par. "5" hereof;
13. That the check Annex "C", has not as yet been paid up to now, hence, defendant Olivia should be
held liable for interest at the rate of one percent (1%) monthly, from date of issue, until fully paid;

Fourth Cause of Action

14. That on August 30, 1977, plaintiff Teresita, extended a loan in favor of defendant Olivia, in the
amount of Five Thousand (P5,000.00) Pesos, secured by a Philippine Commercial and Industrial Bank
Check, PCIBANK Singalong Branch, No. 14311, dated Sept. 30, 1977, photo copy of which is hereto
attached and made a part hereof as Annex "D" ;

15. That this loan was extended on the same representation made by defendant Olivia, as stated in par.
"9" hereof, under the terms and conditions stated in par. "5" hereof;

16. That this check, Annex "D" has not as yet been paid up to now, hence, she should be held liable for
interest thereon at the rate of one percent (1%) per month, from date of issue, until fully paid;

Fifth Cause of Action

17. That on Sept. 15, 1977, plaintiff Teresita extended a loan in favor of defendant Olivia, in the amount
of TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine Commercial & Industrial Bank check,
PCIBANK Singalong Branch, No. 143P0, dated October 15, 1977, photo copy of which is hereto attached
and made a part hereof as Annex "E" ;

18. That this loan was given on the same representation made by defendant Olivia, stated on par. "9"
hereof, and under the terms and conditions stated in par. "5" hereof;

19. That this check Annex "E" when deposited was dishonored; that for the reason that the check was
dishonored when deposited, defendant Olivia should be held liable for interest at the rate of one
percent (1%) monthly, from date of issue, until fully paid;

Sixth Cause of Action

20. That on Sept. 27, 1977, plaintiff Teresita extended a loan to defendant Olivia, in the amount of TEN
THOUSAND (P10,000.00) PESOS, secured by a Philippine Commercial & Industrial Bank check, No. 14325,
dated October 27, 1977, photo copy of which is hereto attached and made a part hereof as Annex "F" ;

21. That this loan was given on the same representation made by defendant Olivia, stated in par. "9"
hereof, and under the terms and conditions stated in par. "5" hereof;

22. That this check, Annex F, when deposited was dishonored; that for the reason that the check was
dishonored when deposited, defendant Olivia should be held liable for interest thereon, at the rate of
one percent (1%) monthly, from date of issue, until fully paid;
Seventh Cause of Action

23. That plaintiff, by reason of the two transactions in par. "5" hereof, reposed trust and confidence on
defendant Olivia, however, by virtue of these trust and confidence, she availed of the same in securing
the loans aforementioned by misrepresentations, and as a direct consequence thereof, the loans have
not as yet been settled up to now, for which plaintiff Teresita suffered sleepless nights, mental torture
and wounded feelings, for the reason that the money used in said transactions do all belong to her; that
this situation is further aggravated by the malicious act of defendant Olivia, by having filed a complaint
with the Manila Police, to the effect that she (Teresita) stole the checks involved in this case; that as a
consequence thereof, she was investigated and she suffered besmirched reputation, social humiliation,
wounded feelings, moral shock and similar injuries, for which defendant Olivia should be held liable, as
and by way of moral damages in the amount of EIGHTY THOUSAND (P80,000.00)PESOS;

Eight Cause of Action

24. That as and by way of exemplary or corrective damages, to serve as an example or correction for the
public good, defendant Olivia should be held liable to pay to the herein plaintiff Teresita, the amount of
Ten Thousand Pesos, as exemplary damages;

Ninth Cause of Action

25. That plaintiff, in order to protect her rights and interests, engaged the services of the undersigned,
and she committed herself to pay the following:chanrob1es virtual 1aw library

a. The amount of P200.00 for every appearance in the trial of this case.

b. The amount of P2,000.00 as retainers fees.

c. An amount equivalent to ten percent of any recovery from defendant.

On the basis of the allegations under the heading Allegations Common to all Causes of Action above
stated as well as those found under the First Cause of Action to the Ninth Cause of Action, should the
complaint be dismissed for want of cause of action?

A cause of action is the fact or combination of facts which affords a party a right to judicial interference
in his behalf. The requisites for a cause of action are: (a) a right in favor of the plaintiff by whatever
means and under whatever law it arises or is created, (b) an obligation on the part of the defendant to
respect and not to violate such right; and, (c) an act or omission on the part of the defendant
constituting a violation of the plaintiff’s right or breach of the obligation of the defendant to the plaintiff.
4 Briefly stated, it is the reason why the litigation has come about; it is the act or omission of defendant
resulting in the violation of someone’s right. 5

In determining the existence of a cause of action, only the statements in the complaint may properly be
considered. Lack of cause of action must appear on the face of the complaint and its existence may be
determined only by the allegations of the complaint, consideration of other facts being proscribed and
any attempt to prove extraneous circumstances not being allowed.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, such as what
petitioners did in the case at bar, he is regarded as having hypothetically admitted all the averments
thereof. The test of sufficiency of the facts found in a complaint as constituting a cause of action is
whether or not admitting the facts alleged the court can render a valid judgment upon the same in
accordance with the prayer thereof. The hypothetical admission extends to the relevant and material
facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the allegations in
a complaint furnish sufficient basis by which the complaint can be maintained, the same should not be
dismissed regardless of the defense that may be assessed by the defendants. 6

In their first cause of action private respondents Eduardo and Teresita Domdoma alleged that petitioner
Olivia Navoa obtained from the latter a ring valued at P15,000.00 and issued as security therefor a check
for the same amount dated 15 August 1977 with the condition that if the ring was not returned within
fifteen (15) days the ring would be considered sold; and, after the lapse of the period, private
respondent Teresita Domdoma asked to deposit the check but petitioner Olivia Navoa requested the
former not to deposit it in the meantime; that when Teresita Domdoma deposited the check after
holding it for sometime the same was dishonored for lack of funds. Private respondent Teresita
Domdoma sought to collect the amount of P15,000.00 plus interest from 15 August 1977 until fully paid.

From these facts the ring was considered sold to petitioner Olivia Navoa 15 days from 15 August 1977
and despite the sale the latter failed to pay the price therefor even as the former was given ample time
to pay the agreed amount covered by a check. Clearly, respondent Teresita Domdoma’s right under the
agreement with petitioner Olivia Navoa was violated by the latter.

In the second to the sixth causes of action it was alleged that private respondents granted loans to
petitioners in different amounts on different dates. All these loans were secured by separate checks
intended for each amount of loan obtained and dated one month after the contracts of loan were
executed. That when these checks were deposited on their due dates they were all dishonored by the
bank. As a consequence, private respondents prayed that petitioners be ordered to pay the amounts of
the loans granted to them plus one percent interest monthly from the dates the checks were
dishonored until fully paid.

Culled from the above, the right of private respondents to recover the amounts loaned to petitioners is
clear. Moreover, the corresponding duty of petitioners to pay private respondents is undisputed. The
question now is whether petitioners committed an act or omission constituting a violation of the right of
private respondents.

All the loans granted to petitioners are secured by corresponding checks dated a month after each loan
was obtained. In this regard, the term security is defined as a means of ensuring the enforcement of an
obligation or of protecting some interest in property. It may be personal, as when an individual becomes
a surety or a guarantor; or a property security, as when a mortgage, pledge, charge, lien, or other device
is used to have property held, out of which the person to be made secure can be compensated for loss.
7 Security is something to answer for as a promissory note. 8 That is why a secured creditor is one who
holds a security from his debtor for payment of a debt. 9 From the allegations in the complaint there is
no other fair inference than that the loans were payable one month after they were contracted and the
checks issued by petitioners were drawn to answer for their debts to private respondents.

Petitioners failed to make good the checks on their due dates for the payment of their obligations.
Hence, private respondents filed the action with the trial court precisely to compel petitioners to pay
their due and demandable obligations. Art. 1169 of the Civil Code is explicit — those obliged to deliver
or to do something incur in delay from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation. The continuing refusal of petitioners to heed the demand of
private respondents stated in their complaint unmistakably shows the existence of a cause of action on
the part of the latter against the former.

Quite obviously, the trial court erred in dismissing the case on the ground of lack of cause of action.
Respondent Court of Appeals therefore is correct in demanding the case to the trial court for the filing of
an answer by petitioners and to try the case on the merits.

WHEREFORE, the petition is DENIED. The judgment of the Court of Appeals dated 11 December 1980
remanding the case to the trial court for the filing of petitioners’ answer and thereafter for trial on the
merits is AFFIRMED. Costs against petitioners.

SO ORDERED

Padilla, Davide, Jr., Kapunan and Hermosisima, JJ., concur.

SECOND DIVISION

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

 RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, Petitioners, v. THE HONORABLE COURT OF
APPEALS and THE PHILIPPINE BANK OF COMMERCE, Respondents.

Edgardo I. De Leon, for Petitioners.

Siguion Reyna, Montecillo & Associates for Private Respondent.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACT OF LOAN WITH MORTGAGE; BEING A
CONSENSUAL CONTRACT, DEEMED PERFECTED AT THE EXECUTION OF THE CONTRACT OF MORTGAGE;
FAILURE TO TAKE IMMEDIATE COLLECTION OF CONSIDERATION, IMMATERIAL. — From the recitals of
the mortgage deed itself, it is clearly seen that the mortgage deed was executed for and on condition of
the loan granted to the Lozano spouses. The fact that the latter did not collect from the respondent
Bank the consideration of the mortgage on the date it was executed is immaterial. A contract of loan
being a consensual contract, the herein contract of loan was perfected at the same time the contract of
mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence of
indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution.

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

3. ID.; MORTGAGE; EXTRA-JUDICIAL FORECLOSURE; PERSONAL NOTICE UNDER ACT 3135, NOT
REQUIRED NOR TO ANYONE NOT PRIVY TO THE OBLIGATION. — The lack of notice of the foreclosure
sale on petitioners is a flimsy ground. Respondent Bank not being a party to the Deed of Sale with
Assumption of Mortgage, it can validly claim that it was not aware of the same and hence, it may not be
obliged to notify petitioners. Secondly, petitioner Honesto Bonnevie was not entitled to any notice
because as of May 14, 1968, he had transferred and assigned all his rights and interests over the
property in favor of intervenor Raoul Bonnevie and respondent Bank was not likewise informed of the
same. For the same reason, Raoul Bonnevie is not entitled to notice. Most importantly, Act No. 3135
does not require personal notice on the mortgagor. In the case at bar, the notice of sale was published
in the Luzon Courier on June 30, July 7 and July 14, 1968 and notices of the sale were posted for not less
than twenty days in at least three (3) public places in the Municipality where the property is located.
Petitioners were thus placed on constructive notice.

4. ID.; ID.; SANTIAGO CASE; NOT APPLICABLE IN THE CASE AT BAR. — The case of Santiago v. Dionisio, 92
Phil. 495, cited by petitioners is inapplicable because said case involved a judicial foreclosure and the
sale to the vendee of the mortgaged property was duly registered making the mortgagee privy to the
sale.

5. ID.; ID.; EXTRA-JUDICIAL FORECLOSURE; PERIOD OF PUBLICATION OF NOTICE OF AUCTION SALE,

CONSTRUED. — As regards the claim that the period of publication of the notice of auction sale was not
in accordance with law, namely: once a week for at least three consecutive weeks, the Court of Appeals
ruled that the publication of notice on June 30, July 7 and July 14, 1968 satisfies the publication
requirement under Act No. 3133 notwithstanding the fact that June 30 to July 14 is only 14 days. We
agree. Act No. 3135 merely requires that "such notice shall be published once a week for at least three
consecutive weeks." Such phrase, as interpreted by the Court in Basa v. Mercado, 61 Phil. 632, does not
mean that notice should be published for three full weeks.

6. REMEDIAL LAW; EVIDENCE; AFFIDAVIT OF PUBLICATION BY THE PUBLISHER, BUSINESS/ADVERTISING

MANAGER OF A NEWSPAPER; PRIMA FACIE EVIDENCE OF PUBLICATION. — The argument that the
publication of the notice in the "Luzon Weekly Courier" was not in accordance with law as said
newspaper is not of general circulation must likewise he disregarded. The affidavit of publication,
executed by the publisher, business/advertising manager of the Luzon Weekly Courier, states that it is "a
newspaper of general circulation in . . . Rizal; and that the Notice of Sheriff’s sale was published in said
paper on June 30, July and July 14, 1968." This constitutes prima facie evidence of compliance with the
requisite publication. (Sadang vs.GSlS, 18 SCRA 491). To be a newspaper of general circulation, it is
enough that "it is published for the dissemination of local news and general information; that it has a
bona fide subscription list of paying subscribers; that it is published at regular intervals." (Basa v.
Mercado, 61 Phil. 632). The newspaper need not have the largest circulation so long as it is of general
circulation. (Banta v. Pacheco, 74 Phil. 67). The testimony of three witnesses that they do not read the
Luzon Weekly Courier is not proof that said newspaper is not a newspaper of general circulation in the
province of Rizal.

7. ID.; NOTICE; PUBLICATION; NEWSPAPER OF GENERAL CIRCULATION, CONSTRUED. — Whether or not

the notice of auction sale was posted for the period required by law is a question of fact. It can no longer
be entertained by this Court. (See Reyes, Et. Al. v. CA, Et Al., 107 SCRA 126) Nevertheless, the records
show that copies of said notice were posted in three conspicuous places in the municipality of Pasig,
Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig Municipal Hall. In the same
manner, copies of said notice were also posted in the place where the property was located, namely:
the Municipal Building of San Juan, Rizal; the Municipal Market and on Benitez Street. The following
statement of Atty. Santiago Pastor, head of the legal department of respondent bank namely: "Q - How
many days were the notices posted in these two places, if you know? A- We posted them only once in
one day" (TSN, p.45, July 25, 1973) is not a sufficient countervailing evidence to prove that there was no
compliance with the posting requirement in the absence of proof or even of allegation that the notices
were removed before the expiration of the twenty day period. A single act of posting (which may even
extend beyond the period required by law) satisfies the requirement of law. The burden of proving that
the posting requirement was not complied with is now shifted to the one who alleges non-compliance.

8. CIVIL LAW; MORTGAGE; UNREGISTERED MORTGAGOR; RIGHT TO REDEEM; DISALLOWED. — On the

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

9. ID.; OBLIGATIONS AND CONTRACTS; RENEWAL OF LOAN; NOT DEPENDENT SOLELY ON THE DEBTOR
BUT ON THE DISCRETION OF THE CREDITOR BANK; BAD FAITH; ABSENCE IN THE CASE AT BAR. — On the
question of whether or not respondent Court of Appeals erred in holding that respondent Bank did not
act in bad faith, the undeniable fact is that the loan matured on December 26, 1967. On June 10, 1968,
when respondent Bank applied for foreclosure the loan was already six months overdue. Petitioners’
payment of interest on July 12, 1968 does not thereby make the earlier act of respondent Bank
inequitous nor does it ipso facto result in the renewal of the loan. In order that a renewal of a loan may
he effected, not only the payment of the accrued interest is necessary but also the payment of interest
for the proposed period of renewal as well. Besides, whether or not a loan may be renewed does not
solely depend on the debtor but more so on the discretion of the bank. Respondent Bank may not be,
therefore, charged of bad faith.

DECISION

GUERRERO, J.:

Petition for review on certiorari seeking the reversal of the decision of the defunct Court of Appeals,
now Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie v. Philippine
Bank of Commerce, Et Al.," promulgated August 11, 1978 1 as well as the Resolution denying the motion
for reconsideration.
The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First Instance
of Rizal against respondent Philippine Bank of Commerce sought the annulment of the Deed of
Mortgage dated December 6, 1966 executed in favor of the Philippine Bank of Commerce by the
spouses Jose M. Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made on September
4, 1968. It alleged among others that (a) the Deed of Mortgage lacks consideration and (b) the mortgage
was executed by one who was not the owner of the mortgaged property. It further alleged that the
property in question was foreclosed pursuant to Act No. 3135 as amended, without, however,
complying with the condition imposed for a valid foreclosure. Granting the validity of the mortgage and
the extrajudicial foreclosure, it finally alleged that respondent Bank should have accepted petitioner’s
offer to redeem the property under the principle of equity and justice.

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

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

On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as
follows:chanrobles.com:cralaw:red

"WHEREFORE, all the foregoing promises considered, judgment is hereby rendered dismissing the
complaint with costs against the plaintiff and the intervenor."cralaw virtua1aw library

After the motion for reconsideration of the lower court’s decision was denied, petitioners appealed to
respondent Court of Appeals assigning the following errors:chanrob1es virtual 1aw library
1. The lower court erred in not finding that the real estate mortgage executed by Jose Lozano was null
and void;

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

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

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

5. The lower court erred in dismissing the complaint.

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

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

"It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the owners of the property
which they mortgaged on December 6, 1966, to secure the payment of the loan in the principal amount
of P75,000.00 they were about to obtain from defendant-appellee Philippine Bank of Commerce; that
on December 8, 1966, they executed in favor of plaintiff-appellant the Deed of Sale with Assumption of
Mortgage, for and in consideration of the sum of P100,000.00, P20,000.00 of which amount being
payable to the Lozano spouses upon the execution of the document, and the balance of P75,000.00
being payable to defendant-appellee; that on December 6, 1966, when the mortgage was executed by
the Lozano spouses in favor of defendant-appellee, the loan of P75,000.00 was not yet received by
them, as it was on December 12, 1966 when they and their co-maker Alfonso Lim signed the promissory
note for that amount; that from April 28, 1967 to July 12, 1968, plaintiff-appellant made payments to
defendant-appellee on the mortgage in the total amount of P18,944.22; that on May 4, 1968, plaintiff-
appellant assigned all his rights under the Deed of Sale with Assumption of Mortgage to his brother,
intervenor Raoul Bonnevie; that on June 10, 1968, defendant-appellee applied for the foreclosure of the
mortgage, and notice of sale was published in the Luzon Weekly Courier on June 30, July 7, and July 14,
1968; that auction sale was conducted on August 19, 1968, and the property was sold to defendant-
appellee for P84,387.00; and that offers from plaintiff-appellant to repurchase the property failed, and
on October 9, 1969, he caused an adverse claim to be annotated on the title of the property." (Decision
of the Court of Appeals, p. 5)

Presented for resolution in this review are the following issues:chanrob1es virtual 1aw library

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

II

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

III

Whether petitioners had a right to redeem the foreclosed property.

IV

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

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

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

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

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

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

Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following
grounds:chanrobles law library : red

a) Petitioners were never notified of the foreclosure sale.

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

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

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

"Section 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least
three pub]ic places of the municipality or city where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the municipality or city."cralaw virtua1aw
library

In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July 14,
1968 and notices of the sale were posted for not less than twenty days in at least three (3) public places
in the Municipality where the property is located. Petitioners were thus placed on constructive notice.
The case of Santiago v. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said case
involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly registered
making the mortgaged privy to the sale.

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

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

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

Whether or not the notice of auction sale was posted for the period required by law is a question of fact.
It can no longer be entertained by this Court. (see Reyes, Et. Al. v. CA, Et Al., 107 SCRA 126).
Nevertheless, the records show that copies of said notice were posted in three conspicuous places in the
municipality of Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig Municipal
Hall. In the same manner, copies of said notice were also posted in the place where the property was
located, namely: the Municipal Building of San Juan, Rizal; the Municipal Market and on Benitez Street.
The following statement of Atty. Santiago Pastor, head of the legal department of respondent bank,
namely:jgc:chanrobles.com.ph

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

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

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

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

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

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

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

SO ORDERED.

Aquino, J., concur.

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

Concepcion, Jr., J., did not take part.

De Castro, J., is on leave.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

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

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

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

Antonio R. Tupaz for private respondent.

MAKASIAR, CJ.:

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

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

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

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

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

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

x x x           x x x          x x x

(p. 46, rec.).

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

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

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

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

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

On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount
of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining order so that
the sheriff may proceed with the foreclosure (pp. 135-136. rec.

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

Hence, this instant petition by the central Bank.

The issues are:

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

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

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

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

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

The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken
as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the
advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only
P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a
non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an
exercise of his right to it, which right exist independently of his right to demand the completion of the
P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the
other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt
it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court
previously ruled that bank officials and employees are expected to exercise caution and prudence in the
discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the
obligation of the bank's officials and employees that before they approve the loan application of their
customers, they must investigate the existence and evaluation of the properties being offered as a loan
security. The recent rush of events where collaterals for bank loans turn out to be non-existent or
grossly over-valued underscore the importance of this responsibility. The mere reliance by bank officials
and employees on their customer's representation regarding the loan collateral being offered as loan
security is a patent non-performance of this responsibility. If ever bank officials and employees totally
reIy on the representation of their customers as to the valuation of the loan collateral, the bank shall
bear the risk in case the collateral turn out to be over-valued. The representation made by the customer
is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the lower court,
on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on the alleged
over-valuation because of their failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15.
1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states that
"defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed
waived." Petitioners, thus, cannot raise the same issue before the Supreme Court.

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

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

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

Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the
liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his
overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall
not be included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some
benefit for his use of the P17,000.00, it is just that he should account for the interest thereon.

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

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

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

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

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

Article 2089 provides:

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

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

Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several
heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a
mortgage cannot apply

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

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

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

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

NO COSTS. SO ORDERED.

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

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

FIRST DIVISION

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

FRANCISCO HERRERA, Plaintiff-Appellant, v. PETROPHIL CORPORATION, Defendant-Appellee.

Paterno R. Canlas Law Offices, for Plaintiff-Appellant.

SYLLABUS

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

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

3. ID.; ID.; USURY LAW; NO APPLICATION IN THE CASE AT BAR. — There is no usury in this case because
no money was given by the defendant-appellee to the plaintiff-appellant, nor did it allow him to use its
money already in his possession. There was neither loan nor forbearance but a mere discount which the
plaintiff-appellant allowed the defendant-appellee to deduct from the total payments because they
were being made in advance for eight years. The discount was in effect a reduction of the rentals which
the lessor had the right to determine, and any reduction thereof, by any amount, could not contravene
the Usury Law.

4. ID.; ID.; DISCOUNT AND LOAN, DIFFERENTIATED. — The difference between a discount and a loan or
forbearance is that the former does not have to be repaid. The loan or forbearance is subject to
repayment and is therefore governed by the laws on usury. To constitute usury, "there must be loan or
forbearance; the loan must be money or something circulating as money; it must be repayable
absolutely and in all events; and something must be exacted for the use of the money in excess of and in
addition to interest allowed by law."cralaw virtua1aw library

5. ID.; ID.; ELEMENTS OF USURY. — It has been held that the elements of usury are (1) a loan express or
implied; (2) an understanding between the parties that the money lent shall or may be returned; (3) that
for such loan a greater rate or interest that is allowed by law shall be paid, or agreed to be paid, as the
case may be; and (4) a corrupt intent to take more than the legal rate for the use of money loaned.
Unless these four things concur in every transaction, it is safe to affirm that no case of usury can be
declared.

6. ID.; CONTRACTS; INTERPRETED ACCORDING TO THEIR LITERAL MEANING, NOT BEYOND INTENTION
OF PARTIES. — Computation of the deductible discount appears to be too technical mumbo jumbo and
could not have been the intention of the parties to the transaction. Had it been so, then lit should have
been clearly stipulated in the contract. Contracts should be interpreted according to their literal
meaning and should not be interpreter beyond their obvious intendment.

DECISION

CRUZ, J.:

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

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

The facts are as follows:chanrob1es virtual 1aw library

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

"3. Rental: The LESSEE shall pay the LESSOR a rental of P1.40 sqm. per month on 400 sqm. and are to be
expropriated later on (sic) or P560 per month and P1.40 per sqm. per month on 1,693 sqm. or P2,370.21
per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable yearly in advance within
the 1st twenty days of each year; provided, a financial aid in the sum of P15,000 to clear the leased
premises of existing improvements thereon is paid in this manner; P10,000 upon execution of this lease
and P5,000 upon delivery of leased premises free and clear of improvements thereon within 30 days
from the date of execution of this agreement. The portion on the side of the leased premises with an
area of 365 sqm. more or less, will be occupied by LESSEE without rental during the lifetime of this lease.
PROVIDED FINALLY, that the Lessor is paid 8 years advance rental based on P2,930.70 per month
discounted at 12% interest per annum or a total net amount of P130,288.47 before registration of lease.
Leased premises shall be delivered within 30 days after 1st partial payment of financial aid." 2

On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintiff-
appellant advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73,
the amount it computed as constituting the interest or discount for the first eight years, in the total sum
P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a mistake in
computation, paid to the plaintiff-appellant the additional sum of P2,182.70, thereby reducing the
deducted amount to only P98,828.03. 3
On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03,
with interest, claiming this had been illegally deducted from him in violation of the Usury Law. 4 He also
prayed for moral damages and attorney’s fees. In its answer, the defendant-appellee admitted the
factual allegations of the complaint but argued that the amount deducted was not usurious interest but
a discount given to it for paying the rentals in advance for eight years. 5 Judgment on the pleadings was
rendered for the defendant. 6

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

The thrust of the plaintiff-appellant’s position is set forth in paragraph 6 of his complaint, which
read:jgc:chanrobles.com.ph

"6. The interest collected by defendant out of the rentals for the first eight years was excessive and
beyond that allowable by law, because the total interest on the said amount is only P33,755.90 at
P4,219.4880 per yearly rental; and considering that the interest should be computed excluding the first
year rental because at the time the amount of P281,199.20 was paid it was already due under the lease
contract hence no interest should be collected from the rental for the first year, the amount of
P29,536.42 only as the total interest should have been deducted by defendant from the sum of
P281,299.20."cralaw virtua1aw library

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

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

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

There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-
appellant, nor did it allow him to use its money already in his possession. 9 There was neither loan nor
forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee to deduct
from the total payments because they were being made in advance for eight years. The discount was in
effect a reduction of the rentals which the lessor had the right to determine, and any reduction thereof,
by any amount, would not contravene the Usury Law.

The difference between a discount and a loan or forbearance is that the former does not have to be
repaid. The loan or forbearance is subject to repayment and is therefore governed by the laws on usury.
10 To constitute usury, "there must be loan or forbearance; the loan must be of money or something
circulating as money; it must be repayable absolutely and in all events; and something must be exacted
for the use of the money in excess of and in addition to interest allowed by law." 11

It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding
between the parties that the money lent shall or may be returned; (3) that for such loan a greater rate
or interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a
corrupt intent to take more than the legal rate for the use of money loaned. Unless these four things
concur in every transaction, it is safe to affirm that no case of usury can be declared. 12

Concerning the computation of the deductible discount, the trial court declared:jgc:chanrobles.com.ph

"As above-quoted, the ‘Lease Agreement’ expressly provides that the lessee (defendant) shall pay the
lessor (plaintiff) eight (8) years in advance rentals based on P2,930.20 per month discounted at 12%
interest per annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20 multiplied by 12
months) and that the interest therefrom is P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore,
the total interest for the first eight (8) years should be only P33,755.90 (P4,129.4880 multiplied by eight
(8) years) and not P98,828.03 as the defendant claimed it to be."cralaw virtua1aw library

"The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most seriously
misleading. He just computed the annual discount to be at P4,129.4880 and then simply multiplied it by
eight (8) years. He did not take into consideration the naked fact that the rentals due on the eight year
were paid in advance by seven (7) years, the rentals due on the seventh year were paid in advance by six
(6) years, those due on the sixth year by five (5) years, those due on the fifth year by four (4) years,
those due on the fourth year by three (3) years, those due on the third year by two (2) years, and those
due on the second year by one (1) year, so much so that the total number of years by which the annual
rental of P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of
P118,145.44 (P4,129.48 multiplied by 28 years) as the discount. However, defendant was most fair to
plaintiff. It did not simply multiply the annual rental discount by 28 years. It computed the total discount
with the principal diminishing month to month as shown by Annex ‘A’ of its memorandum. This is why
the total discount amount to only P8,828.03.

"The allegation of plaintiff that defendant made the computation in a compounded manner is
erroneous. Also after making its own computations and after examining closely defendant’s Annex ‘A’ of
its memorandum, the court finds that defendant did not charge 12% discount on the rentals due for the
first year so much so that the computation conforms with the provision of the Lease Agreement to the
effect that the rentals shall be `payable yearly in advance within the 1st 20 days of each year.’"
We do not agree. The above computation appears to be too much technical mumbo-jumbo and could
not have been the intention of the parties to the transaction. Had it been so, then it should have been
clearly stipulated in the contract. Contracts should be interpreted according to their literal meaning and
should not be interpreted beyond their obvious intendment. 13

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

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

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

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

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

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

SO ORDERED.

Yap, Narvasa, Melencio-Herrera and Feliciano, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. L-4150             February 10, 1910

FELIX DE LOS SANTOS, plaintiff-appelle,

vs.
AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased, defendant-appellant.

Matias Hilado, for appellant.

Jose Felix Martinez, for appellee.

TORRES, J.:

On the 1st of September, 1906, Felix de los Santos brought suit against Agustina Jarra, the administratrix
of the estate of Magdaleno Jimenea, alleging that in the latter part of 1901 Jimenea borrowed and
obtained from the plaintiff ten first-class carabaos, to be used at the animal-power mill of his hacienda
during the season of 1901-2, without recompense or remuneration whatever for the use thereof, under
the sole condition that they should be returned to the owner as soon as the work at the mill was
terminated; that Magdaleno Jimenea, however, did not return the carabaos, notwithstanding the fact
that the plaintiff claimed their return after the work at the mill was finished; that Magdaleno Jimenea
died on the 28th of October, 1904, and the defendant herein was appointed by the Court of First
Instance of Occidental Negros administratrix of his estate and she took over the administration of the
same and is still performing her duties as such administratrix; that the plaintiff presented his claim to the
commissioners of the estate of Jimenea, within the legal term, for the return of the said ten carabaos,
but the said commissioners rejected his claim as appears in their report; therefore, the plaintiff prayed
that judgment be entered against the defendant as administratrix of the estate of the deceased,
ordering her to return the ten first-class carabaos loaned to the late Jimenea, or their present value, and
to pay the costs.

The defendant was duly summoned, and on the 25th of September, 1906, she demurred in writing to
the complaint on the ground that it was vague; but on the 2d of October of the same year, in answer to
the complaint, she said that it was true that the late Magdaleno Jimenea asked the plaintiff to loan him
ten carabaos, but that he only obtained three second-class animals, which were afterwards transferred
by sale by the plaintiff to the said Jimenea; that she denied the allegations contained in paragraph 3 of
the complaint; for all of which she asked the court to absolve her of the complaint with the cost against
the plaintiff.

By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified the defendant and
her counsel, Matias Hilado, that he had made an agreement with the plaintiff to the effect that the latter
would not compromise the controversy without his consent, and that as fees for his professional
services he was to receive one half of the amount allowed in the judgment if the same were entered in
favor of the plaintiff.

The case came up for trial, evidence was adduced by both parties, and either exhibits were made of
record. On the 10th of January, 1907, the court below entered judgment sentencing Agustina Jarra, as
administratrix of the estate of Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the
remaining six second and third class carabaos, or the value thereof at the rate of P120 each, or a total of
P720 with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated January 19,
moved for anew trial on the ground that the findings of fact were openly and manifestly contrary to the
weight of the evidence. The motion was overruled, the defendant duly excepted, and in due course
submitted the corresponding bill of exceptions, which was approved and submitted to this court.

The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten carabaos
which are now claimed by the latter, as shown by two letters addressed by the said Jimenea to Felix de
los Santos; but in her answer the said defendant alleged that the late Jimenea only obtained three
second-class carabaos, which were subsequently sold to him by the owner, Santos; therefore, in order
to decide this litigation it is indispensable that proof be forthcoming that Jimenea only received three
carabaos from his son-in-law Santos, and that they were sold by the latter to him.

The record discloses that it has been fully proven from the testimony of a sufficient number of witnesses
that the plaintiff, Santos, sent in charge of various persons the ten carabaos requested by his father-in-
law, Magdaleno Jimenea, in the two letters produced at the trial by the plaintiff, and that Jimenea
received them in the presence of some of said persons, one being a brother of said Jimenea, who saw
the animals arrive at the hacienda where it was proposed to employ them. Four died of rinderpest, and
it is for this reason that the judgment appealed from only deals with six surviving carabaos.

The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not evidenced by any
trustworthy documents such as those of transfer, nor were the declarations of the witnesses presented
by the defendant affirming it satisfactory; for said reason it can not be considered that Jimenea only
received three carabaos on loan from his son-in-law, and that he afterwards kept them definitely by
virtue of the purchase.

By the laws in force the transfer of large cattle was and is still made by means of official documents
issued by the local authorities; these documents constitute the title of ownership of the carabao or
horse so acquired. Furthermore, not only should the purchaser be provided with a new certificate or
credential, a document which has not been produced in evidence by the defendant, nor has the loss of
the same been shown in the case, but the old documents ought to be on file in the municipality, or they
should have been delivered to the new purchaser, and in the case at bar neither did the defendant
present the old credential on which should be stated the name of the previous owner of each of the
three carabaos said to have been sold by the plaintiff.

From the foregoing it may be logically inferred that the carabaos loaned or given on commodatum to
the now deceased Magdaleno Jimenea were ten in number; that they, or at any rate the six surviving
ones, have not been returned to the owner thereof, Felix de los Santos, and that it is not true that the
latter sold to the former three carabaos that the purchaser was already using; therefore, as the said six
carabaos were not the property of the deceased nor of any of his descendants, it is the duty of the
administratrix of the estate to return them or indemnify the owner for their value.

The Civil Code, in dealing with loans in general, from which generic denomination the specific one of
commodatum is derived, establishes prescriptions in relation to the last-mentioned contract by the
following articles:

ART. 1740. By the contract of loan, one of the parties delivers to the other, either anything not
perishable, in order that the latter may use it during a certain period and return it to the former, in
which case it is called commodatum, or money or any other perishable thing, under the condition to
return an equal amount of the same kind and quality, in which case it is merely called a loan.

Commodatum is essentially gratuitous.

A simple loan may be gratuitous, or made under a stipulation to pay interest.

ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee acquires the use
thereof, but not its fruits; if any compensation is involved, to be paid by the person requiring the use,
the agreement ceases to be a commodatum.

ART. 1742. The obligations and rights which arise from the commodatum pass to the heirs of both
contracting parties, unless the loan has been in consideration for the person of the bailee, in which case
his heirs shall not have the right to continue using the thing loaned.

The carabaos delivered to be used not being returned by the defendant upon demand, there is no doubt
that she is under obligation to indemnify the owner thereof by paying him their value.

Article 1101 of said code reads:

Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and those who in any
manner whatsoever act in contravention of the stipulations of the same, shall be subjected to indemnify
for the losses and damages caused thereby.

The obligation of the bailee or of his successors to return either the thing loaned or its value, is
sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out with precision
the legal doctrine touching commodatum as follows:

Although it is true that in a contract of commodatum the bailor retains the ownership of the thing
loaned, and at the expiration of the period, or after the use for which it was loaned has been
accomplished, it is the imperative duty of the bailee to return the thing itself to its owner, or to pay him
damages if through the fault of the bailee the thing should have been lost or injured, it is clear that
where public securities are involved, the trial court, in deferring to the claim of the bailor that the
amount loaned be returned him by the bailee in bonds of the same class as those which constituted the
contract, thereby properly applies law 9 of title 11 of partida  5.

With regard to the third assignment of error, based on the fact that the plaintiff Santos had not
appealed from the decision of the commissioners rejecting his claim for the recovery of his carabaos, it
is sufficient to estate that we are not dealing with a claim for the payment of a certain sum, the
collection of a debt from the estate, or payment for losses and damages (sec. 119, Code of Civil
Procedure), but with the exclusion from the inventory of the property of the late Jimenea, or from his
capital, of six carabaos which did not belong to him, and which formed no part of the inheritance.

The demand for the exclusion of the said carabaos belonging to a third party and which did not form
part of the property of the deceased, must be the subject of a direct decision of the court in an ordinary
action, wherein the right of the third party to the property which he seeks to have excluded from the
inheritance and the right of the deceased has been discussed, and rendered in view of the result of the
evidence adduced by the administrator of the estate and of the claimant, since it is so provided by the
second part of section 699 and by section 703 of the Code of Civil Procedure; the refusal of the
commissioners before whom the plaintiff unnecessarily appeared can not affect nor reduce the
unquestionable right of ownership of the latter, inasmuch as there is no law nor principle of justice
authorizing the successors of the late Jimenea to enrich themselves at the cost and to the prejudice of
Felix de los Santos.

For the reasons above set forth, by which the errors assigned to the judgment appealed from have been
refuted, and considering that the same is in accordance with the law and the merits of the case, it is our
opinion that it should be affirmed and we do hereby affirm it with the costs against the appellant. So
ordered.

Arellano, C.J., Johnson, Moreland and Elliott, JJ., concur.

Carson, J., reserves his vote.

SECOND DIVISION

G.R. No. 118375             October 3, 2003

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

DECISION

TINGA, J.:

Before us is a Petition for Review on Certiorari under Rule 45, assailing the decision of the Sixteenth
Division of the respondent Court of Appeals promulgated on 21 December 1994 1 , which affirmed in toto
the decision handed down by the Regional Trial Court (RTC) of Pasay City. 2

The case arose when on 11 August 1981, private respondent Aurora Queaño (Queaño) filed a complaint
before the Pasay City RTC for cancellation of a Real Estate Mortgage she had entered into with
petitioner Celestina Naguiat (Naguiat). The RTC rendered a decision, declaring the questioned Real
Estate Mortgage void, which Naguiat appealed to the Court of Appeals. After the Court of Appeals
upheld the RTC decision, Naguiat instituted the present petition.1ªvvphi1.nét

The operative facts follow:

Queaño applied with Naguiat for a loan in the amount of Two Hundred Thousand Pesos (₱200,000.00),
which Naguiat granted. On 11 August 1980, Naguiat indorsed to Queaño Associated Bank Check No.
090990 (dated 11 August 1980) for the amount of Ninety Five Thousand Pesos (₱95,000.00), which was
earlier issued to Naguiat by the Corporate Resources Financing Corporation. She also issued her own
Filmanbank Check No. 065314, to the order of Queaño, also dated 11 August 1980 and for the amount
of Ninety Five Thousand Pesos (₱95,000.00). The proceeds of these checks were to constitute the loan
granted by Naguiat to Queaño.3

To secure the loan, Queaño executed a Deed of Real Estate Mortgage dated 11 August 1980 in favor of
Naguiat, and surrendered to the latter the owner’s duplicates of the titles covering the mortgaged
properties.4 On the same day, the mortgage deed was notarized, and Queaño issued to Naguiat a
promissory note for the amount of TWO HUNDRED THOUSAND PESOS (₱200,000.00), with interest at
12% per annum, payable on 11 September 1980. 5 Queaño also issued a Security Bank and Trust
Company check, postdated 11 September 1980, for the amount of TWO HUNDRED THOUSAND PESOS
(₱200,000.00) and payable to the order of Naguiat.

Upon presentment on its maturity date, the Security Bank check was dishonored for insufficiency of
funds. On the following day, 12 September 1980, Queaño requested Security Bank to stop payment of
her postdated check, but the bank rejected the request pursuant to its policy not to honor such requests
if the check is drawn against insufficient funds. 6

On 16 October 1980, Queaño received a letter from Naguiat’s lawyer, demanding settlement of the loan.
Shortly thereafter, 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. 7

Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal Province, who
then scheduled the foreclosure sale on 14 August 1981. Three days before the scheduled sale, Queaño
filed the case before the Pasay City RTC,8 seeking the annulment of the mortgage deed. The trial court
eventually stopped the auction sale.9

On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage null and
void, and ordering Naguiat to return to Queaño the owner’s duplicates of her titles to the mortgaged
lots.10 Naguiat appealed the decision before the Court of Appeals, making no less than eleven
assignments of error. The Court of Appeals promulgated the decision now assailed before us that
affirmed in toto the RTC decision. Hence, the present petition.

Naguiat questions the findings of facts made by the Court of Appeals, especially on the issue of whether
Queaño had actually received the loan proceeds which were supposed to be covered by the two checks
Naguiat had issued or indorsed. Naguiat claims that being a notarial instrument or public document, the
mortgage deed enjoys the presumption that the recitals therein are true. Naguiat also questions the
admissibility of various representations and pronouncements of Ruebenfeldt, invoking the rule on the
non-binding effect of the admissions of third persons. 11

The resolution of the issues presented before this Court by Naguiat involves the determination of facts,
a function which this Court does not exercise in an appeal by certiorari. Under Rule 45 which governs
appeal by certiorari, only questions of law may be raised 12 as the Supreme Court is not a trier of
facts.13 The resolution of factual issues is the function of lower courts, whose findings on these matters
are received with respect and are in fact generally binding on the Supreme Court. 14 A question of law
which the Court may pass upon must not involve an examination of the probative value of the evidence
presented by the litigants.15 There is a question of law in a given case when the doubt or difference
arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or
difference arises as to the truth or the falsehood of alleged facts. 16

Surely, there are established exceptions to the rule on the conclusiveness of the findings of facts of the
lower courts.17 But Naguiat’s case does not fall under any of the exceptions. In any event, both the
decisions of the appellate and trial courts are supported by the evidence on record and the applicable
laws.
Against the common finding of the courts below, Naguiat vigorously insists that Queaño received the
loan proceeds. Capitalizing on the status of the mortgage deed as a public document, she cites the rule
that a public document enjoys the presumption of validity and truthfulness of its contents. The Court of
Appeals, however, is correct in ruling that the presumption of truthfulness of the recitals in a public
document was defeated by the clear and convincing evidence in this case that pointed to the absence of
consideration.18 This Court has held that the presumption of truthfulness engendered by notarized
documents is rebuttable, yielding as it does to clear and convincing evidence to the contrary, as in this
case.19

On the other hand, 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.20 It is only after the checks have produced the effect of payment that the contract of loan may
be deemed perfected. Art. 1934 of the Civil Code 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 the delivery of the object
of the contract."

A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of the
object of the contract.21 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. If indeed the
checks were encashed or deposited, Naguiat would have certainly presented the corresponding
documentary evidence, such as the returned checks and the pertinent bank records. Since Naguiat
presented no such proof, it follows that the checks were not encashed or credited to Queaño’s
account.1awphi1.nét

Naguiat questions the admissibility of the various written representations made by Ruebenfeldt on the
ground that they could not bind her following the res inter alia acta alteri nocere non debet rule. The
Court of Appeals rejected the argument, holding that since Ruebenfeldt was an authorized
representative or agent of Naguiat the situation falls under a recognized exception to the rule. 22 Still,
Naguiat insists that Ruebenfeldt was not her agent.

Suffice to say, however, the existence of an agency relationship between Naguiat and Ruebenfeldt is
supported by ample evidence. As correctly pointed out by the Court of Appeals, Ruebenfeldt was not a
stranger or an unauthorized person. Naguiat instructed Ruebenfeldt to withhold from Queaño the
checks she issued or indorsed to Queaño, pending delivery by the latter of additional collateral.
Ruebenfeldt served as agent of Naguiat on the loan application of Queaño’s friend, Marilou Farralese,
and it was in connection with that transaction that Queaño came to know Naguiat. 23 It was also
Ruebenfeldt who accompanied Queaño in her meeting with Naguiat and on that occasion, on her own
and without Queaño asking for it, Reubenfeldt actually drew a check for the sum of ₱220,000.00
payable to Naguiat, to cover for Queaño’s alleged liability to Naguiat under the loan agreement. 24

The Court of Appeals recognized the existence of an "agency by estoppel 25 citing Article 1873 of the Civil
Code.26 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.27 The Court of Appeals is correct in invoking the said rule on agency by estoppel.1awphi1.nét

More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is irrelevant
in the face of the fact that the checks issued or indorsed to Queaño were never encashed or deposited
to her account of Naguiat.

All told, we find 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. The consideration of the mortgage
contract is the same as that of the principal contract from which it receives life, and without which it
cannot exist as an independent contract. 28 A mortgage contract being a mere accessory contract, its
validity would depend on the validity of the loan secured by it. 29

WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against petitioner.

SO ORDERED.

Bellosillo, (Chairman), Quisumbing, Austria-Martinez, and Callejo, Sr., JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 154878             March 16, 2007

CAROLYN M. GARCIA, Petitioner,
vs.
RICA MARIE S. THIO, Respondent.
DECISION

CORONA, J.:

Assailed in this petition for review on certiorari 1 are the June 19, 2002 decision2 and August 20, 2002
resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28, 1997
decision of the Regional Trial Court (RTC) of Makati City, Branch 58.

Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M. Garcia a
crossed check4 dated February 24, 1995 in the amount of US$100,000 payable to the order of a certain
Marilou Santiago.5 Thereafter, petitioner received from respondent every month (specifically, on March
24, April 26, June 26 and July 26, all in 1995) the amount of US$3,000 6 and ₱76,5007 on July 26,8 August
26, September 26 and October 26, 1995.

In June 1995, respondent received from petitioner another crossed check 9 dated June 29, 1995 in the
amount of ₱500,000, also payable to the order of Marilou Santiago. 10 Consequently, petitioner received
from respondent the amount of ₱20,000 every month on August 5, September 5, October 5 and
November 5, 1995.11

According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000 and
₱500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of money
and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the sums of
US$100,000, with interest thereon at 3% a month from October 26, 1995 and ₱500,000, with interest
thereon at 4% a month from November 5, 1995, plus attorney’s fees and actual damages. 12

Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of US$100,000
with interest thereon at the rate of 3% per month, which loan would mature on October 26, 1995. 13 The
amount of this loan was covered by the first check. On June 29, 1995, respondent again borrowed the
amount of ₱500,000 at an agreed monthly interest of 4%, the maturity date of which was on November
5, 1995.14 The amount of this loan was covered by the second check. For both loans, no promissory note
was executed since petitioner and respondent were close friends at the time. 15 Respondent paid the
stipulated monthly interest for both loans but on their maturity dates, she failed to pay the principal
amounts despite repeated demands.161awphi1.nét

Respondent denied that she contracted the two loans with petitioner and countered that it was Marilou
Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to give the
crossed checks to Santiago.17 She issued the checks for ₱76,000 and ₱20,000 not as payment of interest
but to accommodate petitioner’s request that respondent use her own checks instead of Santiago’s. 18

In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. 19 It found that respondent
borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and ₱500,000 at a
monthly interest of 4%:20

WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby
rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:

1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October 26, 1995
until fully paid;
2. ₱500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.

3. ₱100,000.00 as and for attorney’s fees; and

4. ₱50,000.00 as and for actual damages.

For lack of merit, [respondent’s] counterclaim is perforce dismissed.

With costs against [respondent].

IT IS SO ORDERED.21

On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan
between the parties:

A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows that
[respondent] received money from [petitioner]. What is evident is the fact that [respondent] received a
MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the order
of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of ₱500,000.00,
again payable to the order of Marilou Santiago, both of which were issued by [petitioner]. The checks
received by [respondent], being crossed, may not be encashed but only deposited in the bank by the
payee thereof, that is, by Marilou Santiago herself.

It must be noted that crossing a check has the following effects: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only once—to one who has an account with
the bank; (c) and the act of crossing the check serves as warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check pursuant to that
purpose, otherwise, he is not a holder in due course.

Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the
payee in contemplation of law since the latter is not the person who could take the checks as a holder,
i.e., as a payee or indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as
an agent of Marilou Santiago with respect to the checks because she was merely facilitating the
transactions between the former and [petitioner].

With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan
that existed between the parties. x x x (emphasis supplied) 22

Hence this petition.23

As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45 of the
Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual findings of the
CA (which held that there were no  contracts of loan between petitioner and respondent) and the RTC
(which held that there were contracts of loan) are contradictory. 24

The petition is impressed with merit.

A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the object of
the contract.25 This is evident in Art. 1934 of the Civil Code which 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 the delivery of the
object of the contract. (Emphasis supplied)

Upon delivery of the object of the contract of loan (in this case the money received by the debtor when
the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is bound
to pay the creditor an equal amount. 26

It is undisputed that the checks were delivered to respondent. However, these checks were crossed and
payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus the main
question to be answered is: who borrowed money from petitioner — respondent or Santiago?

Petitioner insists that it was upon respondent’s instruction that both checks were made payable to
Santiago.27 She maintains that it was also upon respondent’s instruction that both checks were delivered
to her (respondent) so that she could, in turn, deliver the same to Santiago. 28 Furthermore, she argues
that once respondent received the checks, the latter had possession and control of them such that she
had the choice to either forward them to Santiago (who was already her debtor), to retain them or to
return them to petitioner.29

We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within the
actual or constructive possession or control of another. 30 Although respondent did not physically receive
the proceeds of the checks, these instruments were placed in her control and possession under an
arrangement whereby she actually re-lent the amounts to Santiago.

Several factors support this conclusion.

First, respondent admitted that petitioner did not personally know Santiago. 31 It was highly improbable
that petitioner would grant two loans to a complete stranger without requiring as much as promissory
notes or any written acknowledgment of the debt considering that the amounts involved were quite big.
Respondent, on the other hand, already had transactions with Santiago at that time. 32

Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in both
parties’ list of witnesses) testified that respondent’s plan was for petitioner to lend her money at a
monthly interest rate of 3%, after which respondent would lend the same amount to Santiago at a
higher rate of 5% and realize a profit of 2%. 33 This explained why respondent instructed petitioner to
make the checks payable to Santiago. Respondent has not shown any reason why Ruiz’ testimony should
not be believed.

Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of ₱76,000
each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the ₱500,000
loan, she also issued her own checks in the amount of ₱20,000 each for four months. 34 According to
respondent, she merely accommodated petitioner’s request for her to issue her own checks to cover the
interest payments since petitioner was not personally acquainted with Santiago. 35 She claimed,
however, that Santiago would replace the checks with cash. 36 Her explanation is simply incredible. It is
difficult to believe that respondent would put herself in a position where she would be compelled to pay
interest, from her own funds, for loans she allegedly did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to
be believed, it must not only proceed from the mouth of a credible witness, but must be credible in
itself such as the common experience of mankind can approve as probable under the circumstances. We
have no test of the truth of human testimony except its conformity to our knowledge, observation, and
experience. Whatever is repugnant to these belongs to the miraculous, and is outside of juridical
cognizance.37

Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not petitioner,
who was listed as one of her (Santiago’s) creditors. 38

Last, respondent inexplicably never presented Santiago as a witness to corroborate her story. 39 The
presumption is that "evidence willfully suppressed would be adverse if produced." 40 Respondent was
not able to overturn this presumption.

We hold that the CA committed reversible error when it ruled that respondent did not borrow the
amounts of US$100,000 and ₱500,000 from petitioner. We instead agree with the ruling of the RTC
making respondent liable for the principal amounts of the loans.

We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and ₱500,000 loans respectively. There was no written proof of the interest payable except
for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the
Civil Code provides that "[n]o interest shall be due unless it has been expressly stipulated in writing."

Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to
Article 2209 of the Civil Code. It is well-settled that:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.41

Hence, respondent is liable for the payment of legal interest per annum to be computed from November
21, 1995, the date when she received petitioner’s demand letter. 42 From the finality of the decision until
it is fully paid, the amount due shall earn interest at 12% per annum, the interim period being deemed
equivalent to a forbearance of credit. 43

The award of actual damages in the amount of ₱50,000 and ₱100,000 attorney’s fees is deleted since
the RTC decision did not explain the factual bases for these damages.

WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20, 2002
resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE. The February
28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with
the MODIFICATION that respondent is directed to pay petitioner the amounts of US$100,000 and
₱500,000 at 12% per annum interest from November 21, 1995 until the finality of the decision. The total
amount due as of the date of finality will earn interest of 12% per annum  until fully paid. The award of
actual damages and attorney’s fees is deleted.
SO ORDERED.

RENATO C. CORONA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

ANGELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA

Associate Justice Asscociate Justice

CANCIO C. GARCIA
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above decision
had been reached in consultation before the case was assigned to the writer of the opinion of the
Court’s Division.

REYNATO S. PUNO
Chief Justice