Banco Filipino Savings & Mortgage Bank vs.

Navarro

FACTS:

On May 20, 1975, respondent Florante del Valle obtained a loan secured by a real estate mortgage from petitioner
Banco Filipino in the sum of P41,300.00, payable and to be amortized within fifteen (15) years at twelve (12%) per
cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when
CIRCULAR No. 494 was issued by the Central Bank.

Stamped on the promissory note evidencing the loan is an Escalation Clause, which read that Valle authorized Banco
Filipino to increase the interest rate stipulated without advance notice in the event law should be enacted increasing
the lawful rates of interest that may be charged on this particular kind of loan.

The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion
of which reads: The maximum rate of interest, including commissions, premiums, fees and other charges on loans
with maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift banks and rural
banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen
percent (19%) per annum.

7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by
the Usury Law, as amended."

On the strength of CIRCULAR No. 494, Banco Filipino gave notice to del Valle on June 30, 1976 of the increase of
interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976.

In a reply letter to del Valle, Central Bank Director Mercedes Paredes clarified that as a rule, should a bank increase
the interest rates on loans already existing as of January 2, 1976, pertinent loan contracts/documents must contain
escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase
the rate of interest stipulated in the contract, in the event that any law OR Central Bank regulation is promulgated
increasing the maximum interest rate for loans

Thus, del Valle file a suit against Banco Filipino for “Declaratory Relief”, contending that Circular No. 494 is NOT THE
LAW contemplated in the Escalation Clause of her promissory note since said Circular is a Central Bank regulation.

In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from
enforcing the increased rate of interest on the del Valle’s loan. It reasoned out that P.D. No. 116 does not expressly
grant the Central Bank authority to maximize interest rates with retroactive effect and that BANCO FILIPINO cannot
legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid
other than the 12% per annum in force at the time of the execution of the loan.

ISSUE:
WON BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation
Clause?
RULING:
NO.
FIRST, it is clear from the stipulation between the parties that the interest rate may be increased "in the event a law
should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." The
Escalation Clause was dependent on an increase of rate made by "law" ALONE. However, CIRCULAR No. 494,
although it has the effect of law, is not a law but an Administrative Regulation.

The distinction between a law and an Administrative Regulation is recognized by P.D.No. 1684 which provides that
from March 17, 1980, escalation clauses to be valid should specifically provide:

(1) that there can be an increase in interest if increased by law OR by the Monetary Board; and (2) it must include a
provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board." (De-
escalation Clause) While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in
the Escalation Clause in question provides ANOTHER REASON why it should not be given effect because of its one-
sidedness in favor of the lender.

SECOND, the Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular
kind of loan, " meaning one secured by registered real estate mortgage.

Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to, unlike Circular No. 586
dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the effective rate of interest on loan
transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not
exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as
amended."

In the absence of any indication in CIRCULAR No. 494 as to which particular type of
loan was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR
No. 494 to loans guaranteed by securities other than mortgage upon registered realty

Florendo vs. Court of Appeals

Facts:

Florendo was an employee of Landbank of the Philippines (LBP) from May 17, 1976 until August 16, 1984
when she voluntarily resigned. Before her resignation, she applied for a housing loan payable in 25 years
from LBP’s Provident Fund. Both parties executed a Housing Loan Agreement and constituted a Real Estate
Mortgage and Promissory Note.

After almost a year from her resignation, LBP increased the interest rate on the loan from 95 per annum to 17%.
LBP informed Florendo and the latter protested the increase. LBP kept on demanding Florendo to pay the
increased interest or the new monthly installments based on the increased interest rate.
Florendo maintained that such increase is unjustified and unlawful. Nevertheless, Florendo just
disregarded the increased rate and continued to pay the obligation under the original contract.

Issue:

WON the LBP have a valid and legal basis to impose an increased interest rate on the housing loan.

Ruling:

The increased rate imposed or charged is not valid.

In Banco Filipino, this Court, disallowed the bank from increasing the interest rate on the subject
loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to
“correspondingly increase the interest rate stipulated in this contract without advance notice to me/us
in the event the law should be enacted increasing the lawful rates of interest that may be charged on this
particular kind of loan.”

In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on
January 29, 1973. In the light of the CB issuances in force at that time, respondent bank was
fully aware that it could have imposed an interest higher than 9% per annum rate for the housing
loans of its employees, but it did not. In the subject loan, the respondent bank knowingly agreed that
the interest rate on the petitioner’s loans shall remain at 9% unless a CB issuance is passed authorizing
an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of
Trustees acts accordingly. Thus, as far as the parties were concerned, all other onerous factors,
such as employee resignations, which could have been used to trigger the application of the escalation
clause were considered barred or waived.

(I)t will not be amiss to point out that the unilateral determination and imposition of increased interest
rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained
in Article 1308 of the Civil Code.

Let it be clear that this Court understands respondent’s bank’s position that the concessional interest rate was
really intended as a means to remunerate its employees and thus an escalation clause due to resignation would have
been a valid stipulation. But no such stipulation was in fact made, and thus escalation provision could not be
legally applied and enforced against herein
petitioners.

In PNB vs. Court of Appeals, this Court disallowed the increases in interest rate imposed by the petitioner-bank
therein, on the ground, among others, that said bank relied merely on its own Board Resolution (No. 681), PNB
Circular No. 40-79-84, and PNB Circular No. 40-129-84, which were neither laws nor resolutions of the Monetary
Board.

Cariño vs. Court of Appeals

FACTS: Pablo Encabo formally applied with the Land Estates Division, Bureau of Lands, to purchase a parcel of land
which was a part of the Tuason Estate purchased by the government pursuant to the provisions of Commonwealth
Act No. 539, for resale to bona fide tenants or occupants who are qualified to own public land in the Philippines.

Thereafter, Encabo, through petitioner Cirila Vicencio, supposedly as "agent," came to an agreement with Josue
Quesada transferring rights over the lot to the latter, conditioned on approval by the Land Tenure Administration .
The transfer of rights by Encabo to Quesada was not put in writing but payment of the price for the rights transferred
was evidenced by receipts (Exhibits "A" and "B") on which Cirila Vicencio signed as a witness.

On 30 July 1957, the LTA, unaware of the transfer of rights by Encabo to Quesada, adjudicated the lot in favor of
Encabo, and the LTA and Encabo signed an "Agreement to Sell" (Exh."G-1"). LTA later came to know about the
"transfer" of rights from Encabo to Quesada. It disapproved the same on the ground that Quesada was not qualified
to acquire the lot because he is already a lot owner. However, before the LTA's disapproval of the transfer of Encabo's
rights to Quesada, the latter had entered into possession of the lot in question.

Encabo executed a Deed of Sale of House and Transfer of Rights (Exh. "D-1"), purportedly conveying to herein
petitioners (Juanito Cariño and Cirila Vicencio), his rights over the lot, subject to approval of the LTA. Encabo wrote a
letter to the LTA (Exh. "1") requesting permission to transfer his rights. Juanito Cariño filed a petition with the LTA
seeking approval of the transfer to herein petitioners of rights to the lot in question on the basis of the Deed of Sale
of House and Transfer of Rights executed by Pablo Encabo (Exh. "D-1").

The LTA rendered a decision holding that the status quo should be maintained. It reasoned out that "the authenticity
of the alleged deed (Exh. "D-1") is not for this office to decide, as only the courts have that prerogative."

The Cariños appealed the decision of the LTA to the Office of the President, which affirmed it. Motions for
reconsideration were filed by the Cariños but were denied, the last denial being contained in a letter dated 22 March
1963, signed by Acting Assistant Executive Secretary Juan S. Cancio.

The Encabos filed an action in the Court of First Instance of Manila to declare them as the owners of the lot and for
the Cariños to deliver the possession of the lot itself, and to pay rentals for their occupancy of the properties, the
lower court rendered decision in favor of the plaintiffs therein the Encabos. Petitioners appealed to CA. CA affirmed
the decision of the lower court.

ISSUE: Whether the Deed of sale of House and transfer of rights on which the petitioners have based their
application over the lot is absolutely simulated.

RULING: YES

The characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce
legal effects nor in any way alter the judicial situation of the parties.13 Under the circumstances surrounding their
transaction, the parties knew that the document Exhibit "D-1" was at once fictitious and simulated where none of
the parties intended to be bound thereby.

There is merit to the Encabos' claim that the simulated deed of sale in favor of the Cariños was executed in order to
protect the money Quesada invested in the purchase of the rights to the lot in question, which transfer of said lot to
his name was later on disapproved by the LTA. As can be gleaned from the testimony of Josue Quesada, he did this
by putting Cirila Vicencio as the vendee in the simulated Deed of Sale, when in fact, Encabo and Quesada meant her
only as a dummy for the latter. To this effect Quesada testified, despite the warning given to him by the court that his
statement might incriminate him. Such candor in the testimony of Quesada gives credibility to the Encabos' claim.

From the testimonies of the witnesses, it can be deduced that Cirila Vicencio was privy to all the transactions relating
to the sale of the disputed lot between Encabo and Quesada so that it is entirely possible for Cirila Vicencio to have
been used by Encabo and Quesada as their dummy in the simulated deed of sale and for Cirila Vicencio herself to
lend a hand in the scheme so as to protect the interests of Quesada, and in the process, protect herself as she was
occupying the disputed lot at the instance of Quesada. Even at the start, it was Cirila Vicencio who introduced
Quesada to the Encabos in connection with a house and the right to the lot, which according to Cirila Vicencio, was
being sold by Juanita de los Santos-Encabo. Not only that, Cirila Vicencio signed as a witness on Exhibits "A" and "B"
which are the receipts of payment for the disputed lot by Quesada to Encabo.

Contracts of sale are void and produce no effect whatsoever where the price, which appears therein as paid, has in
fact never been paid by the vendee to the vendor. A sale of land without consideration, but intended merely to
protect a party to a joint venture for the cash advances he was to make for the realty subdivision that the parties
wanted to put up, is null and void.The law is clear on this matter. The Civil Code provides:

"Art. 1409. The following contracts are inexistent and void from the beginning:

(2) Those which are absolutely simulated or fictitious;

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived."

Furthermore, even without going into the merits and/or validity of Exhibit "D-1", it is clear that there has been no
legal transfer of rights in favor of the Cariños because neither the LTA nor the Land Authority has approved or given
due course to such transfer of rights.25 The LTA never waived its right to approve the transfer of rights. It only ruled
that the status quo will be maintained so long as the Court has not yet ruled on the authenticity of document Exhibit
"D-1". The ownership of the lot by the Cariños is still contingent on the approval of the LTA upon their compliance
with all the requirements of the latter. Since no approval or due course has yet been given by the LTA or LA to such
transfer of rights, the document Exhibit "D-1" is not enforceable against the latter.

Republic vs. Phil. Long Distance Telephone Co.

FACTS: PLDT, is a public service corporation holding a legislative franchise to install, operate and maintain a
telephone system throughout the Philippines and to carry electrical transmission of messages within the Philippines
and between the Philippines and the telephone systems of other countries.

The RCA Communications, Inc., is an American corporation authorized to transact business in the Philippines and is
the grantee, by assignment, of a legislative franchise to operate a domestic station for the reception and
transmission of long distance wireless messages and to operate broadcasting and radio-telephone and radio-
telegraphic communications services.

Sometime in 1933, the defendant, PLDT, and the RCA Communications, Inc., entered into an agreement whereby
telephone messages, coming from the United States and received by RCA’s domestic station, could automatically be
transferred to the lines of PLDT; and vice-versa. The arrangement was later extended to radio-telephone messages to
and from European and Asiatic countries.
Soon after its creation in 1947, the Bureau of Telecommunications set up its own Government Telephone System by
utilizing its own appropriation and equipment and by renting trunk lines of the PLDT to enable government offices to
call private parties. However, its application for these trunk lines contained a statement whereby it states that it
would abide by the rules and regulations of PLDT.

The Director of Telecommunications entered into an agreement with RCA Communications whereby the Bureau
would convey overseas calls from RCA to local residents. Defendant PLDT then complained to the Bureau that they
had used the trunk lines not for government offices only but also to serve the general public; which is in direct
competition of PLDT. The Bureau did not respond, thus PLDT severed the lines.

After failure to negotiate terms, the Bureau filed a suit against defendant in the CFI of Manila praying that PLDT be
commanded to execute a contract with plaintiff for the use of the latter’s telephone system under such terms as the
court would deem just and a preliminary injunction to prevent further severance or to restore those that had already
been severed.

The lower court ruled that it could not force PLDT to enter into a contract, nor is the Bureau not allowed to service
the general public with telephone connections. Thus, this appeal.

Issue:
Whether or not Republic can command PLDT to execute the contract.