Tomas P. Matic, Jr. For Petitioners. Jose E. Fernandez For Private Respondent. Office of The Solicitor General For Respondent The People of The Philippines

G.R. No.
L-50550-52 October 31, 1979
CHEE KIONG YAM, AMPANG MAH, ANITA YAM JOSE Y.C. YAM AND RICHARD
YAM, petitioners,
vs.
HON. NABDAR J. MALIK, Municipal Judge of Jolo, Sulu (Branch I), THE PEOPLE OF THE
PHILIPPINES, ROSALINDA AMIN, TAN CHU KAO and LT. COL. AGOSTO SAJOR respondents.
Tomas P. Matic, Jr. for petitioners.
Jose E. Fernandez for private respondent.
Office of the Solicitor General for respondent the People of the Philippines.
ABAD SANTOS, J.:
This is a petition for certiorari, prohibition, and mandamus with preliminary injunction. Petitioners
alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu, acted without jurisdiction, in
excess of jurisdiction and with grave abuse of discretion when:
(a) he held in the preliminary investigation of the charges of estafa filed by respondents Rosalinda
Amin, Tan Chu Kao and Augusto Sajor against petitioners that there was a prima facie case against
the latter;
(b) he issued warrants of arrest against petitioners after making the above determination; and
(c) he undertook to conduct trial on the merits of the charges which were docketed in his court as
Criminal Cases No. M-111, M-183 and M-208.
Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction and with grave
abuse of discretion because the facts recited in the complaints did not constitute the crime of estafa,
and assuming they did, they were not within the jurisdiction of the respondent judge.
In a resolution dated May 23, 1979, we required respondents to comment in the petition and issued
a temporary restraining order against the respondent judge from further proceeding with Criminal
Cases Nos. M-111, M-183 and M-208 or from enforcing the warrants of arrest he had issued in
connection with said cases.
Comments by the respondent judge and the private respondents pray for the dismissal of the petition
but the Solicitor General has manifested that the People of the Philippines have no objection to the
grant of the reliefs prayed for, except the damages. We considered the comments as answers and
gave due course to the petition.
The position of the Solicitor General is well taken. We have to grant the petition in order to prevent
manifest injustice and the exercise of palpable excess of authority.
In Criminal Case No. M-111, respondent Rosalinda M. Amin charges petitioners Yam Chee Kiong
and Yam Yap Kieng with estafa through misappropriation of the amount of P50,000.00. But the
complaint states on its face that said petitioners received the amount from respondent Rosalinda M.
Amin "as a loan." Moreover, the complaint in Civil Case No. N-5, an independent action for the
collection of the same amount filed by respondent Rosalinda M. Amin with the Court of First Instance
of Sulu on September 11, 1975, likewise states that the P50,000.00 was a "simple business loan"
which earned interest and was originally demandable six (6) months from July 12, 1973. (Annex E of
the petition.)
In Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners Yam Chee Kiong, Jose
Y.C. Yam, Ampang Mah and Anita Yam, alias Yong Tay, with estafa through misappropriation of the
amount of P30,000.00. Likewise, the complaint states on its face that the P30,000.00 was "a simple
loan." So does the complaint in Civil Case No. N-8 filed by respondent Tan Chu Kao on April 6, 1976
with the Court of First Instance of Sulu for the collection of the same amount. (Annex D of the
petition.).
In Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C. Yam, Anita
Yam alias Yong Tai Mah, Chee Kiong Yam and Richard Yam, with estafa through misappropriation
of the amount of P20,000.00. Unlike the complaints in the other two cases, the complaint in Criminal
Case No. M-208 does not state that the amount was received as loan. However, in a sworn
statement dated September 29, 1976, submitted to respondent judge to support the complaint,
respondent Augusto Sajor states that the amount was a "loan." (Annex G of the petition.).
We agree with the petitioners that the facts alleged in the three criminal complaints do not constitute
estafa through misappropriation.
Estafa through misappropriation is committed according to Article 315, paragraph 1, subparagraph

(b), of the Revised Penal Code as follows:
Art. 315. Swindling (Estafa). — Any person who shall defraud another by any of the
means mentioned herein below shall be punished by:
xxx xxx xxx
1. With unfaithfulness or abuse of confidence namely:
xxx xxx xxx
b) By misappropriating or converting, to the prejudice of another, money, goods, or

any other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or
to return the same, even though such obligation be totally or partially guaranteed by
a bond; or by denying having received such money, goods, or other property.
In order that a person can be convicted under the abovequoted provision, it must be proven that he
has the obligation to deliver or return the same money, goods or personal property that he received.
Petitioners had no such obligation to return the same money, i.e., the bills or coins, which they
received from private respondents. This is so because as clearly stated in criminal complaints, the
related civil complaints and the supporting sworn statements, the sums of money that petitioners
received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.
Art. 1933. — By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other
consumable thing upon the condition that the same amount of the same kind and
quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple
loam ownership passes to the borrower.
Art. 1953. — A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality.
It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as contrasted
to commodatum, the borrower acquires ownership of the money, goods or personal property
borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil Code)
and his act will not be considered misappropriation thereof.
In U.S. vs. Ibañez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person to refuse
to nay his debt or to deny its existence.
We are of the opinion and so decide that when the relation is purely that of debtor
and creditor, the debtor can not be held liable for the crime of estafa, under said
article, by merely refusing to pay or by denying the indebtedness.
It appears that respondent judge failed to appreciate the distinction between the two types of loan,
mutuum and commodatum, when he performed the questioned acts, He mistook the transaction
between petitioners and respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor to be
commodatum wherein the borrower does not acquire ownership over the thing borrowed and has the
duty to return the same thing to the lender.
Under Sec. 87 of the Judiciary Act, the municipal court of a provincial capital, which the Municipal
Court of Jolo is, has jurisdiction over criminal cases where the penalty provided by law does not
exceed prision correccional or imprisonment for not more than six (6) years, or fine not exceeding
P6,000.00 or both, The amounts allegedly misappropriated by petitioners range from P20,000.00 to
P50,000.00. The penalty for misappropriation of this magnitude exceeds prision correccional or 6
year imprisonment. (Article 315, Revised Penal Code), Assuming then that the acts recited in the
complaints constitute the crime of estafa, the Municipal Court of Jolo has no jurisdiction to try them
on the merits. The alleged offenses are under the jurisdiction of the Court of First Instance.
Respondents People of the Philippines being the sovereign authority can not be sued for damages.
They are immune from such type of suit.
With respect to the other respondents, this Court is not the proper forum for the consideration of the
claim for damages against them.
WHEREFORE, the petition is hereby granted; the temporary restraining order previously issued is
hereby made permanent; the criminal complaints against petitioners are hereby declared null and
void; respondent judge is hereby ordered to dismiss said criminal cases and to recall the warrants of
arrest he had issued in connection therewith. Moreover, respondent judge is hereby rebuked for
manifest ignorance of elementary law. Let a copy of this decision be included in his personal life.
Costs against private respondents.
SO ORDERED.
Barredo, Antonio and Santos, JJ., concur.
Concepcion Jr. ,J., is on leave.
Separate Opinions
AQUINO, J., concurring:
The claim for damages in this certiorari, mandamus and prohibition case is not warranted under
section 3, Rule 65 of the Rules of Court.
# Separate Opinions
AQUINO, J., concurring:
The claim for damages in this certiorari, mandamus and prohibition case is not warranted under
section 3, Rule 65 of the Rules of Court.
G.R. No. 195166
SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners,

vs.
SPOUSES ROMEO ABELLA AND ANNIE ABELLA, Respondents.
DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that
judgment be rendered reversing and setting aside the September 30, 2010 Decision and the 1
January 4, 2011 Resolution of the Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388.
2
The Petition also prays that respondents Spouses Romeo and Annie Abella be ordered to pay
petitioners Spouses Salvador and Alma Abella 2.5% monthly interest plus the remaining balance of
the amount loaned.
The assailed September 30, 2010 Decision of the Court of Appeals reversed and set aside the
December 28, 2005 Decision3 of the Regional Trial Court, Branch 8, Kalibo, Aklan in Civil Case No.
6627. It directed petitioners to pay respondents P148,500.00 (plus interest), which was the amount
respondents supposedly overpaid. The assailed January 4, 2011 Resolution of the Court of Appeals
denied petitioners’ Motion for Reconsideration.
The Regional Trial Court’s December 28, 2005 Decision ordered respondents to pay petitioners the
supposedly unpaid loan balance of P300,000.00 plus the allegedly stipulated interest rate of 30%
per annum, as well as litigation expenses and attorney’s fees. 4
On July 31, 2002, petitioners Spouses Salvador and Alma Abella filed a Complaint for sum of
5
money and damages with prayer for preliminary attachment against respondents Spouses Romeo
and Annie Abella before the Regional Trial Court, Branch 8, Kalibo, Aklan. The case was docketed
as Civil Case No. 6627. 6
In their Complaint, petitioners alleged that respondents obtained a loan from them in the amount of
P500,000.00. The loan was evidenced by an acknowledgment receipt dated March 22, 1999 and
was payable within one (1) year. Petitioners added that respondents were able to pay a total of
P200,000.00— P100,000.00 paid on two separate occasions—leaving an unpaid balance of
P300,000.00. 7
In their Answer (with counterclaim and motion to dismiss), respondents alleged that the amount
8
involved did not pertain to a loan they obtained from petitioners but was part of the capital for a joint
venture involving the lending of money. 9
Specifically, respondents claimed that they were approached by petitioners, who proposed that if
respondents were to "undertake the management of whatever money [petitioners] would give them,
[petitioners] would get 2.5% a month with a 2.5% service fee to [respondents]." The 2.5% that each
10
party would be receiving represented their sharing of the 5% interest that the joint venture was
supposedly going to charge against its debtors. Respondents further alleged that the one year
averred by petitioners was not a deadline for payment but the term within which they were to return
the money placed by petitioners should the joint venture prove to be not lucrative. Moreover, they
claimed that the entire amount of P500,000.00 was disposed of in accordance with their agreed
terms and conditions and that petitioners terminated the joint venture, prompting them to collect from
the joint venture’s borrowers. They were, however, able to collect only to the extent of P200,000.00;
hence, the P300,000.00 balance remained unpaid. 11
In the Decision dated December 28, 2005, the Regional Trial Court ruled in favor of petitioners. It
12
noted that the terms of the acknowledgment receipt executed by respondents clearly showed that:
(a) respondents were indebted to the extent of P500,000.00; (b) this indebtedness was to be paid
within one (1) year; and (c) the indebtedness was subject to interest. Thus, the trial court concluded
that respondents obtained a simple loan, although they later invested its proceeds in a lending
enterprise. The Regional Trial Court adjudged respondents solidarily liable to petitioners. The
13
dispositive portion of its Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering the defendants jointly and severally to pay the plaintiffs the sum of P300,000.00
with interest at the rate of 30% per annum from the time the complaint was filed on July 31,
2002 until fully paid;
2. Ordering the defendants to pay the plaintiffs the sum of P2,227.50 as reimbursement for
litigation expenses, and another sum of P5,000.00 as attorney’s fees.
For lack of legal basis, plaintiffs’ claim for moral and exemplary damages has to be denied, and for
lack of merit the counter-claim is ordered dismissed. 14
In the Order dated March 13, 2006, the Regional Trial Court denied respondents’ Motion for
15
Reconsideration.
On respondents’ appeal, the Court of Appeals ruled that while respondents had indeed entered into
a simple loan with petitioners, respondents were no longer liable to pay the outstanding amount of
P300,000.00. 16
The Court of Appeals reasoned that the loan could not have earned interest, whether as
contractually stipulated interest or as interest in the concept of actual or compensatory damages. As
to the loan’s not having earned stipulated interest, the Court of Appeals anchored its ruling on Article
1956 of the Civil Code, which requires interest to be stipulated in writing for it to be due. The Court
17
of Appeals noted that while the acknowledgement receipt showed that interest was to be charged,
no particular interest rate was specified. Thus, at the time respondents were making interest
18
payments of 2.5% per month, these interest payments were invalid for not being properly stipulated
by the parties. As to the loan’s not having earned interest in the concept of actual or compensatory
damages, the Court of Appeals, citing Eusebio-Calderon v. People, noted that interest in the
19
concept of actual or compensatory damages accrues only from the time that demand (whether
judicial or extrajudicial) is made. It reasoned that since respondents received petitioners’ demand
letter only on July 12, 2002, any interest in the concept of actual or compensatory damages due
should be reckoned only from then. Thus, the payments for the 2.5% monthly interest made after the
perfection of the loan in 1999 but before the demand was made in 2002 were invalid. 20
Since petitioners’ charging of interest was invalid, the Court of Appeals reasoned that all payments
respondents made by way of interest should be deemed payments for the principal amount of
P500,000.00. 21
The Court of Appeals further noted that respondents made a total payment of P648,500.00, which,
as against the principal amount of P500,000.00, entailed an overpayment of P148,500.00. Applying
the principle of solutio indebiti, the Court of Appeals concluded that petitioners were liable to
reimburse respondents for the overpaid amount of P148,500.00. The dispositive portion of the
22
assailed Court of Appeals Decision reads:
WHEREFORE, the Decision of the Regional Trial Court is hereby REVERSED and SET ASIDE, and
a new one issued, finding that the Spouses Salvador and Alma Abella are DIRECTED to jointly and
severally pay Spouses Romeo and Annie Abella the amount of P148,500.00, with interest of 6%
interest (sic) per annum to be computed upon receipt of this decision, until full satisfaction thereof.
Upon finality of this judgment, an interest as the rate of 12% per annum, instead of 6%, shall be
imposed on the amount due, until full payment thereof. 23
In the Resolution dated January 4, 2011, the Court of Appeals denied petitioners’ Motion for
24
Reconsideration.
Aggrieved, petitioners filed the present appeal where they claim that the Court of Appeals erred in
25
completely striking off interest despite the parties’ written agreement stipulating it, as well as in
ordering them to reimburse and pay interest to respondents.
In support of their contentions, petitioners cite Article 1371 of the Civil Code, which calls for the
26
consideration of the contracting parties’ contemporaneous and subsequent acts in determining their
true intention. Petitioners insist that respondents’ consistent payment of interest in the year following
the perfection of the loan showed that interest at 2.5% per month was properly agreed upon despite
its not having been expressly stated in the acknowledgment receipt. They add that during the
proceedings before the Regional Trial Court, respondents admitted that interest was due on the
loan.27
In their Comment, respondents reiterate the Court of Appeals’ findings that no interest rate was
28
ever stipulated by the parties and that interest was not due and demandable at the time they were
making interest payments. 29
In their Reply, petitioners argue that even though no interest rate was stipulated in the
30
acknowledgment receipt, the case fell under the exception to the Parol Evidence Rule. They also
argue that there exists convincing and sufficiently credible evidence to supplement the imperfection
of the acknowledgment receipt. 31
For resolution are the following issues:
First, whether interest accrued on respondents’ loan from petitioners. If so, at what rate?
Second, whether petitioners are liable to reimburse respondents for the latter’s supposed excess
payments and for interest.
As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a simple
loan or mutuum, rather than a joint venture, with petitioners.
Respondents’ claims, as articulated in their testimonies before the trial court, cannot prevail over the
clear terms of the document attesting to the relation of the parties. "If the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control." 32
Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual
relation is one of simple loan or mutuum:
Art. 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which case the contract is simply called
a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower.
....
Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. (Emphasis
supplied)
On March 22, 1999, respondents executed an acknowledgment receipt to petitioners, which states:
Batan, Aklan
March 22, 1999
This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos from
Mrs. Alma R. Abella, payable within one (1) year from date hereof with interest.
Annie C. Abella (sgd.) Romeo M. Abella (sgd.) (Emphasis supplied)

33
The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first,
respondents’ receipt of the sum of P500,000.00 from petitioner Alma Abella; second, respondents’
duty to pay back this amount within one (1) year from March 22, 1999; and third, respondents’ duty
to pay interest. Consistent with what typifies a simple loan, petitioners delivered to respondents with
the corresponding condition that respondents shall pay the same amount to petitioners within one (1)
year.
II
Although we have settled the nature of the contractual relation between petitioners and respondents,
controversy persists over respondents’ duty to pay conventional interest, i.e., interest as the cost of
borrowing money. 34
Article 1956 of the Civil Code spells out the basic rule that "[n]o interest shall be due unless it has
been expressly stipulated in writing."
On the matter of interest, the text of the acknowledgment receipt is simple, plain, and unequivocal. It
attests to the contracting parties’ intent to subject to interest the loan extended by petitioners to
respondents. The controversy, however, stems from the acknowledgment receipt’s failure to state
the exact rate of interest.
Jurisprudence is clear about the applicable interest rate if a written instrument fails to specify a rate.
In Spouses Toring v. Spouses Olan, this court clarified the effect of Article 1956 of the Civil Code
35
and noted that the legal rate of interest (then at 12%) is to apply: "In a loan or forbearance of money,
according to the Civil Code, the interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum." 36
Spouses Toring cites and restates (practically verbatim) what this court settled in Security Bank and
Trust Company v. Regional Trial Court of Makati, Branch 61: "In a loan or forbearance of money, the
interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12%
per annum." 37
Security Bank also refers to Eastern Shipping Lines, Inc. v. Court of Appeals, which, in turn, stated: 38
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code. (Emphasis supplied)
39
The rule is not only definite; it is cast in mandatory language. From Eastern Shipping to Security
Bank to Spouses Toring, jurisprudence has repeatedly used the word "shall," a term that has long
been settled to denote something imperative or operating to impose a duty. Thus, the rule leaves
40
no room for alternatives or otherwise does not allow for discretion. It requires the application of the
legal rate of interest.
Our intervening Decision in Nacar v. Gallery Frames recognized that the legal rate of interest has
41
been reduced to 6% per annum:
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No.
796 dated May 16, 2013, approved the amendment of Section 2 of Circular No. 905, Series of 1982
and, accordingly, issued Circular No. 799, Series of 2013, effective July 1, 2013, the pertinent
portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending
Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be
six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for
Non-Bank Financial Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum — as
reflected in the case of Eastern Shipping Lines and Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1,= 4305S.3 and 4303P.1 of the Manual of Regulations for Non-
Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 — but will now be six
percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new rate
could only be applied prospectively and not retroactively. Consequently, the twelve percent (12%)
per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six
percent (6%) per annum shall be the prevailing rate of interest when applicable. (Emphasis
42
supplied, citations omitted)
Nevertheless, both Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and Nacar retain
the definite and mandatory framing of the rule articulated in Eastern Shipping, Security Bank,
and Spouses Toring. Nacar even restates Eastern Shipping:
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Lines are accordingly modified to embody BSP-MB Circular No. 799, as follows:
....
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the
Civil Code. (Emphasis supplied, citations omitted)
43
Thus, it remains that where interest was stipulated in writing by the debtor and creditor in a simple
loan or mutuum, but no exact interest rate was mentioned, the legal rate of interest shall apply. At
present, this is 6% per annum, subject to Nacar’s qualification on prospective application.
Applying this, the loan obtained by respondents from petitioners is deemed subjected to
conventional interest at the rate of 12% per annum, the legal rate of interest at the time the parties
executed their agreement. Moreover, should conventional interest still be due as of July 1, 2013, the
rate of 12% per annum shall persist as the rate of conventional interest.
This is so because interest in this respect is used as a surrogate for the parties’ intent, as expressed
as of the time of the execution of their contract. In this sense, the legal rate of interest is an
affirmation of the contracting parties’ intent; that is, by their contract’s silence on a specific rate, the
then prevailing legal rate of interest shall be the cost of borrowing money. This rate, which by their
contract the parties have settled on, is deemed to persist regardless of shifts in the legal rate of
interest. Stated otherwise, the legal rate of interest, when applied as conventional interest, shall
always be the legal rate at the time the agreement was executed and shall not be susceptible to
shifts in rate.
Petitioners, however, insist on conventional interest at the rate of 2.5% per month or 30% per
annum. They argue that the acknowledgment receipt fails to show the complete and accurate
intention of the contracting parties. They rely on Article 1371 of the Civil Code, which provides that
the contemporaneous and subsequent acts of the contracting parties shall be considered should
there be a need to ascertain their intent. In addition, they claim that this case falls under the
44
exceptions to the Parol Evidence Rule, as spelled out in Rule 130, Section 9 of the Revised Rules
on Evidence. 45
It is a basic precept in legal interpretation and construction that a rule or provision that treats a
subject with specificity prevails over a rule or provision that treats a subject in general terms. 46
The rule spelled out in Security Bank and Spouses Toring is anchored on Article 1956 of the Civil
Code and specifically governs simple loans or mutuum. Mutuum is a type of nominate contract that
is specifically recognized by the Civil Code and for which the Civil Code provides a specific set of
governing rules: Articles 1953 to 1961. In contrast, Article 1371 is among the Civil Code provisions
generally dealing with contracts. As this case particularly involves a simple loan, the specific rule
spelled out in Security Bank and Spouses Toring finds preferential application as against Article
1371.
Contrary to petitioners’ assertions, there is no room for entertaining extraneous (or parol) evidence.
In Spouses Bonifacio and Lucia Paras v. Kimwa Construction and Development Corporation, we 47
spelled out the requisites for the admission of parol evidence:
In sum, two (2) things must be established for parol evidence to be admitted: first, that the existence
of any of the four (4) exceptions has been put in issue in a party’s pleading or has not been objected
to by the adverse party; and second, that the parol evidence sought to be presented serves to form
the basis of the conclusion proposed by the presenting party. 48
The issue of admitting parol evidence is a matter that is proper to the trial, not the appellate, stage of
a case. Petitioners raised the issue of applying the exceptions to the Parol Evidence Rule only in the
Reply they filed before this court. This is the last pleading that either of the parties has filed in the
entire string of proceedings culminating in this Decision. It is, therefore, too late for petitioners to
harp on this rule. In any case, what is at issue is not admission of evidence per se, but the
appreciation given to the evidence adduced by the parties. In the Petition they filed before this court,
petitioners themselves acknowledged that checks supposedly attesting to payment of monthly
interest at the rate of 2.5% were admitted by the trial court (and marked as Exhibits "2," "3," "4," "5,"
"6," "7," and "8"). What petitioners have an issue with is not the admission of these pieces of
49
evidence but how these have not been appreciated in a manner consistent with the conclusions they
advance.
Even if it can be shown that the parties have agreed to monthly interest at the rate of 2.5%, this is
unconscionable. As emphasized in Castro v. Tan, the willingness of the parties to enter into a
50
relation involving an unconscionable interest rate is inconsequential to the validity of the stipulated
rate:
The imposition of an unconscionable rate of interest on a money debt, even if knowingly and
voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an
iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in
principles of justice, or in the human conscience nor is there any reason whatsoever which may
justify such imposition as righteous and as one that may be sustained within the sphere of public or
private morals. 51
The imposition of an unconscionable interest rate is void ab initio for being "contrary to morals, and
the law."52
In determining whether the rate of interest is unconscionable, the mechanical application of pre-
established floors would be wanting. The lowest rates that have previously been considered
unconscionable need not be an impenetrable minimum. What is more crucial is a consideration of
the parties’ contexts. Moreover, interest rates must be appreciated in light of the fundamental nature
of interest as compensation to the creditor for money lent to another, which he or she could
otherwise have used for his or her own purposes at the time it was lent. It is not the default vehicle
for predatory gain. As such, interest need only be reasonable. It ought not be a supine mechanism
for the creditor’s unjust enrichment at the expense of another.
Petitioners here insist upon the imposition of 2.5% monthly or 30% annual interest. Compounded at
this rate, respondents’ obligation would have more than doubled—increased to 219.7% of the
principal—by the end of the third year after which the loan was contracted if the entire principal
remained unpaid. By the end of the ninth year, it would have multiplied more than tenfold (or
increased to 1,060.45%). In 2015, this would have multiplied by more than 66 times (or increased to
6,654.17%). Thus, from an initial loan of only P500,000.00, respondents would be obliged to pay
more than P33 million. This is grossly unfair, especially since up to the fourth year from when the
loan was obtained, respondents had been assiduously delivering payment. This reduces their best
efforts to satisfy their obligation into a protracted servicing of a rapacious loan.
The legal rate of interest is the presumptive reasonable compensation for borrowed money. While
parties are free to deviate from this, any deviation must be reasonable and fair. Any deviation that is
far-removed is suspect. Thus, in cases where stipulated interest is more than twice the prevailing
legal rate of interest, it is for the creditor to prove that this rate is required by prevailing market
conditions. Here, petitioners have articulated no such justification.
In sum, Article 1956 of the Civil Code, read in light of established jurisprudence, prevents the
application of any interest rate other than that specifically provided for by the parties in their loan
document or, in lieu of it, the legal rate. Here, as the contracting parties failed to make a specific
stipulation, the legal rate must apply. Moreover, the rate that petitioners adverted to is
unconscionable. The conventional interest due on the principal amount loaned by respondents from
petitioners is held to be 12% per annum.
III
Apart from respondents’ liability for conventional interest at the rate of 12% per annum, outstanding
conventional interest—if any is due from respondents—shall itself earn legal interest from the time
judicial demand was made by petitioners, i.e., on July 31, 2002, when they filed their Complaint. This
is consistent with Article 2212 of the Civil Code, which provides:
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point.
So, too, Nacar states that "the interest due shall itself earn legal interest from the time it is judicially
demanded." 53
Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua, the interest due on
54
conventional interest shall be at the rate of 12% per annum from July 31, 2002 to June 30, 2013.
Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per annum.
IV
Proceeding from these premises, we find that respondents made an overpayment in the amount of
P3,379.17.
As acknowledged by petitioner Salvador Abella, respondents paid a total of P200,000.00, which was
charged against the principal amount of P500,000.00. The first payment of P100,000.00 was made
on June 30, 2001, while the second payment of P100,000.00 was made on December 30, 2001.
55 56
The Court of Appeals’ September 30, 2010 Decision stated that respondents paid P6,000.00 in
March 1999. 57
The Pre-Trial Order dated December 2, 2002,58 stated that the parties admitted that "from the time
the principal sum of P500,000.00 was borrowed from [petitioners], [respondents] ha[d] been
religiously paying" what was supposedly interest "at the rate of 2.5% per month."
59 60
From March 22, 1999 (after the loan was perfected) to June 22, 2001 (before respondents’ payment
of P100,000.00 on June 30, 2001, which was deducted from the principal amount of P500,000.00),
the 2.5% monthly "interest" was pegged to the principal amount of P500,000.00. These monthly
interests, thus, amounted to P12,500.00 per month. Considering that the period from March 1999 to
June 2001 spanned twenty seven (27) months, respondents paid a total of P337,500.00. 61
From June 22, 2001 up to December 22, 2001 (before respondents’ payment of another
P100,000.00 on December 30, 2001, which was deducted from the remaining principal amount of
P400,000.00), the 2.5% monthly "interest" was pegged to the remaining principal amount of
P400,000.00. These monthly interests, thus, amounted to P10,000.00 per month. Considering that
this period spanned six (6) months, respondents paid a total of P60,000.00. 62
From after December 22, 2001 up to June 2002 (when petitioners filed their Complaint), the 2.5%
monthly "interest" was pegged to the remaining principal amount of P300,000.00. These monthly
interests, thus, amounted to P7,500.00 per month. Considering that this period spanned six (6)
months, respondents paid a total of P45,000.00. 63
Applying these facts and the properly applicable interest rate (for conventional interest, 12% per
annum; for interest on conventional interest, 12% per annum from July 31, 2002 up to June 30, 2013
and 6% per annum henceforth), the following conclusions may be drawn:
By the end of the first year following the perfection of the loan, or as of March 21, 2000, P560,000.00
was due from respondents. This consisted of the principal of P500,000.00 and conventional interest
of P60,000.00.
Within this first year, respondents made twelve (12) monthly payments totalling P150,000.00
(P12,500.00 each from April 1999 to March 2000). This was in addition to their initial payment of
P6,000.00 in March 1999.
Application of payments must be in accordance with Article 1253 of the Civil Code, which reads:
Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been
made until the interests have been covered.
Thus, the payments respondents made must first be reckoned as interest payments. Thereafter, any
excess payments shall be charged against the principal. As respondents paid a total of P156,000.00
within the first year, the conventional interest of P60,000.00 must be deemed fully paid and the
remaining amount that respondents paid (i.e., P96,000.00) is to be charged against the principal.
This yields a balance of P404,000.00. By the end of the second year following the perfection of the
loan, or as of March 21, 2001, P452,480.00 was due from respondents. This consisted of the
outstanding principal of P404,000.00 and conventional interest of P48,480.00.
Within this second year, respondents completed another round of twelve (12) monthly payments
totaling P150,000.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of P156,000.00 within the
second year, the conventional interest of P48,480.00 must be deemed fully paid and the remaining
amount that respondents paid (i.e., P101,520.00) is to be charged against the principal. This yields a
balance of P302,480.00.
By the end of the third year following the perfection of the loan, or as of March 21, 2002,
P338,777.60 was due from respondents. This consists of the outstanding principal of P302,480.00
and conventional interest of P36,297.60.
Within this third year, respondents paid a total of P320,000.00, as follows:
(a) Between March 22, 2001 and June 30, 2001, respondents completed three (3) monthly
payments of P12,500.00 each, totaling P37,500.00.
(b) On June 30, 2001, respondents paid P100,000.00, which was charged as principal
payment.
(c) Between June 30, 2001 and December 30, 2001, respondents delivered monthly
payments of P10,000.00 each. At this point, the monthly payments no longer amounted to
P12,500.00 each because the supposed monthly interest payments were pegged to the
supposedly remaining principal of P400,000.00. Thus, during this period, they paid a total of
six (6) monthly payments totaling P60,000.00.
(d) On December 30, 2001, respondents paid P100,000.00, which, like the June 30, 2001
payment, was charged against the principal.
(e) From the end of December 2002 to the end of February 2002, respondents delivered
monthly payments of P7,500.00 each. At this point, the supposed monthly interest payments
were now pegged to the supposedly remaining principal of P300,000.00. Thus, during this
period, they delivered three (3) monthly payments totaling P22,500.00.
Consistent with Article 1253 of the Civil Code, as respondents paid a total of P320,000.00 within the
third year, the conventional interest of P36,927.50 must be deemed fully paid and the remaining
amount that respondents paid (i.e., P283,702.40) is to be charged against the principal. This yields a
balance of P18,777.60.
By the end of the fourth year following the perfection of the loan, or as of March 21, 2003,
P21,203.51 would have been due from respondents. This consists of: (a) the outstanding principal of
P18,777.60, (b) conventional interest of P2,253.31, and (c) interest due on conventional interest
starting from July 31, 2002, the date of judicial demand, in the amount of P172.60. The last (i.e.,
interest on interest) must be pro-rated. There were only 233 days from July 31, 2002 (the date of
judicial demand) to March 21, 2003 (the end of the fourth year); this left 63.83% of the fourth year,
within which interest on interest might have accrued. Thus, the full annual interest on interest of 12%
per annum could not have been completed, and only the proportional amount of 7.66% per annum
may be properly imposed for the remainder of the fourth year.
From the end of March 2002 to June 2002, respondents delivered three (3) more monthly payments
of P7,500.00 each. Thus, during this period, they delivered three (3) monthly payments totalling
P22,500.00.
At this rate, however, payment would have been completed by respondents even before the end of
the fourth year. Thus, for precision, it is more appropriate to reckon the amounts due as
against payments made on a monthly, rather than an annual, basis.
By April 21, 2002, _18,965.38 (i.e., remaining principal of P18,777.60 plus pro-rated monthly
conventional interest at 1%, amounting to P187.78) would have been due from respondents.
Deducting the monthly payment of P7,500.00 for the preceding month in a manner consistent with
Article 1253 of the Civil Code would yield a balance of P11,465.38.
By May 21, 2002, _11,580.03 (i.e., remaining principal of P11,465.38 plus pro-rated monthly
Article 1253 of the Civil Code would yield a balance of P4,080.03.
By June 21, 2002, P4,120.83 (i.e., remaining principal of P4,080.03 plus pro-rated monthly
Article 1253 of the Civil Code would yield a negative balance of P3,379.17.
Thus, by June 21, 2002, respondents had not only fully paid the principal and all the conventional
interest that had accrued on their loan. By this date, they also overpaid P3,379.17. Moreover, while
hypothetically, interest on conventional interest would not have run from July 31, 2002, no such
interest accrued since there was no longer any conventional interest due from respondents by then.
As respondents made an overpayment, the principle of solutio indebiti as provided by Article 2154 of
the Civil Code applies. Article 2154 reads:
64
Article 2154. If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.
In Moreno-Lentfer v. Wolff, this court explained the application of solutio indebiti:

65
The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich
himself unjustly at the expense of another. It applies where (1) a payment is made when there exists
no binding relation between the payor, who has no duty to pay, and the person who received the
payment, and (2) the payment is made through mistake, and not through liberality or some other
cause. 66
As respondents had already fully paid the principal and all conventional interest that had accrued,
they were no longer obliged to make further payments. Any further payment they made was only
1awp++i1
because of a mistaken impression that they were still due. Accordingly, petitioners are now bound by
a quasi-contractual obligation to return any and all excess payments delivered by respondents.
Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum." This applies to obligations arising from quasi-contracts such
67
as solutio indebiti.
Further, Article 2159 of the Civil Code provides:
Art. 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of
money is involved, or shall be liable for fruits received or which should have been received if the
thing produces fruits.
He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for
damages to the person who delivered the thing, until it is recovered.
Consistent however, with our finding that the excess payment made by respondents were borne out
of a mere mistake that it was due, we find it in the better interest of equity to no longer hold
petitioners liable for interest arising from their quasi-contractual obligation.
Nevertheless, Nacar also provides:
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit. 68
Thus, interest at the rate of 6% per annum may be properly imposed on the total judgment award.
This shall be reckoned from the finality of this Decision until its full satisfaction.
WHEREFORE, the assailed September 30, 2010 Decision and the January 4, 2011 Resolution of
the Court of Appeals Nineteenth Division in CA-G.R. CV No. 01388 are SET ASIDE. Petitioners
Spouses Salvador and Alma Abella are DIRECTED to jointly and severally reimburse respondents
Spouses Romeo and Annie Abella the amount of P3,379.17, which respondents have overpaid.
A legal interest of 6% per annum shall likewise be imposed on the total judgment award from the
finality of this Decision until its full satisfaction.
SO ORDERED.
MARVIC M.V.F. LEONEN

Associate Justice
WE CONCUR:
DIOSDADO M. PERALTA*
Associate Justice
MARIANO C. DEL CASTILLO***

LUCAS P. BERSAMIN**
Associate Justice
Associate Justice
Acting Chairperson
JOSE CATRAL MENDOZA

Associate Justice
ATTESTATION
I attest 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.
MARIANO C. DEL CASTILLO

Associate Justice
Acting Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Acting Chairperson's
Attestation, 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.
MARIA LOURDES P.A. SERENO

Chief Justice
Footnotes
* Designated Acting Member per S.O. No. 2088 dated July 1, 2015.
** Designated Acting Member per S.O. No. 2079 dated June 29, 2015.
*** Designated Acting Chairperson per S.O. No. 2087 (Revised) dated July 1, 2015.
1
Rollo, pp. 28-42. The Decision was penned by Associate Justice Ramon A. Cruz and
concurred in by Associate Justices Pampio A. Abarintos and Myra V. Garcia-Fernandez of
the Court of Appeals Cebu.
2
Jd.at50-51.
3
Id. at 102–112. The Decision was penned by Judge Eustaquio G. Terencio.
4
Id. at 112.
5
Id. at 53–55.
6
Id. at 29.
7
Id. at 53–55.
8
Id. at 58–63.
9
Id. at 59.
10
Id.
Id. at 59–60.
11
Id. at 102–112.
12
Id. at 111–112.
13
Id. at 112.
14
Id. at 123.
15
Id. at 39–41.
16
Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
17
Rollo, p. 39.
18
484 Phil. 87 (2004) [Per J. Ynares-Santiago, First Division].

19
Rollo, p. 39.
20
Id. at 39–40.
21
Id.
22
Id. at 41.
23
Id. at 50–51.
24
Id. at 10–25.
25
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous
26
and subsequent acts shall be principally considered.
Rollo, pp. 19–20.

27
Id. at 128–137.
28
Id. at 133–136.
29
Id. at 178–181.
30
Id. at 178–179.
31
CIVIL CODE, art. 1370.

32
Id. at 57.
33
Cf. interest on interest (i.e., interest due on conventional interest) and compensatory
34
interest / penalty interest / indemnity interest (i.e., damages paid arising from delay in paying
a fixed sum of money or delay in assessing and paying damages).
589 Phil. 362 (2008) [Per J. Quisumbing, Second Division].

35
Id. at 368, citing CIVIL CODE, art. 1956 and Security Bank and Trust Company v. RTC of
36
Makati, Br. 61, 331 Phil. 787 (1996) [Per J. Hermosisima, Jr., First Division], emphasis
supplied.
331 Phil. 787, 794 (1996) [Per J. Hermosisima, Jr., First Division], citing Eastern Shipping
37
Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78 [Per J. Vitug,
En Banc], emphasis supplied.
G.R. No. 97412, July 12, 1994, 234 SCRA 78 [Per J. Vitug, En Banc].
38
Id. at 95, citing CIVIL CODE, art. 2195, 1956, and 1169.

39
See Philippine Registered Electrical Practitioners, Inc. v. Francia, Jr., 379 Phil. 634 (2000)
40
[Per J. Quisumbing, Second Division]; University of Mindanao, Inc. v. Court of Appeals, 659

Phil. 1 (2011) [Per J. Peralta, Second Division]; and Bersabal v. Salvador, 173 Phil. 379
(1978) [Per J. Makasiar, First Division].
G.R. No. 189871, August 13, 2013, 703 SCRA 439 [Per J. Peralta, En Banc].
41
Id. at 454–456.
42
Id. at 457–458.
43
CIVIL CODE, art. 1371.

44
Section 9. Evidence of written agreements. — When the terms of an agreement have been
45
reduced to writing, it is considered as containing all the terms agreed upon and there can be,
between the parties and their successors in interest, no evidence of such terms other than
the contents of the written agreement.
However, a party may present evidence to modify, explain or add to the terms of written
agreement if he puts in issue in his pleading:
(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;
(b) The failure of the written agreement to express the true intent and agreement of the
parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their successors in interest after
the execution of the written agreement.
The term "agreement" includes wills.

See National Power Corporation v. Presiding Judge, RTC, 10th Judicial Region, Br. XXV,
46
Cagayan De Oro City, 268 Phil. 507 (1990) [Per C.J. Fernan, Third Division].
G.R. No. 171601, April 8, 2015,

47
<http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2015/
april2015/171601.pdf> [Per J. Leonen, Second Division].
Id.
48
Rollo, p. 19.
49
620 Phil. 239, (2009) [Per J. Del Castillo, Second Division].

50
Id. at 242-243, citing Ibarra v. Aveyro, 37 Phil. 273, 282 (1917) [Per J. Torres, First
51
Division].
Id. at 248, citing CIVIL CODE, art. 1306.

52
G.R. No. 189871, August 13, 2013, 703 SCRA 439, 457 [Per J. Peralta, En Banc].
53
G.R. No. 184458, January 14, 2015,

54
<http://sc.judiciary.gov.ph/jurisprudence/2015/january2015/184458.pdf> [Per J. Perez, First

Division].
Rollo, p. 31.
55
Id.
56
Id. at 40.
57
Id. at 125–126.
58
Id. at 125.
59
Id.
60
Id. at 40.
61
Id.
62
Id.
63
Art. 2154. If something is received when there is no right to demand it, and it was unduly
64
delivered through mistake, the obligation to return it arises.
484 Phil. 552 (2004) [Per J. Quisumbing, First Division].

65
Id. at 559–560, citing Power Commercial and Industrial Corp. v. Court of Appeals,

66
340 ]Phil. 705 (1997) [Per J. Panganiban, Third Division]; and National Commercial Bank of
Saudi Arabia v. Court of Appeals, 480 Phil. 391 (2003) [Per J. Carpio-Morales, Third
Division].
Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439, 458 [Per J.
67
Peralta, En Banc].
Id.
68
G.R. No. L-46240 November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.

Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture which she lent
him for his use. She appealed from the judgment of the Court of First Instance of Manila which
ordered that the defendant return to her the three has heaters and the four electric lamps found in
the possession of the Sheriff of said city, that she call for the other furniture from the said sheriff of
Manila at her own expense, and that the fees which the Sheriff may charge for the deposit of the
furniture be paid pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H. del Pilar
street, No. 1175. On January 14, 1936, upon the novation of the contract of lease between the
plaintiff and the defendant, the former gratuitously granted to the latter the use of the furniture
described in the third paragraph of the stipulation of facts, subject to the condition that the defendant
would return them to the plaintiff upon the latter's demand. The plaintiff sold the property to Maria
Lopez and Rosario Lopez and on September 14, 1936, these three notified the defendant of the
conveyance, giving him sixty days to vacate the premises under one of the clauses of the contract of
lease. There after the plaintiff required the defendant to return all the furniture transferred to him for
them in the house where they were found. On November 5, 1936, the defendant, through
another person, wrote to the plaintiff reiterating that she may call for the furniture in the ground floor
of the house. On the 7th of the same month, the defendant wrote another letter to the plaintiff
informing her that he could not give up the three gas heaters and the four electric lamps because he
would use them until the 15th of the same month when the lease in due to expire. The plaintiff
refused to get the furniture in view of the fact that the defendant had declined to make delivery of all
of them. On November 15th, before vacating the house, the defendant deposited with the
Sheriff all the furniture belonging to the plaintiff and they are now on deposit in the warehouse
situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the law: in
holding that they violated the contract by not calling for all the furniture on November 5, 1936, when
the defendant placed them at their disposal; in not ordering the defendant to pay them the value of
the furniture in case they are not delivered; in holding that they should get all the furniture from the
Sheriff at their expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the
deposit of the furniture; in ruling that both parties should pay their respective legal expenses or the
costs; and in denying pay their respective legal expenses or the costs; and in denying the motions
for reconsideration and new trial. To dispose of the case, it is only necessary to decide whether the
defendant complied with his obligation to return the furniture upon the plaintiff's demand; whether the
latter is bound to bear the deposit fees thereof, and whether she is entitled to the costs of litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
thereof; by this contract the defendant bound himself to return the furniture to the plaintiff, upon the
latters demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil
Code). The obligation voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's residence or house.
The defendant did not comply with this obligation when he merely placed them at the disposal of the
plaintiff, retaining for his benefit the three gas heaters and the four eletric lamps. The provisions of
article 1169 of the Civil Code cited by counsel for the parties are not squarely applicable. The trial
court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her
obligation to get the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of
the furniture at the defendant's behest. The latter, as bailee, was not entitled to place the furniture on
deposit; nor was the plaintiff under a duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment thereof
by the defendant in case of his inability to return some of the furniture because under paragraph 6 of
the stipulation of facts, the defendant has neither agreed to nor admitted the correctness of the said
value. Should the defendant fail to deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the parties may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the prevailing
party (section 487 of the Code of Civil Procedure). The defendant was the one who breached the
contract of commodatum, and without any reason he refused to return and deliver all the furniture
upon the plaintiff's demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the plaintiff,
in the residence to return and deliver to the plaintiff, in the residence or house of the latter, all the
furniture described in paragraph 3 of the stipulation of facts Exhibit A. The expenses which may be
occasioned by the delivery to and deposit of the furniture with the Sheriff shall be for the account of
the defendant. the defendant shall pay the costs in both instances. So ordered.
Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

G.R. No. L-24968 April 27, 1972
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.
MAKALINTAL, J.:p
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 building 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:
1. 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 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."
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 reexamination 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 reexamination
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:
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."
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 RFC that his company no longer to of the
loan and therefore considered the same as 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 insofar as they are concerned."
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.".
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:
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:
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 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 theIsland of Mindanao
where the proposed jutemill is located ..."
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:
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 equip-

ment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the open-

ing 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:
Dear Sirs:
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 purpose 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.
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, ahnost 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:
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 perferted until the delivery of the object of the contract.
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 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.
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 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 able 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 cf mutual desistance — what
Manresa terms "mutuo disenso" — which is a mode of extinguishing obligations. It is a concept that
1
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 non-compliance. 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.
Footnotes
1 8 Manresa, p. 294.
2 2 Castan, p. 560.
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,

vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.
REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs
Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner
Government Service Insurance System (hereinafter referred to as GSIS) and subsequently, another
deed of mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the
sums of P 11,500.00 and P 3,000.00, respectively. A parcel of land covered by Transfer Certificate
1
of Title No. 38989 of the Register of Deed of Quezon City, co-owned by said mortgagor spouses,
was given as security under the aforesaid two deeds. They also executed a 'promissory note" which
2
states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SOLIDARILY, promise to pay the GOVERNMENT SERVICE INSURANCE SYSTEM
the sum of . . . (P 11,500.00) Philippine Currency, with interest at the rate of six (6%)
per centum compounded monthly payable in . . . (120)equal monthly installments
of . . . (P 127.65) each.
3
On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of
Mortgage" under which they obligated themselves to assume the aforesaid obligation to the GSIS
and to secure the release of the mortgage covering that portion of the land belonging to herein
private respondents and which was mortgaged to the GSIS. This undertaking was not fulfilled.
4 5
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the
payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the
mortgaged property to be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint
against the petitioner and the Lagasca spouses in the former Court of
First Instance of Quezon City, praying that the extrajudicial foreclosure "made on, their property and
7
all other documents executed in relation thereto in favor of the Government Service Insurance
System" be declared null and void. It was further prayed that they be allowed to recover said
property, and/or the GSIS be ordered to pay them the value thereof, and/or they be allowed to
repurchase the land. Additionally, they asked for actual and moral damages and attorney's fees.
In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not
as sureties or guarantors for the Lagasca spouses but they merely gave their common property to
the said co-owners who were solely benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to
establish a cause of action. 8
Said decision was reversed by the respondent Court of Appeals which held that:
9
... although formally they are co-mortgagors, they are so only for accomodation (sic)
in that the GSIS required their consent to the mortgage of the entire parcel of land
which was covered with only one certificate of title, with full knowledge that the loans
secured thereby were solely for the benefit of the appellant (sic) spouses who alone
applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid cause for
having foreclosed the mortgage without having given sufficient notice to them as
required either as to their delinquency in the payment of amortization or as to the
subsequent foreclosure of the mortgage by reason of any default in such payment.
The notice published in the newspaper, 'Daily Record (Exh. 12) and posted pursuant
to Sec 3 of Act 3135 is not the notice to which the mortgagor is entitled upon the
application being made for an extrajudicial foreclosure. ...
10
On the foregoing findings, the respondent court consequently decreed that-
In view of all the foregoing, the judgment appealed from is hereby reversed, and
another one entered (1) declaring the foreclosure of the mortgage void insofar as it
affects the share of the appellants; (2) directing the GSIS to reconvey to appellants
their share of the mortgaged property, or the value thereof if already sold to third
party, in the sum of P 35,000.00, and (3) ordering the appellees Flaviano Lagasca
and Esther Lagasca to pay the appellants the sum of P 10,00.00 as moral damages,
P 5,000.00 as attorney's fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No.
2031, otherwise known as the Negotiable Instruments Law, which provide that an accommodation
party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving
value therefor, but is held liable on the instrument to a holder for value although the latter knew him
to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The
promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly
not negotiable instruments. These documents do not comply with the fourth requisite to be
considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor
to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the
provisions of Act No. 2031 would not apply; governance shall be afforded, instead, by the provisions
of the Civil Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private respondents signed the
documents "only to give their consent to the mortgage as required by GSIS", with the latter having
full knowledge that the loans secured thereby were solely for the benefit of the Lagasca
spouses. This appears to be duly supported by sufficient evidence on record. Indeed, it would be
12
unusual for the GSIS to arrange for and deduct the monthly amortizations on the loans from the
salary as an army officer of Flaviano Lagasca without likewise affecting deductions from the salary of
Isabelo Racho who was also an army sergeant. Then there is also the undisputed fact, as already
stated, that the Lagasca spouses executed a so-called "Assumption of Mortgage" promising to
exclude private respondents and their share of the mortgaged property from liability to the
mortgagee. There is no intimation that the former executed such instrument for a consideration, thus
confirming that they did so pursuant to their original agreement.
The parol evidence rule cannot be used by petitioner as a shield in this case for it is clear that there
13
was no objection in the court below regarding the admissibility of the testimony and documents that
were presented to prove that the private respondents signed the mortgage papers just to
accommodate their co-owners, the Lagasca spouses. Besides, the introduction of such evidence
falls under the exception to said rule, there being allegations in the complaint of private respondents
in the court below regarding the failure of the mortgage contracts to express the true agreement of
the parties. 14
However, contrary to the holding of the respondent court, it cannot be said that private respondents
are without liability under the aforesaid mortgage contracts. The factual context of this case is
precisely what is contemplated in the last paragraph of Article 2085 of the Civil Code to the effect
that third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca
spouses would not invalidate the mortgage with respect to private respondents' share in the
property. In consenting thereto, even assuming that private respondents may not be assuming
personal liability for the debt, their share in the property shall nevertheless secure and respond for
the performance of the principal obligation. The parties to the mortgage could not have intended that
the same would apply only to the aliquot portion of the Lagasca spouses in the property, otherwise
the consent of the private respondents would not have been required.
The supposed requirement of prior demand on the private respondents would not be in point here
since the mortgage contracts created obligations with specific terms for the compliance thereof. The
facts further show that the private respondents expressly bound themselves as solidary debtors in
the promissory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of
respondent court that lack of notice to the private respondents of the extrajudicial foreclosure sale
impairs the validity thereof. In Bonnevie, et al. vs. Court of appeals, et al., the Court ruled that Act
15
No. 3135, as amended, does not require personal notice on the mortgagor, quoting the requirement
on notice in such cases as follows:
Section 3. Notice shall be given by posting notices of sale for not less than twenty
days in at least three public places of the municipality 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.
There is no showing that the foregoing requirement on notice was not complied with in the
foreclosure sale complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of
private respondents or in directing reconveyance of their property or the payment of the value
thereof Indubitably, whether or not private respondents herein benefited from the loan, the mortgage
and the extrajudicial foreclosure proceedings were valid.
WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of
Appeals and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.
Footnotes
1 Record on Appeal, 9, 22; Rollo, 54.
2 Rollo, 58.
3 Ibid., 26.
4 Record on Appeal, 27-31; Rollo, 54.
5 Rollo, 59.
6 Ibid., Id.; Record on Appeal, 64.
7 Branch IV, Civil Case No. Q-9418; Record on Appeal, 1- 38; Rollo, 54.
8 Record on Appeal, 69-73; Ibid.
9 CA-G.R. No. 42193-R; Justice Pacifica P. de Castro, ponente, Justices Luis B.

Reyes and Ramon G. Gaviola, Jr., concurring.
10 Rollo, 61-63.
11 Ibid., 66.
12 Ibid., 61.
13 Sec. 7, Rule 130, Rules of Court.
14 Record on Appeal, 3-4; Rollo, 54.

15 125 SCRA 122 (1983).
G.R. No. 183204 January 13, 2014
THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
ANA GRACE ROSALES AND YO YUK TO, Respondents.
DECISION
DEL CASTILLO, J.:
Bank deposits, which are in the nature of a simple loan or mutuum, must be paid upon demand by
1
the depositor. 2
This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the April 2, 2008
3
Decision and the May 30, 2008 Resolution of he Court of Appeals CA) in CA-G.R. CV No. 89086.
4 5
Factual Antecedents
Petitioner Metropolitan Bank and Trust Company is a domestic banking corporation duly organized
and existing under the laws of the Philippines. Respondent Ana Grace Rosales (Rosales) is the
6
owner of China Golden Bridge Travel Services, a travel agency. Respondent Yo Yuk To is the
7 8
mother of respondent Rosales. 9
In 2000, respondents opened a Joint Peso Account with petitioner’s Pritil-Tondo Branch. As of
10 11
August 4, 2004, respondents’ Joint Peso Account showed a balance of ₱2,515,693.52. 12
In May 2002, respondent Rosales accompanied her client Liu Chiu Fang, a Taiwanese National
applying for a retiree’s visa from the Philippine Leisure and Retirement Authority (PLRA), to
petitioner’s branch in Escolta to open a savings account, as required by the PLRA. Since Liu Chiu
13
Fang could speak only in Mandarin, respondent Rosales acted as an interpreter for her. 14
On March 3, 2003, respondents opened with petitioner’s Pritil-Tondo Branch a Joint Dollar
Account with an initial deposit of US$14,000.00.
15 16
On July 31, 2003, petitioner issued a "Hold Out" order against respondents’ accounts. 17
On September 3, 2003, petitioner, through its Special Audit Department Head Antonio Ivan Aguirre,
filed before the Office of the Prosecutor of Manila a criminal case for Estafa through False
Pretences, Misrepresentation, Deceit, and Use of Falsified Documents, docketed as I.S. No. 03I-
25014, against respondent Rosales. Petitioner accused respondent Rosales and an unidentified
18 19
woman as the ones responsible for the unauthorized and fraudulent withdrawal of US$75,000.00
from Liu Chiu Fang’s dollar account with petitioner’s Escolta Branch. Petitioner alleged that on
20
February 5, 2003, its branch in Escolta received from the PLRA a Withdrawal Clearance for the
dollar account of Liu Chiu Fang; that in the afternoon of the same day, respondent Rosales went to
21
petitioner’s Escolta Branch to inform its Branch Head, Celia A. Gutierrez (Gutierrez), that Liu Chiu
Fang was going to withdraw her dollar deposits in cash; that Gutierrez told respondent Rosales to
22
come back the following day because the bank did not have enough dollars; that on February 6, 23
2003, respondent Rosales accompanied an unidentified impostor of Liu Chiu Fang to the bank; that 24
the impostor was able to withdraw Liu Chiu Fang’s dollar deposit in the amount of
US$75,000.00; that on March 3, 2003, respondents opened a dollar account with petitioner; and
25
that the bank later discovered that the serial numbers of the dollar notes deposited by respondents
in the amount of US$11,800.00 were the same as those withdrawn by the impostor. 26
Respondent Rosales, however, denied taking part in the fraudulent and unauthorized withdrawal
from the dollar account of Liu Chiu Fang. Respondent Rosales claimed that she did not go to the
27
bank on February 5, 2003. Neither did she inform Gutierrez that Liu Chiu Fang was going to close
28
her account. Respondent Rosales further claimed that after Liu Chiu Fang opened an account with
29
petitioner, she lost track of her. Respondent Rosales’ version of the events that transpired
30
thereafter is as follows:
On February 6, 2003, she received a call from Gutierrez informing her that Liu Chiu Fang was at the
bank to close her account. At noon of the same day, respondent Rosales went to the bank to make
31
a transaction. While she was transacting with the teller, she caught a glimpse of a woman seated at
32
the desk of the Branch Operating Officer, Melinda Perez (Perez). After completing her transaction,
33
respondent Rosales approached Perez who informed her that Liu Chiu Fang had closed her account
and had already left. Perez then gave a copy of the Withdrawal Clearance issued by the PLRA to
34
respondent Rosales. On June 16, 2003, respondent Rosales received a call from Liu Chiu Fang
35
inquiring about the extension of her PLRA Visa and her dollar account. It was only then that Liu 36
Chiu Fang found out that her account had been closed without her knowledge. Respondent 37
Rosales then went to the bank to inform Gutierrez and Perez of the unauthorized withdrawal. On 38
June 23, 2003, respondent Rosales and Liu Chiu Fang went to the PLRA Office, where they were
informed that the Withdrawal Clearance was issued on the basis of a Special Power of Attorney
(SPA) executed by Liu Chiu Fang in favor of a certain Richard So. Liu Chiu Fang, however, denied39
executing the SPA. The following day, respondent Rosales, Liu Chiu Fang, Gutierrez, and Perez
40
met at the PLRA Office to discuss the unauthorized withdrawal. During the conference, the bank
41
officers assured Liu Chiu Fang that the money would be returned to her. 42
On December 15, 2003, the Office of the City Prosecutor of Manila issued a Resolution dismissing
the criminal case for lack of probable cause. Unfazed, petitioner moved for reconsideration.
43
On September 10, 2004, respondents filed before the Regional Trial Court (RTC) of Manila a
Complaint for Breach of Obligation and Contract with Damages, docketed as Civil Case No.
44
04110895 and raffled to Branch 21, against petitioner. Respondents alleged that they attempted
several times to withdraw their deposits but were unable to because petitioner had placed their
accounts under "Hold Out" status. No explanation, however, was given by petitioner as to why it
45
issued the "Hold Out" order. Thus, they prayed that the "Hold Out" order be lifted and that they be
46
allowed to withdraw their deposits. They likewise prayed for actual, moral, and exemplary damages,
47
as well as attorney’s fees. 48
Petitioner alleged that respondents have no cause of action because it has a valid reason for issuing
the "Hold Out" order. It averred that due to the fraudulent scheme of respondent Rosales, it was
49
compelled to reimburse Liu Chiu Fang the amount of US$75,000.00 and to file a criminal complaint 50
for Estafa against respondent Rosales. 51

While the case for breach of contract was being tried, the City Prosecutor of Manila issued a
Resolution dated February 18, 2005, reversing the dismissal of the criminal complaint. An
52
Information, docketed as Criminal Case No. 05-236103, was then filed charging respondent
53
Rosales with Estafa before Branch 14 of the RTC of Manila. 54
Ruling of the Regional Trial Court
On January 15, 2007, the RTC rendered a Decision finding petitioner liable for damages for breach
55
of contract. The RTC ruled that it is the duty of petitioner to release the deposit to respondents as
56
the act of withdrawal of a bank deposit is an act of demand by the creditor. The RTC also said that
57
the recourse of petitioner is against its negligent employees and not against respondents. The
58
dispositive portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered ordering [petitioner]

METROPOLITAN BANK & TRUST COMPANY to allow [respondents] ANA GRACE ROSALES and
YO YUK TO to withdraw their Savings and Time Deposits with the agreed interest, actual damages
of ₱50,000.00, moral damages of ₱50,000.00, exemplary damages of ₱30,000.00 and 10% of the
amount due [respondents] as and for attorney’s fees plus the cost of suit.
The counterclaim of [petitioner] is hereby DISMISSED for lack of merit.
SO ORDERED. 59
Ruling of the Court of Appeals
Aggrieved, petitioner appealed to the CA.
On April 2, 2008, the CA affirmed the ruling of the RTC but deleted the award of actual damages
because "the basis for [respondents’] claim for such damages is the professional fee that they paid
to their legal counsel for [respondent] Rosales’ defense against the criminal complaint of [petitioner]
for estafa before the Office of the City Prosecutor of Manila and not this case." Thus, the CA
60
disposed of the case in this wise:
WHEREFORE, premises considered, the Decision dated January 15, 2007 of the RTC, Branch 21,
Manila in Civil Case No. 04-110895 is AFFIRMED with MODIFICATION that the award of actual
damages to [respondents] Rosales and Yo Yuk To is hereby DELETED.
SO ORDERED. 61
Petitioner sought reconsideration but the same was denied by the CA in its May 30, 2008
Resolution.62
Issues
Hence, this recourse by petitioner raising the following issues:
A. THE [CA] ERRED IN RULING THAT THE "HOLD-OUT" PROVISION IN THE

APPLICATION AND AGREEMENT FOR DEPOSIT ACCOUNT DOES NOT APPLY IN THIS
CASE.
B. THE [CA] ERRED WHEN IT RULED THAT PETITIONER’S EMPLOYEES WERE
NEGLIGENT IN RELEASING LIU CHIU FANG’S FUNDS.
C. THE [CA] ERRED IN AFFIRMING THE AWARD OF MORAL DAMAGES, EXEMPLARY

DAMAGES, AND ATTORNEY’S FEES. 63
Petitioner’s Arguments
Petitioner contends that the CA erred in not applying the "Hold Out" clause stipulated in the
Application and Agreement for Deposit Account. It posits that the said clause applies to any and all
64
kinds of obligation as it does not distinguish between obligations arising ex contractu or ex

delictu. Petitioner also contends that the fraud committed by respondent Rosales was clearly
65
established by evidence; thus, it was justified in issuing the "Hold-Out" order. Petitioner likewise
66 67
denies that its employees were negligent in releasing the dollars. It claims that it was the deception
68
employed by respondent Rosales that caused petitioner’s employees to release Liu Chiu Fang’s
funds to the impostor. 69
Lastly, petitioner puts in issue the award of moral and exemplary damages and attorney’s fees. It
insists that respondents failed to prove that it acted in bad faith or in a wanton, fraudulent,
oppressive or malevolent manner. 70
Respondents’ Arguments
Respondents, on the other hand, argue that there is no legal basis for petitioner to withhold their
deposits because they have no monetary obligation to petitioner. They insist that petitioner
71
miserably failed to prove its accusations against respondent Rosales. In fact, no documentary
72
evidence was presented to show that respondent Rosales participated in the unauthorized
withdrawal. They also question the fact that the list of the serial numbers of the dollar notes
73
fraudulently withdrawn on February 6, 2003, was not signed or acknowledged by the alleged
impostor. Respondents likewise maintain that what was established during the trial was the
74
negligence of petitioner’s employees as they allowed the withdrawal of the funds without properly
verifying the identity of the depositor. Furthermore, respondents contend that their deposits are in
75
the nature of a loan; thus, petitioner had the obligation to return the deposits to them upon
demand. Failing to do so makes petitioner liable to pay respondents moral and exemplary
76
damages, as well as attorney’s fees. 77
Our Ruling
The Petition is bereft of merit.
At the outset, the relevant issues in this case are (1) whether petitioner breached its contract with
respondents, and (2) if so, whether it is liable for damages. The issue of whether petitioner’s
employees were negligent in allowing the withdrawal of Liu Chiu Fang’s dollar deposits has no
bearing in the resolution of this case. Thus, we find no need to discuss the same.
The "Hold Out" clause does not apply
to the instant case.

Petitioner claims that it did not breach its contract with respondents because it has a valid reason for
issuing the "Hold Out" order. Petitioner anchors its right to withhold respondents’ deposits on the
Application and Agreement for Deposit Account, which reads:
Authority to Withhold, Sell and/or Set Off:
The Bank is hereby authorized to withhold as security for any and all obligations with the Bank, all
monies, properties or securities of the Depositor now in or which may hereafter come into the
possession or under the control of the Bank, whether left with the Bank for safekeeping or otherwise,
or coming into the hands of the Bank in any way, for so much thereof as will be sufficient to pay any
or all obligations incurred by Depositor under the Account or by reason of any other transactions
between the same parties now existing or hereafter contracted, to sell in any public or private sale
any of such properties or securities of Depositor, and to apply the proceeds to the payment of any
Depositor’s obligations heretofore mentioned.
xxxx
JOINT ACCOUNT
xxxx
The Bank may, at any time in its discretion and with or without notice to all of the Depositors, assert
a lien on any balance of the Account and apply all or any part thereof against any indebtedness,
matured or unmatured, that may then be owing to the Bank by any or all of the Depositors. It is
understood that if said indebtedness is only owing from any of the Depositors, then this provision
constitutes the consent by all of the depositors to have the Account answer for the said
indebtedness to the extent of the equal share of the debtor in the amount credited to the Account. 78
Petitioner’s reliance on the "Hold Out" clause in the Application and Agreement for Deposit Account
is misplaced.
The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of the
sources of obligation enumerated in Article 1157 of the Civil Code, to wit: law, contracts, quasi-
79
contracts, delict, and quasi-delict. In this case, petitioner failed to show that respondents have an
obligation to it under any law, contract, quasi-contract, delict, or quasi-delict. And although a criminal
case was filed by petitioner against respondent Rosales, this is not enough reason for petitioner to
issue a "Hold Out" order as the case is still pending and no final judgment of conviction has been
rendered against respondent Rosales. In fact, it is significant to note that at the time petitioner issued
the "Hold Out" order, the criminal complaint had not yet been filed. Thus, considering that
respondent Rosales is not liable under any of the five sources of obligation, there was no legal basis
for petitioner to issue the "Hold Out" order. Accordingly, we agree with the findings of the RTC and
the CA that the "Hold Out" clause does not apply in the instant case.
In view of the foregoing, we find that petitioner is guilty of breach of contract when it unjustifiably
refused to release respondents’ deposit despite demand. Having breached its contract with
respondents, petitioner is liable for damages.
Respondents are entitled to moral and

exemplary damages and attorney’s fees. 1âwphi1
In cases of breach of contract, moral damages may be recovered only if the defendant acted
fraudulently or in bad faith, or is "guilty of gross negligence amounting to bad faith, or in wanton
80
disregard of his contractual obligations."81
In this case, a review of the circumstances surrounding the issuance of the "Hold Out" order reveals
that petitioner issued the "Hold Out" order in bad faith. First of all, the order was issued without any
legal basis. Second, petitioner did not inform respondents of the reason for the "Hold Out." Third,
82
the order was issued prior to the filing of the criminal complaint. Records show that the "Hold Out"
order was issued on July 31, 2003, while the criminal complaint was filed only on September 3,
83
2003. All these taken together lead us to conclude that petitioner acted in bad faith when it
84
breached its contract with respondents. As we see it then, respondents are entitled to moral
damages.
As to the award of exemplary damages, Article 2229 of the Civil Code provides that exemplary
85
damages may be imposed "by way of example or correction for the public good, in addition to the
moral, temperate, liquidated or compensatory damages." They are awarded only if the guilty party
acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. 86
In this case, we find that petitioner indeed acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner when it refused to release the deposits of respondents without any legal basis.
We need not belabor the fact that the banking industry is impressed with public interest. As such,
87
"the highest degree of diligence is expected, and high standards of integrity and performance are
even required of it." It must therefore "treat the accounts of its depositors with meticulous care and
88
always to have in mind the fiduciary nature of its relationship with them." For failing to do this, an
89
award of exemplary damages is justified to set an example.
The award of attorney's fees is likewise proper pursuant to paragraph 1, Article 2208 of the Civil
90
Code.
In closing, it must be stressed that while we recognize that petitioner has the right to protect itself
from fraud or suspicions of fraud, the exercise of his right should be done within the bounds of the
law and in accordance with due process, and not in bad faith or in a wanton disregard of its
contractual obligation to respondents.
WHEREFORE, the Petition is hereby DENIED. The assailed April 2, 2008 Decision and the May 30,
2008 Resolution of the Court of Appeals in CA-G.R. CV No. 89086 are hereby AFFIRMED. SO
ORDERED.

Associate Justice
WE CONCUR:
ANTONIO T. CARPIO
Associate Justice
Chairperson
ARTURO D. BRION JOSE PORTUGAL PEREZ

Associate Justice Associate Justice
ESTELA M. PERLAS-BERNABE
Associate Justice
ATTESTATION
was assigned to the writer of the opinion of the Court’s Division.
ANTONIO T CARPIO
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson s Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case
MARIA LOURDES P. A. SERENO

Chief Justice
G.R. No. 32576 November 6, 1930
FULTRON IRON WORKS CO., plaintiff-appellee,

vs.
CHINA BANKING CORPORATION, ET AL., defendants.
CHINA BANKING CORPORATION, appellant.
Feria and La O, and Gibbs and McDonough for appellant.

Claro M. Recto and DeWitt, Perkins and Brady for appellee.
STREET, J.:
This action was instituted on June 23, 1926, in the Court of First Instance of the City of Manila by the
Fulton Iron Works Co., a Delaware corporation having its principal place of business in St. Louis,
Missouri, and duly authorized under the laws of the Philippine Islands to engage in business in this
country. The defendants named in the complaint are the China Banking Corporation, a domestic
corporation having its principal place of business in the City of Manila, and one S. C. Schwarzkopf.
In the petitory part of the complaint judgment is sought against the two defendants jointly and
severally for the sum of P131,197.10, with interest. As a ground of action against the two defendants
it is asserted in the complaint that the amount claimed by the plaintiff is part of a larger sum of
money (P176, 197.10) belonging to the plaintiff which had been deposited in the defendant bank by
Schwarzkopf during the year 1922, and which had been misappropriated and embezzled by him,
with the full knowledge and consent of the defendant bank. The idea underlying the action, as
against the bank, is that it has been guilty of what may perhaps be styled a civil complicity in the
misappropriation of the money for which recovery is sought.
Upon hearing the cause, upon the separate answers of the two defendants, the trial court absolved
Schwarckopf from the complaint, for the reason that in two prior criminal proceedings he had been
convicted of the offense of estafa, based upon his misappropriated of the same money, and in said
proceedings the obligation to indemnify the plaintiff had been imposed upon him in the amount of
P146,197.40. His Honor, however, gave judgment in favor of the plaintiff, the Fulton Iron Works Co.,
to recover of the defendant bank the sum of P127,200.36, with lawful interest from June 23, 1926,
the date of the filing of the complaint, and with costs. From this judgment the defendant bank
appealed.
It appears that in the month of March, 1921, the plaintiff the Fulton Iron Works Co., of St. Louis,
Missouri, sold to the Binalbagan Estate, Inc., a Philippine corporation, machinery for a sugar mill, for
which the purchaser executed three notes amounting to about $80,000. The first of these notes
became due October 1, 1921, and the other two on April 1, 1922. Neither of the three notes was
paid at maturity, owing to the fact that, before the notes fell due, the Binalbagan Estate, Inc.
suspended payments and passed into the hands of the Philippine National Bank, its principal
creditor, for administration.
The consequently delay in the payments of the notes caused the plaintiff to employ a firm of lawyers
in Manila, of which S. C. Schwarzkopf was then a member, to represent the plaintiff in an effort to
obtain security for the indebtedness, with a view to its later collection. At the time this retainer was
effect, Schwarzkopf was in St. Louis, on a visit to the United States, and in order that the plaintiff
might comply with the laws of the Philippine Islands in the matter of obtaining a license to transact
business here, the plaintiff executed a formal power of attorney authorizing the members of
Schwarzkopf's firm jointly and severally to accept service in actions and to do other things necessary
to enable the plaintiff to secure the contemplated license. It is noteworthy that the authority of
Schwarzkopf's firm to represent the plaintiff in the collection of the claims above mentioned did not
proceed from this power, but had its origin in the employment of said firm as attorneys in the matter.
Schwarzkopf returned to Manila in the early part of November, 1921, and the law firm to which he
pertained was dissolved on November 15, 1921. Under the dissolution agreement the matter of
handling this collection devolved upon Schwarzkopf, and he alone was thereafter concerned in the
matter.
On December 13, 1921, Schwarzkopf opened a personal account, as a depositor, in the China
Banking Corporation by making a deposit, on that date, of the sum of P578. This account was at all
times modest in sized, and on January 1, 1922, the credit balance therein was P543.35. This
account has little or no significance in the case, and it became defunct by September 1, 1922. It may
be observed, however, that a few of the deposits in this account appear to have been taken from
account No. 2 to which reference will presently be made.
In the early part of the year 1922, the financial condition of the Binalbagan Estate, Inc. began to
improve; and on January 13, 1922, D. M. Semple, manager of the Philippine Sugar Centrals Agency,
a department of the Philippine National Bank, drew check No. 574 for the sum of P10,000, payable
to the order of Sydney C. Schwarzkopf, and delivered the same to him in part payment of the
indebtedness owing to the plaintiff from the Binalbagan Estate, Inc. Upon receiving this check
Schwarzkopf signed a receipt as "attorney-in-fact of Fulton Iron Works Co." The character of
attorney-in-fact, thus assumed by Schwarzkopf, was of course a mere fiction, as the power of
attorney which he really possessed was limited to other matters. The point, however, is really of no
moment.
The check for P10,000 above mentioned was duly indorsed by Schwarzkopf and deposited by him in
a new account with the defendant bank, known as "No. 2 account." This money was thereafter
withdrawn from the bank from time to time by Schwarzkopf, upon his personal checks, and used for
his individual purposes. In the appealed judgment the defendant is held liable for this money, a mere
oversight resulting apparently, from a confusion of this matter with the more important issues
involved in other parts of the case. There is no proof that the defendant bank had any knowledge, or
was chargeable with notice, that the P10,000 thus deposited and drawn out belonged to any person
other than Schwarzkopf himself; and, as depositor, Schwarzkopf of course had absolute control of
the account. A depositor is presumed to be the owner of funds standing in his name in a bank
deposit; and where a bank is not chargeable with notice that the money deposited in such account is
the property of some other person than the depositor, the bank is justified in paying out the money to
the depositor or upon his order, and cannot be liable to any other person as the true owner. It is
hardly necessary to cite authority upon a proposition so manifestly in accord with the usage and the
common sense of the commercial community. The proposition stated is implicit in all the cases
concerned with the question of the liability of a bank to its depositors and other persons claiming an
interest in the deposits.
Proceeding to the next collection effected by Schwarzkopf upon account of the plaintiff's claim
against the Binalbagan Estate, Inc., we find that on April 11, 1922, Schwarkopf received, from the
manager of the Philippine Sugar Centrals Agency, a check for the sum of P61,237.50. This check
was made payable on its face to "S. C. Schwarkopf Attorney-in-Fact, Fulton Iron Works Co., or
order." After indorsing this check in the form in which it was drawn, Schwarzkopf opened a new
account with the defendant bank, entitled "S. C. Schwarzkopf, Attorney- in-Fact, Fulton Iron Works
Co.," and deposited said check therein. This account remained undisputed on the books of the bank
for some two months, during which period it had an accretion of about P130.
Meanwhile, the No. 2 account which had been established back in January, became depleted, but
the manager of the bank, in view, no doubt, of the funds to Schwarzkopf's credit in the third account
conceded to him a credit in No. 2 account of P25,000. By June 15, 1922, said account became
overdrawn to the extend of P22, 144.39, and it was obvious that the limit of the conceded credit
would soon be reached. The manager of the bank then intervened and requested Schwarzkopf to
settle the overdraft. To accomplish this Schwarkopf merely transferred, by check, the money to his
credit in his special account as plaintiff's attorney-in-fact to the No. 2 account. The amount thus
transferred was P61,360.81, and the effect of the transfer was to absorb the overdraft and place a
credit balance of nearly P40,000 in No. 2 account. Schwarzkopf then purchased a draft on New York
in the amount of $15,000, and after some delay transmitted the same by mail to the plaintiff. This
draft cost Schwarzkopf the sum of P30,375.02, and it was the only remittance ever made by him to
his client.
The principal question that arises upon the facts above stated is, whether the defendant bank is
liable to the plaintiff for the sum of P22, 144.39 which was thus applied to the payment of
Schwarzkopf's personal indebtedness resulting from his overdraft in the No. 2 account. Upon this
point the first thing to be noted is that the very form in which the third account was carried on the
books of the defendant bank was sufficient to charge the bank with notice of the fact that the money
deposited in said account belonged to the Fulton Iron Works Co. and not to Schwarzkopf. It is
commonly said, and truly said in a legal sense, that money has no earmarks. But bank accounts and
commercial paper can have earmarks, and these earmarks consist of the word or words which
infallibly convey to the mind notice that the money or credit represented by the account with which
they are associated or the instrument upon which they are written rightfully belongs to some other
person than the one having control thereof. A bank cannot permit, much less require, a depositor
who is in control of a trust fund to apply any part of the same to his individual indebtedness to the
bank. The decisions to this effect are uniformly accordant and it is believed no creditable authority to
the contrary can be produced from any source. The expression "trust fund," in this connection, is not
a technical term, and is applied in a loose sense to indicate the situation where a bank account or
negotiable securities of any sort are under the control of a person other than the true owner. The
following decisions are instructive as illustrating different phases of the rule above stated, the
selection having been made with a view to the fact that the cases cited are for the most part
accessible in one or more series of annotated reports; Central Nat. Bank of Baltimore vs. Conn. Mut.
Life Ins. Co., 104 U. S., 54; 26 Law. ed., 693; Union Stock Yards Nat. Bank vs. Moore, 25 C. C. A.,
150; 79 Fed., 705 Sayre vs. Weil, 94 Ala., 466; 15 L. R. A., 544; Am. Trust & Banking Co. vs. Boone,
102 Ga., 202; 40 L. R. A., 250; 66 Am. St. Rep., 167; First Denton Nat. Bank vs. Kenney, 116 Md.,
24; Ann. Cas. 19193B, 1337; Allen vs. Puritan Trust Co., 211 Mass., 409; L. R. A. 1915C, 518 (and
note); Emerado Farmers' El. Co. vs. Farmers' Bank, 20 N. D., 270; 29 L. R. A. (N. S.), 567; Baird vs.
Lorenz (N. D.), 61 L. R. A., 1385, 1389 (note); Walters Nat. Bank vs. Bantock, 41 Okla.,, 153; L. R.
A. 1915C, 531; Interstate Nat. Bank vs. Claxton 97 Tex., 569; 65 L. R. A., 820; 104 Am. St. Rep.,
885; Boyle vs. Northwestern Nat. Bank of Superior, 125 Wis., 498; 1 L. R. A. (N. S.) 1110 Am. St.
Rep., 851; United States Fidelity & Gy. Co. vs. Adoue, 104 Tex., 379; 37 L. R. A. (N. S.), 409; Ann.
Cas. 1914B, 667; Underwood Ltd. vs. Bank of Liverpool (1924), 1 K. B., 755.
Upon the facts before us it is evident that when credit to the extent of P25,000 was conceded to
Schwarzkopf in his personal account No. 2, the eye of the banker was fixed upon the large amount
then upon deposit to Schwarkopf's credit in his account as attorney-in-fact; but of course, if a bank
cannot apply the money in such an account, or even permit it to be applied, to the personal
indebtedness of the fiduciary depositor, it is not permissible for the bank to extend personal credit to
such depositor upon the faith of the trust account. From any point that the matter be viewed, the
liability of the bank is clear to the extent of P22144.39 this being the amount derived from
Schwarkopf's account as attorney-in-fact which was absorbed by his overdraft in account No. 2
when the transfer of the balance in the former account to the latter account was effected, in the
manner already stated.
We next proceed to consider the disposition made of the proceeds of the third check collected by
Schwarzkopf upon account of plaintiff's claim against the Binalbagan Estate, Inc., from the Philippine
National Bank. The amount of this collection was P104, 959.60, and it was paid, on October 11,
1922, by a cashier's check on the Philippine National Bank, payable "to the order of S. C.
Schwarzkopf, attorney-in-fact, Fulton Iron Works Co." Upon receiving this check, Schwarzkopf
indorsed it in proper form, by writing thereon the words "S. C. Schwarzkopf, attorney-in-fact, Fulton
Iron Works Co.," to which he added another indorsement consisting of his own name alone, and
deposited the check in his personal account No. 2 with the defendant bank. The check thus
delivered to the bank was collected by it from the Philippine National Bank in ordinary course.
Thereafter, in the course of the next few months, Schwarzkopf withdrew, upon checks written by
himself, the entire amount of the money to his credit in account No. 2, thus misappropriating the
money in said account to his own use.
It will be noted that the money thus squandered comprised not only the proceeds of the check last
mentioned but the residue, consisting of a few thousand pesos, which had been left in No. 2 account
after the overdraft had been paid and Schwarzkopf had remitted the draft of $15,000 to his principal
in the United States. We consider that, from a legal point of view, the situation with respect to this
money is precisely the same as that presented with respect to the money which came into the
account later by deposit of the check for P104,959.60 above mentioned, because as to both funds,
liability is sought to be fixed upon the bank by reason of its knowledge of the source from which said
funds were derived; and in this connection it should be noted that there is no proof showing that the
defendant bank had any knowledge of the misappropriation of this money by Schwarzkopf other
than such as might have been derived from an inspection of its own books and the checks by which
the money was paid in and paid out.
The feature of the case now under consideration brings us, it must be admitted, into debatable
territory, but a discriminating analysis of the legal principles involved leads to the conclusion that the
defendant cannot be held liable for money paid out by it in ordinary course on checks, in regular
form, drawn by Schwarzkopf on the No. 2 account.
The specialized function of bank is to serve as a place of deposit for money, to keep it safely while
on deposit, and to pay it out, upon demand to the person who effected the deposit or upon his order.
A bank is not a guardian of trust funds deposited with it in the sense that it must see to their proper
application nor is it its business to pry into the uses to which moneys on deposit in its vault are being
put; and so long as it serves its function and pays the money out in good faith to the person who
deposited it, or upon his order, without knowledge or notice that it is in fact assisting in the
misappropriation of the fund, the bank will be protected. As is well said by the author of the
monographic article on Banks and Banking in Ruling Case Law, It would seriously interfere with
commercial transactions to charge banks with the duty of supervising the administration of trust
funds, when, in due course of business, they receive checks and drafts in proper form drawn upon
such funds in their custody. The law imposes no such duty upon them (3 R. C. L.,
549; see also cases cited in 7 C. J., 644, 645, note 25).
There are, it is true, decisions from a few courts, deservedly held in high esteem, to the effect that a
bank makes itself an effective accomplice in the conversion of a trust fund when, with notice of the
character of such fund, it permits the person in control thereof to deposit it in his personal account.
But the decided weight of judicial authority is to the contrary; and it is generally held that the mere
act of a bank in entering a trust fund to the personal account of the fiduciary, knowing it to be a trust
fund, will not make the bank liable in case of the subsequent misappropriation of the money by the
fiduciary. (United States Fidelity & Gy. Co. vs. First Nat. Bank, 18 Cal. App., 437: Goodwin vs. Am.
Nat. Bank, 48 Conn., 550; Batchelder vs. Cen. Nat. Bank of Boston, 188 Mass., 25; Allen vs. Puritan
Trust Co., 211 Mass., 409; L. R. A. 1915C, 518; Gate City Bldg. & Loan Assoc. vs. National Bank of
Commerce, 126 Mo., 82; 27 L. R. A., 401; 47 Am. St. Rep., 630; Bischoff vs. Yorkville Bank, 218 N.
Y., 106; Havana C. R. Co. vs. Knickerbocker Trust Co., 198 N. Y., 422; L. R. A. 1915B, 720). The
bank has the right to presume that the fiduciary will apply a trust fund to its proper purpose, and at
any rate the bank is not required to send a courier with the money to see that it reaches a proper
destination.
In the case before us an intimate study of the checks which came into the defendant bank against
account No. 2 over a series of months, would have led a discerning person to the conclusion that the
plaintiff's money was being squandered, but such an inference could not legitimately have been
drawn from the first few checks which were drawn upon the fund, and it would be hard to say just
where the bank, supposing its suspicions to have been aroused, should have intervened. No such a
duty is imposed. Of course, when the bank became a party to the application of part of the plaintiff's
money to the satisfaction of the overdraft in No. 2 account, it was directly chargeable with knowledge
of the misappropriation of the fund to the extent of the overdraft and that fact, as we have already
said, made the bank liable. But this rule cannot be extented to subsequent acts of malversation and
misappropriation committed by the fiduciary against the real owner of the fund.
Furthermore, it is undeniable that a bank may incur liability by assisting the fiduciary to accomplish a
misappropriation, although the bank does not actually profit by the misappropriation. A decision
illustrating this aspect of the law is found in Washborn vs. Linscott State Bank (87 Kan., 698), where
a bank, to help the treasurer of a lodge to conceal his defalcations, permitted him to overdraw, and
when his account were to be audited, issued to him a deposit certificate for the shortage, payable to
the lodge. After the audit was made, the certificate was returned and cancelled, and the shortage
reappeared. The court held that a loan had been made to the treasurer personally, and that the bank
became liable to the lodge upon cancelling the deposit certificate. lawphil.net
Our discussion of this phase of the case should not be concluded without reference to Bischoff vs.
Yorville Bank (218 N. Y., 106), which undoubtedly affords some support to the contention of the
appellee that the defendant bank is liable not only for the proceeds of the last check collected by
Schwarzkopf, but for all of the money which was transferred to account No. 2 from the account of
Schawarzkopf as attorney-in-fact. This decision comes, it must be admitted, from a court of high
repute. But we are unable to accept the court's conclusions, as applicable to the facts before us. In
the case mentioned it appeared that an executor, named Poggenburg, having money on deposit in a
certain bank to his credit as executor, gradually withdrew about $13,000 from said deposit by checks
drawn by him, over a long period of time, in the character of executor. These checks were indorsed
by Poggenburg in his own name simply and deposited in the defendant Yorkville Bank to his
personal credit. At the inception of this series of transactions Poggenburg was indebted by note to
the defendant and payments were made on this note and other notes thereafter executed in favor of
the bank, out of the funds transferred as above stated. The court held, upon the facts before, it that
the defendant knew at all times that the credits created by the various deposits through checks of
the executor were assets pertaining to the estate of which Poggenburg was executor; and from this
fact, in connection with the misapplication of part of the money to the payment of the personal notes
of Poggenburg, the court held that the defendant bank was liable to the extent of the whole amount
misappropriated by means of the personal account.
It will be noted that this decision was made in third instance, after a trial in first instance possibly
before a jury and after the judgment against the bank been affirmed upon appeal in the appellate
division of the Supreme Court. The prior history of the case was therefore such as to entitle the
findings of fact of the two prior courts of great weight, and these courts had found in effect that the
defendant bank had acted in bad faith. If not explicable upon this ground, the decision in the Court of
Appeals must be considered a unique variant from accepted doctrine in this that while repudiating
the idea, favored by a few courts that the act of depositing a trust fund in the personal accounts of
the fiduciary is an effective act of conversion on the part both of bank and fiduciary, the court
nevertheless held that the act of the bank in permitting the application of part of the money to the
personal indebtedness of the fiduciary afforded a sufficient basis for finding the bank to have been
an accomplice in the subsequent misapplication, by the fiduciary, of other portions of the deposit.
We can accede to the first of these propositions but not to the second. In this connection we refer to
the Annotation appended to Allen vs. Puritan Trust Co. (L. R. A. 1915C, 518, 529), where the
pertinent cases are analyzed and the conclusion stated 1 that, by the weight of authority, the placing
of a trust fund in the personal account of the fiduciary does not make the bank liable for a
subsequent misappropriation of the money by the former. For the rest it is enough to say that there
is no proof in this case that the defendant bank had any guilty connection in fact with the dishonest
acts of Schwarzkopf, in squandering the contents of the No. 2 account after he had made his
remittance of $15,000 to his principal.
In conclusion we ought to add that the legal principles involved in this decision are not directly
deducible from the provisions of the Negotiable Instruments Law, which is in force in this jurisdiction
(Act No. 2031); and there is no provision of the Civil Code or Code of Commerce directly bearing
upon the point under consideration. The liability of the defendant bank, to the extent recognized in
this decision proceeds upon the fundamental idea that a creditor cannot apply to the obligation of his
debtor money which as he knows belongs to another, without the consent of the latter, — a principle
implicit in all law. We note that the attorneys for the appellant bank have suggested in their brief that,
supposing the bank to have been an accomplice of Schwarzkopf in the misappropriation of the
plaintiff's money, its subsidiary liability was extinguished as a result of the criminal proceedings
against Schwarzkopf. This suggestion is clearly untenable, with respect to the liability which is fixed
upon the bank by this decision.
From what has been said it follows that the appealed judgment must be modified and the same is
hereby modified by reducing the amount of the judgment against the bank to the sum of P22,144.39
with lawful interest from June 23, 1926 until date of payment, 2without pronouncement as to costs.
So ordered.
Malcolm, Villamor, Ostrand, Johns, Romualdez, and Villa-Real, JJ., concur.

G.R. No. L-60033 April 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners,

vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO
N. LOTA and CLEMENT DAVID, respondents.
MAKASIAR, Actg. C.J.: ñé+.£ªwph!1
This is a petition for prohibition and injunction with a prayer for the immediate issuance of restraining
order and/or writ of preliminary injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a
temporary restraining order was duly issued ordering the respondents, their officers, agents,
representatives and/or person or persons acting upon their (respondents') orders or in their place or
stead to refrain from proceeding with the preliminary investigation in Case No. 8131938 of the Office
of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement
David filed a motion to lift restraining order which was denied in the resolution of this Court dated
May 18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit public respondents from
proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners were charged
by private respondent Clement David, with estafa and violation of Central Bank Circular No. 364 and
related regulations regarding foreign exchange transactions principally, on the ground of lack of
jurisdiction in that the allegations of the charged, as well as the testimony of private respondent's
principal witness and the evidence through said witness, showed that petitioners' obligation is civil in
nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor General in
its Comment dated June 28,1982, as follows: têñ.£îhqwâ£
On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office
of the City Fiscal of Manila, which case was assigned to respondent Lota for
preliminary investigation (Petition, p. 8).
In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall
and the following directors of the Nation Savings and Loan Association, Inc., namely
Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto
Manalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and
violation of Central Bank Circular No. 364 and related Central Bank regulations on
foreign exchange transactions, allegedly committed as follows (Petition, Annex "A"): têñ.£îhqwâ£
"From March 20, 1979 to March, 1981, David invested with the
Nation Savings and Loan Association, (hereinafter called NSLA) the
sum of P1,145,546.20 on nine deposits, P13,531.94 on savings
account deposits (jointly with his sister, Denise Kuhne),
US$10,000.00 on time deposit, US$15,000.00 under a receipt and
guarantee of payment and US$50,000.00 under a receipt dated June
8, 1980 (au jointly with Denise Kuhne), that David was induced into
making the aforestated investments by Robert Marshall an Australian
national who was allegedly a close associate of petitioner Guingona
Jr., then NSLA President, petitioner Martin, then NSLA Executive
Vice-President of NSLA and petitioner Santos, then NSLA General
Manager; that on March 21, 1981 N LA was placed under
receivership by the Central Bank, so that David filed claims therewith
for his investments and those of his sister; that on July 22, 1981
David received a report from the Central Bank that only P305,821.92
of those investments were entered in the records of NSLA; that,
therefore, the respondents in I.S. No. 81-31938 misappropriated the
balance of the investments, at the same time violating Central Bank
Circular No. 364 and related Central Bank regulations on foreign
exchange transactions; that after demands, petitioner Guingona Jr.
paid only P200,000.00, thereby reducing the amounts
misappropriated to P959,078.14 and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in
which they stated the following. têñ.£îhqwâ£
"That Martin became President of NSLA in March 1978 (after the

resignation of Guingona, Jr.) and served as such until October 30,
1980, while Santos was General Manager up to November 1980; that
because NSLA was urgently in need of funds and at David's
insistence, his investments were treated as special- accounts with
interest above the legal rate, an recorded in separate confidential
documents only a portion of which were to be reported because he
did not want the Australian government to tax his total earnings (nor)
to know his total investments; that all transactions with David were
recorded except the sum of US$15,000.00 which was a personal loan
of Santos; that David's check for US$50,000.00 was cleared through
Guingona, Jr.'s dollar account because NSLA did not have one, that
a draft of US$30,000.00 was placed in the name of one Paz Roces
because of a pending transaction with her; that the Philippine Deposit
Insurance Corporation had already reimbursed David within the legal
limits; that majority of the stockholders of NSLA had filed Special
Proceedings No. 82-1695 in the Court of First Instance to contest its
(NSLA's) closure; that after NSLA was placed under receivership,
Martin executed a promissory note in David's favor and caused the
transfer to him of a nine and on behalf (9 1/2) carat diamond ring with
a net value of P510,000.00; and, that the liabilities of NSLA to David
were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the
following:têñ.£îhqwâ£
"That he had no hand whatsoever in the transactions between David

and NSLA since he (Guingona Jr.) had resigned as NSLA president
in March 1978, or prior to those transactions; that he assumed a
portion o; the liabilities of NSLA to David because of the latter's
insistence that he placed his investments with NSLA because of his
faith in Guingona, Jr.; that in a Promissory Note dated June 17, 1981
(Petition, Annex "D") he (Guingona, Jr.) bound himself to pay David
the sums of P668.307.01 and US$37,500.00 in stated installments;
that he (Guingona, Jr.) secured payment of those amounts with
second mortgages over two (2) parcels of land under a deed of
Second Real Estate Mortgage (Petition, Annex "E") in which it was
provided that the mortgage over one (1) parcel shall be cancelled
upon payment of one-half of the obligation to David; that he
(Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00
which David refused to accept, hence, he (Guingona, Jr.) filed Civil
Case No. Q-33865 in the Court of First Instance of Rizal at Quezon
City, to effect the release of the mortgage over one (1) of the two
parcels of land conveyed to David under second mortgages."
At the inception of the preliminary investigation before respondent Lota, petitioners

moved to dismiss the charges against them for lack of jurisdiction because David's
claims allegedly comprised a purely civil obligation which was itself novated. Fiscal
Lota denied the motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the instant
petition because: (a) the production of the Promisory Notes, Banker's Acceptance,
Certificates of Time Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e., civil obligations on the
part of NSLA which were novated when Guingona, Jr. and Martin assumed them;
and (b) David's principal witness allegedly testified that the duplicate originals of the
aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's
claim that some of his investments were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative remedies
because to do so would be futile (Petition, p. 9) [pp. 153-157, rec.].
As correctly pointed out by the Solicitor General, the sole issue for resolution is whether public
respondents acted without jurisdiction when they investigated the charges (estafa and violation of
CB Circular No. 364 and related regulations regarding foreign exchange transactions) subject matter
of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in nature and therefore,
public respondents have no jurisdiction over the charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City Fiscal of
Manila by private respondent David against petitioners Teopisto Guingona, Jr., Antonio I. Martin and
Teresita G. Santos, together with one Robert Marshall and the other directors of the Nation Savings
and Loan Association, will show that from March 20, 1979 to March, 1981, private respondent David,
together with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association the
sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and Certificates of Time
Deposits and the sum of P13,531.94 on savings account deposits covered by passbook nos. 6-632
and 29-742, or a total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent
David, together with his sister, made investments in the aforesaid bank in the amount of
US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed under receivership on March
21, 1981, petitioners Guingona and Martin, upon the request of private respondent David, assumed
the obligation of the bank to private respondent David by executing on June 17, 1981 a joint
promissory note in favor of private respondent acknowledging an indebtedness of Pl,336,614.02 and
US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of account as of June
30, 1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness assumed
appears to be bigger than the original claim because of the added interest and the inclusion of other
deposits of private respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said
indebtedness, and petitioner Guingona executed another promissory note antedated to June 17,
1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2 of P1,336,614.02)
and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent (p. 25, rec.). The aforesaid
promissory notes were executed as a result of deposits made by Clement David and Denise Kuhne
with the Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David, before this
Court indisputably show that he has indeed invested his money on time and savings deposits with
the Nation Savings and Loan Association.
It must be pointed out that when private respondent David invested his money on nine. and savings
deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan
or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides that: têñ.£îhqwâ£
Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said: têñ.£îhqwâ£
It should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are hat true deposits. are considered simple loans and, as such,
are not preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of
China Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast
Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National
Bank vs. Ang Chong UM 66 PWL 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65
Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines (96 SCRA
102 [1980]) that:têñ.£îhqwâ£
Bank deposits are in the nature of irregular deposits. They are really 'loans because
they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to
be treated as loans and are to be covered by the law on loans (Art. 1980 Civil Code
Gullas vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits, are loans
to a bank because it can use the same. The petitioner here in making time deposits
that earn interests will respondent Overseas Bank of Manila was in reality a creditor
of the respondent Bank and not a depositor. The respondent Bank was in turn a
debtor of petitioner. Failure of the respondent Bank to honor the time deposit is
failure to pay its obligation as a debtor and not a breach of trust arising from a
depositary's failure to return the subject matter of the deposit (Emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and Loan
Association is that of creditor and debtor; consequently, the ownership of the amount deposited was
transmitted to the Bank upon the perfection of the contract and it can make use of the amount
deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals.
While the Bank has the obligation to return the amount deposited, it has, however, no obligation to
return or deliver the same money that was deposited. And, the failure of the Bank to return the
amount deposited will not constitute estafa through misappropriation punishable under Article 315,
par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the public
respondents have no- jurisdiction.
WE have already laid down the rule that: têñ.£îhqwâ£
In order that a person can be convicted under the above-quoted provision, it must be
proven that he has the obligation to deliver or return the some money, goods or
personal property that he received Petitioners had no such obligation to return the
same money, i.e., the bills or coins, which they received from private respondents.
This is so because as clearly as stated in criminal complaints, the related civil
complaints and the supporting sworn statements, the sums of money that petitioners
received were loans.
The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code. têñ.£îhqwâ£
"Art. 1933. — By the contract of loan, one of the parties delivers to

another, either something not consumable so that the latter may use
the same for a certain time- and return it, in which case the contract is
called a commodatum; or money or other consumable thing, upon
the condition that the same amount of the same kind and quality shall
he paid in which case the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay interest.
"In commodatum the bailor retains the ownership of the thing loaned

while in simple loan, ownership passes to the borrower.
"Art. 1953. — A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality."
It can be readily noted from the above-quoted provisions that in simple loan
(mutuum), as contrasted to commodatum the borrower acquires ownership of the
money, goods or personal property borrowed Being the owner, the borrower can
dispose of the thing borrowed (Article 248, Civil Code) and his act will not be
considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979];
Emphasis supplied).
But even granting that the failure of the bank to pay the time and savings deposits of private
respondent David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal
Code, nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid
bank was placed under receivership by the Central Bank, petitioners Guingona and Martin assumed
the obligation of the bank to private respondent David, thereby resulting in the novation of the
original contractual obligation arising from deposit into a contract of loan and converting the original
trust relation between the bank and private respondent David into an ordinary debtor-creditor relation
between the petitioners and private respondent. Consequently, the failure of the bank or petitioners
Guingona and Martin to pay the deposits of private respondent would not constitute a breach of trust
but would merely be a failure to pay the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent
the rise of criminal liability as long as it occurs prior to the filing of the criminal information in court.
Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held that: têñ.£îhqwâ£
As pointed out in People vs. Nery, novation prior to the filing of the criminal
information — as in the case at bar — may convert the relation between the parties
into an ordinary creditor-debtor relation, and place the complainant in estoppel to
insist on the original transaction or "cast doubt on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581 [1983] ),
this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring that: têñ.£îhqwâ£
The novation theory may perhaps apply prior to the filling of the criminal information
in court by the state prosecutors because up to that time the original trust relation
may be converted by the parties into an ordinary creditor-debtor situation, thereby
placing the complainant in estoppel to insist on the original trust. But after the justice
authorities have taken cognizance of the crime and instituted action in court, the
offended party may no longer divest the prosecution of its power to exact the criminal
liability, as distinguished from the civil. The crime being an offense against the state,
only the latter can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs.
Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil. 620).
It may be observed in this regard that novation is not one of the means recognized
by the Penal Code whereby criminal liability can be extinguished; hence, the role of
novation may only be to either prevent the rise of criminal habihty or to cast doubt on
the true nature of the original basic transaction, whether or not it was such that its
breach would not give rise to penal responsibility, as when money loaned is made to
appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90
Phil. 581; U.S. vs. Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory
note on June 17, 1981 assuming the obligation of the bank to private respondent David; while the
criminal complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal.
Hence, it is clear that novation occurred long before the filing of the criminal complaint with the Office
of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a
civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular No. 364
and other related regulations regarding foreign exchange transactions by accepting foreign currency
deposit in the amount of US$75,000.00 without authority from the Central Bank. They contend
however, that the US dollars intended by respondent David for deposit were all converted into
Philippine currency before acceptance and deposit into Nation Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was about to make a deposit of bank
draft issued in his name in the amount of US$50,000.00 with the Nation Savings and Loan
Association, the same had to be cleared first and converted into Philippine currency. Accordingly,
the bank draft was endorsed by respondent David to petitioner Guingona, who in turn deposited it to
his dollar account with the Security Bank and Trust Company. Petitioner Guingona merely
accommodated the request of the Nation Savings and loan Association in order to clear the bank
draft through his dollar account because the bank did not have a dollar account. Immediately after
the bank draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association to
withdraw the same in order to be utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before they
were accepted and deposited in Nation Savings and Loan Association, because the bank is
presumed to have followed the ordinary course of the business which is to accept deposits in
Philippine currency only, and that the transaction was regular and fair, in the absence of a clear and
convincing evidence to the contrary (see paragraphs p and q, Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners despite the fact
that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's comment and in
the July 27, 1982 reply to public respondents' comment and reiterated in petitioners' memorandum
filed on October 30, 1982, thereby adding more support to the conclusion that the US$75,000.00
were really converted into Philippine currency before they were accepted and deposited into Nation
Savings and Loan Association. Considering that this might adversely affect his case, respondent
David should have promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in nature and that there is
no clear showing that they engaged in foreign exchange transactions, We hold that the public
respondents acted without jurisdiction when they investigated the charges against the petitioners.
Consequently, public respondents should be restrained from further proceeding with the criminal
case for to allow the case to continue, even if the petitioners could have appealed to the Ministry of
Justice, would work great injustice to petitioners and would render meaningless the proper
administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition and
injunction, this court has recognized the resort to the extraordinary writs of prohibition and injunction
in extreme cases, thus: têñ.£îhqwâ£
On the issue of whether a writ of injunction can restrain the proceedings in Criminal
Case No. 3140, the general rule is that "ordinarily, criminal prosecution may not be
blocked by court prohibition or injunction." Exceptions, however, are allowed in the
following instances:têñ.£îhqwâ£
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an oppressive
and vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is

unconstitutional or was held invalid" ( Primicias vs. Municipality of
Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing Ramos
vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19
SCRA 95, 96 [1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held that: têñ.£îhqwâ£
The writs of certiorari and prohibition, as extraordinary legal remedies, are in the
ultimate analysis, intended to annul void proceedings; to prevent the unlawful and
oppressive exercise of legal authority and to provide for a fair and orderly
administration of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took
cognizance of a petition for certiorari and prohibition although the accused in the
case could have appealed in due time from the order complained of, our action in the
premises being based on the public welfare policy the advancement of public policy.
In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the
prosecution of certain chiropractors although, if convicted, they could have appealed.
We gave due course to their petition for the orderly administration of justice and to
avoid possible oppression by the strong arm of the law. And in Arevalo vs.
Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial court's
action admitting an amended information was sustained despite the availability of
appeal at the proper time.
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY RESTRAINING

ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS AGAINST THE PRIVATE
RESPONDENT.
SO ORDERED. 1äwphï1.ñët
Concepcion, Jr., Guerrero, De Castro and Escolin, JJ., concur.
Abad Santos, J., concur in the result.
Aquino, J., took no part.

G.R. No. 176664 July 21, 2008
BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
SPOUSES REYNALDO AND VICTORIA ROYECA, Respondents.
DECISION
NACHURA, J.:
Bank of the Philippine Islands (BPI) seeks a review of the Court of Appeals (CA) Decision 1 dated
July 12, 2006, and Resolution2 dated February 13, 2007, which dismissed its complaint for replevin
and damages and granted the respondents’ counterclaim for damages.
The case stems from the following undisputed facts:
On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed and delivered
to Toyota Shaw, Inc. a Promissory Note3 for ₱577,008.00 payable in 48 equal monthly installments
of ₱12,021.00, with a maturity date of August 18, 1997. The Promissory Note provides for a penalty
of 3% for every month or fraction of a month that an installment remains unpaid.
To secure the payment of said Promissory Note, respondents executed a Chattel Mortgage 4 in favor
of Toyota over a certain motor vehicle, more particularly described as follows:
<
p>Make and Type 1993 Toyota Corolla 1.3 XL
Motor No. 2E-2649879

Serial No. EE100-9512571
Color D.B. Gray Met.
Toyota, with notice to respondents, executed a Deed of Assignment 5 transferring all its rights, title,
and interest in the Chattel Mortgage to Far East Bank and Trust Company (FEBTC).
Claiming that the respondents failed to pay four (4) monthly amortizations covering the period from
May 18, 1997 to August 18, 1997, FEBTC sent a formal demand to respondents on March 14, 2000
asking for the payment thereof, plus penalty.6 The respondents refused to pay on the ground that
they had already paid their obligation to FEBTC.
On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the respondents with
the Metropolitan Trial Court (MeTC) of Manila praying for the delivery of the vehicle, with an
alternative prayer for the payment of ₱48,084.00 plus interest and/or late payment charges at the
rate of 36% per annum from May 18, 1997 until fully paid. The complaint likewise prayed for the
payment of ₱24,462.73 as attorney’s fees, liquidated damages, bonding fees and other expenses
incurred in the seizure of the vehicle. The complaint was later amended to substitute BPI as plaintiff
when it merged with and absorbed FEBTC.7
In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto Financing
Department of FEBTC eight (8) postdated checks in different amounts totaling ₱97,281.78. The
Acknowledgment Receipt,8 which they attached to the Answer, showed that FEBTC received the
following checks:
DATE BANK CHECK NO. AMOUNT

26 May 97 Landbank #610945 ₱13,824.15
6 June 97 Head Office #610946 12,381.63
#17A00-
30 May 97 FEBTC 12,021.00
11550P
#17A00-
15 June 97 Shaw Blvd. 12,021.00
11549P
#17A00-
30 June 97 " 12,021.00
11551P
18 June 97 Landbank #610947 11,671.00
18 July 97 Head Office #610948 11,671.00
18 August 97 #610949 11,671.00
The respondents further averred that they did not receive any notice from the drawee banks or from
FEBTC that these checks were dishonored. They explained that, considering this and the fact that
the checks were issued three years ago, they believed in good faith that their obligation had already
been fully paid. They alleged that the complaint is frivolous and plainly vexatious. They then prayed
that they be awarded moral and exemplary damages, attorney’s fees and costs of suit. 9
During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC since 1994 and
had assumed the position of Account Analyst since its merger with BPI. He admitted that they had,
in fact, received the eight checks from the respondents. However, two of these checks (Landbank
Check No. 0610947 and FEBTC Check No. 17A00-11551P) amounting to ₱23,692.00 were
dishonored. He recalled that the remaining two checks were not deposited anymore due to the
previous dishonor of the two checks. He said that after deducting these payments, the total
outstanding balance of the obligation was ₱48,084.00, which represented the last four monthly
installments.
On February 23, 2005, the MeTC dismissed the case and granted the respondents’ counterclaim for
damages, thus:
WHEREFORE, judgment is hereby rendered dismissing the complaint for lack of cause of action,
and on the counterclaim, plaintiff is ordered to indemnify the defendants as follows:
a) The sum of PhP30,000.00 as and by way of moral damages;
b) The sum of PhP30,000.00 as and by way of exemplary damages;
c) The sum of PhP20,000.00 as and by way of attorney’s fees; and
d) To pay the costs of the suit.
SO ORDERED.10
On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered the
respondents to pay the amount claimed by the petitioner. The dispositive portion of its
Decision11 dated August 11, 2005 reads:
WHEREFORE, premises considered, the Decision of the Metropolitan Trial Court, Branch 9 dated
February 23, 2005 is REVERSED and a new one entered directing the defendants-appellees to pay
the plaintiff-appellant, jointly and severally,
1. The sum of ₱48,084.00 plus interest and/or late payment charges thereon at the rate of
36% per annum from May 18, 1997 until fully paid;
2. The sum of ₱10,000.00 as attorney’s fees; and
3. The costs of suit.
SO ORDERED.12
The RTC denied the respondents’ motion for reconsideration. 13
The respondents elevated the case to the Court of Appeals (CA) through a petition for review. They
succeeded in obtaining a favorable judgment when the CA set aside the RTC’s Decision and
reinstated the MeTC’s Decision on July 12, 2006. 14 On February 13, 2007, the CA denied the
petitioner’s motion for reconsideration. 15
The issues submitted for resolution in this petition for review are as follows:
I. WHETHER OR NOT RESPONDENTS WERE ABLE TO PROVE FULL PAYMENT OF

THEIR OBLIGATION AS ONE OF THEIR AFFIRMATIVE DEFENSES.
II. WHETHER OR NOT TENDER OF CHECKS CONSTITUTES PAYMENT.
III. WHETHER OR NOT RESPONDENTS ARE ENTITLED TO MORAL AND EXEMPLARY

DAMAGES AND ATTORNEY’S FEES.16
The petitioner insists that the respondents did not sufficiently prove the alleged payment. It avers
that, under the law and existing jurisprudence, delivery of checks does not constitute payment. It
points out that this principle stands despite the fact that there was no notice of dishonor of the two
checks and the demand to pay was made three years after default.
On the other hand, the respondents postulate that they have established payment of the amount
being claimed by the petitioner and, unless the petitioner proves that the checks have been
dishonored, they should not be made liable to pay the obligation again. 17
The petition is partly meritorious.
In civil cases, the party having the burden of proof must establish his case by a preponderance of
evidence, or evidence which is more convincing to the court as worthy of belief than that which is
offered in opposition thereto. 18 Thus, the party, whether plaintiff or defendant, who asserts the
affirmative of an issue has the onus to prove his assertion in order to obtain a favorable judgment.
For the plaintiff, the burden to prove its positive assertions never parts. For the defendant, an
affirmative defense is one which is not a denial of an essential ingredient in the plaintiff’s cause of
action, but one which, if established, will be a good defense – i.e. an "avoidance" of the claim. 19
In Jimenez v. NLRC,20 cited by both the RTC and the CA, the Court elucidated on who, between the
plaintiff and defendant, has the burden to prove the affirmative defense of payment:
As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff
must allege non-payment, the general rule is that the burden rests on the defendant to prove
payment, rather than on the plaintiff to prove non-payment. The debtor has the burden of showing
with legal certainty that the obligation has been discharged by payment.
When the existence of a debt is fully established by the evidence contained in the record, the burden
of proving that it has been extinguished by payment devolves upon the debtor who offers such a
defense to the claim of the creditor. Where the debtor introduces some evidence of payment, the
burden of going forward with the evidence - as distinct from the general burden of proof - shifts to the
creditor, who is then under a duty of producing some evidence to show non-payment. 21
In applying these principles, the CA and the RTC, however, arrived at different conclusions. While
both agreed that the respondents had the burden of proof to establish payment, the two courts did
not agree on whether the respondents were able to present sufficient evidence of payment —
enough to shift the burden of evidence to the petitioner. The RTC found that the respondents failed
to discharge this burden because they did not introduce evidence of payment, considering that mere
delivery of checks does not constitute payment. 22 On the other hand, the CA concluded that the
respondents introduced sufficient evidence of payment, as opposed to the petitioner, which failed to
produce evidence that the checks were in fact dishonored. It noted that the petitioner could have
easily presented the dishonored checks or the advice of dishonor and required respondents to
replace the dishonored checks but none was presented. Further, the CA remarked that it is absurd
for a bank, such as petitioner, to demand payment of a failed amortization only after three years from
the due date.
The divergence in this conflict of opinions can be narrowed down to the issue of whether the
Acknowledgment Receipt was sufficient proof of payment. As correctly observed by the RTC, this is
only proof that respondents delivered eight checks in payment of the amount due. Apparently, this
will not suffice to establish actual payment.
Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. 23 Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself, operate
as payment. Mere delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by commercial document is
actually realized.24
To establish their defense, the respondents therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the respondents could have easily
produced the cancelled checks as evidence to prove the same. Instead, they merely averred that
they believed in good faith that the checks were encashed because they were not notified of the
dishonor of the checks and three years had already lapsed since they issued the checks. 1avvphi1
Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were
dishonored. The burden of evidence is shifted only if the party upon whom it is lodged was able to
adduce preponderant evidence to prove its claim. 25
To stress, the obligation to prove that the checks were not dishonored, but were in fact encashed,
fell upon the respondents who would benefit from such fact. That payment was effected through the
eight checks was the respondents’ affirmative allegation that they had to establish with legal
certainty. If the petitioner were seeking to enforce liability upon the check, the burden to prove that a
notice of dishonor was properly given would have devolved upon it. 26 The fact is that the petitioner’s
cause of action was based on the original obligation as evidenced by the Promissory Note and the
Chattel Mortgage, and not on the checks issued in payment thereof.
Further, it should be noted that the petitioner, as payee, did not have a legal obligation to inform the
respondents of the dishonor of the checks. A notice of dishonor is required only to preserve the right
of the payee to recover on the check. It preserves the liability of the drawer and the indorsers on the
check. Otherwise, if the payee fails to give notice to them, they are discharged from their liability
thereon, and the payee is precluded from enforcing payment on the check. The respondents,
therefore, cannot fault the petitioner for not notifying them of the non-payment of the checks because
whatever rights were transgressed by such omission belonged only to the petitioner.
In all, we find that the evidence at hand preponderates in favor of the petitioner. The petitioner’s
possession of the documents pertaining to the obligation strongly buttresses its claim that the
obligation has not been extinguished. The creditor’s possession of the evidence of debt is proof that
the debt has not been discharged by payment. 27 A promissory note in the hands of the creditor is a
proof of indebtedness rather than proof of payment. 28 In an action for replevin by a mortgagee, it is
prima facie evidence that the promissory note has not been paid. 29 Likewise, an uncanceled
mortgage in the possession of the mortgagee gives rise to the presumption that the mortgage debt is
unpaid.30
Finally, the respondents posit that the petitioner’s claim is barred by laches since it has been three
years since the checks were issued. We do not agree. Laches is a recourse in equity. Equity,
however, is applied only in the absence, never in contravention, of statutory law. Thus, laches
cannot, as a rule, abate a collection suit filed within the prescriptive period mandated by the New
Civil Code.31 The petitioner’s action was filed within the ten-year prescriptive period provided under
Article 1144 of the New Civil Code. Hence, there is no room for the application of laches.
Nonetheless, the Court cannot ignore what the respondents have consistently raised — that they
were not notified of the non-payment of the checks. Reasonable banking practice and prudence
dictates that, when a check given to a creditor bank in payment of an obligation is dishonored, the
bank should immediately return it to the debtor and demand its replacement or payment lest it
causes any prejudice to the drawer. In light of this and the fact that the obligation has been partially
paid, we deem it just and equitable to reduce the 3% per month penalty charge as stipulated in the
Promissory Note to 12% per annum.32 Although a court is not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit, as long as they contravene no law,
morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be
equitably reduced by the courts if it is iniquitous or unconscionable, or if the principal obligation has
been partly or irregularly complied with.33
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Court of Appeals
Decision dated July 12, 2006, and Resolution dated February 13, 2007, are REVERSED and SET
ASIDE. The Decision of the Regional Trial Court, dated August 11, 2005, is REINSTATED with the
MODIFICATION that respondents are ordered to deliver the possession of the subject vehicle, or in
the alternative, pay the petitioner ₱48,084.00 plus late penalty charges/interest thereon at the rate of
12% per annum from May 18, 1997 until fully paid.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA

Associate Justice
WE CONCUR:
LEONARDO A. QUISUMBING*
Associate Justice
CONSUELO YNARES-SANTIAGO MA. ALICIA AUSTRIA-MARTINEZ

RUBEN T. REYES
Associate Justice
ATTESTATION
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I
certify that the conclusions in the above decision had been reached in consultation before the case
REYNATO S. PUNO
Chief Justice
G.R. No. 183272 October 15, 2014
SUN LIFE OF CANADA (PHILIPPINES), INC., Petitioner,

vs.
SANDRA TAN KIT and The Estate of the Deceased NORBERTO TAN KIT, respondents.
DECISION
DEL CASTILLO, J.:
The Court of Appeals' (CA) imposition of 12o/o interest on the ₱13,080.93 premium refund is the
only matter in question in this case.
This Petition for Review on Certiorari assails the October 17, 2007 Decision of CA in CA-GR. CV
1 2
No. 86923, which, among others, imposed a 12% per annum rate of interest reckoned from the time
of death of the insured until fully paid, on the premium to be reimbursed by petitioner Sun Life of
Canada (Philippines), Inc. (petitioner) to respondents Sandra Tan Kit (respondent Tan Kit) and the
Estate of the Deceased Norberto Tan Kit (respondent estate). Likewise assailed in this Petition is the
CA's June 12, 2008 Resolution denying petitioner's Motion for Reconsideration of the said Decision.
3
Factual Antecedents
Respondent Tan Kit is the widow and designated beneficiary of Norberto Tan Kit (Norberto), whose
application for a life insurance policy, with face value of ₱300,000.00, was granted by petitioner on
4
October 28, 1999. On February 19, 2001, or within the two-year contestability period, Norberto died
5
of disseminated gastric carcinoma. Consequently, respondent Tan Kit filed a claim under the subject
6
policy.
In a Letter dated September 3, 2001, petitioner denied respondent Tan Kit’s claim on account of
7
Norberto’s failure to fully and faithfully disclose in his insurance application certain material and
relevant information about his health and smoking history. Specifically, Norberto answered "No" to
the question inquiring whether he had smoked cigarettes or cigars within the last 12 months prior to
filling out said application. However, the medical report of Dr. Anna Chua (Dr. Chua), one of the
8
several physicians that Norberto consulted for his illness, reveals that he was a smoker and had only
stopped smoking in August 1999. According to petitioner, its underwriters would not have approved
Norberto’s application for life insurance had they been given the correct information. Believing that
the policy is null and void, petitioner opined that its liability is limited to the refund of all the premiums
paid. Accordingly, it enclosed in the said letter a check for ₱13,080.93 representing the premium
refund.
In a letter dated September 13, 2001, respondent Tan Kit refused to accept the check and insisted
9
on the payment of the insurance proceeds.
On October 4, 2002, petitioner filed a Complaint for Rescission of Insurance Contract before the
10
Regional Trial Court (RTC) of Makati City.
Ruling of the Regional Trial Court
In its November 30, 2005 Decision, the RTC noted that petitioner’s physician, Dr. Charity Salvador
11
(Dr. Salvador), conducted medical examination on Norberto. Moreover, petitioner’s agent, Irma Joy
E. Javelosa (Javelosa), answered "NO" to the question "Are you aware of anything about the life to
be insured’s lifestyle, hazardous sports, habits, medical history, or any risk factor that would have an
adverse effect on insurability?" in her Agent’s Report. Javelosa also already knew Norberto two
years prior to the approval of the latter’s application for insurance. The RTC concluded that
petitioner, through the above-mentioned circumstances, had already cleared Norberto of any
misrepresentation that he may have committed. The RTC also opined that the affidavit of Dr. Chua,
presented as part of petitioner’s evidence and which confirmed the fact that the insured was a
smoker and only stopped smoking a year ago [1999], is hearsay since Dr. Chua did not testify in
court. Further, since Norberto had a subsisting insurance policy with petitioner during his application
for insurance subject of this case, it was incumbent upon petitioner to ascertain the health condition
of Norberto considering the additional burden that it was assuming. Lastly, petitioner did not comply
with the requirements for rescission of insurance contract as held in Philamcare Health Systems,
Inc. v. Court of Appeals. Thus, the dispositive portion of the RTC Decision:
12
WHEREFORE, in view of the foregoing considerations, this court hereby finds in favor of the
[respondents and] against the [petitioner], hence it hereby orders the [petitioner] to pay the
[respondent], Sandra Tan Kit, the sum of Philippine Pesos: THREE HUNDRED THOUSAND
(₱300,000.00), representing the face value of the insurance policy with interest at six percent (6%)
per annum from October 4, 2002 until fully paid.
Cost de oficio.
SO ORDERED. 13
Petitioner moved for reconsideration, but was denied in an Order15 dated February 15, 2006.
14
Hence, petitioner appealed to the CA.
Ruling of the Court of Appeals
On appeal, the CA reversed and set aside the RTC’s ruling in its Decision16 dated October 17,
2007.
From the records, the CA found that prior to his death, Norberto had consulted two physicians, Dr.
Chua on August 19, 2000, and Dr. John Ledesma (Dr. Ledesma) on December 28, 2000, to whom
he confided that he had stopped smoking only in 1999. At the time therefore that he applied for
insurance policy on October 28, 1999, there is no truth to his claim that he did not smoke cigarettes
within 12 months prior to the said application. The CA thus held that Norberto is guilty of
concealment which misled petitioner in forming its estimates of the risks of the insurance policy. This
gave petitioner the right to rescind the insurance contract which it properly exercised in this case.
In addition, the CA held that the content of Norberto’s medical records are deemed admitted by
respondents since they failed to deny the same despite having received from petitioner a Request
for Admission pursuant to Rule 26 of the Rules of Court. And since an admission is in the nature of
17
evidence the legal effects of which form part of the records, the CA discredited the RTC’s ruling that
the subject medical records and the affidavits executed by Norberto’s physicians attesting to the
truth of the same were hearsay.
The dispositive portion of the CA Decision reads:
WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the appealed
Decision REVERSED and SET ASIDE, and in lieu thereof, a judgment is hereby rendered
GRANTING the complaint a quo.
Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of ₱13,080.93 representing

the [premium] paid by the insured with interest at the rate of 12% per annum from the time of the
death of the insured until fully paid.
SO ORDERED. 18
The parties filed their separate motions for reconsideration. While respondents questioned the
19
factual and legal bases of the CA Decision, petitioner, on the other hand, assailed the imposition of
interest on the premium ordered refunded to respondents.
However, the appellate court denied the motions in its June 12, 2008 Resolution, viz:
20
WHEREFORE, the foregoing considered, the separate motions for reconsideration filed by the
[petitioner] and the [respondents] are hereby DENIED.
SO ORDERED. 21
Only petitioner appealed to this Court through the present Petition for Review on Certiorari.
Issue
The sole issue in this case is whether petitioner is liable to pay interest on the premium to be
refunded to respondents.
The Parties’ Arguments
Petitioner argues that no interest should have been imposed on the premium to be refunded
because the CA Decision does not provide any legal or factual basis therefor; that petitioner directly
and timely tendered to respondents an amount representing the premium refund but they rejected it
since they opted to pursue their claim for the proceeds of the insurance policy; that respondents
should bear the consequence of their unsound decision of rejecting the refund tendered to them;
and, that petitioner is not guilty of delay or of invalid or unjust rescission as to make it liable for
interest. Hence, following the ruling in Tio Khe Chio v. Court of Appeals, no interest can be
22
assessed against petitioner.
Respondents, on the other hand, contend that the reimbursement of premium is clearly a money
obligation or one that arises from forbearance of money, hence, the imposition of 12% interest per
annum is just, proper and supported by jurisprudence. While they admit that they refused the tender
of payment of the premium refund, they aver that they only did so because they did not want to
abandon their claim for the proceeds of the insurance policy. In any case, what petitioner should
have done under the circumstances was to consign the amount of payment in court during the
pendency of the case.
Our Ruling
Tio Khe Chio is not applicable in this case.
Petitioner avers that Tio Khe Chio, albeit pertaining to marine insurance, is instructive on the issue of
payment of interest. There, the Court pointed to Sections 243 and 244 of the Insurance Code which
1âwphi1
explicitly provide for payment of interest when there is unjustified refusal or withholding of payment
of the claim by the insurer, and to Article 2209 of the New Civil Code which likewise provides for
23 24
payment of interest when the debtor is in delay.
The Court finds, however, that Tio Khe Chio is not applicable here as it deals with payment of
interest on the insurance proceeds in which the claim therefor was either unreasonably denied or
withheld or the insurer incurred delay in the payment thereof. In this case, what is involved is an
order for petitioner to refund to respondents the insurance premium paid by Norberto as a
consequence of the rescission of the insurance contract on account of the latter’s concealment of
material information in his insurance application. Moreover, petitioner did not unreasonably deny or
withhold the insurance proceeds as it was satisfactorily established that Norberto was guilty of
concealment.
Nature of interest imposed by the CA
There are two kinds of interest – monetary and compensatory.
"Monetary interest refers to the compensation set by the parties for the use or forbearance of
money." No such interest shall be due unless it has been expressly stipulated in writing. "On the
25 26
other hand, compensatory interest refers to the penalty or indemnity for damages imposed by law or
by the courts." The interest mentioned in Articles 2209 and 2212 of the Civil Code applies to
27 28
compensatory interest. 29
Clearly and contrary to respondents’ assertion, the interest imposed by the CA is not monetary
interest because aside from the fact that there is no use or forbearance of money involved in this
case, the subject interest was not one which was agreed upon by the parties in writing. This being
the case and judging from the tenor of the CA, to wit:
Accordingly, [petitioner] is ordered to reimburse [respondents] the sum of ₱13,080.93 representing

the [premium] paid by the insured with interest at the rate of 12% per annum from time of death of
the insured until fully paid.
30
there can be no other conclusion than that the interest imposed by the appellate court is in the
nature of compensatory interest.
The CA incorrectly imposed compensatory interest on the premium refund reckoned from the time of
death of the insured until fully paid
As a form of damages, compensatory interest is due only if the obligor is proven to have failed to
comply with his obligation.31
In this case, it is undisputed that simultaneous to its giving of notice to respondents that it was
rescinding the policy due to concealment, petitioner tendered the refund of premium by attaching to
the said notice a check representing the amount of refund. However, respondents refused to accept
the same since they were seeking for the release of the proceeds of the policy. Because of this
discord, petitioner filed for judicial rescission of the contract. Petitioner, after receiving an adverse
judgment from the RTC, appealed to the CA. And as may be recalled, the appellate court found
Norberto guilty of concealment and thus upheld the rescission of the insurance contract and
consequently decreed the obligation of petitioner to return to respondents the premium paid by
Norberto. Moreover, we find that petitioner did not incur delay or unjustifiably deny the claim.
Based on the foregoing, we find that petitioner properly complied with its obligation under the law
and contract. Hence, it should not be made liable to pay compensatory interest.
Considering the prevailing circumstances of the case, we hereby direct petitioner to reimburse the
premium paid within 15 days from date of finality of this Decision. If petitioner fails to pay within the
said period, then the amount shall be deemed equivalent to a forbearance of credit. In such a case,
32
the rate of interest shall be 6% per annum. 33
WHEREFORE, the assailed October 17, 2007 Decision of the Court of Appeals in CA-G.R. CV No.
86923 is MODIFIED in that petitioner Sun Life of Canada (Philippines), Inc. is ordered to reimburse
to respondents Sandra Tan Kit and the Estate of the Deceased Norberto Tan Kit the sum of
~13,080.93 representing the premium paid by the insured within fifteen (15) days from date of finality
of this Decision. If the amount is not reimbursed within said period, the same shall earn interest of
6% per annum until fully paid.
SO ORDERED.

Associate Justice
WE CONCUR:
ANTONIO T. CARPIO
Associate Justice
Chairperson
DIOSDADO M. PERALTA* BIENVENIDO L. REYES**

MARVIC M.V.F. LEONEN

Associate Justice
ATTESTATION
ANTONIO T. CARPIO
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case

Chief Justice
G.R. No. 225562
WILLIAM C. LOUH, JR. and IRENE L. LOUH,, Petitioners

vs
BANK OF THE PHILIPPINE ISLANDS, Respondent
RESOLUTION
REYES, J.:
Before the Court is the instant petition for review on certiorari filed by William C. Louh, Jr. (William)
1
and Irene L. Louh (Irene) (collectively, the Spouses Louh) to assail the Decision and
2
Resolution, dated August 11, 2015 and May 23, 2016, respectively, of the Court of Appeals (CA) in
3
CA-G.R. CV No. 100754.
Antecedents
The herein respondent, Bank of the Philippine Islands (BPI), issued a credit card in William's name,
with Irene as the extension card holder. Pursuant to the terms and conditions of the cards' issuance,
3.5% finance charge and 6% late payment charge shall be imposed monthly upon unpaid credit
availments.4
The Spouses Louh made purchases from the use of the credit cards and paid regularly based on the
amounts indicated in the Statement of Accounts (SO As). However, they were remiss in their
obligations starting October 14, 2009. As of August 15, 2010, their account was unsettled prompting
5
BPI to send written demand letters dated August 7, 2010, January 25, 2011 and May 19, 2011. By
September 14, 2010, they owed BPI the total amount of ₱533,836.27. Despite repeated verbal and
written demands, the Spouses Louh failed to pay BPI. 6
On August 4, 2011, BPI filed before the Regional Trial Court (RTC) of Makati City a Complaint for 7
Collection of a Sum of Money.
On February 21, 2012, William filed before the RTC a Motion for Extension of Time to File an
Answer or Responsive Pleading. In its Order dated February 27, 2012, the RTC granted an
8 9
extension of 15 days or up to March 4, 2012, but the Spouses Louh still failed to comply within the
prescribed period.10
On June 11, 2012, BPI filed a motion to declare the Spouses Louh in default. Before the RTC can
11
rule on BPI's motion, the Spouses Louh filed an Answer on July 20, 2012 or more than three
12
months after the prescribed period, which ended on March 4, 2012.
On July 24, 2012, the RTC issued an Order declaring the Spouses Louh in default and setting
13
BPI's ex-parte presentation of evidence on August 7, 2012. The Branch Clerk of Court thereafter

submitted a Commissioner's Report dated September 7, 2012, and the RTC considered the case
14
submitted for decision on November 27, 2012. 15
On November 29, 2012, the RTC rendered a Decision, the fallo of which ordered the Spouses Louh
16
to solidarily pay BPI (1) P533,836.27 plus 12% finance and 12% late payment annual charges
starting from August 7, 2010 until full payment, and (2) 25% of the amount due as attorney's fees,
plus ₱l,000.00 per court hearing and ₱8,064.00 as filing or docket fees; and (3) costs of suit. 17
The RTC explained that BPI had adduced preponderant evidence proving that the Spouses Louh
had in fact availed of credit accommodations from the use of the cards. However, the RTC found the
3.5% finance and 6% late payment monthly charges imposed by BPI as iniquitous and
18
unconscionable. Hence, both charges were reduced to 1 % monthly. Anent the award of attorney's
fees equivalent to 25% of the amount due, the RTC found the same to be within the terms of the
parties' agreement. 19
The Spouses Louh filed a Motion for Reconsideration, which the RTC denied in the Order issued
20 21
on April 8, 2013. The appeal they filed was likewise denied by the CA in the herein assailed
22
decision and resolution.
In affirming in toto the RTC's judgment, the CA explained that the Spouses Louh were properly
declared in default for their failure to file an answer within the reglementary period. The Spouses
Louh further filed no motion to set aside the order of default. The CA also found that BPI had offered
ample evidence, to wit: (1) delivery receipts pertaining to the credit cards and the terms and
conditions governing the use thereof signed by the Spouses Louh; (2) computer-generated authentic
copies of the SOAs; and (3) demand letters sent by BPI, which the Spouses Louh received but
ignored. As to the award of attorney's fees, the CA ruled that the terms governing the use of the
cards explicitly stated that should the account be referred to a collection agency, then 25% of the
amount due shall be charged as attorney's fees. 23
In the herein assailed Resolution dated May 23, 2016, the CA denied the Spouses Louh's Motion
24
for Reconsideration. 25
Issue
Aggrieved, the Spouses Louh are before the Court raising the sole issue of whether or not the CA
erred in sustaining BPI's complaint. 26
The Spouses Louh pray for the dismissal of BPI's suit. They likewise seek a relaxation of procedural
rules claiming that their failure to file a timely Answer was due to William's medical condition, which
required him to undergo a heart by-pass surgery. They further alleged that BPI failed to establish its
27
case by preponderance of evidence. Purportedly, BPI did not amply prove that the Spouses Louh
had in fact received and accepted the SO As, which were, however, unilaterally prepared by the
bank. They allege the same circumstance as to the receipt of the demand letters. The computations
28
likewise did not show the specific amounts pertaining to the principal, interests and penalties. They
point out that since their credit limit was only ₱326,000.00, it is evident that the amount of
₱533,836.27 demanded by BPI included unconscionable charges. 29
BPI failed to file a comment to the instant petition within the prescribed period, which expired on
September 23, 2016.
Ruling of the Court
The Court affirms the herein assailed decision and resolution, but modifies the principal amount and
attorney's fees awarded by the RTC and the CA.
The Spouses Louh reiterate that the RTC wrongly declared them in default since by reason of
William's sickness, they were entitled to a relaxation of the rules. Moreover, BPI had failed to offer
preponderant evidence relative to the actual amount of the Spouses Louh's indebtedness.
The foregoing claims are untenable.
In Magsino v. De Ocampo, the Court instructs that:

30
Procedural rules are tools designed to facilitate the adjudication of cases. Courts and litigants alike
are thus enjoined to abide strictly by the rules. And while the Court, in some instances, allows a
relaxation in the application of the rules, this, we stress, was never intended to forge a bastion for
erring litigants to violate the rules with impunity. The liberality in the interpretation and application of
the rules applies only in proper cases and under justifiable causes and circumstances. While it is
true that litigation is not a game of technicalities, it is equally true that every case must be
prosecuted in accordance with the prescribed procedure to insure an orderly and speedy
administration of justice.
Like all rules, procedural rules should be followed except only when, for the most persuasive of
reasons, they may be relaxed to relieve a litigant of an injustice not commensurate with the degree
of his thoughtlessness in not complying with the prescribed procedure.
The rules were instituted to be faithfully complied with, and allowing them to be ignored or lightly
dismissed to suit the convenience of a party like the petitioner was impermissible. Such rules, often
derided as merely technical, are to be relaxed only in the furtherance of justice and to benefit the
deserving. Their liberal construction in exceptional situations should then rest on a showing of
justifiable reasons and of at least a reasonable attempt at compliance with them.xx x. (Citations
31
omitted and emphasis and italics ours)
In the case at bar, the CA aptly pointed out that the Spouses Louh filed their Answer with the RTC
only on July 20, 2012 or more than three months after the prescribed period, which expired on
March 4, 2012. When they were thereafter declared in default, they filed no motion to set aside the
RTC's order, a remedy which is allowed under Rule 9, Section 3 of the Rules of Civil Procedure.
32
The Spouses Louh failed to show that they exerted due diligence in timely pursuing their cause so
as to entitle them to a liberal construction of the rules, which can only be made in exceptional cases.
The Spouses Louh claim as well that BPI's evidence are insufficient to prove the amounts of the
former's obligation; hence, the complaint should be dismissed. The Court, in Macalinao v.
BPl, emphatically ruled that:
33
Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner
Macalinao's failure to file an answer and concomitantly, to allow the latter to submit additional
evidence by dismissing or remanding the case for further reception of evidence. Significantly,
petitioner Macalinao herself admitted the existence of her obligation to respondent BPI, albeit with
reservation as to the principal amount. Thus, a dismissal of the case would cause great injustice to
respondent BPI. Similarly, a remand of the case for further reception of evidence would unduly
prolong the proceedings of the instant case and render inutile the proceedings conducted before the
lower courts. 34
BPI had offered as evidence the (1) testimony of Account Specialist Carlito M. Igos, who executed a
Judicial Affidavit in connection with the case, and (2) documentary exhibits, which included the (a)
delivery receipts pertaining to the credit cards and the terms and conditions governing the use
thereof signed by the Spouses Louh, (b) computer-generated authentic copies of the SOAs, and (c)
35
demand letters sent by BPI, which the Spouses Louh received. The Clerk of Court subsequently
36
prepared a Commissioner's Report, from which the RTC based its judgment.
The Spouses Louh slept on their rights to refute BPI's evidence, including the receipt of the SO As
and demand letters. BPI cannot be made to pay for the Spouses Louh 's negligence, omission or
belated actions.
Be that as it may, the Court finds excessive the principal amount and attorneys fees awarded by the
RTC and CA. A modification of the reckoning date relative to the computation of the charges is in
order too.
In Macalinao, where BPI charged the credit cardholder of 3.25% interest and 6% penalty per
37
month, and 25% of the total amount due as attorney's fees, the Court unequivocally declared that:
38
[T]his is not the first time that this Court has considered the interest rate of 36% per annum as
excessive and unconscionable. We held in Chua vs. Timan:
The stipulated interest rates of 7% and 5% per month imposed on respondents' loans must be
equitably reduced to 1% per month or 12% per annum. We need not unsettle· the principle we had
affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to
morals, if not against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of
maturity, nothing in the said circular could possibly be read as granting carte blanche authority to
lenders to raise interest rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets. x x x
Since the stipulation on the interest rate is void, it is as if there was no express contract thereon.
Hence, courts may reduce the interest rate as reason and equity demand.
The same is true with respect to the penalty charge. x x x Pertinently, Article 1229 of the Civil Code
states:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable. x x xx
x x x [T]he stipulated penalty charge of 3% per month or 36% per annum, in addition to regular
interests, is indeed iniquitous and unconscionable. (Citations and emphasis in the original omitted,
39
and emphasis ours)
Thus, in Macalinao, the Court reduced both the interest and penalty charges to 12% each, and the
attorney's fees to ₱l0,000.00.
In MCMP Construction Corp. v. Monark Equipment Corp., the creditor cumulatively charged the
40
debtor 60% annually as interest, penalty and collection fees, and 25% of the total amount due as
attorney's fees. The Court similarly found the rates as exorbitant and unconscionable; hence,
directed the reduction of the annual interest to 12%, penalty and collection charges to 6%, and
attorney's fees to 5%. The Court explained that attorney's fees are in the nature of liquidated
damages, which under Article 2227 of the New Civil Code, "shall be equitably reduced if they are
iniquitos or unconscionable." 41
In the case at bench, BPI imposed a cumulative annual interest of 114%, plus 25% of the amount
due as attorney's fees. Inevitably, the RTC and the CA aptly reduced the charges imposed by BPI
upon the Spouses Louh. Note that incorporated in the amount of ₱533,836.27 demanded by BPI as
the Spouses Louh's obligation as of August 7, 2010 were the higher rates of finance and late
payment charges, which the comis a quo had properly directed to be reduced.
In the SOA dated October 14, 2009, the principal amount indicated was ₱l13,756.83. In accordance
42
with Macalinao, the finance and late payment charges to be imposed on the principal amount of
₱l13,756.83 are reduced to 12% each per annum, reckoned from October 14, 2009, the date when
the Spouses Louh became initially remiss in the payment of their obligation to BPI, until full payment.
Anent BPI's litigation expenses, the Court retains the RTC and CA' s disquisition awarding
₱5,064.00 as filing or docket fees, and costs of suit.
However, the Court reduces the attorney's fees to five percent (5%) of the total amount due from the
Spouses Louh pursuant to MCMP and Article 2227 of the New Civil Code.
43
WHEREFORE, the Decision and Resolution, dated August 11, 2015 and May 23, 2016, respectively,
of the Court of Appeals in CA-G.R. CV No. 100754, finding the Spouses William and Irene Louh
liable to the Bank of the Philippine Islands for the payment of their past credit availments, plus
finance and late payment charges of 12% each per annum, ₱5,064.00 as filing or docket fees, and
costs of suit, are AFFIRMED. The principal amount due, reckoning period of the computation of
finance and late payment charges, and attorney's fees are, however, MODIFIED as follows:
(1) the principal amount due is Pl 13,756.83 as indicated in the Statement of Account dated October
14, 2009;
(2) finance and late payment charges of twelve percent (12%) each per annum shall be computed
from October 14, 2009 until full payment; and
(3) five percent (5%) of the total amount due is to be paid as attorney's fees.
SO ORDERED.
BIENVENIDO L. REYES
Associate Justice
WE CONCUR:
PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson
DIOSDADO M. PERALTA *
LUCAS P. BERSAMIN
ALFREDO BENJAMIN S. CAGUIOA **
Associate Justice
ATTESTATION
I attest that the conclusions in the above Resolution had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.
PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson
CERTIFICATION
Pursuant to the Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation,
I certify that the conclusions in the above Resolution had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

Chief Justice

Tomas P. Matic, Jr. For Petitioners. Jose E. Fernandez For Private Respondent. Office of The Solicitor General For Respondent The People of The Philippines

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Tomas P. Matic, Jr. For Petitioners. Jose E. Fernandez For Private Respondent. Office of The Solicitor General For Respondent The People of The Philippines

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G.R. No.

L-50550-52 October 31, 1979

Tomas P. Matic, Jr. for petitioners.

Jose E. Fernandez for private respondent.

Estafa through misappropriation is committed according to Article 315, paragraph 1, subparagraph

xxx xxx xxx

1. With unfaithfulness or abuse of confidence namely:

xxx xxx xxx

b) By misappropriating or converting, to the prejudice of another, money, goods, or

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

Barredo, Antonio and Santos, JJ., concur.

Concepcion Jr. ,J., is on leave.

SPOUSES SALVADOR ABELLA AND ALMA ABELLA, Petitioners,

dispositive portion of its Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered:

assailed Court of Appeals Decision reads:

For resolution are the following issues:

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

March 22, 1999

Annie C. Abella (sgd.) Romeo M. Abella (sgd.) (Emphasis supplied)

been reduced to 6% per annum:

Non-Bank Financial Institutions are hereby amended accordingly.

This Circular shall take effect on 1 July 2013.

supplied, citations omitted)

spelled out the requisites for the admission of parol evidence:

Within this third year, respondents paid a total of P320,000.00, as follows:

In Moreno-Lentfer v. Wolff, this court explained the application of solutio indebiti:

Nacar provides that "[w]hen an obligation, not constituting a loan or forbearance of money, is

Further, Article 2159 of the Civil Code provides:

MARVIC M.V.F. LEONEN

MARIANO C. DEL CASTILLO***

JOSE CATRAL MENDOZA

MARIANO C. DEL CASTILLO

MARIA LOURDES P.A. SERENO

484 Phil. 87 (2004) [Per J. Ynares-Santiago, First Division].

and subsequent acts shall be principally considered.

Rollo, pp. 19–20.

CIVIL CODE, art. 1370.

589 Phil. 362 (2008) [Per J. Quisumbing, Second Division].

Id. at 95, citing CIVIL CODE, art. 2195, 1956, and 1169.

[Per J. Quisumbing, Second Division]; University of Mindanao, Inc. v. Court of Appeals, 659

CIVIL CODE, art. 1371.

(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;

(c) The validity of the written agreement; or

The term "agreement" includes wills.

G.R. No. 171601, April 8, 2015,

620 Phil. 239, (2009) [Per J. Del Castillo, Second Division].

Id. at 248, citing CIVIL CODE, art. 1306.

G.R. No. 184458, January 14, 2015,

<http://sc.judiciary.gov.ph/jurisprudence/2015/january2015/184458.pdf> [Per J. Perez, First

delivered through mistake, the obligation to return it arises.

484 Phil. 552 (2004) [Per J. Quisumbing, First Division].

Id. at 559–560, citing Power Commercial and Industrial Corp. v. Court of Appeals,

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

Mauricio Carlos for appellants.

Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,

Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.

For construction of factory building P250,000.00

For payment of the balance of purchase