Civil Law Review

Compiled Case Digests on

Credit Transactions
Gomez, Jan Derrick

Philippine National Bank v. Sps. Tajonera (2014)

Q: Respondent Rosario was Eduarosa Realty Development’s VP, and likewise performed the
duties of president and marketing director by dealing with banks, suppliers, and contractors.
ERDI obtained loans from PNB and entered into several credit agreements to finance the
completion of the construction of their 20-storey Condominium Project. The principal loan of
P60M was secured by a Real Estate Mortgage consisting of three parcels of land, and in addition,
the loan was secured by the assignment of proceeds of contract receivables arising from the sale
of condominium units to be constructed on the mortgaged parcels of land. The Credit Agreement
was amended two times, first granting an additional P40M under the condition that a property in
Greenhills was to be mortgaged, and another granting an additional P55M. As of 1994, ERDI’s
outstanding balance amounted to P211.9M, and it eventually failed to settle its obligation. PNB
then filed an application to foreclose the Real Estate Mortgage over the Greenhills property – to
which it was the highest bidder. ERDI failed to redeem the property and so a new title was issued
in the name of PNB. The spouses challenge the foreclosure of the mortgage and eventual transfer
of ownership to PNB. The RTC and CA nullified the REM executed as there was a breach on the
part of PNB when PNB did not release the full amount in the second amendment of the loan
contract. PNB contends that the lower courts were in error for finding that the REM was not
executed for sufficient consideration when it failed to release the full amount. Did the lower
courts rule correctly?

A: Yes, the lower courts ruled correctly when it said that the REM was executed for insufficient
consideration when PNB did not release the full amount under the second amendment.

Under the Civil Code, a loan requires the delivery of money or any other consumable object by
one party to another who acquires ownership thereof, on the condition that the same amount or
quality shall be paid. A loan is a reciprocal obligation, as it arises from the same cause where one
party is the creditor, and the other the debtor.

In this case, the agreement between PNB and the respondents was one of a loan, thus a reciprocal
obligation. ERDI’s obligation was to execute the REM, while that of PNB was to release the full
amount. As PNB did not fulfill its obligation to release the amount under the contract, it
breached its part of the reciprocal obligation.

Thus, the lower courts were correct in their rulings.

Nuque, Vanya Klarika E.

SPOUSES RAMON SY and ANITA NG, et al. vs. WESTMONT BANK (now UNITED
OVERSEAS BANK PHILIPPINES), et al.
G.R. No. 201074. October 19, 2016

Westmont alleged that petitioners (doing business under the name Moondrops) obtained two
loans as evidenced by two promissory notes. Earlier, a Continuing Suretyship Agreement was
executed between Westmont and petitioners for the purpose of securing any future indebtedness
of Moondrops. Westmont averred that petitioners defaulted in the payment of their loan
obligations. It sent a demand letter, but it was unheeded.

Petitioners countered that Ramon Sy and Richard Sy applied for a loan with Westmont Bank,
through its bank manager William Chu Lao. According to them, Lao required them to sign blank
forms of promissory notes and disclosure statements and promised that he would notify them
immediately regarding the status of their loan application. Later, Lao informed them that their
application was disapproved. He, however, offered to help them secure a loan through Amado
Chua (Chua). Ramon Sy and Richard Sy accepted Lao’s offer and received the amount.
Petitioners claimed that they paid Chua the total amount of their loans. Petitioners insisted that
their loan applications from Westmont were denied and it was Chua who lent them the money.
Thus, they contended that Westmont could not demand the payment of the said loans.

During trial, Westmont presented its employee Consolacion Esplana, who testified that the
proceeds of the loan were credited to the account of Moondrops per its loan manifold. Westmont,
however, never offered such loan manifold in evidence.

On the other hand, petitioners presented a Cashier’s Check, in the amount of P2,429,500.00,
purchased from Chua, to prove that the said loan was obtained from Chua, and not from
Westmont. The cashier’s check for the subsequent loan of P4,000,000.00 could not have been
obtained from Westmont. RTC ruled in favor of Westmont. CA affirmed the RTC.

Q: Did petitioners obtain a loan from Westmont?

A: No, petitioners did not obtain a loan from Westmont.

A simple loan or mutuum is a contract where one of the parties delivers to another, either money
or other consumable thing, upon the condition that the same amount of the same kind and quality
shall be paid. A simple loan is a real contract and it shall not be perfected until the delivery of the
object of the contract. Necessarily, the delivery of the proceeds of the loan by the lender to the
borrower is indispensable to perfect the contract of loan. Once the proceeds have been delivered,
the unilateral characteristic of the contract arises and the borrower is bound to pay the lender an
amount equal to that received.

In this case, Westmont failed to prove that the petitioners received the amount in question. The
promissory notes they presented did not state that the loan proceeds had been delivered to
petitioners, and that they had acknowledged its receipt. On the other hand, petitioners were able
to present the cashier’s check as evidence of the loan they obtained from Chua and not the bank.
Hence, the petitioners obtained a loan from Chua and not Westmont.
Ramos, Patrick

Vicente L. Luntao v. BAP Credit Guaranty Corporation

Q: Vicente was the owner of a real property covered by TCT No. T-111128 in Davao City.7
He executed a Special Power of Attorney in favor of his sister Nanette.8 As his attorney-in-fact,
she was authorized:
(1) to mortgage his real property covered by Transfer Certificate of Title No. T-111128
(2) to apply for any commercial loan with any bank in the Philippines
(3) to receive the proceeds of the loan to be used in the improvements of her business; and
(4) to sign, execute and deliver any documents to effect the purposes aforestated
Subsequently Nanette applied for a loan with BAP and used Vicente's property as collateral.
When the loan became due, the loan was left unpaid thus an Extra-Judicial Foreclosure occurred.
Petitioners argue that the principal contract of loan was null and void because they did
not receive the proceeds of the loan. And as a result, the mortgage was also null and void for
being an accessory contract. Are the petitioners correct?

A: No, the petitioners are not correct on the ground that the contract of loan is valid as there
is a valid object.
Under the New Civil Code, the elements of a contract are consent, object, and cause. All
the elements must be present in order that there is a valid and subsisting contract.
Here, both the trial court and the Court of Appeals found that petitioners received the
proceeds of the loan through the account under the name of Holy Infant Medical Clinic/Nanette
Luntao/Eleanor Luntao. This finding was supported by evidence presented by the parties.
Hence, the contract of loan is valid and subsisting.

Q: Is the mortgage contract valid?

A: Yes, the mortgage contract, being an accessory contract, is valid

The Supreme Court has held that as an accessory contract, a mortgage contract's validity
depends on the loan contract's validity.
Here, the contract of loan is valid because it has all of the essential elements of a contract.
Thus, the mortgage contract, being dependent on a valid contract, is likewise valid.
Realin, Reuel Angelo

Georgia Osmeña-Jalandoni vs Carmen Encomienda

G.R. No. 205578; 01 March 2017

The respondent extended financial assistance to the petitioner amounting to more than Php 3.2
million. This was presumably used by the petitioner to pay her daily expenses and the expenses
relating to the pending habeas corpus case to recover her children from her husband. The amount
remained unpaid by the petitioner which prompted the respondent to file a complaint for sum of
money against the petitioner.

In her answer, the petitioner contended that the amounts given the respondent were gratuitous
and were provided without her prior knowledge. She claimed that there existed no loan contract
between her and the respondent, hence she cannot be held liable for the amount.

Q: Is the contention of the petitioner correct?

A: No, it is not.

Under the principle of unjust enrichment, payment made to a person when there is no duty to pay
and such person having no right to receive it makes such person liable to return the amount
received. Essentially, unjust enrichment when a person unfairly retains a benefit to the loss of
another, or when a person retains money or property of another against the fundamental
principles of justice, equity, and good conscience. Article 22 of the Civil Code provides that
unjust enrichment exists when (1) a person is unjustly benefited and (2) such benefit is derived at
the expense of or with damage to another.

Here, the petitioner had no right to the amount forwarded to her by the respondent. The petitioner
cannot keep the amount of Php 3.2 million as it would cause unjust enrichment on the part of the
petitioner and would damage and prejudice the respondent.
Regalado, Franco Antonio

PNB v. Cua
GR No. 199161, 18 April 2018.

James Cua, along with his brother Antonio, maintained a USD Savings Time Deposit account
with PNB Sucat, which James used as security for several pre-signed loan application documents
with PNB for the purpose of having standby loans anytime such were needed. Relying on the
documents, James took out a loan to revive his business. PNB rejected the application, stating
that it had applied James' time deposit account to loans he had with the bank. James demanded
the release of the time deposit account, claiming that he never made use of any amount from the
pre-signed documents, and later filed suit for said amount.
In its defense, PNB claimed that the pre-signed documents were indeed used for four separate
loans, including one dated 14 February 2001 and renewed 26 February 2002. The RTC ruled in
favor of James, holding that the burden of proof shifted to PNB when the latter claimed the
release of the loan proceeds, which burden PNB failed to discharge. CA affirmed the RTC.

Was PNB able to sufficiently establish James’ receipt of the loan proceeds?

Yes, it was. A promissory note is the best evidence of the existence of a loan. In this case, while
James claimed that his signatures on the promissory notes were pre-signed for pre-arranged loans
which he never availed of, nothing in the 26 Feb 2002 PN suggested that it was executed merely
for future loans. In fact, the PN provides that it was executed "For Value Received", which the
Supreme Court held as amounting to an acknowledgment of receipt of the loan proceeds.

James' allegations that the documents were merely pre-signed for future loans, in order to
overthrow the presumption under the parol evidence rule that a written agreement contains all the
terms agreed upon, needed to be supported by clear and convincing evidence. However, such
allegations were uncorroborated, thus insufficient to overthrow the presumption.
SERRANO, REM JOSHUA T.

Metropolitan Bank and Trust Co. v. Rosales

GR No. 183204, 13 January 2014

In 2000, respondents Ana Grace Rosales, and her mother, Yo Yuk To, opened a Joint
Peso Account with petitioner-bank. 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-bank to open a Joint Dollar Account, and acted as her
interpreter. Thereafter, in 2003, petitioner-bank issued a “Hold Out” order against respondent’s
accounts. Subsequently, a criminal case for estafa was filed against respondent Rosales. It was
alleged that respondent Rosales and an unidentified woman are the ones responsible for the
unauthorized and fraudulent withdrawal of US$75,000.00 from Liu Chiu Fang’s dollar account
with petitioner-bank, which respondent denied. However, the Office of the Prosecutor dismissed
the criminal case.

Thereafter, respondents filed before the RTC, a complaint for breach of obligations with
damages against petitioner-bank. 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, and no explanation was given as to why it issued the “Hold Out” order.
Meanwhile, while the case for breach of contract was being tried, the Office of the Prosecutor
reversed the dismissal of the criminal complaint for estafa against respondent Rosales. RTC
found petitioner liable for damages for breach of contract. It ruled that it is the duty of petitioner
to release the deposit to respondents as the act of withdrawal of a bank deposit is an act of
demand by the creditor, which the CA affirmed.

Q: Whether the “Hold Out” clause stipulated in the agreement between the parties applicable
in the present case.

A: NO, the “Hold Out” clause stipulated in the Application and Agreement for Deposit
Account does not apply.

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-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. Bank deposits,
which are in the nature of a simple loan or mutuum, must be paid upon demand by the depositor.
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.
SY, CHARELLE MEI V.

People of the Philippines v. Go

GR No. 191015, August 6, 2014

Resolution No, 1427 was issued to order the closure of the Orient Commercial Banking
Corp. (OCBC) and placed the bank under receivership of the PDIC. The latter began collecting
OCBC’s past due loans receivable by sending demand letters to its borrowers, but found that the
loans granted to the borrowers Timmy’s Inc. and Asia Textile Mills Inc. were fraudulent and that
their signatures were forged. PDIC found that these “loans” under the names of Timmy’s and
Asia Textile Mills were released in the form of manager’s checks that were deposited to the
OCBC savings account of respondent Go, the OCBC President, and were automatically
transferred to his current account to fund personal checks issued by him earlier.

Thus, PDIC filed a complaint for 2 counts of Estafa thru Falsification of Commercial
Documents. Respondent argues that there is no evidence to show that OCBC released loan
proceeds to the borrowers, and that these loans were deposited in the account of Go. Since no
loans were granted to the two borrowers, then respondent contends there is nothing for Go to
misappropriate, which is a necessary element of estafa. Hence, he is not guilty of estafa.

Q: Whether Go is liable for estafa.

A: Yes.

A bank takes its depositors’ money as a loan, under an obligation to return the same; thus,
the term “demand deposit.” The contract between the bank and its depositor is governed by the
provisions of the Civil Code on simple loan.

Article 1980 of the Civil Code expressly provides that “x x x savings x x x deposits of
money in banks and similar institutions shall be governed by the provisions concerning simple
loan.” There is a debtor-creditor relationship between the bank and its depositor. The bank is the
debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees
to pay the depositor on demand. x x x”

The President of a bank is a fiduciary with respect to the bank’s funds, and he holds the
same in trust or for administration for the bank’s benefit. Hence, it may be inferred that when the
bank president makes it appear through falsification that an individual or entity applied for a loan
when in fact such individual did not, and the bank president obtains the loan proceeds and
converts the same, estafa is committed. (Soriano v. People)
Ayson, Paul
Spouses Silos vs. PNB
G.R. No. 181045, July 02, 2014

Q:
Spouses Silos have are in the business of operating a department store and buying and selling
ready-to-wear apparel. They secured a revolving credit line with Philippine National Bank
(PNB) through a real estate mortgage as a security. After two years, their credit line increased.
They then signed a Credit Agreement, which was also amended 2 years later, and 26 Promissory
Notes (PN) for their Credit Agreements with PNB. The said loan was initially subjected to a
19.5% interest rate per annum.

In the Credit Agreements, Spouses Silos bound themselves to the power of PNB to modify the
interest rate depending on whatever policy that PNB may adopt in the future without need of
notice upon them. Thus, the said interest rates played from 16% to as high as 32% per annum.

Spouses Silos acceded to the policy by pre-signing a total of 26 PNs leaving the individual
applicable interest rates at hand blank since it would be subject to modification by PNB. They
regularly renewed and made good on their PNs, religiously paid the interests without objection
or fail.

However, during the 1997 Asian Financial Crisis, Spouses Silos faltered when the interest rates
soared. The 26th PN became past due and despite repeated demands by PNB, they failed to make
good on the note. Thus, PNB foreclosed and auctioned the involved security for the mortgage.
Spouses Silos instituted an action to annul the foreclosure sale on the ground that the succeeding
interest rates used in their loan agreements was left to the sole will of PNB, the same fixed by the
latter without their prior consent and thus, void.

Can PNB, on its own, modify the interest rate in a loan agreement without violating the
mutuality of contracts? Decide

A:
No, PNB cannot modify the interest rate in a loan agreement on its own. The unilateral action of
the PNB in increasing the interest rate on the private respondent’s loan violated the mutuality of
contracts ordained in Article 1308 of the New Civil Code
Under Article 1308 of the New Civil Code, the contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
Here the act of PNB in unilaterally increasing the interest rates, without the consent and
agreement of the Spouses Silos, violated the mutuality of contracts. In loan agreements, the rate
of interest is a principal condition, if not the most important component. Therefore, any
modification thereof must be mutually agreed upon; otherwise, it has no binding effect.
Hence, PNB cannot modify the interest rate in a loan agreement on its own.
Jillian Ira L. Bagaoisan

Gilat Satellite Networks, Ltd. v United Coconut Planters Bank General Insurance Co., Inc.
GR No. 189563, 7 April 2014

One Virtual placed with Gilat a purchase order for telecommunications equipment from Gilat. To
ensure prompt payment of the balance of the purchase price, it obtained UCPB General
Insurance Co., Inc’s (UCPB) surety bond.

One Virtual failed to pay Gilat in accordance with the payment schedule. Gilat, after having
failed to recover from One Virtual and UCPB despite demand, filed a complaint against UCPB.
The RTC ordered UCPB to pay the principal obligation but not the interest thereon. According to
the RTC, the surety will only be held liable for interest if there is no justifiable cause for the
refusal to pay. Since, One Virtual ordered UCPB not to pay, the interest has not accrued as
against UCPB. On appeal, the Court of Appeals ordered the parties to arbitrate pursuant to the
principal contract – the Purchase Agreement as between Gilat and One Virtual.

Q: May the surety intervene in the principal contract?

No. The acceptance of a surety agreement does not change in any material way the creditor’s
relationship with the principal debtor nor does it make the surety an active party to the principal
creditordebtor relationship.

In other words, the acceptance does not give the surety the right to intervene in the principal
contract. The surety’s role arises only upon the debtor’s default, at which time, it can be directly
held liable by the creditor for payment as a solidary obligor.” Hence, the surety remains a
stranger to the Purchase Agreement. Thus, respondent cannot invoke in its favor the arbitration
clause in the Purchase Agreement, because it is not a party to that contract. An arbitration
agreement being contractual in nature, it is binding only on the parties thereto, as well as their
assigns and heirs.

Q: May the surety be liable to pay interest?

A: Yes. Article 2209 of the Civil Code is clear: If an obligation consists in the payment of a sum
of money, and the debtor incurs a delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation,
the legal interest.”

Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to comply.

In order for the debtor, in this case, the surety, to be in default, it is necessary that the following
requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance judicially or
extrajudicially.

The settled rule is that where there has been an extrajudicial demand before an action for
performance was filed, interest on the amount due begins to run, not from the date of the filing of
the complaint, but from the date of that extrajudicial demand. Here, there has already been
demand. Thus, the interest has already accrued.
CORRO, Erika

Limso v. Philippine National Bank (PNB)

G.R. Nos. 158622, 169441, 172958, 173194, 196958, 197120, 205463
January 27, 2016
(Simple Loan)

Spouses Robert and Nancy Limso (Spouses Limso) and Davao Sunrise Investment and
Development Corp. (Davao Sunrise) took out a loan secured by real estate mortgages from PNB.
The loan was in the total amount of P700M, divided into 2 kinds of loan accommodations: a
revolving credit line of P300M and a 7-year long-term loan of P400M.

To secure the loan, real estate mortgages were constituted on 4 parcels of land registered with the
Register of Deeds of Davao City. Spouses Limso sold one of them to Davao Sunrise.

Spouses Limso and Davao Sunrise had difficulty in paying their loan. In 1999, they requested
that their loan be restructured. After negotiations, Spouses Limso, Davao Sunrise, and PNB
executed a Conversion, Restructuring and Extension Agreement.

The principal obligation in the restructured agreement totaled P1.067B. This included P217.15M
unpaid interest. The restructured loan was divided into two (2) parts. Loan I was for the principal
amount of ₱583.18 million, while Loan II was for the principal amount of ₱483.78 million. The
restructured loan was secured by the same real estate mortgage over four (4) parcels of land in
the original loan agreement. All the properties were registered in the name of Davao Sunrise.

Spouses Limso and Davao Sunrise executed promissory notes, both dated January 5, 1999, in
Philippine National Bank’s favor. The promissory notes bore the amounts of ₱583,183,333.34
and ₱483,811,798.93.

Spouses Limso and Davao Sunrise encountered financial difficulties. Despite the restructuring of
their loan, they were still unable to pay. Philippine National Bank sent demand letters. Still,
Spouses Limso and Davao Sunrise failed to pay.

On August 21, 2000, Philippine National Bank filed a Petition for Extrajudicial Foreclosure of
Real Estate Mortgage before the Sheriff’s Office in Davao City. PNB was the highest bidder.

After the foreclosure sale, but before the Sheriff could issue the Provisional Certificate of
Sale, Spouses Limso and Davao Sunrise filed a Complaint for Reformation or Annulment of
contract against Philippine National Bank, Atty. Marilou D. Aldevera, in her capacity as Ex-
Officio Provincial Sheriff of Davao City, and the Register of Deeds of Davao City.
Immediately after the Complaint was filed, the Executive Judge of the Regional Trial Court of
Davao City issued a 72-hour restraining order preventing Philippine National Bank from taking
possession and selling the foreclosed properties

Q: Whether or not the provision under the loan contract regarding the unilateral imposition and
increases of interest rates violates the principle of mutuality of contract.
A: YES. The provision violates the principle of mutuality of contract.

There is no mutuality of contract when the interest rate in a loan agreement is set at the sole
discretion of one party. Nor is there any mutuality when there is no reasonable means by which
the other party can determine the applicable interest rate. These types of interest rates stipulated
in the loan agreement are null and void. However, the nullity of the stipulated interest rate does
not automatically nullify the provision requiring payment of interest. Certainly, it does not
nullify the obligation to pay the principal loan obligation.

It was further held that escalation clauses in contracts are void when they allow the creditor to
unilaterally adjust the interest rates without the consent of the debtor. The principle of mutuality
of contracts dictates that a contract must be rendered void when the execution of its terms is
skewed in favor of one party. The importance of the principle of mutuality of contracts was
discussed in Juico v. China Banking Corporation. “The binding effect of any agreement between
parties to a contract is premised on two settled principles: (1) that any obligation arising from
contract has the force of law between the parties; and (2) that there must be mutuality between
the parties based on their essential quality. Any contract which appears to be heavily weighed in
favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract, which is left solely to the will of one of the
parties, is likewise, invalid.

Meeting of the minds between the parties to a contract is manifested when the elements of a
valid contract are all present. Art. 1318 of the Civil Code provides that there is no contract unless
the following requisites concur: (1) consent of the contracting parties; (2) object certain which is
the subject matter of the contract; (3) cause of the obligation which is established.

When one of the elements is wanting, no contract can be perfected. In this case, no consent was
given by Spouses Limso and Davao Sunrise as to the increase in the interest rates. Consequently,
the increases in the interest rates are not valid.
Dulay, Nicole

Sps. Jonsay v. Solidbank Corporation

G.R. No. 206459, 6 April 2016

On 9 November 1995 and 28 April 1997, Momarco (controlled and owned by the petitioner
Spouses Jonsay) obtained loans of P40,000,000.00 and P20,000,000.00, respectively, from
Solidbank for which they executed a blanket mortgage over three parcels of land they owned in
Calamba City, Laguna. Thereafter, the loans were consolidated under one promissory note for the
combined amount of P60,000,000.00, signed by Sps. Jonsay. The stipulated rate of interest was
18.75% per annum, along with an escalation clause tied to increases in pertinent Central Bank-
declared interest rates, by which Solidbank was eventually able to unilaterally increase the
interest charges up to 30% per annum.

Claiming business reverses brought on by the 1997 Asian financial crisis, Momarco tried
unsuccessfully to negotiate a moratorium or suspension in its interest payments. Due to persistent
demands by Solidbank, Momarco made its next, and its last, monthly interest payment in April
1998 in the amount of P1,000,000.00. Solidbank applied the said payment to Momarco's accrued
interest for February 1998.

Solidbank proceeded to extrajudicially foreclose on the mortgage, and at the auction sale held on
5 March 1999, it submitted the winning bid of P82,327,249.54.

The petitioners filed a Complaint against Solidbank, Sheriff Perocho and the Register of Deeds
of Calamba, Laguna for Annulment of the Extrajudicial Foreclosure of Mortgage, Injunction,
Accounting and Damages with Prayer for the Immediate Issuance of a Writ of Preliminary
Prohibitory Injunction.  They averred that: (a) the amount claimed by Solidbank as Momarco's
total loan indebtedness is bloated; (b) Solidbank's interest charges are illegal for exceeding the
legal rate of 12% per annum; (c) the filing fee it charged has no legal .and factual basis; (d) the
attorney's fees of P3,600,000.00 it billed the petitioners is excessive and unconscionable; (e)
their previous payments from 1995 to 1997 were not taken into account in computing their
principal indebtedness; (t) Sheriff Perocho's certificate of posting was invalid; and (g) the
publication of the notice of the auction sale was defective because the Morning Chronicle which
published the said notice was not a newspaper of general circulation in Calamba, Laguna. 

The RTC granted the petitioners' application for temporary restraining order followed by
issuance of a writ of preliminary prohibitory injunction, thus suspending the consolidation of
Solidbank's titles to the subject lots. The CA rendered judgment affirming the RTC in toto.
Solidbank moved for reconsideration of the decision, which the CA granted in part.
Issue and Ruling
Can a lending bank unilaterally increase the interest rate in an escalation clause in a loan
agreement, without prior notice to and consent of the borrower? No.

An escalation clause in a loan agreement granting the lending bank authority to unilaterally
increase the interest rate without prior notice to and consent of the borrower is void.

In Philippine National Bank v. CA,  the Court declared void the escalation clause in a credit
agreement whereby the "bank reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the future x x x."  The
Court said:

It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is wanting
on the part of one who contracts, his act has no more efficacy than if it had been
done under duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of
loan contracts, it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.
The Court cannot countenance petitioner bank's posturing that the escalation
clause at bench gives it unbridled right to unilaterally upwardly adjust the interest
on private respondents' loan. That would completely take away from private
respondents the right to assent to an important modification in their agreement,
and would negate the element of mutuality in contracts. x x x.

Although escalation clauses are valid in maintaining fiscal stability and retaining the value of
money on long-term contracts, giving respondent an unbridled right to adjust the interest
independently and upwardly would completely take away from petitioners the "right to assent to
an important modification in their agreement" and would also negate the element of mutuality in
their contracts. The clause cited earlier made the fulfillment of the contracts "dependent
exclusively upon the uncontrolled will" of respondent and was therefore void. Besides, the pro
forma promissory notes have the character of a contract d'adhesion, "where the parties do not
bargain on equal footing, the weaker party's [the debtor's] participation being reduced to the
alternative 'to take it or leave it.”
"While the Usury Law ceiling on interest rates was lifted by [Central Bank] Circular No. 905,
nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels
which will either enslave their borrowers or lead to a hemorrhaging of their assets." Neither this
Circular nor PD 1684, which further amended the Usury Law, "authorized either party to
unilaterally raise the interest rate without the other's consent."
Gomez, Jan Derrick

Reyes v. Bancom (2018)

Q: Reyes, Florencio, Reyes, Jr., Du, Arevalo, and the Pastor (The Reyes Group) executed a
Continuing Guaranty in favor of Bancom. In the instrument, the Reyes Group agreed to
guarantee the full and due payment of obligations incurred by Marbella under an Underwriting
Agreement with Bancom, which included certain Promissory Notes issued by Marbella in favor
of Bancom, totaling P2.8M. Marbella was unable to pay back the notes at the time of their
maturity, so it issued a set of replacement PNs, increasing the amount to P2.9M. It again
defaulted and issued another set of notes, now increasing the amount to P3M, and for a fourth
time it happened and another set was issued for the same amount. When it dawned upon Bancom
that Marbella will not be able to pay, Bancom filed a Complaint for Sum of Money with a prayer
for damages against Marbella as principal debtor, and the Reyes Group individually, as
guarantors of the loan. As a defense, Marbella and the Reyes group both invoked that it had also
entered into other agreements with Bancom resulting in financial distress and that the same was
taken advantage of by Bancom. Along the course of the proceedings, the counsel of Bancom
withdrew, stating that Bancom cannot be contacted despite serious efforts and that reports are
that it has undergone a merger with another entity. On appeal, the Reyes Group contended that
the action must be considered abated pursuant to Sec. 122 of the Corporation Code and it pointed
out that the Cetificate of Registration issued to Bancom had been revoked by the SEC and that
no trustee or receiver had been appointed to continue the suit. Is the obligation to pay on the part
of the Reyes Group still demandable despite Bancom’s non participation?

A: Yes, the obligation of the Reyes Group as a Guarantor is still demandable.

Under the Contract of Guaranty, a guarantor undertakes to pay the obligation of the principal
debtor in the event that the latter should fail to pay when the debt falls due.

Here, the Reyes Group’s undertaking was to be liable in the event that Marbella fail to pay on the
date due. Since the Reyes Group agreed to become liable if any of Marbella’s guaranteed
obligations were not duly paid on the due date, there is absolutely no support for an assertion that
the agreements were not to be binding.
Nuque, Vanya Klarika E.

SECURITY BANK CORP. vs. SPOUSES RODRIGO and ERLINDA MERCADO

G.R. No. 192934 and 197010; June 27, 2018

Security Bank granted Sps. Mercado a revolving credit line secured by two Real Estate Mortgage
over their properties (one for Lipa & San Jose and one for Batangas City). Subsequently, the Sps.
Mercado defaulted in their payment. Security Bank requested the Sps. Mercado to update their
account and sent a final demand letter. Thereafter, it filed a petition for extrajudicial foreclosure.
The respective notices of the foreclosure sales of the properties were published in newspapers of
general circulation once a week for three consecutive weeks. However, the publication of the
notices (San Jose and Batangas City) contained errors with respect to their technical description.
Security Bank caused the publication of an erratum in a newspaper to correct these errors. The
erratum was published only once and did not correct the lack of indication of location in both
cases.The foreclosure sale was finalized over the Lipa properties. A similar foreclosure sale was
conducted over the San Jose and Batangas City properties. Sps. Mercado offered to redeem the
foreclosed properties for P10M. However, Security Bank allegedly refused the offer and made a
counter-offer in the amount of P15M.

Sps. Mercado filed a complaint for annulment of foreclosure sale. In the complaint, it was
averred that: (1) the parcel of land in San Jose, Batangas should not have been foreclosed
together with the properties in Batangas City because they are covered by separate REM; (2) the
requirements of posting and publication of the notice were not complied with; (3) Security Bank
acted arbitrarily in disallowing the redemption of the foreclosed properties for P10M; and (4) the
interests and the penalties imposed were iniquitous and unconscionable.

RTC declared that the foreclosure sales to be void, that the interest rates were void for being
potestative or solely based on the will of Security Bank, and the total amount of their obligation
is around P8M which is below the P10M offer of Sps. Mercado. The MR amended the RTC by
saying that only the sale of the Batangas City and San Jose were void. CA affirmed the RTC

Q: Are the foreclosure sales of the Batangas City and San Jose properties void?
A: Yes, it is void.

Act No. 3135, as amended, provides for the statutory requirements for a valid extrajudicial
foreclosure sale. Among the requisites is a valid notice of sale. Section 3, as amended, requires
that when the value of the property reaches a threshold, the notice of sale must be published once
a week for at least three consecutive weeks in a newspaper of general circulation. Failure to
advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a
Jurisdictional defect which invalidates the sale. This jurisdictional requirement may not be
waived by the parties. Nevertheless, the validity of a notice of sale is not affected if it is
immaterial errors. Only a substantial error or omission in a notice of sale will render the notice
insufficient and vitiate the sale.

Here, the published notice misidentified the identity of the properties. Since the lot numbers are
misstated, the notice effectively identified lots other than the ones sought to be sold. Second, the
published notice omitted the exact locations of the properties. As a result, prospective buyers are
left completely unaware of the type of neighborhood and conforming areas they may consider
buying into. With the properties misidentified and their locations omitted, the properties' sizes
and ultimately, the determination of their probable market prices, are consequently
compromised. The errors are of such nature that they will significantly affect the public's
decision on whether to participate in the public auction. We find that the errors can deter or
mislead bidders, depreciate the value of the properties or prevent the process from fetching a fair
price.

Q: Does the interest rate provision violate the principle of mutuality of contracts?
A: Yes, it violates the principle of mutuality of contracts.

The principle of mutuality of contracts is found in Article 1308 of the New Civil Code, which
states that contracts must bind both contracting parties, and its validity or compliance cannot be
left to the will of one of them. The binding effect of any agreement between parties to a contract
is premised on two settled principles: (1) that any obligation arising from contract has the force
of law between the parties; and (2) that there must be mutuality between the parties based on
their essential equality. As such, any contract which appears to be heavily weighed in favor of
one of the parties so as to lead to an unconscionable result is void. Likewise, any stipulation
regarding the validity or compliance of the contract that is potestative or is left solely to the will
of one of the parties is invalid. This holds true not only as to the original terms of the contract but
also to its modifications. Consequently, any change in a contract must be made with the consent
of the contracting parties and must be mutually agreed upon. Otherwise, it has no binding effect.

Here, the authority to change the interest rate was given to Security Bank alone as the lender,
without need of the written assent of the spouses Mercado. This unbridled discretion given to
Security Bank is evidenced by the clause "I hereby give my continuing consent without need of
additional confirmation to the interests stipulated as computed by [Security Bank]." The
lopsidedness of the imposition of interest rates is further highlighted by the lack of a breakdown
of the interest rates imposed by Security Bank in its statement of account accompanying its
demand letter. Second, the interest rate to be imposed is determined solely by Security Bank for
lack of a stated, valid reference rate. The stipulated interest rate based on "Security Bank's
prevailing lending rate" is not synonymous with "prevailing market rate." For one, Security Bank
is still the one who determines its own prevailing lending rate.

Q: Do the Sps. Mercado pay legal interest after the finality of the decision?
A: No, it is enough that the debtor be in default.

To be considered in default under the revolving credit line agreement the borrower need not be in
default for the whole amount, but for any amount due. The spouses Mercado never challenged
Security Bank's claim that they defaulted as to the payment of the principal obligation of P8M.
Thus, they have defaulted to this amount at the time Security Bank made an extrajudicial demand
on March 31, 1999.
Ramos, Patrick

Spouses Pen vs Julian

Q: On April 9, 1986, the Julians obtained a P60,000.00 loan from appellant Adelaida Pen.
On May 23, 1986 and on the May 27, 1986, they were again extended loans in the amounts of
P50,000.00 and P10,000.00, respectively by appellant Adelaida. These loans were evidenced by
two (2) promissory notes. As security, the Julians executed a Real Estate Mortgage over their
property covered by TCT No. 327733 registered under the name of appellee Santos Julian, Jr.
The owner's duplicate of TCT No. 327733 was delivered to the appellants.
At the time the mortgage was executed, they were likewise required by the appellant
Adelaida to sign a one (1) page document purportedly an "Absolute Deed of Sale". Said
document did not contain any consideration, and was "undated, unfilled and unnotarized". They
allege that their total payments amounted to P115,400.00 and that their last payment was on June
28, 1990 in the amount of P100,000.00.
Was there a valid contract?

A: No, there was no valid contract as the element of consideration is lacking.

Under the New Civil Code, the elements of consent, object, and consideration must be
present otherwise the contract is void.
Here, the absence of the consideration from Linda's copy of the deed of sale was credible
proof of the lack of an essential requisite for the sale. In other words, the meeting of the minds of
the parties so vital in the perfection of the contract of sale did not transpire.
Hence, no valid contract is present in this case

Q: Was a pactum commisorium present?

A: Yes, a pactum commisorium is present in this case.

The Supreme Court has held that the elements of a pactum commisorium are that there
should be a pledge or mortgage wherein property is pledged or mortgaged by way of security for
the payment of the principal obligation; and that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of
the principal obligation within the stipulated period.
Here, both elements are present. The first element is present as there was an actual
mortgage by Linda in favor of Adelaida as security for the farmer's indebtedness. The second
element is implied from Linda's having signed the blank deed of sale simultaneously with her
signing of the real estate mortgage.
Hence pactum sommisorium is present.

Q: What is the legal interest?

A: The legal interest is now at 6% per annum.

The Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796 has lowered to 6%
per annum the legal rate of interest for a loan or forbearance of money, goods or credit starting
July 1, 2013. This will only apply prospectively as differentiated from the Far Eastern Shipping
case where the legal interest was at 12%.
Realin, Reuel Angelo

Land Bank of the Philippines v. Emmanuel Oñate

GR No. 192371; 15 January 2014

Respondent opened seven trust accounts with Land Bank of the Philippines. Each account was
covered by an Investment Management Account (IMA) which provided that Landbank will serve
as the agent of the respondent, having the power to hold, invest, and reinvest the funds at its sole
discretion. Later on, Landbank allegedly misdeposited the amount of Php 4 million to one of the
trust accounts. It demanded the return of the said amount from the respondent, but the latter
refused. Landbank then unilaterally applied the outstanding balance in all of the respondent’s
trust accounts to the said amount. Landbank was only able to debit the amount of Php 1.8
million.

Landbank filed a complaint for collection of sum of money against the respondent. In his answer,
the respondent claimed that the setoff was without legal and factual basis. The RTC dismissed
the complaint as the bank failed to established the source of the funds it had claimed to have
miscredited to the respondent’s account. The CA affirmed the RTC with modification with
respect to the counterclaim of the respondent. The CA awarded the respondent the amount of
Php 60 million representing the offset amount by the bank with interest at the rate of 12% per
annum.

Q: Can a bank unilaterally offset deposited funds upon failure to show the source of miscredited
funds?

A: No it cannot.

The Court has previously held that as between partieswhere negligence is imputable to one and
not to the other, the former must perforce bear the consequences of its neglect.

The contractual relation between Land Bank and Oñate in this case is primarily governed by the
IMAs. It expressly imposed on Land Bank the duty to maintain accurate records of all the
respondent’s investments, receipts, disbursements and other transactions relating to his accounts.
As the bank was negligent and remiss in its duty to observe the necessary diligence in such
obligation, it must bear the consequences of such negligence.

Hence, the failure of the bank to submit an accurate report as to the account of the respondent
effectively bars any offsetting of the said account of the respondent.

Q: Is the 12% interest per annum proper?

A: Yes, it is.

The unilateral offsetting of funds without legal justification and the undocumented withdrawals
are tantamount to forbearance of money. The Court has held that the unwarranted withholding of
the money which rightfully pertains to another amounts to forbearance of money which can be
considered as an involuntary loan. Following Eastern Shipping Lines, Inc. v. Court of Appeals,
the applicable rate of interest in this case is 12% per annum.
Regalado, Franco Antonio

Metrobank v. Chuy Lu Tan

GR No. 202176, 01 August 2016.

Chuy Lu Tan and Romeo Tanco obtained several loans from Metrobank, which loans were
secured by a real estate mortgage on a parcel of land in Quezon City, as well as a continuing
surety agreement executed by Sy See Hiong and Tan Chu Hsiu Yen.
Chuy and Tanco failed to settle the loan obligations, which amounted to around php24M at time
of demand, so Metrobank extrajudicially foreclosed the mortgage, and, with a bid of around the
same amount was the highest bidder at the auction sale. Metrobank, however, later claimed a
deficiency of php1.6M after application of the bid price to the obligation plus costs, charges, and
interest, which was not heeded, prompting them to file suit. The RTC held in favor of
Metrobank.
On appeal, Tanco, Sy, and Tan claimed that the value of the foreclosed property was already
more than enough to pay for the loan obligation, and that Metrobank should not be allowed to
recover on the ground of equity, as it had already substantially gained from the foreclosure due
to the property being sold for less than market value. CA reversed the RTC ruling, holding that
allowing Metrobank to recover would be unconscionable and would amount to unjust
enrichment.

A. Should Metrobank be allowed to collect the deficiency?

B. Should the bid price for a foreclosed property approximate its value?

A. Yes, it should. A creditor is not precluded from recovering any unpaid balance on a principal
obligation if the extrajudicial foreclosure sale of property subjected to a real estate mortgage for
such obligation results in a deficiency: Act No. 3135 (Mortgage Law) does not prohibit recovery
of deficiency. Additionally, the fact that a mortgaged property is sold for less than its actual
market value should not militate against the right to recover the deficiency.
In this case, it is wrong for Tan et al. to conclude that Metrobank's purchase of the property at a
low price prevented them from satisfying their whole obligation; the option to redeem the
properties was still available, allowing them to either redeem the property and sell it for its
supposed market value, or to sell the right to redeem for a price equivalent to the deficiency
claimed by Metrobank.
B. No. Act No. 3135 has neither requirement for determination of mortgaged properties'
appraisal value, nor any requirement that a mortgagee-creditor's appraisal value should be the
basis for bid price.
SERRANO, REM JOSHUA T.

Sps. Louh v. Bank of the Philippine Islands

GR No. 225562, 8 March 2017

BPI issued a credit card in William Louh Jr’s name, with his wife, Irene, as the extension
card holder. Pursuant to the terms and conditions of the cards’ issuance, a 3.5% finance charge
and 6% late payment charge shall be imposed monthly upon unpaid credit availments.

Subsequently, Sps. Louh were remiss in their credit card obligations. Hence, on August
2010, BPI sent written demand letters to petitioner-spouses. By September 2010, they owed BPI
the total amount of P533,836.27, but despite the repeated demands, Sps. Lough failed to pay
BPI. A complaint for collection of a sum of money was filed with the RTC against petitioner-
spouses. RTC ruled in favor of BPI ordering Sps. Louh to pay the unpaid balance plus 12%
finance charge and a 12% late payment annual charge, which the CA affirmed in toto.

However, the RTC ruled that the 3.5% finance and 6% late payment monthly charges
originally imposed by BPI were iniquitous and unconscionable, hence, both charges were
reduced to 1% monthly.

Q: Whether the 3.5% finance and 6% late payment charge imposed monthly by BPI upon
unpaid credit availments excessive and unconscionable.

A: YES, the interest rates are excessive and unconscionable.

Stipulated interest rates of three percent (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.

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 P533,836.27
demanded by BPI as the Spouses Louh’s obligation as of August 7, 2010 were the higher rates of
finance and late payment charges.

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 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.
 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.
SY, CHARELLE MEI V.

Bankard Inc v. Alarte

GR No. 202573. April 19, 2017

RCBC Bankard filed a collection case against Alarte, alleging that the latter applied for
and was granted credit accommodations by “purchasing various products” but refused and failed
to pay her obligations amounting to a total of P67,944.82 despite her receipt of a written demand.
Thus, RCBC prayed that respondent be ordered to pay the same with interest, attorney’s fees and
costs of suit.

The MeTC dismissed the case, ruling that nothing in the lone statement of account
indicates the alleged purchases made by defendant. The RTC affirmed the decision, finding that
there was no clear proof on how the amount was incurred by Alarte. The disputable presumption
only showed that the statement of account was indeed sent by RCBC “on a regular basis” but not
the details itself of the purchase transactions showing that Alarte made use of RCBC’s credit
facilities up to the amount claimed. The CA also affirmed the decisions, contending that the
Statement of Account submitted by RCBC only states the late charges and penalty incurred.
Hence, petitioner failed to submit evidence to show that Alarte indeed incurred the said
purchases.

Q: Whether RCBC Bankard’s contention is correct that Alarte failed to pay its credit card
obligations.

A: Yes. Petition partially granted.

The petitioner’s claim is well founded, in that a monthly credit card statement of account
does not always necessarily involve purchases or transactions made immediately prior to the
issuance of such statement; certainly, it may be that the cardholder did not at all use the credit
card for the month, and the statement of account sent to him or her refers to principal, interest,
and penalty charges incurred from past transactions which are too multiple or cumbersome to
enumerate but nonetheless remain unsettled by the cardholder. However, it would not hurt the
cause of justice to remand the case to the MeTC where petitioner would be required to amend its
Complaint and adduce additional evidence of respondent’s credit history and proving the loan
transactions between them to prove its case; that way, the lower court can better understand the
nature of the claim, and this time it may arrive at a just resolution of the case.

After all, credit card arrangements are simple loan arrangements between the card issuer
and cardholder. Simply put, credit card transaction involves three contracts, namely: (a) the sales
contract between the credit cardholder and the merchant or the business establishment which
accepted the credit card; (b) the loan agreement between the credit card issuer and the credit
cardholder; and lastly, (c) the promise to pay between the credit card issuer and the merchant or
business establishment.
Ayson, Paul
RCJ Bus Lines, Inc. v. Master Tours and Travel Corp.,
G.R. No. 177232 October 11, 2012

Q: Master Tours and Travel Corporation (Master Tours) entered into a five-year lease agreement
with petitioner RCJ Bus Lines, Incorporated (RCJ) covering four Daewoo air-conditioned buses,
described as "presently junked and not operational" for the lease amount of ₱ 600,000.00, with ₱
400,000.00 payable upon the signing of the agreement and ₱ 200,000.00 "payable upon
completion of rehabilitation of the four buses by the lessee.
More than four years into the lease, Master Tours wrote RCJ a letter, demanding the return of the
four buses "brought to your garage at E. Rodriguez Avenue for safekeeping" so Master Tours
could settle its obligation with creditors who wanted to foreclose on the buses. RCJ did not,
however, heed the demand.
Master Tours wrote RCJ a letter, demanding the return of the buses to it and the payment of the
lease fee of ₱ 600,000.00 that had remained unpaid. RCJ wrote back through counsel that it had
no obligation to pay the lease fee and that it would return the buses only after Master Tours shall
have paid RCJ the storage fees due on them. This prompted Master Tours to file a collection suit,
which included attorney’s fees, against RCJ before the Regional Trial Court (RTC)
For its defense, RCJ alleged that it had no use for the buses, they being non-operational, and that
the lease agreement had been modified into a contract of deposit of the buses for which Master
Tours agreed to pay RCJ storage fees of ₱ 4,000.00 a month. To prove the new agreement, RCJ
cited Master Tours’ letter of June 16, 1997 which acknowledged that the buses were brought to
RCJ’s garage for "safekeeping."
a) Was there a novation in the agreement of the parties from one of lease of the buses to one
of deposit of the same?
b) Assuming there is no novation, can RCJ be held liable for rental fees notwithstanding that
the buses never became operational?
c) Is the award of Attorney’s fees justified in this case?

Answers:

a) No, there was no novation in the agreement between the parties from one of lease to
deposit. The cause in a contract of lease is the enjoyment of the thing, while in a contract
of deposit it is the safekeeping of the thing.
Article 1292 of the New Civil Code provides that in novation, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other.
In this case, the agreement of lease was so RCJ would rehabilitate such buses and use
them for its transport business. There is no allegation or evidence that Master Tours pre-
terminated the lease agreement, and subsequently entered into a new agreement to
deposit the buses, either through a new contract novating the first expressly, or with
provisions incompatible on every point with the original lease agreement. This
circumstance rules out any notion that an agreement for RCJ to hold the buses for
safekeeping had overtaken the lease agreement.
Hence, there was no novation in the agreement between the parties from one of lease to
deposit.
b) Yes, RCJ can be held liable for the rental fees even if the buses were not operational.
That the buses may have turned out to be unsuitable for use despite repair cannot
prejudice Master Tours. The latter did not hide the condition of the buses from RCJ. The
lease agreement described them as "presently junked and not operational." RCJ knew that
one part of the lease agreement was to repair the buses and use them for their operations
and earn profits to cover the rehabilitation and to pay the lease.
c) No, the award of attorney’s fees is not justified. No legal basis was alleged in the suit for
the court to consider.
The discretion of the court to award attorney's fees under Article 2208 of the Civil Code
demands factual, legal, and equitable justification. The court must state the reason for the
award of attorney's fees and its failure to do so would make the award baseless.
Jillian Ira L. Bagaoisan

Durban Apartments Corporation v. Pioneer Insurance and Surety Corporation

GR No. 179419, 12 January 2011

Jeffrey See checked in at the City Garden Hotel in Makati. He handed his car key to the parking
attendant so that the attendant can park the car. See was later informed by hotel security that his
car was stolen while it was parked unattended in the Equitable PCI Bank parking area. The hotel
claims that the valet service is a special privilege provided to hotel guests who find difficulty in
finding parking near the hotel and that it does not include responsibility for any loss or damage.

Q: Is the hotel liable for the loss of See’s car?

A: Yes. Under the New Civil Code, a deposit is constituted from the moment a person receives a
thing belonging to another, with the obligation of safely keeping it and returning the same.

Here, a contract of deposit was perfected when the hotel guest handed over to the hotel’s parking
attendant the keys to his vehicle, which the latter received with the obligation of safely keeping
and returning it.

Thus, Urban Apartments Corporation (doing business under the name and style of City Garden
Hotel) is liable for the loss of See’s vehicle.
CORRO, Erika

Land Bank of the Philippines v. Poblete

G.R. No. 196577 February 25, 2013
(Real Estate Mortgage)

Land Bank of the Philippines (LBP) is a banking institution organized and existing under
Philippine laws. Poblete is a registered owner of a parcel of land with an area of 455 square
meters, located in Buenavista, Sablayan, Occidental Mindoro. Poblete obtained a P300,000 loan
from Kabalikat ng Pamayanan ng Nagnanais Tumulong at Yumaman Multi-purpose Cooperative
(Kapantay). Poblete mortgaged Lot No. 29 to Kapantay to guarantee payment of the loan.
Kapantay, in turn, used the parcel of land as collateral.

Poblete decided to sell Lot No. 29 to pay her loan. She instructed her son-in-law Balen to look
for a buyer. Balen referred Maniego to Poblete. Maniego agreed to buy Lot No. 29 for P900,000
but Maniego suggested that a deed of absolute sale for P300,000 be executed instead to reduce
the taxes. Poblete executed the Deed of Absolute Sale with P300,000 as consideration. In the
deed, Poblete described herself as “widow.” Poblete, then, asked Balen to deliver the Deed to
Maniego and to receive the payment in her behalf.

Balen testified that he delivered the Deed to Maniego. However, Balen stated that he did not
receive from Maniego the agreed purchase price. Maniego told Balen that he would pay the
amount upon his return from the United States. In an Affidavit, Poblete stated that she agreed to
have the payment deposited in her LBP Savings Account.

Based on a Certification issued by Land Bank-Sablayan Branch Department Manager Marcelino

Pulayan on 20 August 1999, Maniego paid Kapantay’s Loan Account No. 97-CC-013 for
₱448,202.08. On 8 June 2000, Maniego applied for a loan of ₱1,000,000.00 with Land Bank,
using OCT No. P 12026 as collateral. Land Bank alleged that as a condition for the approval of
the loan, the title of the collateral should first be transferred to Maniego.

On 14 August 2000, pursuant to a Deed of Absolute Sale dated 11 August 2000 (Deed dated 11
August 2000), the Register of Deeds of Occidental Mindoro issued Transfer Certificate of Title
(TCT) No. T-20151 in Maniego’s name. On 15 August 2000, Maniego and Land Bank executed
a Credit Line Agreement and a Real Estate Mortgage over TCT No. T- 20151. On the same day,
Land Bank released the ₱1,000,000.00 loan proceeds to Maniego. Subsequently, Maniego failed
to pay the loan with Land Bank. On 4 November 2002, Land Bank filed an Application for
Extra-judicial Foreclosure of Real Estate Mortgage stating that Maniego’s total indebtedness
amounted to ₱1,154,388.88.

On 2 December 2002, Poblete filed a Complaint for Nullification of the Deed dated 11 August
2000 and TCT No. T-20151, Reconveyance of Title and Damages with Prayer for Temporary
Restraining Order and/or Issuance of Writ of Preliminary Injunction.

Q: Whether or not LBP is a mortgagee in good faith.

A: NO. LBP is a bank and thus, expected to exercise the highest degree of diligence.

Since TCT No. T-20151 has been declared void by final judgment; the Real Estate Mortgage
constituted over it is also void. In a real estate mortgage contract, it is essential that the
mortgagor be the absolute owner of the property to be mortgaged; otherwise, the mortgage is
void.

Land Bank insists that it is a mortgagee in good faith since it verified Maniego’s title, did a credit
investigation, and inspected Lot No. The issue of being a mortgagee in good faith is a factual
matter, which cannot be raised in this petition. However, to settle the issue, we carefully
examined the records to determine whether or not Land Bank is a mortgagee in good faith.

There is indeed a situation where, despite the fact that the mortgagor is not the owner of the
mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale
arising therefrom are given effect by reason of public policy. This is the doctrine of "the
mortgagee in good faith" based on the rule that buyers or mortgagees dealing with property
covered by a Torrens Certificate of Title are not required to go beyond what appears on the face
of the title. 

However, it has been consistently held that this rule does not apply to banks, which are required
to observe a higher standard of diligence. A bank whose business is impressed with public
interest is expected to exercise more care and prudence in its dealings than a private individual,
even in cases involving registered lands. A bank cannot assume that, simply because the title
offered as security is on its face free of any encumbrances or lien, it is relieved of the
responsibility of taking further steps to verify the title and inspect the properties to be mortgaged.

Applying the same principles, we do not find Land Bank to be a mortgagee in good faith.

Good faith, or the lack of it, is a question of intention. In ascertaining intention, courts are
necessarily controlled by the evidence as to the conduct and outward acts by which alone the
inward motive may, with safety, be determined.

Based on the evidence, Land Bank processed Maniego’s loan application upon his presentation
of OCT No. P-12026, which was still under the name of Poblete. Land Bank even ignored the
fact that Kapantay previously used Poblete’s title as collateral in its loan account with Land
Bank.
In Bank of Commerce v. San Pablo, Jr., we held that when "the person applying for the loan is
other than the registered owner of the real property being mortgaged, [such fact] should have
already raised a red flag and which should have induced the Bank x x x to make inquiries into
and confirm x x x [the] authority to mortgage x x x. A person who deliberately ignores a
significant fact that could create suspicion in an otherwise reasonable person is not an innocent
purchaser for value."

Where the mortgagee acted with haste in granting the mortgage loan and did not ascertain the
ownership of the land being mortgaged, as well as the authority of the supposed agent executing
the mortgage, it cannot be considered an innocent mortgagee.
Since Land Bank is not a mortgagee in good faith, it is not entitled to protection. The injunction
against the foreclosure proceeding in the present case should be made permanent. Since Lot No.
29 has not been transferred to a third person who is an innocent purchaser for value, ownership
of the lot remains with Poblete. This is without prejudice to the right of either party to proceed
against Maniego.

On the allegation that Poblete is in pari delicto with Maniego, we find the principle inapplicable.
The pari delicto rule provides that "when two parties are equally at fault, the law leaves them as
they are and denies recovery by either one of them." We adopt the factual finding of the RTC
and the CA that only Maniego is at fault.
Dulay, Nicole

Rolando Robles. v. Fernando Yapcinco et al.

G.R. No. 169568, 22 October 2014

The property in litis was originally registered in the name of Fernando F. Yapcinco. In May 4,
1944, Yapcinco constituted a mortgage on the property in favor of Jose C. Marcelo to secure the
performance of his obligation. In turn, Marcelo transferred his rights as the mortgagee to
Apolinario Cruz. When Yapcinco did not pay the obligation, Apolinario Cruz brought an action
for judicial foreclosure of the mortgage in the Court of First Instance (CFI) of Tarlac, and the
property was sold at a public auction. Apolinario Cruz was adjudged the highest bidder in the
public auction. In his favor was then issued the certificate of absolute sale, and he took
possession of the property in due course. However, he did not register the certificate of sale; nor
was a judicial confirmation of sale issued.

In 1972, Apolinario Cruz donated the property to his grandchildren, which includes Apolinario
Bernabe. In 2000, the respondents, all heirs of the Spouses Yapcinco, instituted an action against
one of the grandchildren, Apolinario Bernabe and his co-vendees in the Regional Trial Court
(RTC) in Tarlac City for the annulment of TCT No. 243719, document restoration, reconveyance
and damages. They claimed that although the property had been mortgaged, the mortgage had
not been foreclosed, judicially or extra judicially; that the property was released from the
mortgage per Entry No. 32-2182 in the Memorandum of Incumbrances; and that the deed of
absolute sale between Fernando Yapcinco and Bernabe, et al. was void and ineffectual because
the Spouses Yapcinco had already been dead as of the date of the sale.

Issue and Ruling

What is the concept of equity of redemption?

The registration of the sale is required only in extrajudicial foreclosure sale because the date of
the registration is the reckoning point for the exercise of the right of redemption. In contrast, the
registration of the sale is superfluous in judicial foreclosure because only the equity of
redemption is granted to the mortgagor, except in mortgages with banking institutions. The
equity of redemption is the right of the defendant mortgagor to extinguish the mortgage and
retain ownership of the property by paying the secured debt within the 90-day period after the
judgment becomes final, or even after the foreclosure sale but prior to the confirmation of the
sale.

Consequently, the late Fernando F. Yapcinco and the respondents as his successors-in-interest
were divested of their right in the property, for they did not duly exercise the equity of
redemption decreed in the decision of the trial court. With Yapcinco having thereby effectively
ceased to be the owner of the property sold, the property was taken out of the mass of the assets
of Yapcinco upon the expiration of the equity of redemption.
Gomez, Jan Derrick

Castillo v. Security Bank, Castillo (2014)

Q: Leonardo and Leon are siblings. Leon and Spouse (Sps. Castillo) were doing business under
the name JRC Poultry. Sps. Castillo obtained a loan from Security Bank in the amount of P45M,
and to secure the loan, executed a REM over 11 parcels of land belonging to different members
of the Castillo family. Afterwards, they procured another loan in the amount of P2.5M, covered
by a mortgage on a land in Pasay City. The Sps. Castillo failed to settle on the loan, prompting
Security Bank to foreclose the REM of the properties. They were able to redeem much of the
properties, except for two parcels of land.

Leonardo filed a complaint for the partial annulment of the real estate mortgage, alleging that he
owned one of the two unredeemed parcels of land and that the Sps. Castillo used it as collateral
for a loan without his consent, as well as alleging that the SPA he supposedly executed was
falsified. Further, he alleges that the interests and penalty charges imposed by Security Bank
were unjust, excessive, and unconscionable.

(a) Whether the real estate mortgage executed over the unredeemed lots are valid and binding.
(b) Whether the interests and penalty charges imposed by Security Bank are just, and not
excessive nor unconscionable.

A: Yes, the real estate mortgage executed are valid and binding.

The requisites for a valid mortgage are that: (1) It must be constituted to secure the fulfillment of
a principal obligation; (2) The mortgagor must be the absolute owner of the thing mortgaged; (3)
The persons constituting the mortgage must have the free disposal of their property, and in the
absence thereof, they should be legally authorized for the purpose.

Here, there was no showing that the mortgage lacked any of the requisites, except for the
allegation that the SPA was falsified. Since Castillo failed to prove that the SPA was indeed
forged, it is presumed that it was regularly executed.

Thus, the real estate mortgage is valid and binding.

A: No, the interests not excessive and unconscionable.

Section 47 of the General Banking Law of 2000 provides that for a mortgagor-debtor to redeem
the property, he must pay the amount due under the mortgage deed, with interest thereon at the
rate specified in the mortgage. Further, in Sps. Bacolor v. Banco Filipino Savings Bank, the
Court has held that a 24% interest per annum as not unconscionable. Here, the imposed 16% per
annum interest was provided for in the mortgage deed, thus binding onto the parties. Further, the
enforcement of penalty can be demanded by the creditor in case of nonperformance due to the
debtor’s fault or fraud. The nonperformance gives rise to the presumption of fault and in order to
avoid the penalty, the debtor has the burden of proving that the failure of the performance was
due to either force majeure or the creditor’s own acts. Since Castillo failed to prove the
following, the presumption cannot be overturned. Thus, the interests are not excessive and
unconscionable.
Nuque, Vanya Klarika E.

PHILIPPINE NATIONAL BANK vs. HEIRS OF BENEDICTO and AZUCENA

ALONDAY
G.R. No. 171865. October 12, 2016.

Facts:
Sps. Alonday obtained an agricultural loan from the petitioner and secured the obligation by
constituting a real estate mortgage over their Sta. Cruz property. Later, Sps. Alonday obtained a
commercial loan from petitioner and constituted a real estate mortgage over their Ulas property.
Sps. Alonday made partial payments on the commercial loan, which they later renewed for the
balance of P15,950. The renewed commercial loan, although due on December 25, 1984, was
fully paid on July 5, 1984. Respondents Alonday (children) demanded the release of the
mortgage over the Ulas property. The petitioner informed them that the mortgage could not be
released because the agricultural loan had not yet been fully paid, and that as the consequence of
the failure to pay, it had foreclosed the mortgage over the Sta. Cruz property.

Despite foreclosure a deficiency balance remained. Hence, the petitioner foreclosed the mortgage
on the Ulas property. Later on, the property was sold to one Felix Malmis. According to the
petitioner, the deed of mortgage relating to the Ulas property included an “all-embracing clause”
whereby the mortgage secured not only the commercial loan contracted with its Davao City
Branch but also the earlier agricultural loan contracted with its Digos Branch. RTC ruled in favor
of the plaintiffs and against the defendant bank. It did not impose interest. CA affirmed the
RTC.

Q: Can the all-embracing or dragnet clause contained in the first mortgage contract for the
security of the first loan authorize the foreclosure of the property under the mortgage to secure a
second loan despite the full payment of the second loan?
A: No, it cannot authorize the foreclosure of the second mortgage.

The mortgage contracts executed by the Sps. Alonday were contracts of adhesion exclusively
prepared by the petitioner. A contract of adhesion, albeit valid, becomes objectionable only when
it takes undue advantage of one of the parties — the weaker party — by having such party just
adhere to the terms of the contract. In such situation, the courts go to the succor of the weaker
party by construing any obscurity in the contract against the party who prepared the contract, the
latter being presumed as the stronger party to the agreement, and as the party who caused the
obscurity.

In order for the all-embracing or dragnet clauses to secure future and other loans, the loans
thereby secured must be sufficiently described in the mortgage contract. Considering that the
agricultural loan had been preexisting when the mortgage was constituted on the Ulas property, it
would have been easy for the petitioner to have expressly incorporated the reference to such
agricultural loan in the mortgage contract covering the commercial loan. But the petitioner did
not. Being the party that had prepared the contract of mortgage, its failure to do so should be
construed that it did not at all contemplate the earlier loan when it entered into the subsequent
mortgage.
Q: Should the RTC and CA impose interest?
A: Yes, it should impose interest.

The lower courts did not impose interest on the judgment obligation to be paid by the petitioner.
Such interest is in the nature of compensatory interest, as distinguished from monetary interest. It
is relevant to elucidate on the distinctions between these kinds of interest. In this regard, the
Court has expounded in Siga-an v. Villanueva, 576 SCRA 696 (2009): Interest is a compensation
fixed by the parties for the use or forbearance of money. This is referred to as monetary interest.
Interest may also be imposed by law or by courts as penalty or indemnity for damages. This is
called compensatory interest. The right to interest arises only by virtue of a contract or by virtue
of damages for delay or failure to pay the principal loan on which interest is demanded. Article
1956 of the Civil Code, which refers to monetary interest, specifically mandates that no interest
shall be due unless it has been expressly stipulated in writing. As can be gleaned from the
foregoing provision, payment of monetary interest is allowed only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement for the payment of interest was
reduced in writing. The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any stipulation therefor
in writing is prohibited by law.

There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states
that if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a
legal interest of 12% per annum may be imposed as indemnity for damages if no stipulation on
the payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that
interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.

Article 2212 of the Civil Code requires that interest due shall earn legal interest from the time it
is judicially demanded, although the obligation may be silent upon this point. Accordingly, the
interest due shall itself earn legal interest of 6% per annum from the date of finality of the
judgment until its full satisfaction, the interim period being deemed to be an equivalent to a
forbearance of credit.

The petitioner should be held liable for interest on the actual damages of P717,600.00
representing the value of the property with an area 598 square meters that was lost to them
through the unwarranted foreclosure, the same to be reckoned from the date of judicial demand
(i.e., the filing of the action by the Sps Alonday).
Ramos, Patrick

Spouses Jonsay vs Solidbank

Q: Momarco, controlled and owned by the Spouses Jonsay, obtained loans of

P40,000,000.00 and P20,000,000.00, respectively, from Solidbank for which the Spouses Jonsay
executed a blanket mortgage over three parcels of land they owned in Calamba City, Laguna.
The loans were consolidated under one promissory note7 for the combined amount of
P60,000,000.00. The stipulated rate of interest was 18.75% per annum, along with an escalation
clause tied to increases in pertinent Central Bank-declared interest rates, by which Solidbank was
eventually able to unilaterally increase the interest charges up to 30% per annum. Eventually
Momarco was unable to pay the loan which prompted Solidbank to extrajudicially foreclose the
property. The publication was done through the Morning Chronicle.
Solidbank submitted the winning bid of P82,327,249.54, representing Momarco's
outstanding loans, interests and penalties. However Momarco claims that on the date of the
auction the fair market value of their mortgaged lots had increased sevenfold to
P441,750,000.00. This prompted Momarco to file case annulling the extrajudicial foreclosure.
They averred that:
 the amount claimed by Solidbank as Momarco's total loan indebtedness is bloated;
 Solidbank's interest charges are illegal for exceeding the legal rate of 12% per annum;
 the filing fee it charged has no legal .and factual basis;
 the attorney's fees of P3,600,000.00 it billed the petitioners is excessive and
unconscionable;
 their previous payments from 1995 to 1997 were not taken into account in computing
their principal indebtedness;
 Sheriff Perocho's certificate of posting was invalid; and
 the publication of the notice of the auction sale was defective because the Morning
Chronicle which published the said notice was not a newspaper of general circulation in
Calamba, Laguna.
Is the publication defective?

A: No, the publication is not defective on the ground that the publication enjoys regularity.
The Supreme Court has held that if the trial court makes a prior determination of the
regularity of a newspaper as a general circulation, the presumption is that such publication is
regular and binding unless refuted.
Here, when the RTC accredited the Morning Chronicle to publish legal notices in
Calamba City, it can be presumed that the RTC had made a prior determination that the said
newspaper had met the requisites for valid publication of legal notices in the said locality, guided
by the understanding that for the publication of legal notices in Calamba City to serve its
intended purpose, it must be in general circulation therein. This presumption lays the burden
upon the petitioners to show otherwise, which the petitioners failed to do.
Hence, the publication is not defective and in effect, is binding and with effect.

Q: Is an escalation clause that grants a bank the unilateral power to increase interest rate
void?
A: Yes, An escalation clause in a loan agreement granting the lending bank authority to
unilaterally increase the interest rate without prior notice to and consent of the borrower is void.
The Supreme Court has held that contract changes such as an increase in interest rate
must be made with the consent of the contracting parties otherwise it is void for being violative
of the mutuality of contracts.
Here, the escalation clause is void because it gives the petitioner bank the unbridled right
to unilaterally upwardly adjust the interest on private respondents' loan. That would completely
take away from private respondents the right to assent to an important modification in their
agreement.

Q: Is the interest rate of 18.75% unconscionable?

A: No, the rate of 18.75% is not unconscionable.
The Supreme Court has held in numerous cases that interest rates such as 24% per annum
are not unconscionable.
Here, the interest is way lower than 24% per annum, since it is only 18.75% per annum.
Hence, the 18.75% is not unconscionable.
Realin, Reuel Angelo

Spouses Gallent vs Juan Velasquez

G.R. 203949/205071; 06 April 2016

Petitioners owned a residential property in Muntinlupa City. The property was later on
mortgaged to serve as a security for a loan that the petitioners secured from Allied Bank. The
petitioners failed to settle their loan resulting in the extrajudicial foreclosure of the property by
Allied Bank where the latter emerged as the highest bidder. The petitioners failed to redeem the
property.

Later on, Allied Bank agreed to sell back to the petitioners the property for Php 4 million. The
petitioners agreed and paid a downpayment of Php 3.5 milllion. Due to financial difficulties, the
petitioners sought the help of the respondent to pay for the remaining balance. The respondent
agreed on the condition that the property was to be registered in his name until they have repaid
him. The petitioners executed a Deed of Assignment of Rights in favor of the respondent
pursuant to the agreement. Allied Bank and the respondent executed a deed of absolute sale in
the name of the respondent. The petitioners continued to occupy and possess the property.

The respondent later on sent a demand letter to the petitioners to vacate the property which the
latter refused to do so. This prompted the respondent to file a petition for the issuance of a writ of
possession from the RTC. The petitioners, in a separate case, filed a complaint for reformation
of instruments wherein they sought to annul the deed of assignment executed in favor of the
respondent on grounds that the contract failed to reflect their true intent. The petitioners
claimed that the deed of assignment was actually an equitable mortgage to secure the loan
they obtained from the respondent for the payment of the property to Allied Bank

Q: Whether the agreement between the parties amounts to an equitable mortgage.

A:

Yes, it is an equitable mortgage.

An equitable mortgage has been defined as one which although lacking in some formality, or
form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the
parties to charge real property as security for a debt, there being no impossibility nor anything
contrary to law in this intent. A contract where the vendor/mortgagor remains in physical
possession as lessee or otherwise has been held to be an equitable mortgage. Under Article 1602
of the New Civil Code, the contract shall be presumed to be an equitable mortgage when it may
be fairly inferred that the real intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.

Here, the petitioners made the substantial repayment of the subject property from Allied Bank
amounting to Php 3.7 million. They have likewise remained in possession of the property. Hence
the agreement between the petitioners and the respondent is presumed to be an equitable
mortgage.
Regalado, Franco Antonio

Luntao v. BAP
GR No. 204412, 20 September 2017.

Vicente Luntao owned a parcel of land in Davao City, which his sister Nanette, through a special
power of attorney, mortgaged in favor of BAP Credit Guaranty Corporation, in order to secure a
loan which proceeds were to be used for improvement of the facilities of Holy Infant Medical
Center, Nanette's business. The loan was approved, and the amount released to the clinic.
When Nanette failed to pay the loan as it became due, BAP applied for extrajudicial foreclosure
of the real estate mortgage, to which Nanette and Vicente filed a complaint for declaration of
nullity of real estate mortgage and damages. In their complaint, Nanette alleged that the
supposed loan documents she was made to sign were all blank forms, and that she never received
the proceeds of the loan. She also claimed that the demand letters were addressed to her sister
Eleanor, who introduced Nanette to BAP but whose loan obligations were separate from hers.
RTC decided in favor of BAP, giving weight to the admission of Jesus, Nanette's brother, that a
loan was obtained in behalf of the clinic, and that the proceeds were used for their intended
purpose. CA denied Nanette and Vicente's appeal, finding that valid contracts of loan and
mortgage existed.

Was the real estate mortgage valid?

Yes, it was. The validity of a real estate mortgage, being an accessory contract, depends on the
validity of the principal contract's validity. In this case, the Supreme Court found that one of the
letters Jesus sent to BAP, when the former was asking for more time to pay the loan obligation,
explicitly made reference to loans made by Nanette and Eleanor, under the name of Holy Infant
Medical Clinic. This admission was never rebutted, and they also failed to present evidence to
support their allegations that Eleanor received the proceeds, and that it was Eleanor's non-
payment of her separate personal loan which caused the foreclosure.
Serrano, Rem
Sps. Miles v. Lao
GR No. 209544, 22 November 2017

Petitioners Sps. Miles claimed that they became the registered owners of a parcel of land
in Makati. Before they left for the US, they entrusted the duplicate of the TCT to their niece,
herein defendant Rodora Jimenez, so that she may offer it to interested buyers. No special power
of attorney was given to Rodora.

Thereafter, Sps. Miles alleged that Rodora conspired with Sps. Ocampo, and made it
appear that Sps. Miles donated the land to Sps. Ocampo, as a result, a new TCT was issued in the
name of Sps. Ocampo. Later on, petitioners cliam that through falsication, fraud and evident bad
faith, Sps. Ocampo caused the execution of a falsified Real Estate Mortgage in favor of
respondent Lao, with the subject property as security. Eventually, Sps. Ocampo defaulted, and
respondent Lao foreclosed the mortgaged.

Here now comes the petitioner seeking to annul the TCT issued to Sps. Ocampo, and the
cancellation of the mortgage inscription on the title of the property.

Q: Whether respondent Lao is a mortgagee in good faith.

A: YES, respondent Lao is a mortgagee in good faith.

There is indeed a situation where, despite the fact that the mortgagor is not the owner of
the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale
arising therefrom are given effect by reason of public policy. This is the doctrine of “the
mortgagee in good faith” based on the rule that buyers or mortgagees dealing with property
covered by a Torrens Certificate of Title are not required to go beyond what appears on the face
of the title.

A mortgagee has a right to rely in good faith on the certificate of title of the mortgagor of
the property given as security, and in the absence of any sign that might arouse suspicion, the
mortgagee has no obligation to undertake further investigation. This doctrine presupposes,
however, that the mortgagor, who is not the rightful owner of the property, has already
succeeded in obtaining Torrens title over the property in his name and that, after obtaining the
said title, he succeeds in mortgaging the property to another who relies on what appears on the
title.

In this case, the title of the property under the name of spouses Ocampo was already
registered as early as May 6, 1998, while the real estate mortgage was executed December 16,
1998. Hence, it is clear that respondent had every right to rely on the TCT presented to her
insofar as the mortgagors’ right of ownership over the subject property is concerned.

Furthermore, respondent’s decision to deal with the mortgagors through a middleman,

does not equate to bad faith. At the outset, it bears to stress that the spouses Ocampo were
already the registered owners of the property at the time they entered into a mortgage contract
with respondent. Hence, respondent was justified in relying on the contents of TCT No. 212314
and is under no legal obligation to further investigate. Likewise, there is nothing in the records,
and neither did petitioners point to anything in the title which would arouse suspicions as to the
spouses Ocampo’s defective title to the subject property.
SY, CHARELLE MEI V.

Sps. Teves v. Integrated Credit & Corporate Services, Co.

GR No. 216714. April 04, 2018

Standard Chartered Bank (SCB) extended various loans to petitioners Sps. Teves. As
security, they mortgaged their property. The spouses defaulted in their loan payments, thus SCB
extrajudicially foreclosed on the mortgage. The property was sold to Integrated Credit &
Corporate Services Co. (ICCS). The RTC ordered the issuance of a writ of possession in favor of
ICCS, and the spouses were ordered to deliver to respondent and/or deposit with the Court the
monthly rentals of the subject property covering the period up to the time they surrender the
possession thereof. The CA affirmed the decision.

Q: Whether the petitioners should deliver the monthly rentals of the subject property to the
respondent.

A: Yes. Petition denied.

When the redemption period expired on May 23, 2007, ICCS became the owner of the
subject property and was, from then on, entitled to the fruits thereof. Petitioners ceased to be the
owners of the subject property, and had no right to the same as well as to its fruits. Thus, if
petitioners leased out the property to third parties after their period for redemption expired,
as was in fact the case here, the rentals collected properly belonged to ICCS or Aqui (the
successor-in-interest), as the case may be. Petitioners had no right to collect them.

By express provision of the law, particularly Article 544 of the Civil Code, respondent is
entitled to the monthly rentals of the subject property which were collected by the respondents
who have no more right over the same after the lapse of the period for them to redeem the
subject property.

The Court recognizes the rights acquired by the purchaser of the foreclosed property at
the public auction sale upon the consolidation of his title when no timely redemption of the
property was made, and thus becomes the absolute owner of the property, if not redeemed during
the period of one year after the registration of the sale. As owner of the subject property, ICCS is
entitled to the fruits thereof the rentals - which were wrongly collected by petitioners after losing
their ownership; this has nothing to do with the previous loan transaction between petitioners and
Standard, to which ICCS was a complete stranger.
Ayson, Paul
Security Bank Corporation vs. Spouses Mercado
G.R. No. 192934, June 27, 2018

Topic: Real Estate Mortgage, Interest stipulations

Q: On September 13, 1996, Security Bank granted spouses Mercado a revolving credit line in
the amount of P1,000,000.00, with annual interest based on Security Bank’s prevailing lending
rate, and a stipulation that if the account is delinquent, the spouses Mercado agree to pay
Security Bank the payment penalty of 2% per month computed on the amount due and unpaid or
in excess of the Credit Limit. To secure the credit line, the spouses Mercado executed a Real
Estate Mortgage in favor of Security Bank on July 3, 1996 over their properties, one property in
San Jose, Batangas, the other in Lipa City, Batangas, to secure an additional credit agreement of
P7,000,000.00.

Subsequently, the spouses Mercado defaulted in their payment under the revolving credit line
agreement. Security Bank requested the spouses Mercado to update their account, and sent a
final demand letter on March 31, 1999. Thereafter, it filed a petition for extrajudicial foreclosure.

The respective notices of the foreclosure sales of the properties were published in newspapers of
general circulation once a week for three consecutive weeks as required by Act No. 3135, as
amended. However, the publication of the notices of the foreclosure of the properties in Batangas
City and San Jose, Batangas contained errors with respect to their technical description, such as
lot areas and numbers. Security Bank caused the publication of an erratum in a newspaper to
correct these errors.
On September 18, 2000, the spouses Mercado offered to redeem the foreclosed properties for
P10,000,000.00. However, Security Bank allegedly refused the offer and made a counter-offer in
the amount of P15,000,000.00.

On November 8, 2000, the spouses Mercado filed a complaint for annulment of foreclosure sale,
damages, injunction, specific performance, and accounting with application for temporary
restraining order and/or preliminary injunction. The Spouses averred that Security Bank acted
arbitrarily on the basis that:
i. the parcel of land in San Jose, Batangas should not have been foreclosed together
with the properties in Batangas City because they are covered by separate real
estate mortgages;
ii. The requirements of posting and publication of the notice under Act No. 3135
(law on extrajudicial foreclosure), as amended, were not complied with
iii. The interests and the penalties imposed by Security Bank on their obligations
were iniquitous and unconscionable.

a) Are the foreclosure sales of the parcels of land in Batangas City and San Jose, Batangas
valid?
b) Are the provisions on the interest rate and addendum on penalty interest in the revolving
credit line agreement void for being violative of the principle of mutuality of contracts?
Answers:

a) No, the foreclosure sales are not valid. The sales are void for non-compliance with the
publication requirement of the notice of sale since there are substantial errors in the
description of the properties to be auctioned.
The Supreme Court has held that in publishing a notice for extrajudicial foreclosures, a
substantial error or omission in a notice of sale will render the notice insufficient and
vitiate the sale. An error is substantial if it will deter or mislead bidders, depreciate the
value of the property or prevent it from bringing a fair price.

Here, the errors in the technical description constitute data important to prospective
bidders when they decide whether to acquire any of the lots announced to be auctioned.
Since the lot numbers are incorrect, the notice effectively identified lots other than the
ones sought to be sold. The errors are substantial enough that they will significantly
affect the public's decision on whether to participate in the public auction.

Hence, the foreclosure sales are not valid.

b) Yes, The interest rate provisions in the parties' agreement are void for violating the
principle of mutuality of contracts.

Under article 1308 of the New Civil Code, contracts must bind both contracting parties,
and its validity or compliance cannot be left to the will of one of them.

The Supreme Court has held in Silos v. Philippine National Bank that stipulations as to
the payment of interest are subject to the principle of mutuality of contracts. As a
principal condition and an important component in contracts of loan, interest rates are
only allowed if agreed upon by express stipulation of the parties, and only when reduced
into writing. Any change to it must be mutually agreed upon, or it produces no binding
effect.

Here, the method of fixing interest rates is based solely on the will of the bank, without
any agreement or consent of the Spouses Mercado. Additionally, the reference rate of
"Security Bank's prevailing lending rate" is not pegged on a market-based reference rate
as required by the BSP in current banking practice.

Hence, the interest rate provisions in the parties' agreement are void.
Jillian Ira L. Bagaoisan

Spouses Charito Reyes and Roberto Reyes, et al v. Heirs of Benjamin Malance, et al.
GR No. 219071, 24 August 2016

Benjamin was the owner of a parcel of agricultural land in Bulacan. During his lifetime,
Benjamin obtained a loan from the Magtalas sisters. Under the loan agreement, the Magtalas
sisters will have a right to the fruits of the subject land for six years or until the loan is fully paid.

After Benjamin passed away, Benjamin’s heirs sought to recover possession of the property from
the Magtalas sisters.

Q: Did Benjamin and the Magtalas sisters enter into a valid agreement?

A: Yes. The parties intended to enter into a contract of antichresis.

Antichresis involves an express agreement between parties whereby: (a) the creditor will have
possession of the debtor’s real property given as security; (b) such creditor will apply the fruits
of the said property to the interest owed by the debtor, if any, then to the principal amount; (c)
the creditor retains enjoyment of such property until the debtor has totally paid what he owes;
and (d) should the obligation be duly paid, then the contract is automatically extinguished
proceeding from the accessory character of the agreement.

Here, the loan was secured by the fruits of the landholding owned by Benjamin. The court noted
that while the agreement did not provide for the transfer of possession of the subject land, the
contemporaneous and subsequent acts of the parties show that the possession was intended to be
transferred to the Magtalas sisters.

At the time that the agreement was entered into, Benjamin was ill and physically incapable of
cultivating the land.

Q: May the Magtalas sisters retain enjoyment of the subject land until the loan is paid?

A: Yes. As antichretic creditors, the Magtalas sisters are entitled to retain enjoyment of the
subject land until the debt has been totally paid.

Article 2136 of the Civil Code reads: The debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he owes the creditor.

Here, the loan is not yet fully paid.

CORRO, Erika

Zacarias v. Revilla
G.R. No. 190901 November 12, 2014

Alfredo Revilla and Paz Castillo-Revilla (Spouses Revilla) are the owners in fee simple of a
15,000 square meter unregistered parcel of land in Silang, Cavite.

In 1983, the Spouses Revilla faced financial difficulties in raising funds for Alfredo Revilla’s
travel to Saudi Arabia, so Paz Castillo-Revilla borrowed money from Amanda Cotoner-Zacarias
(Amada). By way of security, the parties verbally agreed that Amada would take physical
possession of the property, cultivate it, then use the earnings from the cultivation to pay the loan
and realty taxes. Upon full payment of the loan, Amada would return the property to the Revilla
spouses.

Unknown to the Revilla spouses, Amada presented a fictitious document entitled “Kasulatan ng
Bilihan ng Lupa” before the Provincial Assessor of Cavite. This document was executed on
March 19, 1979 with the Revilla spouses as sellers and Amada as buyer of the property.
Consequently, the tax declaration in the name of Revilla spouses was cancelled and another tax
declaration was issued in the name of Amada.

Amada sold the property to the spouses Adolfo and Elvira Casorla (Casorla spouses) by “Deed
of Absolute Sale of Unregistered Land.”

In turn, the Casorla spouses executed a deed of absolute sale in favor of Rodolfo and Yolanda
Sun (Sun spouses). The tax declarations were issued in favor of the Sun spouses.

Alfredo Revilla returned from Saudi Arabia. He asked Amada why she had not returned their tax
declaration considering their full payment of the loan. He then discovered that the property’s tax
declaration was already in the name of the Sun spouses.

The Revilla spouses were served a copy of the answer in the land registration case filed by the
Sun spouses for the property. The Revilla spouses then saw a copy of the "Kasulatan ng Bilihan
ng Lupa" and noticed that their signatures as sellers were forged.

They then demanded the cancellation of the "Kasulatan ng Bilihan ng Lupa" from Amada and all
subsequent transfers of the property, its reconveyance, and the restoration of its tax declaration in
their name. Amada failed to take action.

On November 17, 1995, the Revilla spouses filed a complaint before the Tagaytay Regional Trial
Court for the annulment of sales and transfers of title and reconveyance of the property with
damages against Amada, the Casorla spouses, the Sun spouses, and the Provincial Assessor of
Cavite.

Q: Whether or not the contract of Antichresis is void.

A: YES. Article 2132 of the Civil Code provides that "by the contract of antichresis the creditor
acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply
them to the payment of the interest, if owing, and thereafter to the principal of his credit."

Thus, antichresis involves an express agreement between parties such that the creditor will have
possession of the debtor’s real property given as security, and such creditor will apply the fruits
of the property to the interest owed by the debtor, if any, then to the principal amount.

The term, antichresis, has a Greek origin with "‘anti’ (against) and ‘chresis’ (use) denoting the
action of giving a credit ‘against’ the ‘use’ of a property."

Antichresis requires delivery of the property to the antichretic creditor, but the latter cannot
ordinarily acquire this immovable property in his or her possession by prescription.

Similar to the prohibition against pactum commissorium since creditors cannot "appropriate the
things given by way of pledge or mortgage, or dispose of them," an antichretic creditor also
cannot appropriate the real property in his or her favor upon the non-payment of the debt.

Antichresis also requires that the amount of the principal and the interest be in writing for the
contract to be valid.

However, the issue before us does not concern the nature of the relationship between the parties,
but the validity of the documents that caused the subsequent transfers of the property involved.

The reinstatement of the property in favor of respondents Revilla spouses was anchored on the
lower courts’ finding that their signatures as sellers in the "Kasulatan ng Bilihan ng Lupa" were
forged.

This court has held that the "question of forgery is one of fact." Well-settled is the rule that
"factual findings of the lower courts are entitled great weight and respect on appeal, and in fact
accorded finality when supported by substantial evidence on the record."

In the event that one spouse is incapacitated or otherwise unable to participate in the
administration of the common properties, the other spouse may assume sole powers of
administration. These powers do not include disposition or encumbrance without authority of the
court or the written consent of the other spouse. In the absence of such authority or consent, the
disposition or encumbrance shall be void. However, the transaction shall be construed as a
continuing offer on the part of the consenting spouse and the third person, and may be perfected
as a binding contract upon the acceptance by the other spouse or authorization by the court
before the offer is withdrawn by either or both offerors.

Thus, as correctly found by the Court of Appeals, "assuming arguendo that the signature of
plaintiff-appellee Paz on the Kasulatan ng Bilihan ng Lupawas was not forged, her signature
alone would still not bind the subject property, it being already established that the said
transaction was made without the consent of her husband plaintiff-appellee Alfredo."
This court has held that "the rule in land registration law that the issue of whether the buyer of
realty is in good or bad faith is relevant only where the subject of the sale is registered land and
the purchase was made from the registered owner whose title to the land is clean." Our laws have
adopted the Torrens system to strengthen public confidence in land transactions: The Torrens
system was adopted in this country because it was believed to be the most effective measure to
guarantee the integrity of land titles and to insure their indefeasibility once the claim of
ownership is established and recognized. If a person purchases a piece of land on the assurance
that the seller’s title thereto is valid, he should not run the risk of losing his acquisition. If this
were permitted, public confidence in the system would be eroded and land transactions would
have to be attended by complicated and not necessarily conclusive investigations and proof of
ownership.

Necessarily, those who rely in good faith on a clean title issued under the Torrens system for
registered lands must be protected. On the other hand, those who purchase unregistered lands do
so at their own peril.