G. R. No.

132869 - October
18, 2001

GREGORIO DE VERA, JR.,

Petitioner, v. COURT OF
APPEALS, Q. P. SAN DIEGO
CONSTRUCTION, INC.,
ASIATRUST DEVELOPMENT
BANK, SECOND LAGUNA
DEVELOPMENT BANK,
CAPITOL CITY
DEVELOPMENT BANK, EX-
OFFICIO SHERIFF OF
QUEZON CITY and/or HIS
DEPUTY, Respondents.

BELLOSILLO, J.:

This is a Petition for Review,

under Rule 45 of the
Revised Rules of Court, of
the Decision of the Court of
Appeals in CA-G.R. CV No.
37281, "Gregorio de Vera,
Jr. v. Court of Appeals, QP
San Diego Construction,
Inc., Asiatrust
Development Bank,
Second Laguna
Development Bank,
Capitol City Development
Bank, Ex-Officio Sheriff of
Quezon City and/or his
Deputy," and of its
Resolution of 18 February
1998 denying petitioner's
Manifestation with Motion
for Reconsideration.
Respondent Q. P. San
Diego Construction, Inc.
(QPSDCI), owned a parcel
of land located at 101
Panay Avenue, Quezon
City, on which it built
Lourdes I Condominium.
On 10 June 1983, to
finance its construction
and development,
QPSDCI entered into a
Syndicate Loan
Agreement1 with
respondents Asiatrust
Development Bank
(ASIATRUST) as lead bank,
and Second Laguna
Development Bank
(LAGUNA) and Capitol
City Development Bank
(CAPITOL) as participating
banks (hereafter
collectively known as
FUNDERS). QPSDCI
mortgaged to the creditor
banks as security the
herein mentioned Panay
Avenue property and the
condominium constructed
thereon. The mortgage
deed was registered with
the Register of Deeds of
Quezon City and
annotated on the
individual condominium
certificates of title (CCT) of
each condominium unit.2
On 23 June 1983 petitioner
Gregorio de Vera Jr. and
QPSDCI, through its
authorized agent Fil-Estate
Realty Corporation (FIL-
ESTATE), entered into a
Condominium Reservation
Agreement3 where
petitioner undertook to
buy Unit 211-2C of the
condominium for
P325,000.00 under the
following agreed terms of
payment: (a) an option
money of P5,000.00
payable upon signing of
the agreement to form
part of the purchase price;
(b) a full downpayment of
P175,675.00 broken down
into the reservation fee of
P5,000.00 and three (3)
equal monthly installments
payable beginning the
month after the signing of
the contract; and, (c) the
remaining balance of
P160,000.00 to be secured
through petitioner's Pag-
IBIG and Open-Housing
Loan. Pending release of
the loan, petitioner was to
avail of a bridge financing
loan with ASIATRUST or any
accredited originating
bank of the Pag-IBIG
program.
On 2 June 1983 petitioner
paid the reservation fee of
P5,000.00, and on 11 July
1983 the balance of the
downpayment of
P167,000.00, thus
completing the
downpayment of
P175,675.00 well before the
due date. As incentive,
petitioner was given a full
discount on cash payment
by QPSDCI to bring the
total payment to
P184,040.00.

Pursuant to their
Condominium Reservation
Agreement, petitioner
submitted through FIL-
ESTATE his application for
the Pag-IBIG loan. On 28
December 1983 ASIATRUST
as originating bank notified
FIL-ESTATE that petitioner's
Pag-IBIG loan application
had been approved.4 In a
letter dated 18 January
1984 QPSDCI President
Quintin P. San Diego
forwarded the letter to
petitioner. However, the
amount approved was
only P139,100.00 and not
P160,000.00. Additional
charges further reduced
the amount to P117,043.33.
Petitioner De Vera Jr.
approached QPSDCI to
have the P12,040.00
discount credited to his
additional equity. Since
the resultant net loan of
P117,043.33 was insufficient
to cover the balance of
the purchase price, De
Vera Jr. negotiated with
QPSDCI to defer payment
of the P23,916.67
deficiency until the project
was completed and the
unit was ready for turnover.
QPSDCI agreed.5

The condominium project

was substantially
completed in June 1984
and the unit was turned
over to De Vera Jr. the
following month.
Accordingly, petitioner
paid QPSDCI the
P23,916.67 shortfall
between the balance and
the granted loan.

On 26 June 1984 ASIATRUST

through its Vice-President
Pedro V. Lucero and
Manager Nicanor T.
Villanueva wrote to
QPSDCI asking the unit
buyers to pay in advance
the costs of the transfer of
titles and registration of
their Pag-IBIG loan
mortgages.6 QPSDCI
forwarded the letter to De
Vera Jr. and requested
that he pay the amount to
QPSDCI.7 As ASIATRUST
indicated that the amount
be paid directly to it, De
Vera Jr. went to the bank
for clarification. On 23
August 1983, after learning
that ASIATRUST was in
possession of the
certificate of title, De Vera
Jr. paid the transfer
expenses directly to
ASIATRUST.

On 17 September 1984
ASIATRUST sent another
notice of approval8 to
QPSDCI and De Vera Jr.
with the notation,
"additional equity of all
accounts have (sic) to be
paid directly to the Bank."
On 3 October 1984
ASIATRUST wrote another
letter9 asking QPSDCI to
advise the unit buyers,
among others, to pay all
additional and remaining
equities on 10 October
1984; that their Pag-IBIG
loan mortgages would be
registered only upon
payment of those equities;
and, that loan mortgages
registered after 31 October
1984 would be subject to
the increased Pag-IBIG
interest rates.

On 12 October 1984
ASIATRUST also wrote a
letter to petitioner and
signed by its Assistant
Manager Leticia R. de la
Cruz informing him that his
housing loan would only
be implemented upon the
following conditions: (a)
Payment of the remaining
equity directly to
ASIATRUST Development
Bank; and (b) Signing of all
Pag-IBIG documents not
later than 20 October 1984,
so his mortgages could be
registered on or before 31
October 1984. Mortgages
registered beyond said
date shall subject the Pag-
IBIG loan to the increased
interest rates of the
National Home Mortgage
Finance Corp. (per Circular
#27 dated June 21, 1984).

According to petitioner,
the letter came as a total
surprise to him; all the while
he thought that his loan
had already been
released to QPSDCI and
the titles transferred to his
name; he promptly wrote
ASIATRUST to seek
clarification; ASIATRUST
responded by informing
De Vera Jr. that the
developmental loan
agreement between
QPSDCI and the three (3)
banks, under which the
individual titles of the
condominium units were
mortgaged in favor of the
FUNDERS to secure the
loan, shall be paid out of
the net proceeds of the
Pag-IBIG loans of the
buyers; that the total
amount of loan from the
FUNDERS was distributed
among all condominium
units such that each unit
had to bear a certain
portion of the total loan, or
a "loan value;" that per
agreement with QPSDCI,
ASIATRUST would only
grant the Pag-IBIG-Housing
Loan with the release of
the mortgage liens, which
could not be released
unless the buyers fully paid
their respective loan
values; and that
petitioner's equity
payments to QPSDCI had
not been remitted to the
bank.

On 30 May 1985 ASIATRUST

informed QPSDCI that it
could no longer extend the
bridge financing loan to
some of the buyers,
including petitioner, for
various reasons,10 among
which was that petitioner
had already exceeded
the age limit, hence, he
was disqualified.11

After learning of the

disapproval of his loan,
petitioner wrote the
president of QPSDCI to
make arrangements to
settle his balance. Since
petitioner had already
invested a substantial
amount in remodelling
and improving his unit,
rescinding the sale was no
longer a viable option.
Consequently, he only
asked the president of
QPSDCI for some
assurance that the title
would be turned over to
him upon full payment.

In response, QPSDCI
suggested that petitioner
deal directly with
ASIATRUST for any matter
regarding the sale of the
unit.12 President San Diego
explained that "as far as
we are concerned we
have sold to you our
property at a certain price
and we have
correspondingly issued to
your goodself, thru the
Bank, a Deed of Absolute
Sale for the unit we sold to
you taking into
consideration that the
Bank has approved your
loan per their advice
dated December 28, 1983
and presumably credited
us for the approved
amount of loan."
As petitioner failed to
obtain the housing loan,
he was not able to pay the
balance of the purchase
price. QPSDCI sent him a
letter13 dated 6 August
1987 presenting him with
two options: (a) to pay the
remaining balance of the
purchase price, with
interest, which had already
ballooned to P263,751.63,
on or before 15 August
1987; or, (b) to pay rent for
the use of the unit from 28
July 1984 to June 1987.

On 20 May 1988 petitioner,

upon discovering that the
FUNDERS had already
published a notice14 of
extrajudicial foreclosure of
the mortgage, filed a
complaint against
respondents for damages
and injunction with urgent
prayer for issuance of a writ
of preliminary injunction,
annulment of mortgage
based on fraud, with
urgent prayer for the
issuance of a writ of
preliminary attachment
and specific performance.
The complaint was
docketed as Civil Case No.
Q-53737 and subsequently
raffled to Branch 107 of the
Regional Trial Court of
Quezon City.

Meanwhile, QPSDCI failed

to pay its obligations to the
FUNDERS. On 23 May 1988
ASIATRUST extrajudicially
foreclosed the mortgage
on twenty-seven (27)
condominium units,
including that of petitioner
De Vera Jr. The units were
sold at public auction, with
the FUNDERS as the highest
bidder. The certificate of
sale was issued and
annotated on the CCTs.

On 3 March 1992 the trial

court rendered judgment
"directing the defendants
(herein respondents) to
pay to the plaintiff (herein
petitioner) jointly and
severally the sum
equivalent to the penalties
and charges plus
whatever amount may be
necessary to redeem Unit
211-2C from any lien and
encumbrances so that the
title may be released and
delivered to the plaintiff,
free from any lien and
encumbrances, subject
only to the deduction of his
unpaid balance of
P139,000.00, which the
plaintiff should pay out of
his own funds, plus
exemplary damages of
P100,000.00 each and to
pay plaintiff attorney's fees
jointly and severally x x x
P50,000.00 plus the
expenses of litigation." The
lower court denied
plaintiff's prayer for moral
damages and dismissed
defendants' counterclaim
against the plaintiff and
cross-claims against each
other.15

The Court of Appeals

affirmed the decision of
the trial court with the
modification that
respondents were ordered
solidarily to pay petitioner
P50,000.00 as nominal
damages, but the award
for actual and exemplary
damages was deleted.
On 9 July 1997 petitioner
filed a "Compliance with
Manifestation and Motion
for Extension of Time to File
Motion for
Reconsideration" alleging
that he received the
decision of the Court of
Appeals on 4 July 1997 and
requesting a thirty (30)-day
extension within which to
file a motion for
reconsideration. The
motion was denied by
respondent appellate
court.

On 8 August 1997
petitioner filed a
"Manifestation with Motion
for Reconsideration," and
on 6 February 1998 a
"Compliance with Motion
to Resolve Manifestation
with Motion for
Reconsideration," with
respondent court.
Reckoning the deadline of
the period to file a motion
for reconsideration at 19
July 1997, the Court of
Appeals denied
petitioner's Motion for
Reconsideration for having
been filed out of time.
Hence, the instant petition
for review on certiorari.
Petitioner assails the 18
February 1998 Resolution
denying his Motion for
Reconsideration, asserting
that the Court of Appeals
should not have denied his
motion on mere
technicality. Petitioner
claims that his counsel was
not notified of the Court of
Appeals' decision. The
Notice of Judgment16 of
the decision of the Court of
Appeals shows that the
same was served on
petitioner Gregorio de
Vera himself and not on his
counsel. Petitioner asserts
that service to a party is
allowed only if the party is
not represented by
counsel. But if he is
represented by a counsel,
then service shall be made
upon his counsel unless
service upon the party
himself is ordered by the
court. Unless so ordered,
service on the party himself
who is represented by
counsel is not notice in law,
hence, invalid.17

Furthermore, justice will be

better served by
entertaining this petition
than by dismissing it
outright. It is always in the
power of this Court to
suspend its own rules, or to
except a particular case
from its operation,
whenever the purposes of
justice require it.18

The trial court found that

petitioner's failure to pay
the balance of the price of
Unit 211-2C was not his
fault. It also found that
petitioner was a real party
in interest to annul the loan
agreement between
QPSDCI and the FUNDERS,
and that he had priority in
right to the unit over the
FUNDERS. The trial court
rejected QPSDCI's
counterclaim against
petitioner for rentals and
sustained petitioner's claim
for damages against
private respondents.
The Court of Appeals ruled
that the regular courts had
no jurisdiction over the
subject matter of the case,
the proper venue being
the Housing and Land Use
Regulatory Board (HLURB).
However, respondents
were estopped from
questioning jurisdiction
because they filed
counterclaims in the lower
court.
As to the issue of who had
superior right over the Unit
211-2C, the Court of
Appeals ruled in favor of
petitioner, holding that the
mortgage in favor of
ASIATRUST, which was the
basis for its title, did not
bind petitioner inasmuch
as the same was not
registered with the
National Housing Authority
(NHA), contrary to the
mandate of Sec. 18 of PD
957, or "The Subdivision and
Condominium Buyers'
Protective Decree.''19 The
appellate court further
found that QPSDCI
breached its warranties as
seller under Art. 1547, and
also violated its obligation
to deliver to petitioner a
clean title as required by
Sec. 4 of PD 957. It
declared that delivery of
the unit to petitioner
operated to transfer
ownership to him from
QPSDCI.

Respondents did not

appeal. Petitioner contests
the decision of the Court of
Appeals only insofar as it
deleted the award of
actual and exemplary
damages and attorney's
fees. The only issue to be
addressed by this Court
therefore is the propriety of
the award of damages in
favor of petitioner.

In finding QPSDCI liable for

damages, the trial court
held

x x x it (QPSDCI) has not

exerted any reasonable
diligence or effort to
procure the issuance of
the title to the plaintiff. All
that it did was to refer the
plaintiff to the Funder(s),
alleging that he (plaintiff)
should transact business
with them as the matter of
loan is between the
plaintiff and the Funder(s),
and they had nothing to
do with it. However, it
collected the additional
equity and never
forwarded the same to the
Funder(s) nor informed the
latter of plaintiff's payment
thereof. Thus, to the mind
of Asiatrust, plaintiff never
paid the additional equity,
although per records of
the Seller, he already had.

All these show negligence

on the part of the Seller to
perform its obligations
under the contract to the
detriment of the plaintiff,
for which it should be liable
for damages under Art.
2201 of the Civil Code, for
the natural and probable
consequences of the
breach of the obligation
which the parties, specially
the Seller, should have
foreseen or could have
reasonably foreseen at the
time the obligation was
contracted.
As to respondent
ASIATRUST, the trial court
held that its failure to notify
petitioner of the required
steps to be taken after the
approval of the loan, of
the requirement that
additional equity be paid
directly to the bank and
other important aspects of
the bridging loan, made it
liable for damages under
the general provisions on
torts under Art. 2176 of the
Civil Code, in relation to
Art. 2202.

In deleting the award for

damages, the respondent
Court of Appeals
explained

As earlier found, QPSDCI

failed to comply with its
warranties as seller.
Unfortunately, plaintiff-
appellee posits the
propriety of the award of
actual damages only in
the probable sense: that
such award is to the
amount of interests,
penalties and other
charges as plaintiff may
stand liable for by reason
of the non-payment of the
purchase price. In other
words, plaintiff-appellee
admits not having suffered
damages in consequence
of non-compliance of
seller's warranties. Since
actual damages are
predicated on such
pecuniary loss as duly
proved, the award of the
lower court therefor is
plainly not in order x x x
(citations omitted).
We agree with the
respondent Court of
Appeals on this point.
Petitioner did not present
any proof that he suffered
any damage as a result of
the breach of seller's
warranty. He did not lose
possession of his
condominium unit,
although the same had
not yet been registered in
his name. In his
Consolidated Reply,
petitioner came up with
this feeble argument for
claiming actual damages,
a rehash of his motion for
reconsideration with the
Court of Appeals

Petitioner reiterates that

the compensatory
damages awarded is to
the amount of interests,
penalties and other
charges as (he) may stand
liable for by reason of the
non-payment of the
balance of the purchase
price of Unit #211 in
consequence of the
respondent's fault or
negligence as evidenced
by Exhs. S and S-1. The
compensation is the same
amount as whatever the
liability may be and
therefore merely offsets
the liability x x x x

The cost of clearing the

CCT of liens and
encumbrances and
transferring it to the name
of the petitioner are also
part of the actual or
compensatory damages
and are its own proof.
Article 2199 of the Civil
Code provides that one is
entitled to adequate
compensation only for
such pecuniary loss
suffered by him as is "duly
proved."20 This provision
denies the grant of
speculative damages, or
such damage not actually
proved to have existed
and to have been caused
to the party claiming the
same.21 Actual damages,
to be recoverable, must
not only be capable of
proof, but must actually be
proved with reasonable
degree of certainty. Courts
cannot simply rely on
speculation, conjecture or
guesswork in determining
the fact and amount of
damages.22
This does not mean
however that petitioner is
liable to private
respondents for penalties,
interests and other charges
that accrued by reason of
non-payment of the
balance of the purchase
price. Respondent
ASIATRUST had made
several representations to
petitioner that his loan had
been approved. The tenor
of the letters sent by
ASIATRUST would lead a
reasonable man to believe
that there was nothing left
to do but await the release
of the loan. ASIATRUST
cannot hide behind the
pithy excuse that the grant
of the bridge financing
loan was subject to the
release of the Pag-IBIG
loan. The essence of
bridge financing loans is to
obtain funds through an
interim loan while the Pag-
IBIG funds are not yet
available. To await the
release of the Pag-IBIG
loan would render any
bridge financing nugatory.
Thus, we agree with the
trial court when it said that
"the conclusion is
inevitable that although
the plaintiff was not able to
pay, he was a victim of
circumstances and his
failure was not due to his
own fault."

Furthermore, Sec. 25 of PD
957 provides:

SECTION 25. Issuance of

Title. The owner or
developer shall deliver the
title of the lot or unit to the
buyer upon full payment of
the lot or unit. No fee,
except those required for
the registration of the
deed of sale in the Registry
of Deeds, shall be
collected for the issuance
of such title. In the event a
mortgage over the lot or
unit is outstanding at the
time of the issuance of the
title to the buyer, the
owner or developer shall
redeem the mortgage or
the corresponding portion
thereof within six months
from such issuance in order
that the title over any fully
paid lot or unit may be
secured and delivered to
the buyer in accordance
herewith.

From the foregoing it is

clear that upon full
payment, the seller is duty-
bound to deliver the title of
the unit to the buyer. Even
with a valid mortgage over
the lot, the seller is still
bound to redeem said
mortgage without any cost
to the buyer apart from the
balance of the purchase
price and registration fees.
It has been established
that respondent QPSDCI
had been negligent in
failing to remit petitioner's
payments to ASIATRUST. If
QPSDCI had not been
negligent, then even the
possibility of charges, liens
or penalties would not
have arisen. Therefore, as
between QPSDCI and
petitioner, the former
should be held liable for
any charge, lien or penalty
that may arise. However, it
was error for the trial court
to remedy the situation in
the form of an award for
damages because, as
discussed earlier, the basis
for the same does not
appear indubitable.

Part of the confusion lies in

the deficiency of the trial
court's decision. It had
found that petitioner had
superior right to the unit
over the FUNDERS and the
mortgage in favor of the
FUNDERS was contrary to
Condominium laws.
Therefore, the proper
remedy was to annul the
mortgage foreclosure sale
and the CCT issued in favor
of ASIATRUST, and not
merely decree an award
for damages. We held in
Union Bank of the
Philippines v. HLURB 23

Clearly, FRDC's act of

mortgaging the
condominium project to
Bancom and FEBTC,
without the knowledge
and consent of David as
buyer of a unit therein, and
without the approval of
the NHA (now HLURB) as
required by P.D. No. 957,
was not only an unsound
real estate business
practice but also highly
prejudicial to the buyer
David, (who) has a cause
of action for annulment of
the mortgage, the
mortgage foreclosure sale,
and the condominium
certificate of title that was
issued to the UBP and
FEBTC as highest bidders of
the sale.

These remedies were

clearly within those sought
for in petitioner's
complaint. The trial court
should have also ordered
QPSDCI to credit
petitioner's payments to his
outstanding balance and
deliver to petitioner a
clean CCT upon full
payment of the purchase
price as mandated by Sec.
25 of PD 957.

We note that petitioner,

believing that he won, did
not appeal the trial court's
decision. Petitioner is partly
to blame for the difficult
situation he is in, having
filed his complaint with the
regular courts instead of
the HLURB. Nevertheless,
both trial court and the
Court of Appeals found
that petitioner had superior
rights over the
condominium unit, that
petitioner was not bound
by the mortgage in favor
of the FUNDERS and, that
QPSDCI violated its
contract with petitioner by
its failure to remit the
latter's payments. Such
findings are uncontested
before us and provide
enough ground to warrant
the modification of the
ruling, so that full relief may
be accorded to petitioner.
The general rule that an
appellate court may only
pass upon errors assigned
may be waived, and the
appellate court may
consider matters not
assigned when
consideration of which is
necessary in arriving at a
just decision and complete
resolution of the case or
serve the interests of justice
or to avoid dispensing
piecemeal justice.24
WHEREFORE, the assailed
Decision of the Court of
Appeals in CA-G.R. CV No.
37281 is MODIFIED thus

(a) The mortgage over Unit

211-2C of Lourdes I
Condominium covered by
CCT No. 2307 as well as its
foreclosure sale is
declared NULL and VOID.
The Ex-Officio Sheriff of
Quezon City is ordered to
cancel the certificate of
sale in favor of ASIATRUST
Development Bank over
the aforesaid Unit 211-2C
and the Register of Deeds
of Quezon City to cancel
the Annotation of the Real
Estate Mortgage (Entry No.
7714) and the Annotation
of the Certificate of Sale
(Entry No. 8087); and
(b) Respondents Q. P. San
Diego Construction, Inc.,
and ASIATRUST are ordered
to credit all payments
made by petitioner
Gregorio de Vera Jr., to his
outstanding balance, and
to deliver to petitioner the
certificate of title over Unit
211-2C, Lourdes I
Condominium, upon full
payment of the purchase
price, free from all
penalties, liens, charges,
except those accruing
after finality of this
Decision.

The award of nominal

damages in favor of
petitioner in the amount of
P50,000.00 is AFFIRMED.

SO ORDERED.
X-----------------------X
[G.R. No. 113926. October
23, 1996.]

SECURITY BANK AND TRUST

COMPANY, Petitioner, v.
REGIONAL TRIAL COURT OF
MAKATI, BRANCH 61,
MAGTANGGOL EUSEBIO
and LEILA VENTURA,
Respondents.

DECISION
HERMOSISIMA, JR., J.:

Questions of law which are

of first impression are
sought to be resolved in
this case: Should the rate
of interest on a loan or
forbearance of money,
goods or credits, as
stipulated in a contract, far
in excess of the ceiling
prescribed under or
pursuant to the Usury Law,
prevail over Section 2 of
Central Bank: Circular No
905 which prescribes that
the rate of interest thereof
shall continue to be 12%
per annum? Do the Courts
have the discretion to
arbitrarily override
stipulated interest rates of
promissory notes and
stipulated interest rates of
promissory notes and
thereby impose a 12%
interest on the loans, in the
absence of evidence
justifying the imposition of
a higher rate?

This is a petition for review

on certiorari for the
purpose of assailing the
decision of Honorable
Judge Fernando V.
Gorospe of the Regional
Trial Court of Makati,
Branch 61, dated March
30, 1993, which found
private respondent
Eusebio liable to petitioner
for a sum of money.
Interest was lowered by
the court a quo from 23%
per annum as agreed
upon by the parties to 12%
per annum.
The undisputed facts are
as follows:chanrob1es
virtual 1aw library

On April 27, 1983, private

respondent Magtanggol
Eusebio executed
Promissory Note No.
TL/74/178/83 in favor of
petitioner Security Bank
and Trust Co. (SBTC) in the
total amount of One
Hundred Thousand Pesos
(P100,000.00) payable in six
monthly installments with a
stipulated interest of 23%
per annum up to the fifth
installment. 1

On July 28, 1983,

respondent Eusebio again
executed Promissory Note
No. TL/74/1296/83 in favor
of petitioner SBTC.
Respondent bound himself
to pay the sum of One
Hundred Thousand Pesos
(P100,000.00) in six (6)
monthly installments plus
23% interest per annum. 2

Finally, another Promissory

Note No. TL74/1491/83 was
executed on August 31,
1983 in the amount of Sixty
Five Thousand Pesos
(P65,000.00). Respondent
agreed to pay this note in
six (6) monthly installments
plus interest at the rate of
23% per annum. 3

On all the
abovementioned
promissory notes, private
respondent Leila Ventura
signed as co-maker. 4

Upon maturity which fell on

the different dates below,
the principal balance
remaining on the notes
stood at:
1) PN No. TL/74/748/83 —
P16,665.00 as of
September 1983.

2) PN No. TL/74/1296/83 —
P83,333.00 as of August
1983.

3) PN No. TL/74/1991/83 —
65,000.00 as of August
1983.
Upon the failure and
refusal of respondent
Eusebio to pay the
aforestated balance
payable, a collection case
was filed in court by
petitioner SBTC. 5 On
March 30, 1993, the court a
quo rendered a judgment
in favor of petitioner SBTC,
the dispositive portion
which
reads:jgc:chanrobles.com
.ph

"WHEREFORE, premises
above-considered, and
plaintiffs claim having
been duly proven,
judgment is hereby
rendered in favor of
plaintiff and as against
defendant Eusebio who is
hereby ordered
to:chanrob1es virtual 1aw
library

1. Pay the sum of

P16,665.00, plus interest of
12% per annum starting 27
September 1983, until fully
paid;

2. Pay the sum of

P83,333.00, plus interest of
12% per annum starting 28
August 1983, until fully
paid;

3. Pay the sum of

P65,000.00, plus interest of
12% per annum starting 31
August 1983, until fully
paid;

4. Pay the sum equivalent

to 20% of the total amount
due and payable to
plaintiff as and by way of
attorney’s fees; and to

5. Pay the costs of this suit.

SO ORDERED." 6

On August 6, 1993, a
motion for partial
reconsideration was filed
by petitioner SBTC
contending
that:chanrob1es virtual
1aw library

(1) the interest rate agreed

upon by the parties during
the signing of the
promissory notes was 23%
per annum;

(2) the interests awarded

should be compounded
quarterly from due date as
provided in the three (3)
promissory notes;

MISSING PAGE 4

CB Circular 905 was issued

by the Central Bank’s
Monetary Board pursuant
to P.D. 1684 empowering
them to prescribe the
maximum rates of interest
for loans and certain
forbearances, to
wit:jgc:chanrobles.com.ph

"SECTION 1. Section 1-a of

Act No. 2655, as amended,
is hereby amended to
read as
follows:jgc:chanrobles.co
m.ph

"SEC. 1-a. The Monetary

Board is hereby authorized
to prescribe the maximum
rate or rates of interest for
the loan or renewal thereof
or the forbearance of any
money, goods or credits,
and to change such rate
or rates whenever
warranted by prevailing
economic and social
conditions: Provided, That
changes in such rate or
rates may be effected
gradually on scheduled
dates announced in
advance.

"In the exercise of the

authority herein granted,
the Monetary Board may
prescribe higher maximum
rates for loans of low
priority, such as consumer
loans or renewals thereof
as well as such loans made
by pawnshops, finance
companies and other
similar credit institutions
although the rates
prescribed for these
institutions need not
necessarily be uniform. The
Monetary Board is also
authorized to prescribed
different maximum rate or
rates for different types of
borrowings, including
deposits and deposit
substitutes, or loans of
financial intermediaries."
10

This court has ruled in the

case of Philippine National
Bank v. Court of Appeals
11
that:jgc:chanrobles.com.p
h

"P.D. No. 1684 and C.B.

Circular No. 905 no more
than allow contracting
parties to stipulate freely
regarding any subsequent
adjustment in the interest
rate that shall accrue on a
loan or forbearance of
money, goods or credits. In
fine, they can agree to
adjust, upward or
downward, the interest
previously
stipulated."cralaw
virtua1aw library
All the promissory notes
were signed in 1983 and,
therefore, were already
covered by CB Circular
No. 905. Contrary to the
claim of respondent court,
this circular did not repeal
nor in anyway amend the
Usury Law but simply
suspended the latter’s
effectivity.
Basic is the rule of statutory
construction that when the
law is clear and
unambiguous, the court is
left with no alternative but
to apply the same
according to its clear
language. As we have
held in the case of Quijano
v. Development Bank of
the Philippines: 12
". . . We cannot see any
room for interpretation or
construction in the clear
and unambiguous
language of the above-
quoted provision of law.
This Court had steadfastly
adhered to the doctrine
that its first and
fundamental duty is the
application of the law
according to its express
terms, interpretation being
called for only when such
literal application is
impossible. No process of
interpretation or
construction need be
resorted to where a
provision of law
peremptorily calls for
application. Where a
requirement or condition is
made in explicit and
unambiguous terms, no
discretion is left to the
judiciary. It must see to it
that its mandate is
obeyed."cralaw virtua1aw
library

The rate of interest was

agreed upon by the
parties freely. Significantly,
respondent did not
question that rate. It is not
for respondent court a quo
to change the stipulations
in the contract where it is
not illegal. Furthermore,
Article 1306 of the New
Civil Code provides that
contracting parties may
establish such stipulations,
clauses, terms and
conditions as they may
deem convenient,
provided they are not
contrary to law, morals,
good customs, public
order, or public policy. We
find no valid reason for the
respondent court a quo to
impose a 12% rate of
interest on the principal
balance owing to
petitioner by respondent in
the presence of a valid
stipulation. In a loan or
forbearance of money,
the interest due should be
that stipulated in writing,
and in the absence
thereof, the rate shall be
12% per annum. 13 Hence,
only in the absence of a
stipulation can the court
impose the 12% rate of
interest.

The promissory notes were

signed by both parties
voluntarily. Therefore,
stipulations therein are
binding between them.
Respondent Eusebio,
likewise, did not question
any of the stipulations
therein. In fact, in the
Comment filed by
respondent Eusebio to this
court, he chose not to
question the decision and
instead expressed his
desire to negotiate with
the petitioner bank for
"terms within which to
settle his obligation." 14

IN VIEW OF THE
FOREGOING, the decision
of the respondent court a
quo, is hereby AFFIRMED
with the MODIFICATION
that the rate of interest that
should be imposed be 23%
per annum.

SO ORDERED.
X----------------------------X

G.R. No. 114286 April 19,

2001
THE COSOLIDATED BANK
AND TRUST CORPORATION
(SOLIDBANK), petitioner
vs.
THE COURT OF APPEALS,
CONTINENTAL CEMENT
CORPORATION, GREGORY
T. LIM and SPOUSE,
respondents.

YNARES-SANTIAGO, J.:
The instant petition for
review seeks to partially set
aside the July 26, 1993
Decision1 of respondent
Court of Appeals in CA-GR.
CV No. 29950, insofar as it
orders petitioner to
reimburse respondent
Continental Cement
Corporation the amount of
P490, 228.90 with interest
thereon at the legal rate
from July 26, 1988 until fully
paid. The petition also
seeks to set aside the
March 8, 1994 Resolution2
of respondent Court of
Appeals denying its Motion
for Reconsideration.

The facts are as follows:

On July 13, 1982,

respondents Continental
Cement Corporation
(hereinafter, respondent
Corporation) and Gregory
T. Lim (hereinafter,
respondent Lim) obtained
from petitioner
Consolidated Bank and
Trust Corporation Letter of
Credit No. DOM-23277 in
the amount of P
1,068,150.00 On the same
date, respondent
Corporation paid a
marginal deposit of
P320,445.00 to petitioner.
The letter of credit was
used to purchase around
five hundred thousand
liters of bunker fuel oil from
Petrophil Corporation,
which the latter delivered
directly to respondent
Corporation in its Bulacan
plant. In relation to the
same transaction, a trust
receipt for the amount of P
1,001,520.93 was executed
by respondent
Corporation, with
respondent Lim as
signatory.

Claiming that respondents

failed to turn over the
goods covered by the trust
receipt or the proceeds
thereof, petitioner filed a
complaint for sum of
money with application for
preliminary attachment3
before the Regional Trial
Court of Manila. In answer
to the complaint,
respondents averred that
the transaction between
them was a simple loan
and not a trust receipt
transaction, and that the
amount claimed by
petitioner did not take into
account payments
already made by them.
Respondent Lim also
denied any personal
liability in the subject
transactions. In a
Supplemental Answer,
respondents prayed for
reimbursement of alleged
overpayment to petitioner
of the amount of
P490,228.90.

At the pre-trial conference,

the parties agreed on the
following issues:
1) Whether or not the
transaction involved is a
loan transaction or a trust
receipt transaction;

2) Whether or not the

interest rates charged
against the defendants by
the plaintiff are proper
under the letter of credit,
trust receipt and under
existing rules or regulations
of the Central Bank;
3) Whether or not the
plaintiff properly applied
the previous payment of
P300,456.27 by the
defendant corporation on
July 13, 1982 as payment
for the latter’s account;
and

4) Whether or not the

defendants are personally
liable under the
transaction sued for in this
case.4

On September 17, 1990,

the trial court rendered its
Decision,5 dismissing the
Complaint and ordering
petitioner to pay
respondents the following
amounts under their
counterclaim: P490,228.90
representing overpayment
of respondent
Corporation, with interest
thereon at the legal rate
from July 26, 1988 until fully
paid; P10,000.00 as
attorney's fees; and costs.

Both parties appealed to

the Court of Appeals,
which partially modified
the Decision by deleting
the award of attorney's
fees in favor of
respondents and, instead,
ordering respondent
Corporation to pay
petitioner P37,469.22 as
and for attorney's fees and
litigation expenses.

Hence, the instant petition

raising the following issues:

1. WHETHER OR NOT THE

RESPONDENT APPELLATE
COURT ACTED
INCORRECTLY OR
COMMITTED REVERSIBLE
ERROR IN HOLDING THAT
THERE WAS OVERPAYMENT
BY PRIVATE RESPONDENTS
TO THE PETITIONER IN THE
AMOUNT OF P490,228.90
DESPITE THE ABSENCE OF
ANY COMPUTATION MADE
IN THE DECISION AND THE
ERRONEOUS APPLICATION
OF PAYMENTS WHICH IS IN
VIOLATION OF THE NEW
CIVIL CODE.
2. WHETHER OR NOT THE
MANNER OF
COMPUTATION OF THE
MARGINAL DEPOSIT BY THE
RESPONDENT APPELLATE
COURT IS IN
ACCORDANCE WITH
BANKING PRACTICE.

3. WHETHER OR NOT THE

AGREEMENT AMONG THE
PARTIES AS TO THE
FLOATING OF INTEREST
RATE IS VALID UNDER
APPLICABLE
JURISPRUDENCE AND THE
RULES AND REGULATIONS
OF THE CENTRAL BANK.

4. WHETHER OR NO THE
RESPONDENT APPELLATE
COUR GRIEVOUSLY ERRED
IN NOT CONSIDERING THE
TRANSACTION AT BAR AS A
TRUST RECEIPT
TRANSACTION ON THE
BASIS OF THE JUDICIAL
ADMISSIONS OF THE
PRIVATE RESPONDENTS
AND FOR WHICH
RESPONDENTS ARE LIABLE
THEREFOR.

5. WHETHER OR NOT THE

RESPONDENT APPELLATE
COURT GRIEVOUSLY ERRED
IN NOT HOLDING PRIVATE
RESPONDENT SPOUSES
LIABLE UNDER THE TRUST
RECEIPT TRANSACTION.6

The petition must be

denied.

On the first issue respecting

the fact of overpayment
found by both the lower
court and respondent
Court of Appeals, we stress
the time-honored rule that
findings of fact by the
Court of Appeals
especially if they affirm
factual findings of the trial
court will not be disturbed
by this Court, unless these
findings are not supported
by evidence.7

Petitioner decries the lack

of computation by the
lower court as basis for its
ruling that there was an
overpayment made. While
such a computation may
not have appeared in the
Decision itself, we note that
the trial court's finding of
overpayment is supported
by evidence presented
before it. At any rate, we
painstakingly reviewed
and computed the
payments together with
the interest and penalty
charges due thereon and
found that the amount of
overpayment made by
respondent Bank to
petitioner, i.e., P263,070.13,
was more than what was
ordered reimbursed by the
lower court. However,
since respondents did not
file an appeal in this case,
the amount ordered
reimbursed by the lower
court should stand.
Moreover, petitioner's
contention that the
marginal deposit made by
respondent Corporation
should not be deducted
outright from the amount
of the letter of credit is
untenable. Petitioner
argues that the marginal
deposit should be
considered only after
computing the principal
plus accrued interest and
other charges. However, to
sustain petitioner on this
score would be to
countenance a clear case
of unjust enrichment, for
while a marginal deposit
earns no interest in favour
of the debtor-depositor,
the bank is not only able to
use the same for its own
purposes, interest-free, but
is also able to earn interest
on the money loaned to
respondent Corporation.
Indeed, it would be
onerous to compute
interest and other charges
on the face value of the
letter of credit which the
petitioner issued, without
first crediting or setting off
the marginal deposit
which the respondent
Corporation paid to it.
Compensation is proper
and should take effect by
operation of law because
the requisites in Article 1279
of the Civil Code are
present and should
extinguish both debts to
the concurrent amount.8

Hence, the interests and

other charges on the
subject letter of credit
should be computed only
on the balance of
P681,075.93, which was the
portion actually loaned by
the bank to respondent
Corporation.

Neither do we find error

when the lower court and
the Court of Appeals set
aside as invalid the floating
rate of interest exhorted by
petitioner to be
applicable. The pertinent
provision in the trust receipt
agreement of the parties
fixing the interest rate
states:

I, WE jointly and severally

agree to any increase or
decrease in the interest
rate which may occur
after July 1, 1981, when the
Central Bank floated the
interest rate, and to pay
additionally the penalty of
1% per month until the
amount/s or instalments/s
due and unpaid under the
trust receipt on the reverse
side hereof is/are fully
paid.9

We agree with respondent

Court of Appeals that the
foregoing stipulation is
invalid, there being no
reference rate set either by
it or by the Central Bank,
leaving the determination
thereof at the sole will and
control of petitioner.
1âwphi1.nêt

While it may be
acceptable, for practical
reasons given the
fluctuating economic
conditions, for banks to
stipulate that interest rates
on a loan not be fixed and
instead be made
dependent upon
prevailing market
conditions, there should
always be a reference rate
upon which to peg such
variable interest rates. An
example of such a valid
variable interest rate was
found in Polotan, Sr. v.
Court of Appeals. 10 In that
case, the contractual
provision stating that "if
there occurs any change
in the prevailing market
rates, the new interest rate
shall be the guiding rate in
computing the interest due
on the outstanding
obligation without need of
serving notice to the
Cardholder other than the
required posting on the
monthly statement served
to the Cardholder"11 was
considered valid. The
aforequoted provision was
upheld notwithstanding
that it may partake of the
nature of an escalation
clause, because at the
same time it provides for
the decrease in the interest
rate in case the prevailing
market rates dictate its
reduction. In other words,
unlike the stipulation
subject of the instant case,
the interest rate involved in
the Polotan case is
designed to be based on
the prevailing market rate.
On the other hand, a
stipulation ostensibly
signifying an agreement to
"any increase or decrease
in the interest rate," without
more, cannot be
accepted by this Court as
valid for it leaves solely to
the creditor the
determination of what
interest rate to charge
against an outstanding
loan.
Petitioner has also failed to
convince us that its
transaction with
respondent Corporation is
really a trust receipt
transaction instead of
merely a simple loan, as
found by the lower court
and the Court of Appeals.

The recent case of

Colinares v. Court of
Appeals 12 appears to be
foursquare with the facts
obtaining in the case at
bar. There, we found that
inasmuch as the debtor
received the goods
subject of the trust receipt
before the trust receipt
itself was entered into, the
transaction in question was
a simple loan and not a
trust receipt agreement.
Prior to the date of
execution of the trust
receipt, ownership over
the goods was already
transferred to the debtor.
This situation is inconsistent
with what normally obtains
in a pure trust receipt
transaction, wherein the
goods belong in ownership
to the bank and are only
released to the importer in
trust after the loan is
granted.
In the case at bar, as in
Colinares, the delivery to
respondent Corporation of
the goods subject of the
trust receipt occurred long
before the trust receipt
itself was executed. More
specifically, delivery of the
bunker fuel oil to
respondent Corporation's
Bulacan plant
commenced on July 7,
1982 and was completed
by July 19, 1982.13 Further,
the oil was used up by
respondent Corporation in
its normal operations by
August, 1982.14 On the
other hand, the subject
trust receipt was only
executed nearly two
months after full delivery of
the oil was made to
respondent Corporation,
or on September 2, 1982.
The danger in
characterizing a simple
loan as a trust receipt
transaction was explained
in Colinares, to wit:

The Trust Receipts Law

does not seek to enforce
payment of the loan,
rather it punishes the
dishonesty and abuse of
confidence in the handling
of money or goods to the
prejudice of another
regardless of whether the
latter is the owner. Here, it
is crystal clear that on the
part of Petitioners there
was neither dishonesty nor
abuse of confidence in the
handling of money to the
prejudice of PBC.
Petitioners continually
endeavored to meet their
obligations, as shown by
several receipts issued by
PBC acknowledging
payment of the loan.

The Information charges

Petitioners with intent to
defraud and
misappropriating the
money for their personal
use. The mala prohibita
nature of the alleged
offense notwithstanding,
intent as a state of mind
was not proved to be
present in Petitioners'
situation. Petitioners
employed no artifice in
dealing with PBC and
never did they evade
payment of their
obligation nor attempt to
abscond. Instead,
Petitioners sought
favorable terms precisely
to meet their obligation.
Also noteworthy is the fact
that Petitioners are not
importers acquiring the
goods for re-sale, contrary
to the express provision
embodied in the trust
receipt. They are
contractors who obtained
the fungible goods for their
construction project. At no
time did title over the
construction materials pass
to the bank, but directly to
the Petitioners from CM
Builders Centre. This
impresses upon the trust
receipt in question
vagueness and ambiguity,
which should not be the
basis for criminal
prosecution in the event of
violation of its provisions.

The practice of banks of

making borrowers sign trust
receipts to facilitate
collection of loans and
place them under the
threats of criminal
prosecution should they be
unable to pay it may be
unjust and inequitable if
not reprehensible. Such
agreements are contracts
of adhesion which
borrowers have no option
but to sign lest their loan be
disapproved. The resort to
this scheme leaves poor
and hapless borrowers at
the mercy of banks, and is
prone to misinterpretation,
as had happened in this
case. Eventually, PBC
showed its true colors and
admitted that it was only
after collection of the
money, as manifested by
its Affidavit of Desistance.

Similarly, respondent
Corporation cannot be
said to have been
dishonest in its dealings
with petitioner. Neither has
it been shown that it has
evaded payment of its
obligations. Indeed, it
continually endeavored to
meet the same, as shown
by the various receipts
issued by petitioner
acknowledging payment
on the loan. Certainly, the
payment of the sum of
P1,832,158.38 on a loan
with a principal amount of
only P681,075.93 negates
any badge of dishonesty ,
abuse of confidence or
mishandling of funds on
the part of respondent
Corporation, which are the
gravamen of a trust
receipt violation.
Furthermore, Respondent
Corporation is not an
importer, which acquired
the bunker fuel oil for re-
sale; it needed the oil for its
own operations. More
importantly, at no time did
title over the oil pass to
petitioner, but directly to
respondent Corporation to
which the oil was directly
delivered long before the
trust receipt was executed.
The fact that ownership of
the oil belonged to
respondent Corporation,
through its President,
Gregory Lim, was
acknowledged by
petitioner's own account
officer on the witness
stand, to wit:

Q -After the bank opened

a letter of credit in favor of
Petrophil Corp. for the
account of the defendants
thereby paying the value
of the bunker fuel oil what
transpired next after that?

A -Upon purchase of the

bunker fuel oil and upon
the requests of the
defendant possession of
the bunker fuel oil were
transferred to them.

Q -You mentioned them to

whom are you referring to?
A -To the Continental
Cement Corp. upon the
execution of the trust
receipt acknowledging
the ownership of the
bunker fuel oil this should
be acceptable for
whatever disposition he
may make.

Q - You mentioned about

acknowledging ownership
of the bunker fuel oil to
whom by whom?

A - By the Continental
Cement Corp.

Q – So by your statement
who really owns the bunker
fuel oil?

A TTY. RACHON:
Objection already
answered,

COURT:

Give time to the other

counsel to object.

A TTY. RACHON :

He has testified that

ownership was
acknowledged in favor of
Continental Cement Corp.
so that question has
already been answered.

A TTY. BANAGA:

That is why I made a follow

up question asking
ownership of the bunker
fuel oil.

COURT:
Proceed.

A TTY .BANAGA:

Q - Who owns the bunker

fuel oil after purchase from
Petrophil Corp. ?

A - Gregory Lim.15

By all indications, then, it is

apparent that there was
really no trust receipt
transaction that took
place. Evidently,
respondent Corporation
was required to sign the
trust receipt simply to
facilitate collection by
petitioner of the loan it had
extended to the former.

Finally, we are not

convinced that
respondent Gregory T. Lim
and his spouse should be
personally liable under the
subject trust receipt.
Petitioner's argument that
respondent Corporation
and respondent Lim and
his spouse are one and the
same cannot be sustained.
The transactions sued
upon were clearly entered
into by respondent Lim in
his capacity as Executive
Vice President of
respondent Corporation.
We stress the hornbook law
that corporate personality
is a shield against personal
liability of its officers. Thus,
we agree that respondents
Gregory T. Lim and his
spouse cannot be made
personally liable since
respondent Lim entered
into and signed the
contract clearly in his
official capacity as
Executive Vice President.
The personality of the
corporation is separate
and distinct from the
persons composing it.16

WHEREFORE, in view of all

the foregoing, the instant
Petition for Review is
DENIED. The Decision of the
Court of Appeals dated
July 26, 1993 in CA-G.R. CY
No.29950 is AFFIRMED.
X---------------------X
G.R. No. 113412 April 17,
1996

Spouses PONCIANO
ALMEDA and EUFEMIA P.
ALMEDA, petitioner,
vs.
THE COURT OF APPEALS
and PHILIPPINE NATIONAL
BANK, respondents.
KAPUNAN, J.:p

On various dates in 1981,

the Philippine National
Bank granted to herein
petitioners, the spouses
Ponciano L. Almeda and
Eufemia P. Almeda several
loan/credit
accommodations totaling
P18.0 Million pesos
payable in a period of six
years at an interest rate of
21% per annum. To secure
the loan, the spouses
Almeda executed a Real
Estate Mortgage Contract
covering a 3,500 square
meter parcel of land,
together with the building
erected thereon (the
Marvin Plaza) located at
Pasong Tamo, Makati,
Metro Manila. A credit
agreement embodying
the terms and conditions of
the loan was executed
between the parties.
Pertinent portions of the
said agreement are
quoted below:

SPECIAL CONDITIONS

xxx xxx xxx

The loan shall be subject to

interest at the rate of
twenty one per cent (21%)
per annum, payable semi-
annually in arrears, the first
interest payment to
become due and payable
six (6) months from date of
initial release of the loan.
The loan shall likewise be
subject to the appropriate
service charge and a
penalty charge of three
per cent (30%) per annum
to be imposed on any
amount remaining unpaid
or not rendered when due.

xxx xxx xxx

III. OTHER CONDITIONS

(c) Interest and Charges

(1) The Bank reserves the

right to increase the
interest rate within the limits
allowed by law at any time
depending on whatever
policy it may adopt in the
future; provided, that the
interest rate on this/these
accommodations shall be
correspondingly
decreased in the event
that the applicable
maximum interest rate is
reduced by law or by the
Monetary Board. In either
case, the adjustment in the
interest rate agreed upon
shall take effect on the
effectivity date of the
increase or decrease of
the maximum interest
rate.1

Between 1981 and 1984,

petitioners made several
partial payments on the
loan totaling.
P7,735,004.66,2 a
substantial portion of
which was applied to
accrued interest.3 On
March 31, 1984,
respondent bank, over
petitioners' protestations,
raised the interest rate to
28%, allegedly pursuant to
Section III-c (1) of its credit
agreement. Said interest
rate thereupon increased
from an initial 21% to a high
of 68% between March of
1984 to September, 1986.4
Petitioner protested the
increase in interest rates, to
no avail. Before the loan
was to mature in March,
1988, the spouses filed on
February 6, 1988 a petition
for declaratory relief with
prayer for a writ of
preliminary injunction and
temporary restraining
order with the Regional
Trial Court of Makati,
docketed as Civil Case No.
18872. In said petition,
which was raffled to
Branch 134 presided by
Judge Ignacio Capulong,
the spouses sought
clarification as to whether
or not the PNB could
unilaterally raise interest
rates on the loan, pursuant
to the credit agreement's
escalation clause, and in
relation to Central Bank
Circular No. 905. As a
preliminary measure, the
lower court, on March 3,
1988, issued a writ of
preliminary injunction
enjoining the Philippine
National Bank from
enforcing an interest rate
above the 21% stipulated
in the credit agreement. By
this time the spouses were
already in default of their
loan obligations.
Invoking the Law on
Mandatory Foreclosure
(Act 3135, as amended
and P.D. 385), the PNB
countered by ordering the
extrajudicial foreclosure of
petitioner's mortgaged
properties and scheduled
an auction sale for March
14, 1989. Upon motion by
petitioners, however, the
lower court, on April 5,
1989, granted a
supplemental writ of
preliminary injunction,
staying the public auction
of the mortgaged
property.

On January 15, 1990, upon

the posting of a
counterbond by the PNB,
the trial court dissolved the
supplemental writ of
preliminary injunction.
Petitioners filed a motion
for reconsideration. In the
interim, respondent bank
once more set a new date
for the foreclosure sale of
Marvin Plaza which was
March 12, 1990. Prior to the
scheduled date, however,
petitioners tendered to
respondent bank the
amount of P40,142,518.00,
consisting of the principal
(P18,000,000.00) and
accrued interest
calculated at the originally
stipulated rate of 21%. The
PNB refused to accept the
payment.5

As a result of PNB's refusal

of the tender of payment,
petitioners, on March 8,
1990, formally consigned
the amount of
P40,142,518.00 with the
Regional Trial Court in Civil
Case No. 90-663. They
prayed therein for a writ of
preliminary injunction with
a temporary restraining
order. The case was raffled
to Branch 147, presided by
Judge Teofilo Guadiz. On
March 15, 1990,
respondent bank sought
the dismissal of the case.

On March 30, 1990 Judge

Guadiz in Civil Case No. 90-
663 issued an order
granting the writ of
preliminary injunction
enjoining the foreclosure
sale of "Marvin Plaza"
scheduled on March 12,
1990. On April 17, 1990
respondent bank filed a
motion for reconsideration
of the said order.

On August 16, 1991, Civil

Case No. 90-663 we
transferred to Branch 66
presided by Judge Eriberto
Rosario who issued an
order consolidating said
case with Civil Case 18871
presided by Judge Ignacio
Capulong.

For Judge Ignacio's refusal

to lift the writ of preliminary
injunction issued March 30,
1990, respondent bank
filed a petition for
Certiorari, Prohibition and
Mandamus with
respondent Court of
Appeals, assailing the
following orders of the
Regional Trial Court:

1. Order dated March 30,

1990 of Judge Guadiz
granting the writ of
preliminary injunction
restraining the foreclosure
sale of Mavin Plaza set on
March 12, 1990;
2. Order of Judge Ignacio
Capulong dated January
10, 1992 denying
respondent bank's motion
to lift the writ of injunction
issued by Judge Guadiz as
well as its motion to dismiss
Civil Case No. 90-663;

3. Order of Judge
Capulong dated July 3,
1992 denying respondent
bank's subsequent motion
to lift the writ of preliminary
injunction; and

4. Order of Judge
Capulong dated October
20, 1992 denying
respondent bank's motion
for reconsideration.

On August 27, 1993,

respondent court
rendered its decision
setting aside the assailed
orders and upholding
respondent bank's right to
foreclose the mortgaged
property pursuant to Act
3135, as amended and
P.D. 385. Petitioners' Motion
for Reconsideration and
Supplemental Motion for
Reconsideration, dated
September 15, 1993 and
October 28, 1993,
respectively, were denied
by respondent court in its
resolution dated January
10, 1994.

Hence the instant petition.

This appeal by certiorari

from the respondent
court's decision dated
August 27, 1993 raises two
principal issues namely: 1)
Whether or not respondent
bank was authorized to
raise its interest rates from
21% to as high as 68%
under the credit
agreement; and 2)
Whether or not respondent
bank is granted the
authority to foreclose the
Marvin Plaza under the
mandatory foreclosure
provisions of P.D. 385.

In its comment dated April

19, 1994, respondent bank
vigorously denied that the
increases in the interest
rates were illegal,
unilateral, excessive and
arbitrary, it argues that the
escalated rates of interest
it imposed was based on
the agreement of the
parties. Respondent bank
further contends that it
had a right to foreclose the
mortgaged property
pursuant to P.D. 385, after
petitioners were unable to
pay their loan obligations
to the bank based on the
increased rates upon
maturity in 1984.

The instant petition is

impressed with merit.

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.6 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.

It is plainly obvious,
therefore, from the
undisputed facts of the
case that respondent
bank unilaterally altered
the terms of its contract
with petitioners by
increasing the interest
rates on the loan without
the prior assent of the
latter. In fact, the manner
of agreement is itself
explicitly stipulated by the
Civil Code when it
provides, in Article 1956
that "No interest shall be
due unless it has been
expressly stipulated in
writing." What has been
"stipulated in writing" from
a perusal of interest rate
provision of the credit
agreement signed
between the parties is that
petitioners were bound
merely to pay 21% interest,
subject to a possible
escalation or de-
escalation, when 1) the
circumstances warrant
such escalation or de-
escalation; 2) within the
limits allowed by law; and
3) upon agreement.

Indeed, the interest rate

which appears to have
been agreed upon by the
parties to the contract in
this case was the 21% rate
stipulated in the interest
provision. Any doubt about
this is in fact readily
resolved by a careful
reading of the credit
agreement because the
same plainly uses the
phrase "interest rate
agreed upon," in reference
to the original 21% interest
rate. The interest provision
states:

(c) interest and Charges

(1) The Bank reserves the

right to increase the
interest rate within the limits
allowed by law at any time
depending on whatever
policy it may adopt in the
future; provided, that the
interest rate on this/these
accommodations shall be
correspondingly
decreased in the event
that the applicable
maximum interest rate is
reduced by law or by the
Monetary Board. In either
case, the adjustment in the
interest rate agreed upon
shall take effect on the
effectivity date of the
increase or decrease of
the maximum interest rate.

In Philippine National Bank

v. Court of Appeals, 7 this
Court disauthorized
respondent bank from
unilaterally raising the
interest rate in the
borrower's loan from 18%
to 32%, 41% and 48% partly
because the aforestated
increases violated the
principle of mutuality of
contracts expressed in
Article 1308 of the Civil
Code. The Court held:

CB Circular No. 905, Series

of 1982 (Exh. 11) removed
the Usury Law ceiling on
interest rates —
. . . increases in interest
rates are not subject to any
ceiling prescribed by the
Usury Law.

but it did not authorize the

PNB, or any bank for that
matter, to unilaterally and
successively increase the
agreed interest rates from
18% to 48% within a span of
four (4) months, in violation
of P.D. 116 which limits such
changes to once every
twelve months.

Besides violating P.D. 116,

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 Civil Code:
Art. 308. The contract must
bind both contracting
parties; its validity or
compliance cannot be left
to the will of one of them.

In order that obligations

arising from contracts may
have the force of law
between the parties, there
must be mutuality
between the parties based
on their essential equality.
A contract containing a
condition which makes its
fulfillment dependent
exclusively upon the
uncontrolled will of one of
the contracting parties, is
void (Garcia vs. Rita
Legarda, Inc., 21 SCRA
555). Hence, even
assuming that the P1.8
million loan agreement
between the PNB and the
private respondent gave
the PNB a license
(although in fact there was
none) to increase the
interest rate at will during
the term of the loan, that
license would have been
null and void for being
violative of the principle of
mutuality essential in
contracts. It would have
invested the loan
agreement with the
character of a contract of
adhesion, where the
parties do not bargain on
equal footing, the weaker
party's (the debtor)
participation being
reduced to the alternative
"to take it or lease it" (Qua
vs. Law Union & Rock
Insurance Co., 95 Phil. 85).
Such a contract is a
veritable trap for the
weaker party whom the
courts of justice must
protect against abuse and
imposition.

PNB's successive increases

of the interest rate on the
private respondent's loan,
over the latter's protest,
were arbitrary as they
violated an express
provision of the Credit
Agreement (Exh. 1) Section
9.01 that its terms "may be
amended only by an
instrument in writing signed
by the party to be bound
as burdened by such
amendment." The
increases imposed by PNB
also contravene Art. 1956
of the Civil Code which
provides that "no interest
shall be due unless it has
been expressly stipulated
in writing."
The debtor herein never
agreed in writing to pay
the interest increases fixed
by the PNB beyond 24%
per annum, hence, he is
not bound to pay a higher
rate than that.

That an increase in the

interest rate from 18% to
48% within a period of four
(4) months is excessive, as
found by the Court of
Appeals, is indisputable.

Clearly, the galloping

increases in interest rate
imposed by respondent
bank on petitioners' loan,
over the latter's vehement
protests, were arbitrary.

Moreover, respondent
bank's reliance on C.B.
Circular No. 905, Series of
1982 did not authorize the
bank, or any lending
institution for that matter,
to progressively increase
interest rates on
borrowings to an extent
which would have made it
virtually impossible for
debtors to comply with
their own obligations. True,
escalation clauses in credit
agreements are perfectly
valid and do not
contravene public policy.
Such clauses, however, (as
are stipulations in other
contracts) are nonetheless
still subject to laws and
provisions governing
agreements between
parties, which agreements
— while they may be the
law between the
contracting parties —
implicitly incorporate
provisions of existing law.
Consequently, while the
Usury Law ceiling on
interest rates was lifted by
C.B. Circular 905, nothing in
the said circular could
possibly be read as
granting respondent bank
carte blanche authority to
raise interest rates to levels
which would either enslave
its borrowers or lead to a
hemorrhaging of their
assets. Borrowing
represents a transfusion of
capital from lending
institutions to industries and
businesses in order to
stimulate growth. This
would not, obviously, be
the effect of PNB's
unilateral and lopsided
policy regarding the
interest rates of petitioners'
borrowings in the instant
case.
Apart from violating the
principle of mutuality of
contracts, there is authority
for disallowing the interest
rates imposed by
respondent bank, for the
credit agreement
specifically requires that
the increase be "within the
limits allowed by law". In
the case of PNB v. Court of
Appeals, cited above, this
Court clearly emphasized
that C.B. Circular No. 905
could not be properly
invoked to justify the
escalation clauses of such
contracts, not being a
grant of specific authority.

Furthermore, the
escalation clause of the
credit agreement requires
that the same be made
"within the limits allowed by
law," obviously referring
specifically to legislative
enactments not
administrative circulars.
Note that the phrase "limits
imposed by law," refers
only to the escalation
clause. However, the same
agreement allows
reduction on the basis of
law or the Monetary Board.
Had the parties intended
the word "law" to refer to
both legislative
enactments and
administrative circulars
and issuances, the
agreement would not
have gone as far as
making a distinction
between "law or the
Monetary Board Circulars"
in referring to mutually
agreed upon reductions in
interest rates. This
distinction was the subject
of the Court's disquisition in
the case of Banco Filipino
Savings and Mortgage
Bank v. Navarro8 where
the Court held that:

What should be resolved is

whether BANCO FILIPINO
can increase the interest
rate on the LOAN from 12%
to 17% per annum under
the Escalation Clause. It is
our considered opinion
that it may not.
The Escalation Clause
reads as follows:

I/We hereby authorize

Banco Filipino to
correspondingly increase.

the interest rate stipulated

in this contract without
advance notice to me/us
in the event.
a law

increasing

the lawful rates of interest

that may be charged

on this particular

kind of loan.
(Paragraphing and
emphasis supplied)
It is clear from the
stipulation between the
parties that the interest
rate may be increased "in
the event a law should be
enacted increasing the
lawful rate of interest that
may be charged on this
particular kind of loan." The
Escalation Clause was
dependent on an increase
of rate made by "law"
alone.
CIRCULAR No. 494,
although it has the effect
of law, is not a law.
"Although a circular duly
issued is not strictly a
statute or a law, it has,
however, the force and
effect of law." (Emphasis
supplied). "An
administrative regulation
adopted pursuant to law
has the force and effect of
law." "That administrative
rules and regulations have
the force of law can no
longer be questioned."

The distinction between a

law and an administrative
regulation is recognized in
the Monetary Board
guidelines quoted in the
latter to the BORROWER of
Ms. Paderes of September
24, 1976 (supra).
According to the
guidelines, for a loan's
interest to be subject to the
increases provided in
CIRCULAR No. 494, there
must be an Escalation
Clause allowing the
increase "in the event that
any law or Central Bank
regulation is promulgated
increasing the maximum
rate for loans." The
guidelines thus presuppose
that a Central Bank
regulation is not within the
term "any law."

The distinction is again

recognized by P.D. No.
1684, promulgated on
March 17, 1980, adding
section 7-a to the Usury
Law, providing that parties
to an agreement
pertaining to a loan could
stipulate that the rate of
interest agreed upon may
be increased in the event
that the applicable
maximum rate of interest is
increased "by law or by the
Monetary Board." To
quote:

Sec. 7-a. Parties to an

agreement pertaining to a
loan or forbearance of
money, goods or credits
may stipulate that the rate
of interest agreed upon
may be increased in the
event that the applicable
maximum rate of interest

is increased by law or by
the Monetary Board:

Provided, That such

stipulation shall be valid
only if there is also a
stipulation in the
agreement that the rate of
interest agreed upon shall
be reduced in the event
that the applicable
maximum rate of interest is
reduced by law or by the
Monetary Board;

Provided, further, That the

adjustment in the rate of
interest agreed upon shall
take effect on or after the
effectivity of the increase
or decrease in the
maximum rate of interest.'
(Paragraphing and
emphasis supplied).

It is now clear that from

March 17, 1980, escalation
clauses to be valid should
specifically provide: (1)
that there can be an
increase in interest if
increased by law or by the
Monetary Board; and (2) in
order for such stipulation to
be valid, it must include a
provision for reduction of
the stipulated interest "in
the event that the
applicable maximum rate
of interest is reduced by
law or by the Monetary
Board."

Petitioners never agreed in

writing to pay the
increased interest rates
demanded by respondent
bank in contravention to
the tenor of their credit
agreement. That an
increase in interest rates
from 18% to as much as
68% is excessive and
unconscionable is
indisputable. Between
1981 and 1984, petitioners
had paid an amount
equivalent to virtually half
of the entire principal
(P7,735,004.66) which was
applied to interest alone.
By the time the spouses
tendered the amount of
P40,142,518.00 in
settlement of their
obligations; respondent
bank was demanding
P58,377,487.00 over and
above those amounts
already previously paid by
the spouses.
Escalation clauses are not
basically wrong or legally
objectionable so long as
they are not solely
potestative but based on
reasonable and valid
grounds.9 Here, as clearly
demonstrated above, not
only the increases of the
interest rates on the basis
of the escalation clause
patently unreasonable
and unconscionable, but
also there are no valid and
reasonable standards
upon which the increases
are anchored.

We go now to respondent
bank's claim that the
principal issue in the case
at bench involves its right
to foreclose petitioners'
properties under P.D. 385.
We find respondent's
pretense untenable.
Presidential Decree No.
385 was issued principally
to guarantee that
government financial
institutions would not be
denied substantial cash
inflows necessary to
finance the government's
development projects all
over the country by large
borrowers who resort to
litigation to prevent or
delay the government's
collection of their debts or
loans. 10 In facilitating
collection of debts through
its automatic foreclosure
provisions, the government
is however, not exempted
from observing basic
principles of law, and
ordinary fairness and
decency under the due
process clause of the
Constitution. 11
In the first place, because
of the dispute regarding
the interest rate increases,
an issue which was never
settled on merit in the
courts below, the exact
amount of petitioner's
obligations could not be
determined. Thus, the
foreclosure provisions of
P.D. 385 could be validly
invoked by respondent
only after settlement of the
question involving the
interest rate on the loan,
and only after the spouses
refused to meet their
obligations following such
determination. In Filipinas
Marble Corporation v.
Intermediate Appellate
Court, 12 involving P.D.
385's provisions on
mandatory foreclosure, we
held that:
We cannot, at this point,
conclude that respondent
DBP together with the
Bancom people actually
misappropriated and
misspent the $5 million loan
in whole or in part although
the trial court found that
there is "persuasive"
evidence that such acts
were committed by the
respondent. This matter
should rightfully be
litigated below in the main
action. Pending the
outcome of such litigation,
P.D. 385 cannot
automatically be applied
for if it is really proven that
respondent DBP is
responsible for the
misappropriation of the
loan, even if only in part,
then the foreclosure of the
petitioner's properties
under the provisions of P.D.
385 to satisfy the whole
amount of the loan would
be a gross mistake. It would
unduly prejudice the
petitioner, its employees
and their families.

Only after trial on the merits

of the main case can the
true amount of the loan
which was applied wisely
or not, for the benefit of the
petitioner be determined.
Consequently, the extent
of the loan where there
was no failure of
consideration and which
may be properly satisfied
by foreclosure
proceedings under P.D.
385 will have to await the
presentation of evidence
in a trial on the merits.
In Republic Planters Bank v.
Court of Appeals 13 the
Court reiterating the
dictum in Filipinas Marble
Corporation, held:

The enforcement of P.D.

385 will sweep under the
rug' this iceberg of a
scandal in the sugar
industry during the Marcos
Martial Law years. This we
can not allow to happen.
For the benefit of future
generations, all the dirty
linen in the
PHILSUCUCOM/NASUTRA/
RPB closets have to be
exposed in public so that
the same may NEVER be
repeated.

It is of paramount national
interest, that we allow the
trial court to proceed with
dispatch to allow the
parties below to present
their evidence.

Furthermore, petitioners
made a valid consignation
of what they, in good faith
and in compliance with
the letter of the Credit
Agreement, honestly
believed to be the real
amount of their remaining
obligations with the
respondent bank. The
latter could not therefore
claim that there was no
honest-to-goodness
attempt on the part of the
spouse to settle their
obligations. Respondent's
rush to inequitably invoke
the foreclosure provisions
of P.D. 385 through its legal
machinations in the courts
below, in spite of the
unsettled differences in
interpretation of the credit
agreement was obviously
made in bad faith, to gain
the upper hand over
petitioners.

In the face of the

unequivocal interest rate
provisions in the credit
agreement and in the law
requiring the parties to
agree to changes in the
interest rate in writing, we
hold that the unilateral
and progressive increases
imposed by respondent
PNB were null and void.
Their effect was to increase
the total obligation on an
eighteen million peso loan
to an amount way over
three times that which was
originally granted to the
borrowers. That these
increases, occasioned by
crafty manipulations in the
interest rates is
unconscionable and
neutralizes the salutary
policies of extending loans
to spur business cannot be
disputed.

WHEREFORE, PREMISES
CONSIDERED, the decision
of the Court of Appeals
dated August 27, 1993, as
well as the resolution
dated February 10, 1994 is
hereby REVERSED AND SET
ASIDE. The case is
remanded to the Regional
Trial Court of Makati for
further proceedings.

SO ORDERED.
X--------------------------X

G.R. No. 108052 July 24,

1996

PHILIPPINE NATIONAL
BANK, petitioner,
vs.
THE COURT OF APPEALS
and RAMON LAPEZ,1 doing
business under the name
and style SAPPHIRE
SHIPPING, respondents.

PANGANIBAN, J.:p

Does a local bank, while

acting as local
correspondent bank, have
the right to intercept funds
being coursed through it
by its foreign counterpart
for transmittal and deposit
to the account of an
individual with another
local bank, and apply the
said funds to certain
obligations owed to it by
the said individual?
Assailed in this petition is
the Decision of respondent
Court of Appeals2 in CA-
G.R. CV No. 27926
rendered on June 16, 1992
affirming the decision of
the Regional Trial Court,
Branch 107 of Quezon City,
the dispositive portion of
which read:3

WHEREFORE, judgment is
hereby rendered:
1) In the main complaint,
ordering the defendant
(herein petitioner PNB) to
pay the plaintiff (private
respondent herein) the
sum of US$2,627.11 or its
equivalent in Philippine
currency with interest at
the legal rate from January
13, 1987, the date of
judicial demand;
2) The plaintiff's
supplemental complaint is
hereby dismissed (sic);

3) The defendant's
counterclaims are likewise
dismissed.

The Facts

The factual antecedents

as quoted by the
respondent Court are
reproduced hereinbelow,
the same being
undisputed by the parties:4

The body of the decision

reads:

After a close scrutiny and

analysis of the pleadings as
well as the evidence of
both parties, the Court
makes the following
conclusions:
(a) The defendant
applied/appropriated the
amounts of $2,627.11 and
P34,340.38 from
remittances of the
plaintiff's principals (sic)
abroad. These were
admitted by the
defendant, subject to the
affirmative defense of
compensation for what is
owing to it on the principle
of solution (sic) indebiti.

(b) The first remittance was

made by the NCB of
Jeddah for the benefit of
the plaintiff, to the credited
to his account at Citibank,
Greenhills Branch; the
second was from Libya,
and was intended to be
deposited at the plaintiff's
account with the
defendant, No. 830-2410;

(c) The plaintiff made a

written demand upon the
defendant for remittance
of the equivalent of
$2,627.11 by means of a
letter dated December 4,
1986 (Exh. D). This was
answered by the
defendant on December
22, 1986 (Exh. 13), inviting
the plaintiff to come for a
conference;

(d) There were indeed two

instances in the past, one
in November 1980 and the
other in January 1981
when the plaintiff's
account No. 830-2410 was
doubly credited with the
equivalents of $5,679.23
and $5,885.38,
respectively, which
amounted to an
aggregate amount of
P87,380.44. The
defendant's evidence on
this point (Exhs. 1 thru 11, 14
and 15; see also Annexes C
and E to defendant's
Answer), were never
refuted nor impugned by
the plaintiff. He claims,
however, that plaintiff's
claim has prescribed.
(e) Defendant PNB made
a demand upon the
plaintiff for refund of the
double or duplicated
credits erroneously made
on plaintiff's account, by
means of a letter (Exh. 12)
dated October 23, 1986 or
5 years and 11 months from
November 1980, and 5
years and 9 months from
January 1981. Such letter
was answered by the
plaintiff on December 2,
1986 (Annex C,
Complaint). This plaintiff's
letter was likewise replied
to by the defendant
through Exh. 13;

(f) The deduction of

P34,340.58 was made by
the defendant not without
the knowledge and
consent of the plaintiff,
who was issued a receipt
No. 857576 dated February
18, 1987 (Exh. E) by the
defendant.

There is no question that

the two erroneous double
payments made to
plaintiff's accounts in 1980
and 1981 created an
extra-contractual
obligation on the part of
the plaintiff in favor of the
defendant, under the
principle of solutio indebiti,
as follows:

If something is received
when there is no right to
demand it, and it was
unduly delivered through
(sic) mistake, the
obligation to return it arises.
(Article 2154, Civil Code of
the Phil.)
Two issues were raised
before the trial court,
namely, first, whether the
herein petitioner was
legally justified in making
the compensation or set-
off against the two
remittances coursed
through it in favor of
private respondent to
recover on the double
credits it erroneously made
in 1980 and 1981, based on
the principle solutio
indebiti, and second,
whether or not petitioner's
claim is barred by the
statute of limitations. The
trial court's ratiocination, as
quoted by the appellate
Court, follows:5

Article 1279 of the Civil

Code provides:
In order that
compensation may
prosper, it is necessary:

(1) That each one of the

obligors be bound
principally, and that he be
at the same time a
principal creditor of the
other;

(2) That both debts consists

in a sum of money, or if the
things due are
consumable, they be of
the same kind, and also of
the same quality if the
latter has been stated;

(3) That the two debts be

due;

(4) That they be liquidated

and demandable;
(5) That over neither of
them there by any
retention or controversy,
commenced by third
persons and
communicated in due
time to the debtor.

In the case of the

$2,627.11, requisites Nos. 2
through 5 are apparently
present, for both debts
consist in a sum of money,
are both due, liquidated
and demandable, and
over neither of them is
there a retention or
controversy commenced
by third persons and
communicated in due
time to the debtor. The
question, however, is,
where both of the obligors
bound principally, and was
each one of them a
debtor and creditor of the
other at the same time?

Analyzing now the

relationship between the
parties, it appears that:

(a) With respect to the

plaintiff's being a depositor
of the defendant bank,
they are creditor and
debtor respectively
(Guingona, et.al. vs. City
Fiscal, et. al., 128 SCRA
577);

(b) As to the relationship

created by the telexed
fund transfers from abroad:
A contract between a
foreign bank and local
bank asking the latter to
pay an amount to a
beneficiary is a stipulation
pour autrui. (Bank of
America NT & SA vs. IAC,
145 SCRA 419).

A stipulation pour autrui is a

stipulation in favor of a
third person (Florentino vs.
Encarnacion, 79 SCRA 193;
Bonifacio Brothers vs.
Mora, 20 SCRA 261; Uy Tam
vs. Leonard, 30 Phils. 475).

Thus between the

defendant bank (as the
local correspondent of the
National Commercial Bank
of Jeddah) and the
plaintiff as beneficiary,
there is created an implied
trust pursuant to Art. 1453
of the Civil Code, quoted
as follows:

When the property is

conveyed to a person in
reliance upon his declared
intention to hold it for, or
transfer it to another or the
grantor, there is an implied
trust in favor of the person
whose benefit is
contemplated (sic).

(c) By the principle of

solutio indebiti (Art. 2154,
Civil Code), the plaintiff
who unduly, received
something (sic) by mistake
(i.e., the 2 double credits,
although he had no right
to demand it), became
obligated to the
defendant to return what
he unduly received. Thus,
there was created
between them a
relationship of obligor and
obligee, or of debtor and
creditor under a quasi-
contract.

In view of the foregoing,

the Court is of the opinion
that the parties are not
both principally bound
with respect to the
$2,627.11 from Jeddah;
neither are they at the
same time principal
creditor of the other.
Therefore, as matters
stand, the parties'
obligations are not subject
to compensation or set off
under Art. 1279 of the Civil
Code, for the reason that
the defendant is not a
principal debtor nor is the
plaintiff a principal creditor
insofar as the amount of
$2,627.11 is concerned.
They are debtor and
creditor only with respect
to the double payments;
but are trustee-beneficiary
as to the fund transfer of
$2,627.11.
Only the plaintiff is
principally bound as a
debtor of the defendant to
the extent of the double
credits. On the other hand,
the defendant was an
implied trustee, who was
obliged to deliver to the
Citibank for the benefit of
the plaintiff the sum of
$2,627.11.
Thus while it may be
concluded that the
plaintiff owes the
defendant the equivalent
of the sums of $5,179.23
and $5,885.38 erroneously
doubly credited to his
account, the defendant's
actuation in intercepting
the amount of $2,627.11
supposed to be remitted to
another bank is not only
improper; it will also erode
the trust and confidence
of the international
banking community in the
banking system of the
country, something we
can ill afford at this time
when we need to attract
and invite deposits of
foreign currencies.

It would have been

different has the telex
advice from NCB of
Jeddah been for deposit
of $2,627.11 to plaintiff's
account No. 830-2410 with
the defendant bank.
However, the defendant
alleged this for the first time
in its Memorandum (Pls.
see par. 16, p. 6 of
defendant's
Memorandum). There was
neither any allegation
thereof in its pleadings, nor
was there any evidence to
prove such fact. On the
contrary, the defendant
admitted that the telex
advice was for credit of
the amount of $2,627.11 to
plaintiff's account with
Citibank, Greenhills, San
Juan, Metro-Manila (Pls.
see par. of defendant's
Answer with Compulsary
Counterclaim, in relation to
plaintiff's Complaint).
Hence, it is submitted that
the set-off or
compensation of $2,627.11
against the double
payments to plaintiff's
account is not in
accordance with law.

On this point, the Court

finds the plaintiff's theory of
agency to be untenable.
For one thing, there was no
express contract of
agency. On the other
hand, were we to infer that
there was an implied
agency, the same would
not be between the
plaintiff and defendant,
but rather, between the
National Commercial Bank
of Jeddah as principal on
the one hand, and the
defendant as agent on the
other. Thus, in case of
violation of the agency,
the cause of action would
accrue to the NCB and not
to the plaintiff.

The P34,340.38 subject of

the supplemental
complaint is quite another
thing. The plaintiff's Exh. "E",
which is a receipt issued to
the plaintiff by the
defendant for the amount
of P34,340.00 in "full
settlement of accounts
receivables with RICB Fund
Transfer Department, PNB-
Escolta base on Legal
Department Memo dated
February 28, 1987" seems to
uphold the defendant's
theory that the said
amount was voluntarily
delivered by the plaintiff to
the defendant as alleged
in the last paragraph of
defendant's
memorandum. The same is
in accordance with the
defendant's answer, as
follows:

The retention and

application of the amount
of P34,340.58 was done in
a manner consonant with
basic due process
considering that plaintiff
was not only furnished
documented proof of the
cause but was also given
the opportunity to
con(tro)vert such proof .

Moreover, plaintiff, through

counsel, communicated
his unequivocal and
unconditional consent to
the retention and
application of the amount
in question. (Pls. see
paragraphs 8-9,
defendant's Answer with
Compulsary Counterclaim
to Plaintiff's Supplemental
Complaint).

This conclusion is borne by

the fact that the receipt is
in the hands of the plaintiff,
indicating that such
receipt was handed over
to the plaintiff when he
"paid" or allowed the
deduction from the
amount of $28,392.38 from
Libya.
At any rate, the plaintiff in
his Memorandum, stated
that the subsequent fund
transfer from Brega
Petroleum Marketing
Company of Libya (from
where the P34,340.38 was
deducted) was intended
for credit and deposit in
plaintiff's account at the
defendant's Bank CA No.
830-2410 (per par. 1, page
2, Memorandum for the
plaintiff). Such being the
case, the Court believes
that insofar as the amount
of P34,340.38 is concerned,
all the requirements of Art.
1279 of the Civil Code are
present, and the said
amount may properly be
the subject of
compensation or set-off.
And since all the requisites
of Art. 1279 of the Civil
Code are present (insofar
as the amount of
P34,392.38 is concerned),
compensation takes place
by operation of law (Art.
1286, Ibid.), albeit only
partial with respect to
plaintiff's indebtedness of
P7,380.44.

Now, on the question of

prescription, the Court
believes that Art. 1149 as
cited by the plaintiff is not
applicable in this case.
Rather, the applicable law
is Art. 1145, which fixes the
prescriptive period for
actions upon a quasi
contract (such as solution
indebiti) at six years.

In the dispositive portion of

its decision, the trial court
ruled that the herein
petitioner was obligated to
pay private respondent
the amount of US$2,627.11
or its peso equivalent, with
interest at the legal rate.
The court dismissed all
other claims and
counterclaims.

On appeal to the
respondent Court,
petitioner bank continued
to insist that it validly
retained the US$2,627.11 in
payment of the private
respondent's indebtedness
by way of compensation
or set-off, as provided
under Art. 1279 of the Civil
Code.

The respondent Court of

Appeals rejected such
argument, saying:

The telegraphic money

transfer was sent by the
IBN, plaintiff's principal in
Jeddah, Saudi Arabia, thru
the National Commercial
Bank of Jeddah, Saudi
Arabia (NCB, for short), for
the credit/account of
plaintiff with the Citibank,
Greenhills Branch, San
Juan, Metro Manila,
coursed thru the PNB's
head office, the NCB's
corresponden(t) bank in
the Philippines.
The credit account, or
simply account means that
the amount stated in the
telegraphic money
transfer is to be credited in
the account of plaintiff
with the Citibank, and, in
that sense, presupposes a
creditor-debtor
relationship between the
plaintiff, as creditor and
the Citibank, as debtor.
Withal the telegraphic
money transfer, no such
creditor-debtor
relationship could have
been created between
the plaintiff and
defendant.

The telegraphic money

transfer, or simply
telegraphic transfer(,) was
purchased by the IBN from
the NCB in Saudi Arabia,
and since the PNB is the
NCB's corresponden(t)
bank in the Philippines,
there is created between
the two banks a sort of
communication exchange
for the corresponden(t)
bank to transmit and/or
remit and/or pay the value
of the telegraphic transfer
in accordance with the
dictate of the
correspondence
exchange. Some such
responsibility of the
corresponden(t) bank is
akin to section 7 of the
Rules and Regulations
Implementing E.O. 857, as
amended by E.O. 925, ". . .
to take charge of the
prompt payment" of the
telegraphic transfer, that is,
by transmitting the
telegraphic money
transfer to the Citibank so
that the amount can be
promptly credited to the
account of the plaintiff
with the said bank. That is
all that the PNB can do
under the remittance
arrangement that it has
with the NCB. With its
responsibility as defined as
well as by the nature of its
banking business and the
responsibility attached to
it, and through which the
industry, trade and
commerce of all countries
and communities are
carried on, the PNB's
liability as corresponden(t)
bank continues until it has
completely (sic)
performed and
discharged it(s) obligation
thereunder." (emphasis
ours)
Hence, the respondent
Court affirmed the trial
court's holding in toto.

Dissatisfied, petitioner bank

comes before this Court
seeking a review of the
assailed Decision.

The Issue
Petitioner's arguments
revolve around one single
issue:6

WHILE THE RESPONDENT

COURT CORRECTLY
FOUND PRIVATE
RESPONDENT LEGALLY
BOUND (UNDER THE
PRINCIPLE OF SOLUTIO
INDEBITI) TO RETURN TO PNB
THE SUM OF US$2,627.11, IT
ERRED IN NOT RULING THAT
LEGAL COMPENSATION
HAS TAKEN PLACE WHEN
PNB WAS ORDERED BY THE
TRIAL COURT TO RETURN TO
PRIVATE RESPONDENT THE
SAME AMOUNT. SUCH
COURSE OF ACTION IS IN
CONSONANCE WITH
SPEEDY AND SUBSTANTIAL
JUSTICE, AND WOULD
PREVENT THE
UNNECESSARY FILING OF A
SUBSEQUENT SUIT BY PNB
FOR THE COLLECTION OF
THE SAME AMOUNT FROM
PRIVATE RESPONDENT.

The Court's Ruling

We note that in framing the

issue in the manner
aforecited, the petitioner
implicity admits the
correctness of the
respondent Court's
affirmance of the trial
court's ruling finding herein
petitioner liable to private
respondent for the sum of
US$2,627.11 or its peso
equivalent. And it could
not have done otherwise.
After a careful scrutiny of
both the decision of the
trial court and that of the
appellate court, we find no
reversible error whatsoever
in either ruling, and see no
need to add to the
extensive discussions
already made regarding
the non-existence of all the
requisites for legal
compensation to take
place.

But petitioner has adopted

a novel theory,
contending that since
respondent Court found
that private respondent is
"an obligor of PNB and the
latter, as aforesaid, has
become an obligor of
private respondent
(resulting in legal
compensation), the
(h)onorable respondent
court should have ordered
private respondent to pay
PNB what the latter is
bound by the trial court's
decision to return the
former."7
By this simplistic approach,
petitioner in effect seeks to
render nugatory the
decisions of the trial court
and the appellate Court,
and have this Court
validate its original
misdeed, thereby making
a mockery of the entire
judicial process of this
country. What the
petitioner bank is
effectively saying is that
since the respondent
Court of Appeals ruled that
petitioner bank could not
do a shortcut and simply
intercept funds being
coursed through it, for
transmittal to another
bank, and eventually to be
deposited to the account
of an individual who
happens to owe some
amount of money to the
petitioner, and because
respondent Court order
petitioner bank to return
intercepted amount to
said individual, who in turn
was found by the
appellate Court to be
indebted to petitioner
bank, THEREFORE, there
must now be legal
compensation of the
amounts each owes the
other, and hence, there is
no need for petitioner
bank to actually return the
amount, and finally, that
petitioner bank ends up in
exactly the same position
as when it first took the
improper and
unwarranted shortcut by
intercepting the said
money transfer,
notwithstanding the
assailed Decision saying
that this could not be
done!
We see in this petition a
clever ploy to use this
Court to validate or
legalize an improper act of
the petitioner bank, with
the not impossible
intention of using this case
as a precedent for similar
acts of interception in the
future. This piratical
attitude of the nation's
premier bank deserves a
warning that it should not
abuse the justice system in
its collection efforts,
particularly since we are
aware that if the petitioner
bank had been in good
faith, it could have easily
disposed of this
controversy in ten minutes
flat by means of an
exchange of checks with
private respondent for the
same amount. The
litigation could have
ended there, but it did not.
Instead, this plainly
unmeritorious case had to
clog our docket and take
up the valuable time of this
Court.

WHEREFORE, the instant

petition is herewith DENIED
for being plainly
unmeritorious, and the
assailed Decision is
AFFIRMED in toto. Costs
against petitioner.

SO ORDERED.
X--------------------------X

G.R. Nos. 155217 & 156393

July 30, 2003

GATEWAY ELECTRONICS
CORPORATION, petitioner,
vs.
LAND BANK OF THE
PHILIPPINES, respondent.

YNARES-SANTIAGO, J.:

Before the Court are

consolidated petitions (1)
for review of the decision
of the Court of Appeals in
CA-G.R. SP No. 62658,1
which set aside the Order
dated October 18, 2000 of
the Regional Trial Court of
Makati City, Branch 133, in
Civil Case No. 98-782;2 and
(2) to cite Landbank
President Margarito Teves,
and Landbank's counsel, in
contempt of Court.

The undisputed facts are

as follows: In 1995,
petitioner Gateway
Electronics Corporation
applied for a loan in the
amount of one billion
pesos with respondent
Landbank to finance the
construction and
acquisition of machineries
and equipment for a semi-
conductor plant at
Gateway Business Park in
Javalera, General Trias,
Cavite. However,
Landbank was only able to
extend petitioner a loan in
the amount of six hundred
million pesos
(P600,000,000.00). Hence,
it offered to assist petitioner
in securing additional
funding through its
investment banking
services, which offer
petitioner accepted.
Thereafter, Landbank
released to petitioner the
initial amount of
P250,000,000.00, with the
balance of
P350,000,000.00 to be
released in June 1996. As
security for the said loans,
petitioner mortgaged in
favor of Landbank two
parcels of land3 located in
Barangay Jalavera,
General Trias, Cavite, the
movable properties as well
as the machineries to be
installed therein.4

After petitioner's
acceptance of
Landbank's financial
banking services, the latter
prepared an Information
Memorandum which it
disseminated to various
banks to attract them into
providing additional
funding for petitioner. The
Information Memorandum
stated that the security for
the proposed loan
syndication will be the
"Mortgage Trust Indenture
(MTI) on the project assets
including land, building
and equipment."5 In a
letter dated July 30, 1996,
Landbank informed
petitioner of its willingness
to share the loan collateral
which the latter
constituted in its favor as
part of the collateral for
the syndicated loan from
the other banks.6 On
August 20, 1996, Landbank
confirmed its undertaking
to share the said collateral
with the other creditor
banks, to wit:

In case of failure of
syndication of the loan,
allow the banks that have
granted loans to GEC
[Gateway Electronics
Corporation] in
anticipation of the loan
syndication to have a
registered pari passu
mortgage with you over
the property, the intention
being that all banks,
including Landbank, shall
be on equal footing where
the aforesaid collateral is
concerned.7

Consequently, Philippine
Commercial International
Bank (PCIB), Union Bank of
the Philippines, (UBP), Rizal
Commercial Banking
Corporation-Trust
Investment Division
(RCBC), and Asia Trust
Bank (Asia Trust) joined the
loan syndication and
released various loans to
petitioner. On October 10,
1996, a Memorandum of
Understanding (MOU)8
was executed by
Landbank, PCIB, UBP,
RCBC, Asiatrust and the
petitioner, with RCBC as
the trustee of the loan
syndication. Under the
Memorandum of
Understanding, the said
signatories agreed to –

enter into a Mortgage Trust

Indenture (herein, the
"MTI"), under which GEC
will constitute a mortgage
over the land, building,
other land improvements,
machinery and equipment
of GEC located within
Gateway Business Park,
Crisanto de Los Reyes
Avenue, Javalera, General
Trias, Cavite as well as the
assets to be acquired by
GEC under the Project (as
hereinafter defined) in
favor of RCBC-TID as
trustee, for the benefit of
the Creditors (as defined in
the MTI), to secure the
payment by GEC of its loan
obligations.9

Meanwhile, the
negotiations for the
execution of an MTI failed
because Landbank and
the petitioner were unable
to agree on the valuation
of the equipment and
machineries to be
acquired by the latter. The
petitioner insisted on a 70%
valuation, while the former
wanted a 50% valuation.
To break the impasse,
PCIB, RCBC, UBP, and
Asiatrust proposed, subject
to the approval of their
respective Executive
Committees or Board of
Directors, to execute a
Joint Real Estate Mortgage
(JREM)10 as the "new
mode to secure [their]
respective loan vis-à-vis
[petitioner's] collaterals."11
Under the proposed JREM,
the six hundred million
peso-loan granted by
Land Bank shall be secured
up to 94.42%, while the
loans granted by PCIB,
RCBC, and UBP would be
similarly secured up to
75.22%.12 Land Bank,
however, refused to agree
to the said proposal unless
100% of its loan exposure is
secured, pursuant to the
Loan Agreement it
executed with
petitioner.13

On February 27, 1998, Land

Bank informed petitioner of
its intention not to share
collaterals with the other
banks. In the meantime,
petitioner's loan with PCIB
became due because of
its failure to comply with
the collateral requirement
under the MTI or JREM, or to
provide acceptable
substitute collaterals.
Hence, petitioner filed with
the Regional Trial Court of
Makati City, Branch 133, a
complaint against Land
Bank for specific
performance and
damages with prayer for
the issuance of preliminary
mandatory injunction.
After hearing, the trial
court issued an order on
October 18, 2000 granting
petitioner's prayer for the
issuance of a writ of
preliminary mandatory
injunction, the dispositive
portion of which reads:

Wherefore, in view of the

foregoing, the application
for a writ of preliminary
mandatory injunction is
granted, conditioned
upon the filing of a bond in
the amount of three
hundred thousand pesos
(P300,000.00).

Defendant is hereby
directed to accede to the
terms of the draft MTI
and/or to agree to share
collaterals under a joint
real estate mortgage
[JREM] with long-term
creditors of plaintiff
(including PCIB) as joint
mortgagees and with
defendant as custodian of
the titles.

SO ORDERED.14

With the denial of its

motion for reconsideration,
respondent filed a petition
for certiorari with the Court
of Appeals, on the ground
that the trial court gravely
abused its discretion in
issuing the assailed writ of
preliminary mandatory
injunction. On March 23,
2001, the Court of Appeals,
on motion of Landbank,
issued a temporary
restraining order enjoining
the trial court from
enforcing the October 18,
2000 Order.15
In a decision rendered on
April 12, 2002, the Court of
Appeals annulled the
assailed order of the trial
court.16 It ruled that
petitioner failed to prove
the requisite clear and
legal right that would justify
the issuance of the writ of
preliminary mandatory
injunction; and that
respondent cannot be
compelled to accede to
the terms of the MTI and/or
JREM which was supposed
to cover the syndicated
loan of petitioner
inasmuch as the said
schemes were never
executed nor approved
by the petitioner and the
participating banks.

Hence, the instant petition

for review filed by
petitioner which was
docketed as G.R. No.
155217. On December 10,
2002, petitioner filed an
omnibus motion seeking,
inter alia, the issuance of a
temporary restraining
order enjoining Landbank
from proceeding and
completing the foreclosure
proceedings over its
mortgaged properties.17
On January 22, 2003, the
Court denied said motion
for lack of merit.18
Petitioner's motion for
reconsideration was
likewise denied on March
26, 2003.19

Meanwhile, on January 10,

2003, petitioner filed a
petition to cite Landbank
President Margarito Teves
and Landbank's lawyer in
contempt of Court for
proceeding and
concluding the foreclosure
proceedings and public
auction sale.20 Petitioner
contended that
Landbank's acts constitute
improper conduct which
directly or indirectly
impede, obstruct, or
degrade the
administration of justice.
The petition was docketed
as G.R. No. 156393.
On March 12, 2003, the
consolidation of G.R. No.
156393 and G.R. No.
155217 was ordered.21

The issues to be resolved in

this petition are as follows:
(1) Is Landbank bound to
share the properties
mortgaged to it by
respondent with the other
creditor banks in the loan
syndication? (2) If the
answer is in the affirmative,
can Landbank be
compelled at this point to
agree with the terms of the
MTI or JREM?

Anent the first issue, the

Court finds that Landbank
is bound by a perfected
contract to share
petitioner's collateral with
the participating banks in
the loan syndication.
Article 1305 of the Civil
Code defines a contract
as a meeting of minds
between two persons
whereby one binds himself,
with respect to the other,
to give something or to
render some service. A
contract undergoes three
distinct stages — (1)
preparation or
negotiation; (2) perfection;
and (3) consummation.
Negotiation begins from
the time the prospective
contracting parties
manifest their interest in the
contract and ends at the
moment of agreement of
the parties. The perfection
or birth of the contract
takes place when the
parties agree upon the
essential elements of the
contract. The last stage is
the consummation of the
contract wherein the
parties fulfill or perform the
terms agreed upon in the
contract, culminating in
the extinguishment
thereof. Article 1315 of the
Civil Code, on the other
hand, provides that a
contract is perfected by
mere consent, which is
manifested by the meeting
of the offer and the
acceptance upon the
thing and the cause which
are to constitute the
contract.22

In the case at bar, a

perfected contract for the
sharing of collaterals is
evident from the
exchange of
communications between
Landbank and petitioner
and the participating
banks, as well as in the
Memorandum of
Understanding executed
by petitioner and the
participating banks,
including Landbank. In its
July 31, 1996 letter to
petitioner, Landbank
stated that it is "willing to
submit the properties
covered by the real estate
mortgage (REM) in its favor
as part of [petitioner's]
assets that will be covered
by a Mortgage Trust
Indenture (MTI)." Thus, the
Information Memorandum
distributed by Landbank to
entice other banks to
participate in the loan
syndication, expressly
stated that the security for
the syndicated loan will be
the "MTI on project assets
including land, building
and equipment."23 Finally,
on October 10, 1996,
petitioner, Landbank, PCIB,
RCBC, UBP, and Asiatrust
executed a Memorandum
of Understanding
confirming the said
collateral sharing
agreement. To effect said
sharing, they decided to
enter into a Mortgage Trust
Indenture (MTI) which will
be secured by the same
properties previously
mortgaged by petitioner
to Landbank, or more
specifically, to –

enter into a Mortgage Trust

Indenture (herein, the
"MTI"), under which GEC
will constitute a mortgage
over the land, building,
other land improvements,
machinery and equipment
of GEC located within
Gateway Business Park,
Crisanto de Los Reyes
Avenue, Javalera, General
Trias, Cavite as well as the
assets to be acquired by
GEC under the Project (as
hereinafter defined) in
favor of RCBC-TID as
trustee, for the benefit of
the Creditors (as defined in
the MTI), to secure the
payment by GEC of its loan
obligations.24
Clearly, there was an
acceptance by petitioner
and by PCIB, RCBC, UBP,
and Asiatrust of Lanbank's
offer to share collaterals,
culminating in the
execution of the
Memorandum of
Understanding. We agree
with petitioner that the MTI
and/or the JREM belong to
the realm of
consummation of said
Memorandum of
Understanding, being the
proposed vehicles or
modes to effect the
sharing agreement. Thus, in
the JREM which was
approved by Landbank,
except for its loan security
coverage, the
participating banks
expressly acknowledged
that "[t]he Joint Real Estate
Mortgage [is] pursued by
[them] as a new mode to
secure [their] respective
loans vis-à-vis GEC's
collateral."25 Verily, the
perfection of the collateral
sharing agreement is not
dependent upon the
execution of the MTI or the
JREM. The failure to
execute said schemes did
not affect the perfected
and binding collateral
sharing contract.
With respect, however, to
the second issue, we find
that the issuance by the
trial court of the writ of
preliminary mandatory
injunction directing
Landbank to agree with
the terms of the MTI or
JREM was premature. This is
so because the MTI and/or
JREM that were supposed
to consummate the
perfected collateral
sharing agreement have
not yet come into
existence. As correctly
held by the Court of
Appeals, Landbank
cannot be compelled to
agree with the terms of the
MTI considering that no
such terms were finalized
and approved by the
petitioner and the
participating banks. Simply
stated, Landbank cannot
be forced to give its
conformity to an inexistent
contract. So, also, the
proposed JREM was never
approved by the petitioner
and the participating
banks. Notably, the JREM
expressly stated that "we
hereby appeal to the
GEC's senior management
to decide swiftly and to
favorably approve our
humble requests so that, in
turn, we can seek
respective approvals from
our senior management to
culminate this long term
project financing deal of
ours."26 No such approval,
however, appears in the
records.

As to the questioned
security coverage under
the JREM, Landbank
cannot be compelled to
agree to the proposed
94.42% loan security
coverage over its six
hundred million peso-loan
to petitioner. The security
coverage of the
participating banks on the
collaterals of petitioner
was not agreed upon in
the Memorandum of
Understanding. While it is
true that Landbank
informed petitioner in its
letter dated July 30, 1996
that "the participating
banks in the loan
syndication will have equal
security position",27 and
that on August 20, 1996,
Landbank confirmed to
PCIB that the participating
banks, "shall be on equal
footing where the
aforesaid collateral is
concerned,"28 no such
stipulation was embodied
in the Memorandum of
Understanding executed
by petitioner, Landbank,
PCIB, RCBC, UBP, and
Asiatrust on October 10,
1996. As the repository of
the terms and conditions
agreed upon by the
parties, the Memorandum
of Understanding is
considered as containing
all their stipulations and
there can be no evidence
of such terms other than
the contents thereof.29
Inasmuch as the parties to
the Memorandum of
Understanding did not
agree on the terms of the
security coverage of the
participating banks in the
MTI or JREM, we can
neither add such a
stipulation nor direct
Landbank to agree to the
security coverage stated in
the JREM. Furthermore, the
reasonableness of the
terms of the MTI and JREM,
as well as the good faith or
bad faith of the parties in
negotiating the terms of
the said schemes, are
matters that should be
determined at the trial,
and cannot at this point be
passed upon by this Court.
Furthermore, the other
participating banks,
namely PCIB, RCBC, UBP,
and Asiatrust, are not
parties to the instant case
and cannot, therefore, be
bound by an order
directing Landbank to
accede to the terms of the
MTI or the JREM. We are
not even aware if said
banks are amenable to
the said schemes or
pursuing other modes to
effect the sharing
agreement. Indeed, the
scheme or mode and the
terms that would
consummate the
collateral sharing
agreement are matters
that the signatories of the
Memorandum of
Understanding have yet to
come up with. The rule in
this jurisdiction is that the
contracting parties may
establish any agreement,
term, and condition they
may deem advisable,
provided they are not
contrary to law, morals or
public policy. The right to
enter into lawful contracts
constitutes one of the
liberties guaranteed by the
Constitution. It cannot be
struck down or arbitrarily
interfered with without
violating the freedom to
enter into lawful
contracts.30

A writ of mandatory
injunction requires the
performance of a
particular act and is
granted only upon a
showing of the following
requisites – (1) the invasion
of the right is material and
substantial; (2) the right of
a complainant is clear and
unmistakable; and (3)
there is an urgent and
permanent necessity for
the writ to prevent serious
damage. Since it
commands the
performance of an act, a
mandatory injunction does
not preserve the status quo
and is thus more cautiously
regarded than a mere
prohibitive injunction.
Accordingly, the issuance
of the former is justified only
in a clear case, free from
doubt and dispute.31

While it is true that

petitioner has a right to
compel Landbank to
comply with the collateral
sharing agreement, its right
to enforce the same by
way of an inexistent MTI or
JREM is certainly not clear
and unmistakable. At this
stage, Landbank cannot
be compelled to agree to
the terms of the MTI and/or
JREM. At the most,
Landbank can be
compelled to comply with
its obligation to share with
the other participating
banks of the loan
syndication the properties
mortgaged to it by
petitioner and to execute
the necessary contract
that would implement said
collateral sharing
agreement.

Coming now to the

petition for contempt, we
find that Landbank's acts
of foreclosing and selling
at public auction the lots
mortgaged by petitioner
were not contumacious.
Landbank instituted the
foreclosure proceedings
upon an honest belief that
petitioner had defaulted in
the payment of its
obligation. Having acted
in good faith, the officers of
the bank cannot be held in
contempt of court.
However, in order not to
render this decision moot
and ineffectual, the sale at
public auction should be
annulled.
WHEREFORE, in view of all
the foregoing, the petition
in G.R. No. 155217 is
GRANTED. The decision of
the Court of Appeals
dated April 12, 2002 in CA-
G.R. SP. No. 62658 is SET
ASIDE. The assailed Order
dated October 18, 2000 of
the Regional Trial Court of
Makati City, Branch 133, in
Civil Case No. 98-782 is
MODIFIED as follows:
respondent Landbank is
directed to implement its
agreement under the
Memorandum of
Understanding dated
October 10, 1996 to share
with Philippine
Commercial International
Bank (PCIB), Union Bank of
the Philippines, (UBP), Rizal
Commercial Banking
Corporation-Trust
Investment Division
(RCBC), and Asia Trust
Bank (Asia Trust) the
properties mortgaged to it
by petitioner Gateway
Electronics Corporation, as
collaterals for the
syndicated loan.

In G.R. No. 156393, the

petition to cite Landbank
President Margarito Teves
and Landbank's lawyer in
contempt of Court is
DENIED for lack of merit.

SO ORDERED.
X------------------------X

G.R. No. 195540

March 13, 2013

GOLDENWAY
MERCHANDISING
CORPORATION, Petitioner,
vs.
EQUITABLE PCI BANK,
Respondent.

DECISION

VILLARAMA, JR., J.:

Before the Court is a

petition for review on
certiorari which seeks to
reverse and set aside the
Decision1 dated
November 19, 2010 and
Resolution2 dated January
31, 2011 of the Court of
Appeals (CA) in CA-G.R.
CV No. 91120. The CA
affirmed the Decision3
dated January 8, 2007 of
the Regional Trial Court
(RTC) of- Valenzuela City,
Branch 171 dismissing the
complaint in Civil Case No.
295-V -01.

The facts are undisputed.

On November 29, 1985,
Goldenway
Merchandising
Corporation (petitioner)
executed a Real Estate
Mortgage in favor of
Equitable PCI Bank
(respondent) over its real
properties situated in
Valenzuela, Bulacan (now
Valenzuela City) and
covered by Transfer
Certificate of Title (TCT)
Nos. T-152630, T-151655
and T-214528 of the
Registry of Deeds for the
Province of Bulacan. The
mortgage secured the Two
Million Pesos
(₱2,000,000.00) loan
granted by respondent to
petitioner and was duly
registered.4
As petitioner failed to settle
its loan obligation,
respondent extrajudicially
foreclosed the mortgage
on December 13, 2000.
During the public auction,
the mortgaged properties
were sold for ₱3,500,000.00
to respondent.
Accordingly, a Certificate
of Sale was issued to
respondent on January 26,
2001. On February 16, 2001,
the Certificate of Sale was
registered and inscribed
on TCT Nos. T-152630, T-
151655 and T-214528.5

In a letter dated March 8,

2001, petitioner’s counsel
offered to redeem the
foreclosed properties by
tendering a check in the
amount of ₱3,500,000.00.
On March 12, 2001,
petitioner’s counsel met
with respondent’s counsel
reiterating petitioner’s
intention to exercise the
right of redemption.6
However, petitioner was
told that such redemption
is no longer possible
because the certificate of
sale had already been
registered. Petitioner also
verified with the Registry of
Deeds that title to the
foreclosed properties had
already been
consolidated in favor of
respondent and that new
certificates of title were
issued in the name of
respondent on March 9,
2001.

On December 7, 2001,
petitioner filed a
complaint7 for specific
performance and
damages against the
respondent, asserting that
it is the one-year period of
redemption under Act No.
3135 which should apply
and not the shorter
redemption period
provided in Republic Act
(R.A.) No. 8791. Petitioner
argued that applying
Section 47 of R.A. 8791 to
the real estate mortgage
executed in 1985 would
result in the impairment of
obligation of contracts
and violation of the equal
protection clause under
the Constitution.
Additionally, petitioner
faulted the respondent for
allegedly failing to furnish it
and the Office of the Clerk
of Court, RTC of
Valenzuela City with a
Statement of Account as
directed in the Certificate
of Sale, due to which
petitioner was not
apprised of the assessment
and fees incurred by
respondent, thus depriving
petitioner of the
opportunity to exercise its
right of redemption prior to
the registration of the
certificate of sale.

In its Answer with

Counterclaim,8
respondent pointed out
that petitioner cannot
claim that it was unaware
of the redemption price
which is clearly provided in
Section 47 of R.A. No. 8791,
and that petitioner had all
the opportune time to
redeem the foreclosed
properties from the time it
received the letter of
demand and the notice of
sale before the registration
of the certificate of sale. As
to the check payment
tendered by petitioner,
respondent said that even
assuming arguendo such
redemption was timely
made, it was not for the
amount as required by
law.

On January 8, 2007, the

trial court rendered its
decision dismissing the
complaint as well as the
counterclaim. It noted that
the issue of constitutionality
of Sec. 47 of R.A. No. 8791
was never raised by the
petitioner during the pre-
trial and the trial. Aside
from the fact that
petitioner’s attempt to
redeem was already late,
there was no valid
redemption made
because Atty. Judy Ann
Abat-Vera who talked to
Atty. Joseph E. Mabilog of
the Legal Division of
respondent bank, was not
properly authorized by
petitioner’s Board of
Directors to transact for
and in its behalf; it was only
a certain Chan Guan Pue,
the alleged President of
petitioner corporation,
who gave instruction to
Atty. Abat-Vera to redeem
the foreclosed properties.9
Aggrieved, petitioner
appealed to the CA which
affirmed the trial court’s
decision. According to the
CA, petitioner failed to
justify why Section 47 of
R.A. No. 8791 should be
declared unconstitutional.
Furthermore, the appellate
court concluded that a
reading of Section 47
plainly reveals the intention
to shorten the period of
redemption for juridical
persons and that the
foreclosure of the
mortgaged properties in
this case when R.A. No.
8791 was already in effect
clearly falls within the
purview of the said
provision.10
Petitioner’s motion for
reconsideration was
likewise denied by the CA.

In the present petition, it is

contended that Section 47
of R.A. No. 8791 is
inapplicable considering
that the contracting
parties expressly and
categorically agreed that
the foreclosure of the real
estate mortgage shall be
in accordance with Act
No. 3135. Citing Co v.
Philippine National Bank11
petitioner contended that
the right of redemption is
part and parcel of the
Deed of Real Estate
Mortgage itself and
attaches thereto upon its
execution, a vested right
flowing out of and made
dependent upon the law
governing the contract of
mortgage and not on the
mortgagee’s act of
extrajudicially foreclosing
the mortgaged properties.
This Court thus held in said
case that "Under the terms
of the mortgage contract,
the terms and conditions
under which redemption
may be exercised are
deemed part and parcel
thereof whether the same
be merely conventional or
imposed by law."

Petitioner then argues that

applying Section 47 of R.A.
No. 8791 to the present
case would be a
substantial impairment of
its vested right of
redemption under the real
estate mortgage contract.
Such impairment would be
violative of the
constitutional proscription
against impairment of
obligations of contract, a
patent derogation of
petitioner’s vested right
and clearly changes the
intention of the
contracting parties.
Moreover, citing this
Court’s ruling in Rural Bank
of Davao City, Inc. v. Court
of Appeals12 where it was
held that "Section 119
prevails over statutes
which provide for a shorter
period of redemption in
extrajudicial foreclosure
sales", and in Sulit

v. Court of Appeals,13
petitioner stresses that it
has always been the policy
of this Court to aid rather
than defeat the
mortgagor’s right to
redeem his property.
Petitioner further argues
that since R.A. No. 8791
does not provide for its
retroactive application,
courts therefore cannot
retroactively apply its
provisions to contracts
executed and
consummated before its
effectivity. Also, since R.A.
8791 is a general law
pertaining to the banking
industry while Act No. 3135
is a special law specifically
governing real estate
mortgage and foreclosure,
under the rules of statutory
construction that in case of
conflict a special law
prevails over a general law
regardless of the dates of
enactment of both laws,
Act No. 3135 clearly should
prevail on the redemption
period to be applied in this
case.

The constitutional issue

having been squarely
raised in the pleadings filed
in the trial and appellate
courts, we shall proceed to
resolve the same.

The law governing cases of

extrajudicial foreclosure of
mortgage is Act No.
3135,14 as amended by
Act No. 4118. Section 6
thereof provides:

SEC. 6. In all cases in which

an extrajudicial sale is
made under the special
power hereinbefore
referred to, the debtor, his
successors-in-interest or
any judicial creditor or
judgment creditor of said
debtor, or any person
having a lien on the
property subsequent to the
mortgage or deed of

trust under which the

property is sold, may
redeem the same at any
time within the term of one
year from and after the
date of the sale; and such
redemption shall be
governed by the provisions
of sections four hundred
and sixty-four to four
hundred and sixty-six,
inclusive, of the Code of

Civil Procedure,15 in so far

as these are not
inconsistent with the
provisions of this Act.

The one-year period of

redemption is counted
from the date of the
registration of the
certificate of sale. In this
case, the parties provided
in their real estate
mortgage contract that
upon petitioner’s default
and the latter’s entire loan
obligation becoming due,
respondent may
immediately foreclose the
mortgage judicially in
accordance with the Rules
of Court, or extrajudicially
in accordance with Act
No. 3135, as amended.

However, Section 47 of
R.A. No. 8791 otherwise
known as "The General
Banking Law of 2000"
which took effect on June
13, 2000, amended Act
No. 3135. Said provision
reads:
SECTION 47. Foreclosure of
Real Estate Mortgage. — In
the event of foreclosure,
whether judicially or
extrajudicially, of any
mortgage on real estate
which is security for any
loan or other credit
accommodation granted,
the mortgagor or debtor
whose real property has
been sold for the full or
partial payment of his
obligation shall have the
right within one year after
the sale of the real estate,
to redeem the property by
paying the amount due
under the mortgage deed,
with interest thereon at the
rate specified in the
mortgage, and all the
costs and expenses
incurred by the bank or
institution from the sale
and custody of said
property less the income
derived therefrom.
However, the purchaser at
the auction sale
concerned whether in a
judicial or extrajudicial
foreclosure shall have the
right to enter upon and
take possession of such
property immediately after
the date of the
confirmation of the
auction sale and
administer the same in
accordance with law. Any
petition in court to enjoin or
restrain the conduct of
foreclosure proceedings
instituted pursuant to this
provision shall be given
due course only upon the
filing by the petitioner of a
bond in an amount fixed
by the court conditioned
that he will pay all the
damages which the bank
may suffer by the enjoining
or the restraint of the
foreclosure proceeding.

Notwithstanding Act 3135,

juridical persons whose
property is being sold
pursuant to an
extrajudicial foreclosure,
shall have the right to
redeem the property in
accordance with this
provision until, but not
after, the registration of the
certificate of foreclosure
sale with the applicable
Register of Deeds which in
no case shall be more than
three (3) months after
foreclosure, whichever is
earlier. Owners of property
that has been sold in a
foreclosure sale prior to the
effectivity of this Act shall
retain their redemption
rights until their expiration.
(Emphasis supplied.)

Under the new law, an

exception is thus made in
the case of juridical
persons which are allowed
to exercise the right of
redemption only "until, but
not after, the registration of
the certificate of
foreclosure sale" and in no
case more than three (3)
months after foreclosure,
whichever comes first.16

May the foregoing

amendment be validly
applied in this case when
the real estate mortgage
contract was executed in
1985 and the mortgage
foreclosed when R.A. No.
8791 was already in
effect?
We answer in the
affirmative.

When confronted with a

constitutional question, it is
elementary that every
court must approach it
with grave care and
considerable caution
bearing in mind that every
statute is presumed valid
and every reasonable
doubt should be resolved
in favor of its
constitutionality.17 For a
law to be nullified, it must
be shown that there is a
clear and unequivocal
breach of the Constitution.
The ground for nullity must
be clear and beyond
reasonable doubt.18
Indeed, those who petition
this Court to declare a law,
or parts thereof,
unconstitutional must
clearly establish the basis
therefor. Otherwise, the
petition must fail.19

Petitioner’s contention that

Section 47 of R.A. 8791
violates the constitutional
proscription against
impairment of the
obligation of contract has
no basis.
The purpose of the non-
impairment clause of the
Constitution20 is to
safeguard the integrity of
contracts against
unwarranted interference
by the State. As a rule,
contracts should not be
tampered with by
subsequent laws that
would change or modify
the rights and obligations
of the parties.21
Impairment is anything
that diminishes the
efficacy of the contract.
There is an impairment if a
subsequent law changes
the terms of a contract
between the parties,
imposes new conditions,
dispenses with those
agreed upon or withdraws
remedies for the
enforcement of the rights
of the parties.22
Section 47 did not divest
juridical persons of the right
to redeem their foreclosed
properties but only
modified the time for the
exercise of such right by
reducing the one-year
period originally provided
in Act No. 3135. The new
redemption period
commences from the date
of foreclosure sale, and
expires upon registration of
the certificate of sale or
three months after
foreclosure, whichever is
earlier. There is likewise no
retroactive application of
the new redemption
period because Section 47
exempts from its operation
those properties
foreclosed prior to its
effectivity and whose
owners shall retain their
redemption rights under
Act No. 3135.

Petitioner’s claim that

Section 47 infringes the
equal protection clause as
it discriminates
mortgagors/property
owners who are juridical
persons is equally bereft of
merit.
The equal protection
clause is directed
principally against undue
favor and individual or
class privilege.1âwphi1 It is
not intended to prohibit
legislation which is limited
to the object to which it is
directed or by the territory
in which it is to operate. It
does not require absolute
equality, but merely that all
persons be treated alike
under like conditions both
as to privileges conferred
and liabilities imposed.23
Equal protection permits of
reasonable
classification.24 We have
ruled that one class may
be treated differently from
another where the
groupings are based on
reasonable and real
distinctions.25 If
classification is germane to
the purpose of the law,
concerns all members of
the class, and applies
equally to present and
future conditions, the
classification does not
violate the equal
protection guarantee.26

We agree with the CA that

the legislature clearly
intended to shorten the
period of redemption for
juridical persons whose
properties were foreclosed
and sold in accordance
with the provisions of Act
No. 3135.27

The difference in the

treatment of juridical
persons and natural
persons was based on the
nature of the properties
foreclosed – whether these
are used as residence, for
which the more liberal
one-year redemption
period is retained, or used
for industrial or commercial
purposes, in which case a
shorter term is deemed
necessary to reduce the
period of uncertainty in the
ownership of property and
enable mortgagee-banks
to dispose sooner of these
acquired assets. It must be
underscored that the
General Banking Law of
2000, crafted in the
aftermath of the 1997
Southeast Asian financial
crisis, sought to reform the
General Banking Act of
1949 by fashioning a legal
framework for maintaining
a safe and sound banking
system.28 In this context,
the amendment
introduced by Section 47
embodied one of such
safe and sound practices
aimed at ensuring the
solvency and liquidity of
our banks.1âwphi1 It
cannot therefore be
disputed that the said
provision amending the
redemption period in Act
3135 was based on a
reasonable classification
and germane to the
purpose of the law.
This legitimate public
interest pursued by the
legislature further
enfeebles petitioner’s
impairment of contract
theory.

The right of redemption

being statutory, it must be
exercised in the manner
prescribed by the
statute,29 and within the
prescribed time limit, to
make it effective.
Furthermore, as with other
individual rights to contract
and to property, it has to
give way to police power
exercised for public
welfare.30 The concept of
police power is well-
established in this
jurisdiction. It has been
defined as the "state
authority to enact
legislation that may
interfere with personal
liberty or property in order
to promote the general
welfare." Its scope, ever-
expanding to meet the
exigencies of the times,
even to anticipate the
future where it could be
done, provides enough
room for an efficient and
flexible response to
conditions and
circumstances thus
assuming the greatest
benefits.31

The freedom to contract is

not absolute; all contracts
and all rights are subject to
the police power of the
State and not only may
regulations which affect
them be established by the
State, but all such
regulations must be
subject to change from
time to time, as the general
well-being of the
community may require, or
as the circumstances may
change, or as experience
may demonstrate the
necessity.32 Settled is the
rule that the non-
impairment clause of the
Constitution must yield to
the loftier purposes
targeted by the
Government. The right
granted by this provision
must submit to the
demands and necessities
of the State’s power of
regulation.33 Such
authority to regulate
businesses extends to the
banking industry which, as
this Court has time and
again emphasized, is
undeniably imbued with
public interest.34
Having ruled that the
assailed Section 47 of R.A.
No. 8791 is constitutional,
we find no reversible error
committed by the CA in
holding that petitioner can
no longer exercise the right
of redemption over its
foreclosed properties after
the certificate of sale in
favor of respondent had
been registered.
WHEREFORE, the petition
for review on certiorari is
DENIED for lack of merit.
The Decision dated
November 19, 2010 and
Resolution dated January
31, 2011 of the Court of
Appeals in CA-G.R. CV No.
91120 are hereby
AFFIRMED. With costs
against the petitioner. SO
ORDERED.