Republic of the Philippines

SUPREME COURT
Manila

did not object, he could not return the animals nor pay their value and prayed for the
dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment

EN BANC
G.R. No. L-17474

October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.
Office of the Solicitor General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are
raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the
Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a
Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May
1948 to 7 May 1949 for breeding purposes subject to a government charge of breeding fee
of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract,
the borrower asked for a renewal for another period of one year. However, the Secretary of
Agriculture and Natural Resources approved a renewal thereof of only one bull for another
year from 8 May 1949 to 7 May 1950 and requested the return of the other two. On 25
March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay the
value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value
with a deduction of yearly depreciation to be approved by the Auditor General. On 19
October 1950 the Director of Animal Industry advised him that the book value of the three
bulls could not be reduced and that they either be returned or their book value paid not later
than 31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to
return them. So, on 20 December 1950 in the Court of First Instance of Manila the Republic
of the Philippines commenced an action against him praying that he be ordered to return the
three bulls loaned to him or to pay their book value in the total sum of P3,241.45 and the
unpaid breeding fee in the sum of P199.62, both with interests, and costs; and that other
just and equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered
that because of the bad peace and order situation in Cagayan Valley, particularly in the
barrio of Baggao, and of the pending appeal he had taken to the Secretary of Agriculture
and Natural Resources and the President of the Philippines from the refusal by the Director
of Animal Industry to deduct from the book value of the bulls corresponding yearly
depreciation of 8% from the date of acquisition, to which depreciation the Auditor General

. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value
of the three bulls plus the breeding fees in the amount of P626.17 with interest on
both sums of (at) the legal rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court
granted on 18 October and issued on 11 November 1958. On 2 December 1958 granted an
ex-parte motion filed by the plaintiff on November 1958 for the appointment of a special
sheriff to serve the writ outside Manila. Of this order appointing a special sheriff, on 6
December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas
who died on 23 October 1951 and as administratrix of his estate, was notified. On 7 January
1959 she file a motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were
returned to the Bureau Animal of Industry and that sometime in November 1958 the third
bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on Hacienda
Felicidad Intal, and praying that the writ of execution be quashed and that a writ of
preliminary injunction be issued. On 31 January 1959 the plaintiff objected to her motion. On
6 February 1959 she filed a reply thereto. On the same day, 6 February, the Court denied
her motion. Hence, this appeal certified by the Court of Appeals to this Court as stated at
the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late
defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent of
the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as evidenced by
a memorandum receipt signed by the latter (Exhibit 2). That is why in its objection of 31
January 1959 to the appellant's motion to quash the writ of execution the appellee prays
"that another writ of execution in the sum of P859.53 be issued against the estate of
defendant deceased Jose V. Bagtas." She cannot be held liable for the two bulls which
already had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the
Huk in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao,
Cagayan, where the animal was kept, and that as such death was due to force majeure she
is relieved from the duty of returning the bull or paying its value to the appellee. The
contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of
the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May
1949, later on renewed for another year as regards one bull, was subject to the payment by
the borrower of breeding fee of 10% of the book value of the bulls. The appellant contends
that the contract was commodatum and that, for that reason, as the appellee retained
ownership or title to the bull it should suffer its loss due to force majeure. A contract of
commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation,
then the contract would be a lease of the bull. Under article 1671 of the Civil Code the
lessee would be subject to the responsibilities of a possessor in bad faith, because she had
continued possession of the bull after the expiry of the contract. And even if the contract be
commodatum, still the appellant is liable, because article 1942 of the Civil Code provides
that a bailee in a contract of commodatum

. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there
is a stipulation exempting the bailee from responsibility in case of a fortuitous
event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull
was renewed for another period of one year to end on 8 May 1950. But the appellant kept
and used the bull until November 1953 when during a Huk raid it was killed by stray bullets.
Furthermore, when lent and delivered to the deceased husband of the appellant the bulls
had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at
P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull
due to fortuitous event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the
bull or the payment of its value being a money claim should be presented or filed in the
intestate proceedings of the defendant who died on 23 October 1951, is not altogether
without merit. However, the claim that his civil personality having ceased to exist the trial
court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3
of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the court shall order,
upon proper notice, the legal representative of the deceased to appear and to be
substituted for the deceased, within a period of thirty (30) days, or within such
time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with
section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to
inform the court promptly of such death . . . and to give the name and residence
of the executory administrator, guardian, or other legal representative of the
deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M.
Bagtas had been issue letters of administration of the estate of the late Jose Bagtas and
that "all persons having claims for monopoly against the deceased Jose V. Bagtas, arising
from contract express or implied, whether the same be due, not due, or contingent, for
funeral expenses and expenses of the last sickness of the said decedent, and judgment for
monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg.,
Highway 54, Quezon City, within six (6) months from the date of the first publication of this
order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the appointed
administratrix of the estate of the said deceased," is not a notice to the court and the
appellee who were to be notified of the defendant's death in accordance with the abovequoted rule, and there was no reason for such failure to notify, because the attorney who
appeared for the defendant was the same who represented the administratrix in the special
proceedings instituted for the administration and settlement of his estate. The appellee or its

attorney or representative could not be expected to know of the death of the defendant or of
the administration proceedings of his estate instituted in another court that if the attorney for
the deceased defendant did not notify the plaintiff or its attorney of such death as required
by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late
defendant is only liable for the sum of P859.63, the value of the bull which has not been
returned to the appellee, because it was killed while in the custody of the administratrix of
his estate. This is the amount prayed for by the appellee in its objection on 31 January 1959
to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of
execution.
Special proceedings for the administration and settlement of the estate of the deceased
Jose V. Bagtas having been instituted in the Court of First Instance of Rizal (Q-200), the
money judgment rendered in favor of the appellee cannot be enforced by means of a writ of
execution but must be presented to the probate court for payment by the appellant, the
administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement
as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon,
Regala and Makalintal, JJ., concur.
Barrera, J., concurs in the result.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 80294-95

September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,

vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ,
respondents.

lots 2 and 3 in question; that the two lots were possessed by the predecessors-in-interest of
private respondents under claim of ownership in good faith from 1906 to 1951; that
petitioner had been in possession of the same lots as bailee in commodatum up to 1951,
when petitioner repudiated the trust and when it applied for registration in 1962; that
petitioner had just been in possession as owner for eleven years, hence there is no
possibility of acquisitive prescription which requires 10 years possession with just title and
30 years of possession without; that the principle of res judicata on these findings by the
Court of Appeals will bar a reopening of these questions of facts; and that those facts may
no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows

Valdez, Ereso, Polido & Associates for petitioner.

Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.

... The documents and records presented reveal that the whole controversy started when
the defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed
with the Court of First Instance of Baguio Benguet on September 5, 1962 an application for
registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La
Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church
building, convents, high school building, school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio
Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting
ownership and title thereto. After trial on the merits, the land registration court promulgated
its Decision, dated November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2,
3, and 4.

GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals
promulgated a long time ago can properly be considered res judicata by respondent Court
of Appeals in the present two cases between petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth
Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607
(419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of
Possession, which affirmed the Decision of the Honorable Nicodemo T. Ferrer, Judge of the
Regional Trial Court of Baguio and Benguet in Civil Case No. 3607 (419) and Civil Case No.
3655 (429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar
Apostolic of the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the
plaintiffs. Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the
Heirs of Egmidio Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence,
the plaintiffs' claim or damages is hereby denied. Said defendant is ordered to pay costs. (p.
36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial
court's conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R.
No. 38830-R, in the two cases affirmed by the Supreme Court, touched on the ownership of

The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of
Egmidio Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of the
land registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R. The
Court of Appeals rendered its decision, dated May 9, 1977, reversing the decision of the
land registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots
claimed by the two sets of oppositors in the land registration case (and two sets of plaintiffs
in the two cases now at bar), the first lot being presently occupied by the convent and the
second by the women's dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court
of Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano,
and on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for
reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the
Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied
the motion for reconsideration filed by the Heirs of Juan Valdez on the ground that there
was "no sufficient merit to justify reconsideration one way or the other ...," and likewise
denied that of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the
decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and
3, docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province
vs. Court of Appeals and Heirs of Egmidio Octaviano.'

From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan
Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition
for review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez
vs. Court of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.

because the dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely
dismissed their application for registration and titling of lots 2 and 3. Defendant Vicar
contends that only the dispositive portion of the decision, and not its body, is the controlling
pronouncement of the Court of Appeals. 2

On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of
VICAR on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for
lack of merit. Upon the finality of both Supreme Court resolutions in G.R. No. L-46832 and
G.R. No. L- 46872, the Heirs of Octaviano filed with the then Court of First Instance of
Baguio, Branch II, a Motion For Execution of Judgment praying that the Heirs of Octaviano
be placed in possession of Lot 3. The Court, presided over by Hon. Salvador J. Valdez, on
December 7, 1978, denied the motion on the ground that the Court of Appeals decision in
CA-G.R. No. 38870 did not grant the Heirs of Octaviano any affirmative relief.

The alleged errors committed by respondent Court of Appeals according to petitioner are as
follows:

On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for
certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio
Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979,
the Court of Appeals dismissed the petition.

3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3

FROM VALDEZ AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER
OWNERS WERE VALDEZ AND OCTAVIANO;

It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed
Civil Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the
Heirs of Juan Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for
recovery of possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano
presented one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the
land in question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C );
hiswritten demand (Exh. BB-4 ) to defendant Vicar for the return of the land to them; and
the reasonable rentals for the use of the land at P10,000.00 per month. On the other hand,
defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor
Sison, who testified that the land in question is not covered by any title in the name of
Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the
testimony of Mons.William Brasseur when the plaintiffs admitted that the witness if called to
the witness stand, would testify that defendant Vicar has been in possession of Lot 3, for
seventy-five (75) years continuously and peacefully and has constructed permanent
structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute,
submitted the case on the sole issue of whether or not the decisions of the Court of Appeals
and the Supreme Court touching on the ownership of Lot 2, which in effect declared the
plaintiffs the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up
the defense of ownership and/or long and continuous possession of the two lots in question
since this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R
under the principle of res judicata. Plaintiffs contend that the question of possession and
ownership have already been determined by the Court of Appeals (Exh. C, Decision, CAG.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute Resolution of the
Supreme Court). On his part, defendant Vicar maintains that the principle of res judicata
would not prevent them from litigating the issues of long possession and ownership

1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;

2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE
ACQUIRED BY PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;

4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS

WHO WERE IN POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT
PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT
APPLICATIONS AND THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY
HAD FREE PATENT APPLICATIONS SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951
AND JUST TITLE IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO
ART. 1129 OF THE CIVIL CODE FOR ORDINARY ACQUISITIVE PRESCRIPTION OF 10
YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R.
NO. 038830 WAS AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON
OWNERSHIP OF LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR
PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF
OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2
AND 3 MERELY AS BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN
FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD
FAITH WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY
THE FINALITY AND CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3

The petition is bereft of merit.

Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and
05149, when it clearly held that it was in agreement with the findings of the trial court that
the Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the
question of ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CAG.R. No. 38830-R) did not positively declare private respondents as owners of the land,
neither was it declared that they were not owners of the land, but it held that the
predecessors of private respondents were possessors of Lots 2 and 3, with claim of
ownership in good faith from 1906 to 1951. Petitioner was in possession as borrower in
commodatum up to 1951, when it repudiated the trust by declaring the properties in its
name for taxation purposes. When petitioner applied for registration of Lots 2 and 3 in 1962,
it had been in possession in concept of owner only for eleven years. Ordinary acquisitive
prescription requires possession for ten years, but always with just title. Extraordinary
acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of
Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent
appellate court's ruling that said findings are res judicata between the parties. They can no
longer be altered by presentation of evidence because those issues were resolved with
finality a long time ago. To ignore the principle of res judicata would be to open the door to
endless litigations by continuous determination of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CAG.R. No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be
entitled to register the lands in question under its ownership, on its evaluation of evidence
and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years
possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the
requirement of 10 years possession for ordinary acquisitive prescription because of the
absence of just title. The appellate court did not believe the findings of the trial court that Lot
2 was acquired from Juan Valdez by purchase and Lot 3 was acquired also by purchase
from Egmidio Octaviano by petitioner Vicar because there was absolutely no documentary
evidence to support the same and the alleged purchases were never mentioned in the
application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and
Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots since
1906. The predecessors of private respondents, not petitioner Vicar, were in possession of
the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but
not Lots 2 and 3, because the buildings standing thereon were only constructed after
liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951.
The improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was
appointed only in 1947, the church was constructed only in 1951 and the new convent only
2 years before the trial in 1963.

When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy
the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar
only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed by
petitioner Vicar after the church and the convent were destroyed. They never asked for the
return of the house, but when they allowed its free use, they became bailors in
commodatum and the petitioner the bailee. The bailees' failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part of the borrower.
The bailee held in trust the property subject matter of commodatum. The adverse claim of
petitioner came only in 1951 when it declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive
prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were
possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only
a bailee in commodatum; and that the adverse claim and repudiation of trust came only in
1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No.
38830-R. Its findings of fact have become incontestible. This Court declined to review said
decision, thereby in effect, affirming it. It has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of
discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is
governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R.
No. 05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that
decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of
merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent
Court of Appeals is AFFIRMED, with costs against petitioner.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

failed to file his claim within the prescribed period, the land had become irrevocably public
and could not be the subject of a valid registration for private ownership.
Considering the foregoing facts respondents Court of Appeals ruled as follows:

SECOND DIVISION
G.R. No. L-46145

November 26, 1986

REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS), petitioner,

vs.
THE HON. COURT OF APPEALS, HEIRS OF DOMINGO P. BALOY, represented by
RICARDO BALOY, ET AL., respondents.
Pelaez, Jalondoni, Adriano and Associates for respondents.

PARAS, J.:p
This case originally emanated from a decision of the then Court of First Instance of
Zambales in LRC Case No. 11-0, LRC Record No. N-29355, denying respondents'
application for registration. From said order of denial the applicants, heirs of Domingo Baloy,
represented by Ricardo P. Baloy, (herein private respondents) interposed on appeal to the
Court of Appeals which was docketed as CA-G.R. No. 52039-R. The appellate court, thru its
Fifth Division with the Hon. Justice Magno Gatmaitan as ponente, rendered a decision
dated February 3, 1977 reversing the decision appealed from and thus approving the
application for registration. Oppositors (petitioners herein) filed their Motion for
Reconsideration alleging among other things that applicants' possessory information title
can no longer be invoked and that they were not able to prove a registerable title over the
land. Said Motion for Reconsideration was denied, hence this petition for review on
certiorari.
Applicants' claim is anchored on their possessory information title (Exhibit F which had been
translated in Exhibit F-1) coupled with their continuous, adverse and public possession over
the land in question. An examination of the possessory information title shows that the
description and the area of the land stated therein substantially coincides with the land
applied for and that said possessory information title had been regularly issued having been
acquired by applicants' predecessor, Domingo Baloy, under the provisions of the Spanish
Mortgage Law. Applicants presented their tax declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration alleging that this land had become public
land thru the operation of Act 627 of the Philippine Commission. On November 26, 1902
pursuant to the executive order of the President of the U.S., the area was declared within
the U.S. Naval Reservation. Under Act 627 as amended by Act 1138, a period was fixed
within which persons affected thereby could file their application, (that is within 6 months
from July 8, 1905) otherwise "the said lands or interest therein will be conclusively adjudged
to be public lands and all claims on the part of private individuals for such lands or interests
therein not to presented will be forever barred." Petitioner argues that since Domingo Baloy

... perhaps, the consequence was that upon failure of Domingo Baloy to have filed his
application within that period the land had become irrevocably public; but perhaps also, for
the reason that warning was from the Clerk of the Court of Land Registration, named J.R.
Wilson and there has not been presented a formal order or decision of the said Court of
Land Registration so declaring the land public because of that failure, it can with plausibility
be said that after all, there was no judicial declaration to that effect, it is true that the U.S.
Navy did occupy it apparently for some time, as a recreation area, as this Court understands
from the communication of the Department of Foreign Affairs to the U.S. Embassy exhibited
in the record, but the very tenor of the communication apparently seeks to justify the title of
herein applicants, in other words, what this Court has taken from the occupation by the U.S.
Navy is that during the interim, the title of applicants was in a state of suspended animation
so to speak but it had not died either; and the fact being that this land was really originally
private from and after the issuance and inscription of the possessory information Exh. F
during the Spanish times, it would be most difficult to sustain position of Director of Lands
that it was land of no private owner; open to public disposition, and over which he has
control; and since immediately after U.S. Navy had abandoned the area, applicant came in
and asserted title once again, only to be troubled by first Crispiniano Blanco who however in
due time, quitclaimed in favor of applicants, and then by private oppositors now, apparently
originally tenants of Blanco, but that entry of private oppositors sought to be given color of
ownership when they sought to and did file tax declaration in 1965, should not prejudice the
original rights of applicants thru their possessory information secured regularly so long ago,
the conclusion must have to be that after all, applicants had succeeded in bringing
themselves within the provisions of Sec. 19 of Act 496, the land should be registered in their
favor;
IN VIEW WHEREOF, this Court is constrained to reverse, as it now reverses, judgment
appealed from the application is approved, and once this decision shall have become final,
if ever it would be, let decree issue in favor of applicants with the personal circumstances
outlined in the application, costs against private oppositors.
Petitioner now comes to Us with the following:
ASSIGNMENT OF ERRORS:
1. Respondent court erred in holding that to bar private respondents from asserting any right
under their possessory information title there is need for a court order to that effect.
2. Respondent court erred in not holding that private respondents' rights by virtue of their
possessory information title was lost by prescription.
3. Respondent court erred in concluding that applicants have registerable title.

A cursory reading of Sec. 3, Act 627 reveals that several steps are to be followed before
any affected land can "be conclusively adjudged to be public land." Sec. 3, Act 627 reads as
follows:

attempted to deprive a citizen of private property without or against his consent must, as in
expropriation cases, be strictly complied with, because such statutes are in derogation of
general rights." (Arriete vs. Director of Public Works, 58 Phil. 507, 508, 511).

SEC. 3. Immediately upon receipt of the notice from the civil Governor in the preceeding
section mentioned it shall be the duty of the judge of the Court of Land Registration to issue
a notice, stating that the lands within the limits aforesaid have been reserved for military
purposes, and announced and declared to be military reservations, and that claims for all
private lands, buildings, and interests therein, within the limits aforesaid, must be presented
for registration under the Land Registration Act within six calendar months from the date of
issuing the notice, and that all lands, buildings, and interests therein within the limits
aforesaid not so presented within the time therein limited will be conclusively adjudged to be
public lands and all claims on the part of private individuals for such lands, buildings, or an
interest therein not so presented will be forever barred. The clerk of the Court of Land
Registration shall immediately upon the issuing of such notice by the judge cause the same
to be published once a week for three successive weeks in two newspapers, one of which
newspapers shall be in the English Language, and one in the Spanish language in the city
or province where the land lies, if there be no such Spanish or English newspapers having a
general circulation in the city or province wherein the land lies, then it shall be a sufficient
compliance with this section if the notice be published as herein provided, in a daily
newspaper in the Spanish language and one in the English language, in the City of Manila,
having a general circulation. The clerk shall also cause a duly attested copy of the notice in
the Spanish language to be posted in conspicuous place at each angle formed by the lines
of the limits of the land reserved. The clerk shall also issue and cause to be personally
served the notice in the Spanish language upon every person living upon or in visible
possession of any part of the military reservation. If the person in possession is the head of
the family living upon the hand, it shall be sufficient to serve the notice upon him, and if he is
absent it shall be sufficient to leave a copy at his usual place of residence. The clerk shall
certify the manner in which the notices have been published, posted, and served, and his
certificate shall be conclusive proof of such publication, posting, and service, but the court
shall have the power to cause such further notice to be given as in its opinion may be
necessary.

We also find with favor private respondents' views that court judgments are not to be
presumed. It would be absurd to speak of a judgment by presumption. If it could be
contended that such a judgment may be presumed, it could equally be contended that
applicants' predecessor Domingo Baloy presumably seasonably filed a claim, in accordance
with the legal presumption that a person takes ordinary care of his concerns, and that a
judgment in his favor was rendered.

Clearly under said provisions, private land could be deemed to have become public land
only by virtue of a judicial declaration after due notice and hearing. It runs contrary therefore
to the contention of petitioners that failure to present claims set forth under Sec. 2 of Act
627 made the land ipso facto public without any deed of judicial pronouncement. Petitioner
in making such declaration relied on Sec. 4 of Act 627 alone. But in construing a statute the
entire provisions of the law must be considered in order to establish the correct
interpretation as intended by the law-making body. Act 627 by its terms is not self-executory
and requires implementation by the Court of Land Registration. Act 627, to the extent that it
creates a forfeiture, is a penal statute in derogation of private rights, so it must be strictly
construed so as to safeguard private respondents' rights. Significantly, petitioner does not
even allege the existence of any judgment of the Land Registration court with respect to the
land in question. Without a judgment or order declaring the land to be public, its private
character and the possessory information title over it must be respected. Since no such
order has been rendered by the Land Registration Court it necessarily follows that it never
became public land thru the operation of Act 627. To assume otherwise is to deprive private
respondents of their property without due process of law. In fact it can be presumed that the
notice required by law to be given by publication and by personal service did not include the
name of Domingo Baloy and the subject land, and hence he and his lane were never
brought within the operation of Act 627 as amended. The procedure laid down in Sec. 3 is a
requirement of due process. "Due process requires that the statutes which under it is

The finding of respondent court that during the interim of 57 years from November 26, 1902
to December 17, 1959 (when the U.S. Navy possessed the area) the possessory rights of
Baloy or heirs were merely suspended and not lost by prescription, is supported by Exhibit
"U," a communication or letter No. 1108-63, dated June 24, 1963, which contains an official
statement of the position of the Republic of the Philippines with regard to the status of the
land in question. Said letter recognizes the fact that Domingo Baloy and/or his heirs have
been in continuous possession of said land since 1894 as attested by an "Informacion
Possessoria" Title, which was granted by the Spanish Government. Hence, the disputed
property is private land and this possession was interrupted only by the occupation of the
land by the U.S. Navy in 1945 for recreational purposes. The U.S. Navy eventually
abandoned the premises. The heirs of the late Domingo P. Baloy, are now in actual
possession, and this has been so since the abandonment by the U.S. Navy. A new
recreation area is now being used by the U.S. Navy personnel and this place is remote from
the land in question.
Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes of the
character of a commodatum. It cannot therefore militate against the title of Domingo Baloy
and his successors-in-interest. One's ownership of a thing may be lost by prescription by
reason of another's possession if such possession be under claim of ownership, not where
the possession is only intended to be transient, as in the case of the U.S. Navy's occupation
of the land concerned, in which case the owner is not divested of his title, although it cannot
be exercised in the meantime.
WHEREFORE, premises considered, finding no merit in the petition the appealed decision
is hereby AFFIRMED.
SO ORDERED.
Feria (Chairman), Alampay and Feliciano, * JJ., concur.
Gutierrez, Jr., J., concurs in the results.
Fernan J., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-46240

November 3, 1939

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

vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.

IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture which
she lent him for his use. She appealed from the judgment of the Court of First Instance of
Manila which ordered that the defendant return to her the three has heaters and the four
electric lamps found in the possession of the Sheriff of said city, that she call for the other
furniture from the said sheriff of Manila at her own expense, and that the fees which the
Sheriff may charge for the deposit of the furniture be paid pro rata by both parties, without
pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on M. H.
del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of lease
between the plaintiff and the defendant, the former gratuitously granted to the latter the use
of the furniture described in the third paragraph of the stipulation of facts, subject to the
condition that the defendant would return them to the plaintiff upon the latter's demand. The
plaintiff sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936,
these three notified the defendant of the conveyance, giving him sixty days to vacate the
premises under one of the clauses of the contract of lease. There after the plaintiff required
the defendant to return all the furniture transferred to him for them in the house where they
were found. On
November 5, 1936, the defendant, through another person, wrote to
the plaintiff reiterating that she may call for the furniture in the ground floor of the house. On
the 7th of the same month, the defendant wrote another letter to the plaintiff informing her
that he could not give up the three gas heaters and the four electric lamps because he
would use them until the 15th of the same month when the lease in due to expire. The
plaintiff refused to get the furniture in view of the fact that the defendant had declined to
make delivery of all of them. On
November 15th, before vacating the house, the
defendant deposited with the Sheriff all the furniture belonging to the plaintiff and they are
now on deposit in the warehouse situated at No. 1521, Rizal Avenue, in the custody of the
said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied the
law: in holding that they violated the contract by not calling for all the furniture on November
5, 1936, when the defendant placed them at their disposal; in not ordering the defendant to
pay them the value of the furniture in case they are not delivered; in holding that they should
get all the furniture from the Sheriff at their expenses; in ordering them to pay-half of the
expenses claimed by the Sheriff for the deposit of the furniture; in ruling that both parties
should pay their respective legal expenses or the costs; and in denying pay their respective
legal expenses or the costs; and in denying the motions for reconsideration and new trial.
To dispose of the case, it is only necessary to decide whether the defendant complied with
his obligation to return the furniture upon the plaintiff's demand; whether the latter is bound
to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself
the ownership thereof; by this contract the defendant bound himself to return the furniture to
the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A; articles 1740,
paragraph 1, and 1741 of the Civil Code). The obligation voluntarily assumed by the
defendant to return the furniture upon the plaintiff's demand, means that he should return all
of them to the plaintiff at the latter's residence or house. The defendant did not comply with
this obligation when he merely placed them at the disposal of the plaintiff, retaining for his
benefit the three gas heaters and the four eletric lamps. The provisions of article 1169 of the
Civil Code cited by counsel for the parties are not squarely applicable. The trial court,
therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with
her obligation to get the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon
the latter's demand, the Court could not legally compel her to bear the expenses occasioned
by the deposit of the furniture at the defendant's behest. The latter, as bailee, was not
entitled to place the furniture on deposit; nor was the plaintiff under a duty to accept the
offer to return the furniture, because the defendant wanted to retain the three gas heaters
and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to the payment
thereof by the defendant in case of his inability to return some of the furniture because
under paragraph 6 of the stipulation of facts, the defendant has neither agreed to nor
admitted the correctness of the said value. Should the defendant fail to deliver some of the
furniture, the value thereof should be latter determined by the trial Court through evidence
which the parties may desire to present.
The costs in both instances should be borne by the defendant because the plaintiff is the
prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one
who breached the contract of commodatum, and without any reason he refused to return
and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just and
equitable that he pay the legal expenses and other judicial costs which the plaintiff would
not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver to the
plaintiff, in the residence to return and deliver to the plaintiff, in the residence or house of the
latter, all the furniture described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the furniture with the

Sheriff shall be for the account of the defendant. the defendant shall pay the costs in both
instances. So ordered.
Avancea, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

The case came up for trial, evidence was adduced by both parties, and either exhibits were
made of record. On the 10th of January, 1907, the court below entered judgment sentencing
Agustina Jarra, as administratrix of the estate of Magdaleno Jimenea, to return to the
plaintiff, Felix de los Santos, the remaining six second and third class carabaos, or the value
thereof at the rate of P120 each, or a total of P720 with the costs.

EN BANC
G.R. No. L-4150

February 10, 1910

FELIX DE LOS SANTOS, plaintiff-appelle,

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

Counsel for the defendant excepted to the foregoing judgment, and, by a writing dated
January 19, moved for anew trial on the ground that the findings of fact were openly and
manifestly contrary to the weight of the evidence. The motion was overruled, the defendant
duly excepted, and in due course submitted the corresponding bill of exceptions, which was
approved and submitted to this court.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan of ten
carabaos which are now claimed by the latter, as shown by two letters addressed by the
said Jimenea to Felix de los Santos; but in her answer the said defendant alleged that the
late Jimenea only obtained three second-class carabaos, which were subsequently sold to
him by the owner, Santos; therefore, in order to decide this litigation it is indispensable that
proof be forthcoming that Jimenea only received three carabaos from his son-in-law Santos,
and that they were sold by the latter to him.
The record discloses that it has been fully proven from the testimony of a sufficient number
of witnesses that the plaintiff, Santos, sent in charge of various persons the ten carabaos
requested by his father-in-law, Magdaleno Jimenea, in the two letters produced at the trial
by the plaintiff, and that Jimenea received them in the presence of some of said persons,
one being a brother of said Jimenea, who saw the animals arrive at the hacienda where it
was proposed to employ them. Four died of rinderpest, and it is for this reason that the
judgment appealed from only deals with six surviving carabaos.
The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not
evidenced by any trustworthy documents such as those of transfer, nor were the
declarations of the witnesses presented by the defendant affirming it satisfactory; for said
reason it can not be considered that Jimenea only received three carabaos on loan from his
son-in-law, and that he afterwards kept them definitely by virtue of the purchase.

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

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

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

From the foregoing it may be logically inferred that the carabaos loaned or given on
commodatum to the now deceased Magdaleno Jimenea were ten in number; that they, or at
any rate the six surviving ones, have not been returned to the owner thereof, Felix de los
Santos, and that it is not true that the latter sold to the former three carabaos that the
purchaser was already using; therefore, as the said six carabaos were not the property of

the deceased nor of any of his descendants, it is the duty of the administratrix of the estate
to return them or indemnify the owner for their value.
The Civil Code, in dealing with loans in general, from which generic denomination the
specific one of commodatum is derived, establishes prescriptions in relation to the lastmentioned contract by the following articles:
ART. 1740. By the contract of loan, one of the parties delivers to the other, either
anything not perishable, in order that the latter may use it during a certain period
and return it to the former, in which case it is called commodatum, or money or
any other perishable thing, under the condition to return an equal amount of the
same kind and quality, in which case it is merely called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a stipulation to pay interest.
ART. 1741. The bailee acquires retains the ownership of the thing loaned. The
bailee acquires the use thereof, but not its fruits; if any compensation is involved,
to be paid by the person requiring the use, the agreement ceases to be a
commodatum.
ART. 1742. The obligations and rights which arise from the commodatum pass to
the heirs of both contracting parties, unless the loan has been in consideration
for the person of the bailee, in which case his heirs shall not have the right to
continue using the thing loaned.
The carabaos delivered to be used not being returned by the defendant upon demand, there
is no doubt that she is under obligation to indemnify the owner thereof by paying him their
value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of fraud, negligence, or delay,
and those who in any manner whatsoever act in contravention of the stipulations
of the same, shall be subjected to indemnify for the losses and damages caused
thereby.
The obligation of the bailee or of his successors to return either the thing loaned or its value,
is sustained by the supreme tribunal of Sapin. In its decision of March 21, 1895, it sets out
with precision the legal doctrine touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the
ownership of the thing loaned, and at the expiration of the period, or after the use
for which it was loaned has been accomplished, it is the imperative duty of the
bailee to return the thing itself to its owner, or to pay him damages if through the
fault of the bailee the thing should have been lost or injured, it is clear that where

public securities are involved, the trial court, in deferring to the claim of the bailor
that the amount loaned be returned him by the bailee in bonds of the same class
as those which constituted the contract, thereby properly applies law 9 of title 11
of partida 5.
With regard to the third assignment of error, based on the fact that the plaintiff Santos had
not appealed from the decision of the commissioners rejecting his claim for the recovery of
his carabaos, it is sufficient to estate that we are not dealing with a claim for the payment of
a certain sum, the collection of a debt from the estate, or payment for losses and damages
(sec. 119, Code of Civil Procedure), but with the exclusion from the inventory of the property
of the late Jimenea, or from his capital, of six carabaos which did not belong to him, and
which formed no part of the inheritance.
The demand for the exclusion of the said carabaos belonging to a third party and which did
not form part of the property of the deceased, must be the subject of a direct decision of the
court in an ordinary action, wherein the right of the third party to the property which he seeks
to have excluded from the inheritance and the right of the deceased has been discussed,
and rendered in view of the result of the evidence adduced by the administrator of the
estate and of the claimant, since it is so provided by the second part of section 699 and by
section 703 of the Code of Civil Procedure; the refusal of the commissioners before whom
the plaintiff unnecessarily appeared can not affect nor reduce the unquestionable right of
ownership of the latter, inasmuch as there is no law nor principle of justice authorizing the
successors of the late Jimenea to enrich themselves at the cost and to the prejudice of Felix
de los Santos.
For the reasons above set forth, by which the errors assigned to the judgment appealed
from have been refuted, and considering that the same is in accordance with the law and
the merits of the case, it is our opinion that it should be affirmed and we do hereby affirm it
with the costs against the appellant. So ordered.
Arellano, C.J., Johnson, Moreland and Elliott, JJ., concur.
Carson, J., reserves his vote.

Republic of the Philippines

SUPREME COURT
Manila

In a resolution dated May 23, 1979, we required respondents to comment in the petition and
issued a temporary restraining order against the respondent judge from further proceeding
with Criminal Cases Nos. M-111, M-183 and M-208 or from enforcing the warrants of arrest
he had issued in connection with said cases.

SECOND DIVISION
G.R. No. L-50550-52

October 31, 1979

CHEE KIONG YAM, AMPANG MAH, ANITA YAM JOSE Y.C. YAM AND RICHARD YAM,
petitioners,
vs.
HON. NABDAR J. MALIK, Municipal Judge of Jolo, Sulu (Branch I), THE PEOPLE OF
THE PHILIPPINES, ROSALINDA AMIN, TAN CHU KAO and LT. COL. AGOSTO SAJOR
respondents.
Tomas P. Matic, Jr. for petitioners.
Jose E. Fernandez for private respondent.

Comments by the respondent judge and the private respondents pray for the dismissal of
the petition but the Solicitor General has manifested that the People of the Philippines have
no objection to the grant of the reliefs prayed for, except the damages. We considered the
comments as answers and gave due course to the petition.
The position of the Solicitor General is well taken. We have to grant the petition in order to
prevent manifest injustice and the exercise of palpable excess of authority.
In Criminal Case No. M-111, respondent Rosalinda M. Amin charges petitioners Yam Chee
Kiong and Yam Yap Kieng with estafa through misappropriation of the amount of
P50,000.00. But the complaint states on its face that said petitioners received the amount
from respondent Rosalinda M. Amin "as a loan." Moreover, the complaint in Civil Case No.
N-5, an independent action for the collection of the same amount filed by respondent
Rosalinda M. Amin with the Court of First Instance of Sulu on September 11, 1975, likewise
states that the P50,000.00 was a "simple business loan" which earned interest and was
originally demandable six (6) months from July 12, 1973. (Annex E of the petition.)

Office of the Solicitor General for respondent the People of the Philippines.

ABAD SANTOS, J.:

This is a petition for certiorari, prohibition, and mandamus with preliminary injunction.
Petitioners alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu, acted
without jurisdiction, in excess of jurisdiction and with grave abuse of discretion when:
(a) he held in the preliminary investigation of the charges of estafa filed by respondents
Rosalinda Amin, Tan Chu Kao and Augusto Sajor against petitioners that there was a prima
facie case against the latter;
(b) he issued warrants of arrest against petitioners after making the above determination;
and
(c) he undertook to conduct trial on the merits of the charges which were docketed in his
court as Criminal Cases No. M-111, M-183 and M-208.
Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction and
with grave abuse of discretion because the facts recited in the complaints did not constitute
the crime of estafa, and assuming they did, they were not within the jurisdiction of the
respondent judge.

In Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners Yam Chee
Kiong, Jose Y.C. Yam, Ampang Mah and Anita Yam, alias Yong Tay, with estafa through
misappropriation of the amount of P30,000.00. Likewise, the complaint states on its face
that the P30,000.00 was "a simple loan." So does the complaint in Civil Case No. N-8 filed
by respondent Tan Chu Kao on April 6, 1976 with the Court of First Instance of Sulu for the
collection of the same amount. (Annex D of the petition.).
In Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C. Yam,
Anita Yam alias Yong Tai Mah, Chee Kiong Yam and Richard Yam, with estafa through
misappropriation of the amount of P20,000.00. Unlike the complaints in the other two cases,
the complaint in Criminal Case No. M-208 does not state that the amount was received as
loan. However, in a sworn statement dated September 29, 1976, submitted to respondent
judge to support the complaint, respondent Augusto Sajor states that the amount was a
"loan." (Annex G of the petition.).
We agree with the petitioners that the facts alleged in the three criminal complaints do not
constitute estafa through misappropriation.
Estafa through misappropriation is committed according to Article 315, paragraph 1,
subparagraph (b), of the Revised Penal Code as follows:
Art. 315. Swindling (Estafa). Any person who shall defraud another
by any of the means mentioned herein below shall be punished by:
xxx xxx xxx

1. With unfaithfulness or abuse of confidence namely:

We are of the opinion and so decide that when the relation is purely
that of debtor and creditor, the debtor can not be held liable for the
crime of estafa, under said article, by merely refusing to pay or by
denying the indebtedness.

xxx xxx xxx

b) By misappropriating or converting, to the prejudice of another,
money, goods, or any other personal property received by the
offender in trust or on commission, or for administration, or under any
other obligation involving the duty to make delivery of or to return the
same, even though such obligation be totally or partially guaranteed
by a bond; or by denying having received such money, goods, or other
property.
In order that a person can be convicted under the abovequoted provision, it must be proven
that he has the obligation to deliver or return the same money, goods or personal property
that he received. Petitioners had no such obligation to return the same money, i.e., the bills
or coins, which they received from private respondents. This is so because as clearly stated
in criminal complaints, the related civil complaints and the supporting sworn statements, the
sums of money that petitioners received were loans.

It appears that respondent judge failed to appreciate the distinction between the two types
of loan, mutuum and commodatum, when he performed the questioned acts, He mistook the
transaction between petitioners and respondents Rosalinda Amin, Tan Chu Kao and
Augusto Sajor to be commodatum wherein the borrower does not acquire ownership over
the thing borrowed and has the duty to return the same thing to the lender.
Under Sec. 87 of the Judiciary Act, the municipal court of a provincial capital, which the
Municipal Court of Jolo is, has jurisdiction over criminal cases where the penalty provided by
law does not exceed prision correccional or imprisonment for not more than six (6) years, or
fine not exceeding P6,000.00 or both, The amounts allegedly misappropriated by petitioners
range from P20,000.00 to P50,000.00. The penalty for misappropriation of this magnitude
exceeds prision correccional or 6 year imprisonment. (Article 315, Revised Penal Code),
Assuming then that the acts recited in the complaints constitute the crime of estafa, the
Municipal Court of Jolo has no jurisdiction to try them on the merits. The alleged offenses
are under the jurisdiction of the Court of First Instance.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.
Art. 1933. By the contract of loan, one of the parties delivers to
another, either something not consumable so that the latter may use
the same for a certain time and return it, in which case the contract is
called a commodatum; or money or other consumable thing upon the
condition that the same amount of the same kind and quality shall be
paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned,
while in simple loam ownership passes to the borrower.
Art. 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to
the creditor an equal amount of the same kind and quality.
It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as
contrasted to commodatum, the borrower acquires ownership of the money, goods or
personal property borrowed. Being the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not be considered misappropriation
thereof.
In U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a person
to refuse to nay his debt or to deny its existence.

Respondents People of the Philippines being the sovereign authority can not be sued for
damages. They are immune from such type of suit.
With respect to the other respondents, this Court is not the proper forum for the
consideration of the claim for damages against them.
WHEREFORE, the petition is hereby granted; the temporary restraining order previously
issued is hereby made permanent; the criminal complaints against petitioners are hereby
declared null and void; respondent judge is hereby ordered to dismiss said criminal cases
and to recall the warrants of arrest he had issued in connection therewith. Moreover,
respondent judge is hereby rebuked for manifest ignorance of elementary law. Let a copy of
this decision be included in his personal life. Costs against private respondents.
SO ORDERED.
Barredo, Antonio and Santos, JJ., concur.
Concepcion Jr. ,J., is on leave.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 115324

February 19, 2003

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK),

petitioner,
vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June
25, 1991 in CA-G.R. CV No. 11791 and of its Resolution2 dated May 5, 1994, denying the
motion for reconsideration of said decision filed by petitioner Producers Bank of the
Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend
Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his
business, the Sterela Marketing and Services ("Sterela" for brevity). Specifically, Sanchez
asked private respondent to deposit in a bank a certain amount of money in the bank
account of Sterela for purposes of its incorporation. She assured private respondent that he
could withdraw his money from said account within a months time. Private respondent
asked Sanchez to bring Doronilla to their house so that they could discuss Sanchezs
request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi,
Doronillas private secretary, met and discussed the matter. Thereafter, relying on the
assurances and representations of Sanchez and Doronilla, private respondent issued a
check in the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela.
Private respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and
Sanchez in opening a savings account in the name of Sterela in the Buendia, Makati branch
of Producers Bank of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi
went to the bank to deposit the check. They had with them an authorization letter from
Doronilla authorizing Sanchez and her companions, "in coordination with Mr. Rufo Atienza,"
to open an account for Sterela Marketing Services in the amount of P200,000.00. In
opening the account, the authorized signatories were Inocencia Vives and/or Angeles
Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs.
Vives.4
Subsequently, private respondent learned that Sterela was no longer holding office in the
address previously given to him. Alarmed, he and his wife went to the Bank to verify if their
money was still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant

manager, who informed them that part of the money in Savings Account No. 10-1567 had
been withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told
them that Mrs. Vives could not withdraw said remaining amount because it had to answer
for some postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and
Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account No. 100320 for Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the
amounts necessary to cover overdrawings in Current Account No. 10-0320. In opening said
current account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank.
To cover payment thereof, Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or withdraw the money in Savings
Account No. 10-1567 because he was the sole proprietor of Sterela.5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979,
he received a letter from Doronilla, assuring him that his money was intact and would be
returned to him. On August 13, 1979, Doronilla issued a postdated check for Two Hundred
Twelve Thousand Pesos (P212,000.00) in favor of private respondent. However, upon
presentment thereof by private respondent to the drawee bank, the check was dishonored.
Doronilla requested private respondent to present the same check on September 15, 1979
but when the latter presented the check, it was again dishonored.6
Private respondent referred the matter to a lawyer, who made a written demand upon
Doronilla for the return of his clients money. Doronilla issued another check for
P212,000.00 in private respondents favor but the check was again dishonored for
insufficiency of funds.7
Private respondent instituted an action for recovery of sum of money in the Regional Trial
Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner.
The case was docketed as Civil Case No. 44485. He also filed criminal actions against
Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez passed away on March
16, 1985 while the case was pending before the trial court. On October 3, 1995, the RTC of
Pasig, Branch 157, promulgated its Decision in Civil Case No. 44485, the dispositive portion
of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo
J. Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin
Vives jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest
at the legal rate from the filing of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for
exemplary damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.8

Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated
June 25, 1991, the appellate court affirmed in toto the decision of the RTC. 9 It likewise
denied with finality petitioners motion for reconsideration in its Resolution dated May 5,
1994.10

petitioners delay in furnishing private respondent with copy of the reply12 and several
substitutions of counsel on the part of private respondent.13 On January 17, 2001, the Court
resolved to give due course to the petition and required the parties to submit their respective
memoranda.14 Petitioner filed its memorandum on April 16, 2001 while private respondent
submitted his memorandum on March 22, 2001.

On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE
TRANSACTION BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES
WAS ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS
BANK MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS
IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A
CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE
PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE
RECORDS OF THE REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT
APPEALED FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT WERE
BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED
DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY
OF AN EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;
V.

Petitioner contends that the transaction between private respondent and Doronilla is a
simple loan (mutuum) since all the elements of a mutuum are present: first, what was
delivered by private respondent to Doronilla was money, a consumable thing; and second,
the transaction was onerous as Doronilla was obliged to pay interest, as evidenced by the
check issued by Doronilla in the amount of P212,000.00, or P12,000 more than what private
respondent deposited in Sterelas bank account.15 Moreover, the fact that private
respondent sued his good friend Sanchez for his failure to recover his money from Doronilla
shows that the transaction was not merely gratuitous but "had a business angle" to it.
Hence, petitioner argues that it cannot be held liable for the return of private respondents
P200,000.00 because it is not privy to the transaction between the latter and Doronilla. 16
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not be faulted
for allowing Doronilla to withdraw from the savings account of Sterela since the latter was
the sole proprietor of said company. Petitioner asserts that Doronillas May 8, 1979 letter
addressed to the bank, authorizing Mrs. Vives and Sanchez to open a savings account for
Sterela, did not contain any authorization for these two to withdraw from said account.
Hence, the authority to withdraw therefrom remained exclusively with Doronilla, who was the
sole proprietor of Sterela, and who alone had legal title to the savings account. 17 Petitioner
points out that no evidence other than the testimonies of private respondent and Mrs. Vives
was presented during trial to prove that private respondent deposited his P200,000.00 in
Sterelas account for purposes of its incorporation.18 Hence, petitioner should not be held
liable for allowing Doronilla to withdraw from Sterelas savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the trial courts decision
since the findings of fact therein were not accord with the evidence presented by petitioner
during trial to prove that the transaction between private respondent and Doronilla was a
mutuum, and that it committed no wrong in allowing Doronilla to withdraw from Sterelas
savings account.19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not
liable for the actual damages suffered by private respondent, and neither may it be held
liable for moral and exemplary damages as well as attorneys fees.20

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF

THE LOWER COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY
LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT OF P200,000.00
REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL
DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEYS
FEES AND THE COSTS OF SUIT.11

Private respondent, on the other hand, argues that the transaction between him and
Doronilla is not a mutuum but an accommodation,21 since he did not actually part with the
ownership of his P200,000.00 and in fact asked his wife to deposit said amount in the
account of Sterela so that a certification can be issued to the effect that Sterela had
sufficient funds for purposes of its incorporation but at the same time, he retained some
degree of control over his money through his wife who was made a signatory to the savings
account and in whose possession the savings account passbook was given.22

Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply
thereto on September 25, 1995. The Court then required private respondent to submit a
rejoinder to the reply. However, said rejoinder was filed only on April 21, 1997, due to

He likewise asserts that the trial court did not err in finding that petitioner, Atienzas
employer, is liable for the return of his money. He insists that Atienza, petitioners assistant
manager, connived with Doronilla in defrauding private respondent since it was Atienza who

facilitated the opening of Sterelas current account three days after Mrs. Vives and Sanchez
opened a savings account with petitioner for said company, as well as the approval of the
authority to debit Sterelas savings account to cover any overdrawings in its current
account.23

The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract.27 In case of doubt, the
contemporaneous and subsequent acts of the parties shall be considered in such
determination.28

There is no merit in the petition.

As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows
that private respondent agreed to deposit his money in the savings account of Sterela
specifically for the purpose of making it appear "that said firm had sufficient capitalization for
incorporation, with the promise that the amount shall be returned within thirty (30) days."29
Private respondent merely "accommodated" Doronilla by lending his money without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties to
the transaction that the money would not be removed from Sterelas savings account and
would be returned to private respondent after thirty (30) days.

At the outset, it must be emphasized that only questions of law may be raised in a petition
for review filed with this Court. The Court has repeatedly held that it is not its function to
analyze and weigh all over again the evidence presented by the parties during trial.24 The
Courts jurisdiction is in principle limited to reviewing errors of law that might have been
committed by the Court of Appeals.25 Moreover, factual findings of courts, when adopted
and confirmed by the Court of Appeals, are final and conclusive on this Court unless these
findings are not supported by the evidence on record.26 There is no showing of any
misapprehension of facts on the part of the Court of Appeals in the case at bar that would
require this Court to review and overturn the factual findings of that court, especially since
the conclusions of fact of the Court of Appeals and the trial court are not only consistent but
are also amply supported by the evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between
private respondent and Doronilla was a commodatum and not a mutuum. A circumspect
examination of the records reveals that the transaction between them was a commodatum.
Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which
case the contract is called a commodatum; or money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall be paid, in which case
the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.

Doronillas attempts to return to private respondent the amount of P200,000.00 which the
latter deposited in Sterelas account together with an additional P12,000.00, allegedly
representing interest on the mutuum, did not convert the transaction from a commodatum
into a mutuum because such was not the intent of the parties and because the additional
P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the
Civil Code expressly states that "[t]he bailee in commodatum acquires the use of the thing
loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private
respondent the interest accruing to the latters money deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily liable for the
return of private respondents money because it was not privy to the transaction between
Doronilla and private respondent. The nature of said transaction, that is, whether it is a
mutuum or a commodatum, has no bearing on the question of petitioners liability for the
return of private respondents money because the factual circumstances of the case clearly
show that petitioner, through its employee Mr. Atienza, was partly responsible for the loss of
private respondents money and is liable for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on behalf
of Sterela for Savings Account No. 10-1567 expressly states that

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

In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable
thing, such as money, the contract would be a mutuum. However, there are some instances
where a commodatum may have for its object a consumable thing. Article 1936 of the Civil
Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not
the consumption of the object, as when it is merely for exhibition.

"2. Deposits and withdrawals must be made by the depositor personally or upon his written
authority duly authenticated, and neither a deposit nor a withdrawal will be permitted except
upon the production of the depositor savings bank book in which will be entered by the Bank
the amount deposited or withdrawn."30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the
Assistant Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even
without presenting the passbook (which Atienza very well knew was in the possession of
Mrs. Vives), not just once, but several times. Both the Court of Appeals and the trial court
found that Atienza allowed said withdrawals because he was party to Doronillas "scheme"
of defrauding private respondent:
XXX

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention
of the parties is to lend consumable goods and to have the very same goods returned at the
end of the period agreed upon, the loan is a commodatum and not a mutuum.

But the scheme could not have been executed successfully without the knowledge, help
and cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia)
branch of the defendant bank. Indeed, the evidence indicates that Atienza had not only
facilitated the commission of the fraud but he likewise helped in devising the means by
which it can be done in such manner as to make it appear that the transaction was in
accordance with banking procedure.
To begin with, the deposit was made in defendants Buendia branch precisely because
Atienza was a key officer therein. The records show that plaintiff had suggested that the
P200,000.00 be deposited in his bank, the Manila Banking Corporation, but Doronilla and
Dumagpi insisted that it must be in defendants branch in Makati for "it will be easier for
them to get a certification". In fact before he was introduced to plaintiff, Doronilla had
already prepared a letter addressed to the Buendia branch manager authorizing Angeles B.
Sanchez and company to open a savings account for Sterela in the amount of P200,000.00,
as "per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1).
This is a clear manifestation that the other defendants had been in consultation with Atienza
from the inception of the scheme. Significantly, there were testimonies and admission that
Atienza is the brother-in-law of a certain Romeo Mirasol, a friend and business associate of
Doronilla.1awphi1.nt
Then there is the matter of the ownership of the fund. Because of the "coordination"
between Doronilla and Atienza, the latter knew before hand that the money deposited did
not belong to Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly told
by Inocencia Vives that the money belonged to her and her husband and the deposit was
merely to accommodate Doronilla. Atienza even declared that the money came from Mrs.
Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the
only ones empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez.
In the signature card pertaining to this account (Exh. J), the authorized signatories were
Inocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking
procedure that withdrawals of savings deposits could only be made by persons whose
authorized signatures are in the signature cards on file with the bank. He, however, said that
this procedure was not followed here because Sterela was owned by Doronilla. He
explained that Doronilla had the full authority to withdraw by virtue of such ownership. The
Court is not inclined to agree with Atienza. In the first place, he was all the time aware that
the money came from Vives and did not belong to Sterela. He was also told by Mrs. Vives
that they were only accommodating Doronilla so that a certification can be issued to the
effect that Sterela had a deposit of so much amount to be sued in the incorporation of the
firm. In the second place, the signature of Doronilla was not authorized in so far as that
account is concerned inasmuch as he had not signed the signature card provided by the
bank whenever a deposit is opened. In the third place, neither Mrs. Vives nor Sanchez had
given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is
an accepted practice that whenever a withdrawal is made in a savings deposit, the bank
requires the presentation of the passbook. In this case, such recognized practice was
dispensed with. The transfer from the savings account to the current account was without
the submission of the passbook which Atienza had given to Mrs. Vives. Instead, it was
made to appear in a certification signed by Estrella Dumagpi that a duplicate passbook was
issued to Sterela because the original passbook had been surrendered to the Makati branch

in view of a loan accommodation assigning the savings account (Exh. C). Atienza, who
undoubtedly had a hand in the execution of this certification, was aware that the contents of
the same are not true. He knew that the passbook was in the hands of Mrs. Vives for he
was the one who gave it to her. Besides, as assistant manager of the branch and the bank
official servicing the savings and current accounts in question, he also was aware that the
original passbook was never surrendered. He was also cognizant that Estrella Dumagpi was
not among those authorized to withdraw so her certification had no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that
Atienzas active participation in the perpetration of the fraud and deception that caused the
loss. The records indicate that this account was opened three days later after the
P200,000.00 was deposited. In spite of his disclaimer, the Court believes that Atienza was
mindful and posted regarding the opening of the current account considering that Doronilla
was all the while in "coordination" with him. That it was he who facilitated the approval of the
authority to debit the savings account to cover any overdrawings in the current account
(Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this
case. x x x.31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable
for damages caused by their employees acting within the scope of their assigned tasks. To
hold the employer liable under this provision, it must be shown that an employer-employee
relationship exists, and that the employee was acting within the scope of his assigned task
when the act complained of was committed.32 Case law in the United States of America has
it that a corporation that entrusts a general duty to its employee is responsible to the injured
party for damages flowing from the employees wrongful act done in the course of his
general authority, even though in doing such act, the employee may have failed in its duty to
the employer and disobeyed the latters instructions.33
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did
not deny that Atienza was acting within the scope of his authority as Assistant Branch
Manager when he assisted Doronilla in withdrawing funds from Sterelas Savings Account
No. 10-1567, in which account private respondents money was deposited, and in
transferring the money withdrawn to Sterelas Current Account with petitioner. Atienzas acts
of helping Doronilla, a customer of the petitioner, were obviously done in furtherance of
petitioners interests34 even though in the process, Atienza violated some of petitioners
rules such as those stipulated in its savings account passbook. 35 It was established that the
transfer of funds from Sterelas savings account to its current account could not have been
accomplished by Doronilla without the invaluable assistance of Atienza, and that it was their
connivance which was the cause of private respondents loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the
Civil Code, petitioner is liable for private respondents loss and is solidarily liable with
Doronilla and Dumagpi for the return of the P200,000.00 since it is clear that petitioner failed
to prove that it exercised due diligence to prevent the unauthorized withdrawals from
Sterelas savings account, and that it was not negligent in the selection and supervision of
Atienza. Accordingly, no error was committed by the appellate court in the award of actual,
moral and exemplary damages, attorneys fees and costs of suit to private respondent.

WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the
Court of Appeals are AFFIRMED.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing and Austria-Martinez, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 26085

August 12, 1927

SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,

vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.
Araneta and Zaragoza for appellants.
Eusebio Orense for appelle.
JOHNSON, J.:
PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL

The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid so far
as the record shows upon the due dates. The balance of P15,000 due on said contract of
purchase was paid on or about the 1st day of December, 1922, in the manner which will be
explained below. On the date when the balance of P15,000 with interest was paid, the
vendor of said property had issued to the purchasers transfer certificate of title to said
property, No. 528. Said transfer certificate of title (No. 528) was transfer certificate of title
from No. 40, which shows that said land was originally registered in the name of the vendor
on the 7th day of November, 1913.
PRESENT FACTS
On the 7th day of November, 1922 the representative of the vendor of the property in
question wrote a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the
latter that if the balance of said indebtedness was not paid, an action would be brought for
the purpose of recovering the property, together with damages for non compliance with the
condition of the contract of purchase. The pertinent parts of said letter read as follows:
Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente,
procederemos judicialmente contra Vd. para reclamar la devolucion del camarin
y los daos y perjuicios ocasionados a la compaia por su incumplimiento al
contrato.

The principal questions presented by this appeal are:

Somos de Vd. atentos y S. S.
(a) Is the contract in question a pacto de retro or a mortgage?
SMITH, BELL & CO., LTD.
(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser
and agrees to pay a certain amount per month as rent, may such rent render
such a contract usurious when the amount paid as rent, computed upon the
purchase price, amounts to a higher rate of interest upon said amount than that
allowed by law?
(c)
evidence?

May the contract in the present case may be modified by parol

By (Sgd.) F. I. HIGHAM
Treasurer.
General Managers
LUZON RICE MILLS INC.

ANTECEDENT FACTS
Sometime prior to the 28th day of November, 1922, the appellants purchased of the Luzon
Rice Mills, Inc., a piece or parcel of land with the camarin located thereon, situated in the
municipality of Tarlac of the Province of Tarlac for the price of P25,000, promising to pay
therefor in three installments. The first installment of P2,000 was due on or before the 2d
day of May, 1921; the second installment of P8,000 was due on or before 31st day of May,
1921; the balance of P15,000 at 12 per cent interest was due and payable on or about the
30th day of November, 1922. One of the conditions of that contract of purchase was that on
failure of the purchaser (plaintiffs and appellants) to pay the balance of said purchase price
or any of the installments on the date agreed upon, the property bought would revert to the
original owner.

According to Exhibits B and D, which represent the account rendered by the vendor, there
was due and payable upon said contract of purchase on the 30th day of November, 1922,
the sum P16,965.09. Upon receiving the letter of the vendor of said property of November 7,
1922, the purchasers, the appellants herein, realizing that they would be unable to pay the
balance due, began to make an effort to borrow money with which to pay the balance due,
began to make an effort to borrow money with which to pay the balance of their
indebtedness on the purchase price of the property involved. Finally an application was
made to the defendant for a loan for the purpose of satisfying their indebtedness to the
vendor of said property. After some negotiations the defendants agreed to loan the plaintiffs
to loan the plaintiffs the sum of P17,500 upon condition that the plaintiffs execute and
deliver to him a pacto de retro of said property.

In accordance with that agreement the defendant paid to the plaintiffs by means of a check
the sum of P16,965.09. The defendant, in addition to said amount paid by check, delivered
to the plaintiffs the sum of P354.91 together with the sum of P180 which the plaintiffs paid to
the attorneys for drafting said contract of pacto de retro, making a total paid by the
defendant to the plaintiffs and for the plaintiffs of P17,500 upon the execution and delivery
of said contract. Said contracts was dated the 28th day of November, 1922, and is in the
words and figures following:

aos sin ejercitar el derecho de retracto que nos hemos reservado, entonces
quedara esta venta absoluta e irrevocable.
Tercero. Que durante el expresado termino del retracto tendremos en
arrendamiento la finca arriba descrita, sujeto a condiciones siguientes:

Sepan todos por la presente:

(a) El alquiler que nos obligamos a pagar por mensualidades vencidas

a Don Benito Gonzalez Sy Chiam y en su domicilio, era de trescientos
setenta y cinco pesos (P375) moneda filipina, cada mes.

Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos

mayores de edad, residentes en el Municipio de Calumpit, Provincia de Bulacan,
propietarios y transeuntes en esta Ciudad de Manila, de una parte, y de otra,
Benito Gonzalez Sy Chiam, mayor de edad, casado con Maria Santiago,
comerciante y vecinos de esta Ciudad de Manila.

(b) El amillaramiento de la finca arrendada sera por cuenta de dicho

Don Benito Gonzalez Sy Chiam, asi como tambien la prima del
seguro contra incendios, si el conviniera al referido Sr. Benito
Gonzalez Sy Chiam asegurar dicha finca.

MANIFESTAMOS Y HACEMOS CONSTAR:

Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en
consideracion a la cantidad de diecisiete mil quinientos pesos (P17,500) moneda
filipina, que en este acto hemos recibido a nuestra entera satisfaccion de Don
Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a favor de dicho
Don Benito Gonzalez Sy Chiam, sus herederos y causahabientes, una finca que,
segun el Certificado de Transferencia de Titulo No. 40 expedido por el
Registrador de Titulos de la Provincia de Tarlac a favor de "Luzon Rice Mills
Company Limited" que al incorporarse se donomino y se denomina "Luzon Rice
Mills Inc.," y que esta corporacion nos ha transferido en venta absoluta, se
describe como sigue:
Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el
Municipio de Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por
el E. con propiedad de la Manila Railroad Co.; y por el S. con un camino.
Partiendo de un punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds.
17' E.859.42 m. del mojon de localizacion No. 2 de la Oficina de Terrenos en
Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77 m. al punto 2; desde este
punto N. 4 gds. 22' E.; 54.70 m. al punto 3; desde este punto S. 86 gds. 17' E.;
69.25 m. al punto 4; desde este punto S. 2 gds. 42' E., 61.48 m. al punto de
partida; midiendo una extension superficcial de cuatro mil doscientos diez y seis
metros cuadrados (4,216) mas o menos. Todos los puntos nombrados se hallan
marcados en el plano y sobre el terreno los puntos 1 y 2 estan determinados por
mojones de P. L. S. de 20 x 20 x 70 centimetros y los puntos 3 y 4 por mojones
del P. L. S. B. L.: la orientacion seguida es la verdadera, siendo la declinacion
magnetica de 0 gds. 45' E. y la fecha de la medicion, 1. de febrero de 1913.

(c) La falta de pago del alquiler aqui estipulado por dos meses
consecutivos dara lugar a la terminacion de este arrendamieno y a la
perdida del derecho de retracto que nos hemos reservado, como si
naturalmente hubiera expirado el termino para ello, pudiendo en su
virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca y
desahuciarnos de la misma.
Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta
escritura en los precisos terminos en que la dejan otorgada los conyuges
Severino Tolentino y Potenciana Manio.
En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila,
por cuadruplicado en Manila, hoy a 28 de noviembre de 1922.
(Fdo.) SEVERINO TOLENTINO
(Fda.) POTENCIANA MANIO
(Fdo.) BENITO GONZALEZ SY CHIAM
Firmado en presencia de:
(Fdos.) MOISES M. BUHAIN
B. S. BANAAG

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5)

aos contados desde el dia 1. de diciembre de 1922, devolvemos al expresado
Don Benito Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos
pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez y Chiam a
retrovendernos la finca arriba descrita; pero si transcurre dicho plazo de cinco

An examination of said contract of sale with reference to the first question above, shows
clearly that it is a pacto de retro and not a mortgage. There is no pretension on the part of
the appellant that said contract, standing alone, is a mortgage. The pertinent language of
the contract is:

Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5)

aos contados desde el dia 1. de diciembre de 1922, devolvemos al expresado
Don Benito Gonzales Sy Chiam el referido precio de diecisiete mil quinientos
pesos (P17,500) queda obligado dicho Sr. Benito Gonzales Sy Chiam a
retrovendornos la finca arriba descrita; pero si transcurre dicho plazo de cinco (5)
aos sin ejercitar al derecho de retracto que nos hemos reservado, entonces
quedara esta venta absoluta e irrevocable.
Language cannot be clearer. The purpose of the contract is expressed clearly in said
quotation that there can certainly be not doubt as to the purpose of the plaintiff to sell the
property in question, reserving the right only to repurchase the same. The intention to sell
with the right to repurchase cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing the
absolute sale of the property, entered into a contract with the purchaser by virtue of which
she became the "tenant" of the purchaser. That contract of rent appears in said quoted
document above as follows:
Tercero. Que durante el expresado termino del retracto tendremos en
arrendamiento la finca arriba descrita, sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don
Benito Gonzalez Sy Chiam y en su domicilio, sera de trescientos setenta y cinco
pesos (P375) moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito
Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si le
conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
From the foregoing, we are driven to the following conclusions: First, that the contract of
pacto de retro is an absolute sale of the property with the right to repurchase and not a
mortgage; and, second, that by virtue of the said contract the vendor became the tenant of
the purchaser, under the conditions mentioned in paragraph 3 of said contact quoted above.
It has been the uniform theory of this court, due to the severity of a contract of pacto de
retro, to declare the same to be a mortgage and not a sale whenever the interpretation of
such a contract justifies that conclusion. There must be something, however, in the
language of the contract or in the conduct of the parties which shows clearly and beyond
doubt that they intended the contract to be a "mortgage" and not a pacto de retro.
(International Banking Corporation vs. Martinez, 10 Phil., 252; Padilla vs. Linsangan, 19
Phil., 65; Cumagun vs. Alingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379; Manalo vs.
Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs. Santiago, 38 Phil.,
157.)
We are not unmindful of the fact that sales with pacto de retro are not favored and that the
court will not construe an instrument to one of sale with pacto de retro, with the stringent
and onerous effect which follows, unless the terms of the document and the surrounding
circumstances require it.

While it is general rule that parol evidence is not admissible for the purpose of varying the
terms of a contract, but when an issue is squarely presented that a contract does not
express the intention of the parties, courts will, when a proper foundation is laid therefor,
hear evidence for the purpose of ascertaining the true intention of the parties.
In the present case the plaintiffs allege in their complaint that the contract in question is a
pacto de retro. They admit that they signed it. They admit they sold the property in question
with the right to repurchase it. The terms of the contract quoted by the plaintiffs to the
defendant was a "sale" with pacto de retro, and the plaintiffs have shown no circumstance
whatever which would justify us in construing said contract to be a mere "loan" with
guaranty. In every case in which this court has construed a contract to be a mortgage or a
loan instead of a sale with pacto de retro, it has done so, either because the terms of such
contract were incompatible or inconsistent with the theory that said contract was one of
purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan, supra; Manlagnit vs. Dy
Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to indicate the nature
of the conveyance of the land was "pledged" instead of "sold". In the case of Manlagnit vs.
Dy Puico, while the vendor used to the terms "sale and transfer with the right to
repurchase," yet in said contract he described himself as a "debtor" the purchaser as a
"creditor" and the contract as a "mortgage". In the case of Rodriguez vs. Pamintuan and De
Jesus the person who executed the instrument, purporting on its face to be a deed of sale of
certain parcels of land, had merely acted under a power of attorney from the owner of said
land, "authorizing him to borrow money in such amount and upon such terms and conditions
as he might deem proper, and to secure payment of the loan by a mortgage." In the case of
Villa vs. Santiago (38 Phil., 157), although a contract purporting to be a deed of sale was
executed, the supposed vendor remained in possession of the land and invested the money
he had obtained from the supposed vendee in making improvements thereon, which fact
justified the court in holding that the transaction was a mere loan and not a sale. In the case
of Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from the
vendor, and such acceptance of partial payments is absolutely incompatible with the idea of
irrevocability of the title of ownership of the purchaser at the expiration of the term stipulated
in the original contract for the exercise of the right of repurchase."
Referring again to the right of the parties to vary the terms of written contract, we quote from
the dissenting opinion of Chief Justice Cayetano S. Arellano in the case of Government of
the Philippine Islands vs. Philippine Sugar Estates Development Co., which case was
appealed to the Supreme Court of the United States and the contention of the Chief Justice
in his dissenting opinion was affirmed and the decision of the Supreme Court of the
Philippine Islands was reversed. (See decision of the Supreme Court of the United States,
June 3, 1918.)1 The Chief Justice said in discussing that question:
According to article 1282 of the Civil Code, in order to judge of the intention of the
contracting parties, consideration must chiefly be paid to those acts executed by said
parties which are contemporary with and subsequent to the contract. And according to
article 1283, however general the terms of a contract may be, they must not be held to
include things and cases different from those with regard to which the interested parties
agreed to contract. "The Supreme Court of the Philippine Islands held the parol evidence
was admissible in that case to vary the terms of the contract between the Government of the
Philippine Islands and the Philippine Sugar Estates Development Co. In the course of the

opinion of the Supreme Court of the United States Mr. Justice Brandeis, speaking for the
court, said:

equivalent in sugar at the option of the vendor; third, all the fruits of
the said lands shall be deposited in the sugar depository of the
vendee, situated in the district of Quiapo of this city, and the value of
which shall be applied on account of the price of this sale; fourth, the
deponent acknowledges that he has received from the vendor the
purchase price of P4,000 already paid, and in legal tender currency of
this country . . .; fifth, all the taxes which may be assessed against the
lands surveyed by competent authority, shall be payable by and
constitute a charge against the vendor; sixth, if, through any unusual
event, such as flood, tempest, etc., the properties hereinbefore
enumerated should be destroyed, wholly or in part, it shall be
incumbent upon the vendor to repair the damage thereto at his own
expense and to put them into a good state of cultivation, and should
he fail to do so he binds himself to give to the vendee other lands of
the same area, quality and value.'

It is well settled that courts of equity will reform a written contract where, owing to
mutual mistake, the language used therein did not fully or accurately express the
agreement and intention of the parties. The fact that interpretation or construction
of a contract presents a question of law and that, therefore, the mistake was one
of law is not a bar to granting relief. . . . This court is always disposed to accept
the construction which the highest court of a territory or possession has placed
upon a local statute. But that disposition may not be yielded to where the lower
court has clearly erred. Here the construction adopted was rested upon a clearly
erroneous assumption as to an established rule of equity. . . . The burden of
proof resting upon the appellant cannot be satisfied by mere preponderance of
the evidence. It is settled that relief by way of reformation will not be granted
unless the proof of mutual mistake be of the clearest and most satisfactory
character.
xxx
The evidence introduced by the appellant in the present case does not meet with that
stringent requirement. There is not a word, a phrase, a sentence or a paragraph in the
entire record, which justifies this court in holding that the said contract of pacto de retro is a
mortgage and not a sale with the right to repurchase. Article 1281 of the Civil Code
provides: "If the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal sense of its stipulations shall be followed." Article 1282
provides: "in order to judge as to the intention of the contracting parties, attention must be
paid principally to their conduct at the time of making the contract and subsequently
thereto."
We cannot thereto conclude this branch of our discussion of the question involved, without
quoting from that very well reasoned decision of the late Chief Justice Arellano, one of the
greatest jurists of his time. He said, in discussing the question whether or not the contract, in
the case of Lichauco vs. Berenguer (20 Phil., 12), was a pacto de retro or a mortgage:
The public instrument, Exhibit C, in part reads as follows: "Don Macarion
Berenguer declares and states that he is the proprietor in fee simple of two
parcels of fallow unappropriated crown land situated within the district of his
pueblo. The first has an area of 73 quiones, 8 balitas and 8 loanes, located in
the sitio of Batasan, and its boundaries are, etc., etc. The second is in the sitio of
Panantaglay, barrio of Calumpang has as area of 73 hectares, 22 ares, and 6
centares, and is bounded on the north, etc., etc."
In the executory part of the said instrument, it is stated:
'That under condition of right to repurchase (pacto de retro) he sells
the said properties to the aforementioned Doa Cornelia Laochangco
for P4,000 and upon the following conditions: First, the sale stipulated
shall be for the period of two years, counting from this date, within
which time the deponent shall be entitled to repurchase the land sold
upon payment of its price; second, the lands sold shall, during the
term of the present contract, be held in lease by the undersigned who
shall pay, as rental therefor, the sum of 400 pesos per annum, or the

xxx

xxx

The opponent maintained, and his theory was accepted by the trial court, that
Berenguer's contract with Laochangco was not one of sale with right of
repurchase, but merely one of loan secured by those properties, and,
consequently, that the ownership of the lands in questions could not have been
conveyed to Laochangco, inasmuch as it continued to be held by Berenguer, as
well as their possession, which he had not ceased to enjoy.
Such a theory is, as argued by the appellant, erroneous. The instrument
executed by Macario Berenguer, the text of which has been transcribed in this
decision, is very clear. Berenguer's heirs may not go counter to the literal tenor of
the obligation, the exact expression of the consent of the contracting contained in
the instrument, Exhibit C. Not because the lands may have continued in
possession of the vendor, not because the latter may have assumed the
payment of the taxes on such properties, nor yet because the same party may
have bound himself to substitute by another any one of the properties which
might be destroyed, does the contract cease to be what it is, as set forth in detail
in the public instrument. The vendor continued in the possession of the lands, not
as the owner thereof as before their sale, but as the lessee which he became
after its consummation, by virtue of a contract executed in his favor by the
vendee in the deed itself, Exhibit C. Right of ownership is not implied by the
circumstance of the lessee's assuming the responsibility of the payment is of the
taxes on the property leased, for their payment is not peculiarly incumbent upon
the owner, nor is such right implied by the obligation to substitute the thing sold
for another while in his possession under lease, since that obligation came from
him and he continues under another character in its possessiona reason why
he guarantees its integrity and obligates himself to return the thing even in a case
of force majeure. Such liability, as a general rule, is foreign to contracts of lease
and, if required, is exorbitant, but possible and lawful, if voluntarily agreed to and
such agreement does not on this account involve any sign of ownership, nor
other meaning than the will to impose upon oneself scrupulous diligence in the
care of a thing belonging to another.

The purchase and sale, once consummated, is a contract which by its nature
transfers the ownership and other rights in the thing sold. A pacto de retro, or
sale with right to repurchase, is nothing but a personal right stipulated between
the vendee and the vendor, to the end that the latter may again acquire the
ownership of the thing alienated.
It is true, very true indeed, that the sale with right of repurchase is employed as a
method of loan; it is likewise true that in practice many cases occur where the
consummation of a pacto de retro sale means the financial ruin of a person; it is
also, unquestionable that in pacto de retro sales very important interests often
intervene, in the form of the price of the lease of the thing sold, which is
stipulated as an additional covenant. (Manresa, Civil Code, p. 274.)
But in the present case, unlike others heard by this court, there is no proof that
the sale with right of repurchase, made by Berenguer in favor of Laonchangco is
rather a mortgage to secure a loan.
We come now to a discussion of the second question presented above, and that is, stating
the same in another form: May a tenant charge his landlord with a violation of the Usury Law
upon the ground that the amount of rent he pays, based upon the real value of the property,
amounts to a usurious rate of interest? When the vendor of property under a pacto de retro
rents the property and agrees to pay a rental value for the property during the period of his
right to repurchase, he thereby becomes a "tenant" and in all respects stands in the same
relation with the purchaser as a tenant under any other contract of lease.
The appellant contends that the rental price paid during the period of the existence of the
right to repurchase, or the sum of P375 per month, based upon the value of the property,
amounted to usury. Usury, generally speaking, may be defined as contracting for or
receiving something in excess of the amount allowed by law for the loan or forbearance of
moneythe taking of more interest for the use of money than the law allows. It seems that
the taking of interest for the loan of money, at least the taking of excessive interest has
been regarded with abhorrence from the earliest times. (Dunham vs. Gould, 16 Johnson [N.
Y.], 367.) During the middle ages the people of England, and especially the English Church,
entertained the opinion, then, current in Europe, that the taking of any interest for the loan of
money was a detestable vice, hateful to man and contrary to the laws of God. (3 Coke's
Institute, 150; Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon
history, we shall find that there is scarcely any people, ancient or modern, that have not had
usury laws. . . . The Romans, through the greater part of their history, had the deepest
abhorrence of usury. . . . It will be deemed a little singular, that the same voice against usury
should have been raised in the laws of China, in the Hindu institutes of Menu, in the Koran
of Mahomet, and perhaps, we may say, in the laws of all nations that we know of, whether
Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is condemned by the
Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner of a
property to enter into a contract with the tenant for the payment of a specific amount of rent
for the use and occupation of said property, even though the amount paid as "rent," based
upon the value of the property, might exceed the rate of interest allowed by law? That

question has never been decided in this jurisdiction. It is one of first impression. No cases
have been found in this jurisdiction answering that question. Act No. 2655 is "An Act fixing
rates of interest upon 'loans' and declaring the effect of receiving or taking usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or forbearance of any
money, goods, chattels or credits, etc. The central idea of said statute is to prohibit a rate of
interest on "loans." A contract of "loan," is very different contract from that of "rent". A "loan,"
as that term is used in the statute, signifies the giving of a sum of money, goods or credits to
another, with a promise to repay, but not a promise to return the same thing. To "loan," in
general parlance, is to deliver to another for temporary use, on condition that the thing or its
equivalent be returned; or to deliver for temporary use on condition that an equivalent in
kind shall be returned with a compensation for its use. The word "loan," however, as used in
the statute, has a technical meaning. It never means the return of the same thing. It means
the return of an equivalent only, but never the same thing loaned. A "loan" has been
properly defined as an advance payment of money, goods or credits upon a contract or
stipulation to repay, not to return, the thing loaned at some future day in accordance with
the terms of the contract. Under the contract of "loan," as used in said statute, the moment
the contract is completed the money, goods or chattels given cease to be the property of the
former owner and becomes the property of the obligor to be used according to his own will,
unless the contract itself expressly provides for a special or specific use of the same. At all
events, the money, goods or chattels, the moment the contract is executed, cease to be the
property of the former owner and becomes the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." In a contract of "rent" the
owner of the property does not lose his ownership. He simply loses his control over the
property rented during the period of the contract. In a contract of "loan" the thing loaned
becomes the property of the obligor. In a contract of "rent" the thing still remains the
property of the lessor. He simply loses control of the same in a limited way during the period
of the contract of "rent" or lease. In a contract of "rent" the relation between the contractors
is that of landlord and tenant. In a contract of "loan" of money, goods, chattels or credits, the
relation between the parties is that of obligor and obligee. "Rent" may be defined as the
compensation either in money, provisions, chattels, or labor, received by the owner of the
soil from the occupant thereof. It is defined as the return or compensation for the
possession of some corporeal inheritance, and is a profit issuing out of lands or tenements,
in return for their use. It is that, which is to paid for the use of land, whether in money, labor
or other thing agreed upon. A contract of "rent" is a contract by which one of the parties
delivers to the other some nonconsumable thing, in order that the latter may use it during a
certain period and return it to the former; whereas a contract of "loan", as that word is used
in the statute, signifies the delivery of money or other consumable things upon condition of
returning an equivalent amount of the same kind or quantity, in which cases it is called
merely a "loan." In the case of a contract of "rent," under the civil law, it is called a
"commodatum."
From the foregoing it will be seen that there is a while distinction between a contract of
"loan," as that word is used in the statute, and a contract of "rent" even though those words
are used in ordinary parlance as interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount of rent to be
paid for the use and occupation of the property may depend upon a thousand different
conditions; as for example, farm lands of exactly equal productive capacity and of the same
physical value may have a different rental value, depending upon location, prices of

commodities, proximity to the market, etc. Houses may have a different rental value due to
location, conditions of business, general prosperity or depression, adaptability to particular
purposes, even though they have exactly the same original cost. A store on the Escolta, in
the center of business, constructed exactly like a store located outside of the business
center, will have a much higher rental value than the other. Two places of business located
in different sections of the city may be constructed exactly on the same architectural plan
and yet one, due to particular location or adaptability to a particular business which the
lessor desires to conduct, may have a very much higher rental value than one not so
located and not so well adapted to the particular business. A very cheap building on the
carnival ground may rent for more money, due to the particular circumstances and
surroundings, than a much more valuable property located elsewhere. It will thus be seen
that the rent to be paid for the use and occupation of property is not necessarily fixed upon
the value of the property. The amount of rent is fixed, based upon a thousand different
conditions and may or may not have any direct reference to the value of the property rented.
To hold that "usury" can be based upon the comparative actual rental value and the actual
value of the property, is to subject every landlord to an annoyance not contemplated by the
law, and would create a very great disturbance in every business or rural community. We
cannot bring ourselves to believe that the Legislature contemplated any such disturbance in
the equilibrium of the business of the country.
In the present case the property in question was sold. It was an absolute sale with the right
only to repurchase. During the period of redemption the purchaser was the absolute owner
of the property. During the period of redemption the vendor was not the owner of the
property. During the period of redemption the vendor was a tenant of the purchaser. During
the period of redemption the relation which existed between the vendor and the vendee was
that of landlord and tenant. That relation can only be terminated by a repurchase of the
property by the vendor in accordance with the terms of the said contract. The contract was
one of rent. The contract was not a loan, as that word is used in Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no right
to make contracts for parties. They made their own contract in the present case. There is
not a word, a phrase, a sentence or paragraph, which in the slightest way indicates that the
parties to the contract in question did not intend to sell the property in question absolutely,
simply with the right to repurchase. People who make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts by parol evidence,
sufficiently answers the third questions presented above. The language of the contract is
explicit, clear, unambiguous and beyond question. It expresses the exact intention of the
parties at the time it was made. There is not a word, a phrase, a sentence or paragraph
found in said contract which needs explanation. The parties thereto entered into said
contract with the full understanding of its terms and should not now be permitted to change
or modify it by parol evidence.
With reference to the improvements made upon said property by the plaintiffs during the life
of the contract, Exhibit C, there is hereby reserved to the plaintiffs the right to exercise in a
separate action the right guaranteed to them under article 361 of the Civil Code.
For all of the foregoing reasons, we are fully persuaded from the facts of the record, in
relation with the law applicable thereto, that the judgment appealed from should be and is
hereby affirmed, with costs. So ordered.

Avancea, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

her if the goods are sold; otherwise the money would be returned to Rosales. Consequently,
Rosales gave several cash advances to Liwanag and Tabligan amounting to P633,650.00.

Republic of the Philippines

SUPREME COURT
Manila

During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report
on the progress of the transactions. The visits, however, suddenly stopped, and all efforts
by Rosales to obtain information regarding their business proved futile.

THIRD DIVISION

G.R. No. 114398

October 24, 1997

CARMEN LIWANAG, petitioner,

vs.
THE HON. COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES, represented
by the Solicitor General, respondents.

Alarmed by this development and believing that the amounts she advanced were being
misappropriated, Rosales filed a case of estafa against Liwanag.
After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding
Liwanag guilty as charged. The dispositive portion of the decision reads thus:
WHEREFORE, the Court holds, that the prosecution has established the guilt of the
accused, beyond reasonable doubt, and therefore, imposes upon the accused, Carmen
Liwanag, an Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND TWENTY
ONE (21) DAYS OF PRISION CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT
(8) MONTHS OF PRISION MAYOR AS MAXIMUM, AND TO PAY THE COSTS.

ROMERO, J.:
Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC),
Branch 93, Quezon City, in an information which reads as follows.

The accused is likewise ordered to reimburse the private complainant the sum of
P526,650.00, without subsidiary imprisonment, in case of insolvency.
SO ORDERED.

That on or between the month of May 19, 1988 and August, 1988 in Quezon City,
Philippines and within the jurisdiction of this Honorable Court, the said accused, with intent
of gain, with unfaithfulness, and abuse of confidence, did then and there, willfully, unlawfully
and feloniously defraud one ISIDORA ROSALES, in the following manner, to wit: on the
date and in the place aforementioned, said accused received in trust from the offended
party cash money amounting to P536,650.00, Philippine Currency, with the express
obligation involving the duty to act as complainant's agent in purchasing local cigarettes
(Philip Morris and Marlboro cigarettes), to resell them to several stores, to give her
commission corresponding to 40% of the profits; and to return the aforesaid amount of
offended party, but said accused, far from complying her aforesaid obligation, and once in
possession thereof, misapplied, misappropriated and converted the same to her personal
use and benefit, despite repeated demands made upon her, accused failed and refused and
still fails and refuses to deliver and/or return the same to the damage and prejudice of the
said ISIDORA ROSALES, in the aforementioned amount and in such other amount as may
be awarded under the provision of the Civil Code.

Said decision was affirmed with modification by the Court of Appeals in a decision dated
November 29, 1993, the decretal portion of which reads:
WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with
the correction of the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT
(8) MONTHS and TWENTY ONE (21) DAYS of prision mayor, as minimum, to FOURTEEN
(14) YEARS and EIGHT (8) MONTHS of reclusion temporal, as maximum. In all other
respects, the decision is AFFIRMED.
SO ORDERED.
Her motion for reconsideration having been denied in the resolution of March 16, 1994,
Liwanag filed the instant petition, submitting the following assignment of errors:

CONTRARY TO LAW.
The antecedent facts are as follows:
Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of
complainant Isidora Rosales (Rosales) and asked her to join them in the business of buying
and selling cigarettes. Convinced of the feasibility of the venture, Rosales readily agreed.
Under their agreement, Rosales would give the money needed to buy the cigarettes while
Liwanag and Tabligan would act as her agents, with a corresponding 40% commission to

1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN THE AFFIRMING THE

CONVICTION OF THE ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN
CLEARLY THE CONTRACT THAT EXIST (sic) BETWEEN THE ACCUSED-PETITIONER
AND COMPLAINANT IS EITHER THAT OF A SIMPLE LOAN OR THAT OF A
PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF THE MONEY OF
THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT CRIMINAL.

2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE

ACCUSED-PETITIONER ON GROUNDS OF REASONABLE DOUBT BY APPLYING THE
"EQUIPOISE RULE".
Liwanag advances the theory that the intention of the parties was to enter into a contract of
partnership, wherein Rosales would contribute the funds while she would buy and sell the
cigarettes,
and
later
divide
the
profits
between
them. 1 She also argues that the transaction can also be interpreted as a simple loan, with
Rosales lending to her the amount stated on an installment basis. 2
The Court of Appeals correctly rejected these pretenses.
While factual findings of the Court of Appeals are conclusive on the parties and not
reviewable by the Supreme Court, and carry more weight when these affirm the factual
findings of the trial court, 3 we deem it more expedient to resolve the instant petition on its
merits.
Estafa is a crime committed by a person who defrauds another causing him to suffer
damages, by means of unfaithfulness or abuse of confidence, or of false pretenses of
fraudulent acts. 4
From the foregoing, the elements of estafa are present, as follows: (1) that the accused
defrauded another by abuse of confidence or deceit; and (2) that damage or prejudice
capable of pecuniary estimation is caused to the offended party or third party, 5 and it is
essential that there be a fiduciary relation between them either in the form of a trust,
commission or administration. 6
The receipt signed by Liwanag states thus:
May 19, 1988 Quezon City
Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED
TWENTY SIX THOUSAND AND SIX HUNDRED FIFTY PESOS
(P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip
& Marlboro) to be sold to customers. In the event the said cigarrets
(sic) are not sold, the proceeds of the sale or the said products (shall)
be returned to said Mrs. Isidora P. Rosales the said amount of
P526,650.00 or the said items on or before August 30, 1988.
Signed in the presence of:
(Sgd) Illegible (Sgd) Doming Z. Baligad
The language of the receipt could not be any clearer. It indicates that the money delivered
to Liwanag was for a specific purpose, that is, for the purchase of cigarettes, and in the
event the cigarettes cannot be sold, the money must be returned to Rosales.

Thus, even assuming that a contract of partnership was indeed entered into by and between
the parties, we have ruled that when money or property have been received by a partner for
a specific purpose (such as that obtaining
in the instant case) and he later misappropriated it, such partner is guilty of estafa. 7
Neither can the transaction be considered a loan, since in a contract of loan once the
money is received by the debtor, ownership over the same is transferred. 8 Being the owner,
the borrower can dispose of it for whatever purpose he may deem proper.
In the instant petition, however, it is evident that Liwanag could not dispose of the money as
she pleased because it was only delivered to her for a single purpose, namely, for the
purchase of cigarettes, and if this was not possible then to return the money to Rosales.
Since in this case there was no transfer of ownership of the money delivered, Liwanag is
liable for conversion under Art. 315, par. l(b) of the Revised Penal Code.
WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals
dated November 29, 1993, is AFFIRMED. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

For construction of factory building P250,000.00

For payment of the balance of purchase

EN BANC

price of machinery and equipment 240,900.00

For working capital 9,100.00

G.R. No. L-24968

April 27, 1972

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

vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on
June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay
actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the
amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed
and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation
Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of
P500,000.00, to be used as follows: P250,000.00 for the construction of a factory building
(for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of
the jute mill machinery and equipment; and P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been
purchased by Saura on the strength of a letter of credit extended by the Prudential Bank
and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without
first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for
P500,000.00, to be secured by a first mortgage on the factory building to be constructed,
the land site thereof, and the machinery and equipment to be installed. Among the other
terms spelled out in the resolution were the following:
1. That the proceeds of the loan shall be utilized exclusively for the
following purposes:

T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria
Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly with the borrowercorporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation,
subject to availability of funds, and as the construction of the factory buildings progresses,
to be certified to by an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before,
however, evidently having otherwise been informed of its approval, Saura, Inc. wrote a letter
to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of having
China Engineers, Ltd. (which was willing to assume liability only to the extent of its stock
subscription with Saura, Inc.) sign as co-maker on the corresponding promissory notes,
Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such
subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of
the other co-makers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating
of the members of its Board of Governors, for certain reasons stated in the resolution, "to
reexamine all the aspects of this approved loan ... with special reference as to the
advisability of financing this particular project based on present conditions obtaining in the
operations of jute mills, and to submit his findings thereon at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to
act as co-signer for the loan, and asked that the necessary documents be prepared in
accordance with the terms and conditions specified in Resolution No. 145. In connection
with the reexamination of the project to be financed with the loan applied for, as stated in
Resolution No. 736, the parties named their respective committees of engineers and
technical men to meet with each other and undertake the necessary studies, although in
appointing its own committee Saura, Inc. made the observation that the same "should not
be taken as an acquiescence on (its) part to novate, or accept new conditions to, the
agreement already) entered into," referring to its acceptance of the terms and conditions
mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R.
Halling, representing China Engineers, Ltd., as one of the co-signers; and the
corresponding deed of mortgage, which was duly registered on the following April 17.

It appears, however, that despite the formal execution of the loan agreement the
reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC
Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was
present, it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution
No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under
Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736,
c.s., authorizing the re-examination of all the various aspects of the loan granted the Saura
Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the
manufacture of jute sacks in Davao, with special reference as to the advisability of financing
this particular project based on present conditions obtaining in the operation of jute mills,
and after having heard Ramon E. Saura and after extensive discussion on the subject the
Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura
Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to
P100,000 may be authorized as may be necessary from time to time to place the factory in
actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not
inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory
note for China Engineers Ltd. jointly and severally with the other RFC that his company no
longer to of the loan and therefore considered the same as cancelled as far as it was
concerned. A follow-up letter dated July 2 requested RFC that the registration of the
mortgage be withdrawn.

The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December
22, 1954, wherein it was explained that the certification by the Department of Agriculture
and Natural Resources was required "as the intention of the original approval (of the loan) is
to develop the manufacture of sacks on the basis of locally available raw materials." This
point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc.
does not deny that the factory he was building in Davao was for the manufacture of bags
from local raw materials. The cover page of its brochure (Exh. M) describes the project as a
"Joint venture by and between the Mindanao Industry Corporation and the Saura Import and
Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra
and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials,
principal kenaf." The explanatory note on page 1 of the same brochure states that, the
venture "is the first serious attempt in this country to use 100% locally grown raw materials
notably kenaf which is presently grown commercially in theIsland of Mindanao where the
proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application
in the first place, and to require, in its Resolution No. 9083, a certification from the
Department of Agriculture and Natural Resources as to the availability of local raw materials
to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the
defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a
special study made by the Bureau of Forestry "kenaf will not be available in sufficient
quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that
my company and associates will be able to bring in sufficient jute materials as may be
necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be
made as follows:

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

a) For the payment of the receipt for jute mill

machineries with the Prudential Bank &

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

(For immediate release)

On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original
amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the
promissory notes jointly with the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of
imported raw materials, the Department of Agriculture and Natural
Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry
out its operation are available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide
adequately for the requirements of the factory."

Trust Company P250,000.00

b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.

On January 25, 1955 RFC sent to Saura, Inc. the following reply:

commodatum or simple loan itself shall not be perferted until the

delivery of the object of the contract.

Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the release of your loan
under consideration of P500,000. As stated in our letter of December 22, 1954, the releases
of the loan, if revived, are proposed to be made from time to time, subject to availability of
funds towards the end that the sack factory shall be placed in actual operating status. We
shall be able to act on your request for revised purpose and manner of releases upon reappraisal of the securities offered for the loan.
With respect to our requirement that the Department of Agriculture and Natural Resources
certify that the raw materials needed are available in the immediate vicinity and that there is
prospect of increased production thereof to provide adequately the requirements of the
factory, we wish to reiterate that the basis of the original approval is to develop the
manufacture of sacks on the basis of the locally available raw materials. Your statement that
you will have to rely on the importation of jute and your request that we give you assurance
that your company will be able to bring in sufficient jute materials as may be necessary for
the operation of your factory, would not be in line with our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the
matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955
RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura
himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a
mortgage contract, executed on August 6, 1954, over the same property in favor of the
Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of
the same year within which to pay its obligation on the trust receipt heretofore mentioned. It
appears further that for failure to pay the said obligation the Prudential Bank and Trust Co.
sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the
request of Saura, Inc., the latter commenced the present suit for damages, alleging failure
of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the
proceeds of the loan applied for and approved, thereby preventing the plaintiff from
completing or paying contractual commitments it had entered into, in connection with its jute
mill projeThe trial court rendered judgment for the plaintiff, ruling that there was a perfected
contract between the parties and that the defendant was guilty of breach thereof. The
defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action
had prescribed, or that its claim had been waived or abandoned; (2) that there was no
perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with
the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article
1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of
commodatum or simple loan is binding upon the parties, but the

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for
a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. But this fact alone falls short of resolving the basic
claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to
recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the
assumption that the factory to be constructed would utilize locally grown raw materials,
principally kenaf. There is no serious dispute about this. It was in line with such assumption
that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan
to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw
materials needed by the borrower-corporation to carry out its operation are available in the
immediate vicinity; and (2) that there is prospect of increased production thereof to provide
adequately for the requirements of the factory." The imposition of those conditions was by
no means a deviation from the terms of the agreement, but rather a step in its
implementation. There was nothing in said conditions that contradicted the terms laid down
in RFC Resolution No. 145, passed on January 7, 1954, namely "that the proceeds of the
loan shall be utilized exclusively for the following purposes: for construction of factory
building P250,000.00; for payment of the balance of purchase price of machinery and
equipment P240,900.00; for working capital P9,100.00." Evidently Saura, Inc. realized
that it could not meet the conditions required by RFC, and so wrote its letter of January 21,
1955, stating that local jute "will not be able in sufficient quantity this year or probably next
year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for
raw materials and labor." This was a deviation from the terms laid down in Resolution No.
145 and embodied in the mortgage contract, implying as it did a diversion of part of the
proceeds of the loan to purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which
had been going on for the implementation of the agreement reached an impasse. Saura,
Inc. obviously was in no position to comply with RFC's conditions. So instead of doing so
and insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage
be cancelled, which was done on June 15, 1955. The action thus taken by both parties was
in the nature cf mutual desistance what Manresa terms "mutuo disenso" 1 which is a
mode of extinguishing obligations. It is a concept that derives from the principle that since
mutual agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against
any alleged breach of contract by RFC, or even point out that the latter's stand was legally
unjustified. Its request for cancellation of the mortgage carried no reservation of whatever
rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even
applied with DBP for another loan to finance a rice and corn project, which application was
disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at
its own request, that Saura, Inc. brought this action for damages.All these circumstances
demonstrate beyond doubt that the said agreement had been extinguished by mutual
desistance and that on the initiative of the plaintiff-appellee itself.

With this view we take of the case, we find it unnecessary to consider and resolve the other
issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with
costs against the plaintiff-appellee.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ.,
concur.
Makasiar, J., took no part.

Republic of the Philippines

SUPREME COURT
Manila

After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge, ordered the
defendant Roo to pay four thousand pesos in Philippine currency with legal interest from
the presentation of the complaint plus costs.

EN BANC

On appeal the Court of Appeals in a decision written by Mr. Justice Jugo, affirmed the
judgment with costs. It declared being a mechanic who knew English was not deceived into
signing the promissory note, and that the contents of the same had not been
misrepresented to him. It pronounced the contract valid and enforceable according to its
terms and conditions.

G.R. No. L-1927

May 31, 1949

CRISTOBAL ROO, petitioner,
vs.
JOSE L. GOMEZ, ET AL., respondents.

Alfonso Farcon for petitioner.

Capistrano & Azores for respondents.
BENGZON, J.:
This petition to review a decision of the Court of Appeals was admitted mainly because it
involves one phase of the vital contemporary question: the repayment of loans given in
Japanese fiat currency during the last war of the Pacific.
On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in Japanese
fiat money from Jose L. Gomez. He informed the later that he would use the money to
purchase a jitney; and he agreed to pay that debt one year after date in the currency then
prevailing. He signed a promissory note of the following tenor:
For value received, I promise to pay one year after date the sum of four thousand
pesos (4,000) to Jose L. Gomez. It is agreed that this will not earn any interest
and the payment It is agreed that this will not earn any interest and the payment
prevailing by the end of the stipulated period of one year.
In consideration of this generous loan, I renounce any right that may come to me
by reason of any postwar arrangement, of privilege that may come to me by
legislation wherein this sum may be devalued. I renounce flatly and absolutely
any condition, term right or privilege which in any way will prejudice the right
engendered by this agreement wherein Atty. Jose L. Gomez will receive by right
his money in the amount of P4,000. I affirm the legal tender, currency or any
medium of exchange, or money in this sum of P4,000 will be paid by me to Jose
L. Gomez one year after this date, October 5, 1944.
On October 15, 1945, i.e., after the liberation, Roo was sued for payment in the Laguna
Court of First Instance. His main defense was his liability should not exceed the equivalent
of 4,000 pesos "mickey mouse" money and could not be 4,000 pesos Philippine
currency, because the contract would be void as contrary to law, public order and good
morals.

One basic principle of the law on contracts of the Civil Code is that "the contracting parties
may establish any pacts, clauses and conditions they may deem advisable, provided they
are not contrary to law, morals or public order." (Article 1255.) Another principle is that
"obligations arising from contracts shall have the force of law between the contracting
parties and must be performed in accordance with their stipulations" (Article 1091).
Invoking the above proviso, Roo asserts this contract is contrary to the Usury law, because
on the basis of calculations by Government experts he only received the equivalent of one
hundred Philippine pesos and now he is required to disgorge four thousand pesos or
interest greatly in excess of the lawful rates.
But he is not paying interest. Precisely the contract says that the money received "will not
earn any interest." Furthermore, he received four thousand pesos; and he is required to pay
four thousand pesos exactly. The increased intrinsic value and purchasing power of the
current money is consequence of an event (change of currency) which at the time of the
contract neither party knew would certainly happen within the period of one year. They both
elected to subject their rights and obligations to that contingency. If within one year another
kind of currency became legal tender, Gomez would probably get more for his money. If the
same Japanese currency continued, he would get less, the value of Japanese money being
then on the downgrade.
Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their
validity (see art. 1790 and Manresa's comment thereon) on a par with insurance policies
and life annuities.
The eventual gain of Gomez in this transaction is not interest within the meaning of Usury
Laws. Interest is some additional money to be paid in any event, which is not the case
herein, because Gomez might have gotten less if the Japanese occupation had extended to
the end of 1945 or if the liberation forces had chosen to permit the circulation of the
Japanese notes.
Moreover, Roo argues, the deal was immoral because taking advantage of his superior
knowledge of war developments Gomez imposed on him this onerous obligation. In the first
place, the Court of Appeals found that he voluntary agreed to sign and signed the document
without having been misled as to its contents and "in so far as knowledge of war events was
concerned" both parties were on "equal footing". In the second place although on October 5,
1944 it was possible to surmise the impending American invasion, the date of victory or
liberation was anybody's guess. In the third place there was the possibility that upon-reoccupation the Philippine Government would not invalidate the Japanese currency, which

after all had been forced upon the people in exchange for valuable goods and property. The
odds were about even when Roo and Gomez played their bargaining game. There was no
overreaching, nor unfair advantage.
Again Roo alleges it is immoral and against public order for a man to obtain four thousand
pesos in return for an investment of forty pesos (his estimate of the value of the Japanese
money he borrowed). According to his line of reasoning it would be immoral for the
homeowner to recover ten thousand pesos (P10,000, when his house is burned, because
he invested only about one hundred pesos for the insurance policy. And when the holder of
a sweepstakes ticket who paid only four pesos luckily obtains the first prize of one hundred
thousand pesos or over, the whole business is immoral or against public order.
In this connection we should explain that this decision does not cover situations where
borrowers of Japanese fiat currency promised to repay "the same amount" or promised to
return the same number of pesos "in Philippines currency" or "in the currency prevailing
after the war." There may be room for argument when those litigations come up for
adjudication. All we say here and now is that the contract in question is legal and obligatory.
A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We opine
with the Court of Appeals that the matter involve a defect in procedure which does not
amount to prejudicial error.
Wherefore, the appealed judgment will be affirmed with costs. So ordered.
Moran, C.J., Ozaeta, Tuason, Montemayor and Reyes, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de
Nepomuceno filed their complaint in this case against the mortgagees, which compplaint, as
amended on September 7, 1944, alleged the execution of the contract of mortgage and its
principal novation as above indicated, and

EN BANC
G.R. No. L-1328

September 9, 1949

MARIANO NEPOMUCENO and AGUEDA G. DE NEPOMUCENO, plaintiffs-appellants,

vs.
EDILBERTO A. NARCISO and MAURA SUAREZ, defendants-appellees.
Higinio Gopez for appellants.
Fausto, Solima and Gotiangco for appellees.

7. That as per Annex B, No. 4, it is provided that the mortgagor cannot redeem
the property mortgaged while the war goes on; and that notwithstanding the said
provision the herein plaintiffs-mortgagors are now willing to pay the amount of the
indebtedness together with the corresponding interest due thereon;
8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the
mortgagees-defendants to tender payment of the balance of the mortgage debt
with their corresponding interest, but said spouses defendants refuse and still
refuse to accept payment;

OZAETA, J.:

9. That because of this refusal of the defendants to accept tender of payment on

the mortgage consideration, the plaintiffs suffered and still suffer damages in the
amount of P5,000;

On November 14, 1938, appellant Mariano Nepomuceno executed a mortgage in favor of

the appellees on a parcel of land situated in the municipality of Angeles, Province of
Pampanga, to secure the payment within the period of seven years from the date of the
mortgage of the sum of P24,000 together with interest thereon at the rate of 8 per cent per
annum.

10. That the plaintiffs are now and have deposited with the Clerk of Court of First
Instance of Pampanga the amount of P22,356 for the payment of the mortgage
debt and the interest due thereon;

On September 30, 1943, that is to say, more than two years before the maturity of said
mortgage, the parties executed a notarial document entitled "Partial Novation of Contract"
whereby they modified the terms of said mortgage as follows:
(1) From December 8, 1941, to January 1, 1944, the interest on the mortgage
shall be at 6 per cent per annum, unpaid interest also paying interest also paying
interest at the same rate.
(2) From January 1, 1944, up to the end of the war, the mortgage debt shall
likewise bear interest at 6 per cent. Unpaid interest during this period shall
however not bear any interest.
(3) At the end of the war the interest shall again become 8 per cent in
accordance with the original contract of mortgage.
(4) While the war goes on, the mortgagor, his administrators or assigns, cannot
redeem the property mortgaged.
(5) When the mortgage lapses on November 14, 1945, the mortgage may
continue for another ten years if the mortgagor so chooses, but during this period
he may pay only one half of the capital.

Wherefore, it is more respectfully prayed that this Honorable Court will issue an
order in the following tenor:
(a) Ordering the defendants to accept tender of payment from the plaintiffs;
(b) Ordering defendants to execute the corresponding deed of release of
mortgage;
(c) Ordering defendants to pay damages in the amount of P5,000; and
(d) Ordering defendants to pay the amount of P3,000 as attorney's fee and the
costs of suit and any other remedy just and equitable in the premises.
After the trial the court sustained the defense that the complaint had been prematurely
presented and dismissed it with costs.
Appellants contend that the stipulation in the contract of September 30, 1943, that "while the
war goes on the mortgagor, his administrators or assigns cannot redeem the property
mortgaged," is against public policy and therefore null and void. They cite and rely on article
1255 of the Civil Code, which provides:

ART. 1255. The contracting parties may establish any pacts, clauses, and
conditions they may deem advisable, provided they are not contrary to law,
morals, or public order.
They argue that "it would certainly be against public policy and a restraint on the freedom of
commerce to compel a debtor not to release his property from a lien even if he wanted to
by the payment of the indebtedness while the war goes on, which was undoubtedly of a
very uncertain duration."
The first two paragraphs of article 1125 of the Civil Code provide:
ART. 1125. Obligation for the performance of which a day certain has been
fixed shall be demandable only when the day arrives.
A day certain is understood to be one which must necessarily arrive, even though
its date be unknown.
Article 1127 says:
ART. 1127. Whenever a term for the performance of an obligation is fixed, it is
presumed to have been established for the benefit of the creditor and that of the
debtor, unless from its tenor or from other circumstances it should appear that
the term was established for the benefit of one or the other.
It will be noted that the original contract of mortgage provided for interest at 8 per cent per
annum and that the principal together with the interest was payable within the period of
seven years from November 14, 1938. But by mutual agreement of the parties that term was
modified on September 30, 1943, by reducing the interest to 6 per cent per annum from
December 8, 1941, until the end of the war and by stipulating that the mortgagor shall not
pay off the mortgage while the war went on.
We find nothing immoral or violative of public order in that stipulation. The mortgagees
apparently did not want to have their prewar credit paid with Japanese military notes, and
the mortgagor voluntarily agreed not to do so in consideration of the reduction of the rate of
interest.
It was a perfectly equitable and valid transaction, in conformity with the provision of the Civil
Code hereinabove quoted.
Appellants were bound by said contract and appellees were not obligated to receive the
payment before it was due. Hence the latter had reason not to accept the tender of payment
made to them by the former.
The judgment is affirmed, with costs against the appellants.

Moran, C.J., Paras, Feria, Bengzon, Padilla, Tuason, Montemayor, Reyes and Torres, JJ.,
concur.

Republic of the Philippines

SUPREME COURT
Manila

A) Ordering [Equitable] to reinstate and return the amount of [respondents']

deposit placed on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos as
moral damages;

FIRST DIVISION
G.R. No. 171545

December 19, 2007

EQUITABLE PCI BANK,* AIMEE YU and BEJAN LIONEL APAS, Petitioners,

vs.
NG SHEUNG NGOR** doing business under the name and style "KEN MARKETING,"
KEN APPLIANCE DIVISION, INC. and BENJAMIN E. GO, Respondents.

C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos as

exemplary damages;
D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents],
jointly and severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary
damages;

DECISION

E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally,
to pay [respondents'] attorney's fees in the sum of P300,000; litigation expenses
in the sum of P50,000 and the cost of suit;

This petition for review on certiorari1 seeks to set aside the decision2 of the Court of Appeals
(CA) in CA-G.R. SP No. 83112 and its resolution3 denying reconsideration.

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the
unpaid principal obligation for the peso loan as well as the unpaid obligation for
the dollar denominated loan;

CORONA, J.:

On October 7, 2001, respondents Ng Sheung Ngor,4 Ken Appliance Division, Inc. and
Benjamin E. Go filed an action for annulment and/or reformation of documents and
contracts5 against petitioner Equitable PCI Bank (Equitable) and its employees, Aimee Yu
and Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of Cebu City. 6 They
claimed that Equitable induced them to avail of its peso and dollar credit facilities by offering
low interest rates7 so they accepted Equitable's proposal and signed the bank's pre-printed
promissory notes on various dates beginning 1996. They, however, were unaware that the
documents contained identical escalation clauses granting Equitable authority to increase
interest rates without their consent.8
Equitable, in its answer, asserted that respondents knowingly accepted all the terms and
conditions contained in the promissory notes.9 In fact, they continuously availed of and
benefited from Equitable's credit facilities for five years.10

G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable]

interest as follows:
1) 12% per annum for the peso loans;
2) 8% per annum for the dollar loans. The basis for the payment of the
dollar obligation is the conversion rate of P26.50 per dollar availed of
at the time of incurring of the obligation in accordance with Article
1250 of the Civil Code of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of the aforestated
unpaid principal loan obligations and interest.

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001 alone,
Equitable restructured respondents' loans amounting to US$228,200 and P1,000,000.11 The
trial court, however, invalidated the escalation clause contained therein because it violated
the principle of mutuality of contracts.12 Nevertheless, it took judicial notice of the steep
depreciation of the peso during the intervening period13 and declared the existence of
extraordinary deflation.14 Consequently, the RTC ordered the use of the 1996 dollar
exchange rate in computing respondents' dollar-denominated loans.15 Lastly, because the
business reputation of respondents was (allegedly) severely damaged when Equitable froze
their accounts,16 the trial court awarded moral and exemplary damages to them.17

SO ORDERED.19

The dispositive portion of the February 5, 2004 RTC decision18 provided:

WHEREFORE, premises considered, the appeal interposed by defendants from the

Decision in the above-entitled case is DENIED due course. As of February 27, 2004, the
Decision dated February 5, 2004, is considered final and executory in so far as
[Equitable, Aimee Yu and Bejan Lionel Apas] are concerned.22 (emphasis supplied)

WHEREFORE, premises considered, judgment is hereby rendered:

Equitable and respondents filed their respective notices of appeal.20

In the March 1, 2004 order of the RTC, both notices were denied due course because
Equitable and respondents "failed to submit proof that they paid their respective appeal
fees."21

Equitable moved for the reconsideration of the March 1, 2004 order of the RTC23 on the
ground that it did in fact pay the appeal fees. Respondents, on the other hand, prayed for
the issuance of a writ of execution.24
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit25 and ordered the issuance of a writ of execution in favor of
respondents.26 According to the RTC, because respondents did not move for the
reconsideration of the previous order (denying due course to the parties notices of
appeal),27 the February 5, 2004 decision became final and executory as to both parties and
a writ of execution against Equitable was in order.28
A writ of execution was thereafter issued29 and three real properties of Equitable were levied
upon.30
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1, 2004
order.31 It, however, withdrew that petition on March 30, 200432 and instead filed a petition
for certiorari with an application for an injunction in the CA to enjoin the implementation and
execution of the March 24, 2004 omnibus order.33
On June 16, 2004, the CA granted Equitable's application for injunction. A writ of preliminary
injunction was correspondingly issued.34
Notwithstanding the writ of injunction, the properties of Equitable previously levied upon
were sold in a public auction on July 1, 2004. Respondents were the highest bidders and
certificates of sale were issued to them.35
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to cite the
sheriffs who conducted the sale in contempt for proceeding with the auction despite the
injunction order of the CA.36

Equitable Was Not Guilty Of Forum shopping

Forum shopping exists when two or more actions involving the same transactions, essential
facts and circumstances are filed and those actions raise identical issues, subject matter
and causes of action.45 The test is whether, in two or more pending cases, there is identity
of parties, rights or causes of actions and reliefs.46
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not have
identical causes of action. The petition for relief from the denial of its notice of appeal was
based on the RTCs judgment or final order preventing it from taking an appeal by "fraud,
accident, mistake or excusable negligence."47 On the other hand, its petition for certiorari in
the CA, a special civil action, sought to correct the grave abuse of discretion amounting to
lack of jurisdiction committed by the RTC.48
In a petition for relief, the judgment or final order is rendered by a court with competent
jurisdiction. In a petition for certiorari, the order is rendered by a court without or in excess of
its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping when it
moved to withdraw its petition for relief in the RTC on the same day (in fact just four hours
and forty minutes after) it filed the petition for certiorari in the CA. Even if Equitable failed to
disclose that it had a pending petition for relief in the RTC, it rectified what was doubtlessly a
careless oversight by withdrawing the petition for relief just a few hours after it filed its
petition for certiorari in the CA a clear indication that it had no intention of maintaining the
two actions at the same time.
The Trial Court Committed Grave Abuse of Discretion In Issuing Its March 1, 2004 and
March 24, 2004 Orders
Section 1, Rule 65 of the Rules of Court provides:

On October 28, 2005, the CA dismissed the petition for certiorari. 37 It found Equitable guilty
of forum shopping because the bank filed its petition for certiorari in the CA several hours
before withdrawing its petition for relief in the RTC.38 Moreover, Equitable failed to disclose,
both in the statement of material dates and certificate of non-forum shopping (attached to its
petition for certiorari in the CA), that it had a pending petition for relief in the RTC. 39
Equitable moved for reconsideration40 but it was denied.41 Thus, this petition.
Equitable asserts that it was not guilty of forum shopping because the petition for relief was
withdrawn on the same day the petition for certiorari was filed.42 It likewise avers that its
petition for certiorari was meritorious because the RTC committed grave abuse of discretion
in issuing the March 24, 2004 omnibus order which was based on an erroneous
assumption. The March 1, 2004 order denying its notice of appeal for non payment of
appeal fees was erroneous because it had in fact paid the required fees. 43 Thus, the RTC,
by issuing its March 24, 2004 omnibus order, effectively prevented Equitable from appealing
the patently wrong February 5, 2004 decision.44
This petition is meritorious.

Section 1. Petition for Certiorari. When any tribunal, board or officer exercising judicial
or quasi-judicial function has acted without or in excess of its or his jurisdiction, or
with grave abuse of discretion amounting to lack or excess of jurisdiction, and there
is no appeal, nor any plain, speedy or adequate remedy in the ordinary course of law,
a person aggrieved thereby may file a verified petition in the proper court, alleging the facts
with certainty and praying that judgment be rendered annulling or modifying the proceedings
of such tribunal, board or officer, and granting such incidental reliefs as law and justice may
require.
The petition shall be accompanied by a certified true copy of the judgment, order or
resolution subject thereof, copies of all pleadings and documents relevant and pertinent
thereto, and a sworn certificate of non-forum shopping as provided in the third paragraph of
Section 3, Rule 46.
There are two substantial requirements in a petition for certiorari. These are:

1. that the tribunal, board or officer exercising judicial or quasi-judicial functions

acted without or in excess of his or its jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction; and

decision was patently erroneous, specially the exorbitant award of damages, as it was
inconsistent with existing law and jurisprudence.57
The Promissory Notes Were Valid

2. that there is no appeal or any plain, speedy and adequate remedy in the
ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner must
show that the public respondent patently and grossly abused his discretion and that abuse
amounted to an evasion of positive duty or a virtual refusal to perform a duty enjoined by
law or to act at all in contemplation of law, as where the power was exercised in an arbitrary
and despotic manner by reason of passion or hostility.49
The March 1, 2004 order denied due course to the notices of appeal of both Equitable and
respondents. However, it declared that the February 5, 2004 decision was final and
executory only with respect to Equitable.50 As expected, the March 24, 2004 omnibus
order denied Equitable's motion for reconsideration and granted respondents' motion for the
issuance of a writ of execution.51
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to
prevent Equitable, et al. from appealing the February 5, 2004 decision. Not only that. The
execution of the decision was undertaken with indecent haste, effectively obviating or
defeating Equitable's right to avail of possible legal remedies. No matter how we look at it,
the RTC committed grave abuse of discretion in rendering those orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the ordinary
course of law, we hold that there was none. The RTC denied due course to its notice of
appeal in the March 1, 2004 order. It affirmed that denial in the March 24, 2004 omnibus
order. Hence, there was no way Equitable could have possibly appealed the February 5,
2004 decision.52
Although Equitable filed a petition for relief from the March 24, 2004 order, that petition was
not a plain, speedy and adequate remedy in the ordinary course of law. 53 A petition for relief
under Rule 38 is an equitable remedy allowed only in exceptional circumstances or where
there is no other available or adequate remedy.54
Thus, we grant Equitable's petition for certiorari and consequently give due course to its
appeal.
Equitable Raised Pure Questions of Law in Its Petition For Review
The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.55 There is a
question of law "when the doubt or controversy concerns the correct application of law or
jurisprudence to a certain set of facts; or when the issue does not call for the probative
value of the evidence presented, the truth or falsehood of facts being admitted."56
Equitable does not assail the factual findings of the trial court. Its arguments essentially
focus on the nullity of the RTCs February 5, 2004 decision. Equitable points out that that

The RTC upheld the validity of the promissory notes despite respondents assertion that
those documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted by one
party.58 The participation of the other party is limited to affixing his signature or his
"adhesion" to the contract.59 For this reason, contracts of adhesion are strictly construed
against the party who drafted it.60
It is erroneous, however, to conclude that contracts of adhesion are invalid per se. They are,
on the contrary, as binding as ordinary contracts. A party is in reality free to accept or reject
it. A contract of adhesion becomes void only when the dominant party takes advantage of
the weakness of the other party, completely depriving the latter of the opportunity to bargain
on equal footing.61
That was not the case here. As the trial court noted, if the terms and conditions offered by
Equitable had been truly prejudicial to respondents, they would have walked out and
negotiated with another bank at the first available instance. But they did not. Instead, they
continuously availed of Equitable's credit facilities for five long years.
While the RTC categorically found that respondents had outstanding dollar- and pesodenominated loans with Equitable, it, however, failed to ascertain the total amount due
(principal, interest and penalties, if any) as of July 9, 2001. The trial court did not explain
how it arrived at the amounts of US$228,200 and P1,000,000.62 In Metro Manila Transit
Corporation v. D.M. Consunji,63 we reiterated that this Court is not a trier of facts and it shall
pass upon them only for compelling reasons which unfortunately are not present in this
case.64 Hence, we ordered the partial remand of the case for the sole purpose of
determining the amount of actual damages.65
Escalation Clause Violated The Principle Of Mutuality Of Contracts
Escalation clauses are not void per se. However, one "which grants the creditor an
unbridled right to adjust the interest independently and upwardly, completely depriving the
debtor of the right to assent to an important modification in the agreement" is void. Clauses
of that nature violate the principle of mutuality of contracts. 66 Article 130867 of the Civil Code
holds that a contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.68
For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the applicable maximum rate of interest is
increased by law or by the Monetary Board; and

2. that the stipulated rate of interest will be reduced if the applicable maximum rate of
interest is reduced by law or by the Monetary Board (de-escalation clause).69
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent extensions shall be at
such rate as shall be determined by the bank.70
Equitable dictated the interest rates if the term (or period for repayment) of the loan was
extended. Respondents had no choice but to accept them. This was a violation of Article
1308 of the Civil Code. Furthermore, the assailed escalation clause did not contain the
necessary provisions for validity, that is, it neither provided that the rate of interest would be
increased only if allowed by law or the Monetary Board, nor allowed de-escalation. For
these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine National
Bank71 we held that, because the escalation clause was annulled, the principal amount of
the loan was subject to the original or stipulated rate of interest. Upon maturity, the amount
due was subject to legal interest at the rate of 12% per annum.72

3. that the parties expressly agreed to consider the effects of the extraordinary
inflation or deflation.76
Despite the devaluation of the peso, the BSP never declared a situation of extraordinary
inflation. Moreover, although the obligation in this instance arose out of a contract, the
parties did not agree to recognize the effects of extraordinary inflation (or deflation). 77 The
RTC never mentioned that there was a such stipulation either in the promissory note or loan
agreement. Therefore, respondents should pay their dollar-denominated loans at the
exchange rate fixed by the BSP on the date of maturity.78
The Award Of Moral And Exemplary Damages Lacked Basis
Moral damages are in the category of an award designed to compensate the claimant for
actual injury suffered, not to impose a penalty to the wrongdoer.79 To be entitled to moral
damages, a claimant must prove:
1. That he or she suffered besmirched reputation, or physical, mental or
psychological suffering sustained by the claimant;
2. That the defendant committed a wrongful act or omission;

Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for their
dollar-denominated loans and 20% p.a. for their peso-denominated loans from January 10,
2001 to July 9, 2001. Thereafter, Equitable was entitled to legal interest of 12% p.a. on all
amounts due.
There Was No Extraordinary Deflation
Extraordinary inflation exists when there is an unusual decrease in the purchasing power of
currency (that is, beyond the common fluctuation in the value of currency) and such
decrease could not be reasonably foreseen or was manifestly beyond the contemplation of
the parties at the time of the obligation. Extraordinary deflation, on the other hand, involves
an inverse situation.73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should
intervene, the value of the currency at the time of the establishment of the obligation shall
be the basis of payment, unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must
be proven:
1. that there was an official declaration of extraordinary inflation or deflation from
the Bangko Sentral ng Pilipinas (BSP);74
2. that the obligation was contractual in nature;75 and

3. That the wrongful act or omission was the proximate cause of the damages
the claimant sustained;
4. The case is predicated on any of the instances expressed or envisioned by
Article 221980 and 222081 . 82
In culpa contractual or breach of contract, moral damages are recoverable only if the
defendant acted fraudulently or in bad faith or in wanton disregard of his contractual
obligations.83 The breach must be wanton, reckless, malicious or in bad faith, and
oppressive or abusive.84
The RTC found that respondents did not pay Equitable the interest due on February 9, 2001
(or any month thereafter prior to the maturity of the loan)85 or the amount due (principal plus
interest) due on July 9, 2001.86 Consequently, Equitable applied respondents' deposits to
their loans upon maturity.
The relationship between a bank and its depositor is that of creditor and debtor. 87 For this
reason, a bank has the right to set-off the deposits in its hands for the payment of a
depositor's indebtedness.88
Respondents indeed defaulted on their obligation. For this reason, Equitable had the option
to exercise its legal right to set-off or compensation. However, the RTC mistakenly (or, as it
now appears, deliberately) concluded that Equitable acted "fraudulently or in bad faith or in
wanton disregard" of its contractual obligations despite the absence of proof. The
undeniable fact was that, whatever damage respondents sustained was purely the

consequence of their failure to pay their loans. There was therefore absolutely no basis
for the award of moral damages to them.
Neither was there reason to award exemplary damages. Since respondents were not
entitled to moral damages, neither should they be awarded exemplary damages. 89 And if
respondents were not entitled to moral and exemplary damages, neither could they be
awarded attorney's fees and litigation expenses.90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of Appeals in
CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City in
Civil Case No. CEB-26983 is hereby ANNULLED for being rendered with grave abuse of
discretion amounting to lack or excess of jurisdiction. All proceedings undertaken pursuant
thereto are likewise declared null and void.
The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil Case
No. CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI Bank, Aimee
Yu and Bejan Lionel Apas is therefore given due course.1avvphi1
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in Civil
Case No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby entered:
1. ordering respondents Ng Sheung Ngor, doing business under the name and
style of "Ken Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay
petitioner Equitable PCI Bank the principal amount of their dollar- and pesodenominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name and
style of "Ken Marketing," Ken Appliance Division, Inc. and Benjamin E. Go to pay
petitioner Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from
January 10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from
January 10, 2001 to July 9, 2001;91
c) pursuant to our ruling in Eastern Shipping Lines v. Court of
Appeals,92 the total amount due on July 9, 2001 shall earn legal
interest at 12% p.a. from the time petitioner Equitable PCI Bank
demanded payment, whether judicially or extra-judicially; and

d) after this Decision becomes final and executory, the applicable rate
shall be 12% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute the exact
amounts due on the respective dollar-denominated and peso-denominated loans, as of July
9, 2001, of respondents Ng Sheung Ngor, doing business under the name and style of "Ken
Marketing," Ken Appliance Division and Benjamin E. Go.
SO ORDERED.

price adjustment. To show goodwill, Pan Pacific reduced the price adjustment to
P4,858,548.67.11

Republic of the Philippines

SUPREME COURT
Manila

On 28 April 1992, TCGI Engineers recommended to respondent that the price adjustment
should be pegged at P3,730,957.07. TCGI Engineers based their evaluation of the price
adjustment on the following factors:

SECOND DIVISION
G.R. No. 169975

March 18, 2010

1. Labor Indices of the Department of Labor and Employment.

PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL ROSARIO,

Petitioners,
vs.
EQUITABLE PCI BANK (formerly THE PHILIPPINE COMMERCIAL INTERNATIONAL
BANK), Respondent.
DECISION

2. Price Index of the National Statistics Office.

PD 1594 and its Implementing Rules and Regulations as amended, 15 March 1991.
Shipping Documents submitted by PPSCI.
Sub-clause 70.1 of the General Conditions of the Contract Documents.12

CARPIO, J.:
The Case
Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed this
Petition for Review1 assailing the Court of Appeals (CA) Decision2 dated 30 June 2005 in
CA-G.R. CV No. 63966 as well as the Resolution3 dated 5 October 2005 denying the Motion
for Reconsideration. In the assailed decision, the CA modified the 12 April 1999 Decision4 of
the Regional Trial Court of Makati City, Branch 59 (RTC) by ordering Equitable PCI Bank 5
(respondent) to pay petitioners P1,516,015.07 with interest at the legal rate of 12% per
annum starting 6 May 1994 until the amount is fully paid.
The Facts

Pan Pacific contended that with this recommendation, respondent was already estopped
from disclaiming liability of at least P3,730,957.07 in accordance with the escalation
clause.13
Due to the extraordinary increases in the costs of labor and materials, Pan Pacifics
operational capital was becoming inadequate for the project. However, respondent withheld
the payment of the price adjustment under the escalation clause despite Pan Pacifics
repeated demands.14 Instead, respondent offered Pan Pacific a loan of P1.8 million. Against
its will and on the strength of respondents promise that the price adjustment would be
released soon, Pan Pacific, through Del Rosario, was constrained to execute a promissory
note in the amount of P1.8 million as a requirement for the loan. Pan Pacific also posted a
surety bond. The P1.8 million was released directly to laborers and suppliers and not a
single centavo was given to Pan Pacific.15

Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting mechanical
works on airconditioning system. On 24 November 1989, Pan Pacific, through its President,
Ricardo F. Del Rosario (Del Rosario), entered into a contract of mechanical works
(Contract) with respondent for P20,688,800. Pan Pacific and respondent also agreed on
nine change orders for P2,622,610.30. Thus, the total consideration for the whole project
was P23,311,410.30.6 The Contract stipulated, among others, that Pan Pacific shall be
entitled to a price adjustment in case of increase in labor costs and prices of materials under
paragraphs 70.17 and 70.28 of the "General Conditions for the Construction of PCIB Tower II
Extension" (the escalation clause).9

Pan Pacific made several demands for payment on the price adjustment but respondent
merely kept on promising to release the same. Meanwhile, the P1.8 million loan matured
and respondent demanded payment plus interest and penalty. Pan Pacific refused to pay
the loan. Pan Pacific insisted that it would not have incurred the loan if respondent released
the price adjustment on time. Pan Pacific alleged that the promissory note did not express
the true agreement of the parties. Pan Pacific maintained that the P1.8 million was to be
considered as an advance payment on the price adjustment. Therefore, there was really no
consideration for the promissory note; hence, it is null and void from the beginning.16

Pursuant to the contract, Pan Pacific commenced the mechanical works in the project site,
the PCIB Tower II extension building in Makati City. The project was completed in June
1992. Respondent accepted the project on 9 July 1992.10

Respondent stood firm that it would not release any amount of the price adjustment to Pan
Pacific but it would offset the price adjustment with Pan Pacifics outstanding balance of
P3,226,186.01, representing the loan, interests, penalties and collection charges.17

In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance with
the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52.
Respondents appointed project engineer, TCGI Engineers, asked for a reduction in the

Pan Pacific refused the offsetting but agreed to receive the reduced amount of
P3,730,957.07 as recommended by the TCGI Engineers for the purpose of extrajudicial
settlement, less P1.8 million and P414,942 as advance payments.18

On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the

promissory note, sum of money, and damages against the respondent with the RTC of
Makati City, Branch 59. On 12 April 1999, the RTC rendered its decision, the dispositive
portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs
and against the defendant as follows:

ordered respondent to pay P1,516,015.07 to petitioners, with interest at the legal rate of
12% per annum starting 6 May 1994.20
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a
reconsideration of the CAs Decision imposing the legal rate of 12%. Petitioners claimed that
the interest rate applicable should be the 18% bank lending rate. Respondent likewise filed
a Motion for Reconsideration of the CAs decision. In a Resolution dated 5 October 2005,
the CA denied both motions.

1. Declaring the promissory note (Exhibit "B") null and void;

Aggrieved by the CAs Decision, petitioners elevated the case before this Court.
Ordering the defendant to pay the plaintiffs the following amounts:
The Issue
a. P1,389,111.10 representing unpaid balance of the adjustment price,
with interest thereon at the legal rate of twelve (12%) percent per
annum starting May 6, 1994, the date when the complaint was filed,
until the amount is fully paid;

Petitioners submit this sole issue for our consideration: Whether the CA, in awarding the
unpaid balance of the price adjustment, erred in fixing the interest rate at 12% instead of the
18% bank lending rate.
Ruling of the Court

P100,000.00 representing moral damages;

P50,000.00 representing exemplary damages; and

We grant the petition.

P50,000.00 as and for attorneys fees.

This Court notes that respondent did not appeal the decision of the CA. Hence, there is no
longer any issue as to the principal amount of the unpaid balance on the price adjustment,
which the CA correctly computed at P1,516,015.07. The only remaining issue is the interest
rate applicable for respondents delay in the payment of the balance of the price adjustment.

2. Dismissing defendants counterclaim, for lack of merit; and

With costs against the defendant.

The CA denied petitioners claim for the application of the bank lending rate of 18%
compounded annually reasoning, to wit:

SO ORDERED.19
On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26 May
1999, respondent appealed the entire RTC Decision for being contrary to law and evidence.
In sum, the appeals of the parties with the CA are as follows:
1. With respect to the petitioners, whether the RTC erred in deducting the
amount of P126,903.97 from the balance of the adjusted price and in awarding
only 12% annual interest on the amount due, instead of the bank loan rate of
18% compounded annually beginning September 1992.
2. With respect to respondent, whether the RTC erred in declaring the
promissory note void and in awarding moral and exemplary damages and
attorneys fees in favor of petitioners and in dismissing its counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to the
principal amount due to petitioners. The CA removed the deduction of P126,903.97
because it represented the final payment on the basic contract price. Hence, the CA

Anent the 18% interest rate compounded annually, while it is true that the contract provides
for an interest at the current bank lending rate in case of delay in payment by the Owner,
and the promissory note charged an interest of 18%, the said proviso does not authorize
plaintiffs to unilaterally raise the interest rate without the other partys consent. Unlike their
request for price adjustment on the basic contract price, plaintiffs never informed nor sought
the approval of defendant for the imposition of 18% interest on the adjusted price. To
unilaterally increase the interest rate of the adjusted price would be violative of the principle
of mutuality of contracts. Thus, the Court maintains the legal rate of twelve percent per
annum starting from the date of judicial demand. Although the contract provides for the
period when the recommendation of the TCGI Engineers as to the price adjustment would
be binding on the parties, it was established, however, that part of the adjusted price
demanded by plaintiffs was already disbursed as early as 28 February 1992 by defendant
bank to their suppliers and laborers for their account.21
In this appeal, petitioners allege that the contract between the parties consists of two parts,
the Agreement22 and the General Conditions,23 both of which provide for interest at the bank
lending rate on any unpaid amount due under the contract. Petitioners further claim that
there is nothing in the contract which requires the consent of the respondent to be given in

order that petitioners can charge the bank lending rate.24 Specifically, petitioners invoke
Section 2.5 of the Agreement and Section 60.10 of the General Conditions as follows:
Agreement
2.5 If any payment is delayed, the CONTRACTOR may charge interest thereon at the
current bank lending rates, without prejudice to OWNERS recourse to any other remedy
available under existing law.25

parties. Thus, when the terms of an agreement have been reduced to writing, it is
considered as containing all the terms agreed upon and there can be, between the parties
and their successors in interest, no evidence of such terms other than the contents of the
written agreement.30
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION

General Conditions

70.1 Increase or Decrease of Cost

60.10 Time for payment

There shall be added to or deducted from the Contract Price such sums in respect of rise or
fall in the cost of labor and/or materials or any other matters affecting the cost of the
execution of the Works as may be determined.

The amount due to the Contractor under any interim certificate issued by the Engineer
pursuant to this Clause, or to any term of the Contract, shall, subject to clause 47, be paid
by the Owner to the Contractor within 28 days after such interim certificate has been
delivered to the Owner, or, in the case of the Final Certificate referred to in Sub-Clause
60.8, within 56 days, after such Final Certificate has been delivered to the Owner. In the
event of the failure of the Owner to make payment within the times stated, the Owner shall
pay to the Contractor interest at the rate based on banking loan rates prevailing at the time
of the signing of the contract upon all sums unpaid from the date by which the same should
have been paid. The provisions of this Sub-Clause are without prejudice to the Contractors
entitlement under Clause 69.26 (Emphasis supplied)
Petitioners thus submit that it is automatically entitled to the bank lending rate of interest
from the time an amount is determined to be due thereto, which respondent should have
paid. Therefore, as petitioners have already proven their entitlement to the price adjustment,
it necessarily follows that the bank lending interest rate of 18% shall be applied.27
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of the
General Conditions, it is stipulated that any additional cost shall be determined by the
Engineer and shall be added to the contract price after due consultation with the Owner,
herein respondent. Hence, there being no prior consultation with the respondent regarding
the additional cost to the basic contract price, it naturally follows that respondent was never
consulted or informed of the imposition of 18% interest rate compounded annually on the
adjusted price.28
A perusal of the assailed decision shows that the CA made a distinction between the
consent given by the owner of the project for the liability for the price adjustments, and the
consent for the imposition of the bank lending rate. Thus, while the CA held that petitioners
consulted respondent for price adjustment on the basic contract price, petitioners,
nonetheless, are not entitled to the imposition of 18% interest on the adjusted price, as
petitioners never informed or sought the approval of respondent for such imposition. 29
We disagree.
It is settled that the agreement or the contract between the parties is the formal expression
of the parties rights, duties, and obligations. It is the best evidence of the intention of the

70.2 Subsequent Legislation

If, after the date 28 days prior to the latest date of submission of tenders for the Contract
there occur in the country in which the Works are being or are to be executed changes to
any National or State Statute, Ordinance, Decree or other Law or any regulation or bye-law
(sic) of any local or other duly constituted authority, or the introduction of any such State
Statute, Ordinance, Decree, Law, regulation or bye-law (sic) which causes additional or
reduced cost to the contractor, other than under Sub-Clause 70.1, in the execution of the
Contract, such additional or reduced cost shall, after due consultation with the Owner and
Contractor, be determined by the Engineer and shall be added to or deducted from the
Contract Price and the Engineer shall notify the Contractor accordingly, with a copy to the
Owner.31
In this case, the CA already settled that petitioners consulted respondent on the imposition
of the price adjustment, and held respondent liable for the balance of P1,516,015.07.
Respondent did not appeal from the decision of the CA; hence, respondent is estopped
from contesting such fact.
However, the CA went beyond the intent of the parties by requiring respondent to give its
consent to the imposition of interest before petitioners can hold respondent liable for interest
at the current bank lending rate. This is erroneous. A review of Section 2.6 of the
Agreement and Section 60.10 of the General Conditions shows that the consent of the
respondent is not needed for the imposition of interest at the current bank lending rate,
which occurs upon any delay in payment.
When the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations governs. In these cases, courts
have no authority to alter a contract by construction or to make a new contract for the
parties. The Courts duty is confined to the interpretation of the contract which the parties
have made for themselves without regard to its wisdom or folly as the court cannot supply
material stipulations or read into the contract words which it does not contain. It is only when
the contract is vague and ambiguous that courts are permitted to resort to construction of its
terms and determine the intention of the parties.32

The escalation clause must be read in conjunction with Section 2.5 of the Agreement and
Section 60.10 of the General Conditions which pertain to the time of payment. Once the
parties agree on the price adjustment after due consultation in compliance with the
provisions of the escalation clause, the agreement is in effect an amendment to the original
contract, and gives rise to the liability of respondent to pay the adjusted costs. Under
Section 60.10 of the General Conditions, the respondent shall pay such liability to the
petitioner within 28 days from issuance of the interim certificate. Upon respondents failure
to pay within the time provided (28 days), then it shall be liable to pay the stipulated
interest.1avvphi1

annum. Absent any evidence of fraud, undue influence or any vice of consent exercised by
petitioners against the respondent, the interest rate agreed upon is binding on them.37
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 63966. We ORDER respondent to pay petitioners
P1,516,015.07 with interest at the bank lending rate of 18% per annum starting 6 May 1994
until the amount is fully paid.
SO ORDERED.

This is the logical interpretation of the agreement of the parties on the imposition of interest.
To provide a contrary interpretation, as one requiring a separate consent for the imposition
of the stipulated interest, would render the intentions of the parties nugatory.
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates that
no interest shall be due unless it has been expressly stipulated in writing. Therefore,
payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The
concurrence of the two conditions is required for the payment of monetary
interest.33
We agree with petitioners interpretation that in case of default, the consent of the
respondent is not needed in order to impose interest at the current bank lending rate.
Applicable Interest Rate
Under Article 2209 of the Civil Code, the appropriate measure for damages in case of delay
in discharging an obligation consisting of the payment of a sum of money is the payment of
penalty interest at the rate agreed upon in the contract of the parties. In the absence of a
stipulation of a particular rate of penalty interest, payment of additional interest at a rate
equal to the regular monetary interest becomes due and payable. Finally, if no regular
interest had been agreed upon by the contracting parties, then the damages payable will
consist of payment of legal interest which is 6%, or in the case of loans or forbearances of
money, 12% per annum.34 It is only when the parties to a contract have failed to fix the rate
of interest or when such amount is unwarranted that the Court will apply the 12% interest
per annum on a loan or forbearance of money.35
The written agreement entered into between petitioners and respondent provides for an
interest at the current bank lending rate in case of delay in payment and the promissory
note charged an interest of 18%.
To prove petitioners entitlement to the 18% bank lending rate of interest, petitioners
presented the promissory note36 prepared by respondent bank itself. This promissory note,
although declared void by the lower courts because it did not express the real intention of
the parties, is substantial proof that the bank lending rate at the time of default was 18% per

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 169617

April 4, 2007

HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, Petitioners,

vs.
SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Represented by ZOILO
LANDRITO, as their Attorney-in-Fact, Respondents.

Due to the continued inability of the Spouses Landritos to settle their obligations with the
Spouses Espiritu, the loan agreement was renewed three more times. In all these
subsequent renewals, the same terms and conditions found in the first agreement were
retained. On 29 July 1987, the principal was increased to P507,000.00 inclusive of running
interest. On 11 March 1988, it was increased to P647,000.00. And on 21 October 1988, the
principal was increased to P874,125.00.6 At the hearing before the trial court, Zoilo Espiritu
testified that the increase in the principal in each amendment of the loan agreement did not
correspond to the amount delivered to the Spouses Landrito. Rather, the increase in the
principal had been due to unpaid interest and other charges.7
The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the
mortgaged property on 31 October 1990. During the auction sale, the property was sold to
the Spouses Espiritu as the lone bidder. On 9 January 1991, the Sheriffs Certificate of Sale
was annotated on the title of the mortgaged property, giving the Spouses Landrito until 8
January 1992 to redeem the property. 8

DECISION
CHICO-NAZARIO, J.:
This is a petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
Decision of the Court of Appeals,1 dated 31 August 2005, reversing the Decision rendered
by the trial court on 13 December 1995. The Court of Appeals, in its assailed Decision, fixed
the interest rate of the loan between the parties at 12% per annum, and ordered the
Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to reconvey the subject property to
the Spouses Landrito conditioned upon the payment of the loan.
Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all surnamed
ESPIRITU, are the only children and legal heirs of the Spouses Zoilo and Primitiva Espiritu,
who both died during the pendency of the case before the Honorable Court of Appeals.2
Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein
represented by their son and attorney-in-fact, Zoilo Landrito.3
On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the amount of
P350,000.00 payable in three months. To secure the loan, the Spouses Landrito executed a
real estate mortgage over a five hundred forty (540) square meter lot located in Alabang,
Muntinlupa, covered by Transfer Certificate of Title No. S-48948, in favor of the Spouses
Espiritu. From the P350,000.00 that the Landritos were supposed to receive, P17,500.00
was deducted as interest for the first month which was equivalent to five percent of the
principal debt, and P7,500.00 was further deducted as service fee. Thus, they actually
received a net amount of P325,000.00. The agreement, however, provided that the principal
indebtedness earns "interest at the legal rate."4
After three months, when the debt became due and demandable, the Spouses Landrito
were unable to pay the principal, and had not been able to make any interest payments
other than the amount initially deducted from the proceeds of the loan. On 29 December
1986, the loan agreement was extended to 4 January 1987 through an Amendment of Real
Estate Mortgage. The loan was restructured in such a way that the unpaid interest became
part of the principal, thus increasing the principal to P385,000. The new loan agreement
adopted all other terms and conditions contained in first agreement.5

The Spouses Landrito failed to redeem the subject property although they alleged that they
negotiated for the redemption of the property as early as 30 October 1991. While the
negotiated price for the land started at P1,595,392.79, it was allegedly increased by the
Spouses Espiritu from time to time. Spouses Landrito allegedly tendered two managers
checks and some cash, totaling P1,800,000.00 to the Spouses Espiritu on 13 January 1992,
but the latter refused to accept the same. They also alleged that the Spouses Espiritu
increased the amount demanded to P2.5 Million and gave them until July 1992 to pay the
said amount. However, upon inquiry, they found out that on 24 June 1992, the Spouses
Espiritu had already executed an Affidavit of Consolidation of Ownership and registered the
mortgaged property in their name, and that the Register of Deeds of Makati had already
issued Transfer Certificate of Title No. 179802 in the name of the Spouses Espiritu. On 9
October 1992, the Spouses Landrito, represented by their son Zoilo Landrito, filed an action
for annulment or reconveyance of title, with damages against the Spouses Espiritu before
Branch 146 of the Regional Trial Court of Makati.9 Among the allegations in their Complaint,
they stated that the Spouses Espiritu, as creditors and mortgagees, "imposed interest rates
that are shocking to ones moral senses."10
The trial court dismissed the complaint and upheld the validity of the foreclosure sale. The
trial court ordered in its Decision, dated 13 December 1995:11
WHEREFORE, all the foregoing premises considered, the herein complaint is hereby
dismissed forthwith.
Without pronouncements to costs.
The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the 1997
Rules of Court. In its Decision dated 31 August 2005, the Court of Appeals reversed the trial
courts decision, decreeing that the five percent (5%) interest imposed by the Spouses
Espiritu on the first month and the varying interest rates imposed for the succeeding months
contravened the provisions of the Real Estate Mortgage contract which provided that
interest at the legal rate, i.e., 12% per annum, would be imposed. It also ruled that although
the Usury Law had been rendered ineffective by Central Bank Circular No. 905, which, in
effect, removed the ceiling rates prescribed for interests, thus, allowing parties to freely
stipulate thereon, the courts may render void any stipulation of interest rates which are

found iniquitous or unconscionable. As a result, the Court of Appeals set the interest rate of
the loan at the legal rate, or 12% per annum.12
Furthermore, the Court of Appeals held that the action for reconveyance, filed by the
Spouses Landrito, is still a proper remedy. Even if the Spouses Landrito failed to redeem
the property within the one-year redemption period provided by law, the action for
reconveyance remained as a remedy available to a landowner whose property was
wrongfully registered in anothers name since the subject property has not yet passed to an
innocent purchaser for value.13
In the decretal portion of its Decision, the Court of Appeals ruled14:
WHEREFORE, the instant appeal is hereby GRANTED. The assailed Decision dated
December 13, 1995 of the Regional Trial Court of Makati, Branch 146 in Civil Case No. 922920 is hereby REVERSED and SET ASIDE, and a new one is hereby entered as follows:
(1) The legal rate of 12% per annum is hereby FIXED to be applied as the interest of the
loan; and (2) Conditioned upon the payment of the loan, defendants-appellees spouses
Zoilo and Primitiva Espiritu are hereby ordered to reconvey Transfer Certificate of Title No.
S-48948 to appellant spouses Maximo and Paz Landrito.
The case is REMANDED to the Trial Court for the above determination.
Hence, the present petition. The following issues were raised:15
I
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND SETTING ASIDE
THE DECISION OF THE TRIAL COURT AND ORDERING HEREIN PETITIONERS TO
RECONVEY TRANSFER CERTIFICATE OF TITLE NO. 18918 TO HEREIN
RESPONDENTS, WITHOUT ANY FACTUAL OR LEGAL BASIS THEREFOR.
II
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT HEREIN
PETITIONERS UNILATERALLY IMPOSED ON HEREIN RESPONDENTS THE
ALLEGEDLY UNREASONABLE INTERESTS ON THE MORTGAGE LOANS.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING THAT HEREIN
RESPONDENTS ATTORNEY-IN-FACT IS NOT ARMED WITH AUTHORITY TO FILE AND
PROSECUTE THIS CASE.
The petition is without merit.

The Real Estate Mortgage executed between the parties specified that "the principal
indebtedness shall earn interest at the legal rate." The agreement contained no other
provision on interest or any fees or charges incident to the debt. In at least three contracts,
all designated as Amendment of Real Estate Mortgage, the interest rate imposed was,
likewise, unspecified. During his testimony, Zoilo Espiritu admitted that the increase in the
principal in each of the Amendments of the Real Estate Mortgage consists of interest and
charges. The Spouses Espiritu alleged that the parties had agreed on the interest and
charges imposed in connection with the loan, hereunder enumerated:
1. P17,500.00 was the interest charged for the first month and P7,500.00 was imposed as
service fee.
2. P35,000.00 interest and charges, or the difference between the P350,000.00 principal in
the Real Estate Mortgage dated 5 September 1986 and the P385,000.00 principal in the
Amendment of the Real Estate Mortgage dated 29 December 1986.
3. P132,000.00 interest and charges, or the difference between the P385,000.00 principal in
the Amendment of the Real Estate Mortgage dated 29 December 1986 and the
P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 July 1987.
4. P140,000.00 interest and charges, or the difference between the P507,000.00 principal in
the Amendment of the Real Estate Mortgage dated 29 July 1987 and the P647,000.00
principal in the Amendment of the Real Estate Mortgage dated 11 March 1988.
5. P227,125.00 interest and charges, or the difference between the P647,000.00 principal in
the Amendment of the Real Estate Mortgage dated 11 March 1988 and the P874,125
principal in the Amendment of the Real Estate Mortgage dated 21 October 1988.
The total interest and charges amounting to P559,125.00 on the original principal of
P350,000 was accumulated over only two years and one month. These charges are not
found in any written agreement between the parties. The records fail to show any
computation on how much interest was charged and what other fees were imposed. Not
only did lack of transparency characterize the aforementioned agreements, the interest
rates and the service charge imposed, at an average of 6.39% per month, are excessive.
In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State seeks to
protect its citizens from a lack of awareness of the true cost of credit by assuring the full
disclosure of such costs. Section 4, in connection with Section 3(3)16 of the said law, gives a
detailed enumeration of the specific information required to be disclosed, among which are
the interest and other charges incident to the extension of credit. Section 617 of the same
law imposes on anyone who willfully violates these provisions, sanctions which include civil
liability, and a fine and/or imprisonment.
Although any action seeking to impose either civil or criminal liability had already prescribed,
this Court frowns upon the underhanded manner in which the Spouses Espiritu imposed
interest and charges, in connection with the loan. This is aggravated by the fact that one of
the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to plead ignorance of the
requirements of the law in connection with the transparency of credit transactions. In
addition, the Civil Code clearly provides that:

Article 1956. No interest shall be due unless it has been stipulated in writing.
The omission of the Spouses Espiritu in specifying in the contract the interest rate which
was actually imposed, in contravention of the law, manifested bad faith.
In several cases, this Court has been known to declare null and void stipulations on interest
and charges that were found excessive, iniquitous, and unconscionable. In the case of
Medel v. Court of Appeals,18 the Court declared an interest rate of 5.5% per month on a
P500,000.00 loan to be excessive, iniquitous, unconscionable and exorbitant. Even if the
parties themselves agreed on the interest rate and stipulated the same in a written
agreement, it nevertheless declared such stipulation as void and ordered the imposition of a
12% yearly interest rate. In Spouses Solangon v. Salazar,19 6% monthly interest on a
P60,000.00 loan was likewise equitably reduced to a 1% monthly interest or 12% per
annum. In Ruiz v. Court of Appeals,20 the Court found a 3% monthly interest imposed on
four separate loans with a total of P1,050,000.00 to be excessive and reduced the interest
to a 1% monthly interest or 12% per annum.
In declaring void the stipulations authorizing excessive interest and charges, the Court
declared that although the Usury Law was suspended by Central Bank Circular No. 905, s.
1982, effective on 1 January 1983, and consequently parties are given a wide latitude to
agree on any interest rate, nothing in the said Circular grants lenders carte blanche
authority to raise interest rates to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets.21
Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if not
against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void
from the beginning. They cannot be ratified nor the right to set up their illegality as a
defense be waived.22 The nullity of the stipulation on the usurious interest does not,
however, affect the lenders right to recover the principal of the loan.23 Nor would it affect the
terms of the real estate mortgage. The right to foreclose the mortgage remains with the
creditors, and said right can be exercised upon the failure of the debtors to pay the debt
due. The debt due is to be considered without the stipulation of the excessive interest. A
legal interest of 12% per annum will be added in place of the excessive interest formerly
imposed.
While the terms of the Real Estate Mortgage remain effective, the foreclosure proceedings
held on 31 Ocotber 1990 cannot be given effect. In the Notice of Sheriffs Sale24 dated 5
October 1990, and in the Certificate of Sale25 dated 31 October 1990, the amount
designated as mortgage indebtedness amounted to P874,125.00. Likewise, in the demand
letter26 dated 12 December 1989, Zoilo Espiritu demanded from the Spouses Landrito the
amount of P874,125.00 for the unpaid loan. Since the debt due is limited to the principal of
P350,000.00 with 12% per annum as legal interest, the previous demand for payment of the
amount of P874,125.00 cannot be considered as a valid demand for payment. For an
obligation to become due, there must be a valid demand. 27 Nor can the foreclosure
proceedings be considered valid since the total amount of the indebtedness during the
foreclosure proceedings was pegged at P874,125.00 which included interest and which this
Court now nullifies for being excessive, iniquitous and exorbitant. If the foreclosure
proceedings were considered valid, this would result in an inequitable situation wherein the
Spouses Landrito will have their land foreclosed for failure to pay an over-inflated loan only
a small part of which they were obligated to pay.

Moreover, it is evident from the facts of the case that despite considerable effort on their
part, the Spouses Landrito failed to redeem the mortgaged property because they were
unable to raise the total amount, which was grossly inflated by the excessive interest
imposed. Their attempt to redeem the mortgaged property at the inflated amount of
P1,595,392.79, as early as 30 October 1991, is reflected in a letter, which creditormortgagee Zoilo Landrito acknowledged to have received by affixing his signature herein. 28
They also attached in their Complaint copies of two checks in the amounts of P770,000.00
and P995,087.00, both dated 13 January 1992, which were allegedly refused by the
Spouses Espiritu.29 Lastly, the Spouses Espiritu even attached in their exhibits a copy of a
handwritten letter, dated 27 January 1994, written by Paz Landrito, addressed to the
Spouses Espiritu, wherein the former offered to pay the latter the sum of P2,000,000.00.30
In all these instances, the Spouses Landrito had tried, but failed, to pay an amount way over
the indebtedness they were supposed to pay i.e., P350,000.00 and 12% interest per
annum. Thus, it is only proper that the Spouses Landrito be given the opportunity to repay
the real amount of their indebtedness.
Since the Spouses Landrito, the debtors in this case, were not given an opportunity to settle
their debt, at the correct amount and without the iniquitous interest imposed, no foreclosure
proceedings may be instituted. A judgment ordering a foreclosure sale is conditioned upon a
finding on the correct amount of the unpaid obligation and the failure of the debtor to pay the
said amount.31 In this case, it has not yet been shown that the Spouses Landrito had
already failed to pay the correct amount of the debt and, therefore, a foreclosure sale
cannot be conducted in order to answer for the unpaid debt. The foreclosure sale conducted
upon their failure to pay P874,125 in 1990 should be nullified since the amount demanded
as the outstanding loan was overstated; consequently it has not been shown that the
mortgagors the Spouses Landrito, have failed to pay their outstanding obligation.
Moreover, if the proceeds of the sale together with its reasonable rates of interest were
applied to the obligation, only a small part of its original loans would actually remain
outstanding, but because of the unconscionable interest rates, the larger part corresponded
to said excessive and iniquitous interest.
As a result, the subsequent registration of the foreclosure sale cannot transfer any rights
over the mortgaged property to the Spouses Espiritu. The registration of the foreclosure
sale, herein declared invalid, cannot vest title over the mortgaged property. The Torrens
system does not create or vest title where one does not have a rightful claim over a real
property. It only confirms and records title already existing and vested. It does not permit
one to enrich oneself at the expense of another.32 Thus, the decree of registration, even
after the lapse of one (1) year, cannot attain the status of indefeasibility.
Significantly, the records show that the property mortgaged was purchased by the Spouses
Espiritu and had not been transferred to an innocent purchaser for value. This means that
an action for reconveyance may still be availed of in this case.33
Registration of property by one person in his or her name, whether by mistake or fraud, the
real owner being another person, impresses upon the title so acquired the character of a
constructive trust for the real owner, which would justify an action for reconveyance. 34 This
is based on Article 1465 of the Civil Code which states that:
Art. 1465. If property acquired through mistakes or fraud, the person obtaining it is, by force
of law, considered a trustee of an implied trust for benefit of the person from whom the
property comes.

The action for reconveyance does not prescribe until after a period of ten years from the
date of the registration of the certificate of sale since the action would be based on implied
trust.35 Thus, the action for reconveyance filed on 31 October 1992, more than one year
after the Sheriffs Certificate of Sale was registered on 9 January 1991, was filed within the
prescription period.
It should, however, be reiterated that the provisions of the Real Estate Mortgage are not
annulled and the principal obligation stands. In addition, the interest is not completely
removed; rather, it is set by this Court at 12% per annum. Should the Spouses Landrito fail
to pay the principal, with its recomputed interest which runs from the time the loan
agreement was entered into on 5 September 1986 until the present, there is nothing in this
Decision which prevents the Spouses Espiritu from foreclosing the mortgaged property.
The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized to file
the action for reconveyance filed before the trial court or even to file the appeal from the
judgment of the trial court, by virtue of the Special Power of Attorney dated 30 September
1992. They further noted that the trial court and the Court of Appeals failed to rule on this
issue.36
The Special Power of Attorney37 dated 30 September 1992 was executed by Maximo
Landrito, Jr., with the conformity of Paz Landrito, in connection with the mortgaged property.
It authorized Zoilo Landrito:
2. To make, sign, execute and deliver corresponding pertinent contracts, documents,
agreements and other writings of whatever nature or kind and to sue or file legal action in
any court of the Philippines, to collect, ask demands, encash checks, and recover any and
all sum of monies, proceeds, interest and other due accruing, owning, payable or belonging
to me as such owner of the afore-mentioned property. (Emphasis provided.)
Zoilo Landritos authority to file the case is clearly set forth in the Special Power of Attorney.
Furthermore, the records of the case unequivocally show that Zoilo Landrito filed the
reconveyance case with the full authority of his mother, Paz Landrito, who attended the
hearings of the case, filed in her behalf, without making any protest.38 She even testified in
the same case on 30 August 1995. From the acts of Paz Landrito, there is no doubt that she
had authorized her son to file the action for reconveyance, in her behalf, before the trial
court.
IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court AFFIRMS the
assailed Decision of the Court of Appeals, promulgated on 31 August 2005, fixing the
interest rate of the loan between the parties at 12% per annum, and ordering the Spouses
Espiritu to reconvey the subject property to the Spouses Landrito conditioned upon the
payment of the loan together with herein fixed rate of interest. Costs against the petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

Length of Service

8 yrs. & 1 month

Date Dismissed

January 24, 1997

Rate per day

P196.00

Date of Decisions

Aug. 18, 1998

P198.00 x 26 days x 8 months = P41,184.00

BACKWAGES

EN BANC
G.R. No. 189871

August 13, 2013

DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.

a) 1/24/97 to 2/5/98 = 12.36 mos.

DECISION

P196.00/day x 12.36 mos.

= P62,986.56

b) 2/6/98 to 8/18/98 = 6.4 months

PERALTA, J.:
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008
of the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October
9, 2009 denying petitioners motion for reconsideration.

Prevailing Rate per day

= P62,986.00

P198.00 x 26 days x 6.4 mos.

= P32,947.20

TOTAL

= P95.933.76

The factual antecedents are undisputed.

Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration
Branch of the National Labor Relations Commission (NLRC) against respondents Gallery
Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found
that he was dismissed from employment without a valid or just cause. Thus, petitioner was
awarded backwages and separation pay in lieu of reinstatement in the amount of
P158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of
showing that complainant was dismissed from employment for a just or valid cause. All the
more, it is clear from the records that complainant was never afforded due process before
he was terminated. As such, we are perforce constrained to grant complainants prayer for
the payments of separation pay in lieu of reinstatement to his former position, considering
the strained relationship between the parties, and his apparent reluctance to be reinstated,
computed only up to promulgation of this decision as follows:

xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents
guilty of constructive dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred
eighty-six pesos and 56/100 (P62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine
hundred thirty-three and 36/100 (P95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution5
dated February 29, 2000. Accordingly, the NLRC sustained the decision of the Labor
Arbiter. Respondents filed a motion for reconsideration, but it was denied.6

SEPARATION PAY
Date Hired

August 1990

Rate

P198/day

Date of Decision

Aug. 18, 1998

Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August
24, 2000, the CA issued a Resolution dismissing the petition. Respondents filed a Motion for
Reconsideration, but it was likewise denied in a Resolution dated May 8, 2001. 7

Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332.
Finding no reversible error on the part of the CA, this Court denied the petition in the
Resolution dated April 17, 2002.8
An Entry of Judgment was later issued certifying that the resolution became final and
executory on May 27, 2002.9 The case was, thereafter, referred back to the Labor Arbiter. A
pre-execution conference was consequently scheduled, but respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his
backwages be computed from the date of his dismissal on January 24, 1997 up to the
finality of the Resolution of the Supreme Court on May 27, 2002.11 Upon recomputation, the
Computation and Examination Unit of the NLRC arrived at an updated amount in the sum of
P471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the
Sheriff to collect from respondents the total amount of P471,320.31. Respondents filed a
Motion to Quash Writ of Execution, arguing, among other things, that since the Labor Arbiter
awarded separation pay of P62,986.56 and limited backwages of P95,933.36, no more
recomputation is required to be made of the said awards. They claimed that after the
decision becomes final and executory, the same cannot be altered or amended anymore. 14
On January 13, 2003, the Labor Arbiter issued an Order15 denying the motion. Thus, an
Alias Writ of Execution16 was issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution17 granting the appeal in favor of the respondents and ordered the recomputation
of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the
NLRC to be final and executory. Consequently, another pre-execution conference was held,
but respondents failed to appear on time. Meanwhile, petitioner moved that an Alias Writ of
Execution be issued to enforce the earlier recomputed judgment award in the sum of
P471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for
recomputation, where the judgment award of petitioner was reassessed to be in the total
amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him
the original amount as determined by the Labor Arbiter in his Decision dated October 15,
1998, pending the final computation of his backwages and separation pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the
judgment award that was due to petitioner in the amount of P147,560.19, which petitioner
eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the
monetary award to include the appropriate interests.19

On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to
the amount of P11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998
Decision that should be enforced considering that it was the one that became final and
executory. However, the Labor Arbiter reasoned that since the decision states that the
separation pay and backwages are computed only up to the promulgation of the said
decision, it is the amount of P158,919.92 that should be executed. Thus, since petitioner
already received P147,560.19, he is only entitled to the balance of P11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its
Resolution22 dated September 27, 2006. Petitioner filed a Motion for Reconsideration, but it
was likewise denied in the Resolution23 dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No.
98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined
that since petitioner no longer appealed the October 15, 1998 Decision of the Labor Arbiter,
which already became final and executory, a belated correction thereof is no longer allowed.
The CA stated that there is nothing left to be done except to enforce the said judgment.
Consequently, it can no longer be modified in any respect, except to correct clerical errors
or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution 25 dated
October 9, 2009.
Hence, the petition assigning the lone error:
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED,
COMMITTED GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN
UPHOLDING THE QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN,
SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT MAKING THE
DISPOSITIVE PORTION OF THE OCTOBER 15, 1998 DECISION OF LABOR ARBITER
LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE BODY OF THE SAME
DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages
in the Labor Arbiters decision, the same is not final until reinstatement is made or until
finality of the decision, in case of an award of separation pay. Petitioner maintains that
considering that the October 15, 1998 decision of the Labor Arbiter did not become final and
executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was
entered in the Book of Entries on May 27, 2002, the reckoning point for the computation of
the backwages and separation pay should be on May 27, 2002 and not when the decision
of the Labor Arbiter was rendered on October 15, 1998. Further, petitioner posits that he is
also entitled to the payment of interest from the finality of the decision until full payment by
the respondents.

On their part, respondents assert that since only separation pay and limited backwages
were awarded to petitioner by the October 15, 1998 decision of the Labor Arbiter, no more
recomputation is required to be made of said awards. Respondents insist that since the
decision clearly stated that the separation pay and backwages are "computed only up to
[the] promulgation of this decision," and considering that petitioner no longer appealed the
decision, petitioner is only entitled to the award as computed by the Labor Arbiter in the total
amount of P158,919.92. Respondents added that it was only during the execution
proceedings that the petitioner questioned the award, long after the decision had become
final and executory. Respondents contend that to allow the further recomputation of the
backwages to be awarded to petitioner at this point of the proceedings would substantially
vary the decision of the Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v.
Court of Appeals (Sixth Division),27 wherein the issue submitted to the Court for resolution
was the propriety of the computation of the awards made, and whether this violated the
principle of immutability of judgment. Like in the present case, it was a distinct feature of the
judgment of the Labor Arbiter in the above-cited case that the decision already provided for
the computation of the payable separation pay and backwages due and did not further order
the computation of the monetary awards up to the time of the finality of the judgment. Also
in Session Delights, the dismissed employee failed to appeal the decision of the labor
arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of
the labor arbiter's original computation of the awards made, pegged as of the time the
decision was rendered and confirmed with modification by a final CA decision, is legally
proper. The question is posed, given that the petitioner did not immediately pay the awards
stated in the original labor arbiter's decision; it delayed payment because it continued with
the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from
the way the original labor arbiter framed his decision. The decision consists essentially of
two parts.
The first is that part of the decision that cannot now be disputed because it has been
confirmed with finality. This is the finding of the illegality of the dismissal and the awards of
separation pay in lieu of reinstatement, backwages, attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the
labor arbiter made shows that it was time-bound as can be seen from the figures used in the
computation. This part, being merely a computation of what the first part of the decision
established and declared, can, by its nature, be re-computed. This is the part, too, that the
petitioner now posits should no longer be re-computed because the computation is already
in the labor arbiter's decision that the CA had affirmed. The public and private respondents,
on the other hand, posit that a re-computation is necessary because the relief in an illegal
dismissal decision goes all the way up to reinstatement if reinstatement is to be made, or up
to the finality of the decision, if separation pay is to be given in lieu reinstatement.

That the labor arbiter's decision, at the same time that it found that an illegal dismissal had
taken place, also made a computation of the award, is understandable in light of Section 3,
Rule VIII of the then NLRC Rules of Procedure which requires that a computation be made.
This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as
practicable, shall embody in any such decision or order the detailed and full amount
awarded.
Clearly implied from this original computation is its currency up to the finality of the labor
arbiter's decision. As we noted above, this implication is apparent from the terms of the
computation itself, and no question would have arisen had the parties terminated the case
and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the
finding of illegality as well as on all the consequent awards made. Hence, the petitioner
appealed the case to the NLRC which, in turn, affirmed the labor arbiter's decision. By law,
the NLRC decision is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds
through a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC
exceeded its authority in affirming the payment of 13th month pay and indemnity, lapsed to
finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal
portion of the original labor arbiter's decision, the implementing labor arbiter ordered the
award re-computed; he apparently read the figures originally ordered to be paid to be the
computation due had the case been terminated and implemented at the labor arbiter's level.
Thus, the labor arbiter re-computed the award to include the separation pay and the
backwages due up to the finality of the CA decision that fully terminated the case on the
merits. Unfortunately, the labor arbiter's approved computation went beyond the finality of
the CA decision (July 29, 2003) and included as well the payment for awards the final CA
decision had deleted - specifically, the proportionate 13th month pay and the indemnity
awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it
essentially considered the labor arbiter's original decision in accordance with its basic
component parts as we discussed above. To reiterate, the first part contains the finding of
illegality and its monetary consequences; the second part is the computation of the awards
or monetary consequences of the illegal dismissal, computed as of the time of the labor
arbiter's original decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought
to be executed by the petitioner, no essential change is made by a recomputation as this
step is a necessary consequence that flows from the nature of the illegality of dismissal
declared by the Labor Arbiter in that decision.29 A recomputation (or an original
computation, if no previous computation has been made) is a part of the law specifically,
Article 279 of the Labor Code and the established jurisprudence on this provision that is
read into the decision. By the nature of an illegal dismissal case, the reliefs continue to add

up until full satisfaction, as expressed under Article 279 of the Labor Code. The
recomputation of the consequences of illegal dismissal upon execution of the decision does
not constitute an alteration or amendment of the final decision being implemented. The
illegal dismissal ruling stands; only the computation of monetary consequences of this
dismissal is affected, and this is not a violation of the principle of immutability of final
judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it
cannot avoid as it is the risk that it ran when it continued to seek recourses against the
Labor Arbiter's decision. Article 279 provides for the consequences of illegal dismissal in no
uncertain terms, qualified only by jurisprudence in its interpretation of when separation pay
in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal
decision becomes the reckoning point instead of the reinstatement that the law decrees. In
allowing separation pay, the final decision effectively declares that the employment
relationship ended so that separation pay and backwages are to be computed up to that
point.31

satisfaction, this interim period being deemed to be by then an equivalent to a

forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013, approved the amendment of Section 234 of Circular
No. 905, Series of 1982 and, accordingly, issued Circular No. 799, 35 Series of 2013,
effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following
revisions governing the rate of interest in the absence of stipulation in loan contracts,
thereby amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be six percent (6%) per annum.

Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines,
Inc. v. Court of Appeals,32 the Court laid down the guidelines regarding the manner of
computing legal interest, to wit:

Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for
Banks and Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for
Non-Bank Financial Institutions are hereby amended accordingly.

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

This Circular shall take effect on 1 July 2013.

1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment
of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its

Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest
that would govern the parties, the rate of legal interest for loans or forbearance of any
money, goods or credits and the rate allowed in judgments shall no longer be twelve
percent (12%) per annum - as reflected in the case of Eastern Shipping Lines40 and
Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3
and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its
amendment by BSP-MB Circular No. 799 - but will now be six percent (6%) per annum
effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be
applied prospectively and not retroactively. Consequently, the twelve percent (12%) per
annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of
six percent (6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B.
Olaguer v. Bangko Sentral Monetary Board,41 this Court affirmed the authority of the BSPMB to set interest rates and to issue and enforce Circulars when it ruled that "the BSP-MB
may prescribe the maximum rate or rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for loans of low priority such as
consumer loans, as well as such loans made by pawnshops, finance companies and similar
credit institutions. It even authorizes the BSP-MB to prescribe different maximum rate or
rates for different types of borrowings, including deposits and deposit substitutes, or loans of
financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to
July 1, 2013, said judgments shall not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.1awp++i1

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern
Shipping Lines42 are accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held liable
for damages. The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.1wphi1
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6%
per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court
at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims
or damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment of the court
is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall
be 6% per annum from such finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July
1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of
interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court
of Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9, 2009 are
REVERSED and SET ASIDE. Respondents are Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on
January 24, 1997 up to May 27, 2002, when the Resolution of this Court in G.R.
No. 151332 became final and executory;

(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of
one month pay per year of service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards,
computed from May 27, 2002 to June 30, 2013 and six percent (6%) per annum
from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total
monetary benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

mortgage, an extension of one year from the date of maturity within which to make payment,
without making any mention of any interest which the mortgagor should pay during the
additional period (see Exhibit B attached to the complaint), indicates that the true intention
of the parties was that no interest should be paid during the period of grace. What reason
the parties may have therefor, we need not here seek to explore.

EN BANC
G.R. No. L-47878

July 24, 1942

GIL JARDENIL, plaintiff-appellant,

vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.
Eleuterio J. Gustilo for appellant.
Jose C. Robles for appellee.
MORAN, J.:
This is an action for foreclosure of mortgage. The only question raised in this appeal is: Is
defendant-appellee bound to pay the stipulated interest only up to the date of maturity as
fixed in the promissory note, or up to the date payment is effected? This question is, in our
opinion controlled by the express stipulation of the parties.
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS MIL
CUATROCIENTOS PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti Solas
se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno (31) de
marzo de mil novecientos treintaicuarto (1934), con los intereses de dicha suma
al tipo de doce por ciento (12%) anual a partir desde fecha hasta el dia de su
vencimiento o sea treintaiuno (31) de marzo de mil novecientos treintaicuatro
(1934), por la presente, el Sr. Hepti Solas cede y traspasa, por via de primera
hipoteca, a favor del Sr. Jardenil, sus herederos y causahabientes, la parcela de
terreno descrita en el parrafo primero (1.) de esta escritura.
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of
maturity, or until March 31, 1934. As the contract is silent as to whether after that date, in
the event of non-payment, the debtor would continue to pay interest, we cannot in law,
indulge in any presumption as to such interest; otherwise, we would be imposing upon the
debtor an obligation that the parties have not chosen to agree upon. Article 1755 of the Civil
Code provides that "interest shall be due only when it has been expressly stipulated."
(Emphasis supplied.)
A writing must be interpreted according to the legal meaning of its language (section 286,
Act No. 190, now section 58, Rule 123), and only when the wording of the written instrument
appears to be contrary to the evident intention of the parties that such intention must prevail.
(Article 1281, Civil Code.) There is nothing in the mortgage deed to show that the terms
employed by the parties thereto are at war with their evident intent. On the contrary the act
of the mortgage of granting to the mortgagor on the same date of execution of the deed of

Neither has either of the parties shown that, by mutual mistake, the deed of mortgage fails
to express their agreement, for if such mistake existed, plaintiff would have undoubtedly
adduced evidence to establish it and asked that the deed be reformed accordingly, under
the parcel-evidence rule.
We hold therefore, that as the contract is clear and unmistakable and the terms employed
therein have not been shown to belie or otherwise fail to express the true intention of the
parties and that the deed has not been assailed on the ground of mutual mistake which
would require its reformation, same should be given its full force and effect. When a party
sues on a written contract and no attempt is made to show any vice therein, he cannot be
allowed to lay any claim more than what its clear stipulations accord. His omission, to which
the law attaches a definite warning as an in the instant case, cannot by the courts be
arbitrarily supplied by what their own notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the loan of P2,
400 from November 8, 1932 to March 31, 1934. And it being a fact that extra judicial
demands have been made which we may assume to have been so made on the expiration
of the year of grace, he shall be entitled to legal interest upon the principal and the accrued
interest from April 1, 1935, until full payment.
Thus modified judgment is affirmed, with costs against appellant.
Yulo, C.J., Ozaeta and Bocobo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

June 8, 1994

P1,040,000.006

Total

P1,240,000.00

SECOND DIVISION
To secure the payment of the loan, Pantaleon issued a promissory note7 that states:
G.R. No. 160545

March 9, 2010

PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S.

PANTALEON, Petitioners,
vs.
ARTHUR F. MENCHAVEZ, Respondent.
DECISION
BRION, J.:
We resolve in this Decision the petition for review on certiorari1 filed by petitioners Prisma
Construction & Development Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon)
(collectively, petitioners) who seek to reverse and set aside the Decision2 dated May 5,
2003 and the Resolution3 dated October 22, 2003 of the Former Ninth Division of the Court
of Appeals (CA) in CA-G.R. CV No. 69627. The assailed CA Decision affirmed the Decision
of the Regional Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 97-4552 that
held the petitioners liable for payment of P3,526,117.00 to respondent Arthur F. Menchavez
(respondent), but modified the interest rate from 4% per month to 12% per annum,
computed from the filing of the complaint to full payment. The assailed CA Resolution
denied the petitioners Motion for Reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.
On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA,
obtained a P1,000,000.004 loan from the respondent, with a monthly interest of P40,000.00
payable for six months, or a total obligation of P1,240,000.00 to be paid within six (6)
months,5 under the following schedule of payments:

I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED
FORTY THOUSAND PESOS (P1,240,000), Philippine Currency, from Mr. Arthur F.
Menchavez, representing a six-month loan payable according to the following schedule:

January 8, 1994 .

P40,000.00

February 8, 1994 ...

P40,000.00

March 8, 1994 ...

P40,000.00

April 8, 1994 .

P40,000.00

May 8, 1994 ..

P40,000.00

June 8, 1994

P1,040,000.00

The checks corresponding to the above amounts are hereby acknowledged.8

and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed
the promissory note in his personal capacity,9 and as duly authorized by the Board of
Directors of PRISMA.10 The petitioners failed to completely pay the loan within the stipulated
six (6)-month period.
From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to
the respondent:

September 8, 1994

P320,000.00

October 8, 1995.

P600,000.00

January 8, 1994 .

P40,000.00

November 8, 1995.

P158,772.00

February 8, 1994 ...

P40,000.00

January 4, 1997 .

P30,000.0011

March 8, 1994 ...

P40,000.00

April 8, 1994 .

P40,000.00

May 8, 1994 ..

P40,000.00

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However,
the respondent found that the petitioners still had an outstanding balance of P1,364,151.00
as of January 4, 1997, to which it applied a 4% monthly interest. 12 Thus, on August 28,
1997, the respondent filed a complaint for sum of money with the RTC to enforce the unpaid

balance, plus 4% monthly interest, P30,000.00 in attorneys fees, P1,000.00 per court
appearance and costs of suit.13
In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00,
but denied the stipulation on the 4% monthly interest, arguing that the interest was not
provided in the promissory note. Pantaleon also denied that he made himself personally
liable and that he made representations that the loan would be repaid within six (6)
months.14
THE RTC RULING
The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a
check for P1,000,000.00 in favor of the petitioners for a loan that would earn an interest of
4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month period. It noted that
the petitioners made several payments amounting to P1,228,772.00, but they were still
indebted to the respondent for P3,526,117.00 as of February 11,15 1999 after considering
the 4% monthly interest. The RTC observed that PRISMA was a one-man corporation of
Pantaleon and used this circumstance to justify the piercing of the veil of corporate fiction.
Thus, the RTC ordered the petitioners to jointly and severally pay the respondent the
amount of P3,526,117.00 plus 4% per month interest from February 11, 1999 until fully
paid.16

interest, the interest covers the six (6)-month period only and cannot be interpreted to apply
beyond it. The petitioners also point out the glaring inconsistency in the CA Decision, which
reduced the interest from 4% per month or 48% per annum to 12% per annum, but failed to
consider that the amount of P3,526,117.00 that the RTC ordered them to pay includes the
compounded 4% monthly interest.
THE CASE FOR THE RESPONDENT
The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly
interest because the board resolution is attached to, and an integral part of, the promissory
note based on which the petitioners obtained the loan. The respondent further contends that
the petitioners are estopped from assailing the 4% monthly interest, since they agreed to
pay the 4% monthly interest on the principal amount under the promissory note and the
board resolution.
THE ISSUE
The core issue boils down to whether the parties agreed to the 4% monthly interest on the
loan. If so, does the rate of interest apply to the 6-month payment period only or until full
payment of the loan?
OUR RULING

The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the
Rules of Court, insisting that there was no express stipulation on the 4% monthly interest.
We find the petition meritorious.
THE CA RULING

Interest due should be stipulated in writing; otherwise, 12% per annum

The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4%
monthly interest principally based on the board resolution that authorized Pantaleon to
transact a loan with an approved interest of not more than 4% per month. The appellate
court, however, noted that the interest of 4% per month, or 48% per annum, was
unreasonable and should be reduced to 12% per annum. The CA affirmed the RTCs finding
that PRISMA was a mere instrumentality of Pantaleon that justified the piercing of the veil of
corporate fiction. Thus, the CA modified the RTC Decision by imposing a 12% per annum
interest, computed from the filing of the complaint until finality of judgment, and thereafter,
12% from finality until fully paid.17
After the CA's denial18 of their motion for reconsideration,19 the petitioners filed the present
petition for review on certiorari under Rule 45 of the Rules of Court.
THE PETITION
The petitioners submit that the CA mistakenly relied on their board resolution to conclude
that the parties agreed to a 4% monthly interest because the board resolution was not an
evidence of a loan or forbearance of money, but merely an authorization for Pantaleon to
perform certain acts, including the power to enter into a contract of loan. The expressed
mandate of Article 1956 of the Civil Code is that interest due should be stipulated in writing,
and no such stipulation exists. Even assuming that the loan is subject to 4% monthly

Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.20 When the terms of a contract are clear and leave no
doubt as to the intention of the contracting parties, the literal meaning of its stipulations
governs.21 In such cases, courts have no authority to alter the contract by construction or to
make a new contract for the parties; a court's duty is confined to the interpretation of the
contract the parties made for themselves without regard to its wisdom or folly, as the court
cannot supply material stipulations or read into the contract words the contract does not
contain.22 It is only when the contract is vague and ambiguous that courts are permitted to
resort to the interpretation of its terms to determine the parties intent.
In the present case, the respondent issued a check for P1,000,000.00.23 In turn, Pantaleon,
in his personal capacity and as authorized by the Board, executed the promissory note
quoted above. Thus, the P1,000,000.00 loan shall be payable within six (6) months, or from
January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an interest of
P40,000.00 per month, for a total obligation of P1,240,000.00 for the six-month period. We
note that this agreed sum can be computed at 4% interest per month, but no such
rate of interest was stipulated in the promissory note; rather a fixed sum equivalent
to this rate was agreed upon.
Article 1956 of the Civil Code specifically mandates that "no interest shall be due unless it
has been expressly stipulated in writing." Under this provision, the payment of interest in

loans or forbearance of money is allowed only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the payment of interest at a
stipulated rate. Thus, we held in Tan v. Valdehueza24 and Ching v. Nicdao25 that collection
of interest without any stipulation in writing is prohibited by law.1avvphi1

Medel finds no application in the present case where no other stipulation exists for the
payment of any extra amount except a specific sum of P40,000.00 per month on the
principal of a loan payable within six months. Additionally, no issue on the excessiveness of
the stipulated amount of P40,000.00 per month was ever put in issue by the petitioners;41
they only assailed the application of a 4% interest rate, since it was not agreed upon.

Applying this provision, we find that the interest of P40,000.00 per month corresponds only
to the six (6)-month period of the loan, or from January 8, 1994 to June 8, 1994, as agreed
upon by the parties in the promissory note. Thereafter, the interest on the loan should be at
the legal interest rate of 12% per annum, consistent with our ruling in Eastern Shipping
Lines, Inc. v. Court of Appeals:26

It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law between
them, the only limitation being that these stipulations, clauses, terms and conditions are not
contrary to law, morals, public order or public policy.42 The payment of the specific sum of
money of P40,000.00 per month was voluntarily agreed upon by the petitioners and the
respondent. There is nothing from the records and, in fact, there is no allegation showing
that petitioners were victims of fraud when they entered into the agreement with the
respondent.

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil Code." (Emphasis supplied)
We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,27 Sulit v.
Court of Appeals,28 Crismina Garments, Inc. v. Court of Appeals, 29 Eastern Assurance and
Surety Corporation v. Court of Appeals, 30 Sps. Catungal v. Hao, 31 Yong v. Tiu,32 and Sps.
Barrera v. Sps. Lorenzo.33 Thus, the RTC and the CA misappreciated the facts of the case;
they erred in finding that the parties agreed to a 4% interest, compounded by the application
of this interest beyond the promissory notes six (6)-month period. The facts show that the
parties agreed to the payment of a specific sum of money of P40,000.00 per month for six
months, not to a 4% rate of interest payable within a six (6)-month period.

Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per
month for a period of six (6) months, or from December 8, 1993 to June 8, 1994, for a total
principal and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per
annum shall apply. The amounts already paid by the petitioners during the pendency of the
suit, amounting to P1,228,772.00 as of February 12, 1999,43 should be deducted from the
total amount due, computed as indicated above. We remand the case to the trial court for
the actual computation of the total amount due.
Doctrine of Estoppel not applicable
The respondent submits that the petitioners are estopped from disputing the 4% monthly
interest beyond the six-month stipulated period, since they agreed to pay this interest on the
principal amount under the promissory note and the board resolution.

Medel v. Court of Appeals not applicable

The CA misapplied Medel v. Court of Appeals34 in finding that a 4% interest per month was
unconscionable.
In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per
month, a service charge of 2% per annum, and a penalty charge of 1% per month, plus
attorneys fee equivalent to 25% of the amount due, until the loan is fully paid. Taken in
conjunction with the stipulated service charge and penalty, we found the interest rate of
5.5% to be excessive, iniquitous, unconscionable, exorbitant and hence, contrary to morals,
thereby rendering the stipulation null and void.
Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v.
Salazar35 of 6% per month or 72% per annum interest on a P60,000.00 loan; in Ruiz v.
Court of Appeals,36 of 3% per month or 36% per annum interest on a P3,000,000.00 loan; in
Imperial v. Jaucian,37 of 16% per month or 192% per annum interest on a P320,000.00 loan;
in Arrofo v. Quio,38 of 7% interest per month or 84% per annum interest on a P15,000.00
loan; in Bulos, Jr. v. Yasuma,39 of 4% per month or 48% per annum interest on a
P2,500,000.00 loan; and in Chua v. Timan,40 of 7% and 5% per month for loans totalling
P964,000.00. We note that in all these cases, the terms of the loans were open-ended; the
stipulated interest rates were applied for an indefinite period.

We disagree with the respondents contention.

We cannot apply the doctrine of estoppel in the present case since the facts and
circumstances, as established by the record, negate its application. Under the promissory
note,44 what the petitioners agreed to was the payment of a specific sum of P40,000.00
per month for six months not a 4% rate of interest per month for six (6) months on
a loan whose principal is P1,000,000.00, for the total amount of P1,240,000.00. Thus,
no reason exists to place the petitioners in estoppel, barring them from raising their present
defenses against a 4% per month interest after the six-month period of the agreement. The
board resolution,45 on the other hand, simply authorizes Pantaleon to contract for a loan
with a monthly interest of not more than 4%. This resolution merely embodies the extent of
Pantaleons authority to contract and does not create any right or obligation except as
between Pantaleon and the board. Again, no cause exists to place the petitioners in
estoppel.
Piercing the corporate veil unfounded
We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of
PRISMA.

The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely:
a) when the separate and distinct corporate personality defeats public convenience, as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation; b) in
fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or
defend a crime; or c) is used in alter ego cases, i.e., where a corporation is essentially a
farce, since it is a mere alter ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. 46 In the absence of
malice, bad faith, or a specific provision of law making a corporate officer liable, such
corporate officer cannot be made personally liable for corporate liabilities.47
In the present case, we see no competent and convincing evidence of any wrongful,
fraudulent or unlawful act on the part of PRISMA to justify piercing its corporate veil. While
Pantaleon denied personal liability in his Answer, he made himself accountable in the
promissory note "in his personal capacity and as authorized by the Board Resolution" of
PRISMA.48 With this statement of personal liability and in the absence of any representation
on the part of PRISMA that the obligation is all its own because of its separate corporate
identity, we see no occasion to consider piercing the corporate veil as material to the case.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the
Decision dated May 5, 2003 of the Court of Appeals in CA-G.R. CV No. 69627. The
petitioners loan of P1,000,000.00 shall bear interest of P40,000.00 per month for six (6)
months from December 8, 1993 as indicated in the promissory note. Any portion of this loan,
unpaid as of the end of the six-month payment period, shall thereafter bear interest at 12%
per annum. The total amount due and unpaid, including accrued interests, shall bear
interest at 12% per annum from the finality of this Decision. Let this case be REMANDED to
the Regional Trial Court, Branch 73, Antipolo City for the proper computation of the amount
due as herein directed, with due regard to the payments the petitioners have already
remitted. Costs against the respondent.
SO ORDERED.

confidence between them. According to her computation, the total amount she paid to
petitioner for the loan and interest accumulated to P1,200,000.00.7

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 173227

January 20, 2009

SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.

Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the
loan despite absence of agreement to that effect. Her lawyer told her that petitioner could
not validly collect interest on the loan because there was no agreement between her and
petitioner regarding payment of interest. Since she paid petitioner a total amount of
P1,200,000.00 for the P540,000.00 worth of loan, and upon being advised by her lawyer
that she made overpayment to petitioner, she sent a demand letter to petitioner asking for
the return of the excess amount of P660,000.00. Petitioner, despite receipt of the demand
letter, ignored her claim for reimbursement.8

DECISION

Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1)
P660,000.00 plus legal interest from the time of demand; (2) P300,000.00 as moral
damages; (3) P50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of
P660,000.00 as attorneys fees.9

Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of Court seeking
to set aside the Decision,2 dated 16 December 2005, and Resolution,3 dated 19 June 2006
of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision,4
dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil
Case No. LP-98-0068.

In his answer10 to the complaint, petitioner denied that he offered a loan to respondent. He
averred that in 1992, respondent approached and asked him if he could grant her a loan, as
she needed money to finance her business venture with the PNO. At first, he was reluctant
to deal with respondent, because the latter had a spotty record as a supplier of the PNO.
However, since respondent was an acquaintance of his officemate, he agreed to grant her a
loan. Respondent paid the loan in full.11

CHICO-NAZARIO, J.:

The facts gathered from the records are as follows:

On 30 March 1998, respondent Alicia Villanueva filed a complaint5 for sum of money against
petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch
255, docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a
businesswoman engaged in supplying office materials and equipments to the Philippine
Navy Office (PNO) located at Fort Bonifacio, Taguig City, while petitioner was a military
officer and comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and
offered to loan her the amount of P540,000.00. Since she needed capital for her business
transactions with the PNO, she accepted petitioners proposal. The loan agreement was not
reduced in writing. Also, there was no stipulation as to the payment of interest for the loan. 6
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial
payment of the loan. On 31 October 1993, she issued another check in the amount of
P200,000.00 to petitioner as payment of the remaining balance of the loan. Petitioner told
her that since she paid a total amount of P700,000.00 for the P540,000.00 worth of loan, the
excess amount of P160,000.00 would be applied as interest for the loan. Not satisfied with
the amount applied as interest, petitioner pestered her to pay additional interest. Petitioner
threatened to block or disapprove her transactions with the PNO if she would not comply
with his demand. As all her transactions with the PNO were subject to the approval of
petitioner as comptroller of the PNO, and fearing that petitioner might block or unduly
influence the payment of her vouchers in the PNO, she conceded. Thus, she paid additional
amounts in cash and checks as interests for the loan. She asked petitioner for receipt for
the payments but petitioner told her that it was not necessary as there was mutual trust and

Subsequently, respondent again asked him to give her a loan. As respondent had been able
to pay the previous loan in full, he agreed to grant her another loan. Later, respondent
requested him to restructure the payment of the loan because she could not give full
payment on the due date. He acceded to her request. Thereafter, respondent pleaded for
another restructuring of the payment of the loan. This time he rejected her plea. Thus,
respondent proposed to execute a promissory note wherein she would acknowledge her
obligation to him, inclusive of interest, and that she would issue several postdated checks to
guarantee the payment of her obligation. Upon his approval of respondents request for
restructuring of the loan, respondent executed a promissory note dated 12 September 1994
wherein she admitted having borrowed an amount of P1,240,000.00, inclusive of interest,
from petitioner and that she would pay said amount in March 1995. Respondent also issued
to him six postdated checks amounting to P1,240,000.00 as guarantee of compliance with
her obligation. Subsequently, he presented the six checks for encashment but only one
check was honored. He demanded that respondent settle her obligation, but the latter failed
to do so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law (Batas
Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan Trial
Court of Makati City, Branch 65 (MeTC).12
Petitioner insisted that there was no overpayment because respondent admitted in the
latters promissory note that her monetary obligation as of 12 September 1994 amounted to
P1,240,000.00 inclusive of interests. He argued that respondent was already estopped from
complaining that she should not have paid any interest, because she was given several
times to settle her obligation but failed to do so. He maintained that to rule in favor of
respondent is tantamount to concluding that the loan was given interest-free. Based on the
foregoing averments, he asked the RTC to dismiss respondents complaint.

After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made
an overpayment of her loan obligation to petitioner and that the latter should refund the
excess amount to the former. It ratiocinated that respondents obligation was only to pay the
loaned amount of P540,000.00, and that the alleged interests due should not be included in
the computation of respondents total monetary debt because there was no agreement
between them regarding payment of interest. It concluded that since respondent made an
excess payment to petitioner in the amount of P660,000.00 through mistake, petitioner
should return the said amount to respondent pursuant to the principle of solutio indebiti.13

THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST
WAS DUE TO PETITIONER;

The RTC also ruled that petitioner should pay moral damages for the sleepless nights and
wounded feelings experienced by respondent. Further, petitioner should pay exemplary
damages by way of example or correction for the public good, plus attorneys fees and costs
of suit.

Interest is a compensation fixed by the parties for the use or forbearance of money. This is
referred to as monetary interest. Interest may also be imposed by law or by courts as
penalty or indemnity for damages. This is called compensatory interest. 18 The right to
interest arises only by virtue of a contract or by virtue of damages for delay or failure to pay
the principal loan on which interest is demanded.19

II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF
SOLUTIO INDEBITI.17

The dispositive portion of the RTC Decision reads:

WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against
the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal
interest of 12% per annum computed from 3 March 1998 until the amount is paid
in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral
damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary
damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of
P660,000.00 as attorneys fees; and
(5) Ordering defendant to pay the costs of suit.14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court
promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the
assailed decision [is] AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate courts decision but this was
denied.16 Hence, petitioner lodged the instant petition before us assigning the following
errors:
I.

Article 1956 of the Civil Code, which refers to monetary interest,20 specifically mandates that
no interest shall be due unless it has been expressly stipulated in writing. As can be
gleaned from the foregoing provision, payment of monetary interest is allowed only if: (1)
there was an express stipulation for the payment of interest; and (2) the agreement for the
payment of interest was reduced in writing. The concurrence of the two conditions is
required for the payment of monetary interest. Thus, we have held that collection of interest
without any stipulation therefor in writing is prohibited by law.21
It appears that petitioner and respondent did not agree on the payment of interest for the
loan. Neither was there convincing proof of written agreement between the two regarding
the payment of interest. Respondent testified that although she accepted petitioners offer of
loan amounting to P540,000.00, there was, nonetheless, no verbal or written agreement for
her to pay interest on the loan.22
Petitioner presented a handwritten promissory note dated 12 September 199423 wherein
respondent purportedly admitted owing petitioner "capital and interest." Respondent,
however, explained that it was petitioner who made a promissory note and she was told to
copy it in her own handwriting; that all her transactions with the PNO were subject to the
approval of petitioner as comptroller of the PNO; that petitioner threatened to disapprove
her transactions with the PNO if she would not pay interest; that being unaware of the law
on interest and fearing that petitioner would make good of his threats if she would not obey
his instruction to copy the promissory note, she copied the promissory note in her own
handwriting; and that such was the same promissory note presented by petitioner as
alleged proof of their written agreement on interest.24 Petitioner did not rebut the foregoing
testimony. It is evident that respondent did not really consent to the payment of interest for
the loan and that she was merely tricked and coerced by petitioner to pay interest. Hence, it
cannot be gainfully said that such promissory note pertains to an express stipulation of
interest or written agreement of interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he
and respondent agreed on the payment of 7% rate of interest on the loan; that the agreed
7% rate of interest was duly admitted by respondent in her testimony in the Batas
Pambansa Blg. 22 cases he filed against respondent; that despite such judicial admission
by respondent, the RTC and the Court of Appeals, citing Article 1956 of the Civil Code, still
held that no interest was due him since the agreement on interest was not reduced in

writing; that the application of Article 1956 of the Civil Code should not be absolute, and an
exception to the application of such provision should be made when the borrower admits
that a specific rate of interest was agreed upon as in the present case; and that it would be
unfair to allow respondent to pay only the loan when the latter very well knew and even
admitted in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest
on the loan.25
We have carefully examined the RTC Decision and found that the RTC did not make a
ruling therein that petitioner and respondent agreed on the payment of interest at the rate of
7% for the loan. The RTC clearly stated that although petitioner and respondent entered into
a valid oral contract of loan amounting to P540,000.00, they, nonetheless, never intended
the payment of interest thereon.26 While the Court of Appeals mentioned in its Decision that
it concurred in the RTCs ruling that petitioner and respondent agreed on a certain rate of
interest as regards the loan, we consider this as merely an inadvertence because, as earlier
elucidated, both the RTC and the Court of Appeals ruled that petitioner is not entitled to the
payment of interest on the loan. The rule is that factual findings of the trial court deserve
great weight and respect especially when affirmed by the appellate court. 27 We found no
compelling reason to disturb the ruling of both courts.
Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22
cases that they had agreed on the payment of interest at the rate of 7% deserves scant
consideration. In the said case, respondent merely testified that after paying the total
amount of loan, petitioner ordered her to pay interest.28 Respondent did not categorically
declare in the same case that she and respondent made an express stipulation in writing as
regards payment of interest at the rate of 7%. As earlier discussed, monetary interest is due
only if there was an express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code
states that if the obligation consists in the payment of a sum of money, and the debtor
incurs delay, a legal interest of 12% per annum may be imposed as indemnity for damages
if no stipulation on the payment of interest was agreed upon. Likewise, Article 2212 of the
Civil Code provides that interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a penalty or
damages for breach of contractual obligations. It cannot be charged as a compensation for
the use or forbearance of money. In other words, the two instances apply only to
compensatory interest and not to monetary interest.29 The case at bar involves petitioners
claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was not
duly proven that respondent defaulted in paying the loan. Also, as earlier found, no interest
was due on the loan because there was no written agreement as regards payment of
interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti
does not apply to the instant case. Thus, he cannot be compelled to return the alleged
excess amount paid by respondent as interest.30

Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has
been no stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall
be applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said
provision provides that if something is received when there is no right to demand it, and it
was unduly delivered through mistake, the obligation to return it arises. In such a case, a
creditor-debtor relationship is created under a quasi-contract whereby the payor becomes
the creditor who then has the right to demand the return of payment made by mistake, and
the person who has no right to receive such payment becomes obligated to return the
same. The quasi-contract of solutio indebiti harks back to the ancient principle that no one
shall enrich himself unjustly at the expense of another.31 The principle of solutio indebiti
applies where (1) a payment is made when there exists no binding relation between the
payor, who has no duty to pay, and the person who received the payment; and (2) the
payment is made through mistake, and not through liberality or some other cause. 32 We
have held that the principle of solutio indebiti applies in case of erroneous payment of undue
interest.33
It was duly established that respondent paid interest to petitioner. Respondent was under no
duty to make such payment because there was no express stipulation in writing to that
effect. There was no binding relation between petitioner and respondent as regards the
payment of interest. The payment was clearly a mistake. Since petitioner received
something when there was no right to demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed by the
RTC and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from petitioner.34
Respondent issued two checks with a total worth of P700,000.00 in favor of petitioner as
payment of the loan.35 These checks were subsequently encashed by petitioner.36
Obviously, there was an excess of P160,000.00 in the payment for the loan. Petitioner
claims that the excess of P160,000.00 serves as interest on the loan to which he was
entitled. Aside from issuing the said two checks, respondent also paid cash in the total
amount of P175,000.00 to petitioner as interest.37 Although no receipts reflecting the same
were presented because petitioner refused to issue such to respondent, petitioner,
nonetheless, admitted in his Reply-Affidavit38 in the Batas Pambansa Blg. 22 cases that
respondent paid him a total amount of P175,000.00 cash in addition to the two checks.
Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party as to a
relevant fact may be given in evidence against him. Aside from the amounts of P160,000.00
and P175,000.00 paid as interest, no other proof of additional payment as interest was
presented by respondent. Since we have previously found that petitioner is not entitled to
payment of interest and that the principle of solutio indebiti applies to the instant case,
petitioner should return to respondent the excess amount of P160,000.00 and P175,000.00
or the total amount of P335,000.00. Accordingly, the reimbursable amount to respondent
fixed by the RTC and the Court of Appeals should be reduced from P660,000.00 to
P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg.
22 against respondent. In the said cases, the MeTC found respondent guilty of violating
Batas Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless,
respondents conviction therein does not affect our ruling in the instant case. The two
checks, subject matter of this case, totaling P700,000.00 which respondent claimed as
payment of the P540,000.00 worth of loan, were not among the five checks found to be

dishonored or bounced in the five criminal cases. Further, the MeTC found that respondent
made an overpayment of the loan by reason of the interest which the latter paid to
petitioner.39
Article 2217 of the Civil Code provides that moral damages may be recovered if the party
underwent physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injury. Respondent testified
that she experienced sleepless nights and wounded feelings when petitioner refused to
return the amount paid as interest despite her repeated demands. Hence, the award of
moral damages is justified. However, its corresponding amount of P300,000.00, as fixed by
the RTC and the Court of Appeals, is exorbitant and should be equitably reduced. Article
2216 of the Civil Code instructs that assessment of damages is left to the discretion of the
court according to the circumstances of each case. This discretion is limited by the principle
that the amount awarded should not be palpably excessive as to indicate that it was the
result of prejudice or corruption on the part of the trial court.40 To our mind, the amount of
P150,000.00 as moral damages is fair, reasonable, and proportionate to the injury suffered
by respondent.

In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti and
not from a loan or forbearance of money. Thus, an interest of 6% per annum should be
imposed on the amount to be refunded as well as on the damages awarded and on the
attorneys fees, to be computed from the time of the extra-judicial demand on 3 March
1998,46 up to the finality of this Decision. In addition, the interest shall become 12% per
annum from the finality of this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16
December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount
of P660,000.00 as refundable amount of interest is reduced to THREE HUNDRED THIRTY
FIVE THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral
damages is reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an
interest of 6% per annum is imposed on the P335,000.00, on the damages awarded and on
the attorneys fees to be computed from the time of the extra-judicial demand on 3 March
1998 up to the finality of this Decision; and (4) an interest of 12% per annum is also
imposed from the finality of this Decision up to its satisfaction. Costs against petitioner.
SO ORDERED.

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti,
exemplary damages may be imposed if the defendant acted in an oppressive manner.
Petitioner acted oppressively when he pestered respondent to pay interest and threatened
to block her transactions with the PNO if she would not pay interest. This forced respondent
to pay interest despite lack of agreement thereto. Thus, the award of exemplary damages is
appropriate. The amount of P50,000.00 imposed as exemplary damages by the RTC and
the Court is fitting so as to deter petitioner and other lenders from committing similar and
other serious wrongdoings.41
Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual,
legal or equitable justification for awarding the same.42 In the case under consideration, the
RTC stated in its Decision that the award of attorneys fees equivalent to 25% of the amount
paid as interest by respondent to petitioner is reasonable and moderate considering the
extent of work rendered by respondents lawyer in the instant case and the fact that it
dragged on for several years.43 Further, respondent testified that she agreed to compensate
her lawyer handling the instant case such amount.44 The award, therefore, of attorneys fees
and its amount equivalent to 25% of the amount paid as interest by respondent to petitioner
is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the
amount refundable to respondent computed from 3 March 1998 until its full payment. This is
erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals,45 that when an obligation, not
constituting a loan or forbearance of money is breached, an interest on the amount of
damages awarded may be imposed at the rate of 6% per annum. We further declared that
when the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether it is a loan/forbearance of money or not, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed equivalent to
a forbearance of credit.

Republic of the Philippines

SUPREME COURT
Manila

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge)
was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its
claimed P244,890.00 deduction for security services.7

THIRD DIVISION

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February
9, 1995, however, it received a final notice before seizure demanding payment of the
amounts stated in the said notices. Hence, it brought the case to the CTA which held that
the petition is premature because the final notice of assessment cannot be considered as a
final decision appealable to the tax court. This was reversed by the Court of Appeals holding
that a demand letter of the BIR reiterating the payment of deficiency tax, amounts to a final
decision on the protested assessment and may therefore be questioned before the CTA.
This conclusion was sustained by this Court on July 1, 2001, in G.R. No. 135210. 8 The case
was thus remanded to the CTA for further proceedings.

G.R. No. 172231

February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION

YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005
Decision1 of the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003
Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and
set aside the Assessment Notices for deficiency income tax and expanded withholding tax
issued by the Bureau of Internal Revenue (BIR) against respondent Isabela Cultural
Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the
BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional
and security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year
ending December 31, 1985;4

On February 26, 2003, the CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the claimed deductions for professional
and security services were properly claimed by ICC in 1986 because it was only in the said
year when the bills demanding payment were sent to ICC. Hence, even if some of these
professional services were rendered to ICC in 1984 or 1985, it could not declare the same
as deduction for the said years as the amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory
notes. It found that it was the BIR which made an overstatement of said income when it
compounded the interest income receivable by ICC from the promissory notes of Realty
Investment, Inc., despite the absence of a stipulation in the contract providing for a
compounded interest; nor of a circumstance, like delay in payment or breach of contract,
that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its
claimed deduction for security services as shown by the various payment orders and
confirmation receipts it presented as evidence. The dispositive portion of the CTAs
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-8690-000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SET
ASIDE.
SO ORDERED.9

(b) Expenses for the legal services [inclusive of retainer fees] of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson
for the years 1984 and 1985.5
(c) Expense for security services of El Tigre Security & Investigation
Agency for the months of April and May 1986.6
(2) The alleged understatement of ICCs interest income on the three promissory
notes due from Realty Investment, Inc.

Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were
rendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at that
time, hence, it could be considered as deductible expenses only in 1986 when ICC received
the billing statements for said services. It further ruled that ICC did not understate its interest
income from the promissory notes of Realty Investment, Inc., and that ICC properly withheld
and remitted taxes on the payments for security services for the taxable year 1986.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petition
contending that since ICC is using the accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 1985, should have been declared as
deductions from income during the said years and the failure of ICC to do so bars it from
claiming said expenses as deduction for the taxable year 1986. As to the alleged deficiency
interest income and failure to withhold expanded withholding tax assessment, petitioner
invoked the presumption that the assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the
deduction of the expenses for professional and security services from ICCs gross income;
and (2) held that ICC did not understate its interest income from the promissory notes of
Realty Investment, Inc; and that ICC withheld the required 1% withholding tax from the
deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must have been paid or incurred during the
taxable year; (c) it must have been paid or incurred in carrying on the trade or business of
the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is further
qualified by Section 45 of the National Internal Revenue Code (NIRC) which states that:
"[t]he deduction provided for in this Title shall be taken for the taxable year in which paid or
accrued or paid or incurred, dependent upon the method of accounting upon the basis of
which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how
to report income and deductions.12 In the instant case, the accounting method used by ICC
is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year
when they are incurred cannot be claimed as deduction from income for the succeeding
year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable
deductions for the current year but failed to do so cannot deduct the same for the next
year.13
The accrual method relies upon the taxpayers right to receive amounts or its obligation to
pay them, in opposition to actual receipt or payment, which characterizes the cash method
of accounting. Amounts of income accrue where the right to receive them become fixed,
where there is created an enforceable liability. Similarly, liabilities are accrued when fixed
and determinable in amount, without regard to indeterminacy merely of time of payment. 14
For a taxpayer using the accrual method, the determinative question is, when do the facts
present themselves in such a manner that the taxpayer must recognize income or expense?
The accrual of income and expense is permitted when the all-events test has been met.
This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of
the reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not
demand that the amount of income or liability be known absolutely, only that a taxpayer has
at his disposal the information necessary to compute the amount with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as
much as unknowable, within the taxable year. The amount of liability does not have to be
determined exactly; it must be determined with "reasonable accuracy." Accordingly,
the term "reasonable accuracy" implies something less than an exact or completely
accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or
could reasonably be expected to have known, at the closing of its books for the
taxable year.[16] Accrual method of accounting presents largely a question of fact; such
that the taxpayer bears the burden of proof of establishing the accrual of an item of income
or deduction.17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed in
strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one
who claims an exemption must be able to justify the same by the clearest grant of organic or
statute law. An exemption from the common burden cannot be permitted to exist upon
vague implications. And since a deduction for income tax purposes partakes of the nature of
a tax exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and
auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and
retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson,
and for reimbursement of the expenses of said firm in connection with ICCs tax problems
for the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel since
the 1960s.19 From the nature of the claimed deductions and the span of time during which
the firm was retained, ICC can be expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for its legal services. The failure to
determine the exact amount of the expense during the taxable year when they could have
been claimed as deductions cannot thus be attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into
the amount of their obligation to the firm, especially so that it is using the accrual method of
accounting. For another, it could have reasonably determined the amount of legal and
retainer fees owing to its familiarity with the rates charged by their long time legal
consultant.
As previously stated, the accrual method presents largely a question of fact and that the
taxpayer bears the burden of establishing the accrual of an expense or income. However,
ICC failed to discharge this burden. As to when the firms performance of its services in
connection with the 1984 tax problems were completed, or whether ICC exercised
reasonable diligence to inquire about the amount of its liability, or whether it does or does
not possess the information necessary to compute the amount of said liability with
reasonable accuracy, are questions of fact which ICC never established. It simply relied on
the defense of delayed billing by the firm and the company, which under the circumstances,
is not sufficient to exempt it from being charged with knowledge of the reasonable amount
of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of
ICC for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so
because ICC failed to present evidence showing that even with only "reasonable accuracy,"
as the standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine
the professional fees which said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for
the professional services were allowable deductions for the taxable year 1986. Hence, per
Revenue Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its
gross income for the said year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were
incurred by ICC in 198620 and could therefore be properly claimed as deductions for the
said year.
Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one
should have been applied by the BIR. There is indeed no stipulation between the latter and
ICC on the application of compounded interest.21 Under Article 1959 of the Civil Code,
unless there is a stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the
required withholding tax from its claimed deductions for security services and remitted the
same to the BIR is supported by payment order and confirmation receipts. 22 Hence, the
Assessment Notice for deficiency expanded withholding tax was properly cancelled and set
aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for
deficiency income tax should be cancelled and set aside but only insofar as the claimed
deductions of ICC for security services. Said Assessment is valid as to the BIRs
disallowance of ICCs expenses for professional services. The Court of Appeals
cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for
deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of
the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that
Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of
Isabela Cultural Corporation for professional and security services, is declared valid only
insofar as the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is
affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporations
liability under Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.

Republic of the Philippines

SUPREME COURT

On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage and the
consequent foreclosure proceedings, docketed as Civil Case No. 99-4376 of the RTC.
Petitioners consigned the amount of Two Hundred Fifty-Seven Thousand One Hundred
Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26) with the RTC.

SECOND DIVISION
G.R. Nos. 150773 & 153599

September 30, 2005

SPOUSES DAVID B. CARPO & and RECHILDA S. CARPO, Petitioners,

vs.
ELEANOR CHUA and ELMA DY NG, Respondent.
DECISION
Tinga, J.:
Before this Court are two consolidated petitions for review. The first, docketed as G.R. No.
150773, assails the Decision1 of the Regional Trial Court (RTC), Branch 26 of Naga City
dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B. Montenegro
dismissed the complaint2 for annulment of real estate mortgage and consequent foreclosure
proceedings filed by the spouses David B. Carpo and Rechilda S. Carpo (petitioners).
The second, docketed as G.R. No. 153599, seeks to annul the Court of Appeals Decision3
dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of Appeals Third Division annulled
and set aside the orders of Judge Corazon A. Tordilla to suspend the sheriffs enforcement
of the writ of possession.
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they borrowed
from Eleanor Chua and Elma Dy Ng (respondents) the amount of One Hundred SeventyFive Thousand Pesos (P175,000.00), payable within six (6) months with an interest rate of
six percent (6%) per month. To secure the payment of the loan, petitioners mortgaged their
residential house and lot situated at San Francisco, Magarao, Camarines Sur, which lot is
covered by Transfer Certificate of Title (TCT) No. 23180. Petitioners failed to pay the loan
upon demand. Consequently, the real estate mortgage was extrajudicially foreclosed and
the mortgaged property sold at a public auction on 8 July 1996. The house and lot was
awarded to respondents, who were the only bidders, for the amount of Three Hundred
Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos and Eighty Centavos
(P367,457.80).
Upon failure of petitioners to exercise their right of redemption, a certificate of sale was
issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was cancelled
and in its stead, TCT No. 29338 was issued in the name of respondents.
Despite the issuance of the TCT, petitioners continued to occupy the said house and lot,
prompting respondents to file a petition for writ of possession with the RTC docketed as
Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge Ernesto A. Miguel
issued an Order4 for the issuance of a writ of possession.

Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion on 3
August 1999, enjoining the enforcement of the writ of possession. In an Order5 dated 6
January 2000, the RTC suspended the enforcement of the writ of possession pending the
final disposition of Civil Case No. 99-4376. Against this Order, respondents filed a petition
for certiorari and mandamus before the Court of Appeals, docketed as CA-G.R. SP No.
57297.
During the pendency of the case before the Court of Appeals, RTC Judge Filemon B.
Montenegro dismissed the complaint in Civil Case No. 99-4376 on the ground that it was
filed out of time and barred by laches. The RTC proceeded from the premise that the
complaint was one for annulment of a voidable contract and thus barred by the four-year
prescriptive period. Hence, the first petition for review now under consideration was filed
with this Court, assailing the dismissal of the complaint.
The second petition for review was filed with the Court after the Court of Appeals on 30 April
2002 annulled and set aside the RTC orders in SP No. 98-1665 on the ground that it was
the ministerial duty of the lower court to issue the writ of possession when title over the
mortgaged property had been consolidated in the mortgagee.
This Court ordered the consolidation of the two cases, on motion of petitioners.
In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v. Court of
Appeals6 the rate of interest stipulated in the principal loan agreement is clearly null and
void. Consequently, they also argue that the nullity of the agreed interest rate affects the
validity of the real estate mortgage. Notably, while petitioners were silent in their petition on
the issues of prescription and laches on which the RTC grounded the dismissal of the
complaint, they belatedly raised the matters in their Memorandum. Nonetheless, these
points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit any
grave abuse of discretion when it issued the orders dated 3 August 1999 and 6 January
2000, and that these orders could not have been "the proper subjects of a petition for
certiorari and mandamus". More accurately, the justiciable issues before us are whether the
Court of Appeals could properly entertain the petition for certiorari from the timeliness
aspect, and whether the appellate court correctly concluded that the writ of possession
could no longer be stayed.
We first resolve the petition in G.R. No. 150773.
Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum is so
excessive, iniquitous, unconscionable and exorbitant that it should have been declared null
and void. Instead of dismissing their complaint, they aver that the lower court should have
declared them liable to respondents for the original amount of the loan plus 12% interest per

annum and 1% monthly penalty charge as liquidated damages, 7 in view of the ruling in
Medel v. Court of Appeals.8
In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per annum
was so iniquitous or unconscionable as to render the stipulation void.
Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by
the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to
morals ("contra bonos mores"), if not against the law. The stipulation is void. The Court shall
reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they
are iniquitous or unconscionable.9
In a long line of cases, this Court has invalidated similar stipulations on interest rates for
being excessive, iniquitous, unconscionable and exorbitant. In Solangon v. Salazar,10 we
annulled the stipulation of 6% per month or 72% per annum interest on a P60,000.00 loan.
In Imperial v. Jaucian,11 we reduced the interest rate from 16% to 1.167% per month or 14%
per annum. In Ruiz v. Court of Appeals,12 we equitably reduced the agreed 3% per month or
36% per annum interest to 1% per month or 12% per annum interest. The 10% and 8%
interest rates per month on a P1,000,000.00 loan were reduced to 12% per annum in
Cuaton v. Salud.13 Recently, this Court, in Arrofo v. Quino,14 reduced the 7% interest per
month on a P15,000.00 loan amounting to 84% interest per annum to 18% per annum.
There is no need to unsettle the principle affirmed in Medel and like cases. From that
perspective, it is apparent that the stipulated interest in the subject loan is excessive,
iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle
embodied in Article 1306 of the Civil Code, 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. In the ordinary
course, the codal provision may be invoked to annul the excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By the
standards set in the above-cited cases, this stipulation is similarly invalid. However, the RTC
refused to apply the principle cited and employed in Medel on the ground that Medel did not
pertain to the annulment of a real estate mortgage,15 as it was a case for annulment of the
loan contract itself. The question thus sensibly arises whether the invalidity of the stipulation
on interest carries with it the invalidity of the principal obligation.
The question is crucial to the present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage contract. The consideration of the
mortgage contract is the same as that of the principal contract from which it receives life,
and without which it cannot exist as an independent contract. Being a mere accessory
contract, the validity of the mortgage contract would depend on the validity of the loan
secured by it.16
Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to the more
reasonable rate of 12% per annum. The same remedial approach to the wrongful interest
rates involved was employed or affirmed by the Court in Solangon, Imperial, Ruiz, Cuaton,
and Arrofo.

The Courts ultimate affirmation in the cases cited of the validity of the principal loan
obligation side by side with the invalidation of the interest rates thereupon is congruent with
the rule that a usurious loan transaction is not a complete nullity but defective only with
respect to the agreed interest.
We are aware that the Court of Appeals, on certain occasions, had ruled that a usurious
loan is wholly null and void both as to the loan and as to the usurious interest. 17 However,
this Court adopted the contrary rule,
as comprehensively discussed in Briones v. Cammayo:18
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any
event, the debtor in a usurious contract of loan should pay the creditor the amount which he
justly owes him, citing in support of this ruling its previous decisions in Go Chioco, Supra,
Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739.
....
Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held that the
standing jurisprudence of this Court on the question under consideration was clearly to the
effect that the Usury Law, by its letter and spirit, did not deprive the lender of his right to
recover from the borrower the money actually loaned to and enjoyed by the latter. This
Court went further to say that the Usury Law did not provide for the forfeiture of the capital in
favor of the debtor in usurious contracts, and that while the forfeiture might appear to be
convenient as a drastic measure to eradicate the evil of usury, the legal question involved
should not be resolved on the basis of convenience.
Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs.
Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held
that when a contract is found to be tainted with usury "the only right of the respondent
(creditor) . . . was merely to collect the amount of the loan, plus interest due thereon."
The view has been expressed, however, that the ruling thus consistently adhered to should
now be abandoned because Article 1957 of the new Civil Code a subsequent law
provides that contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws against usury, shall be void, and that in such cases "the borrower may
recover in accordance with the laws on usury." From this the conclusion is drawn that the
whole contract is void and that, therefore, the creditor has no right to recover not even his
capital.
The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated,
and the view referred to in the preceding paragraph is adequately answered, in Angel Jose,
etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the question of whether a
creditor in a usurious contract may or may not recover the principal of the loan, and, in the
affirmative, whether or not he may also recover interest thereon at the legal rate, We said
the following:
". . . .

Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious
interest, may the creditor recover the principal of the loan? (2) Should attorney's fees be
awarded in plaintiff's favor?"
Great reliance is made by appellants on Art. 1411 of the New Civil Code . . . .
Since, according to the appellants, a usurious loan is void due to illegality of cause or
object, the rule of pari delicto expressed in Article 1411, supra, applies, so that neither party
can bring action against each other. Said rule, however, appellants add, is modified as to
the borrower, by express provision of the law (Art. 1413, New Civil Code), allowing the
borrower to recover interest paid in excess of the interest allowed by the Usury Law. As to
the lender, no exception is made to the rule; hence, he cannot recover on the contract. So
they continue the New Civil Code provisions must be upheld as against the Usury
Law, under which a loan with usurious interest is not totally void, because of Article 1961 of
the New Civil Code, that: "Usurious contracts shall be governed by the Usury Law and other
special laws, so far as they are not inconsistent with this Code."
We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it is the
same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for
departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as
amended), a loan with usurious interest is not totally void only as to the interest.
. . . [a]ppellants fail to consider that a contract of loan with usurious interest consists
of principal and accessory stipulations; the principal one is to pay the debt; the
accessory stipulation is to pay interest thereon.
And said two stipulations are divisible in the sense that the former can still stand
without the latter. Article 1273, Civil Code, attests to this: "The renunciation of the
principal debt shall extinguish the accessory obligations; but the waiver of the latter
shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of
interest likewise renders a nullity the legal terms as to payments of the principal debt.
Article 1420 of the New Civil Code provides in this regard: "In case of a divisible
contract, if the illegal terms can be separated from the legal ones, the latter may be
enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay
the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not
illegal. The illegality lies only as to the prestation to pay the stipulated interest;
hence, being separable, the latter only should be deemed void, since it is the only
one that is illegal.

complaint). Such interest is not due to stipulation, for there was none, the same being void.
Rather, it is due to the general provision of law that in obligations to pay money, where the
debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil Code).
The court a quo therefore, did not err in ordering defendants to pay the principal debt with
interest thereon at the legal rate, from the date of filing of the complaint."19
The Courts wholehearted affirmation of the rule that the principal obligation subsists despite
the nullity of the stipulated interest is evinced by its subsequent rulings, cited above, in all of
which the main obligation was upheld and the offending interest rate merely corrected.
Hence, it is clear and settled that the principal loan obligation still stands and remains valid.
By the same token, since the mortgage contract derives its vitality from the validity of the
principal obligation, the invalid stipulation on interest rate is similarly insufficient to render
void the ancillary mortgage contract.
It should be noted that had the Court declared the loan and mortgage agreements void for
being contrary to public policy, no prescriptive period could have run. 20 Such benefit is
obviously not available to petitioners.
Yet the RTC pronounced that the complaint was barred by the four-year prescriptive period
provided in Article 1391 of the Civil Code, which governs voidable contracts. This conclusion
was derived from the allegation in the complaint that the consent of petitioners was vitiated
through undue influence. While the RTC correctly acknowledged the rule of prescription for
voidable contracts, it erred in applying the rule in this case. We are hard put to conclude in
this case that there was any undue influence in the first place.
There is ultimately no showing that petitioners consent to the loan and mortgage
agreements was vitiated by undue influence. The financial condition of petitioners may have
motivated them to contract with respondents, but undue influence cannot be attributed to
respondents simply because they had lent money. Article 1391, in relation to Article 1390 of
the Civil Code, grants the aggrieved party the right to obtain the annulment of contract on
account of factors which vitiate consent. Article 1337 defines the concept of undue
influence, as follows:
There is undue influence when a person takes improper advantage of his power over the
will of another, depriving the latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family, spiritual and other relations
between the parties or the fact that the person alleged to have been unduly influenced was
suffering from mental weakness, or was ignorant or in financial distress.

....

While petitioners were allegedly financially distressed, it must be proven that there is
deprivation of their free agency. In other words, for undue influence to be present, the
influence exerted must have so overpowered or subjugated the mind of a contracting party
as to destroy his free agency, making him express the will of another rather than his own. 21
The alleged lingering financial woes of petitioners per se cannot be equated with the
presence of undue influence.

The principal debt remaining without stipulation for payment of interest can thus be
recovered by judicial action. And in case of such demand, and the debtor incurs in delay,
the debt earns interest from the date of the demand (in this case from the filing of the

The RTC had likewise concluded that petitioners were barred by laches from assailing the
validity of the real estate mortgage. We wholeheartedly agree. If indeed petitioners
unwillingly gave their consent to the agreement, they should have raised this issue as early

as in the foreclosure proceedings. It was only when the writ of possession was issued did
petitioners challenge the stipulations in the loan contract in their action for annulment of
mortgage. Evidently, petitioners slept on their rights. The Court of Appeals succinctly made
the following observations:
In all these proceedings starting from the foreclosure, followed by the issuance of a
provisional certificate of sale; then the definite certificate of sale; then the issuance of TCT
No. 29338 in favor of the defendants and finally the petition for the issuance of the writ of
possession in favor of the defendants, there is no showing that plaintiffs questioned the
validity of these proceedings. It was only after the issuance of the writ of possession in favor
of the defendants, that plaintiffs allegedly tendered to the defendants the amount of
P260,000.00 which the defendants refused. In all these proceedings, why did plaintiffs sleep
on their rights?22
Clearly then, with the absence of undue influence, petitioners have no cause of action. Even
assuming undue influence vitiated their consent to the loan contract, their action would
already be barred by prescription when they filed it. Moreover, petitioners had clearly slept
on their rights as they failed to timely assail the validity of the mortgage agreement. The
denial of the petition in G.R. No. 150773 is warranted.
We now resolve the petition in G.R. No. 153599.
Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January 2000
could no longer be questioned in a special civil action for certiorari and mandamus as the
reglementary period for such action had already elapsed.
It must be noted that the Order dated 3 August 1999 suspending the enforcement of the writ
of possession had a period of effectivity of only twenty (20) days from 3 August 1999, or
until 23 August 1999. Thus, upon the expiration of the twenty (20)-day period, the said
Order became functus officio. Thus, there is really no sense in assailing the validity of this
Order, mooted as it was. For the same reason, the validity of the order need not have been
assailed by respondents in their special civil action before the Court of Appeals.
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of injunction
whose period of efficacy is indefinite. It may be properly assailed by way of the special civil
action for certiorari, as it is interlocutory in nature.
As a rule, the special civil action for certiorari under Rule 65 must be filed not later than sixty
(60) days from notice of the judgment or order.23 Petitioners argue that the 3 August 1999
Order could no longer be assailed by respondents in a special civil action for certiorari
before the Court of Appeals, as the petition was filed beyond sixty (60) days following
respondents receipt of the Order. Considering that the 3 August 1999 Order had become
functus officio in the first place, this argument deserves scant consideration.
Petitioners further claim that the 6 January 2000 Order could not have likewise been the
subject of a special civil action for certiorari, as it is according to them a final order, as
opposed to an interlocutory order. That the 6 January 2000 Order is interlocutory in nature
should be beyond doubt. An order is interlocutory if its effects would only be provisional in
character and would still leave substantial proceedings to be further had by the issuing court

in order to put the controversy to rest.24 The injunctive relief granted by the order is definitely
final, but merely provisional, its effectivity hinging on the ultimate outcome of the then
pending action for annulment of real estate mortgage. Indeed, an interlocutory order hardly
puts to a close, or disposes of, a case or a disputed issue leaving nothing else to be done
by the court in respect thereto, as is characteristic of a final order.
Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature, we
cannot agree with petitioners who insist that it may be assailed only through an appeal
perfected within fifteen (15) days from receipt thereof by respondents. It is axiomatic that an
interlocutory order cannot be challenged by an appeal,
but is susceptible to review only through the special civil action of certiorari. 25 The sixty (60)day reglementary period for special civil actions under Rule 65 applies, and respondents
petition was filed with the Court of Appeals well within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the petition for
certiorari and mandamus. As pointed out by respondents, the remedy of mandamus lies to
compel the performance of a ministerial duty. The issuance of a writ of possession to a
purchaser in an extrajudicial foreclosure is merely a ministerial function.26
Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders enjoining the
enforcement of the writ of possession.27 The purchaser in a foreclosure sale is entitled as a
matter of right to a writ of possession, regardless of whether or not there is a pending suit
for annulment of the mortgage or the foreclosure proceedings. An injunction to prohibit the
issuance or enforcement of the writ is entirely out of place.28
One final note. The issue on the validity of the stipulated interest rates, regrettably for
petitioners, was not raised at the earliest possible opportunity. It should be pointed out
though that since an excessive stipulated interest rate may be void for being contrary to
public policy, an action to annul said interest rate does not prescribe. Such indeed is the
remedy; it is not the action for annulment of the ancillary real estate mortgage. Despite the
nullity of the stipulated interest rate, the principal loan obligation subsists, and along with it
the mortgage that serves as collateral security for it.
WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against
petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

docketed as Civil Case No. 21248 alleging the foregoing antecedents and praying that said
defendants be ordered to pay jointly and severally unto the plaintiff.
a) The amount of P198,602.41 as its principal obligation, including interest and damage
dues as of April 29, 1975;

SECOND DIVISION

b) To pay interest at 14% per annum and damage dues at the rate of 2% every 45 days
commencing from April 30, 1975 up to the time the full amount is fully paid:
G.R. No. L-52482

February 23, 1990

xxx xxx xxx

SENTINEL INSURANCE CO., INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, HON. FLORELIANA CASTRO-BARTOLOME,
Presiding Judge, Court of First Instance of Rizal, Seventh Judicial District, Branch
XV, THE PROVINCIAL SHERIFF OF RIZAL, and ROSE INDUSTRIES, INC., respondents.

After petitioner filed its answer with counterclaim, the case, upon agreement of the parties,
was submitted for summary judgment and on December 29, 1975, respondent court
rendered its decision with the following dispositive portion:
xxx xxx xxx

Jesus I. Santos Law Office for petitioner.

Quasha, Asperilla, Ancheta, Valmonte, Pea & Marcos for private respondent.

a) To pay interest on the principal obligation at the rate of 14% per annum at the rate of 2%
every 45 days commencing from April 30, 1975 until the amount is fully paid.

Before us is a petition seeking the amendment and modification of the dispositive portion of
respondent court's decision in CA-G.R. No. SP-09331, 1 allegedly to make it conform with
the findings, arguments and observations embodied in said decision which relief was denied
by respondent court in its resolution, dated January 15, 1980, 2 rejecting petitioner's ex
parte motion filed for that purpose. 3

The decision having become final and executory, the prevailing party moved for its
execution which respondent judge granted and pursuant thereto, a notice of attachment and
levy was served by respondent Provincial Sheriff upon the petitioner. On the same day,
however, the latter filed a motion for 'clarification of the judgment as to its real and true
import because on its face, it would appear that aside from the 14% interest imposed on the
principal obligation, an additional 2% every 45 days corresponding to the additional penalty
has been imposed against the petitioner which imposition would be usurious and could not
have been the intention of respondent Judge.' But the move did nor prosper because oil
May 22, 1971, the judge denied the motion on the theory that the judgment, having become
final and executory, it can no longer be amended or corrected. 4

While not involving the main issues in the case threshed out in the court a quo, the
judgment in which had already become final and executory, the factual backdrop of the
present petition is summarized by respondent court as follows:

Contending that the order was issued with grave abuse of discretion, petitioner went to
respondent court on a petition for certiorari and mandamus to compel the court below to
clarify its decision, particularly Paragraph l(a) of the dispositive portion thereof.

Petitioner Sentinel Insurance Co., Inc., was the surety in a contract of suretyship entered
into on November 15, 1974 with Nemesio Azcueta, Sr., who is doing business under the
name and style of 'Malayan Trading as reflected in SICO Bond No. G(16)00278 where both
of them bound themselves, 'jointly and severally, to fully and religiously guarantee the
compliance with the terms and stipulations of the credit line granted by private respondent
Rose Industries, Inc., in favor of Nemesio Azcueta, Sr., in the amount of P180,00.00.'
Between November 23 to December 23, 1974, Azcueta made various purchases of tires,
batteries and tire tubes from the private respondent but failed to pay therefor, prompting the
latter to demand payment but because Azcueta failed to settle his accounts, the case was
referred to the Insurance Commissioner who invited the attention of the petitioner on the
matter and the latter cancelled the Suretyship Agreement on May 13, 1975 with due notice
to the private respondent. Meanwhile, private respondent filed with the respondent court of
Makati a complaint for collection of sum of money against herein petitioner and Azcueta,

Respondent court granted tile petition in its decision dated December 3, 1979, the
disquisition and dispositive portion whereof read:

REGALADO, J.:

While it is an elementary rule of procedure that after a decision, order or ruling has become
final, the court loses its jurisdiction orderover the same and can no longer be subjected to
any modification or alteration, it is likewise well-settled that courts are empowered even after
such finality, to correct clerical errors or mistakes in the decisions (Potenciano vs. CA, L11569, 55 O.G. 2895). A clerical error is one that is visible to the eyes or obvious to the
understanding (Black vs. Republic, 104 Phil. 849).
That there was a mistake in the dispositive portion of the decision cannot be denied
considering that in the complaint filed against the petitioner, the prayer as specifically stated

in paragraph (b) was to 'order the latter, to pay interest at 14% per annum and damage
dues at the rate of 2% every 45 days commencing from April 30, 1975 up to the time the
amount is fully paid.' But this notwithstanding the respondent court in its questioned decision
decreed the petitioner to pay the interest on the principal obligation at the rate of 14% per
annum and 2% every 45 days commencing from April 30, 1975 until the amount is fully
paid,' so that, as petitioner correctly observes, it would appear that on top of the 14% per
annum on the principal obligation, another 2% interest every 45 days commencing from
April 30, 1975 until the amount is fully paid has been imposed against him (petitioner). In
other words, 365 days in one year divided by 45 days equals 8-1/9 which, multiplied by 2%
as ordered by respondent-judge would amount to a little more than 16%. Adding 16% per
annum to the 14% interest imposed on the principal obligation would be 30% which is
veritably usurious and this cannot be countenanced, much less sanctioned by any court of
justice.
We agree with this observation and what is more, it is likewise a settled rule that although a
court may grant any relief allowed by law, such prerogative is delimited by the cardinal
principle that it cannot grant anything more than what is prayed for, for certainly, the relief to
be dispensed cannot rise above its source. (Potenciano vs. CA, supra.)
WHEREFORE, the writ of certiorari is hereby granted and the respondent judge is ordered
to clarify its judgment complained of in the following manner:

Indeed, this was what respondent court did in resolving the original petition. It examined the
complaint filed against the petitioner and noted that the prayer as stated in Paragraph (b)
thereof was to "order defendant to pay interest at 14 per centum and damage dues at the
rate of 2% every 45 days commencing from April 30, 1975 up to the time the full amount is
fully paid." 9
Insofar as the findings and the dispositive portion set forth in respondent court's decision are
concerned, there is really no inconsistency as wittingly or unwittingly asserted by petitioner.
The findings made by respondent court did not actually nullify the judgment of the trial court.
More specifically, the statement that the imposition of 2% interest every 45 days
commencing from April 30, 1975 on top of the 14% per annum (as would be the impression
from a superficial reading of the dispositive portion of the trial court's decision) would be
usurious is a sound observation. It should, however, be stressed that such observation was
on the theoretical assumption that the rate of 2% is being imposed as interest, not as
damage dues which was the intendment of the trial court.
Certainly, the damage dues in this case do not include and are not included in the
computation of interest as the two are of different categories and are distinct claims which
may be demanded separately, in the same manner that commissions, fines and penalties
are excluded in the computation of interest where the loan or forbearance is not secured in
whole or in part by real estate or an interest therein. 10

xxx xxx xxx

a) to pay interest at 14% per annum on the principal obligation and damage dues at the rate
of 2% every 45 days commencing from April 30, 1975 up to the time the full amount is fully
paid; 5

While interest forms part of the consideration of the contract itself, damage dues (penalties,
and so forth) are usually made payable only in case of default or non-performance of the
contract. 11 Also, although interest is subject to the provisions of the Usury Law, 12 there is
no policy or provision in such law preventing the enforcement of damage dues although the
effect may be to increase the sum payable beyond the prescribed ceiling rates.

xxx xxx xxx

As earlier stated, petitioner filed an ex parte motion seeking to amend the above-quoted
decretal portion which respondent court denied, hence the petition at bar.
The amendment sought, ostensibly in order that the dispositive portion of said decision
would conform with the body thereof, is the sole issue for resolution by the Court. Petitioner
itself cites authorities in support of its contention that it is entitled to a correct and clear
expression of a judgment to avoid substantial injustice. 6 In amplification of its plaint,
petitioner further asseverates that respondent court should not have made an award for
"damage dues" at such late stage of the proceeding since said dues were not the subject of
the award made by the trial court. 7
We disagree with petitioner.
To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to the
pleadings filed by the parties, the findings of fact and the conclusions of law expressed in
the text or body of the decision. 8

Petitioner's assertion that respondent court acted without authority in appending the award
of damage dues to the judgment of the trial court should be rejected. As correctly pointed
out by private respondent, the opening sentence of Paragraph l(a) of the dispositive portion
of the lower court's decision explicitly ordered petitioner to pay private respondent the
amount of P198,602.41 as principal obligation including interest and damage dues, which is
a clear and unequivocal indication of the lower court's intent to award both interest and
damage dues. 13
Significantly, it bears mention that on several occasions before petitioner moved for a
clarificatory judgment, it offered to settle its account with private respondent without
assailing the imposition of the aforementioned damage dues. 14 As ramified by private
respondent:
2. ... the then counsel of record for the petitioner, Atty. Porfirio Bautista, and Atty. Teodulfo
L. Reyes, petitioner's Assistant Vice- President for Operations, had a conference with the
undersigned attorneys as to how petitioner will settle its account to avoid execution. During
the conference, both parties arrived at almost the same computation and the amount due
from petitioner, which includes 2% damage dues every 45 days from 30 April 1975 until the
amount is fully paid, under the judgment. No question was ever raised as regards same.

xxx xxx xxx

5. The very face of Annex 'D' shows that the '2%' damage dues being questioned by the
present counsel of petitioner had been mentioned no less than TEN (10) TIMES and was
clearly and distinctly defined by petitioner and included in the computation of its obligation to
herein petitioner as '2% penalty for every 45 days.'
xxx xxx xxx
Petitioner's pretense that it was not the intent of the court to award the damage dues of 2%
every 45 days commencing 30 April 1975 is belied by the fact (and this is admitted by
petitioner) that upon agreement of the parties, the case before the lower court was
submitted for summary judgment; in other words, the case was submitted upon the facts as
appear in the pleadings with no other evidence presented and a fact that appears clearly in
the pleadings is that the defendants in the case before the lower court were under contract
to pay private respondent, among others, the damage dues of 2% every 45 days
commencing on 30 April 1975 until the obligation is fully paid; .... 15
Respondent court demonstrably did not err in ordering the clarification of the decision of the
trial court by amending the questioned part of its dispositive portion to include therein the
phrase damage dues to modify the stated rate of 2%, and thereby obviate any
misconception that it is being imposed as interest.
ACCORDINGLY, certiorari is hereby DENIED and the decision of respondent Court of
Appeals is hereby AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

open
account
subject to
check

EN BANC
G.R. Nos. L-43697 and L-442200

March 31, 1938

In re Liquidation of the Mercantile Bank of China,

GOPOCO GROCERY (GOPOCO), ET AL., claimants-appellants,
vs.
PACIFIC COAST BISCUIT CO., ET AL., oppositors-appellees.
A.M. Zarate for appellants Gopoco Grocery et al.
Laurel, Del Rosario and Sabido for appellant Tiong-Chui Gion.
Ross, Lawrence and Selph for appellees Pacific Coast Biscuit Co. et al.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso. et al.
Marcelo Nubla for appellees Ang Cheng Lian et al.
DIAZ, J.:
On petition of the Bank Commissioner who alleged to have found, after an investigation,
that the Mercantile Bank of China could not continue operating as such without running the
risk of suffering losses and prejudice its depositors and customers; and that with the
requisite approval of the corresponding authorities, he had taken charge of all the assets
thereof; the Court of First Instance of Manila declared the said bank in liquidation; approved
all the acts theretofore executed by the commissioner; prohibited the officers and agents of
the bank from interfering with said commissioner in the possession of the assets thereof, its
documents, deed, vouchers, books of account, papers, memorandum, notes, bond, bonds
and accounts, obligations or securities and its real and personal properties; required its
creditors and all those who had any claim against it, to present the same in writing before
the commissioner within ninety days; and ordered the publication, as was in fact done, of
the order containing all these provisions, for the two consecutive weeks in two news-papers
of general circulation in the City of Manila, at the expenses of the aforesaid bank. After
these publications, and within the period of ninety days, the following creditors, among
others, presented their presented their claims:
Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat and La Bella
Tondea.

I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged that he
deposited said sum in the bank under liquidation on current account.
II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48 plus P460.
It described its claim as follows:
Balance
due on

P4,927.95

Interest on
c/a

4,53

4,932.48
Surety
deposit

460.00

III. The claim of Tan Locko is for the sum of P7,624.20, and he describes it in
turn as follows:
Balance
due on
open
account
subject to
check L759
Savings
account
No. 156
(foreign)
with
Mercantile
Bank of
China L1611
Amoy
$15,000,00
Interest on
said
Savings
Account
No. 156
Interest on
checking
a/c

P7,610.44

8.22

10.54

7,624.20
IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set out in its
written claim appearing in the record on appeal as follows:

Balance
due on
open
subject to
check L845
Interest on
checking
a/c

recommending that the same be considered as an ordinary credit only, and not as a
preferred credit as the interested parties wanted, because they were at the same time
debtors of the bank.
P6,961.01

11.37

6,972.83
V. The claim of Sy Guan Huat is for the sum of P6,232.88 and the described it as
follows:
Balance
due on
open
account
subject to
check L718
Interest on
checking
a/c

P6,224.34

8.54

6,232.88
VI. The claim of La Bella Tondea is for the sum of P1,912.79, also described as
follows:
Balance
due on
open
account
subject to
check
Interest on
account

The evidence adduced and the very admissions of the said interested parties in fact show
that (a) the claimant Tiong Chui Gion, while he was a creditor of the Mercantile Bank of
China in the sum of P10,285.27 which he deposited on current account, was also a debtor
not only in the sum of P633.76 but also in the sum of P664.77, the amount of a draft which
he accepted, plus interest thereon and the protest fees paid therefor; (b) the claimant
Gopoco Grocery (Gopoco) had a current account in the bank in the sum of P5,392.48, but it
is indebted to it, in Turn, in the sum of $2,334.80, the amount of certain drafts which it had
accepted; (c) the claimant Tan Locko had a deposit of P7,624.20, but he owed $1,378.90,
the amount of a draft which he also accepted; (d) the claimant Woo & Lo & Co. had a
deposit of P6,972.88, but it was indebted in the sum of $3,464.84, the amount also of
certain drafts accepted by it; (e) the claimants Sy Guan Huat and Sy Kia had a deposit of
P6,232.88, but they owed the sum of $3,107.37, for two drafts accepted by them and
already due; and (f) the claimant La Bella Tondea had, in turn, a deposit of P1,912.79, but
it was, in turn, indebted in the sum of $565.40 including interest and other expenses, the
amount of two drafts drawn upon and accepted by it.

P1910.59

The lower court approved all the recommendations of The commissioner and referee as to
claims of the six appellants as follows; (1) To approve the claim of Tiong Chui Gion
(P10,285.27) but only as an ordinary credit, minus the amount of the draft for P664.77; (2)
to approve the claim of Gopoco Grocery (Gopoco) but also as an ordinary credit only
(P5,387.95 according to the referee), minus its obligation amounting to $2,334.80 or
P4,669.60; (3) to approve the claim of Tan Locko but as an ordinary credit only (P7,610.44
according to the referee), deducting therefrom his obligation amounting to $1,378.90 or
P2,757.80; to approve the claim of Woo & Lo & Co. but only as an ordinary credit
(P6,961.01 according to the referee). after deducting its obligation to the bank, amounting to
$3,464.84 or P6,929.68; (5) to approve the claim of Sy Guan Huat but only as an ordinary
credit (P6,224.34 according to the referee), after deducting his obligation amounting to
$3,107.37) or P6,214.74; and, finally, (6) to approve the claim of la Bella Tondea but also
as an ordinary credit only (1,917.50 according to the referee), after deducting it obligation
amounting to $565.40 or P1,130.80; but he expressly refused to authorize the payment of
the interest by reason of impossibility upon the ground set out in the decision. Not agreeable
to the decision of the lower court, each of the interested parties appealed therefrom and
thereafter filed their respective briefs.
Tiong Chui Gion argues in his brief filed in case in G. R. No. 442200, that the lower court
erred:

2.20
1. In holding that his deposit of P10,285.27 in the Mercantile Bank of China,
constitutes an ordinary credit only and not a preferred credit.
1,912.79

To better resolve not only these claims but also the many others which were presented
against the bank, the lower court, on July 15, 1932, appointed Fulgencio Borromeo as
commissioner and referee to receive the evidence which the interested parties may desire
to present; and the commissioner and referee thus named, after qualifying for the office and
receiving the evidence presented to him, resolved the aforesaid six claims by

2. In holding as preferred credits the drafts and checks issued by the bank under
liquidation in payment of the drafts remitted to it for collection from merchants
residing in the country, by foreign entities or banks; and in not holding that the
deposits on current account in said bank should enjoy preference over said drafts
and checks; and

3. In holding that the amount of P633.76 (which should be understood as

P664.77), which the claimant owes to the bank under liquidation, be deducted
from his current account deposit therein, amounting to P10,285.27, upon the
distribution of the assets of the bank among its various creditors, instead of
holding that, after deducting the aforesaid sum of P633.76 (should be P664.77)
from his aforesaid deposit, there be turned over to him the balance together with
the dividends or shares then corresponding to him, on the basis of said amount.

In the fifth group he included the claims of certain depositors or creditors of the bank who
were at the same time debtors thereof; and he considered of this class the claims of the
appellants in these two cases, and

The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo & Co., Sy Guan
Huat and La Bella Tondea, in turn argue in the brief they jointly filed in case G. R. No.
43697, that the lower court erred:

I. Now, then, should the appellants' deposits on current account in the bank now under
liquidation be considered preferred credits, and not otherwise, or should they be considered
ordinary credits only? The appellants contend that they are preferred credits only? The
appellants contend that they are preferred credits because they are deposits in
contemplation of law, and as such should be returned with the corresponding interest
thereon. In support thereof they cite Manresa (11 Manresa, Civil Code, page 663), and what
has been insinuated in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319), citing the
said commentator who maintains that, notwithstanding the provisions of articles 1767 and
1768 and others of the aforesaid Code, from which it is inferred that the so-called irregular
deposits no longer exist, the fact is that said deposits still exist. And they contend and argue
that what they had in the bank should be considered as of this character. But it happens that
they themselves admit that the bank owes them interest which should have been paid to
them before it was declared in a state of liquidation. This fact undoubtedly destroys the
character which they nullifies their contention that the same be considered as irregular
deposits, because the payment of interest only takes place in the case of loans. On the
other hand, as we stated with respect to the claim of Tan Tiong Tick (In re Liquidation of
Mercantile Bank of China, G.R. No. 43682), the provisions of the Code of Commerce, and
not those of the Civil Code, are applicable to cases of the nature of those at bar, which have
to do with parties who are both merchants. (Articles 303 and 309, Code of Commerce.) We
there said, and it is not amiss to repeat now, that the so-called current account and savings
deposits have lost their character of deposits, properly so-called and are convertible into
simple commercial loans because, in cases of such deposits, the bank has made use
thereof in the ordinary course of its transactions as an institution engaged in the banking
business, not because it so wishes, but precisely because of the authority deemed to have
been granted to it by the appellants to enable them to collect the interest which they had
been and they are now collecting, and by virtue further of the authority granted to it by
section 125 of the Corporation Law (Act No. 1459), as amended by Acts Nos. 2003 and
3610 and section 9 of the Banking Law (Act No. 3154), without considering of course the
provisions of article 1768 of the Civil Code. Wherefore, it is held that the deposits on current
account of the appellants in the bank under liquidation, with the right on their right on their
part to collect interest, have not created and could not create a juridical relation between
them except that of creditors and debtor, they being the creditors and the bank the debtor.

1. In not first deducting from their respective deposits in the bank under
liquidation, whose payment they claim, their respective obligation thereto.
2. In not holding that their claims constitute a preferred credit.
3. In holding that the drafts and checks issued by the bank under liquidation in
payment of the drafts remitted to it by foreign entitles and banks for collection
from the certain merchant residing in the country, are preferred credits; and in not
holding that the deposits made by each of them enjoy preference over said drafts
and checks, and
4. In denying their motion for a new trial base on the proposition that the
appealed decision is not in accordance with law and is contrary to the evidence
adduced at the trial.
The questions raised by the appellant in case G. R. No. 44200 and by appellants in case
G.R. 43697 being identical in nature, we believe it practical and proper to resolve said
questions jointly in one decision. Before proceeding, however, it is convenient to note that
the commissioner and referee, classifying the various claims presented against the bank,
placed under one group those partaking of the same nature, the classification having
resulted in six groups.
In the first group he included all the claims for current account, savings and fixed deposits.
In the second group he included the claims for checks or drafts sold by the bank under
liquidation and not paid by the agents or banks in whose favor they had been issued.
In the third group he included the claims checks or drafts issued by the bank under
liquidation in payment or reimbursement of the drafts or goods remitted to it for collection,
from resident merchants and entitles, by foreign banks and entities.
In the fourth group he included the claims for drafts or securities to be collected from
resident merchants and entities to be collected from resident merchants and entities which
were pending collection on the date payments were suspended.

In the sixth group he included the other claims different in nature from the of the aforesaid
five claims.

What has so far been said resolves adversely the contention of the appellants, the question
raised in the first and second assigned errors Tiong Chui Gion in case G. R. No. 44200, and
the appellants' second and third assigned errors in case G. R. No. 43697.
II. As to the third and first errors attributed to lower court by Tiong Chui Gion in his case, and
by the other appellants in theirs, respectively, it should be stated that the question of set-off
raised by them cannot be resolved a like question in the said case, G. R. No. 43682, entitled
"In re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant." It is proper that
set-offs be made, inasmuch as the appellants and the bank being reciprocally debtors and
creditors, the same is only just and according to law (art. 1195, Civil Code), particularly as

none of the appellants falls within the exceptions mentioned in section 58 of the Insolvency
Law (Act No. 1956), reading:
SEC. 58. In all cases of mutual debts and mutual credits between the parties, the account
between them shall be stated, and one debt set off against the other, and the balance only
shall be allowed and paid. But no set-off or counterclaim shall be allowed of a claim in its
nature not provable against the estate: Provided, That no set-off on counterclaim shall be
allowed in favor of any debtor to the insolvent of a claim purchased by or transferred to such
debtor within thirty days immediately preceding the filing, or after the filing of the petition by
or against the insolvent.
It has been said with much basis by Morse, in his work on Bank and Banking (6th ed., vol. 1,
pages 776 and 784) that:
The rules of law as to the right of set-off between the bank and its depositors are not
different from those applicable to other parties. (Page 776.)
Where the bank itself stops payment and becomes insolvent, the customer may avail
himself in set-off against his indebtedness to the bank of any indebtedness of the bank to
himself, as, for example, the balance due him on his deposit account. (Page 784.)
But if set-offs are proper in these cases, when and how should they be made, considering
that the appellants ask for the payment of interest? Are they by any chance entitled to
interest? If they are, when and until what time should they be paid the same?
The question of whether they are entitled to interest should be resolved in the same way
that we resolved the case of the claimant Tan Tiong Tick in the said case, G. R. No. 43682.
The circumstances in these two cases are certainly the same as those in the said case with
reference to the said question. The Mercantile Bank of China owes to each of the appellants
the interest claimed by them, corresponding to the year ending December 4, 1931, the date
it was declared in a state of liquidation, but not which the appellants claim should be earned
by their deposits after said date and until the full amounts thereof are paid to them. And with
respect to the question of set-off, this should be deemed made, of course, as of the date
when the Mercantile Bank of China was declared in a state of liquidation, that is, on
December 4, 1931, for then there was already a reciprocal concurrence of debts, with
respect to said bank and the appellants. (Arts. 1195 and 1196 of the Civil Code; 8 Manresa,
4th ed., p. 361.)
III. With respect to the fourth assigned error of the appellants in case G. R. No. 43697, we
hold, in view of the considerations set out in resolving the other assignments of errors, that
the lower court properly denied the motion for new trial of said appellants.
In view of the foregoing, we modify the appealed judgments by holding that the deposits
claimed by the appellants, and declared by the lower court to be ordinary credits are for the
following amounts: P10,285.27 of Tiong Chui Gion; P5,387.95 of Gopoco Grocery
(Gopoco); P7,610.44 of Tan Locko; P6961.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan
Huat; and P1,917.50 of La Bella Tondea, plus their corresponding interest up to December
4, 1931; that their obligations to the bank under liquidation which should be set off against
said deposits, are respectively for the following amounts: P664.77 of Tiong Chui Gion;

P4,669.60 of Gopoco Grocery (Gopoco); P2,757.80 of Tan Locko; P6,929.68 of Woo & Lo &
Co.; P6,214.74 of Sy Huat; and P1,130.80 of La Bella Todea; and we order that the setoffs in question be made in the manner stated in this decision, that is, as of the date already
indicated, December 4, 1931. In all other respects, we affirm the aforesaid judgments,
without special pronouncement as to costs. So ordered.
Avancea, C.J., Villa-Real, Abad Santos, Imperial and Horrilleno, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

recovery of the sum of P50, 584 as the balance of their time deposits (Civil Case No. 82520
assigned to Branch I).
In the judgment rendered in that case on December 13, 1972 the Fidelity Savings Bank was
ordered to pay the Elizes spouses the sum of P50,584 plus accumulated interest.

SECOND DIVISION

G.R. No. L-38427

March 12, 1975

CENTRAL BANK OF THE PHILIPPINES as Liquidator of the FIDELITY SAVINGS

BANK, petitioner,
vs.
HONORABLE JUDGE JESUS P. MORFE, as Presiding Judge of Branch XIII, Court of
First Instance of Manila, Spouses AUGUSTO and ADELAIDA PADILLA and Spouses
MARCELA and JOB ELIZES, respondents.
F.E. Evangelista and Agapito S. Fajardo for petitioner.
Juan C. Nabong, Jr. for respondent Spouses Augusto and Adelaida Padilla.
Albert R. Palacio for respondent spouses Marcela and Job Elizes.

In another case, assigned to Branch XXX of the Court of First Instance of Manila, the
spouses Augusta A. Padilla and Adelaida Padilla secured on April 14, 1972 a judgment
against the Fidelity Savings Bank for the sums of P80,000 as the balance of their time
deposits, plus interests, P70,000 as moral and exemplary damages and P9,600 as
attorney's fees (Civil Case No. 84200 where the action was filed on September 6, 1971).
In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII having
cognizance of the liquidation proceeding), upon motions of the Elizes and Padilla spouses
and over the opposition of the Central Bank, directed the latter as liquidator, to pay their
time deposits as preferred judgments, evidenced by final judgments, within the meaning of
article 2244(14)(b) of the Civil Code, if there are enough funds in the liquidator's custody in
excess of the credits more preferred under section 30 of the Central Bank Law in relation to
articles 2244 and 2251 of the Civil Code.
From the said order, the Central Bank appealed to this Court by certiorari. It contends that
the final judgments secured by the Elizes and Padilla spouses do not enjoy any preference
because (a) they were rendered after the Fidelity Savings Bank was declared insolvent and
(b) under the charter of the Central Bank and the General Banking Law, no final judgment
can be validly obtained against an insolvent bank.
Republic Act No. 265 provides:t.hqw

AQUINO, J.:+.wph!1
This case involves the question of whether a final judgment for the payment of a time
deposit in a savings bank which judgment was obtained after the bank was declared
insolvent, is a preferred claim against the bank. The question arises under the following
facts:
On February 18,1969 the Monetary Board found the Fidelity Savings Bank to be insolvent.
The Board directed the Superintendent of Banks to take charge of its assets, forbade it to
do business and instructed the Central Bank Legal Counsel to take legal actions (Resolution
No. 350).
On December 9, 1969 the Board involved to seek the court's assistant and supervision in
the liquidation of the ban The resolution implemented only on January 25, 1972, when his
Central Bank of the Philippines filed the corresponding petition for assistance and
supervision in the Court of First Instance of Manila (Civil Case No. 86005 assigned to
Branch XIII).
Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or,
specifically, sometime in March, 1971, the spouses Job Elizes and Marcela P. Elizes filed a
complaint in the Court of First Instance of Manila against the Fidelity Savings Bank for the

SEC. 29. Proceeding upon insolvency.Whenever upon examination by the

Superintendent or his examiners or agents into the condition of any banking institution, it
shall be disclosed that the condition of the same is one of insolvency, or that its continuance
in business would involve probable loss to its depositors or creditors, it shall be the duty of
the Superintendent forthwith, in writing to inform the Monetary Board of the facts, and the
Board, upon finding the statements of the Superintendent to be true, shall forthwith forbid
the institution to do business in the Philippines and shall take charge of its assets and
proceeds according to law.
The Monetary Board shall thereupon determine within thirty days whether the institution may
be reorganized or otherwise placed in such a condition so that it may be permitted to
resume business with safety to its creditors and shall prescribe the conditions under which
such resumption of business shall take place. In such case the expenses and fees in the
administration of the institution shall be determined by the Board and shall be paid to the
Central Bank out of the assets of such banking institution.
At any time within ten days after the Monetary Board has taken charge of the assets of any
banking institution, such institution may apply to the Court of First Instance for an order
requiring the Monetary Board to show cause why it should not be enjoined from continuing
such charge of its assets, and the court may direct the Board to refrain from further
proceedings and to surrender charge of its assets.

If the Monetary Board shall determine that the banking institution cannot resume business
with safety to its creditors, it shall, by the Office of the Solicitor General, file a petition in the
Court of First Instance reciting the proceedings which have been taken and praying the
assistance and supervision of the court in the liquidation of the affairs of the same. The
Superintendent shall thereafter, upon order of the Monetary Board and under the
supervision of the court and with all convenient speed, convert the assets of the banking
institution to money.
SEC. 30. Distribution of assets.In case of liquidation of a banking institution, after
payment of the costs of the proceedings, including reasonable expenses and fees of the
Central Bank to be allowed by the court, the Central Bank shall pay the debts of such
institution, under the order of the court, in accordance with their legal priority.
The General Banking Act, Republic Act No. 337, provides:t.hqw
SEC. 85. Any director or officer of any banking institution who receives or permits or causes
to be received in said bank any deposit, or who pays out or permits or causes to be paid out
any funds of said bank, or who transfers or permits or causes to be transferred any
securities or property of said bank, after said bank becomes insolvent, shall be punished by
fine of not less than one thousand nor more than ten thousand pesos and by imprisonment
for not less than two nor more than ten years.

The trial court or, to be exact, the liquidation court noted that there is no provision in the
charter of the Central Bank in the General Banking Law (Republic Acts Nos. 265 and 337,
respectively) which suspends or abates civil actions against an insolvent bank pending in
courts other than the liquidation court. It reasoned out that, because such actions are not
suspended, judgments against insolvent banks could be considered as preferred credits
under article 2244(14)(b) of the Civil Code. It further noted that, in contrast with the Central
Act, section 18 of the Insolvency Law provides that upon the issuance by the court of an
order declaring a person insolvent "all civil proceedings against the said insolvent shall be
stayed."
The liquidation court directed the Central Bank to honor the writs of execution issued by
Branches I and XXX for the enforcement of the judgments obtained by the Elizes and
Padilla spouses. It suggested that, after satisfaction of the judgment the Central Bank, as
liquidator, should include said judgments in the list of preferred credits contained in the
"Project of Distribution" "with the notation "already paid" "
On the other hand, the Central Bank argues that after the Monetary Board has declared that
a bank is insolvent and has ordered it to cease operations, the Board becomes the trustee
of its assets "for the equal benefit of all the creditors, including the depositors". The Central
Bank cites the ruling that "the assets of an insolvent banking institution are held in trust for
the equal benefit of all creditors, and after its insolvency, one cannot obtain an advantage or
a preference over another by an attachment, execution or otherwise" (Rohr vs. Stanton
Trust & Savings Bank, 76 Mont. 248, 245 Pac. 947).

The Civil Code provides:t.hqw

ART. 2237. Insolvency shall be governed by special laws insofar as they are not
inconsistent with this Code. (n)
ART. 2244. With reference to other property, real and personal, of the debtor, the following
claims or credits shall be preferred in the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a
final judgment, if they have been the subject of litigation. These credits shall have
preference among themselves in the order of priority of the dates of the instruments and of
the judgments, respectively. (1924a)
ART. 2251. Those credits which do not enjoy any preference with respect to specific
property, and those which enjoy preference, as to the amount not paid, shall be satisfied
according to the following rules:
(1) In the order established in article 2244;
(2) Common credits referred to in article 2245 shall be paid pro rata regardless of dates.
(1929a)

The stand of the Central Bank is that all depositors and creditors of the insolvent bank
should file their actions with the liquidation court. In support of that view it cites the provision
that the Insolvency Law does not apply to banks (last sentence, sec. 52 of Act No. 1956).
It also invokes the provision penalizing a director officer of a bank who disburses, or allows
disbursement, of the funds of the bank after it becomes insolvent (Sec. 85, General Banking
Act, Republic Act No. 337). It cites the ruling that "a creditor of an insolvent state bank in the
hands of a liquidator who recovered a judgment against it is not entitled to a preference for
(by) the mere fact that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. vs. Allen,
207 N. Carolina 10, 175 S. E. 838, Braver Liquidation of Financial Institutions, p. 922).
It should be noted that fixed, savings, and current deposits of money in banks and similar
institutions are not true deposits. They are considered simple loans and, as such, are not
preferred credits (Art. 1980, Civil Code; In re Liquidation of Mercantile Bank of China: Tan
Tiong Tick vs. American Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. vs.
Chinese Grocers Association, 65 Phil. 375; Fletcher American National Bank vs. Ang Cheng
Lian, 65 Phil. 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 Phil. 429;
Gopoco Grocery vs. Pacific Coast Biscuit Co., 65 Phil. 443).
The aforequoted section 29 of the Central Bank's charter explicitly provides that when a
bank is found to be insolvent, the Monetary Board shall forbid it to do business and shall
take charge of its assets. The Board in its Resolution No. 350 dated February 18,1969
banned the Fidelity Savings Bank from doing business. It took charge of the bank's assets.
Evidently, one purpose in prohibiting the insolvent bank from doing business is to prevent
some depositors from having an undue or fraudulent preference over other creditors and
depositors.

That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits
by some depositors could be maintained and judgments would be rendered for the payment
of their deposits and then such judgments would be considered preferred credits under
article 2244 (14) (b) of the Civil Code.
We are of the opinion that such judgments cannot be considered preferred and that article
2244(14)(b) does not apply to judgments for the payment of the deposits in an insolvent
savings bank which were obtained after the declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and confusion. To
recognize such judgments as entitled to priority would mean that depositors in insolvent
banks, after learning that the bank is insolvent as shown by the fact that it can no longer pay
withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from
doing business, would rush to the courts to secure judgments for the payment of their
deposits.
In such an eventuality, the courts would be swamped with suits of that character. Some of
the judgments would be default judgments. Depositors armed with such judgments would
pester the liquidation court with claims for preference on the basis of article 2244(14)(b).
Less alert depositors would be prejudiced. That inequitable situation could not have been
contemplated by the framers of section 29.
The Rohr case (supra) supplies some illumination on the disposition of the instant case. It
appears in that case that the Stanton Trust & Savings Bank of Great Falls closed its doors
to business on July 9, 1923. On November 7,1924 the bank (then already under liquidation)
issued to William Rohr a certificate stating that he was entitled to claim from the bank
$1,191.72 and that he was entitled to dividends thereon. Later, Rohr sued the bank for the
payment of his claim. The bank demurred to the complaint. The trial court sustained the
demurrer. Rohr appealed. In affirming the order sustaining the demurrer, the Supreme Court
of Montana said:t.hqw
The general principle of equity that the assets of an insolvent are to he distributed ratably
among general creditors applies with full force to the distribution of the assets of a bank. A
general depositor of a bank is merely a general creditor, and, as such, is not entitled to any
preference or priority over other general creditors.
The assets of a bank in process of liquidation are held in trust for the equal benefit of all
creditors, and one cannot be permitted to obtain an advantage or preference over another
by an attachment, execution or otherwise. A disputed claim of a creditor may be
adjudicated, but those whose claims are recognized and admitted may not successfully
maintain action thereon. So to permit would defeat the very purpose of the liquidation of a
bank whether being voluntarily accomplished or through the intervention of a receiver.
xxx xxx xxx
The available assets of such a bank are held in trust, and so conserved that each depositor
or other creditor shall receive payment or dividend according to the amount of his debt, and
that none of equal class shall receive any advantage or preference over another.

And with respect to a national bank under voluntary liquidation, the court noted in the Rohr
case that the assets of such a bank "become a trust fund, to be administered for the benefit
of all creditors pro rata and, while the bank retains its corporate existence, and may be
sued, the effect of a judgment obtained against it by a creditor is only to fix the amount of
debt. He can acquire no lien which will give him any preference or advantage over other
general creditors. (245 Pac. 249). *
Considering that the deposits in question, in their inception, were not preferred credits, it
does not seem logical and just that they should be raised to the category of preferred credits
simply because the depositors, taking advantage of the long interval between the
declaration of insolvency and the filing of the petition for judicial assistance and supervision,
were able to secure judgments for the payment of their time deposits.
The judicial declaration that the said deposits were payable to the depositors, as
indisputably they were due, could not have given the Elizes and Padilla spouses a priority
over the other depositors whose deposits were likewise indisputably due and owing from the
insolvent bank but who did not want to incur litigation expenses in securing a judgment for
the payment of the deposits.
The circumstance that the Fidelity Savings Bank, having stopped operations since February
19, 1969, was forbidden to do business (and that ban would include the payment of time
deposits) implies that suits for the payment of such deposits were prohibited. What was
directly prohibited should not be encompassed indirectly. (See Maurello vs. Broadway Bank
& Trust Co. of Paterson 176 Atl. 391, 114 N.J.L. 167).
It is noteworthy that in the trial court's order of October 3, 1972, which contains the Bank
Liquidation Rules and Regulations, it indicated in step III the procedure for processing the
claims against the insolvent bank. In Step IV, the court directed the Central Bank, as
liquidator, to submit a Project of Distribution which should include "a list of the preferred
credits to be paid in full in the order of priorities established in Articles 2241, 2242, 2243,
2246 and 2247" of the Civil Code (note that article 2244 was not mentioned). There is no
cogent reason why the Elizes and Padilla spouses should not adhere to the procedure
outlined in the said rules and regulations.
WHEREFORE, the lower court's orders of August 20, 1973 and February 25, 1974 are
reversed and set aside. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

A sought for ex-parte preliminary injunction against both respondent banks was not given by
this Court.
Undisputed pertinent facts are:

SECOND DIVISION
G.R. No. L-30511

February 14, 1980

MANUEL M. SERRANO, petitioner,

vs.
CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M.
RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA
RAMA, HORACIO DELA RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA,
RODOLFO LEDESMA, VICTORIA RAMOS TANJUATCO, and TEOFILO TANJUATCO,
respondents.
Rene Diokno for petitioner.
F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent Overseas
Bank of Manila.
Josefina G. Salonga for all other respondents.

CONCEPCION, JR., J.:

Petition for mandamus and prohibition, with preliminary injunction, that seeks the
establishment of joint and solidary liability to the amount of Three Hundred Fifty Thousand
Pesos, with interest, against respondent Central Bank of the Philippines and Overseas Bank
of Manila and its stockholders, on the alleged failure of the Overseas Bank of Manila to
return the time deposits made by petitioner and assigned to him, on the ground that
respondent Central Bank failed in its duty to exercise strict supervision over respondent
Overseas Bank of Manila to protect depositors and the general public. 1 Petitioner also
prays that both respondent banks be ordered to execute the proper and necessary
documents to constitute all properties fisted in Annex "7" of the Answer of respondent
Central Bank of the Philippines in G.R. No. L-29352, entitled "Emerita M. Ramos, et al vs.
Central Bank of the Philippines," into a trust fund in favor of petitioner and all other
depositors of respondent Overseas Bank of Manila. It is also prayed that the respondents
be prohibited permanently from honoring, implementing, or doing any act predicated upon
the validity or efficacy of the deeds of mortgage, assignment. and/or conveyance or transfer
of whatever nature of the properties listed in Annex "7" of the Answer of respondent Central
Bank in G.R. No. 29352. 2

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one year
with 6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the respondent
Overseas Bank of Manila. 3 Concepcion Maneja also made a time deposit, for one year with
6-% interest, on March 6, 1967, of Two Hundred Thousand Pesos (P200,000.00) with the
same respondent Overseas Bank of Manila. 4
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned and
conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent
Overseas Bank of Manila. 5
Notwithstanding series of demands for encashment of the aforementioned time deposits
from the respondent Overseas Bank of Manila, dating from December 6, 1967 up to March
4, 1968, not a single one of the time deposit certificates was honored by respondent
Overseas Bank of Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the
banking system of the Republic and it exercises supervision over all doing business in the
Philippines, but denies the petitioner's allegation that the Central Bank has the duty to
exercise a most rigid and stringent supervision of banks, implying that respondent Central
Bank has to watch every move or activity of all banks, including respondent Overseas Bank
of Manila. Respondent Central Bank claims that as of March 12, 1965, the Overseas Bank
of Manila, while operating, was only on a limited degree of banking operations since the
Monetary Board decided in its Resolution No. 322, dated March 12, 1965, to prohibit the
Overseas Bank of Manila from making new loans and investments in view of its chronic
reserve deficiencies against its deposit liabilities. This limited operation of respondent
Overseas Bank of Manila continued up to 1968. 7
Respondent Central Bank also denied that it is guarantor of the permanent solvency of any
banking institution as claimed by petitioner. It claims that neither the law nor sound banking
supervision requires respondent Central Bank to advertise or represent to the public any
remedial measures it may impose upon chronic delinquent banks as such action may
inevitably result to panic or bank "runs". In the years 1966-1967, there were no findings to
declare the respondent Overseas Bank of Manila as insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was created in favor of
petitioner and his predecessor in interest Concepcion Maneja when their time deposits were
made in 1966 and 1967 with the respondent Overseas Bank of Manila as during that time
the latter was not an insolvent bank and its operation as a banking institution was being
salvaged by the respondent Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that the properties given
by respondent Overseas Bank of Manila as additional collaterals to respondent Central
Bank of the Philippines for the former's overdrafts and emergency loans were acquired

through the use of depositors' money, including that of the petitioner and Concepcion
Maneja. 10
In G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the Philippines,"
a case was filed by the petitioner Ramos, wherein respondent Overseas Bank of Manila
sought to prevent respondent Central Bank from closing, declaring the former insolvent, and
liquidating its assets. Petitioner Manuel Serrano in this case, filed on September 6, 1968, a
motion to intervene in G.R. No. L-29352, on the ground that Serrano had a real and legal
interest as depositor of the Overseas Bank of Manila in the matter in litigation in that case.
Respondent Central Bank in G.R. No. L-29352 opposed petitioner Manuel Serrano's motion
to intervene in that case, on the ground that his claim as depositor of the Overseas Bank of
Manila should properly be ventilated in the Court of First Instance, and if this Court were to
allow Serrano to intervene as depositor in G.R. No. L-29352, thousands of other depositors
would follow and thus cause an avalanche of cases in this Court. In the resolution dated
October 4, 1968, this Court denied Serrano's, motion to intervene. The contents of said
motion to intervene are substantially the same as those of the present petition. 11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became final
and executory on March 3, 1972, favorable to the respondent Overseas Bank of Manila,
with the dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted
and respondent Central Bank's resolution Nos. 1263, 1290 and 1333
(that prohibit the Overseas Bank of Manila to participate in clearing,
direct the suspension of its operation, and ordering the liquidation of
said bank) are hereby annulled and set aside; and said respondent
Central Bank of the Philippines is directed to comply with its
obligations under the Voting Trust Agreement, and to desist from
taking action in violation therefor. Costs against respondent Central
Bank of the Philippines. 12
Because of the above decision, petitioner in this case filed a motion for judgment in this
case, praying for a decision on the merits, adjudging respondent Central Bank jointly and
severally liable with respondent Overseas Bank of Manila to the petitioner for the P350,000
time deposit made with the latter bank, with all interests due therein; and declaring all assets
assigned or mortgaged by the respondents Overseas Bank of Manila and the Ramos
groups in favor of the Central Bank as trust funds for the benefit of petitioner and other
depositors. 13
By the very nature of the claims and causes of action against respondents, they in reality
are recovery of time deposits plus interest from respondent Overseas Bank of Manila, and
recovery of damages against respondent Central Bank for its alleged failure to strictly
supervise the acts of the other respondent Bank and protect the interests of its depositors
by virtue of the constructive trust created when respondent Central Bank required the other
respondent to increase its collaterals for its overdrafts said emergency loans, said
collaterals allegedly acquired through the use of depositors money. These claims shoud be
ventilated in the Court of First Instance of proper jurisdiction as We already pointed out
when this Court denied petitioner's motion to intervene in G.R. No. L-29352. Claims of these
nature are not proper in actions for mandamus and prohibition as there is no shown clear
abuse of discretion by the Central Bank in its exercise of supervision over the other
respondent Overseas Bank of Manila, and if there was, petitioner here is not the proper

party to raise that question, but rather the Overseas Bank of Manila, as it did in G.R. No. L29352. Neither is there anything to prohibit in this case, since the questioned acts of the
respondent Central Bank (the acts of dissolving and liquidating the Overseas Bank of
Manila), which petitioner here intends to use as his basis for claims of damages against
respondent Central Bank, had been accomplished a long time ago.
Furthermore, both parties overlooked one fundamental principle in the nature of bank
deposits when the petitioner claimed that there should be created a constructive trust in his
favor when the respondent Overseas Bank of Manila increased its collaterals in favor of
respondent Central Bank for the former's overdrafts and emergency loans, since these
collaterals were acquired by the use of depositors' money.
Bank deposits are in the nature of irregular deposits. They are really loans because they
earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated
as loans and are to be covered by the law on loans. 14 Current and savings deposit are
loans to a bank because it can use the same. The petitioner here in making time deposits
that earn interests with respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a debtor of
petitioner. Failure of he respondent Bank to honor the time deposit is failure to pay s
obligation as a debtor and not a breach of trust arising from depositary's failure to return the
subject matter of the deposit
WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

Circular No. 364 and related Central Bank regulations on foreign exchange transactions,
allegedly committed as follows (Petition, Annex "A"):t.hqw

SECOND DIVISION
G.R. No. L-60033

April 4, 1984

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS, petitioners,

vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL
FELIZARDO N. LOTA and CLEMENT DAVID, respondents.

MAKASIAR, Actg. C.J.:+.wph!1

This is a petition for prohibition and injunction with a prayer for the immediate issuance of
restraining order and/or writ of preliminary injunction filed by petitioners on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on the same date, a
temporary restraining order was duly issued ordering the respondents, their officers, agents,
representatives and/or person or persons acting upon their (respondents') orders or in their
place or stead to refrain from proceeding with the preliminary investigation in Case No.
8131938 of the Office of the City Fiscal of Manila (pp. 47-48, rec.). On January 24, 1983,
private respondent Clement David filed a motion to lift restraining order which was denied in
the resolution of this Court dated May 18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit public respondents
from proceeding with the preliminary investigation of I.S. No. 81-31938, in which petitioners
were charged by private respondent Clement David, with estafa and violation of Central
Bank Circular No. 364 and related regulations regarding foreign exchange transactions
principally, on the ground of lack of jurisdiction in that the allegations of the charged, as well
as the testimony of private respondent's principal witness and the evidence through said
witness, showed that petitioners' obligation is civil in nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor
General in its Comment dated June 28,1982, as follows:t.hqw
On December 23,1981, private respondent David filed I.S. No. 81-31938 in the Office of the
City Fiscal of Manila, which case was assigned to respondent Lota for preliminary
investigation (Petition, p. 8).
In I.S. No. 81-31938, David charged petitioners (together with one Robert Marshall and the
following directors of the Nation Savings and Loan Association, Inc., namely Homero
Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac, Jaime V.
Paz, Paulino B. Dionisio, and one John Doe) with estafa and violation of Central Bank

"From March 20, 1979 to March, 1981, David invested with the Nation Savings and Loan
Association, (hereinafter called NSLA) the sum of P1,145,546.20 on nine deposits,
P13,531.94 on savings account deposits (jointly with his sister, Denise Kuhne),
US$10,000.00 on time deposit, US$15,000.00 under a receipt and guarantee of payment
and US$50,000.00 under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that
David was induced into making the aforestated investments by Robert Marshall an
Australian national who was allegedly a close associate of petitioner Guingona Jr., then
NSLA President, petitioner Martin, then NSLA Executive Vice-President of NSLA and
petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed
under receivership by the Central Bank, so that David filed claims therewith for his
investments and those of his sister; that on July 22, 1981 David received a report from the
Central Bank that only P305,821.92 of those investments were entered in the records of
NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance of
the investments, at the same time violating Central Bank Circular No. 364 and related
Central Bank regulations on foreign exchange transactions; that after demands, petitioner
Guingona Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to
P959,078.14 and US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in which
they stated the following.t.hqw
"That Martin became President of NSLA in March 1978 (after the resignation of Guingona,
Jr.) and served as such until October 30, 1980, while Santos was General Manager up to
November 1980; that because NSLA was urgently in need of funds and at David's
insistence, his investments were treated as special- accounts with interest above the legal
rate, an recorded in separate confidential documents only a portion of which were to be
reported because he did not want the Australian government to tax his total earnings (nor)
to know his total investments; that all transactions with David were recorded except the sum
of US$15,000.00 which was a personal loan of Santos; that David's check for US$50,000.00
was cleared through Guingona, Jr.'s dollar account because NSLA did not have one, that a
draft of US$30,000.00 was placed in the name of one Paz Roces because of a pending
transaction with her; that the Philippine Deposit Insurance Corporation had already
reimbursed David within the legal limits; that majority of the stockholders of NSLA had filed
Special Proceedings No. 82-1695 in the Court of First Instance to contest its (NSLA's)
closure; that after NSLA was placed under receivership, Martin executed a promissory note
in David's favor and caused the transfer to him of a nine and on behalf (9 1/2) carat
diamond ring with a net value of P510,000.00; and, that the liabilities of NSLA to David were
civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the
following:t.hqw
"That he had no hand whatsoever in the transactions between David and NSLA since he
(Guingona Jr.) had resigned as NSLA president in March 1978, or prior to those
transactions; that he assumed a portion o; the liabilities of NSLA to David because of the
latter's insistence that he placed his investments with NSLA because of his faith in
Guingona, Jr.; that in a Promissory Note dated June 17, 1981 (Petition, Annex "D") he
(Guingona, Jr.) bound himself to pay David the sums of P668.307.01 and US$37,500.00 in

stated installments; that he (Guingona, Jr.) secured payment of those amounts with second
mortgages over two (2) parcels of land under a deed of Second Real Estate Mortgage
(Petition, Annex "E") in which it was provided that the mortgage over one (1) parcel shall be
cancelled upon payment of one-half of the obligation to David; that he (Guingona, Jr.) paid
P200,000.00 and tendered another P300,000.00 which David refused to accept, hence, he
(Guingona, Jr.) filed Civil Case No. Q-33865 in the Court of First Instance of Rizal at
Quezon City, to effect the release of the mortgage over one (1) of the two parcels of land
conveyed to David under second mortgages."
At the inception of the preliminary investigation before respondent Lota, petitioners moved
to dismiss the charges against them for lack of jurisdiction because David's claims allegedly
comprised a purely civil obligation which was itself novated. Fiscal Lota denied the motion to
dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the instant petition
because: (a) the production of the Promisory Notes, Banker's Acceptance, Certificates of
Time Deposits and Savings Account allegedly showed that the transactions between David
and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated
when Guingona, Jr. and Martin assumed them; and (b) David's principal witness allegedly
testified that the duplicate originals of the aforesaid instruments of indebtedness were all on
file with NSLA, contrary to David's claim that some of his investments were not record
(Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative remedies because to
do so would be futile (Petition, p. 9) [pp. 153-157, rec.].
As correctly pointed out by the Solicitor General, the sole issue for resolution is whether
public respondents acted without jurisdiction when they investigated the charges (estafa
and violation of CB Circular No. 364 and related regulations regarding foreign exchange
transactions) subject matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in nature and
therefore, public respondents have no jurisdiction over the charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of the City
Fiscal of Manila by private respondent David against petitioners Teopisto Guingona, Jr.,
Antonio I. Martin and Teresita G. Santos, together with one Robert Marshall and the other
directors of the Nation Savings and Loan Association, will show that from March 20, 1979 to
March, 1981, private respondent David, together with his sister, Denise Kuhne, invested
with the Nation Savings and Loan Association the sum of P1,145,546.20 on time deposits
covered by Bankers Acceptances and Certificates of Time Deposits and the sum of
P13,531.94 on savings account deposits covered by passbook nos. 6-632 and 29-742, or a
total of P1,159,078.14 (pp. 15-16, roc.). It appears further that private respondent David,
together with his sister, made investments in the aforesaid bank in the amount of
US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed under receivership
on March 21, 1981, petitioners Guingona and Martin, upon the request of private
respondent David, assumed the obligation of the bank to private respondent David by

executing on June 17, 1981 a joint promissory note in favor of private respondent
acknowledging an indebtedness of Pl,336,614.02 and US$75,000.00 (p. 80, rec.). This
promissory note was based on the statement of account as of June 30, 1981 prepared by
the private respondent (p. 81, rec.). The amount of indebtedness assumed appears to be
bigger than the original claim because of the added interest and the inclusion of other
deposits of private respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the said
indebtedness, and petitioner Guingona executed another promissory note antedated to
June 17, 1981 whereby he personally acknowledged an indebtedness of P668,307.01 (1/2
of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in favor of private respondent
(p. 25, rec.). The aforesaid promissory notes were executed as a result of deposits made by
Clement David and Denise Kuhne with the Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David,
before this Court indisputably show that he has indeed invested his money on time and
savings deposits with the Nation Savings and Loan Association.
It must be pointed out that when private respondent David invested his money on nine. and
savings deposits with the aforesaid bank, the contract that was perfected was a contract of
simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil
Code provides that:
Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions
shall be governed by the provisions concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975], We said:
It should be noted that fixed, savings, and current deposits of money in banks and similar
institutions are hat true deposits. are considered simple loans and, as such, are not
preferred credits (Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China Tan
Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific Coast Biscuit Co. vs.
Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang Chong
UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL 429;
Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the Philippines
(96 SCRA 102 [1980]) that:t.hqw
Bank deposits are in the nature of irregular deposits. They are really 'loans because they
earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated
as loans and are to be covered by the law on loans (Art. 1980 Civil Code Gullas vs. Phil.
National Bank, 62 Phil. 519). Current and saving deposits, are loans to a bank because it
can use the same. The petitioner here in making time deposits that earn interests will
respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and
not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the
respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not
a breach of trust arising from a depositary's failure to return the subject matter of the deposit
(Emphasis supplied).

Hence, the relationship between the private respondent and the Nation Savings and Loan
Association is that of creditor and debtor; consequently, the ownership of the amount
deposited was transmitted to the Bank upon the perfection of the contract and it can make
use of the amount deposited for its banking operations, such as to pay interests on deposits
and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it
has, however, no obligation to return or deliver the same money that was deposited. And,
the failure of the Bank to return the amount deposited will not constitute estafa through
misappropriation punishable under Article 315, par. l(b) of the Revised Penal Code, but it
will only give rise to civil liability over which the public respondents have no- jurisdiction.
WE have already laid down the rule that:t.hqw

petitioners Guingona and Martin assumed the obligation of the bank to private respondent
David, thereby resulting in the novation of the original contractual obligation arising from
deposit into a contract of loan and converting the original trust relation between the bank
and private respondent David into an ordinary debtor-creditor relation between the
petitioners and private respondent. Consequently, the failure of the bank or petitioners
Guingona and Martin to pay the deposits of private respondent would not constitute a
breach of trust but would merely be a failure to pay the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it may however,
prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal
information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [1968]) We held
that:t.hqw

In order that a person can be convicted under the above-quoted provision, it must be proven
that he has the obligation to deliver or return the some money, goods or personal property
that he received Petitioners had no such obligation to return the same money, i.e., the bills
or coins, which they received from private respondents. This is so because as clearly as
stated in criminal complaints, the related civil complaints and the supporting sworn
statements, the sums of money that petitioners received were loans.

As pointed out in People vs. Nery, novation prior to the filing of the criminal information
as in the case at bar may convert the relation between the parties into an ordinary
creditor-debtor relation, and place the complainant in estoppel to insist on the original
transaction or "cast doubt on the true nature" thereof.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.t.hqw

Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-581
[1983] ), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964] ), declaring
that:t.hqw

"Art. 1933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time- and return
it, in which case the contract is called a commodatum; or money or other consumable thing,
upon the condition that the same amount of the same kind and quality shall he paid in which
case the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay interest.
"In commodatum the bailor retains the ownership of the thing loaned while in simple loan,
ownership passes to the borrower.
"Art. 1953. A person who receives a loan of money or any other fungible thing acquires
the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind
and quality."
It can be readily noted from the above-quoted provisions that in simple loan (mutuum), as
contrasted to commodatum the borrower acquires ownership of the money, goods or
personal property borrowed Being the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not be considered misappropriation
thereof' (Yam vs. Malik, 94 SCRA 30, 34 [1979]; Emphasis supplied).
But even granting that the failure of the bank to pay the time and savings deposits of private
respondent David would constitute a violation of paragraph 1(b) of Article 315 of the
Revised Penal Code, nevertheless any incipient criminal liability was deemed avoided,
because when the aforesaid bank was placed under receivership by the Central Bank,

The novation theory may perhaps apply prior to the filling of the criminal information in court
by the state prosecutors because up to that time the original trust relation may be converted
by the parties into an ordinary creditor-debtor situation, thereby placing the complainant in
estoppel to insist on the original trust. But after the justice authorities have taken cognizance
of the crime and instituted action in court, the offended party may no longer divest the
prosecution of its power to exact the criminal liability, as distinguished from the civil. The
crime being an offense against the state, only the latter can renounce it (People vs.
Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8 Phil.
620).
It may be observed in this regard that novation is not one of the means recognized by the
Penal Code whereby criminal liability can be extinguished; hence, the role of novation may
only be to either prevent the rise of criminal habihty or to cast doubt on the true nature of the
original basic transaction, whether or not it was such that its breach would not give rise to
penal responsibility, as when money loaned is made to appear as a deposit, or other similar
disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs. Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona and Martin executed a
promissory note on June 17, 1981 assuming the obligation of the bank to private
respondent David; while the criminal complaint for estafa was filed on December 23, 1981
with the Office of the City Fiscal. Hence, it is clear that novation occurred long before the
filing of the criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided but there will
still be a civil liability on the part of petitioners Guingona and Martin to pay the assumed
obligation.

Petitioners herein were likewise charged with violation of Section 3 of Central Bank Circular
No. 364 and other related regulations regarding foreign exchange transactions by accepting
foreign currency deposit in the amount of US$75,000.00 without authority from the Central
Bank. They contend however, that the US dollars intended by respondent David for deposit
were all converted into Philippine currency before acceptance and deposit into Nation
Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was about to make a deposit of
bank draft issued in his name in the amount of US$50,000.00 with the Nation Savings and
Loan Association, the same had to be cleared first and converted into Philippine currency.
Accordingly, the bank draft was endorsed by respondent David to petitioner Guingona, who
in turn deposited it to his dollar account with the Security Bank and Trust Company.
Petitioner Guingona merely accommodated the request of the Nation Savings and loan
Association in order to clear the bank draft through his dollar account because the bank did
not have a dollar account. Immediately after the bank draft was cleared, petitioner Guingona
authorized Nation Savings and Loan Association to withdraw the same in order to be
utilized by the bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos before
they were accepted and deposited in Nation Savings and Loan Association, because the
bank is presumed to have followed the ordinary course of the business which is to accept
deposits in Philippine currency only, and that the transaction was regular and fair, in the
absence of a clear and convincing evidence to the contrary (see paragraphs p and q, Sec.
5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners despite
the fact that it was raised. in petitioners' reply filed on May 7, 1982 to private respondent's
comment and in the July 27, 1982 reply to public respondents' comment and reiterated in
petitioners' memorandum filed on October 30, 1982, thereby adding more support to the
conclusion that the US$75,000.00 were really converted into Philippine currency before they
were accepted and deposited into Nation Savings and Loan Association. Considering that
this might adversely affect his case, respondent David should have promptly denied
petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in nature and that
there is no clear showing that they engaged in foreign exchange transactions, We hold that
the public respondents acted without jurisdiction when they investigated the charges against
the petitioners. Consequently, public respondents should be restrained from further
proceeding with the criminal case for to allow the case to continue, even if the petitioners
could have appealed to the Ministry of Justice, would work great injustice to petitioners and
would render meaningless the proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition
and injunction, this court has recognized the resort to the extraordinary writs of prohibition
and injunction in extreme cases, thus:t.hqw

On the issue of whether a writ of injunction can restrain the proceedings in Criminal Case
No. 3140, the general rule is that "ordinarily, criminal prosecution may not be blocked by
court prohibition or injunction." Exceptions, however, are allowed in the following
instances:t.hqw
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an oppressive and vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is unconstitutional or was held invalid" (
Primicias vs. Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470 [1979]; citing
Ramos vs. Torres, 25 SCRA 557 [1968]; and Hernandez vs. Albano, 19 SCRA 95, 96
[1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We held
that:t.hqw
The writs of certiorari and prohibition, as extraordinary legal remedies, are in the ultimate
analysis, intended to annul void proceedings; to prevent the unlawful and oppressive
exercise of legal authority and to provide for a fair and orderly administration of justice.
Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a petition for
certiorari and prohibition although the accused in the case could have appealed in due time
from the order complained of, our action in the premises being based on the public welfare
policy the advancement of public policy. In Dimayuga vs. Fajardo, 43 Phil. 304, We also
admitted a petition to restrain the prosecution of certain chiropractors although, if convicted,
they could have appealed. We gave due course to their petition for the orderly
administration of justice and to avoid possible oppression by the strong arm of the law. And
in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari challenging the trial
court's action admitting an amended information was sustained despite the availability of
appeal at the proper time.
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY
RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS
AGAINST THE PRIVATE RESPONDENT.
SO ORDERED.1wph1.t

Republic of the Philippines

SUPREME COURT
Manila

After perusing the Informations in these cases, the trial court did not find the existence of
probable cause that would have necessitated the issuance of a warrant of arrest based on
the following grounds:

THIRD DIVISION
G.R. Nos. 173654-765

August 28, 2008

PEOPLE OF THE PHILIPPINES, petitioner,

vs.
TERESITA PUIG and ROMEO PORRAS, respondents.

(1) the element of taking without the consent of the owners was missing on
the ground that it is the depositors-clients, and not the Bank, which filed the
complaint in these cases, who are the owners of the money allegedly taken by
respondents and hence, are the real parties-in-interest; and
(2) the Informations are bereft of the phrase alleging "dependence,
guardianship or vigilance between the respondents and the offended party
that would have created a high degree of confidence between them which
the respondents could have abused."

DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner
People of the Philippines, represented by the Office of the Solicitor General, praying for the
reversal of the Orders dated 30 January 2006 and 9 June 2006 of the Regional Trial Court
(RTC) of the 6th Judicial Region, Branch 68, Dumangas, Iloilo, dismissing the 112 cases of
Qualified Theft filed against respondents Teresita Puig and Romeo Porras, and denying
petitioners Motion for Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch 68 of the
RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against respondents Teresita Puig
(Puig) and Romeo Porras (Porras) who were the Cashier and Bookkeeper, respectively, of
private complainant Rural Bank of Pototan, Inc. The cases were docketed as Criminal
Cases No. 05-3054 to 05-3165.
The allegations in the Informations1 filed before the RTC were uniform and pro-forma,
except for the amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan, Province of
Iloilo, Philippines, and within the jurisdiction of this Honorable Court, above-named
[respondents], conspiring, confederating, and helping one another, with grave abuse of
confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank and
with intent of gain, did then and there willfully, unlawfully and feloniously take, steal and
carry away the sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine Currency, to
the damage and prejudice of the said bank in the aforesaid amount.

It added that allowing the 112 cases for Qualified Theft filed against the respondents to
push through would be violative of the right of the respondents under Section 14(2), Article
III of the 1987 Constitution which states that in all criminal prosecutions, the accused shall
enjoy the right to be informed of the nature and cause of the accusation against him.
Following Section 6, Rule 112 of the Revised Rules of Criminal Procedure, the RTC
dismissed the cases on 30 January 2006 and refused to issue a warrant of arrest against
Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioners Motion for Reconsideration was issued by
the RTC, finding as follows:
Accordingly, the prosecutions Motion for Reconsideration should be, as it
hereby, DENIED. The Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45,
raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT
SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING WITHOUT THE
CONSENT OF THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF
GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated 30
January 2006 and 9 June 2006 issued by the trial court, and that it be directed to proceed
with Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and
current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans." Corollary thereto, Article 1953 of the same Code
provides that "a person who receives a loan of money or any other fungible thing acquires
the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind
and quality." Thus, it posits that the depositors who place their money with the bank are

considered creditors of the bank. The bank acquires ownership of the money deposited by
its clients, making the money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of the crime of
qualified theft, citing that a perusal of the Informations will show that they specifically allege
that the respondents were the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
respectively, and that they took various amounts of money with grave abuse of confidence,
and without the knowledge and consent of the bank, to the damage and prejudice of the
bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the
ground that a Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal
because a finding of probable cause for the issuance of a warrant of arrest presupposes
evaluation of facts and circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary of
Justice, is the principal party to file a Petition for Review on Certiorari, considering that the
incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the
Informations and, therefore, because of this defect, there is no basis for the existence of
probable cause which will justify the issuance of the warrant of arrest. Petitioner assails the
dismissal contending that the Informations for Qualified Theft sufficiently state facts which
constitute (a) the qualifying circumstance of grave abuse of confidence; and (b) the element
of taking, with intent to gain and without the consent of the owner, which is the Bank.

ART. 310. Qualified Theft. The crime of theft shall be punished by the penalties
next higher by two degrees than those respectively specified in the next
preceding article, if committed by a domestic servant, or with grave abuse of
confidence, or if the property stolen is motor vehicle, mail matter or large cattle or
consists of coconuts taken from the premises of a plantation, fish taken from a
fishpond or fishery or if property is taken on the occasion of fire, earthquake,
typhoon, volcanic eruption, or any other calamity, vehicular accident or civil
disturbance. (Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking of
anothers property without violence or intimidation against persons or force upon things. The
elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;

In determining the existence of probable cause to issue a warrant of arrest, the RTC judge
found the allegations in the Information inadequate. He ruled that the Information failed to
state facts constituting the qualifying circumstance of grave abuse of confidence and the
element of taking without the consent of the owner, since the owner of the money is not the
Bank, but the depositors therein. He also cites People v. Koc Song,4 in which this Court
held:
There must be allegation in the information and proof of a relation, by reason of
dependence, guardianship or vigilance, between the respondents and the
offended party that has created a high degree of confidence between them,
which the respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was no
probable cause simply on the insufficiency of the allegations in the Informations concerning
the facts constitutive of the elements of the offense charged. This, therefore, makes the
issue of sufficiency of the allegations in the Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal Code, is
committed as follows, viz:

3. That the said taking be done with intent to gain;

4. That it be done without the owners consent;
5. That it be accomplished without the use of violence or intimidation against
persons, nor of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court requires,
inter alia, that the information must state the acts or omissions complained of as constitutive
of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the Rules
of Court, is enlightening:

Section 9. Cause of the accusation. The acts or omissions complained of as

constituting the offense and the qualifying and aggravating circumstances must
be stated in ordinary and concise language and not necessarily in the language
used in the statute but in terms sufficient to enable a person of common
understanding to know what offense is being charged as well as its qualifying
and aggravating circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in alleging
the acts or omissions complained of as constituting the offense. The test is whether it
enables a person of common understanding to know the charge against him, and the court
to render judgment properly.5

corporation, and having collected and received in her capacity as teller of the
BABSLA the sum of TEN THOUSAND PESOS (P10,000.00), said accused, with
intent of gain, with grave abuse of confidence and without the knowledge
and consent of said corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00, Philippine
currency, by making it appear that a certain depositor by the name of Antonio
Salazar withdrew from his Savings Account No. 1359, when in truth and in fact
said Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the
damage and prejudice of BABSLA in the total amount of P10,000.00, Philippine
currency.
In convicting the therein appellant, the Court held that:

The portion of the Information relevant to this discussion reads:

A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence,
being the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or

[S]ince the teller occupies a position of confidence, and the bank places money
in the tellers possession due to the confidence reposed on the teller, the felony
of qualified theft would be committed.7

consent of the management of the Bank x x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who
come into possession of the monies deposited therein enjoy the confidence reposed in them
by their employer. Banks, on the other hand, where monies are deposited, are considered
the owners thereof. This is very clear not only from the express provisions of the law, but
from established jurisprudence. The relationship between banks and depositors has been
held to be that of creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as
appropriately pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the nature
of possession by the Bank of the money deposits therein, and the duties being performed
by its employees who have custody of the money or have come into possession of it. The
Court has consistently considered the allegations in the Information that such employees
acted with grave abuse of confidence, to the damage and prejudice of the Bank, without
particularly referring to it as owner of the money deposits, as sufficient to make out a case of
Qualified Theft. For a graphic illustration, we cite Roque v. People,6 where the accused
teller was convicted for Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of
Floridablanca, province of Pampanga, Philippines and within the jurisdiction of
his Honorable Court, the above-named accused ASUNCION GALANG ROQUE,
being then employed as teller of the Basa Air Base Savings and Loan
Association Inc. (BABSLA) with office address at Basa Air Base, Floridablanca,
Pampanga, and as such was authorized and reposed with the responsibility to
receive and collect capital contributions from its member/contributors of said

Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of
Qualified Theft based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992
and February 13, 1992, both dates inclusive, in the City of Manila, Philippines,
the said accused did then and there wilfully, unlawfully and feloniously, with
intent of gain and without the knowledge and consent of the owner thereof, take,
steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to
the PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity),
Luneta Branch, Manila represented by its Branch Manager, HELEN U. FARGAS,
to the damage and prejudice of the said owner in the aforesaid amount of
P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave
abuse of confidence and unfaithfulness, he being the Branch Operation Officer of
the said complainant and as such he had free access to the place where the said
amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine
Commercial and Industrial Bank (PCIB), is Qualified Theft. Appellant could not
have committed the crime had he not been holding the position of Luneta Branch
Operation Officer which gave him not only sole access to the bank vault xxx. The
management of the PCIB reposed its trust and confidence in the appellant as its
Luneta Branch Operation Officer, and it was this trust and confidence which he
exploited to enrich himself to the damage and prejudice of PCIB x x x.9

From another end, People v. Locson,10 in addition to People v. Sison, described the
nature of possession by the Bank. The money in this case was in the possession of the
defendant as receiving teller of the bank, and the possession of the defendant was the
possession of the Bank. The Court held therein that when the defendant, with grave abuse
of confidence, removed the money and appropriated it to his own use without the consent of
the Bank, there was taking as contemplated in the crime of Qualified Theft. 11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged the
positions of the respondents; that the crime was committed with grave abuse of confidence,
with intent to gain and without the knowledge and consent of the Bank, without necessarily
stating the phrase being assiduously insisted upon by respondents, "of a relation by
reason of dependence, guardianship or vigilance, between the respondents and the
offended party that has created a high degree of confidence between them, which
respondents abused,"12 and without employing the word "owner" in lieu of the "Bank" were
considered to have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the Bank in
this case, there is even no reason to quibble on the allegation in the Informations that they
acted with grave abuse of confidence. In fact, the Information which alleged grave abuse of
confidence by accused herein is even more precise, as this is exactly the requirement of the
law in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank due to
the confidence reposed in them, occupy positions of confidence. The Informations,
therefore, sufficiently allege all the essential elements constituting the crime of Qualified
Theft.
On the theory of the defense that the DOJ is the principal party who may file the instant
petition, the ruling in Mobilia Products, Inc. v. Hajime Umezawa13 is instructive. The Court
thus enunciated:
In a criminal case in which the offended party is the State, the interest of the
private complainant or the offended party is limited to the civil liability arising
therefrom. Hence, if a criminal case is dismissed by the trial court or if there is an
acquittal, a reconsideration of the order of dismissal or acquittal may be
undertaken, whenever legally feasible, insofar as the criminal aspect thereof is
concerned and may be made only by the public prosecutor; or in the case of an
appeal, by the State only, through the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is wellsettled that in appeals by certiorari under Rule 45 of the Rules of Court, only errors of law
may be raised,14 and herein petitioner certainly raised a question of law.
As an aside, even if we go beyond the allegations of the Informations in these cases, a
closer look at the records of the preliminary investigation conducted will show that, indeed,
probable cause exists for the indictment of herein respondents. Pursuant to Section 6, Rule
112 of the Rules of Court, the judge shall issue a warrant of arrest only upon a finding of
probable cause after personally evaluating the resolution of the prosecutor and its

supporting evidence. Soliven v. Makasiar,15 as reiterated in Allado v. Driokno,16 explained

that probable cause for the issuance of a warrant of arrest is the existence of such facts and
circumstances that would lead a reasonably discreet and prudent person to believe that an
offense has been committed by the person sought to be arrested. 17 The records reasonably
indicate that the respondents may have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the judge, as
the case may be, to relieve the respondents from the pain of going through a trial once it is
ascertained that no probable cause exists to form a sufficient belief as to the guilt of the
respondents, conversely, it is also equally imperative upon the judge to proceed with the
case upon a showing that there is a prima facie case against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby
GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the RTC dismissing
Criminal Cases No. 05-3054 to 05-3165 are REVERSED and SET ASIDE. Let the
corresponding Warrants of Arrest issue against herein respondents TERESITA PUIG and
ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is directed to
proceed with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive, with reasonable
dispatch. No pronouncement as to costs.
SO ORDERED.

The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in an
instrument payable on demand, and as no attempt was made to cash it until August 23,
1911, he could indorse and negotiate it like any other commercial instrument. There is no
doubt that if Veraguth accepted the receipt for P2,498 it was because at that time he agreed
with the defendant to consider the operation of sale on commission closed, leaving the
collection of said sum until later, which sum remained as a loan payable upon presentation
of the receipt." (Brief, 3 and 4.)

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-7593

March 27, 1913

THE UNITED STATES, plaintiff-appellee,
vs.
JOSE M. IGPUARA, defendant-appellant.

W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant.

Office of the Solicitor-General Harvey for appellee.
ARELLANO, C.J.:
The defendant therein is charged with the crime of estafa, for having swindled Juana
Montilla and Eugenio Veraguth out of P2,498 Philippine currency, which he had take on
deposit from the former to be at the latter's disposal. The document setting forth the
obligation reads:
We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and
ninety-eight pesos (P2,498), the balance from Juana Montilla's sugar. Iloilo, June 26,
1911, Jose Igpuara, for Ramirez and Co.
The Court of First Instance of Iloilo sentenced the defendant to two years of presidio
correccional, to pay Juana Montilla P2,498 Philippine currency, and in case of insolvency to
subsidiary imprisonment at P2.50 per day, not to exceed one-third of the principal penalty,
and the costs.
The defendant appealed, alleging as errors: (1) Holding that the document executed by him
was a certificate of deposit; (2) holding the existence of a deposit, without precedent
transfer or delivery of the P2,498; and (3) classifying the facts in the case as the crime of
estafa.
A deposit is constituted from the time a person receives a thing belonging to
another with the obligation of keeping and returning it. (Art. 1758, Civil Code.)
That the defendant received P2,498 is a fact proven. The defendant drew up a document
declaring that they remained in his possession, which he could not have said had he not
received them. They remained in his possession, surely in no other sense than to take care
of them, for they remained has no other purpose. They remained in the defendant's
possession at the disposal of Veraguth; but on August 23 of the same year Veraguth
demanded for him through a notarial instrument restitution of them, and to date he has not
restored them.

Then, after averring the true facts: (1) that a sales commission was precedent; (2) that this
commission was settled with a balance of P2,498 in favor of the principal, Juana Montilla;
and (3) that this balance remained in the possession of the defendant, who drew up an
instrument payable on demand, he has drawn two conclusions, both erroneous: One, that
the instrument drawn up in the form of a deposit certificate could be indorsed or negotiated
like any other commercial instrument; and the other, that the sum of P2,498 remained in
defendant's possession as a loan.
It is erroneous to assert that the certificate of deposit in question is negotiable like any other
commercial instrument: First, because every commercial instrument is not negotiable; and
second, because only instruments payable to order are negotiable. Hence, this instrument
not being to order but to bearer, it is not negotiable.
It is also erroneous to assert that sum of money set forth in said certificate is, according to it,
in the defendant's possession as a loan. In a loan the lender transmits to the borrower the
use of the thing lent, while in a deposit the use of the thing is not transmitted, but merely
possession for its custody or safe-keeping.
In order that the depositary may use or dispose oft he things deposited, the depositor's
consent is required, and then:
The rights and obligations of the depositary and of the depositor shall cease, and
the rules and provisions applicable to commercial loans, commission, or contract
which took the place of the deposit shall be observed. (Art. 309, Code of
Commerce.)
The defendant has shown no authorization whatsoever or the consent of the depositary for
using or disposing of the P2,498, which the certificate acknowledges, or any contract
entered into with the depositor to convert the deposit into a loan, commission, or other
contract.
That demand was not made for restitution of the sum deposited, which could have been
claimed on the same or the next day after the certificate was signed, does not operate
against the depositor, or signify anything except the intention not to press it. Failure to claim
at once or delay for sometime in demanding restitution of the things deposited, which was
immediately due, does not imply such permission to use the thing deposited as would
convert the deposit into a loan.
Article 408 of the Code of Commerce of 1829, previous to the one now in force, provided:

The depositary of an amount of money cannot use the amount, and if he makes
use of it, he shall be responsible for all damages that may accrue and shall
respond to the depositor for the legal interest on the amount.
Whereupon the commentators say:
In this case the deposit becomes in fact a loan, as a just punishment imposed
upon him who abuses the sacred nature of a deposit and as a means of
preventing the desire of gain from leading him into speculations that may be
disastrous to the depositor, who is much better secured while the deposit exists
when he only has a personal action for recovery.
According to article 548, No. 5, of the Penal Code, those who to the prejudice of
another appropriate or abstract for their own use money, goods, or other
personal property which they may have received as a deposit, on commission, or
for administration, or for any other purpose which produces the obligation of
delivering it or returning it, and deny having received it, shall suffer the penalty of
the preceding article," which punishes such act as the crime of estafa. The
corresponding article of the Penal Code of the Philippines in 535, No. 5.
In a decision of an appeal, September 28, 1895, the principle was laid down that: "Since he
commits the crime of estafa under article 548 of the Penal Code of Spain who to another's
detriment appropriates to himself or abstracts money or goods received on commission for
delivery, the court rightly applied this article to the appellant, who, to the manifest detriment
of the owner or owners of the securities, since he has not restored them, willfully and
wrongfully disposed of them by appropriating them to himself or at least diverting them from
the purpose to which he was charged to devote them."
It is unquestionable that in no sense did the P2,498 which he willfully and wrongfully
disposed of to the detriments of his principal, Juana Montilla, and of the depositor, Eugenio
Veraguth, belong to the defendant.
Likewise erroneous is the construction apparently at tempted to be given to two decisions of
this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs. Morales and
Morco, 15 Phil. Rep., 236) as implying that what constitutes estafa is not the disposal of
money deposited, but denial of having received same. In the first of said cases there was no
evidence that the defendant had appropriated the grain deposited in his possession.
On the contrary, it is entirely probable that, after the departure of the defendant
from Libmanan on September 20, 1898, two days after the uprising of the civil
guard in Nueva Caceres, the rice was seized by the revolutionalists and
appropriated to their own uses.
In this connection it was held that failure to return the thing deposited was not sufficient, but
that it was necessary to prove that the depositary had appropriated it to himself or diverted
the deposit to his own or another's benefit. He was accused or refusing to restore, and it
was held that the code does not penalize refusal to restore but denial of having received. So
much for the crime of omission; now with reference to the crime of commission, it was not

held in that decision that appropriation or diversion of the thing deposited would not
constitute the crime of estafa.
In the second of said decisions, the accused "kept none of the proceeds of the sales.
Those, such as they were, he turned over to the owner;" and there being no proof of the
appropriation, the agent could not be found guilty of the crime of estafa.
Being in accord and the merits of the case, the judgment appealed from is affirmed, with
costs.

be deposited with plaintiffs dollar account and defendant's only

obligation is to return the same to plaintiff upon demand;

Republic of the Philippines

SUPREME COURT
Manila

xxx xxx xxx

THIRD DIVISION
G.R. No. L-66826

August 19, 1988

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.
Pacis & Reyes Law Office for petitioner.
Ernesto T. Zshornack, Jr. for private respondent.

5. Ordering defendant COMTRUST to pay plaintiff in the amount of

P8,000.00 as damages in the concept of litigation expenses and
attorney's fees suffered by plaintiff as a result of the failure of the
defendant bank to restore to his (plaintiffs) account the amount of U.S.
$1,000.00 and to return to him (plaintiff) the U.S. $3,000.00 cash left
for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any liability
to Zshornack. The latter not having appealed the Court of Appeals decision, the issues
facing this Court are limited to the bank's liability with regard to the first and second causes
of action and its liability for damages.

CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and
Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In 1980, the
Bank of the Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a
corporate merger, and was substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First
Instance of Rizal Caloocan City a complaint against COMTRUST alleging four causes of
action. Except for the third cause of action, the CFI ruled in favor of Zshornack. The bank
appealed to the Intermediate Appellate Court which modified the CFI decision absolving the
bank from liability on the fourth cause of action. The pertinent portions of the judgment, as
modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as
follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings
account of plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of
October 27, 1975 to earn interest together with the remaining balance
of the said account at the rate fixed by the bank for dollar deposits
under Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount
of U.S. $3,000.00 immediately upon the finality of this decision,
without interest for the reason that the said amount was merely held in
custody for safekeeping, but was not actually deposited with the
defendant COMTRUST because being cash currency, it cannot by law

1. We first consider the first cause of action, On the dates material to this case, Rizaldy
Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon City Branch,
a dollar savings account and a peso current account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V.
Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain
Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia indicated that the
amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings account of the
Zshornacks; the charges for commission, documentary stamp tax and others totalling
P17.46 were to be charged to Current Acct. No. 210465-29, again, the current account of
the Zshornacks. There was no indication of the name of the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia,
issued a check payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn
on the Chase Manhattan Bank, New York, with an indication that it was to be charged to
Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an
explanation from the bank. In answer, COMTRUST claimed that the peso value of the
withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on October 27,
1975 when he (Ernesto) encashed with COMTRUST a cashier's check for P8,450.00 issued
by the Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of
both the trial court and the Appellate Court on the first cause of action. Petitioner must be
held liable for the unauthorized withdrawal of US$1,000.00 from private respondent's dollar
account.

In its desperate attempt to justify its act of withdrawing from its depositor's savings account,
the bank has adopted inconsistent theories. First, it still maintains that the peso value of the
amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter encashed the
Manilabank Cashier's Check. At the same time, the bank claims that the withdrawal was
made pursuant to an agreement where Zshornack allegedly authorized the bank to
withdraw from his dollar savings account such amount which, when converted to pesos,
would be needed to fund his peso current account. If indeed the peso equivalent of the
amount withdrawn from the dollar account was credited to the peso current account, why did
the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner
bank has not shown how the transaction involving the cashier's check is related to the
transaction involving the dollar draft in favor of Dizon financed by the withdrawal from
Rizaldy's dollar account. The two transactions appear entirely independent of each other.
Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from
Rizaldy Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy.

MR. RIZALDY T. ZSHORNACK

&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:

As to the second explanation, even if we assume that there was such an agreement, the
evidence do not show that the withdrawal was made pursuant to it. Instead, the record
reveals that the amount withdrawn was used to finance a dollar draft in favor of Leovigilda
D. Dizon, and not to fund the current account of the Zshornacks. There is no proof
whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso
equivalent of the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account
No. 25-4109.

We acknowledged (sic) having received from

you today the sum of US DOLLARS: THREE
THOUSAND ONLY (US$3,000.00) for
safekeeping.

2. As for the second cause of action, the complaint filed with the trial court alleged that on
December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash
(popularly known as greenbacks) for safekeeping, and that the agreement was embodied in
a document, a copy of which was attached to and made part of the complaint. The
document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
D
e
c
e
m
b
e

execution of the document O

in question, or questioning the authority of Garcia to bind the
bank, or denying the bank's capacity to enter into the contract, was ever filed. Hence, the
bank is deemed to have admitted
V
not only Garcia's authority, but also the bank's power, to
enter into the contract in question.
.
G
In the past, this Court had occasion
to explain the reason behind this procedural
A
requirement.
R

It was also alleged in the complaint that despite demands, the bank refused to return the
money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso
current account at prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the
authenticity and due execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the
bank US $3,000 for safekeeping. When he requested the return of the money on May 10,
1976, COMTRUST explained that the sum was disposed of in this manner: US$2,000.00
was sold on December 29, 1975 and the peso proceeds amounting to P14,920.00 were
deposited to Zshornack's current account per deposit slip accomplished by Garcia; the
remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to
P8,350.00 were deposited to his current account per deposit slip also accomplished by
Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current
account at prevailing conversion rates, BPI now posits another ground to defeat private
respondent's claim. It now argues that the contract embodied in the document is the
contract of depositum (as defined in Article 1962, New Civil Code), which banks do not enter
into. The bank alleges that Garcia exceeded his powers when he entered into the
transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the
obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point which arises on
the pleadings, must be considered.
The second cause of action is based on a document purporting to be signed by
COMTRUST, a copy of which document was attached to the complaint. In short, the second
cause of action was based on an actionable document. It was therefore incumbent upon the
bank to specifically deny under oath the due execution of the document, as prescribed
under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind the
corporation; and (2) to deny its capacity to enter into such contract. [See, E.B. Merchant v.
International Banking Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due

C
I
The reason
for the rule enunciated in the foregoing authorities will, we
think,Abe readily appreciated. In dealing with corporations the public at
large is bound to rely to a large extent upon outward appearances. If a
man is found acting for a corporation with the external indicia of
authority, any person, not having notice of want of authority, may
usually rely upon those appearances; and if it be found that the
directors had permitted the agent to exercise that authority and
thereby held him out as a person competent to bind the corporation, or
had acquiesced in a contract and retained the benefit supposed to
have been conferred by it, the corporation will be bound,
notwithstanding the actual authority may never have been granted
... Whether a particular officer actually possesses the authority which
he assumes to exercise is frequently known to very few, and the proof
of it usually is not readily accessible to the stranger who deals with the
corporation on the faith of the ostensible authority exercised by some
of the corporate officers. It is therefore reasonable, in a case where an
officer of a corporation has made a contract in its name, that the
corporation should be required, if it denies his authority, to state such
defense in its answer. By this means the plaintiff is apprised of the fact
that the agent's authority is contested; and he is given an opportunity
to adduce evidence showing either that the authority existed or that
the contract was ratified and approved. [Ramirez v. Orientalist Co. and
Fernandez, 38 Phil. 634, 645- 646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of
absolving a corporation from liability every time an officer enters into a contract which is
beyond corporate powers, even without the proper allegation or proof that the corporation
has not authorized nor ratified the officer's act, is to cast corporations in so perfect a mold
that transgressions and wrongs by such artificial beings become impossible [Bissell v.
Michigan Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no
right to do unauthorized acts is only to put forth a very plain truism but to say that such
bodies have no power or capacity to err is to impute to them an excellence which does not
belong to any created existence with which we are acquainted. The distinction between
power and right is no more to be lost sight of in respect to artificial than in respect to natural
persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the corporation, we
now determine the correct nature of the contract, and its legal consequences, including its
enforceability.

The document which embodies the contract states that the US$3,000.00 was received by
the bank for safekeeping. The subsequent acts of the parties also show that the intent of the
parties was really for the bank to safely keep the dollars and to return it to Zshornack at a
later time, Thus, Zshornack demanded the return of the money on May 10, 1976, or over
five months later.

banking institutions, and existent within the

Philippines, which belong to any person, firm,
partnership, association, branch office, agency,
company or other unincorporated body or
corporation not residing or located within the
Philippines;

The above arrangement is that contract defined under Article 1962, New Civil Code, which
reads:

(c) Any and all assets existent within the

Philippines including money, checks, drafts,
bullions, bank drafts, all debts, indebtedness or
obligations, financial securities commonly dealt
in by bankers, brokers and investment houses,
notes, debentures, stock, bonds, coupons, bank
acceptances, mortgages, pledges, liens or other
rights in the nature of security expressed in
foreign currencies, or if payable abroad,
irrespective of the currency in which they are
expressed, and belonging to any person, firm,
partnership, association, branch office, agency,
company or other unincorporated body or
corporation residing or located within the
Philippines.

Art. 1962. A deposit is constituted from the moment a person receives

a thing belonging to another, with the obligation of safely keeping it
and of returning the same. If the safekeeping of the thing delivered is
not the principal purpose of the contract, there is no deposit but some
other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign
exchange. Hence, the transaction was covered by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9,
1949, which was in force at the time the parties entered into the transaction involved in this
case. The circular provides:
xxx xxx xxx

xxx xxx xxx

2. Transactions in the assets described below and all dealings in them

of whatever nature, including, where applicable their exportation and
importation, shall NOT be effected, except with respect to deposit
accounts included in sub-paragraphs (b) and (c) of this paragraph,
when such deposit accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held
through, in, or with banks or banking institutions
located in the Philippines, including money,
checks, drafts, bullions bank drafts, deposit
accounts (demand, time and savings), all debts,
indebtedness or obligations, financial brokers
and investment houses, notes, debentures,
stocks, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the
nature of security, expressed in foreign
currencies, or if payable abroad, irrespective of
the currency in which they are expressed, and
belonging to any person, firm, partnership,
association, branch office, agency, company or
other unincorporated body or corporation
residing or located within the Philippines;
(b) Any and all assets of the kinds included
and/or described in subparagraph (a) above,
whether or not held through, in, or with banks or

4. (a) All receipts of foreign exchange shall be sold daily to the Central
Bank by those authorized to deal in foreign exchange. All receipts of
foreign exchange by any person, firm, partnership, association, branch
office, agency, company or other unincorporated body or corporation
shall be sold to the authorized agents of the Central Bank by the
recipients within one business day following the receipt of such foreign
exchange. Any person, firm, partnership, association, branch office,
agency, company or other unincorporated body or corporation,
residing or located within the Philippines, who acquires on and after
the date of this Circular foreign exchange shall not, unless licensed by
the Central Bank, dispose of such foreign exchange in whole or in
part, nor receive less than its full value, nor delay taking ownership
thereof except as such delay is customary; Provided, further, That
within one day upon taking ownership, or receiving payment, of
foreign exchange the aforementioned persons and entities shall sell
such foreign exchange to designated agents of the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and
any person, firm or corporation, foreign or domestic, who being bound
to the observance thereof, or of such other rules, regulations or
directives as may hereafter be issued in implementation of this
Circular, shall fail or refuse to comply with, or abide by, or shall violate
the same, shall be subject to the penal sanctions provided in the
Central Bank Act.

xxx xxx xxx

Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281,
Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its
coverage to Philippine residents only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm,
company or corporation shall be sold to authorized agents of the
Central Bank by the recipients within one business day following the
receipt of such foreign exchange. Any resident person, firm, company
or corporation residing or located within the Philippines, who acquires
foreign exchange shall not, unless authorized by the Central Bank,
dispose of such foreign exchange in whole or in part, nor receive less
than its full value, nor delay taking ownership thereof except as such
delay is customary; Provided, That, within one business day upon
taking ownership or receiving payment of foreign exchange the
aforementioned persons and entities shall sell such foreign exchange
to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they
intended the bank to safekeep the foreign exchange, and return it later to Zshornack, who
alleged in his complaint that he is a Philippine resident. The parties did not intended to sell
the US dollars to the Central Bank within one business day from receipt. Otherwise, the
contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank
within one business day from receipt, is a transaction which is not authorized by CB Circular
No. 20, it must be considered as one which falls under the general class of prohibited
transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having been executed
against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of
the parties a cause of action against the other. "When the nullity proceeds from the illegality
of the cause or object of the contract, and the act constitutes a criminal offense, both parties
being in pari delicto, they shall have no cause of action against each other. . ." [Art. 1411,
New Civil Code.] The only remedy is one on behalf of the State to prosecute the parties for
violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of
litigation expenses and attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to
restore to the dollar savings account of private respondent the amount of US$1,000.00 as of
October 27, 1975 to earn interest at the rate fixed by the bank for dollar savings deposits.
Petitioner is further ordered to pay private respondent the amount of P8,000.00 as
damages. The other causes of action of private respondent are ordered dismissed.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

13. The bank is not a depositary of the contents of the safe and it has
neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability in
connection therewith. 1

THIRD DIVISION

G.R. No. 90027

March 3, 1993

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.

DAVIDE, JR., J.:

Is the contractual relation between a commercial bank and another party in a contract of
rent of a safety deposit box with respect to its contents placed by the latter one of bailor and
bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon
and Paula Pugao entered into an agreement whereby the former purchased from the latter
two (2) parcels of land for a consideration of P350,625.00. Of this amount, P75,725.00 was
paid as downpayment while the balance was covered by three (3) postdated checks.
Among the terms and conditions of the agreement embodied in a Memorandum of True and
Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to the
petitioner upon full payment of the purchase price and that the owner's copies of the
certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434,
shall be deposited in a safety deposit box of any bank. The same could be withdrawn only
upon the joint signatures of a representative of the petitioner and the Pugaos upon full
payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then
rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust
Company, a domestic banking corporation hereinafter referred to as the respondent Bank.
For this purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia, the
following conditions:

After the execution of the contract, two (2) renter's keys were given to the renters one to
Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the
possession of the respondent Bank. The safety deposit box has two (2) keyholes, one for
the guard key and the other for the renter's key, and can be opened only with the use of
both keys. Petitioner claims that the certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots
at a price of P225.00 per square meter which, as petitioner alleged in its complaint,
translates to a profit of P100.00 per square meter or a total of P280,500.00 for the entire
property. Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed
the production of the certificates of title. In view thereof, Aguirre, accompanied by the
Pugaos, then proceeded to the respondent Bank on 4 October 1979 to open the safety
deposit box and get the certificates of title. However, when opened in the presence of the
Bank's representative, the box yielded no such certificates. Because of the delay in the
reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots; as a
consequence thereof, the petitioner allegedly failed to realize the expected profit of
P280,500.00. Hence, the latter filed on 1 September 1980 a complaint 2 for damages
against the respondent Bank with the Court of First Instance (now Regional Trial Court) of
Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no cause
of action because of paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily,
loss of any of the items or articles contained in the box could not give rise to an action
against it. It then interposed a counterclaim for exemplary damages as well as attorney's
fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the
counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court
(RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8
December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered
dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering
plaintiff to pay defendant the amount of FIVE THOUSAND (P5,000.00)
PESOS as attorney's fees.
With costs against plaintiff. 6

The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13
and 14 of the contract of lease, the Bank has no liability for the loss of the certificates of title.
The court declared that the said provisions are binding on the parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the adverse
decision to the respondent Court of Appeals which docketed the appeal as CA-G.R. CV No.
15150. Petitioner urged the respondent Court to reverse the challenged decision because
the trial court erred in (a) absolving the respondent Bank from liability from the loss, (b) not
declaring as null and void, for being contrary to law, public order and public policy, the
provisions in the contract for lease of the safety deposit box absolving the Bank from any
liability for loss, (c) not concluding that in this jurisdiction, as well as under American
jurisprudence, the liability of the Bank is settled and (d) awarding attorney's fees to the Bank
and denying the petitioner's prayer for nominal and exemplary damages and attorney's fees.
8

In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed
decision principally on the theory that the contract (Exhibit "2") executed by the petitioner
and respondent Bank is in the nature of a contract of lease by virtue of which the petitioner
and its co-renter were given control over the safety deposit box and its contents while the
Bank retained no right to open the said box because it had neither the possession nor
control over it and its contents. As such, the contract is governed by Article 1643 of the Civil
Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to
give to another the enjoyment or use of a thing for a price certain, and
for a period which may be definite or indefinite. However, no lease for
more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property
loses his control over the property leased during the period of the contract and
Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or
instruments which earn interest shall be bound to collect the latter
when it becomes due, and to take such steps as may be necessary in
order that the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety
deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty
to maintain the contents of the box. The stipulation absolving the defendantappellee from liability is in accordance with the nature of the contract of lease
and cannot be regarded as contrary to law, public order and public policy." 12 The
appellate court was quick to add, however, that under the contract of lease of the
safety deposit box, respondent Bank is not completely free from liability as it may
still be made answerable in case unauthorized persons enter into the vault area

or when the rented box is forced open. Thus, as expressly provided for in
stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall
be admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of
28 August 1989, 15 petitioner took this recourse under Rule 45 of the Rules of Court and
urges Us to review and set aside the respondent Court's ruling. Petitioner avers that both
the respondent Court and the trial court (a) did not properly and legally apply the correct law
in this case, (b) acted with grave abuse of discretion or in excess of jurisdiction amounting to
lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents
adhered to and affirmed by decisions of this Court and precepts in American jurisprudence
adopted in the Philippines. It reiterates the arguments it had raised in its motion to
reconsider the trial court's decision, the brief submitted to the respondent Court and the
motion to reconsider the latter's decision. In a nutshell, petitioner maintains that regardless
of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a
contract of deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the
certificates of title pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to
return it, when required, to the depositor, or to his heirs and
successors, or to the person who may have been designated in the
contract. His responsibility, with regard to the safekeeping and the
loss of the thing, shall be governed by the provisions of Title I of this
Book.
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence 17 which is
supposed to expound on the prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit company
leases a safe-deposit box or safe and the lessee takes possession of
the box or safe and places therein his securities or other valuables,
the relation of bailee and bail or is created between the parties to the
transaction as to such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it
shall know, the character or description of the property which is
deposited in such safe-deposit box or safe does not change that
relation. That access to the contents of the safe-deposit box can be
had only by the use of a key retained by the lessee ( whether it is the
sole key or one to be used in connection with one retained by the
lessor) does not operate to alter the foregoing rule. The argument that
there is not, in such a case, a delivery of exclusive possession and
control to the deposit company, and that therefore the situation is
entirely different from that of ordinary bailment, has been generally

rejected by the courts, usually on the ground that as possession must

be either in the depositor or in the company, it should reasonably be
considered as in the latter rather than in the former, since the
company is, by the nature of the contract, given absolute control of
access to the property, and the depositor cannot gain access thereto
without the consent and active participation of the company. . . .
(citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the
rental of a bank safety deposit box in consideration of a fixed amount at stated
periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to
law and public policy and should be declared null and void. In support thereof, it cites Article
1306 of the Civil Code which provides that parties to a contract 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.
After the respondent Bank filed its comment, this Court gave due course to the petition and
required the parties to simultaneously submit their respective Memoranda.

There is, however, some support for the view that the relationship in
question might be more properly characterized as that of landlord and
tenant, or lessor and lessee. It has also been suggested that it should
be characterized as that of licensor and licensee. The relation
between a bank, safe-deposit company, or storage company, and the
renter of a safe-deposit box therein, is often described as contractual,
express or implied, oral or written, in whole or in part. But there is
apparently no jurisdiction in which any rule other than that applicable
to bailments governs questions of the liability and rights of the parties
in respect of loss of the contents of safe-deposit boxes. 22 (citations
omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit
boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been
adopted. Section 72 of the General Banking Act 23 pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere
in this Act, banking institutions other than building and loan
associations may perform the following services:
(a) Receive in custody funds, documents, and
valuable objects, and rent safety deposit boxes
for the safeguarding of such effects.

The petition is partly meritorious.

We agree with the petitioner's contention that the contract for the rent of the safety deposit
box is not an ordinary contract of lease as defined in Article 1643 of the Civil Code.
However, We do not fully subscribe to its view that the same is a contract of deposit that is
to be strictly governed by the provisions in the Civil Code on deposit; 19 the contract in the
case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of
lease under Article 1643 because the full and absolute possession and control of the safety
deposit box was not given to the joint renters the petitioner and the Pugaos. The guard
key of the box remained with the respondent Bank; without this key, neither of the renters
could open the box. On the other hand, the respondent Bank could not likewise open the
box without the renter's key. In this case, the said key had a duplicate which was made so
that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither
could Article 1975, also relied upon by the respondent Court, be invoked as an argument
against the deposit theory. Obviously, the first paragraph of such provision cannot apply to a
depositary of certificates, bonds, securities or instruments which earn interest if such
documents are kept in a rented safety deposit box. It is clear that the depositary cannot
open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find unanimous
support even in American jurisprudence. We agree with the petitioner that under the latter,
the prevailing rule is that the relation between a bank renting out safe-deposit boxes and its
customer with respect to the contents of the box is that of a bail or and bailee, the bailment
being for hire and mutual benefit. 21 This is just the prevailing view because:

xxx xxx xxx

The banks shall perform the services permitted under subsections (a),
(b) and (c) of this section as depositories or as agents. . . . 24
(emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit,
i.e., the receiving in custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not independent from, but
related to or in conjunction with, this principal function. A contract of deposit may be entered
into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto
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. The depositary's responsibility for the safekeeping of the objects deposited in
the case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the depositary
would be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. 26 In the absence of any stipulation prescribing
the degree of diligence required, that of a good father of a family is to be observed. 27
Hence, any stipulation exempting the depositary from any liability arising from the loss of the
thing deposited on account of fraud, negligence or delay would be void for being contrary to
law and public policy. In the instant case, petitioner maintains that conditions 13 and 14 of
the questioned contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has
neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, except

herein expressly provided, and it assumes absolutely no liability in
connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with
the respondent Bank's responsibility as a depositary under Section 72(a) of the
General Banking Act. Both exempt the latter from any liability except as
contemplated in condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall
be admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the
actual practice of the Bank. It is not correct to assert that the Bank has neither
the possession nor control of the contents of the box since in fact, the safety
deposit box itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the said box. As stated
earlier, renters cannot open their respective boxes unless the Bank cooperates
by presenting and using this guard key. Clearly then, to the extent above stated,
the foregoing conditions in the contract in question are void and ineffective. It has
been said:
With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the relation is
a contractual one, may by special contract define their respective
duties or provide for increasing or limiting the liability of the deposit
company, provided such contract is not in violation of law or public
policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by
law from the relationship of the parties; liability of the deposit company
will not be enlarged or restricted by words of doubtful meaning. The
company,
in
renting
safe-deposit boxes, cannot exempt itself from liability for loss of the
contents by its own fraud or negligence or that of its agents or
servants, and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose. Although it
has been held that the lessor of a safe-deposit box cannot limit its
liability for loss of the contents thereof through its own negligence, the
view has been taken that such a lessor may limits its liability to some
extent by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the
petition should be dismissed, but on grounds quite different from those relied upon by the
Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to
the holding of the Court of Appeals, be based on or proceed from a characterization of the
impugned contract as a contract of lease, but rather on the fact that no competent proof was
presented to show that respondent Bank was aware of the agreement between the
petitioner and the Pugaos to the effect that the certificates of title were withdrawable from

the safety deposit box only upon both parties' joint signatures, and that no evidence was
submitted to reveal that the loss of the certificates of title was due to the fraud or negligence
of the respondent Bank. This in turn flows from this Court's determination that the contract
involved was one of deposit. Since both the petitioner and the Pugaos agreed that each
should have one (1) renter's key, it was obvious that either of them could ask the Bank for
access to the safety deposit box and, with the use of such key and the Bank's own guard
key, could open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad
faith on its part had been established, the trial court erred in condemning the petitioner to
pay the respondent Bank attorney's fees. To this extent, the Decision (dispositive portion) of
public respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for
attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals in CAG.R. CV No. 15150. As modified, and subject to the pronouncement We made above on the
nature of the relationship between the parties in a contract of lease of safety deposit boxes,
the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for
Review is otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which,
together with the P1,102.16 acknowledged in the complaint, aggregated the total sum of
P5,602.16, and that, deducting therefrom the total sum of P2,686.58 stated in the document
transcribed in the complaint, the plaintiff still owed the defendants P2,915.58; therefore, they
asked that judgment be entered absolving them, and sentencing the plaintiff to pay them the
sum of P2,915.58 with the costs.

EN BANC
G.R. No. 4015

August 24, 1908

ANGEL JAVELLANA, plaintiff-appellee,
vs.
JOSE LIM, ET AL., defendants-appellants.

R. Zaldarriaga for appellants.

B. Montinola for appellee.
TORRES, J.:
The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October, 1906,
with the Court of First Instance of Iloilo, praying that the defendants, Jose Lim and Ceferino
Domingo Lim, he sentenced to jointly and severally pay the sum of P2,686.58, with interest
thereon at the rate of 15 per cent per annum from the 20th of January, 1898, until full
payment should be made, deducting from the amount of interest due the sum of P1,102.16,
and to pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint was amended on
the 10th of January, 1907; it was then alleged, on the 26th of May, 1897, the defendants
executed and subscribed a document in favor of the plaintiff reading as follows:
We have received from Angel Javellana, as a deposit without interest, the sum of two
thousand six hundred and eighty-six cents of pesos fuertes, which we will return to the said
gentleman, jointly and severally, on the 20th of January, 1898. Jaro, 26th of May, 1897.
Signed Jose Lim. Signed: Ceferino Domingo Lim.
That, when the obligation became due, the defendants begged the plaintiff for an extension
of time for the payment thereof, building themselves to pay interest at the rate of 15 per cent
on the amount of their indebtedness, to which the plaintiff acceded; that on the 15th of May,
1902, the debtors paid on account of interest due the sum of P1,000 pesos, with the
exception of either capital or interest, had thereby been subjected to loss and damages.
A demurrer to the original complaint was overruled, and on the 4th of January, 1907, the
defendants answered the original complaint before its amendment, setting forth that they
acknowledged the facts stated in Nos. 1 and 2 of the complaint; that they admitted the
statements of the plaintiff relative to the payment of 1,102.16 pesos made on the 15th of
November, 1902, not, however, as payment of interest on the amount stated in the
foregoing document, but on account of the principal, and denied that there had been any
agreement as to an extension of the time for payment and the payment of interest at the
rate of 15 per cent per annum as alleged in paragraph 3 of the complaint, and also denied
all the other statements contained therein.

Evidence was adduced by both parties and, upon their exhibits, together with an account
book having been made of record, the court below rendered judgment on the 15th of
January, 1907, in favor of the plaintiff for the recovery of the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new trial. This motion was
overruled and was also excepted to by them; the bill of exceptions presented by the
appellants having been approved, the same was in due course submitted to this court.
The document of indebtedness inserted in the complaint states that the plaintiff left on
deposit with the defendants a given sum of money which they were jointly and severally
obliged to return on a certain date fixed in the document; but that, nevertheless, when the
document appearing as Exhibits 2, written in the Visayan dialect and followed by a
translation into Spanish was executed, it was acknowledged, at the date thereof, the 15th of
November, 1902, that the amount deposited had not yet been returned to the creditor,
whereby he was subjected to losses and damages amounting to 830 pesos since the 20th
of January, 1898, when the return was again stipulated with the further agreement that the
amount deposited should bear interest at the rate of 15 per cent per annum, from the
aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on the 15th of
May, 1900, according to the receipt issued by him to the debtors, would be included, and
that the said rate of interest would obtain until the debtors on the 20th of May, 1897, it is
called a deposit consisted, and they could have accomplished the return agreed upon by
the delivery of a sum equal to the one received by them. For this reason it must be
understood that the debtors were lawfully authorized to make use of the amount deposited,
which they have done, as subsequent shown when asking for an extension of the time for
the return thereof, inasmuch as, acknowledging that they have subjected the letter, their
creditor, to losses and damages for not complying with what had been stipulated, and being
conscious that they had used, for their own profit and gain, the money that they received
apparently as a deposit, they engaged to pay interest to the creditor from the date named
until the time when the refund should be made. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered into between the interested parties
was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that
The depository can not make use of the thing deposited without the express
permission of the depositor.
Otherwise he shall be liable for losses and damages.
Article 1768 also provides that

When the depository has permission to make use of the thing deposited, the
contract loses the character of a deposit and becomes a loan or bailment.
The permission shall not be presumed, and its existence must be proven.
When on one of the latter days of January, 1898, Jose Lim went to the office of the creditor
asking for an extension of one year, in view of the fact the money was scare, and because
neither himself nor the other defendant were able to return the amount deposited, for which
reason he agreed to pay interest at the rate of 15 per cent per annum, it was because, as a
matter of fact, he did not have in his possession the amount deposited, he having made use
of the same in his business and for his own profit; and the creditor, by granting them the
extension, evidently confirmed the express permission previously given to use and dispose
of the amount stated as having bee deposited, which, in accordance with the loan, to all
intents and purposes gratuitously, until the 20th of January, 1898, and from that dated with
interest at 15 per cent per annum until its full payment, deducting from the total amount of
interest the sum of 1,000 pesos, in accordance with the provisions of article 1173 of the Civil
Code.
Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2)
executed in the presence of three witnesses on the 15th of November, 1902, by Ceferino
Domingo Lim on behalf of himself and the former, nevertheless, the said document has not
been contested as false, either by a criminal or by a civil proceeding, nor has any doubt
been cast upon the authenticity of the signatures of the witnesses who attested the
execution of the same; and from the evidence in the case one is sufficiently convinced that
the said Jose Lim was perfectly aware of and authorized his joint codebtor to liquidate the
interest, to pay the sum of 1,000 pesos, on account thereof, and to execute the aforesaid
document No. 2. A true ratification of the original document of deposit was thus made, and
not the least proof is shown in the record that Jose Lim had ever paid the whole or any part
of the capital stated in the original document, Exhibit 1.
If the amount, together with interest claimed in the complaint, less 1,000 pesos appears as
fully established, such is not the case with the defendant's counterclaim for P5,602.16,
because the existence and certainty of said indebtedness imputed to the plaintiff has not
been proven, and the defendants, who call themselves creditors for the said amount have
not proven in a satisfactory manner that the plaintiff had received partial payments on
account of the same; the latter alleges with good reason, that they should produce the
receipts which he may have issued, and which he did issue whenever they paid him any
money on account. The plaintiffs allegation that the two amounts of 400 and 1,200 pesos,
referred to in documents marked "C" and "D" offered in evidence by the defendants, had
been received from Ceferino Domingo Lim on account of other debts of his, has not been
contradicted, and the fact that in the original complaint the sum of 1,102.16 pesos, was
expressed in lieu of 1,000 pesos, the only payment made on account of interest on the
amount deposited according to documents No. 2 and letter "B" above referred to, was due
to a mistake.
Moreover, for the reason above set forth it may, as a matter of course, be inferred that there
was no renewal of the contract deposited converted into a loan, because, as has already
been stated, the defendants received said amount by virtue of real loan contract under the
name of a deposit, since the so-called bailees were forthwith authorized to dispose of the
amount deposited. This they have done, as has been clearly shown.

The original joint obligation contracted by the defendant debtor still exists, and it has not
been shown or proven in the proceedings that the creditor had released Joe Lim from
complying with his obligation in order that he should not be sued for or sentenced to pay the
amount of capital and interest together with his codebtor, Ceferino Domingo Lim, because
the record offers satisfactory evidence against the pretension of Jose Lim, and it further
appears that document No. 2 was executed by the other debtor, Ceferino Domingo Lim, for
himself and on behalf of Jose Lim; and it has also been proven that Jose Lim, being fully
aware that his debt had not yet been settled, took steps to secure an extension of the time
for payment, and consented to pay interest in return for the concession requested from the
creditor.
In view of the foregoing, and adopting the findings in the judgment appealed from, it is our
opinion that the same should be and is hereby affirmed with the costs of this instance
against the appellant, provided that the interest agreed upon shall be paid until the complete
liquidation of the debt. So ordered.
Arellano, C.J., Carson, Willard and Tracey, JJ., concur.