Loan

Commodatum
1 Republic vs Bagtas
FACTS: May 8, 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
1 year for breeding purposes subject to a breeding fee of 10% of the book value of
the bulls
May 7, 1949: Jose requested for a renewal for another year for the three bulls but
only one bull was approved while the others are to be returned
March 25, 1950: He wrote to the Director of Animal Industry that he would pay the
value of the 3 bulls
October 17, 1950: he reiterated his desire to buy them at a value with a deduction
of yearly depreciation to be approved by the Auditor General.
October 19, 1950: Director of Animal Industry advised him that either the 3 bulls
are to be returned or their book value without deductions should be paid not later
than October 31, 1950 which he was not able to do
December 20, 1950: An action at the CFI was commenced against Jose praying that
he be ordered to return the 3 bulls or to pay their book value of P3,241.45 and the
unpaid breeding fee of P199.62, both with interests, and costs
July 5, 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, he could not return the animals nor pay their value and prayed for the
dismissal of the complaint.
RTC: granted the action
December 1958: granted an ex-parte motion for the appointment of a special
sheriff to serve the writ outside Manila
December 6, 1958: Felicidad M. Bagtas, the surviving spouse of Jose who died on
October 23, 1951 and administratrix of his estate, was notified
January 7, 1959: she file a motion that the 2 bulls where returned by his son on
June 26, 1952 evidenced by recipt and the 3rd bull died from gunshot wound
inflicted during a Huk raid and prayed that the writ of execution be quashed and
that a writ of preliminary injunction be issued.
ISSUE: W/N the contract is commodatum and NOT a lease and the estate should
be liable for the loss due to force majeure due to delay.
HELD: YES. writ of execution appealed from is set aside, without pronouncement
as to costs
If contract was commodatum then Bureau of Animal Industry retained ownership
or title to the bull it should suffer its loss due to force majeure. A contract of

commodatum is essentially gratuitous. 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
if he keeps it longer than the period stipulated. 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 because it was killed while in the custody of the administratrix of his
estate
Special proceedings for the administration and settlement of the estate of the
deceased Jose V. Bagtas having been instituted in the CFI, 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.
2 Republic vs CA
3 Pajuyo vs CA
Facts: Pajuyo entrusted a house to Guevara for the latter's use provided he should
return the same upon demand and with the condition that Guevara should be
responsible of the maintenance of the property. Upon demand Guevara refused to
return the property to Pajuyo. The petitioner then filed an ejectment case against
Guevara with the MTC who ruled in favor of the petitioner. On appeal with the CA,
the appellate court reversed the judgment of the lower court on the ground that
both parties are illegal settlers on the property thus have no legal right so that the
Court should leave the present situation with respect to possession of the
property as it is, and ruling further that the contractual relationship of Pajuyo and
Guevara was that of a commodatum.
Issue: Is the contractual relationship of Pajuyo and Guevara that of a
commodatum?
Held: No. The Court of Appeals theory that the Kasunduan is one of commodatum
is devoid of merit. In a contract of commodatum, one of the parties delivers to
another something not consumable so that the latter may use the same for a
certain time and return it. An essential feature of commodatum is that it is
gratuitous. Another feature of commodatum is that the use of the thing belonging
to another is for a certain period. Thus, the bailor cannot demand the return of the
thing loaned until after expiration of the period stipulated, or after
accomplishment of the use for which the commodatum is constituted. If the bailor
should have urgent need of the thing, he may demand its return for temporary
use. If the use of the thing is merely tolerated by the bailor, he can demand the
return of the thing at will, in which case the contractual relation is called a
precarium. Under the Civil Code, precarium is a kind of commodatum. The
Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was

not essentially gratuitous. While the Kasunduan did not require Guevarra to pay
rent, it obligated him to maintain the property in good condition. The imposition
of this obligation makes the Kasunduan a contract different from a commodatum.
The effects of the Kasunduan are also different from that of a commodatum. Case
law on ejectment has treated relationship based on tolerance as one that is akin to
a landlord-tenant relationship where the withdrawal of permission would result in
the termination of the lease. The tenants withholding of the property would then
be unlawful.
4 Quintos vs Beck
Facts: Quintos and Beck entered into a contract of lease, whereby the latter
occupied the formers house. On Jan 14, 1936, the contract of lease was novated,
wherein the QUintos gratuitously granted to Beck the use of the furniture, subject
to the condition that Beck should return the furnitures to Quintos upon demand.
Thereafter, Quintos sold the property to Maria and Rosario Lopez. Beck was
notified of the conveyance and given him 60 days to vacate the premises. IN
addition, Quintos required Beck to return all the furniture. Beck refused to return
3 gas heaters and 4 electric lamps since he would use them until the lease was due
to expire. Quintos refused to get the furniture since Beck had declined to return all
of them. Beck deposited all the furniture belonging to QUintos to the sheriff.
ISSUE: WON Beck complied with his obligation of returning the furnitures to
Quintos when it deposited the furnitures to the sheriff.
RULING: 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.
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 nt 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.
5 Delos Santos vs Jarra
Facts: The Plaintiff Felix delos Santos filed this suit against Agustina Jarra. Jarra was
the administratix of the estate of Jimenea. Plaintiff alleged that he owned 10 1st
class carabaos which he lent to his father-in-law Jimenea to be used in the animal-

power mill without compensation. This was done on the condition of their return
after the work at the latters mill is terminated. When delos Santos demanded the
return of the animals Jimenea refused, hence this suit.
Issue: W/N the contracts is one of a commodatum
Ruling: YES. The carabaos were given on commodatum as these were delivered to
be used by defendant. Upon failure of defendant to return the cattle upon
demand, he is under the obligation to indemnify the plaintiff by paying him their
value. Since the 6 carabaos were not the property of the deceased or of any of his
descendants, it is the duty of the administratrix of the estate to either return them
or indemnify the owner thereof of their value.
6 Manzano vs Perez
Commodatum (The Bailor)
Facts: Petitioner Emilia Manzano alleged that she is the owner of a residential
house and lot situated at General Luna St. Laguna. In 1979, Nieves Manzano, sister
of the petitioner borrowed the aforementioned property as collateral for a
projected loan. Pursuant to their understanding, the petitioner executed two
deeds of conveyance for the sale of the residential lot and the house erected, both
for a consideration of P1.00 plus other valuables allegedly received by her from
Nieves Manzano. Nieves Manzano, together with her husband, respondent Miguel
Perez, Sr. obtained a loan fromthe Rural Bank of Infanta, Inc. in the sum of
P30,000.00. To secure payment of their indebtedness, they executed a Real Estate
Mortgage over the subject property in favor of the bank. Nieves Manzano died on
18 December 1979 leaving her husband and children as heirs. These heirs refused
to return the subject property to the petitioner even after the payment of their
loan with the Rural Bank. The petitioner sought the annulment of the deeds of sale
and execution of a deed of transfer or reconveyance of the subject property in her
favor, and award of damages. The Court of Appeals ruled that it was not convinced
by petitioner's claim that there was a supposed oral agreement of commodatum
over the disputed house and lot. Hence, this petition.
Contention of petitioner: The petitioner alleged that properties in question after
they have been transferred to Nieves Manzano, were mortgaged in favor of the
Rural Bank of Infanta, Inc to secure payment of the loan. The documents covering
said properties which were given to the bank as collateral of said loan, upon
payment and release to the private respondents, were returned to petitioner by
Florencio Perez. These are a clear recognition by respondents that petitioner is the
owner of the properties in question
Contention of respondents: the respondents countered that they are the owners
of the property in question being the legal heirs of Nieves Manzano who
purchased the same from the petitioner for value and in good faith, as shown by
the deeds of sale which contain the true agreements between the parties therein

that except for the petitioner's bare allegations, she failed to show any proof that
the transaction she entered into with her sister was a loan and not a sale.
Resolution: The court ruled that petitioner has presented no convincing proof of
her continued ownership of the subject property. In addition to her own oral
testimony, she submitted proof of payment of real property taxes, but such
payment was made only after her Complaint had already been lodged before the
trial court. Neither can the court give weight to her allegation that respondent's
possession of the subject property was merely by virtue of her tolerance. Oral
testimony cannot, as a rule, prevail over a written agreement of the parties. In
order to contradict the facts contained in a notarial document, such
as the two Kasulatan ng Bilihang Tuluyan in this case, as well as the presumption
of regularity in the execution thereof, there must be clear and convincing evidence
that is more than merely preponderant. Here petitioner has failed to come up with
even a preponderance of evidence to prove her claim.
Courts are not blessed with the ability to read what goes on in the minds of
people. That is why parties to a case are given all the opportunity to present
evidence to help the courts decide on who are telling the truth and who are lying,
who are entitled to their claim and who are not. The Supreme Court cannot
depart from these guidelines and decide on the basis of compassion alone
because, aside from being contrary to the rule of law and our judicial system, this
course of action would ultimately lead to anarchy.
We reiterate, the evidence offered by petitioner to prove her claim is sadly lacking.
Jurisprudence on the subject matter, when applied thereto, points to the existence
of a sale, not a commodatum over the subject house and lot.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED.
Costs against petitioner.
7 Producers Bank of the Phils vs CA
Doronilla is in the process of incorporating his business and to comply with one of
the requirements of incorporation, he caused Vives to issue a check which was
then deposited in Doronillas savings account. It was agreed that Vives can
withdraw his money in a months time. However, what Doronilla did was to open a
current account and instructed the bank to debit from the savings account and
deposit it in his current account. So when Vives checked the savings account, the
money was gone. Is the contract a mutuum or commodatum?
Supreme Court held that the contract is a commodatum. Although in a
commodatum, the object is a non-consumable thing, there are instances where a
consumable thing may be the object of a commodatum, such as when the purpose
is not for consumption of the object but merely for exhibition (Art. 1936). 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.
CONSIDERATION
Art. 1933: xxx Commodatum is essentially gratuitous.
Art. 1935: xxx if any compensation is to be paid by him who acquires the use, the
contract ceases to be a commodatum.
DELIVERY
- perfects the contract
SIMPLE LOAN
1 Saura Import vs Development Bank of the Phils
FACTS: Saura applied to the Rehabilitation Finance Corporation (RFC), before its
conversion into DBP, for an industrial loan to be used for construction of factory
building, for payment of the balance of the purchase price of the jute machinery
and equipment and as additional working capital. In Resolution No.145, the loan
application was approved to be secured first by mortgage on the factory buildings,
the land site, and machinery and equipment to be installed.
The mortgage was registered and documents for the promissory note were
executed. The cancellation of the mortgage was requested to make way for the
registration of a mortgage contract over the same property in favor of Prudential
Bank and Trust Co., the latter having issued Saura letter of credit for the release of
the jute machinery. As security, Saura execute a trust receipt in favor of the
Prudential. For failure of Saura to pay said obligation, Prudential sued Saura.
After 9 years after the mortgage was cancelled, Saura sued RFc alleging failure to
comply with tits obligations to release the loan proceeds, thereby prevented it
from paying the obligation to Prudential Bank.
The trial court ruled in favor of Saura, ruling that there was a perfected contract
between the parties ad that the RFC was guilty of breach thereof.
ISSUE : Whether or not there was a perfected contract between the parties.
HELD : The Court held in the affirmative. Article 1934 provides: An accepted
promise to deliver something by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perfected
until delivery of the object of the contract.
There was undoubtedly offer and acceptance in the case. When an application for
a loan of money was approved by resolution of the respondent corporation and
the responding mortgage was executed and registered, there arises a perfected
consensual contract.
2 BPI Investment vs CA
FACTS: Frank Roa obtained a loan from Ayala Investment and Development
Corporation (AIDC), for the construction of his house. Said house and lot were
mortgaged to AIDC to secure the loan. Roa sold the properties to ALS and Litonjua,

the latter paid in cash and assumed the balance of Roas indebtedness wit AIDC.
AIDC was not willing to extend the old interest to private respondents and
proposed a grant of new loan of P500,000 with higher interest to be applied to
Roas debt, secured by the same property. Private respondents executed a
mortgage deed containing the stipulation. The loan contract was signed on 31
March 1981 and was perfected on 13 September 1982, when the full loan was
released to private respondents.
BPIIC, AIDCs predecessor, released to private respondents P7,146.87, purporting
to be what was left of their loan after full payment of Roas loan. BPIIC filed for
foreclosure proceedings on the ground that private respondents failed to pay the
mortgage indebtedness. Private respondents maintained that they should not be
made to pay amortization before the actual release of the P500,000 loan. The suit
was dismissed and affirmed by the CA.
ISSUE: Whether or not a contract of loan is a consensual contract.
HELD: The Court held in the negative. A loan contract is not a consensual contract
but a real contract. It is perfected only upon delivery of the object of the contract.
A contract o loan involves a reciprocal obligation, wherein the obligation or
promise of each party is the consideration for that of the other; it is a basic
principle in reciprocal obligations that neither party incurs in delay, if the other
does not comply or is not ready to comply is a proper manner with what is
incumbent upon him
3 Naguiat vs CA
FACTS
Queao applied with Naguiat a loan for P200,000, which the latter granted.
Naguiat indorsed to Queao Associated bank Check No. 090990 for the amount of
P95,000 and issued also her own Filmanbank Check to the order of Queao for the
amount of P95,000. The proceeds of these checks were to constitute the loan
granted by Naguiat to Queao. To secure the loan, Queao executed a Deed of
Real Estate Mortgage in favor of Naguiat, and surrendered the owners duplicates
of titles of the mortgaged properties. The deed was notarized and Queao issued
to Naguiat a promissory note for the amount of P200,000. Queao also issued a
post-dated check amounting to P200,000 payable to the order of Naguait. The
check was dishonoured for insufficiency of funds. Demand was sent to Queao.
Shortly, Queao, and one Ruby Reubenfeldt met with Naguiat. Queao told
Naguiat that she did not receive the loan proceeds, adding that the checks were
retained by Reubenfeldt, who purportedly was Naguiats agent.

Naguiat applied for extrajudicial foreclosure of the mortgage. RTC declared the
Deed as null and void and ordered Naguiat to return to Queao the owners
duplicates of titles of the mortgaged lots.
ISSUE: Whether or not the issuance of check resulted in the perfection of the loan
contract.
HELD: The Court held in the negative. No evidence was submitted by Naguiat that
the checks she issued or endorsed were actually encashed or deposited. The mere
issuance of the checks did not result in the perfection of the contract of loan. The
Civil Code provides that the delivery of bills of exchange and mercantile
documents such as checks shall produce the effect of payment only when they
have been cashed. It is only after the checks have been produced the effect of
payment that the contract of loan may have been perfected.
Article 1934 of the Civil Code provides: An accepted promise to deliver something
by way of commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itsel shall not be perfected until the delivery of the
object of the contract. A loan contract is a real contract, not consensual, and as
such, is perfected only upon the delivery of the objects of the contract.
4 Cebu Intl Finance vs CA
The prevailing jurisprudence is that a mortgagee has a right to rely in good faith on
the certificate of title of the mortgagor to the property given as security and in the
absence of any sign that might arouse suspicion, has no obligation to undertake
further investigation.
Facts: Jacinto Dy executed a Special Power of Attorneyin favor of private
respondent Ang Tay, authorizing the latter to sell the cargo vessel owned by Dy
and christened LCT Asiatic. Through a Deed of Absolute Sale, Ang Tay sold the
subject vessel to Robert Ong (Ong). Ong paid the purchase price by issuing three
(3) checks However, since the payment was not made in cash, it was specifically
stipulated in the deed of sale that the LCT Asiatic shall not be registered or
transferred to Robert Ong until complete payment. Thereafter, Ong obtained
possession of the subject vessel so he could begin deriving economic benefits
therefrom. He, likewise, obtained copies of the unnotarized deed of sale allegedly
to be shown to the banks to enable him to acquire a loan to replenish his (Ongs)
capital. The aforequoted condition, however, which was handwritten on the
original deed of sale does not appear on Ongs copies.Contrary to the
aforementioned agreements and without the knowledge of Ang Tay, Ong had his
copies of the deed of sale (on which the aforementioned prohibition does not
appear) notarized Ong presented the notarized deed to the Philippine Coast Guard
which subsequently issued him a Certificate of Ownership and a Certificate of

Philippine Register over the subject vessel. Ong also succeeded in having the name
of the vessel changed to LCT Orient Hope.
Using the acquired vessel, Ong acquired a loan from Cebu International Finance
Corporation to be paid in installments as evidenced by a promissory note of even
date. As security for the loan, Ong executed a chattel mortgage over the subject
vessel, which mortgage was registered with the Philippine Coast Guard and
annotated on the Certificate of Ownership.
-Ong defaulted in the payment of the monthly installments. Consequently, Cebu
International Finance Corporation sent him a letter] demanding delivery of the
mortgaged vessel for foreclosure or in the alternative to pay the balance pursuant
to paragraph 11 of the deed of chattel mortgage. Meanwhile, the two checks paid
by Ong to Ang Tay for the Purchase of the subject vessel bounced. Ang Tays
search for the elusive Ong and all attempts to confer with him proved to be futile.
A subsequent investigation and inquiry with the Office of the Coast Guard revealed
that the subject vessel was already in the name of Ong, in violation of the express
undertaking contained in the original deed of sale. As a result thereof, Ang Tay and
Jacinto Dy filed a civil case for rescission and replevin with damages against Ong
and his wife.
Issue: Whether or not Cebu International Finance Corporation can validly foreclose
the chattel mortgage
Held: The prevailing jurisprudence is that a mortgagee has a right to rely in good
faith on the certificate of title of the mortgagor to the property given as security
and in the absence of any sign that might arouse suspicion, has no obligation to
undertake further investigation. Hence, even if the mortgagor is not the rightful
owner of or does not have a valid title to the mortgaged property, the mortgagee
or transferee in good faith is nonetheless entitled to protection. Although this rule
generally pertains to real property, particularly registered land, it may also be
applied by analogy to personal property, in this case specifically, since ship owners
are, likewise, required by law to register their vessels with the Philippine Coast
Guard.
The chattel mortgage constituted on a vessel by the buyer who was able to
register the vessel in his name despite the agreement with the seller that the
vessel would not be so registered until after full payment of the price which do
not appear in the buyers copy of the deed of sale is VALID, for the mortgagee has
the right to rely in good faith on the certificate of registration.
5 BPI Family vs Franco
(Simple Loan)


Article 1980 of the Civil Code: Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the provisions concerning
loan.

As there is a debtor-creditor relationship between a bank and its depositor,

BPI-FB ultimately acquired ownership of Francos deposits, but such ownership is
coupled with a corresponding obligation to pay him an equal amount on demand.
Although BPI-FB owns the deposits in Francos accounts, it cannot prevent him
from demanding payment of BPI-FBs obligation by drawing checks against his
current account, or asking for the release of the funds in his savings account.
Thus, when Franco issued checks drawn against his current account, he had every
right as creditor to expect that those checks would be honored by BPI-FB as
debtor.
6 Tolentino vs Gonzales Sy Chiam
Tolentino purchased land from Luzon Rice Mills for Php25,000 payable in three
installments. Tolentino defaulted on the balance so the owner sent a letter of
demand to him. To pay, Tolentino applied for loan from Gonzalez on condition
that he would execute a pacto de retro sale on the property in favor of Gonzalez.
Upon maturation of loan, Tolentino defaulted so Gonzalez is demanding recovery
of the land. Tolentino contends that the pacto de retro sale is a mortgage and not
an absolute sale.
The Supreme Court held that upon its terms, the deed of pacto de retro sale is an
absolute sale with right of repurchase and not a mortgage. Thus, Gonzalez is the
owner of the land and Tolentino is only holding it as a tenant by virtue of a
contract of lease.
INTEREST AND THE USURY LAW
1 Jadenil vs Salas

2 Cu Unijen e Hijos vs Mabalacat Sugar

Facts: Cu Unjieng e Hijos loaned Mabalacat 163 k, for security, Mabalacat
mortgaged its property.
Mabalacat failed to pay, but Cu Unjieng extended the payment. Cu Unjieng filed a
case against Mabalacat for foreclosure of property and payment of attorney's fees.
It also claims interest over interest. Mabalacat insisted that the agreement for the
extension of the time of payment had the effect of abrogating the stipulation of
the original contract with respect to the acceleration of the maturity of the debt by
non-compliance with the terms of the mortgage. The issue related on this case is
the interest over interest.

Issue: WoN Cu-Unjieng is entitled to interest over interest.

Ruling: It is well settled that, under article 1109 of the Civil Code, as well as under
section 5 of the Usury Law (Act No. 2655), the parties may stipulate that interest
shall be compounded; and rests for the computation of compound interest can
certainly be made monthly, as well as quarterly, semiannually, or annually. But in
the absence of express stipulation for the accumulation of compound interest, no
interest can be collected upon interest until the debt is judicially claimed, and then
the rate at which interest upon accrued interest must be computed is fixed at 6
per cent per annum. In this case, there was no compound interest in the
agreement.
3 GSIS vs CA
FACTS Sps. Medina applied for a loan with GSIS in the amount of P600,000. But
only P350,000 had been approved (BR 5041) subject to the conditions: a. that 9%
per annum shall be the interest rate, compounded monthly; b. that the loan shall
be repayable in 10 years at a monthly mortization of P4,433.65 including principal
and interest, and that any installment or amortization due and unpaid shall bear
an interest of 9%/12 per month.
The Office of the Economic Coordinator, in a 2nd Indorsement, further reduced
the approved amount to P295,000. The Medinas accepted the reduced amount,
executed a promissory note and a REM in favor of GSIS.
On June 6, 1962, the approved loan was restored to P350,000 and was
denominated as Account No. 31055. As a consequence, the Medinas subsequently
executed an Amendment of Real Estate Mortgage. Upon application by the
Medinas, GSIS adopted Resolution No. 121, as amended by Resolution No. 348,
granting an additional loan of P230,000 on the security of the same mortgaged
properties and additional properties. The loan was denominated as Account No.
31442.
Beginning 1965, the Medinas defaulted in their payments and in 1967, they began
defaulting in the payment of their fire insurance premiums. On May 3, 1974, GSIS
informed the debtors that they had arrearages in the amount of P575,652.42 as of
April 18, 1974 and demanded payment within 7 days, otherwise, it would foreclose
the mortgage.
On Apr. 21, 1975, GSIS applied for foreclosure of the mortgage. The Medinas filed
a complaint, praying for the issuance of a restraining order or writ of PI, but no
such RO or WPI was issued in view of PD No. 385.
On Apr. 25, 1975, the Medinas made a last partial payment in the amount of
P209, 662.80. The properties of the medinas were sold at public auction with GSIS

as the highest bidder. Hence, the Medinas filed an amended complaint, praying for
the declaration of nullity of their 2 REM contracts with the GSIS, as well as of the EJ
foreclosure proceedings, and for the refund of excess payments, damages and AF.
TC: N&V + Medinas to pay GSIS P1,611.12 in fully payment of their obligation with
9% p.a. interest from Dec. 11, 1975 CA: Affirmed: GSIS to reimburse P9,580 OP and
pay Sp Medina P3,000 AF and P1,000 litigation exp; SC: PRC ; MR: due course
ISSUE # 1 WON the CA erred in holding that the amendment of the REM dated July
6, 1962 superseded the mortgage contract dated Apr. 4, 1962, particularly with
the compounding of interest
HELD Said Amendment was never intended to completely supersede the mortgage
contract dated April 4, 1962. In fact, GSIS, as a matter of policy, imposes uniform
terms and conditions for all its real estate loans, particularly with respect to
compounding of interest. GSIS: Did not supersede; amended only wrt the
amount secured thereby and the amount of monthly amortizations; others
deemed rewritten Medinas: no express stipulation on the compounded interest
OP o The difference in the computation lies in the inclusion of the compounded
interest as demanded by the GSIS on the one hand and the exclusion thereof, as
insisted by the Medinas on the other.
ISSUE # 2 WON the CA erred in sustaining the Sp. Medinas claim of OP, by
crediting the fire insurance proceeds in the sum of P11,152.02 to the total
payment made by said spouses as of Dec. 11, 1975
HELD YES. The plaintiffs were not entitled to a credit of P19,381.07 as FI proceeds,
as they were only entitled to and were credited with P11,152.02.
ISSUE # 3 WON the CA erred in holding that the interest rates on the loan accounts
of the Medinas are usurious
HELD NO. Usury Law applies only to interest by way of compensation for the use
or forbearance of money. Interest by way of damages is governed by Article 2209
of the Civil Code
ISSUE # 4: WON the CA erred in affirming the annulment of the subject EJ
foreclosure and sheriffs Certificate of Sale
HELD Since the Medinas failed to settle their accounts with the GSIS, the latter had
a perfect right to foreclose the mortgage. Reversed and set asideVALID.
4 Ligutan vs CA

The essence or rationale for the payment of interest, quite often referred to as
cost of money, is not exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest, if there is an agreement
to that effect, the two being distinct concepts which may separately be demanded.
What may justify a court in not allowing the creditor to impose full surcharges and
penalties, despite an express stipulation therefor in a valid agreement, may not
equally justify the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank's existence.

Here, the stipulated interest of 15.189% on the forbearance of money was

upheld by the court as reasonable.
5 Tan vs CA
FACTS: TAN OBTAINED 2 LOANS, EACH FOR P2,000,000 FROM CCP.
Executed a promissory note in amount of P3,411,421.32; payable in 5 installments.
TAN failed to pay any installment on the said restructured loan.
In a letter, TAN requested and proposed to respondent CCP a mode of paying the
restructured loan
i.
20% of the principal amount of the loan upon the
respondent giving its conformity to his proposal
ii.
Balance on the principal obligation payable 36
monthly installments until fully paid.
TAN requested for a moratorium on his loan obligation until the following year
allegedly due to a substantial deduction in the volume of his business and on
account of the peso devaluation.
i. No favorable response was made to said letters.
ii.
CCP demanded full payment, within ten (10) days
from receipt of said letter P6,088,735.03.
CCP FILED COMPLAINT collection of a sum of money
TAN interposed the defense that he accommodated a friend who asked for help to
obtain a loan from CCP.
i. Claimed that cannot find the friend.
TAN filed a Manifestation wherein he proposed to settle his indebtedness to CCP
by down payment of P140,000.00 and to issue1 2 checks every beginning of the
year to cover installment payments for one year, and every year thereafter until
the balance is fully paid.
i.
CCP did not agree to the petitioners proposals and
so the trial of the case ensued.
TRIAL COURT ORDERED TAN TO PAY CCP P7,996,314.67, representing defendants
outstanding account as of August 28, 1986, with the corresponding stipulated

interest and charges thereof, until fully paid, plus attorneys fees in an amount
equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary
damages, plus costs.
REASONS:
i. Reason of loan for accommodation of friend was not
credible.
ii. Assuming, arguendo, that the TAN did not personally
benefit from loan, he should have filed a 3rd-party complaint against Wilson
Lucmen
iii.
3 times the petitioner offered to settle his loan
obligation with CCP.
iv.
TAN may not avoid his liability to pay his obligation
under the promissory note which he must comply with in good faith.
v.
TAN is estopped from denying his liability or loan
obligation to the private respondent.
TAN APPEALED TO CA, asked for the reduction of the penalties and charges on his
loan obligation.
Judgment appealed from is hereby AFFIRMED.
1. No alleged partial or irregular performance.
2. However, the appellate court modified the decision of the trial court by
deleting exemplary damages because not proportionate to actual damage caused
by the non-performance of the contract
ISSUES: WON there are contractual and legal bases for the imposition of the
penalty, interest on the penalty and attorneys fees.
TAN imputes error on CA in not fully eliminating attorney fees and in not reducing
the penalties considering that he made partial payments on the loan.
And if penalty is to be awarded, TAN asking for non-imposition of interest on the
surcharges because compounding of these are not included in promissory note.
No basis in law for the charging of interest on the surcharges for the reason that
the New Civil Code is devoid of any provision allowing the imposition of interest on
surcharges.
WON interest may accrue on the penalty or compensatory interest without
violating ART 1959: Without prejudice to the provisions of Article 2212, interest
due and unpaid shall not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as added principal, shall
earn new interest.

TAN- No legal basis for the imposition of interest on the penalty charge for the
reason that the law only allows imposition of interest on monetary interest but not
the charging of interest on penalty. Penalties should not earn interest.
WON TAN can file reduction of penalty due to made partial payments.
Petitioner contends that reduction of the penalty is justifiable under ART 1229:
The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.
HELD: CA DECISION AFFIRMED with MODIFICATION in that the penalty charge of
two percent (2%) per month on the total amount due, compounded monthly, is
hereby reduced to a straight twelve percent (12%) per annum starting from August
28, 1986. With costs against the petitioner.
WON there are contractual and legal bases for the imposition of the penalty,
interest on the penalty and attorneys fees. YES. WITH LEGAL BASES.
ART 1226: In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.
i.
The penalty may be enforced only when it is
demandable in accordance with the provisions of this Code.
CASE AT BAR: promissory note expressed the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the
subject restructured loan.
PENALTY IN MANY FORMS:
i.
If the parties stipulate penalty apart monetary
interest, two are different and distinct from each other and may be demanded
separately.
ii. If stipulation about payment of an additional interest
rate partakes of the nature of a penalty clause which is sanctioned by law:
1. ART 2209: If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the absence
of stipulation, the legal interest, which is six per cent per annum.

CASE AT BAR: Penalty charge of 2% per month began to accrue from the time of
default by the petitioner.
i.
No doubt petitioner is liable for both the stipulated
monetary interest and the stipulated penalty charge.
1. PENALTY CHARGE = penalty or compensatory interest.
WON interest may accrue on the penalty or compensatory interest without
violating ART 1959.
Penalty clauses can be in the form of penalty or compensatory interest.
i.
Thus, the compounding of the penalty or
compensatory interest is sanctioned by and allowed pursuant to the above-quoted
provision of Article 1959 of the New Civil Code considering that:
1. There is an express stipulation in the promissory note (Exhibit A) permitting
the compounding of interest.
a. 5th paragraph of the said promissory note provides that: Any interest which
may be due if not paid shall be added to the total amount when due and shall
become part thereof, the whole amount to bear interest at the maximum rate
allowed by law..
2.
Therefore, any penalty interest not paid, when due, shall earn the legal
interest of twelve percent (12%) per annum, in the absence of express stipulation
on the specific rate of interest, as in the case at bar.
ART 2212: Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
CASE AT BAR: interest began to run on the penalty interest upon the filing of the
complaint in court by CCP.
i.
Hence, the courts did not err in ruling that the
petitioner is bound to pay the interest on the total amount of the principal, the
monetary interest and the penalty interest.
WON TAN can file reduction of penalty due to made partial payments. YES. BUT
NOT 10% REDUCTION AS SUGGESTED BY PETITIONER.
REDUCED TO 2% REDUCTION:
i.
PARTIAL PAYMENTS showed his good faith despite
difficulty in complying with his loan obligation due to his financial problems.
1. However, we are not unmindful of the respondents long overdue deprivation
of the use of its money collectible.
The petitioner also imputes error on the part of the appellate court for not
declaring the suspension of the running of the interest during period when the CCP
allegedly failed to assist the petitioner in applying for relief from liability

Alleges that his obligation to pay the interest and surcharge should have been
suspended because the obligation to pay such interest and surcharge has become
conditional
i.
Dependent on a future and uncertain event which
consists of whether the petitioners request for condonation of interest and
surcharge would be recommended by the Commission on Audit.
1. Since the condition has not happened due to the private respondents reneging
on its promise, his liability to pay the interest and surcharge on the loan has not
arisen.
COURT ANSWER:
i.
Running of the interest and surcharge was not
suspended.
ii.
CCP correctly asserted that it was the primary
responsibility of petitioner to inform the Commission on Audit of his application
for condonation of interest and surcharge.
6 RCBC vs CA
FACTS: RCBC Binondo Branch initially granted a credit facility of P30M to Goyu &
Sons, Inc. GOYUs applied again and through Binondo Branch key officer's Uys
and Laos recommendation, RCBCs executive committee increased its credit
facility to P50M to P90M and finally to P117M.
As security, GOYU executed 2 real estate mortgages and 2 chattel mortgages in
favor of RCBC.
GOYU obtained in its name 10 insurance policy on the mortgaged properties from
Malayan Insurance Company, Inc. (MICO). In February 1992, he was issued 8
insurance policies in favor of RCBC.
April 27, 1992: One of GOYUs factory buildings was burned so he claimed against
MICO for the loss who denied contending that the insurance policies were either
attached pursuant to writs of attachments/garnishments or that creditors are
claiming to have a better right
GOYU filed a complaint for specific performance and damages at the RTC
RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the
proceeds of the insurance policies, but said claims were also denied for the same
reasons that MICO denied GOYUs claims
RTC: Confirmed GOYUs other creditors (Urban Bank, Alfredo Sebastian, and
Philippine Trust Company) obtained their writs of attachment covering an
aggregate amount of P14,938,080.23 and ordered that 10 insurance policies be
deposited with the court minus the said amount so MICO deposited
P50,505,594.60.
Another Garnishment of P8,696,838.75 was handed down

RTC: favored GOYU against MICO for the claim, RCBC for damages and to pay RCBC
its loan
CA: Modified by increasing the damages in favor of GOYU
In G.R. No. 128834, RCBC seeks right to intervene in the action between Alfredo C.
Sebastian (the creditor) and GOYU (the debtor), where the subject insurance
policies were attached in favor of Sebastian
RTC and CA: endorsements do not bear the signature of any officer of GOYU
concluded that the endorsements favoring RCBC as defective.
ISSUE: W/N RCBC as mortgagee, has any right over the insurance policies taken by
GOYU, the mortgagor, in case of the occurrence of loss
HELD: YES.
mortgagor and a mortgagee have separate and distinct insurable interests in the
same mortgaged property, such that each one of them may insure the same
property for his own sole benefit
although it appears that GOYU obtained the subject insurance policies naming
itself as the sole payee, the intentions of the parties as shown by their
contemporaneous acts, must be given due consideration in order to better serve
the interest of justice and equity
8 endorsement documents were prepared by Alchester in favor of RCBC
MICO, a sister company of RCBC
GOYU continued to enjoy the benefits of the credit facilities extended to it by
RCBC.
GOYU is at the very least estopped from assailing their operative effects.
The two courts below erred in failing to see that the promissory notes which they
ruled should be excluded for bearing dates which are after that of the fire, are
mere renewals of previous ones
RCBC has the right to claim the insurance proceeds, in substitution of the property
lost in the fire. Having assigned its rights, GOYU lost its standing as the beneficiary
of the said insurance policies
insurance company to be held liable for unreasonably delaying and withholding
payment of insurance proceeds, the delay must be wanton, oppressive, or
malevolent - not shown
Sebastians right as attaching creditor must yield to the preferential rights of RCBC
over the Malayan insurance policies as first mortgagee.
7 Eastern Shipping Lines vs CA
FACTS: This is an action against defendants shipping company, arrastre operator
and broker-forwarder for damages sustained by a shipment while in defendants'

custody, filed by the insurer-subrogee who paid the consignee the value of such
losses/damages.
the losses/damages were sustained while in the respective and/or successive
custody and possession of defendants carrier (Eastern), arrastre operator (Metro
Port) and broker (Allied Brokerage).
As a consequence of the losses sustained, plaintiff was compelled to pay the
consignee P19,032.95 under the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said consignee against defendants.
DECISION OF LOWER COURTS: * trial court: ordered payment of damages, jointly
and severally * CA: affirmed trial court.
ISSUES AND RULING:
(a) whether or not a claim for damage sustained on a shipment of goods can be a
solidary, or joint and several, liability of the common carrier, the arrastre operator
and the customs broker;
YES, it is solidary. Since it is the duty of the ARRASTRE to take good care of the
goods that are in its custody and to deliver them in good condition to the
consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver
the goods in good condition to the consignee.
The common carrier's duty to observe the requisite diligence in the shipment of
goods lasts from the time the articles are surrendered to or unconditionally placed
in the possession of, and received by, the carrier for transportation until delivered
to, or until the lapse of a reasonable time for their acceptance by, the person
entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals,
161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods
shipped either are lost or arrive in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence, and there need not be an
express finding of negligence to hold it liable.
(b) whether the payment of legal interest on an award for loss or damage is to be
computed from the time the complaint is filed or from the date the decision
appealed from is rendered; and
FOLLOW THESE VERY IMPORTANT RULES (GUIDANCE BY THE SUPREME COURT)

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

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.
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:
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
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
(c) whether the applicable rate of interest, referred to above, is twelve percent
(12%) or six percent (6%).

SIX PERCENT (6%) on the amount due computed from the decision, dated 03
February 1988, of the court a quo (Court of Appeals) AND A TWELVE PERCENT
(12%) interest, in lieu of SIX PERCENT (6%), shall be imposed on such amount upon
finality of the Supreme Court decision until the payment thereof.
RATIO: when the judgment awarding a sum of money becomes final and
executory, the monetary award shall earn interest at 12% per annum from the
date of such finality until its satisfaction, regardless of whether the case involves a
loan or forbearance of money. The reason is that this interim period is deemed to
be by then equivalent to a forbearance of credit.
NOTES: the Central Bank Circular imposing the 12% interest per annum applies
only to loans or forbearance of money, goods or credits, as well as to judgments
involving such loan or forbearance of money, goods or credits, and that the 6%
interest under the Civil Code governs when the transaction involves the payment
of indemnities in the concept of damage arising from the breach or a delay in the
performance of obligations in general. Observe, too, that in these cases, a
common time frame in the computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until the adjudged amount is fully
paid.
8 Nacar vs Gallery Frames
Dario Nacar filed a labor case against Gallery Frames and its owner Felipe Bordey,
Jr. Nacar alleged that he was dismissed without cause by Gallery Frames on
January 24, 1997. On October 15, 1998, the Labor Arbiter (LA) found Gallery
Frames guilty of illegal dismissal hence the Arbiter awarded Nacar P158,919.92 in
damages consisting of backwages and separation pay.
Gallery Frames appealed all the way to the Supreme Court (SC). The Supreme
Court affirmed the decision of the Labor Arbiter and the decision became final on
May 27, 2002.
After the finality of the SC decision, Nacar filed a motion before the LA for
recomputation as he alleged that his backwages should be computed from the
time of his illegal dismissal (January 24, 1997) until the finality of the SC decision
(May 27, 2002) with interest. The LA denied the motion as he ruled that the
reckoning point of the computation should only be from the time Nacar was
illegally dismissed (January 24, 1997) until the decision of the LA (October 15,
1998). The LA reasoned that the said date should be the reckoning point because
Nacar did not appeal hence as to him, that decision became final and executory.

ISSUE: Whether or not the Labor Arbiter is correct.

HELD: No. There are two parts of a decision when it comes to illegal dismissal
cases (referring to cases where the dismissed employee wins, or loses but wins on
appeal). The first part is the ruling that the employee was illegally dismissed. This is
immediately final even if the employer appeals but will be reversed if employer
wins on appeal. The second part is the ruling on the award of backwages and/or
separation pay. For backwages, it will be computed from the date of illegal
dismissal until the date of the decision of the Labor Arbiter. But if the employer
appeals, then the end date shall be extended until the day when the appellate
courts decision shall become final. Hence, as a consequence, the liability of the
employer, if he loses on appeal, will increase this is just but a risk that the
employer cannot avoid when it continued to seek recourses against the Labor
Arbiters decision. This is also in accordance with Article 279 of the Labor Code.
Anent the issue of award of interest in the form of actual or compensatory
damages, the Supreme Court ruled that the old case of Eastern Shipping Lines vs
CA is already modified by the promulgation of the Bangko Sentral ng Pilipinas
Monetary Board Resolution No. 796 which lowered the legal rate of interest from
12% to 6%. Specifically, the rules on interest are now as follows:
1. Monetary Obligations ex. Loans:
a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing of the case)
a.2. rate of interest shall be that amount stipulated
b. If not stipulated in writing
b.1. shall run from date of default (either failure to pay upon extra-judicial demand
or upon judicial demand whichever is appropriate and subject to the provisions of
Article 1169 of the Civil Code)
b.2. rate of interest shall be 6% per annum
2. Non-Monetary Obligations (such as the case at bar)

a. If already liquidated, rate of interest shall be 6% per annum, demandable from

date of judicial or extra-judicial demand (Art. 1169, Civil Code)
b. If unliquidated, no interest
Except: When later on established with certainty. Interest shall still be 6% per
annum demandable from the date of judgment because such on such date, it is
already deemed that the amount of damages is already ascertained.
3. Compounded Interest
This is applicable to both monetary and non-monetary obligations
6% per annum computed against award of damages (interest) granted by the
court. To be computed from the date when the courts decision becomes final and
executory until the award is fully satisfied by the losing party.
4. The 6% per annum rate of legal interest shall be applied prospectively:
Final and executory judgments awarding damages prior to July 1, 2013 shall
apply the 12% rate;
Final and executory judgments awarding damages on or after July 1, 2013 shall
apply the 12% rate for unpaid obligations until June 30, 2013; unpaid obligations
with respect to said judgments on or after July 1, 2013 shall still incur the 6% rate.
9 First Fil Sin Lending Corp vs Padillo
DOCTRINE: When the terms of the agreement are clear and explicit that they do
not justify an attempt to read into it any alleged intention of the parties, the terms
are to be understood literally just as they appear on the face of the contract. (Note
this doctrine was cited in the 1st case: Gaisano Cagayan, Inc. vs. Insurance
Company of North America)
As between two parties to a written agreement, the party who gave rise to the
mistake or error in the provisions of the same is estopped from asserting a
contrary intention to that contained therein.
FACTS: Respondent Gloria D. Padillo obtained a P500,000.00 loan from petitioner
First Fil-Sin Lending Corp. Respondent obtained another P500,000.00 loan from

petitioner. In both instances, respondent executed a promissory note and

disclosure statement.
For the first loan, respondent made 13 monthly interest payments of P22,500.00
each before she settled the P500,000.00 outstanding principal obligation. As
regards the second loan, respondent made 11 monthly interest payments of
P25,000.00 each before paying the principal loan of P500,000.00. In sum,
respondent paid a total of P792,500.00 for the first loan and P775,000.00 for the
second loan.
Respondent Padillo then filed an action for sum of money against herein petitioner
before the RTC alleging that she only agreed to pay interest at the rates of 4.5%
and 5% per annum, respectively, for the two loans, and not 4.5% and 5% per
month. Respondent sought to recover the amounts she allegedly paid in excess of
her actual obligations.
The RTC dismissed respondents complaint and ordered her to pay petitioner
P311,125.00 with legal interest. On appeal, the CA reversed and set aside the
decision of the RTC and ruled that, based on the disclosure statements executed
by respondent, the interest rates should be imposed on a monthly basis but only
for the 3-month term of the loan. Thereafter, the legal interest rate will apply.
Hence, the instant petition.
Petitioner maintains that the interest rates are to be imposed on a monthly and
not on a per annum basis and the monthly interest shall be imposed until the
outstanding obligations have been fully paid. On the other hand, respondent avers
that the interest on the loans is per annum as expressly stated in the promissory
notes and disclosure statements. The provision as to annual interest rate is clear
and requires no room for interpretation. Respondent asserts that any ambiguity in
the promissory notes and disclosure statements should not favor petitioner since
the loan documents were prepared by the latter.
ISSUE: Whether the interest on the loans is per annum, and not monthly, as
expressly stated in the promissory notes and disclosure statements
YES.RULING: We agree with respondent. Perusal of the promissory notes and the
disclosure statements pertinent to the loan obligations of respondent clearly and
unambiguously provide for interest rates of 4.5% per annum and 5% per annum,
respectively. Nowhere was it stated that the interest rates shall be applied on a
monthly basis.

Thus, when the terms of the agreement are clear and explicit that they do not
justify an attempt to read into it any alleged intention of the parties, the terms are
to be understood literally just as they appear on the face of the contract. It is only
in instances when the language of a contract is ambiguous or obscure that courts
ought to apply certain established rules of construction in order to ascertain the
supposed intent of the parties. However, these rules will not be used to make a
new contract for the parties or to rewrite the old one, even if the contract is
inequitable or harsh. They are applied by the court merely to resolve doubts and
ambiguities within the framework of the agreement.
The lower court and the CA mistook the Loan Transactions Summary for the
Disclosure Statement. The former was prepared exclusively by petitioner and
merely summarizes the payments made by respondent and the income earned by
petitioner. There was no mention of any interest rates and having been prepared
exclusively by petitioner, the same is self serving. On the contrary, the Disclosure
Statements were signed by both parties and categorically stated that interest rates
were to be imposed annually, not monthly.
As such, since the terms and conditions contained in the promissory notes and
disclosure statements are clear and unambiguous, the same must be given full
force and effect. The expressed intention of the parties as laid down on the loan
documents controls.
Notably, petitioner even admitted that it was solely responsible for the
preparation of the loan documents, and that it failed to correct the pro forma note
p.a. to per month. Since the mistake is exclusively attributed to petitioner, the
same should be charged against it. This unilateral mistake cannot be taken against
respondent who merely affixed her signature on the pro forma loan agreements.
As between two parties to a written agreement, the party who gave rise to the
mistake or error in the provisions of the same is estopped from asserting a
contrary intention to that contained therein. The checks issued by respondent do
not clearly and convincingly prove that the real intent of the parties is to apply the
interest rates on a monthly basis. Absent any proof of vice of consent, the
promissory notes and disclosure statements remain the best evidence to ascertain
the real intent of the parties.
The same promissory note provides that x x x any and all remaining amount due
on the principal upon maturity hereof shall earn interest at the rate of _____ from
date of maturity until fully paid. The CA thus properly imposed the legal interest of
12% per annum from the time the loans matured until the same has been fully
paid on February 2, 1999. As decreed in Eastern Shipping Lines, Inc. v. Court of

Appeals, in the absence of stipulation, the rate of interest shall be 12% per annum
to be computed from default.
DISPOSITIVE: WHEREFORE, in view of the foregoing, the October 16, 2003 decision
of the Court of Appeals in CA-G.R. CV No. 75183 is AFFIRMED with the
MODIFICATION that the interest rates on the July 22, 1997 and September 7, 1997
loan obligations of respondent Gloria D. Padillo from petitioner First Fil-Sin Lending
Corporation be imposed and computed on a per annum basis, and upon their
respective maturities, the interest rate of 12% per annum shall be imposed until
full payment. In addition, the penalty at the rate of 12% per annum shall be
imposed on the outstanding obligations from date of default until full payment. SO
ORDERED.
10 Integrated Realty Corp vs PNB
FACTS: Raul Santos made a time deposit with OBM in the amount of P500H and
he was issued a certificate of time deposits. On another date, Santos again made a
time deposit with OBM in the amount of P200H, he was again issued a CTD. IRC,
thru its president Raul Santos, applied for a loan and/or credit line (P700H) with
PNB. To secure such, Santos executed a Deed of Assignment of the 2 time
deposits. After due dates of the time deposit certificates, OBM did not pay PNB.
PNB then demanded payment from IRC and Santos, but they replied that the loan
was deemed paid with the irrevocable assignment of the time deposit certificates.
PB then filed with RTC to collect from IRC and Santos with interest. The trial
court ruled in favor of PNB ordering IRC and Santos to pay PNB the total amount of
P700H plus interest of 9% PA, 2% additional interest and 1& PA penalty interest.
On appeal, the CA ordered OBM to pay IRC and Santos whatever amts they will to
PNB with interest.
IRC and Santos now claim that OBM should reimburse them for whatever
amts they may be adjudged to pay PNB by way of compensation for damages
incurred.
ISSUE: Whether or not the claim of IRC and Santos will prosper.
HELD: The Court held in the affirmative. The 2 time deposits matured on 11
January 1968 and 6 February 1968, respectively. However, OBM was not allowed
and suspended to operate only on 31 July 1968 and resolved on 2 August 1968.
There was a yet no obstacle to the faithful compliance by OBM of its liabilities. For
having incurred in delay in the performance of its obligation, OBM should be held
for damages. OBM contends that it had agreed to pay interest only up to the dates

of maturity of the CTD and that Santos is not entitled to interest after maturity
dates had expired.
While it is true that under Article 1956 of the CC, no interest shall be due
unless it has been expressly stipulated in writing, this applies only to interest for
the use of money. It does not comprehend interest paid as damages. OBM is being
required to pay such interest, not as interest income stipulated in the CTD, but as
damages fro failure and delay in the payment of its obligations which thereby
compelled IRC and Santos to resort to the courts.
The applicable rule is that LI, in the nature of damages for non-compliance
with an obligation to puy sum of money, is recoverable from the date judicially or
extra-judicially demand is made.
11 Bataan Seedling Assn vs RP
FACTS: Petitioner entered into a contract with respondent, represented by the
DENR for the reforestation of a forest land within a period of 3 years. Petitioner
undertook to report to DENR any event or condition which delays or may delay the
project. With the contract was the release of mobilization fund but the fund was to
be returned upon completion or deducted from periodic release of mhoneys to
petitioner. Believing that petitioners failed to comply with their obligations,
respondent sent a notice of cancellation. Petitioners failed to respond to the
notice, thus, respondent filed a complaint for damages against petitioners. The
RTC held that respondent had sufficient grounds to cancel the contract but saw no
reason why the mobilization fund and the cash advances should be refunded or
that petitioners are liable for liquidated damages. Both parties appealed to the CA,
which affirmed the trial court and that the balnce of the fund should be returned
with 12% interest.
ISSUE: Whether the order to refund the balance of the fund with 12% interest pa
is proper.
HELD: No. Interest at the rate of 12% pa is impossible if there is no stipulation in
the contract. Herein subject contract does not contain any stipulation as to
interest. However, the amount due to respondent does not represent a loan or
forbearance of money. The word forbearance is defined, within, the context of
usury law, as a contractual obligation of lender or creditor to refrain, during given
period of time, from requiring borrower or debtor to repay loan or debt then due
and payable. In the absence of stipulation, the legal interest is 6% pa on the
amount finally adjudged by the Court.
12 Catungal vs Hao
FACTS: The original owner Aniana Galang, leased a 3-storey building in Paraaque
to BPI in 1972. During the lease period, BPI subleased the ground floor to Doris
Hao. In 1984, Galang and Hao executed a lease contract on the 2nd and 3rd floors
of the building. 2 years later, spouses Catungal bought the property from Galang.

Upon expiration of the lease agreements, Catungal demanded Hao to vacate the
building. The demand was unheeded so petitioners filed for ejectment before the
MeTC, which ordered Hao to vacate the premises and pay P20,000 until she finally
vacates. Petitioners moved for clarificatory or amended judgment on the ground
that lthough MeTC ordered defendant to vacate, it only awarded rent or
compensation for the use of said property for the ground floor and not for the
entire subject property. the MeTC amended the judgment but petitioners moved
for reconsideration praing that respondent be ordered to pay P20,000 pm for the
use and occupancy of the ground floor and P10,000 pm for the 2nd and 3rd floors.
The case was referred to RTC which affirmed the decision. On appeal to the CA,
the latter reduced the P20,000 to P8,000 and the P10,000 each to P5,000 each.
ISSUE: Whether or not the RTC decision should be reinstated
HELD: Yes. The plaintiff in an ejectment case is entitled to damages caused by his
loss of the use and possession of the premises.
13 Banco Filipino vs CA
FACTS: Elsa and Calvin Arcilla secured, on 3 occassions, loan from petitioner as
evidenced by promissory note. REM was also executed. Under said deeds, Banco
Filipino may increase rate of interest on said loans, within the limits allowed by
law. at that time, under Usury Law, the maximum rate of interest for loans secured
by REM was 12% pa. later, the Central bank issued Circular No. 494 provinding for
the maximum interest of 19%pa. meanwhile, Skyli Builders, thru President Calvin
Arcilla secured loans from BPI with FGU Insurance as surety. Banco Filipino issued
an account statement with 17% pa as interest. The Arcillas filed for annulment of
the loan contracts because the rate of interests charged were usurious.
ISSUE: Whether or not respondents are entitled to refund of the alleged interest
overpayments.
HELD: Yes. Private respondents aver that they are entitled to the refund inasmuch
as the escalation clause incorporated in the loan contracts do not have a
corresponding de-escalation clause and is therefore, illegal.
In Banco Filipino Savings & Mortgage Bank vs Navarro, the Court ruled that
Central Bank Circular 494, although it has the force and effect of law, is not a law
and is not the law contemplated by the parties which authorizes the petitioner to
unilaterally raise the interest rate of loan. The reliance on the circular was without
any legal basis.
14 Consolidated Bank & Trust Co vs CA

FACTS: Continental Cement Corp obtained from Consolidated Bank letter of credit
used to purchased 500,000 liters of bunker fuel oil. Respondent Corporation made
a marginal deposit to petitioner. A trust receipt was executed by respondent
corporation, with respondent Gregory Lim as signatory. Claiming that respondents
failed to turn over the goods or proceeds, petitioner filed a complaint for sum of
money before the RTC of Manila. In their answer, respondents aver that the
transaction was a simple loan and not a trust receipt one, and tht the amount
claimed by petitioner did not take into account payments already made by them.
The court dismissed the complaint, CA affirmed the same.
ISSUE: Whether or not the marginal deposit should not be deducted outright from
the amount of the letter of credit.
HELD: No. petitioner argues that the marginal deposit should be considered only
after computing the principal plus accrued interest and other charges. It could be
onerous to compute interest and other charges on the face value of the letter of
credit which a bank issued, without first crediting or setting off the marginal
deposit which the borrower paid to it-compensation is proper and should take
effect by operation of law because the requisited in Art. 1279 are present and
should extinguish both debts to the concurrent amount. Unjust enrichment.
15 Mendoza vs CA
FACTS: Respondent was granted by respondent Philippine National Bank (PNB)
credit line and Letter of Credit/Trust Receipt (LC/TR) line. As security for the credit
accommodations and for those which may thereinafter be granted, petitioner
mortgaged to respondent PNB some of his properties. Petitioner later requested
for loan restructuring and issued promissory notes, which he failed to comply.
Respondent PNB extra-judicially foreclosed the real and chattel mortgages, and
the mortgaged properties were sold at public auction to respondent PNB, as
highest bidder. Petitioner filed a case in the RTC contending that foreclosure is
illegal invoking promissory estoppel, and secured favorable judgment. The decision
of RTC was reversed by the Court of Appeals.
ISSUE: Whether or not the foreclosure of petitioners real estate and chattel
mortgages were legal and valid as opposed to promissory estoppel.
RULING: YES. First, there was no promissory estoppel as the promise (of
respondent bank) must be plain and unambiguous and sufficiently specific.
Second, there was no meeting of the minds leading to another contract, hence
loan was not restructured. Third, promissory notes petitioner issued were valid.
Fourth, stipulation in the mortgage, extending its scope and effect to afteracquired property is valid and binding after the correct and valid process of extra-

judicial foreclosure. Finally, record showed that petitioner did not even attempt to
tender any redemption price during the one-year redemption period.
16 First Metro Investment Corp vs Este del sol Mountain
FACTS: FMIC granted Este del Sol a loan to finance a sports/resort complex in
Montalban, Rizal. Under the agreement, the interest was 16% pa based on the
diminishing balance. In case of default, an acceleration clause was provided and
the amount due is subject to 20% one-time penalty on the amount due and such
amount shall bear interest at the highest rate permitted by law. respondent
executed a REM, individual continuing suretyship and an underwriting agreement
whereby FMIC shall underwrite the public offering of one P120,000 common
shares of respondents capital stock for one-time underwriting fee of P200,000.
For failure to pay its obligation, FMIC caused the foreclosure of the REM. At the
public auction, FIC was the highest bidder. Petitioner filed to collect for alleged
deficiency balance against respondents since it failed to collect from the sureties,
plus interest at 21% pa. the trial court ruled in favor of FMIC. Respondents
appealed before the CA which held that the fees provided for in the Underwriting
and Consultacy Agreements were mere subterfuges to camouflage the excessively
usurious interest charged. The CA ordered FMIC to reimburse petitioner
representing what is ue to petitioner and what is due to respondent.
ISSUE: Whether or not the interests are lawful
HELD: No. an apparently lawful loan is usurious when it is intended that additional
compensation for the loan be disguised by an ostensibly unrelated contract for the
payment by the borrower for the lenders services which re of little value or which
are not in fact to be rendered. Article 1957 clearly provides: contracts and
stipulations, under any cloak or device whatever, intended to circumvent the law
agaistn usury shall be void. The borrower may recover in accordance with the laws
on usury.
17 Solidbank vs permanent homes
FACTS: The records disclose that PERMANENT HOMES is a real estate development
company, and to
finance its housing project known as the Buena Vida Townhome located within
Merville Subdivision,Paraaque City, it applied and was subsequently granted by
SOLIDBANK with an Omnibus Line credit
facility in the total amount of SIXTY MILLION PESOS. Of the entire loan, FIFTY NINE
MILLION as time loanfor a term of up to three hundred sixty (360) days, with
interest thereon at prevailing market rates, andsubject to monthly repricing. The
remaining ONE MILLION was available for domestic bills purchase.To secure the

aforesaid loan, PERMANENT HOMES initially mortgaged three(3) townhouse units

withinthe Buena Vida project in Paraaque. At the time, however, the instant
complaint was filed againstSOLIDBANK, a total of thirty six (36) townhouse units
were mortgaged with said bank. Of the 60 millionavailable to PERMANENT
HOMES, it availed of a total of 41.5 million pesos covered by three(3)promissory
notes. There was a standing agreement by the parties that any increase or
decrease ininterest rates shall be subject to the mutual agreement of the
parties.For the three loan availments that PERMANENT HOMES obtained, the
herein respondent argued thatSOLIDBANK unilaterally and arbitrarily accelerated
the interest rates without any declared basis of suchincreases, of which
PERMANENT HOMES had not agreed to, or at the very least, been informed of.On
July 5, 2002, the trial court promulgated its Decision in favor of Solidbank.
Permanent then filed anappeal before the appellate court which was granted, in
which reversed and set aside the assaileddecision dated July 5, 2002. Hence, the
present petition.
ISSUES: (1)WON the Honorable Court of Appeals was correct in ruling that the
increases in the interest
rates on Permanents loans are void for having been unilaterally imposed without
basis.
(2)WON the Honorable Court of Appeals was correct in ordering the parties to
enter into an
express agreement regarding the applicable interest rates on Permanents loan
availments
subsequent to the initial thirty-day (30) period.
RULING: (1) Yes. Although interest rates are no longer subject to a ceiling, the
lender still does not havean unbridled license to impose increased interest rates.
The lender and the borrower should agree onthe imposed rate, and such imposed
rate should be in writing of which was not provided by petitioner.
(2)Yes. In order that obligations arising from contracts may have the force of law
between the parties,there must be mutuality between the parties based on their
essential quality. A contract containing acondition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of thecontracting parties
is void. There was no showing that either Solidbank or Permanent coerced
eachother to enter into the loan agreements. The terms of the Omnibus Line
Agreement and the promissorynotes were mutually and freely agreed upon by the
parties.

18 Silos vs PNB
Doctrine: In loan agreements, it cannot be denied that the rate of interest is a
principal condition, if not the most important component. Thus, any modification
thereof must be mutually agreed upon; otherwise, it has no binding effect.
Moreover, the Court cannot consider a stipulation granting a party the option to
prepay the loan if said party is not agreeable to the arbitrary interest rates
imposed. Premium may not be placed upon a stipulation in a contract which grants
one party the right to choose whether to continue with or withdraw from the
agreement if it discovers that what the other party has been doing all along is
improper or illegal.
Facts: Ps have been in business for about two decades of operating a department
store and buying and selling of ready-to-wear apparel.
To secure a one-year revolving credit line of P150,000.00 obtained from PNB, Ps
constituted in August 1987 a Real Estate Mortgage over a lot in Kalibo, Aklan. In
July 1988,the credit line was increased to P1.8 million and the mortgage was
correspondingly increased to P1.8 million.
And in July 1989, a Supplement to the Existing Real Estate Mortgage was executed
to cover the same credit line, which was increased to P2.5 million, and additional
security was given in the form of a 134-square meter lot. In addition, Ps issued
eight Promissory Notes and signed a Credit Agreement. This July 1989 Credit
Agreement contained a stipulation on interest which provides as follows:
1.03. Interest. (a) The Loan shall be subject to interest at the rate of 19.5% per
annum. Interest shall be payable in advance every one hundred twenty days at the
rate prevailing at the time of the renewal.
(b) The Borrower agrees that the Bank may modify the interest rate in the Loan
depending on whatever policy the Bank may adopt in the future, including without
limitation, the shifting from the floating interest rate system to the fixed interest
rate system, or vice versa. Where the Bank has imposed on the Loan interest at a
rate per annum, which is equal to the Banks spread over the current floating
interest rate, the Borrower hereby agrees that the Bank may, without need of
notice to the Borrower, increase or decrease its spread over the floating interest
rate at any time depending on whatever policy it may adopt in the future.
The eight Promissory Notes, on the other hand, contained a stipulation granting
PNB the right to increase or reduce interest rates "within the limits allowed by law
or by the Monetary Board."

The Real Estate Mortgage agreement provided the same right to increase or
reduce interest rates "at any time depending on whatever policy PNB may adopt in
the future."
In August 1991, an Amendment to Credit Agreement was executed by the parties,
with the following stipulation regarding interest:
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full
payment thereof at the rate per annum which is determined by the Bank to be
prime rate plus applicable spread in effect as of the date of each Availment.
The 9th up to the 17th promissory notes provide for the payment of interest at the
"rate the Bank may at any time without notice, raise within the limits allowed by
law x x x.
On the other hand, the 18th up to the 26th promissory notes including PN
9707237, which is the 26th promissory note carried the following provision:
x x x For this purpose, I/We agree that the rate of interest herein stipulated may
be increased or decreased for the subsequent Interest Periods, with prior notice to
the Borrower in the event of changes in interest rate prescribed by law or the
Monetary Board of the Central Bank of the Philippines, or in the Banks overall cost
of funds. I/We hereby agree that in the event I/we are not agreeable to the
interest rate fixed for any Interest Period, I/we shall have the option to repay the
loan or credit facility without penalty within ten (10) calendar days from the
Interest Setting Date.
R regularly renewed the line from 1990 up to 1997, and Ps made good on the
promissory notes, religiously paying the interests without objection or fail. But in
1997, Ps faltered when the interest rates soared due to the Asian financial crisis.
Ps sole outstanding promissory note for P2.5 million PN 9707237 executed in
July 1997 and due 120 days later or on October 28, 1997 became past due, and
despite repeated demands, Ps failed to make good on the note.
Incidentally, PN 9707237 provided for the penalty equivalent to 24% per annum in
case of default.
PNB prepared a Statement of Account as of October 12, 1998, detailing the
amount due and demandable from Ps in the total amount of P3,620,541.60.

Despite demand, Ps failed to pay the foregoing amount. Thus, PNB foreclosed on
the mortgage, and on January 14, 1999, the lots were sold at the auction. The
sheriffs certificate of sale was registered on March 11, 1999.
More than a year later, or on March 24, 2000, Ps filed Civil Case No. 5975, seeking
annulment of the foreclosure sale and an accounting of the PNB credit. Ps
theorized that after the first promissory note where they agreed to pay 19.5%
interest, the succeeding stipulations for the payment of interest in their loan
agreements with PNB which allegedly left to the latter the sole will to determine
the interest rate became null and void. Ps added that because the interest rates
were fixed by R without their prior consent or agreement, these rates are void,
and as a result, Ps should only be made liable for interest at the legal rate of 12%.
They claimed further that they overpaid interests on the credit, and concluded
that due to this overpayment of steep interest charges, their debt should now be
deemed paid, and the foreclosure and sale of TCTs T-14250 and T-16208 became
unnecessary and wrongful. As for the imposed penalty of P581,666.66, Ps alleged
that since the Real Estate Mortgage and the Supplement thereto did not include
penalties as part of the secured amount, the same should be excluded from the
foreclosure amount or bid price, even if such penalties are provided for in the final
Promissory Note.
In addition, Ps sought to be reimbursed an alleged overpayment of P848,285.00
made during the period August 21, 1991 to March 5, 1998, resulting from Rs
imposition of the alleged illegal and steep interest rates. They also prayed to be
awarded P200,000.00 by way of attorneys fees.
In its Answer, PNB denied that it unilaterally imposed or fixed interest rates; that
Ps agreed that without prior notice, PNB may modify interest rates depending on
future policy adopted by it; and that the imposition of penalties was agreed upon
in the Credit Agreement. It added that the imposition of penalties is supported by
the all-inclusive clause in the Real Estate Mortgage agreement which provides that
the mortgage shall stand as security for any and all other obligations of whatever
kind and nature owing to R, which thus includes penalties imposed upon default or
non-payment of the principal and interest on due date.
RTC: Ruled in favor of R
CA: Ruled in favor of R
Issue/Held:
WoN the interest rates imposed by R are null and void- YES
WoN P is estopped from questioning the interest rates because of their continuous
payment thereof w/o opposition- NO

Ratio: SC cited and discussed numerous cases but the main point of all the cases is
the doctrine stated above.
Any modification in the contract, such as the interest rates, must be made with the
consent of the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof
must be mutually agreed upon; otherwise, it has no binding effect.
In the present case, the stipulations in question no longer provide that the parties
shall agree upon the interest rate to be fixed; -instead, they are worded in such a
way that the borrower shall agree to whatever interest rate R fixes. In credit
agreements covered by the cited cases, it is provided that:
The Bank reserves the right to increase the interest rate within the limits allowed
by law at any time depending on whatever policy it may adopt in the future:
Provided, that, the interest rate on this accommodation shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by
law or by the Monetary Board. In either case, the adjustment in the interest rate
agreed upon shall take effect on the effectivity date of the increase or decrease in
maximum interest rate.
Whereas, in the present credit agreements under scrutiny, it is stated that:
IN THE JULY 1989 CREDIT AGREEMENT
(b) The Borrower agrees that the Bank may modify the interest rate on the Loan
depending on whatever policy the Bank may adopt in the future, including without
limitation, the shifting from the floating interest rate system to the fixed interest
rate system, or vice versa. Where the Bank has imposed on the Loan interest at a
rate per annum, which is equal to the Banks spread over the current floating
interest rate, the Borrower hereby agrees that the Bank may, without need of
notice to the Borrower, increase or decrease its spread over the floating interest
rate at any time depending on whatever policy it may adopt in the future.86
(Emphases supplied)
IN THE AUGUST 1991 AMENDMENT TO CREDIT AGREEMENT
1.03. Interest on Line Availments. (a) The Borrowers agree to pay interest on each
Availment from date of each Availment up to but not including the date of full
payment thereof at the rate per annum which is determined by the Bank to be
prime rate plus applicable spread in effect as of the date of each Availment.87
(Emphasis supplied)
Plainly, with the present credit agreement, the element of consent or agreement
by the borrower is now completely lacking, which makes Rs unlawful act all the
more reprehensible.

Re estoppel:
Accordingly, Ps are correct in arguing that estoppel should not apply to them, for
"[e]stoppel cannot be predicated on an illegal act. As between the parties to a
contract, validity cannot be given to it by estoppel if it is prohibited by law or is
against public policy."
It appears that by its acts, R violated the Truth in Lending Act, or Republic Act No.
3765, which was enacted "to protect x x x citizens from a lack of awareness of the
true cost of credit to the user by using a full disclosure of such cost with a view of
preventing the uninformed use of credit to the detriment of the national
economy."89 The 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."90 Section 4 thereof provides that a disclosure
statement must be furnished prior to the consummation of the transaction, thus:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior
to the consummation of the transaction, a clear statement in writing setting forth,
to the extent applicable and in accordance with rules and regulations prescribed
by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person
in connection with the transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
Under Section 4(6), "finance charge" represents the amount to be paid by the
debtor incident to the extension of credit such as interest or discounts, collection
fees, credit investigation fees, attorneys fees, and other service charges. The total
finance charge represents the difference between (1) the aggregate consideration
(down payment plus installments) on the part of the debtor, and (2) the sum of the
cash price and non-finance charges.
By requiring the Ps to sign the credit documents and the promissory notes in
blank, and then unilaterally filling them up later on, R violated the Truth in Lending
Act, and was remiss in its disclosure obligations.

19 Imperial vs Jaucian

FACTS: Petitioner obtained six (6) separate loans amounting to P 320,000.00 from
the respondent. In the written agreement, they agreed upon the 16% interest per
month plus penalty charge of 5% per month and the 25% attorneys fee, failure to
pay the said loans on the stipulated date.
Petitioner executed six (6) separate promissory notes and issued several
checks as guarantee for payment. When the said loans become overdue and
unpaid, especially when the petitioners checks issued were dishonored,
respondent made repeated oral and written demands for payment.
The petitioner was able to pay only P 116,540.00 as found by the RTC.
Although she alleged that she had already paid the amount of P 441,780.00 and
the excess of P 121,780.00 is more than the interest that could be legally charged,
the Court affirms the findings of RTC that petitioner is still indebted to the
respondent.
ISSUE: Whether or not the stipulated interest of 16% per month, 5% per month
for penalty charge and 25% attorneys fee are usurious.
HELD:
YES. The rate must be equitably reduced for being iniquitous,
unconscionable and exorbitant. While the Usury Law ceiling on interest rates was
lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte
blanche authority to raise interests rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets.
When the agreed rate is iniquitous or unconscionable, it considered
contrary to morals, if not against the law. Such stipulation is void. Since the
stipulation is void, it is as if there was no express contract thereon. Hence, courts
may reduce the interest rate as reason and equity demand.
The interest rate of 16% per month was reduced to 1.167% per month or
14% per annum and the penalty charge of 5% per month was also reduced to
1.167% per month or 14% per annum.
The attorneys fees here are in the nature of liquidated damages and the
stipulation therefor is aptly called a penal clause. So long as the stipulation does
not contravene the law, morals, public order or public policy, it is binding upon the
obligor. Nevertheless, in the case at bar, petitioners failure to comply fully with
her obligation was not motivated by ill will or malice. The partial payments she
made were manifestations of her good faith. Hence the attorneys fees were
reduced to 10% of the total due and payable.
20 Advocates for TILA vs BSMB
Facts: "Advocates for Truth in Lending, Inc." (AFTIL) is a non-profit, non-stock
corporation organized to engage in pro bono concerns and activities relating to

money lending issues. It was incorporated on July 9, 2010,and a month later, it

filed this petition, joined by its founder and president, Eduardo B. Olaguer, suing as
a taxpayer and a citizen.
HISTORY OF CENTRAL BANKS POWER TO FIX MAX INTEREST RATES
1.
R.A. No. 265, which created the Central Bank on June 15, 1948, empowered
the CB-MB toset the maximum interest rates which banks may charge for all types
of loans and other credit operations.
2.
The Usury Law was amended by P.D.1684, giving the CB-MB authority to
prescribe different maximum rates of interest which may be imposed for a loan or
renewal thereof or the forbearance of any money, goods or credits, provided that
the changes are effected gradually and announced in advance. Section 1-a of Act
No. 2655 now reads:
3.
In its Resolution No. 2224 dated December 3, 1982, the CB-MB issued CB
Circular No. 905, Series of 1982, effective on January 1, 1983. It removed the
ceilings on interest rates on loans or forbearance of any money, goods or credits:
Sec. 1. The rate of interest, including commissions, premiums, fees and other
charges, on a loan or forbearance of any money, goods, or credits, regardless of
maturity and whether secured or unsecured, that may be charged or collected by
any person, whether natural or juridical, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.
4.
R.A. No. 7653 establishing the BSP replaced the CB:
Sec. 135. Repealing Clause. Except as may be provided for in Sections 46 and
132 of this Act, Republic Act No. 265, as amended, the provisions of any other law,
special charters, rule or regulation issued pursuant to said Republic Act No. 265, as
amended, or parts thereof, which may be inconsistent with the provisions of this
Act are hereby repealed. Presidential Decree No. 1792 is likewise repealed.
Note: R.A. 7653 the law that created BSP to replace CB Note: this law did not
retain the same provision as that of Section 109 in RA 265.
PETITIONERS ARGUMENTS

To justify their skipping the hierarchy of courts petitioners contend the

transcendental importance of their Petition:
a)
CB-MB statutory or constitutional authority to prescribe the maximum rates
of interest for all kinds of credit transactions and forbearance of money, goods or
credit beyond the limits prescribed in the Usury Law;
b)
If so, whether the CB-MB exceeded its authority when it issued CB Circular
No. 905, which removed all interest ceilings and thus suspended Act No. 2655 as
regards usurious interest rates;
c)
Whether under R.A. No. 7653, the new BSP-MB may continue to enforce CB
Circular No. 905.

Petitioners contend that under Section 1-a of Act No. 2655, as amended by
P.D. No. 1684, the CB-MB was authorized only to prescribe or set the maximum

rates of interest for a loan or renewal thereof or for the forbearance of any
money, goods or credits, and to change such rates whenever warranted by
prevailing economic and social conditions, the changes to be effected gradually
and on scheduled dates; that nothing in P.D. No. 1684 authorized the CB-MB to lift
or suspend the limits of interest on all credit transactions, when it issued CB
Circular No. 905. They further insist that under Section 109 of R.A. No. 265, the
authority of the CB-MB was clearly only to fix the banks maximum rates of
interest, but always within the limits prescribed by the Usury Law.

CB Circular No. 905, which was promulgated without the benefit of any prior
public hearing, is void because it violated NCC 5 which provides that "Acts
executed against the provisions of mandatory or prohibitory laws shall be void,
except when the law itself authorizes their validity."

weeks after the issuance of CB Circular No. 905, the benchmark 91-day
Treasury bills shot up to 40% PA, as a result. The banks followed suit and re-priced
their loans to rates which were even higher than those of the "Jobo" bills.

CB Circular No. 905 is also unconstitutional in light of the Bill of Rights, which
commands that "no person shall be deprived of life, liberty or property without
due process of law, nor shall any person be denied the equal protection of the
laws."

R.A. No. 7653 did not re-enact a provision similar to Section 109 of RA 265,
and therefore, in view of the repealing clause in Section 135 of R.A. No. 7653, the
BSP-MB has been stripped of the power either to prescribe the maximum rates of
interest which banks may charge for different kinds of loans and credit
transactions, or to suspend Act No. 2655 and continue enforcing CB Circular No.
905.
Ruling
CB-MB merely suspended the effectivity of the Usury Law when it issued CB
Circular No. 905.
In Medel v. CA, it was said that the circular did not repeal nor amend the Usury
Law but simply suspended its effectivity; that a Circular cannot repeal a low; that
by virtue of CB the Usury Law has been rendered ineffective; that the Usury has
been legally non-existent in our jurisdiction and interest can now be charged as
lender and borrow may agree upon.
Circular upheld the parties freedom of contract to agree freely on the rate of
interest citing Art. 1306 under which the 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.
BSP-MB has authority to enforce CB Circular No. 905.
RA 265 covered only banks while Section 1-a of the Usury Law, empowers the
Monetary Board, BSP for that matter, to prescribe the maximum rate or rates of

interest for all loans or renewals thereof or the forbearance of any money, good or
credits
The Usury Law is broader in scope than RA 265, now RA 7653, the later merely
supplemented the former as it provided regulation for loans by banks and other
financial institutions. RA 7653 was not unequivocally repealed by RA 765.
CB Circular 905 is essentially based on Section 1-a of the Usury Law and the Usury
Law being broader in scope than the law that created the Central Bank was not
deemed repealed when the law replacing CB with the Bangko Sentral was enacted
despite the non-reenactment in the BSP Law of a provision in the CB Law which
the petitioners purports to be the basis of Circular 905. Magulo ba? Hahaha. Basta
the present set up is: The power of the BSP Monetary Board to determine interest
rates emanates from the Usury Law [which was further specified by Circular 905].
Granting that the CB had power to "suspend" the Usury Law, the new BSP-MB did
not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653,
which expressly repealed R.A. No. 265. The petitioners point out that R.A. No.
7653 did not reenact a provision similar to Section 109 of R.A. No. 265.
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans
extended by banks, whereas under Section 1-a of the Usury Law, as amended, 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.
Act No. 2655, an earlier law, is much broader in scope, whereas R.A. No. 265, now
R.A. No. 7653, merely supplemented it as it concerns loans by banks and other
financial institutions. Had R.A. No. 7653 been intended to repeal Section 1-a of Act
No. 2655, it would have so stated in unequivocal terms.
Moreover, the rule is settled that repeals by implication are not favored, because
laws are presumed to be passed with deliberation and full knowledge of all laws
existing pertaining to the subject.An implied repeal is predicated upon the
condition that a substantial conflict or repugnancy is found between the new and
prior laws. Thus, in the absence of an express repeal, a subsequent law cannot be
construed as repealing a prior law unless an irreconcilable inconsistency and
repugnancy exists in the terms of the new and old laws. We find no such conflict
between the provisions of Act 2655 and R.A. No. 7653.
#generalia specialibus non derogant
The lifting of the ceilings for interest rates does not authorize stipulations charging
excessive, unconscionable, and iniquitous interest.

In Castro v. Tan, the Court held that the imposition of unconscionable interest is
immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous
deprivation of property repulsive to the common sense of man.
They are struck down for being contrary to morals, if not against the law, therefore
deemed inexistent and void ab initio. However this nullity does not affect the
lenders right to recover the principal of the loan nor affect the other terms
thereof.
PROCEDURAL MATTERS
The Petition is procedurally infirm.
The CB-MB was created to perform executive functions with respect to the
establishment, operation or liquidation of banking and credit institutions. It does
not perform judicial or quasi-judicial functions. Certainly, the issuance of CB
Circular No. 905 was done in the exercise of an executive function. Certiorari will
not lie in the instant case.
Petitioners have no locus standi to file the Petition
Locus standi is defined as "a right of appearance in a court of justice on a given
question." In private suits, Section 2, Rule 3 of the 1997 Rules of Civil Procedure
provides that "every action must be prosecuted or defended in the name of the
real party in interest," who is "the party who stands to be benefited or injured by
the judgment in the suit or the party entitled to the avails of the suit." Succinctly
put, a partys standing is based on his own right to the relief sought.
Even in public interest cases such as this petition, the Court has generally adopted
the "direct injury" test that the person who impugns the validity of a statute must
have "a personal and substantial interest in the case such that he has sustained, or
will sustain direct injury as a result." while petitioners assert a public right it is
nonetheless required of them to make out a sufficient interest in the vindication of
the public order and the securing of relief.
Petitioners also do not claim that public funds were being misused in the
enforcement of CB Circular No. 905 which would have made the action a public
one, "and justify relaxation of the requirement that an action must be prosecuted
in the name of the real party-in-interest."
The Petition raises no issues of transcendental importance.
In Prof. David v. Pres. Macapagal-Arroyo,the Court summarized the requirements
before taxpayers, voters, concerned citizens, and legislators can be accorded a
standing to sue, viz:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal disbursement of public funds or
that the tax measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity of the
election law in question;

(4) for concerned citizens, there must be a showing that the issues raised are of
transcendental importance which must be settled early; and
(5) for legislators, there must be a claim that the official action complained of
infringes upon their prerogatives as legislators.
In CREBA v. ERC, guidelines as determinants on whether a matter is of
transcendental importance, namely:
1.
the character of the funds or other assets involved in the case;
2.
the presence of a clear case of disregard of a constitutional or statutory
prohibition by the public respondent agency or instrumentality of the government;
and
3.
the lack of any other party with a more direct and specific interest in the
questions being raised.

GUARANTY AND SURETYSHIP (2047-2084)

1 Ong vs PCIB -S
FACTS: Spouses petitioners, President and Treasurer of Baliwag Mahogany Corp
BMC obtained a loan from respondent, they signed as sureties. Thereafter, BMC
was under receivership, MOA with all creditors not to collect for a period of time.
Petitioners contend benefits them as sureties/guarantors. TC, CA, SC for
respondent, petitioners are not guarantors but sureties, bank may after them or
BMC.
DOCTRINE:There is a sea of difference in the rights and liabilities of a guarantor
and a surety. A guarantor insures the solvency of the debtor while a surety is an
insurer of the debt itself. A contract of guaranty gives rise to a subsidiary
obligation on the part of the guarantor. It is only after the creditor has proceeded
against the properties of the principal debtor and the debt remains unsatisfied
that a guarantor can be held liable to answer for any unpaid amount.

2 International Finance Corp vs Imperial Textile Mills -S

Facts: - On December 17, 1974, IFC and Philippine Polyamide Industrial
Corporation entered into a loan agreement wherein IFC extended to PPIC a loan of
US$7,000,000 payable in sixteen (16) semi-annual installments of US$437,500.00
each, with 10% interest. The interest shall be paid in US dollars semi-annually.

A Guarantee Agreement was executed with Imperial Textile Maills-ITM, Grand

Textile Manufacturing Corporation and IFC as parties. ITM and Grandtex agreed to
guarantee PPICs obligations under the loan agreement.
PPIC defaulted payments. By virtue of PPICs failure to pay, IFC, together with DBP,
applied for the extrajudicial foreclosure of mortgages on the real estate, buildings,
machinery, equipment plant and all improvements owned by PPIC. During the
public sale, IFCs bid was for P99,269,100 which was equivalent to US$5,250,000.
The outstanding loan, however, amounted to US$8,083,967, thus leaving a balance
of US$2,833,967 PPIC failed to pay the remaining balance.
Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the
outstanding balance. However, the two failed to pay. - IFC filed a complaint against
PPIC and ITM for the payment of the outstanding balance plus interests and
attorneys fees. The trial court dismissed the complaint against ITM. The CA
reversed and held that ITM bound itself under the Guarantee Agreement. The CA,
however, held that ITMs liability as a guarantor would arise only if and when PPIC
could not pay. Since PPICs inability to comply with its obligation was not
sufficiently established, ITM could not immediately be made to assume the
liability.
Issue: WON ITM and Grandtex are sureties and therefore, jointly and severally
liable with PPIC, for the payment of the loan.
Ratio: - IFC claims that, under the Guarantee Agreement, ITM bound itself as a
surety to PPICs obligations proceeding from the Loan Agreement.
For its part, ITM asserts that, by the terms of the Guarantee Agreement, it was
merely a guarantor and not a surety. Moreover, any ambiguity in the Agreement
should be construed against IFC -- the party that drafted it. - The Agreement uses
guarantee and guarantors, prompting ITM to base its argument on those
words.
This Court is not convinced that the use of the two words limits the Contract to a
mere guaranty. The specific stipulations in the Contract show otherwise. While
referring to ITM as a guarantor, the Agreement specifically stated that the
corporation was jointly and severally liable. To put emphasis on the nature of
that liability, the Contract further stated that ITM was a primary obligor, not a
mere surety. Those stipulations meant only one thing: that at bottom, and to all
legal intents and purposes, it was a surety. - Indubitably therefore, ITM bound
itself to be solidarily liable with PPIC for the latters obligations under the Loan

Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not
be deemed merely secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs
liability commenced only when it guaranteed PPICs obligation. It became a surety
when it bound itself solidarily with the principal obligor. Thus, the applicable law is
Art 2047 CC. Pursuant to this provision, petitioner (as creditor) was justified in
taking action directly against respondent.
The Court does not find any ambiguity in the provisions of the Guarantee
Agreement. When qualified by the term jointly and severally, the use of the
word guarantor to refer to a surety does not violate the law. As Art 2047
provides, a suretyship is created when a guarantor binds itself solidarily with the
principal obligor. Likewise, the phrase in the Agreement -- as primary obligor and
not merely as surety -- stresses that ITM is being placed on the same level as
PPIC. Those words emphasize the nature of their liability, which the law
characterizes as a suretyship.
The use of the word guarantee does not ipso facto make the contract one of
guaranty. This Court has recognized that the word is frequently employed in
business transactions to describe the intention to be bound by a primary or an
independent obligation. The very terms of a contract govern the obligations of the
parties or the extent of the obligors liability. Thus, this Court has ruled in favor of
suretyship, even though contracts were denominated as a Guarantors
Undertaking or a Continuing Guaranty.
Indeed, the finding of solidary liability is in line with the premise provided in the
Whereas clause of the Guarantee Agreement. The execution of the Agreement
was a condition precedent for the approval of PPICs loan from IFC. Consistent
with the position of IFC as creditor was its requirement of a higher degree of
liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation
in Section 2.01 and is now estopped from feigning ignorance of its solidary liability.
The literal meaning of the stipulations control when the terms of the contract are
clear and there is no doubt as to the intention of the parties.
We note that the CA denied solidary liability, on the theory that the parties would
not have executed a Guarantee Agreement if they had intended to name ITM as a
primary obligor. The appellate court opined that ITMs undertaking was collateral
to and distinct from the Loan Agreement. On this point, the Court stresses that a
suretyship is merely an accessory or a collateral to a principal obligation. Although
a surety contract is secondary to the principal obligation, the liability of the surety
is direct, primary and absolute; or equivalent to that of a regular party to the

undertaking. A surety becomes liable to the debt and duty of the principal obligor
even without possessing a direct or personal interest in the obligations constituted
by the latter. - With the present finding that ITM is a surety, it is clear that the CA
erred in declaring the former secondarily liable. A surety is considered in law to be
on the same footing as the principal debtor in relation to whatever is adjudged
against the latter. Evidently, the dispositive portion of the assailed Decision should
be modified to require ITM to pay the amount adjudged in favor of IFC.
3 E Zobel Inc vs CA
Surety distinguished from Guaranty, Art. 2047
A contract of surety is an accessory promise by which a person binds himself for
another already bound, and agrees with the creditor to satisfy the obligation if the
debtor does not.
A contract of guaranty, on the other hand, is a collateral undertaking to pay the
debt of another in case the latter does not pay the debt.

Surety
usually bound with his principal
by the same instrument,
executed at the same time, and
on the same consideration

Guarantor
guarantor's
own
separate
undertaking, in which the
principal does not join. It is
usually entered into before or
after that of the principal, and is
often supported on a separate
consideration
from
that
supporting the contract of the
principal.
The original contract of his
principal is not his contract, and
he is not bound to take notice of
its non-performance.
He is often discharged by the
mere indulgence of the creditor
to the principal, and is usually
not liable unless notified of the
default of the principal.

He is an original promissor and

debtor from the beginning, and
is held, ordinarily, to know
every default of his principal
Usually, he will not be
discharged, either by the mere
indulgence of the creditor to the
principal, or by want of notice
of the default of the principal,
no matter how much he may be
injured thereby
the insurer of the debt, and the insurer of the solvency of
he obligates himself to pay if the the debtor and thus binds
principal does not pay.
himself to pay if the principal

is unable to pay

Held: Based on the aforementioned definitions, it appears that the contract

executed by petitioner in favor of SOLIDBANK, albeit denominated as a
"Continuing Guaranty," is a contract of surety. The terms of the contract
categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit
to respondent spouses. The contract clearly disclose that petitioner assumed
liability to SOLIDBANK, as a regular party to the undertaking and obligated itself as
an original promissor. It bound itself jointly and severally to the obligation with the
respondent spouses. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties before it can hold petitioner
liable for the obligation.
Stipulation
agrees t guarantee, and hereby guarantee, the payment
The use of the term "guarantee" does not ipso facto mean that the contract is one
of guaranty. Authorities recognize that the word "guarantee" is frequently
employed in business transactions to describe not the security of the debt but an
intention to be bound by a primary or independent obligation. As aptly observed
by the trial court, the interpretation of a contract is not limited to the title alone
but to the contents and intention of the parties.
4 Tacao vs CA
FACTS: Private respondent Nenita A. Anay met petitioner William T. Belo, then the
vice-president for operations of Ultra Clean Water Purifier, through her former
employer in Bangkok. Belo introduced Anay to petitioner Marjorie Tocao, who
conveyed her desire to enter into a joint venture with her for the importation and
local distribution of kitchen cookwares
Under the joint venture, Belo acted as capitalist, Tocao as president and general
manager, and Anay as head of the marketing department and later, vice-president
for sales
The parties agreed that Belo's name should not appear in any documents relating
to their transactions with West Bend Company. Anay having secured the
distributorship of cookware products from the West Bend Company and organized
the administrative staff and the sales force, the cookware business took off

successfully. They operated under the name of Geminesse Enterprise, a sole

proprietorship registered in Marjorie Tocao's name.
The parties agreed further that Anay would be entitled to:
(1) ten percent (10%) of the annual net profits of the business;
(2) overriding commission of six percent (6%) of the overall weekly production;
(3) thirty percent (30%) of the sales she would make; and
(4) two percent (2%) for her demonstration services. The agreement was not
reduced to writing on the strength of Belo's assurances that he was sincere,
dependable and honest when it came to financial commitments.
On October 9, 1987, Anay learned that Marjorie Tocao had signed a letter
addressed to the Cubao sales office to the effect that she was no longer the vicepresident of Geminesse Enterprise.
Anay attempted to contact Belo. She wrote him twice to demand her overriding
commission for the period of January 8, 1988 to February 5, 1988 and the audit of
the company to determine her share in the net profits.
Anay still received her five percent (5%) overriding commission up to December
1987. The following year, 1988, she did not receive the same commission although
the company netted a gross sales of P 13,300,360.00.
On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum of
money with damages against Marjorie D. Tocao and William Belo before the
Regional Trial Court of Makati, Branch 140
The trial court held that there was indeed an "oral partnership agreement
between the plaintiff and the defendants. The Court of Appeals affirmed the lower
courts decision.
ISSUE: Whether the parties formed a partnership
HELD: Yes, the parties involved in this case formed a partnership
The Supreme Court held that to be considered a juridical personality, a partnership
must fulfill these requisites:
(1) two or more persons bind themselves to contribute money, property or
industry to a common fund; and

(2) intention on the part of the partners to divide the profits among themselves. It
may be constituted in any form; a public instrument is necessary only where
immovable property or real rights are contributed thereto.
This implies that since a contract of partnership is consensual, an oral contract of
partnership is as good as a written one.
In the case at hand, Belo acted as capitalist while Tocao as president and general
manager, and Anay as head of the marketing department and later, vice-president
for sales. Furthermore, Anay was entitled to a percentage of the net profits of the
business.
Therefore, the parties formed a partnership.
5 Astro Electronics vs Phil Export and Foreign Loan Guarantee Corpn
Doctrine: Persons who write their names on the face of promissory notes are
makers. Thus, even without the phrase personal capacity, a person who signs on
the instrument twice will still be primarily liable as a joint and several debtor.
Facts: Astro was granted several loans by the Philippine Trust Company (Philtrust)
amounting to P3,000,000.00 with interest and secured by three promissory notes.
In each of these promissory notes, it appears that petitioner Roxas signed twice, as
President of Astro and in his personal capacity. Roxas also signed a Continuing
Surety ship Agreement in favor of Philtrust Bank, as President of Astro and as
surety.
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of
Philtrust the payment of 70% of Astros loan, subject to the condition that upon
payment by Philguanrantee of said amount, it shall be proportionally subrogated
to the rights of Philtrust against Astro. As a result of Astros failure to pay its loan
obligations, despite demands, Philguarantee paid 70% of the guaranteed loan to
Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint
for sum of money with the RTC of Makati.
Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely
signed the same in blank and the phrases in his personal capacity and in his
official capacity were fraudulently inserted without his knowledge.
The trial court ruled in favor of Philguarantee, stating that if Roxas really intended
to sign the instruments merely in his capacity as President of Astro, then he should

have signed only once in the promissory note. On appeal, the Court of Appeals
affirmed the RTC decision.
Issue: Whether or not Roxas should be solidarily liable with Astro for the sum
awarded by the RTC
Held: Yes. In signing his name aside from being the President of Astro, Roxas
became a co-maker of the promissory notes and cannot escape any liability arising
from it. Under the Negotiable Instruments Law, persons who write their names on
the face of promissory notes are makers. Thus, even without the phrase personal
capacity, Roxas will still be primarily liable as a joint and several debtor under the
notes considering that his intention to be liable as such is manifested by the fact
that he affixed his signature on each of the promissory notes twice which
necessarily would imply that he is undertaking the obligation in two different
capacities, official and personal.
Moreover, an instrument which begins with I, We, or Either of us promise to
pay, when signed by two or more persons, makes them solidary liable (Republic
Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992). Having
signed under such terms, Roxas assumed the solidary liability of a debtor and
Philtrust Bank may choose to enforce the notes against him alone or jointly with
Astro.
It devolves upon one to overcome the presumptions that private transactions are
presumed to be fair and regular and that a person takes ordinary care of his
concerns (Mendoza vs. Court of Appeals, G.R. No. 116710). Bare allegations, when
unsubstantiated by evidence, documentary or otherwise, are not equivalent to
proof under our Rules of Court (Coronel vs. Constantino, G.R. No. 121069,
February 7, 2003). Since Roxas failed to prove the truth of his allegations that the
phrases in his personal capacity and in his official capacity were inserted on
the notes without his knowledge, said presumptions shall prevail over his claims.
6 Spouses Toh vs Solidbank

7 Filipinas Textile Mills vs CA

8 Severino vs Severino

FACTS: Melecio Severino upon his death, left considerable properties. To end
litigation among heirs, a compromise was effected where defendant Guillermo
(son of MS) took over the property of deceased and agreed to pay installment of
100K to plaintiff (wife of MS) payable first in 40K cash upon execution of document
in 3 equal installments. Enrique Echauz became guarantor.
Upon failure to pay the balance, plaintiff filed and action against the defendant
and Echauz. Enchauz contends that he received nothing from affixing his signature
in the document and the contract lacked the consideration as to him.
ISSUE: WON there is a consideration for the guaranty?
HELD: The proof shows that the money claimed in this action has never been paid
and is still owing to the plaintiff; and the only defense worth noting in this decision
is the assertion on the part of Enrique Echaus that he received nothing for affixing
his signature as guarantor to the contract which is the subject of suit and that in
effect the contract was lacking in consideration as to him.
The guarantor or surety is bound by the same consideration that makes the
contract effective between the principal parties thereto.
The compromise and dismissal of a lawsuit is recognized in law as a valuable
consideration; and the dismissal of the action which Felicitas Villanueva and
Fabiola Severino had instituted against Guillermo Severino was an adequate
consideration to support the promise on the part of Guillermo Severino to pay the
sum of money stipulated in the contract which is the subject of this action. The
promise of the appellant Echaus as guarantor therefore binding.
It is neither necessary that guarantor or surety should receive any part of the
benefit, if such there be accruing to his principal.
Thus, judgment affirmed.
9 Willex Plastic Industries vs CA
10 Dino vs CA
11 Atok Finance Corpn vs CA
12 Tanedo vs Allied Banking Corp
WON the extension of payment granted to debtor without the consent of the
guarantor would extinguish the contract of guaranty
Although the general rule states the extension of payment granted to debtor
without the consent of the guarantor would extinguish the guaranty, in this case
the court ruled otherwise.
13 Southern Motors Inc vs Barbosa

FACTS:
Plaintiff Southern Motors brought an action against defendant Barbosa
to foreclose a real estate mortgage constituted by the latter in favor of the former,
as security for the payment of a sum extended by plaintiff to one Alfredo
Brillantes, because the latter failed to settle his obligation in accordance with the
terms and conditions corresponding with the deed of mortgage.
Defendant filed an answer admitting the allegations of the complaint and
alleging by way of special and affirmative defense that he executed the deed of
mortgage for the sole purpose of guaranteeing the above mentioned debt of
Brillantes and that therefore plaintiff cannot foreclose the mortgage property
without a prior exhaustion of the principals properties.
After the case transferred from one judge to another, the trial court
rendered judgment on the pleadings in favor of plaintiff that prompted
respondent to appeal before the CA who certified the case to the SC in view of the
fact that the appeal raises purely questions of law.
ISSUE:
WON plaintiff is required to exhaust debtor-principals property before
he can proceed to foreclose the mortgage.
HELD:
No. Defendants invocation of article 2058 of the Civil Code is misplaced
because the right of the guarantors to demand exhaustion of the property of the
principal debtor under said provision exists only when a pledge or mortgage has
not been given as special security for the payment of the principal obligation.
Under the given facts of the case, a mortgage was executed as security for
brillantes debt, hence, defendants reliance upon the aforementioned provision
cannot be sustained, for what governs in this case are the provisions under title
XVI of the Civil Code concerning pledge and mortgages.
14 Baylon vs CA
Facts: Pacionara Baylon introduced Rosita Luanzon to Leonila Tomacruz which is
the co-manager of her husband in PLDT.Baylon invited Leonila to lend Rosita
money for her business as contractor and in return pay the amount and a monthly
interest rate of 5%.Persuaded by Baylons assurances that the business was stable
and the high interest rate Leonila lent Rosita P 150,000.Rosita on the other hand
issued and signed a promissory note acknowledging the receipt of P 150,000
payable on August22, 1987. Baylon signed the promissory note as
guarantor.Later on, Rosita failed to pay the said amount forcing Leonila to file a
case for collection of sum of money against Rosita and Baylon. However summons
were never served to Rosita.Baylon denied having guaranteed the payment of the
promissory note and claims that the money given to Rosita was not a loan but an

investment and that assuming that the loan was guaranteed Leonila has not
exhausted the property of Rosita nor resorted to all legal remedies against Rosita
as required by law. Trial court ruled in favor of Leonila making Baylon liable for the
said amount. This decision was affirmed by the C.A.
Issue: WON Baylon should be held liable for the amount of the promissory note.
Ruling: No.
Rationale: Petitioner is invoking the benefit of excussion pursuant to article 2058
of the Civil Code, which provides that
The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal remedies
against the debtor.
It is axiomatic that the liability of the guarantor is only subsidiary. All the
properties of the principal debtor must first be exhausted before his own is levied
upon. Thus, the creditor may hold the guarantor liable only after judgment has
been obtained against the principal debtor and the latter is unable to pay, "for
obviously the 'exhaustion of the principal's property' the benefit of which the
guarantor claims cannot even begin to take place before judgment has been
obtained."
This rule is embodied in article 2062 of the Civil Code which provides that the
action brought by the creditor must be filed against the principal debtor alone,
except in some instances when the action may be brought against both the debtor
and the principal debtor. Under the circumstances availing in the present case, the
court held that it is premature to even determine whether or not petitioner is
liable as a guarantor and whether she is entitled to the concomitant rights as such,
like the benefit of excussion, since the most basic prerequisite is wanting that is,
no judgment was first obtained against the principal debtor Rosita B. Luanzon. It is
useless to speak of a guarantor when no debtor has been held liable for the
obligation which is allegedly secured by such guarantee. Although the principal
debtor Luanzon was impleaded as defendant, there is nothing in the records to
show that summons was served upon her. Thus, the trial court never even
acquired jurisdiction over the principal debtor. The court held that private
respondent must first obtain a judgment against the principal debtor before
assuming to run after the alleged guarantor.
15 Wise & Co Inc vs Tanglao
Facts: Atty. Dionisio Tanglao (Cornelio Davids atty) by power of attorney
mortgaged two real properties belonging to him to secure the payment of a

judgment credit of P640 obtained by Wise & Co. against Cornelio David (agent of
W&C). As Cornelio David paid only a part of the indebtedness, Wise & Co. filed an
action against Atty. Tanglao to recover the unpaid balance.
Issue: WON atty. Dionisio Tanglao is liable for the balance?
Held: No, Nothing is stated in the compromise agreement to the effect that Atty.
Tanglao become Davids surety for the payment of the judgment debt.
(1)Tanglao did not contract any personal responsibility for the payment of the
sum of P640. The only obligation which he contracted was that resulting
from the mortgage. However, a foreclosure suit was not instituted against
Atty. Tanglao but a purely personal action for the recovery of the amount still
owned by Atty. Tanglao.
(2) Even granting that Atty. Tanglao may be considered a surety (or guarantor), the
action does not lie against him on the ground that all the legal remedies against
him have not previously been asked for and David has property sufficient to pay
the balance of the debt the payment of which is sought of Tanglao in his alleged
capacity as surety. A guaranty or surety must be expressed and cannot be
presumed. Art 2058 the guarantor cannot be compelled to pay the creditor unless
the latter has exhausted all the property of the debtor, and has resorted to all legal
remedies against the debtor.

16 Syquia vs Jacinto
17 Arroyo vs Jungsay

Summary: the sureties of the absconding former guardian, who is being sued for
the bond he executed upon appointment, are invoking the principle of excussion
to escape liability. Court held that they must first point out available properties
first to be able to enjoy said principle
*The sureties of a guardian against whom judgment has been entered, may
demand the benefit of a levy (exclusion) of the principals property, even when
judgment is rendered against both surety and principal. But to do so, they must
point out property subject to seizure in an amount sufficient to satisfy the debt.
(Right of Surety. R94.3)
Facts

-FLORENTINO HILARIO JUNGSAY was appointed as guardian of the imbecile TITO

JOCSING. He executed a bond, secured by as surety executed by the bondsmen of
JUNGSAY.
-HILARIO absconded with the funds of the ward.
-so new guardian of TITO, JOSE M. A. ARROYO, sued JUNGSAY and his bondsmen
for the P6k absconded, plus interests and costs
TC: BOTH JUNGSAY and BONDSMEN liable
-bondsmen appealed: they should be afforded the benefit of excusion, thus,
should be credited P4,400 (value of certain property of the absconding guardian,
which is however in the exclusive possession of 3P under claim of ownership
WON bondsmen should be credited w/ P4400 and thus benefit from the principle
of excusion? NO.
-Surety has benefit of levy (excusion), even when the judgment is rendered against
both the surety and the principal. [A1834, NCC]
-BUT [A1832, NCC]: the surety must point out property of the principal creditor
which can be sold and which is sufficient to cover the amount of the debt.
-MANRESA EXPLANATION: property should be

Realizable

Situated w/n territory of the court/state - the attachment of property

situated a great distance away would be a lengthy and extremely difficult
proceeding and one that, if actually not opposed to, yet does not very well accord
w/ the purpose of the bond (to insure the fulfillment of the obligation + furnish the
creditor with the means of obtaining its fulfillment w/o hindrance or delays)
-HILL & CO v. BOURCIER and POND: plea of excusion does not stay the proceedigns
but judgment will be modified so as to require the creditor to proceed by
execution against the property of the principal and to exhaust it before resorting
to the property of the surety.
-HERE: The property pointed out by the sureties is not sufficient to pay the
indebtedness; it is not salable; it is so encumbered that third parties have, as we
have indicated, full possession under claim of ownership without leaving to the
absconding guardian a fractional or reversionary interest without determining first
whether the claim of one or more of the occupants is well founded.
18 Luzon Steel vs Sia
19 Towers Assurance Corp vs Ororama
TOWERS ASSURANCE CORPORATION vs ORORAMA SUPERMART ACTS: This case is
about the liability oF a surety in a counterbond For the lifing oF a writ oF
preliminary aachment. See Hong, the proprietor oF Ororama Supermart in
Cagayan de Oro City, sued the spouses Ernesto Ong and Conching Ong For the
collecon oF the sum oF P 58,400 plus ligaon expenses and attorney's Fees. See

Hong asked For a writ oF preliminary attachment. On March 5, 1976, the lower
court issued an order oF attachment. The deputy sheri aached the properties oF
the Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City. To lif the
aachment, the Ong spouses led on March 11, 1976 a counterbond in 'the amount
oF P 58,400 with Towers Assurance Corporaon as surety. In that undertaking, the
Ong spouses and Towers Assurance Corporaon bound themselves to pay
solidarity to See Hong the sum oF P 58,400. or non-appearance at the pre- trial,
the Ong spouses were declared in deFault. On October 25, 1976, the lower court
rendered a decision, ordering not only the Ong spouses but also their surety,
Towers Assurance Corporation, to pay solidarily to See Hong the sum oF P 58,400
Ernesto Ong manifested that he did not want to appeal. On March 8, 1977,
Ororama Supermart Fled a moTon for execuTon. he lower court granted that
moTon. he writ of execuTon was issued on March 14 against the judgment
debtors and their surety.
ISSUE: Whether or not the lower court court acted with grave abuse of discreTon
in issuing a writ of execuTon against the surety without Frst giving it an
opportunity to be heard
RULING: We hold that the lower court acted with grave abuse of discreTon in
issuing a writ of execuTon against the surety without Frst giving it an opportunity
to be heard as required in Rule 57 of the Rules of Court which provides: SEC. 17.
When execuTon returned unsaTsFed, recovery had upon bound. If the
execuTon be returned unsaTsFed in whole or in part, the surety or sureTes on any
counterbound given pursuant to the provisions of this rule to secure the
20 Cochingyan Jr vs R&B Surety and Insurance Co
21 Mercantile Insurance Co vs Ysmael Jr
Facts: Felipe Ysmael, Jr. & Co., Inc. and Magdalena Estate, lnc. represented by
Felipe Ysmael, Jr. as president and in his personal capacity executed with the
plaintiff Mercantile Insurance Co., Inc. an indemnity agreement. The defendants
Felipe Ysmael, Jr. & Co., Inc. and Felipe Ysmael, Jr. bound jointly and severally to
indemnify the plaintiff, from and against any and all payments, damages, costs,
losses, penalties, charges and expenses which said company as surety (MERICO
Bond No. 0007) shall incur or become liable to pay. Paragraph 3 of the indemnity
agreement expressly provides: 3) ACCRUAL OF ACTION: Notwithstanding the
provisions of the next preceding paragraph, where the obligation involves a
liquidated amount for the payment of which the company has become legally
liable under the terms of the obligation and its suretyship undertaking or by the

demand of the obligee or otherwise and the latter has merely allowed the
COMPANY a term or extension for payment of the latter's demand the full amount
necessary to discharge the COMPANY's aforesaid liability irrespective of whether
or not payment has actually been made by the COMPANY, the COMPANY for the
protection of its interest may forthwith proceed against the undersigned or either
of them by court action or otherwise to enforce payment even prior to making
payment to the obligee which may hereafter be done by the COMPANY.
Tordesillas and Torres in their official capacities and the defendantsexecuted
another indemnity agreement with the plaintiff in consideration of the surety
bond (MERICO Bond No. G (16) 0030. In the indemnity agreement the same
provisions of paragraph 3 is found. Later on, the amount of the Bond was reduced
by P40,000.00 so that the total liability of the plaintiff to the Philippine National
Bank in view of the aforesaid reduction is P100,000.00, P60,000.00 onSurety Bond
No. 0007 plus P40,000.00 on Surety Bond No. 0030. The defendants failed to pay
the overdraft and credit line with the Philippine National Bank demanded from
Mercantil, settlement of itsobligation under surety bonds No. (G-16)-0007 for P
60,000.00 which expired on March 6, 1970 and No. G (-16)- 0030 for P 40,000.00
which expired since September 4, 1968 (Exh. P) Attached to the demand letter is a
statement of account. By letter of December 17, 1970, plaintiff company wrote a
letter of demand to the defendants regarding the the letter of demand of the
Philippine National Bank sent to the plaintiff and demanding from the defendants
the settlement of said account. The defendants failed to settle their obligation
with the Philippine National Bank, on February 10, 1971, plaintiff brought the
present action. Lower court dismissed case for lack of cause of action, the
plaintiffhas paid nothing in the surety bonds, therefore, they have not suffered any
actual damage and held that paragraph 3 of contract is void. Defendants argued
that to allow surety to receive indemnity or compensation for something it has not
paid in its capacity as surety would constitute unjust enrichment at the expense of
another. Issue: Whether or not surety can be allowed indemnification fromthe
defendants-appellants, upon the latter's default even before the former has paid
to the creditor.
Held: The overdraft line of Php1M and the credit line of Php1M applied for by the
defendant was granted by the Philippine National Bank on the strength of the two
surety bonds denominated as Bond No. G(16) 0007 and Bond No. G(16) 0030. As
security and in consideration of the execution of the surety bonds,the defendants
executed with the plaintiff identical indemnityagreements which provide that
payment of indemnity or compensation may be claimed whether or not plaintiff
company has actually paid the same as provided in paragraph 3 of contract. The
cause of action was derived from the terms of the Indemnity Agreement,
paragraph 3 thereof. By virtue of the provisions of theIndemnity Agreement,
defendants-appellants have undertaken to hold plaintiff-appellee free and

harmless from any suit, damage or liability which may be incurred by reason of
non-performance by the defendantsappellants of their obligation with the
Philippine National Bank. The Indemnity Agreement is principally entered into as
security of plaintiff-appellee in case of default of defendants-appellants; and the
liability of the parties under the surety bonds is joint and several, so that the
obligee PNB may proceed against either of them for the satisfaction of the
obligation. There is no dispute as to meaning of the terms of the Indemnity
Agreement. Having voluntarily entered into such contract, the appellants cannot
now be heard to complain. Their indemnity agreement have the force and effect
of law. The principal debtors, defendants-appellants herein, are the same persons
who executed the Indemnity Agreement. Thus, the positionoccupied by them is
that of a principal debtor and indemnitor at the same time, and their liability being
joint and several with the plaintiff-appellee's, the Philippine National Bank may
proceed against either for fulfillment of the obligation as covered by the surety
bonds. There is no principle of guaranty involved and, therefore, the provision of
Article 2071 of the Civil Code does not apply. There is no more need for the
plaintiff-appellee to exhaust all the properties of the principal debtor before it may
proceed against defendants-appellants.
22 PNB vs CA
FACTS: The spouses Chua were the owners of a parcel of land covered by a TCT
and registered in their names. Upon the husbands death, the probate court
appointed his son, private respondent Allan as special administrator of the
deceaseds intestate estate. The court also authorized Allan to obtain a loan
accommodation from PNB to be secured by a real estate mortgage over the
above-mentioned parcel of land, which Allan did for P450,000.00 with interest.
For failure to pay the loan in full, the bank extrajudicially foreclosed the real estate
mortgage. During the auction, PNB was the highest bidder. However, the loan
having a payable balance, to claim this deficiency, PNB instituted an action with
the RTC, Balayan, Batangas, against both Mrs. Chua and Allan.
The RTC rendered its decision, ordering the dismissal of PNBs complaint. On
appeal, the CA affirmed the RTC decision by dismissing PNBs appeal for lack of
merit.
Hence, the present petition for review on certiorari under Rule 45 of the Rules of
Court.

ISSUE: The WON it was error for the CA to rule that petitioner may no longer
pursue by civil action the recovery of the balance of indebtedness after having
foreclosed the property securing the same.
HELD: petition is DENIED. The assailed decision of the CA is AFFIRMED.
No
Petitioner relies on Prudential Bank v. Martinez, 189 SCRA 612, 615 (1990), holding
that in extrajudicial foreclosure of mortgage, when the proceeds of the sale are
insufficient to pay the debt, the mortgagee has the right to recover the deficiency
from the mortgagor.
However, it must be pointed out that petitioners cited cases involve ordinary
debts secured by a mortgage. The case at bar, we must stress, involves a
foreclosure of mortgage arising out of a settlement of estate, wherein the
administrator mortgaged a property belonging to the estate of the decedent,
pursuant to an authority given by the probate court. As the CA correctly stated,
the Rules of Court on Special Proceedings comes into play decisively. The
applicable rule is Section 7 of Rule 86 of the Revised Rules of Court ( which PNB
contends is not.)
In the present case it is undisputed that the conditions under the aforecited rule
have been complied with [see notes]. It follows that we must consider Sec. 7 of
Rule 86, appropriately applicable to the controversy at hand, which in summary
[and case law as well] grants to the mortgagee three distinct, independent and
mutually exclusive remedies that can be alternatively pursued by the mortgage
creditor for the satisfaction of his credit in case the mortgagor dies, among them:
(1)to waive the mortgage and claim the entire debt from the estate of the
mortgagor as an ordinary claim;
(2) to foreclose the mortgage judicially and prove any deficiency as an ordinary
claim; and
(2)to rely on the mortgage exclusively, foreclosing the same at any time before
it is barred by prescription without right to file a claim for any deficiency.
(3)Clearly petitioner herein has chosen the mortgage-creditors option of
extrajudicially foreclosing the mortgaged property of the Chuas. This choice
now bars any subsequent deficiency claim against the estate of the
deceased. Petitioner may no longer avail of the complaint for the recovery of
the balance of indebtedness against said estate, after petitioner foreclosed

the property securing the mortgage in its favor. It follows that in this case no
further liability remains on the part of respondents and the deceaseds
estate.
23 Peoples Bank and Trust Co vs Tambunting

24 PNB vs Manila Surety & Fidelity Co

25 Prudencio vs CA
In 1955, Concepcion and Tamayo Construction Enterprise had a contract with the
Bureau of Public Works. The firm needed fund to push through with the contract
so it convinced spouses Eulalio and Elisa Prudencio to mortgage their parcel of
land with the Philippine National Bank for P10,000.00. Prudencio, without
consideration, agreed and so he mortgaged the land and executed a promissory
note for P10k in favor of PNB. Prudencio also authorized PNB to issue the P10k
check to the construction firm.
In December 1955, the firm executed a Deed of Assignment in favor of PNB which
provides that any payment from the Bureau of Public Works in consideration of
work done (by the firm) so far shall be paid directly to PNB this will also ensure
that the loan gets to be paid off before maturity.
Notwithstanding the provision in the Deed of Assignment, the Bureau of Public
Works asked PNB if it can make the payments instead to the firm because the firm
needs the money to buy construction materials to complete the project.
Notwithstanding the provision of the Deed of Assignment, PNB agreed. And so the
loan matured without PNB actually receiving any payment from the Bureau of
Public Works. Prudencio, upon learning that no payment was made on the loan,
petitioned to have the mortgage canceled (to save his property from foreclosure).
The trial court ruled against Prudencio; the Court of Appeals affirmed the trial
court.
ISSUE: Whether or not Prudencio should pay the promissory note to PNB.
HELD: No. PNB is not a holder in due course.

Prudencio is an accommodation party for he signed the promissory note as maker

but he did not receive value or consideration therefor. He expected the firm
(accommodated party) to pay the loan this obligation was shifted to the Bureau
of Public Works by way of the Deed of Assignment). As a general rule, an
accommodation party is liable on the instrument to a holder for value/in due
course, notwithstanding such holder at the time of taking the instrument knew
him to be only an accommodation party. The exception is that if the holder, in this
case PNB, is not a holder in due course. The court finds that PNB is not a holder in
due course because it has not acted in good faith (pursuant to Section 52 of the
Negotiable Instruments Law) when it waived the supposed payments from the
Bureau of Public Works contrary to the Deed of Assignment. Had the Deed been
followed, the loan would have been paid off at maturity.
26 Security Bank vs Cuenca
DOCTRINE:An extension granted to the debtor by the creditor without the consent
of the guarantor extinguishes the guaranty. The 1989 Loan Agreement expressly
stipulated that its purpose was to liquidate, not to renew or extend, the
outstanding indebtedness. Moreover, respondent did not sign or consent to the
1989 Loan Agreeement, which had alledgedly extended the original P8 million
credit facility. Hence, his obligation as a surety should be deemed extinguished,
pursuant to Article 2079 of the Civil Code, which specifically states that *a+n
extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty.
An essential alteration in the terms of a Loan Agreement without the consent
of the surety extinguishes the latters obligation. The submission that only the
borrower, not the surety, is entitled to be notified of any modification in the
original loan accommodation is untenable-such theory is contrary to the to the
principle that a surety cannot assume an obligation more onerous than that of the
principal. That the Indemnity Agreement is a continuing surety does not authorize
the lender to extend the scope of the principal obligation inordinately; A
continuing guaranty is one which covers all transaction, including those arising in
the future, which are within the description or contemplation of the contract of
guaranty, until the expiration or termination thereof.