SECOND DIVISION

[G.R. Nos. 128833. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners, vs. COURT OF APPEALS and GOYU & SONS, INC.,respondents.

[G.R. No. 128834. April 20, 1998]

RIZAL

COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO, respondents.

[G.R. No. 128866. April 20, 1998]

MALAYAN INSURANCE INC., petitioner, vs. GOYU & SONS, INC. respondent. D EC I S I O N MELO, J.: The issues relevant to the herein three consolidated petitions revolve around the fire loss claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in connection with the mortgage contracts entered into by and between Rizal Commercial Banking Corporation (RCBC) and GOYU. The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus 37% interest per annum commencing July 27, 1992. RCBC was ordered to pay actual and compensatory damages in the amount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU P1,500,000.00 as exemplary damages and P1,500,000.00 for attorneys fees. GOYUs obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without any interest, surcharges, and penalties. RCBC and MICO appealed separately but, in view of the common facts and issues involved, their individual petitions were consolidated. The undisputed facts may be summarized as follows: GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao, recommended GOYUs application for approval by RCBCs executive committee. A credit facility in the amount of P30 million was initially granted. Upon GOYUs application and Uys and Laos recommendation, RCBCs executive committee increased GOYUs credit facility to P50 million, then to P90 m illion, and finally to P117 million. As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel mortgages in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila. Under each of these four mortgage contracts, GOYU committed itself to insure the mortgaged property with an insurance company approved by RCBC, and subsequently, to endorse and deliver the insurance policies to RCBC. GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued nine endorsements in favor of RCBC seemingly upon instructions of GOYU (Exhibits 1 -Malayan to 9-Malayan). On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by fire. Consequently, GOYU submitted its claim for indemnity on account of the loss insured against. MICO denied the claim on the ground that the

insurance policies were either attached pursuant to writs of attachments/garnishments issued by various courts or that the insurance proceeds were also claimed by other creditors of GOYU alleging better rights to the proceeds than the insured. GOYU filed a complaint for specific performance and damages which was docketed at the Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as Civil Case No. 93-65442, now subject of the present G.R. No. 128833 and 128866. 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. In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of Manila (Branch 3), confirmed that GOYUs other creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained their respective writs of attachments from various courts, covering an aggregate amount of P14,938,080.23, and ordered that the proceeds of the ten insurance policies be deposited with the said court minus the aforementioned P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC. In the meantime, another notice of garnishment was handed down by another Manila RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit 22-Malayan). After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, Malayan Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the latter as follows: 1. For defendant Malayan Insurance Co., Inc.: a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the amount of P50,000,000.00 which is deposited with this Court; To pay the plaintiff damages by way of interest for the duration of the delay since July 27, 1992 (ninety days after defendant insurers receipt of the required proof of loss and notice of loss) at the rate of twice the ceiling prescribed by the Monetary Board, on the following amounts: 1) P50,000,000.00 from July 27, 1992 up to the time said amount was deposited with this Court on January 7, 1994; P24,040,518.58 from July 27, 1992 up to the time when the writs of attachments were received by defendant Malayan;

b.

2)

2.

For defendant Rizal Commercial Banking Corporation: a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00;

3. a. 1) 2) 3)

For both defendants Malayan and RCBC: To pay the plaintiff, jointly and severally, the following amounts: P1,000,000.00 as exemplary damages; P1,000,000.00 as, and for, attorneys fees; Costs of suit. and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan obligations with defendant RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate stipulated in the respective promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by defendant Malayan, together with all the interests earned thereon.

(Record, pp. 478-479.) From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the amounts awarded in its favor. MICO and RCBC disputed the trial courts findings of liability on their part. The Court of Appeals partly granted GOYUs appeal, but sustained the findings of the trial court with respect to MICO and RCBCs liabilities, thusly: WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows: 1. FOR DEFENDANT MALAYAN INSURANCE CO., INC: a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of P50,505,594.60 (per O.R. No. 3649285) plus deposited in court and damages by way of interest commencing July 27, 1992 until the time Goyu receives the said amount at the rate of thirty-seven (37%) percent per annum which is twice the ceiling prescribed by the Monetary Board. 2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION: a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO: a) 1. 2. To pay the plaintiff jointly and severally the following amounts: P1,500,000.00 as exemplary damages; P1,500,000.00 as and for attorneys fees.

4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan obligation with RCBC in the amount of P68,785,069.04 as of April 27, 1992 without any interest, surcharges and penalties. The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release to Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by Malayan Insurance Co., Inc., together with all the interests thereon. (Rollo, p. 200.) RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and consequent reversal of the above dispositions of the Court of Appeals. In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by virtue of the Court of Appeals resolution dated August 7, 1996, was consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No. 128833). At issue in said petition is RCBCs 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. After a careful review of the material facts as found by the two courts below in relation to the pertinent and applicable laws, we find merit in the submissions of RCBC and MICO. The several causes of action pursued below by GOYU gave rise to several related issues which are now submitted in the petitions before us. This Court, however, discerns one primary and central issue, and this is, whether or not RCBC, as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor, in case of the occurrence of loss. As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed several mortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that GOYU shall insure the mortgaged property with any of the insurance companies acceptable to RCBC. GOYU indeed insured the mortgaged property with MICO, an insurance company acceptable to RCBC. Based on their stipulations in the mortgage contracts, GOYU was supposed to endorse these insurance policies in favor of, and deliver them, to RCBC. Alchester Insurance Agency, Inc., MICOs underwriter from whom GOYU obtained the subject insurance policies, prepared the nine endorsements (see Exh. 1-Malayan to 9-Malayan; also Exh. 51-RCBC to 59-RCBC), copies of which were delivered

to GOYU, RCBC, and MICO. However, because these endorsements do not bear the signature of any officer of GOYU, the trial court, as well as the Court of Appeals, concluded that the endorsements are defective. We do not quite agree. It is settled that a 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. There is no question that GOYU could insure the mortgaged property for its own exclusive benefit. In the present case, 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. It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The Court is in a quandary how Alchester could arrive at the idea of endorsing any specific insurance policy in favor of any particular beneficiary or payee other than the insured had not such named payee or beneficiary been specifically disclosed by the insured itself. It is also significant that GOYU voluntarily and purposely took the insurance policies from MICO, a sister company of RCBC, and not just from any other insurance company. Alchester would not have found out that the subject pieces of property were mortgaged to RCBC had not such information been voluntarily disclosed by GOYU itself. Had it not been for GOYU, Alchester would not have known of GOYUs intention of obtaining insurance coverage in compliance with its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not have endorsed the policies to RCBC had it not been so directed by GOYU. On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor of mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine National Bank vs. Court of Appeals (94 SCRA 357 [1979]), to wit: The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice, and its purpose is to forbid one to speak against his own act, representations, or commitments to the injury of one to whom they were directed and who reasonably relied thereon. The doctrine of estoppel springs from equitable principles and the equities in the case. It is designed to aid the law in the administration of justice where without its aid injustice might result. It has been applied by this Court wherever and whenever special circumstances of a case so demand. (p. 368.) Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she prepared in quadruplicate on February 11, 1992 the nine endorsement documents for GOYUs nine insurance policies in favor of RCBC. The original copies of each of these nine endorsement documents were sent to GOYU, and the others were sent to RCBC and MICO, while the fourth copies were retained for Alchesters file (tsn, February 23, pp. 7 -8). GOYU has not denied having received from Alchester the originals of these endorsements. RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the stipulation in the mortgage contracts. We find such reliance to be justified under the circumstances of the case. GOYU failed to seasonably repudiate the authority of the person or persons who prepared such endorsements. Over and above this, GOYU continued, in the meantime, to enjoy the benefits of the credit facilities extended to it by RCBC. After the occurrence of the loss insured against, it was too late for GOYU to disown the endorsements for any imagined or contrived lack of authority of Alchester to prepare and issue said endorsements. If there had not been actually an implied ratification of said endorsements by virtue of GOYUs inaction in this case, GOYU is at the very least estopped from assailing their operative effects. To permit GOYU to capitalize on its non-confirmation of these endorsements while it continued to enjoy the benefits of the credit facilities of RCBC which believed in good faith that there was due endorsement pursuant to their mortgage contracts, is to countenance grave contravention of public policy, fair dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction. Under the peculiar circumstances obtaining in this case, the Court is bound to recognize RCBCs right to the proceeds of the insurance policies if not for the actual endorsement of the policies, at least on the basis of the equitable principle of estoppel. GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of insurance shall exclusively apply to the interest of the person in whose name or for whose benefit it is made. The peculiarity of the circumstances obtaining in the instant case presents a justification to take exception to the strict application of said provision, it having been sufficiently established that it was the intention of the parties to designate RCBC as the party for whose benefit the insurance policies were taken out. Consider thus the following: 1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered into between RCBC and GOYU in consideration of and for securing GOYUs credit facilities from RCBC. The mortgage contracts contained common provisions whereby GOYU, as mortgagor, undertook to have the mortgaged property properly covered against any loss by an insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less than a sister company of RCBC and definitely an acceptable insurance company to RCBC. 3. Endorsement documents were prepared by MICOs underwriter, Alchester Insurance Agency, Inc., and copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said endorsements. 4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended by RCBC which was conditioned upon the endorsement of the insurance policies to be taken by GOYU to cover the mortgaged properties. This Court can not over stress the fact that upon receiving its copies of the endorsement documents prepared by Alchester, GOYU, despite the absence of its written conformity thereto, obviously considered said endorsement to be sufficient compliance with its obligation under the mortgage contracts since RCBC accordingly continued to extend the benefits of its credit facilities and GOYU continued to benefit therefrom. Just as plain too is the intention of the parties to constitute RCBC as the beneficiary of the various insurance policies obtained by GOYU. The intention of the parties will have to be given full force and effect in this particular case. The insurance proceeds may, therefore, be exclusively applied to RCBC, which under the factual circumstances of the case, is truly the person or entity for whose benefit the policies were clearly intended. Moreover, the laws evident intention to protect the interests of the mortgagee upon the mortgaged property is expressed in Article 2127 of the Civil Code which states: ART. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person. Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them appear to have been subject of the endorsements prepared and delivered by Alchester for and upon instructions of GOYU as shown below: INSURANCE POLICY PARTICULARS a. Policy Number : F-114-07795 Issue Date Expiry Date Amount : March 18, 1992 : April 5, 1993 : P9,646,224.92 ENDORSEMENT None

b.

Policy Number : ACIA/F-174-07660 Issue Date Expiry Date Amount : January 18, 1992 : February 9, 1993 : P4,307,217.54

Exhibit 1-Malayan

c.

Policy Number : ACIA/F-114-07661

Exhibit 2-Malayan

Issue Date Expiry Date Amount

: January 18, 1992 : February 15, 1993 : P6,603,586.43

d.

Policy Number : ACIA/F-114-07662 Issue Date Expiry Date Amount : January 18, 1992 : (not legible) : P6,603,586.43

Exhibit 3-Malayan

e.

Policy Number : ACIA/F-114-07663 Issue Date Expiry Date Amount : January 18, 1992 : February 9, 1993 : P9,457,972.76

Exhibit 4-Malayan

f.

Policy Number : ACIA/F-114-07623 Issue Date Expiry Date Amount : January 13, 1992 : January 13, 1993 : P24,750,000.00

Exhibit 7-Malayan

g.

Policy Number : ACIA/F-174-07223 Issue Date Expiry Date Amount : May 29, 1991 : June 27, 1992 : P6,000,000.00

Exhibit 6-Malayan

h.

Policy Number : CI/F-128-03341 Issue Date Expiry Date Amount : May 3, 1991 : May 3, 1992 : P10,000,000.00

None

i.

Policy Number : F-114-07402 Issue Date Expiry Date Amount : September 16, 1991 : October 19, 1992 : P32,252,125.20

Exhibit 8-Malayan

j.

Policy Number : F-114-07525 Issue Date Expiry Date Amount : November 20, 1991 : December 5, 1992 : P6,603,586.43

Exhibit 9-Malayan

(pp. 456-457, Record; Folder of Exhibits for MICO.) Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICOs witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for Policy Number CI/F-128-03341 [(h) above]. Also, one of the endorsement documents, Exhibit 5-Malayan, refers to a certain insurance policy number ACIA-F-07066, which is not among the insurance policies involved in the complaint. The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being exclusively payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already ruled to have the force and effect of an endorsement by GOYU itself, these 8 policies can not be attached by GOYUs other creditors up to the extent of the GOYUs outstanding obligation in RCBCs favor. Section 53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies shall be applied exclusively to the proper interest of the person for whose benefit it was made. In this case, to the extent of GOYUs obligation with RCBC, the interest of GOYU in the subject policies had been transferred to RCBC effective as of the time of the endorsement. These policies may no longer be attached by the other creditors of GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless forthwith be dismissed for being moot and academic in view of the results reached herein. Only the two other policies amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by GOYUs other creditors. To the extent of GOYUs outstanding obligation with RCBC, all the rest of the other insura nce policies above-listed which were endorsed to RCBC, are, therefore, to be released from attachment, garnishment, and levy by the other creditors of GOYU. This brings us to the next relevant issue to be resolved, which is, the extent of GOYUs outstandin g obligation with RCBC which the proceeds of the 8 insurance policies will discharge and liquidate, or put differently, the actual amount of GOYUs liability to RCBC. The Court of Appeals simply echoed the declaration of the trial court finding that GOYUS total obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial courts exclusion of Promissory Note No. 421 -92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of Promissory Note No. 952-91) on the ground that their execution is highly questionable for not only are these dated after the fire, but also because the signatures of either GOYU or any its representative are conspicuously absent. Accordingly, the Court of Appeals speculated thusly: Hence, this Court is inclined to conclude that said promissory notes were pre -signed by plaintiff in blank terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for the same practice of procedure has always been adopted in its previous dealings with the bank. (Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the documents are spurious, for it is presumed that the ordinary course of business had been followed (Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 222 SCRA 486 [1993]). The obligor and not the holder of the negotiable instrument has the burden of proof of showing that he no longer owes the obligee any amount ( Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]). Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song Hiap when he answered the queries of the trial court: ATTY. NATIVIDAD Q: A: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts stated therein? Yes, sir, I received the amount.

COURT He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC? WITNESS: Yes, Your Honor, I received all the amounts. COURT Indicated in the Promissory Notes? WITNESS A. The promissory Notes they did not give to me but the amount I asked which is correct, Your Honor.

COURT Q: A: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct? Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.) Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory notes as hereinabove quoted, GOYU also offered and admitted to RCBC that its obligation be fixed at P116,301,992.60 as shown in its letter dated March 9, 1993, which pertinently reads: We wish to inform you, therefore that we are ready and willing to pay the current past due account of this company in the amount of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and 18, p. 13 of your affidavits of Third Party Claims in the Urban case at Makati, Metro Manila and in the Zamboanga case at Zamboanga city, respectively, less the total of P8,851,519.71 paid from the Seaboard and Equitable insurance companies and other legitimate deductions. We accept and confirm this amount of P116,301,992.60 as stated as true and correct. (Exhibit BB.) The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes are dated after the fire. It failed to consider that said notes had for their origin transactions consummated prior to the fire. Thus, careful attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92 are mere renewals of Promissory Notes No. 908-91 and 952-91, loans already availed of by GOYU. 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. The proceeds of the loan represented by these promissory notes were admittedly received by GOYU. There is ample factual and legal basis for giving GOYUs judicial admission of liability in the amount of P116,301,992.60 full force and effect It should, however, be quickly added that whatever amount RCBC may have recovered from the other insurers of the mortgaged property will, nonetheless, have to be applied as payment against GO YUs obligation. But, contrary to the lower courts findings, payments effected by GOYU prior to January 21, 1993 should no longer be deducted. Such payments had obviously been duly considered by GOYU, in its aforequoted letter dated March 9, 1993, wherein it admitted that its past due account totaled P116,301,992.60 as of January 21, 1993. The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993, to wit:

Total Obligation as admitted by GOYU as of January 21, 1993: Broken down as follows Principal Regular FDU
[1]

P116,301,992.60

Interest

80,535,946.32 7,548,025.17 ____________ _____________ 8,218,021.11

[2]

Total: LESS: 1)

108,083,971.49

Proceeds from Seaboard Eastern Insurance Company: 6,095,145.81

2)

Proceeds from Equitable Insurance Company: 2,756,373.00

3)

Payment from foreign department negotiation: 203,584.89 9,055,104.70

[3]

NET AMOUNT as of January 21, 1993:

P 107,246,887.90

The need for the payment of interest due upon the principal amount of the obligation, which is the cost of money to RCBC, the primary end and the ultimate reason for RCBCs existence and being, was duly recognized by the trial court when it ruled favorably on RCBCs counterclaim, ordering GOYU to pay its loan obligation with RCBC in the amount of P68,785,069.04, as of April 27,1992, with interest thereon at the rate stipulated in the respective promissory notes (without surcharges and penalties) per computation, pp. 14-A, 14-B, 14-C (Record, p. 479). Inexplicably, the Court of Appeals, without even laying down the fac tual or legal justification for its ruling, modified the trial courts ruling and ordered GOYU to pay the principal amount of P68,785,069.04 without any interest, surcharges and penalties (Rollo, p. 200). It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted the payment of additional interest, penalties, and charges, in this manner: Regarding defendant RCBCs commitment not to charge additional interest, penalties and surcharges, the same does not require that it be embodied in a document or some form of writing to be binding and enforceable. The principle is well known that generally a verbal agreement or contract is no less binding and effective than a written one. And the existence of such a verbal agreement has been amply established by the evidence in this case. In any event, regardless of the existence of such verbal agreement, it would still be unjust and inequitable for defendant RCBC to charge the plaintiff with surcharges and penalties considering the latters pitiful situation. (Emphasis supplied.) (Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate and distinct from that of surcharges and penalties. What may justify a court in not allowing the creditor to charge surcharges and penalties despite express stipulation therefor in a valid agreement, may not equally justify non-payment of interest. The charging of interest for loans forms a very essential and fundamental element of the banking business, which may truly be considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all. We fail to find justification for the Court of Appeals outright deletion of t he payment of interest as agreed upon in the respective promissory notes. This constitutes gross error. For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit: 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 of 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. (pp. 95-97.) There being written stipulations as to the rate of interest owing on each specific promissory note as summarized and tabulated by the trial court in its decision (pp.470 and 471, Record) such agreed interest rates must be followed. This is very clear from paragraph II, sub-paragraph 1 quoted above. On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation must be taken into account. We do not agree, however, that payment of any amount as surcharges and penalties should altogether be deleted. Even assuming that RCBC, through its responsible officers, herein petitioners Eli Lao and Uy Chun Bing, may have relayed its assurance for assistance to GOYU immediately after the occurrence of the fire, we cannot accept the lower courts finding that RCBC had thereby ipso facto effectively waived collection of any additional interests, surcharges, and penalties from GOYU. Assurances of assistance are one thing, but waiver of additional interests, surcharges, and penalties is another. Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof provides: ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably reduced if they are iniquitous and unconscionable. In exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case. It should be stressed that the Court will not make any sweeping ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case, may be totally just and equitable in

another. This provision of law will have to be applied to the established facts of any given case. Given the circumstances under which GOYU found itself after the occurrence of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the penalty charges of 36%, to be definitely iniquitous and unconscionable. The Court tempers these rates to 2% and 3%, respectively. Furthermore, in the light of GOYUs offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See: Exhibit BB), which RCBC refused, we find it more in keeping with justice and equity for RCBC not to charge additional interest, surcharges, and penalties from that time onward. Given the factual milieu spread hereover, we rule that it was error to hold MICO liable in damages for denying or withholding the proceeds of the insurance claim to GOYU. Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies, 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. Secondly, for an insurance company to be held liable for unreasonably delaying and withholding payment of insurance proceeds, the delay must be wanton, oppressive, or malevolent ( Zenith Insurance Corporation vs. CA, 185 SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good faith and honesty entertain a difference of opinion as to its liability. Accordingly, the statutory penalty for vexatious refusal of an insurer to pay a claim should not be inflicted unless the evidence and circumstances show that such refusal was willful and without reasonable cause as the th facts appear to a reasonable and prudent man ( Buffalo Ins. Co. vs. Bommarito [CCA 8 ] 42 F [2d] 53, 70 ALR 1211; Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St Rep 307; Kusnetsky vs. Security Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in bad faith delayed the release of the proceeds. The problem in the determination of who is the actual beneficiary of the insurance policies, aggravated by the claim of various creditors who wanted to partake of the insurance proceeds, not to mention the importance of the endorsement to RCBC, to our mind, and as now borne out by the outcome herein, justified MICO in withholding payment to GOYU. In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of two simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific performance and the other for foreclosure. In doing so, said the appellate court, the second action is deemed barred, RCBC having split a single cause of action (Rollo, pp. 195-199). The Court of Appeals was too accommodating in giving due consideration to this argument of GOYU, for the foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R CV No. 46247, the case having been elevated by RCBC. In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-empted the resolution of said foreclosure case which is not before it. This is plain reversible error if not grave abuse of discretion. As held in Pea vs. Court of Appeals (245 SCRA 691[1995]): It should have been enough, nonetheless, for the appellate court to merely set aside the questioned orders of the trial court for having been issued by the latter with grave abuse of discretion. In likewise enjoining permanently herein petitioner from entering in and interfering with the use or occupation and enjoyment of petitioners (now private respondent) residential house and compound, the appellate court in effect, precipitately resolved with finality the case for injunction that was yet to be heard on the merits by the lower court. Elevated to the appellate court, it might be stressed, were mere incidents of the principal case still pending with the trial court. In Municipality of Bian, Laguna vs. Court of Appeals, 219 SCRA 69, we ruled that the Court of Appeals would have no jurisdiction in a certiorari proceeding involving an incident in a case to rule on the merits of the main case itself which was not on appeal before it. (pp. 701-702.) Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial Court, since it has been determined that RCBC has the right to the insurance proceeds, the subject matter of intervention is rendered moot and academic. Respondent Sebastian must, however, yield to the preferential right of RCBC over the MICO insurance policies. It is basic and fundamental that the first mortgagee has superior rights over junior mortgagees or attaching creditors (Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]). WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new one entered: 1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch 3 of the Manila Regional Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation the proceeds of the insurance policies in the amount of P51,862,390.94 (per report of adjuster Toplis & Harding (Far East), Inc., Exhibits 2 and 2-1), less the amount of P50,505,594.60 (per O.R. No. 3649285); 3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests earned to Rizal Commercial Banking Corporation; 4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation in the principal amount of P107,246,887.90, with interest at the respective rates stipulated in each promissory note from January 21, 1993 until finality of this judgment, and surcharges at 2% and penalties at 3% from January 21, 1993 to March 9, 1993, minus payments made by Malayan Insurance Company, Inc. and the proceeds of the amount deposited with the trial court and its earned interest. The total amount due RCBC at the time of the finality of this judgment shall earn interest at the legal rate of 12% in lieu of all other stipulated interests and charges until fully paid. The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV 48376 is DISMISSED for being moot and academic in view of the results herein arrived at. Respondent Sebastians right as attaching creditor must yield to the preferential rights of Rizal Commercial Banking Corporation over the Malayan insurance policies as first mortgagee. SO ORDERED. Regalado, (Chairman), Puno, Mendoza, and Martinez, JJ., concur.

[1] 1 [2]

See: Exhibit 70-RCBC Computed by deducting P108,083,971.49 from the admitted amount of P116,301,992.60. [3] To be deducted from interest payments due in accordance with Article 1253 of the Civil Code which provides: ART. 1253. If debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered.

SECOND DIVISION [G.R. No. 73198. September 2, 1992.] PRIVATE DEVELOPMENT CORPORATION OF THE PHILIPPINES, Petitioner, v. THE INTERMEDIATE APPELLATE COURT AND ERNESTO C. DEL ROSARIO, Respondents. Pelaez, Adriano & Gregorio for Petitioner. Cabreros, Orencia & Pekas Law Office for Respondent. Cecilio V. Suarez, Jr. co-counsel for Respondent. SYLLABUS

1. CIVIL LAW; USURY LAW (ACT NO. 2655); GOVERNS THE INTEREST RATE FOR LOAN AGREEMENT ENTERED, AFTER JANUARY 29, 1974; APPLICATION IN CASE AT BAR. Inasmuch as the loan agreement herein was entered into on May 21, 1974, the prevailing law applicable is Act No. 2655, otherwise known as the Usury Law, as amended by P.D. No. 116, which took effect on January 29, 1974. Section 2 of Act No. 2655 provides: "No person or corporation shall directly or indirectly take or receive money or other property, real or personal, or choses in action, a higher rate of interest or greater sum of value including commission premiums, fines and penalties for the loan or renewal thereof or forbearance of money, goods or credit, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate, the title to which is duly registered or by a document conveying such real estate at an interest, than twelve percent per annum." The usury law therefore, as amended by Presidential Decree 116, fixed all interest rates for all loans with maturity of more than 360 days at twelve (12%) per cent per annum including premiums, fines and penalties. 2. ID.; ID.; SHOULD NOT BE INTERPRETED TO MEAN AS FORFEITURE OF PRINCIPAL LOAN; RATIONALE. As held in Angel Jose Warehousing Co., Inc. v. Chelda Enterprises, Et. Al.: (23 SCRA 119): "In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest: hence, being separable, the latter only should be deemed void, since it is only one that is illegal.." . . "The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to the payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury. "The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action."cralaw virtua1aw library 3. ID.; ID.; PRESCRIPTION OF ACTION; DOES NOT LIE TO ANNUL USURIOUS STIPULATIONS. Petitioner further contends that the cause of action of Ernesto del Rosario in Civil Case No. 82-8088 is barred by prescription. Article 1957 of the Civil Code provides: ". . . contracts and stipulations, under any cloak or device whatever, intended to circumvent the law against usury shall be void." Furthermore, Article 1410 provides: "The action or defense for the declaration of the inexistence of a contract does not prescribe." The aforesaid articles therefore state that all usurious stipulations are void and as such, an action to annul such usurious stipulations does not prescribe. 4. REMEDIAL LAW; CIVIL PROCEDURE; PARTIES IN CIVIL ACTION; APPLICATION IN CASE AT BAR. Petitioner contends that petitioner Del Rosario is not a party-in-interest in the case. We do not agree. Del Rosario mortgaged his properties in his personal capacity to secure the debt of DATICOR. As such, the creditor, PDCP, may proceed against Del Rosario or DATICOR or both of them simultaneously for the payment of the loan or for the performance of the obligation. In fact, PDCP filed for the foreclosure of the real properties belonging to Del Rosario. 5. ID.; ID.; LITIS PENDENCIA; NOT APPLICABLE IN CASE AT BAR. As to the issue of litis pendencia, such principle is not applicable to the case at bar. Records show and as admitted by petitioner, the action filed in the Court of First Instance of Manila in Civil Case No. 82-8088 was against Del Rosario while the case filed in the Court of First Instance of Mati, Davao Oriental in Civil Case No. 998 was against DATICOR. The first case against a natural person, while the second, against a juridical person. Clearly, there is no identity of parties, hence, litis pendencia cannot apply. DECISION NOCON, J.: Before Us is an appeal from the decision 1 of the then Intermediate Appellate Court which overruled the trials court Decision 2 in Civil Case No. 82-8088.chanrobles virtual lawlibrary

The undisputed facts of the case are as follows:chanrob1es virtual 1aw library On May 21, 1974, Davao Timber Corporation, DATICOR for brevity, and the Private Development Corporation (PDCP) entered into a loan agreement 3 whereby PDCP extended to DATICOR a loan in foreign currency equivalent to US$ 265,000.00 and another in the amount of P2,500,000.00 for the purpose of establishing a kiln drying and woodworking plant in Mati, Davao Oriental. It was stipulated in the loan agreement, that the foreign currency loan was to be paid with an interest rate of eleven and three fourths (11-3/4%) per cent per annum on the disbursed amount of the foreign currency; and the peso loan at the rate of twelve (12%) per cent per annum on the disbursed amount of the peso loan outstanding, commencing on the several dates on which disbursements of the proceeds of the loans were made. 4 The loans were originally secured by a first mortgage 5 executed by Ernesto del Rosario, President of DATICOR, in his personal capacity, and his sister, Lourdes C. Cuerva, as third party mortgagors on a parcel of land which they owned in common. On December 28, 1976, the third party mortgagors, Del Rosario and Cuerva partitioned this mortgaged property which they owned in common, such that said parcel was re-surveyed and two certificates of titles were issued, each with an area of 3,854 square meters, one in the name of Del Rosario and the other in the name of Cuerva. Thereafter, PDCP executed a partial release of mortgage 6 on the parcel of land owned by Cuerva, on the condition that in lieu thereof, DATICOR was to mortgage an additional five (5) parcels of land consisting of prime industrial lands with buildings thereon. As a consequence, DATICOR executed an Addendum to Mortgage 7 in favor of PDCP. DATICOR likewise executed a Deed of Chattel Mortgage 8 on the machineries and equipments attached to the land in Davao Oriental as added security for said loans. The approved value of the parcel of land of Del Rosario, including the building thereon, was P12,000,000.00 while the appraised value of the DATICOR properties consisting of the five parcels of land in Davao Oriental, including the buildings and structure thereon and the machineries and equipments, is at least P15,000,000.00 or a total of P27,000,000.00 for the loan of about P4.4 million pesos.chanrobles virtual lawlibrary PDCP asked DATICOR to pay a service fee of one (1%) per cent per annum on the outstanding balance of the peso loan to cover the cost of administering DATICORs account and supervision of the project. 9 This service fee was subsequently increased to six (6%) per cent per annum in addition to the twelve (12%) per cent per annum interest on the peso loan. 10 Furthermore, DATICOR was asked to pay penalty charges at the rate of two (2%) per cent per month. 11 A total of P3,000,000.00 was already paid by Del Rosario to PDCP and which the latter applied to interests, service fees and penalty charges, such that according to PDCP, DATICOR still has an outstanding balance on the principal loan of P10,887,856.99 as of May 15, 1983. By virtue of which, PDCP initiated extra-judicial foreclosure proceedings 12 against the parcel of land owned by Del Rosario in Manila and the five (5) parcels of land owned by DATICOR in Davao Oriental. Del Rosario and Cuerva then filed a complaint 13 on March 31, 1982 against the PDCP in the Court of First Instance of Manila in Civil Case No. 82-8088 for violation of the Usury Law, annulment of contract and damages with prayer for the issuance of a writ of preliminary injunction. On April 13, 1982, a restraining order 14 was issued by the Court of First Instance of Manila. DATICOR filed another case on April 1, 1982 in the Court of First Instance of Davao Oriental seeking a writ of injunction to prevent PDCP from foreclosing its properties in Davao, and likewise praying for the annulment of the loan contract as it is in violation of the Usury Law and damages. 15 On January 25, 1983, the Court of First Instance of Manila rendered a decision 16 dismissing Del Rosarios petition. A motion for reconsideration was filed and was still pending when the PDCP filed another petition

for extra-judicial foreclosure of the real properties of Del Rosario in Manila and anchored on the same grounds, requesting the Sheriff to conduct the same. The Sheriff had thus posted and caused publication of the public auction sale scheduled on July 27, 1983. Del Rosario and Cuerva therefore sought a restraining order from another branch of the Regional Trial Court in Manila as their right to appeal would be rendered meaningless if the foreclosure proceedings were conducted in the meantime that their motion for reconsideration with Judge Ejercito in Civil Case No. 828088 was still pending resolution.cralawnad On August 3, 1983, herein respondents received a copy of the order in Civil Case No. 82-8088 denying their motion for reconsideration for lack of merit. On that same day, they appealed to the then Intermediate Appellate Court seeking an injunction to issue against the sheriff of Manila from proceeding with the auction sale and likewise appealing the dismissal of their complaint in Civil Case No. 82-8088 for violation of the Usury Law, annulment of contract and damages. The then Intermediate Appellate Court rendered its decision, 17 the dispositive portion of which reads:jgc:chanrobles.com.ph "WHEREFORE, the decision appealed from is hereby set aside and another one is rendered declaring void and of no effect the stipulations of interest in the loan agreement (Annex "A") between DATICOR and PDCP, as if the loan agreement is without stipulation as to payment of interest."cralaw virtua1aw library Hence, this appeal. We find no merit in the instant petition. Inasmuch as the loan agreement herein was entered into on May 21, 1974, the prevailing law applicable is Act No. 2655, otherwise known as the Usury Law, as amended by P.D. No. 116, which took effect on January 29, 1974. Section 2 of Act No. 2655 provides:jgc:chanrobles.com.ph "No person or corporation shall directly or indirectly take or receive money or other property, real or personal, or choses in action, a higher rate of interest or greater sum of value including commission premiums, fines and penalties for the loan or renewal thereof or forbearance of money, goods or credit, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate, the title to which is duly registered or by a document conveying such real estate at an interest, than twelve percent per annum."cralaw virtua1aw library The usury law therefore, as amended by Presidential Decree 116, fixed all interest rates for all loans with maturity of more than 360 days at twelve (12%) per cent per annum including premiums, fines and penalties. It is to be noted that PDCP was charging penalties at the rate of two (2%) per cent per month or an effective rate of twenty four (24%) per cent per annum on the peso loan and one-half (1/2%) per cent per month or an effective six (6%) per cent per annum on the foreign currency loan. It is therefore very clear that PDCP has been charging and imposing interests in violation of the prevailing usury laws.chanroblesvirtualawlibrary In the beginning, PDCP was charging a total of nineteen (19%) per cent interest per annum on the peso loan and eighteen and three-fourths (18-3/4%) per cent on the foreign currency loan. Since the penalty charges was increased to two (2%) per cent per month with regard to the peso loan, PDCP began charging a total of forty two (42%) per cent per annum on the peso loan, clearly in violation of the usury law. DATICOR obtained a loan of P4.4 million pesos and has paid a total of about P3 million pesos, the remaining balance on the principal debt left unpaid is about P1.4 million pesos, to which respondents must still pay the petitioner.

The law should not be interpreted to mean forfeiture of the principal loan as that would be unjustly enriching the borrower. The unpaid principal debt still stands and remains valid but the stipulation as to the usurious interest is void, consequently, the debt is to be considered without stipulation as to the interest. As held in Angel Jose Warehousing Co., Inc. v. Chelda Enterprises, Et. Al.: 18 "In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest: hence, being separable, the latter only should be deemed void, since it is only one that is illegal."cralaw virtua1aw library x x x

"The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to the payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury.chanrobles.com.ph : virtual law library "The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action."cralaw virtua1aw library Petitioner contends that petitioner Del Rosario is not a party-in-interest in the case. We do not agree. Del Rosario mortgaged his properties in his personal capacity to secure the debt of DATICOR. As such, the creditor, PDCP, may proceed against Del Rosario or DATICOR or both of them simultaneously for the payment of the loan or for the performance of the obligation. In fact, PDCP filed for the foreclosure of the real properties belonging to Del Rosario. Petitioner further contends that the cause of action of Ernesto del Rosario in Civil Case No. 82-8088 is barred by prescription and that there is a pending case before the Court of First Instance of Mati, Davao with the same cause of action. With regard to the first contention, Article 1957 of the Civil Code provides:jgc:chanrobles.com.ph ". . . contracts and stipulations, under any cloak or device whatever, intended to circumvent the law against usury shall be void."cralaw virtua1aw library Furthermore, Article 1410 provides:jgc:chanrobles.com.ph "The action or defense for the declaration of the inexistence of a contract does not prescribe."cralaw virtua1aw library The aforesaid articles therefore state that all usurious stipulations are void and as such, an action to annul such usurious stipulations does not prescribe.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph As to the issue of litis pendencia, such principle is not applicable to the case at bar. Records show and as admitted by petitioner, the action filed in the Court of First Instance of Manila in Civil Case No. 82-8088 was against Del Rosario while the case filed in the Court of First Instance of Mati, Davao Oriental in Civil Case No. 998 was against DATICOR. The first case against a natural person, while the second, against a juridical person. Clearly, there is no identity of parties, hence, litis pendencia cannot apply. WHEREFORE, finding no reversible error in the decision appealed herefrom, the same is hereby AFFIRMED

in toto.chanrobles.com:cralaw:red SO ORDERED. Narvasa, C.J., Padilla and Regalado, JJ., concur. Melo, J., took no part.

THIRD DIVISION

[G.R. No. 131622. November 27, 1998]

LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs. COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G. GONZALES, JR., doing lending business under the trade name and style "GONZALES CREDIT ENTERPRISES", respondents. DECISION PARDO, J.: The case before the Court is a petition for review on certiorari, under Rule 45 of the Revised Rules of Court, seeking to set aside the decision of the Court of Appeals,[1] and its resolution denying reconsideration,[2]the dispositive portion of which decision reads as follows: "WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the plaintiff: the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 23, 1986, until the entire amount is fully paid. "The award to the plaintiff of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants. SO ORDERED."[3] The Court required the respondents to comment on the petition, [4] which was filed on April 3, 1998,[5] and the petitioners to reply thereto, which was filed on May 29, 1998.[6] We now resolve to give due course to the petition and decide the case. The facts of the case, as found by the Court of Appeals in its decision, which are considered binding and conclusive on the parties herein, as the appeal is limited to questions of law, are as follows: On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00, payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for one month at 6% per month. Servado and Leticia executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986. On November 19, 1985, Servando and Leticia obtained from Veronica another loan in the amount of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to evidence the loan, maturing on January 19, 1986. They received only P84,000.00, out of the proceeds of the loan. On maturity of the two promissory notes, the borrowers failed to pay the indebtedness. On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the amount of P300,000.00, maturing in one month, secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay, who issued a special power of

attorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a promissory note in favor of Veronica to pay the sum ofP300,000.00, after a month, or on July 11, 1986. However, only the sum of P275,000.00, was given to them out of the proceeds of the loan. Like the previous loans, Servando and Medel failed to pay the third loan on maturity. On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the amount ofP60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23, 1986. The executed a promissory note, reading as follows: "Baliwag, Bulacan July 23, 1986 "Maturity Date August 23, 1986 "P500,000.00 "FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R. GONZALES doing business in the business style of GONZALES CREDIT ENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND ..... ( P500,000.00) Philippine Currency with interest thereon at the rate of 5.5 PERCENT per month plus 2% service charge per annum from date hereof u ntil fully paid according to the amortization schedule contained herein. (Underscoring supplied) "Payment will be made in full at the maturity date. "Should I/WE fail to pay any amortization or portion hereof when due, all the other installments together with all interest accrued shall immediately be due and payable and I/WE hereby agree to pay an additionalamount equivalent to one per cent (1%) per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully paid; and the further sum of TWENTY FIVE PER CENT(25%) thereon in full, without deductions as Attorney's Fee whether actually incurred or not, of the total amount due and demandable, exclusive of costs and judicial or extra judicial expenses. (Underscoring supplied) "I, WE further agree that in the event the present rate of interest on loan is increased by law or the Central Bank of the Philippines, the holder shall have the option to apply and collect the increased interest charges without notice although the original interest have already been collected wholly or partially unless the contrary is required by law. "It is also a special condition of this contract that the parties herein agree that the amount of peso-obligation under this agreement is based on the present value of peso, and if there be any change in the value thereof, due to extraordinary inflation or deflation, or any other cause or reason, then the peso-obligation herein contracted shall be adjusted in accordance with the value of the peso then prevailing at the time of the complete fulfillment of obligation. "Demand and notice of dishonor waived. Holder may accept partial payments and grant renewals of this note or extension of payments, reserving rights against each and all indorsers and all parties to this note. "IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waive all his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules of Court." On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests and penalties, evidenced by the above-quoted promissory note. On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full amount of the loan including interests and other charges. In his answer to the complaint filed with the trial court on April 5, 1990, defendant Servando alleged that he did not obtain any loan from the plaintiffs; that it was defendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sum of P500,000.00, and actually received the amount and benefited therefrom; that the loan was secured by a real estate mortgage executed in favor of the plaintiffs, and that he (Servando Franco) signed the promissory note only as a witness. In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medel alleged that the loan was the transaction of Leticia Yaptinchay, who executed a mortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan, Batangas; that the interest rate is excessive at 5.5% per month with additional service charge of 2% per annum, and penalty charge of 1% per month; that the stipulation for attorney's fees of 25% ofthe amount due is unconscionable, illegal and excessive, and that substantial payments made were applied to interest, penalties and other charges. After due trial, the lower court declared that the due execution and genuineness of the four promissory notes had been duly proved, and ruled that although the Usury Law had been repealed, the interest charged by the plaintiffs on the loans was unconscionable and "revolting to the conscience". Hence, the trial court applied "the provision of the New [Civil] Code" that the "legal rate of interest for loan or forbearance of money, goods or credit is 12% per annum." [7]

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositive portion of which reads as follows: "WHEREFORE, premises considered, judgment is hereby rendered, as follows: "1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, to pay plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7, 1985 and 1% per month as penalty, until the entire amount is paid in full. "2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointly and severally the amount of P84,000.00 with 12% interest per annum and 1% per cent per month as penalty from November 19,1985 until the whole amount is fully paid; "3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amount of P285,000.00 plus 12% interest per annum and 1% per month as penalty from July 11, 1986, until the whole amount is fully paid; "4. Ordering the defendants to pay plaintiffs, jointly and severally, the amount of P50,000.00 as attorney's fees; "5. All counterclaims are hereby dismissed. "With costs against the defendants."[8] In due time, both plaintiffs and defendants appealed to the Court of Appeals. In their appeal, plaintiffs-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants, is the law that governs the parties. They further argued that Circular No. 416 of the Central Bank prescribing the rate of interest for loans or forbearance of money, goods or credit at 12% per annum, applies only in the absence of a stipulation on interest rate, but not when the parties agreed thereon. The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "the Usury Law having become 'legally inexistent' with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and borrower could agree on any interest that may be charged on the loan".[9] The Court of Appeals further held that "the imposition of 'an additional amount equivalent to 1% per month of the amount due and demandable as penalty charges in the form of liquidated damages until fully paid' was allowed by law".[10] Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversing that of the Regional Trial Court, disposing as follows: "WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants are hereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per month interest and 2% service charge per annum effective July 23, 1986, plus 1% per month of the total amount due and demandable as penalty charges effective August 24, 1986, until the entire amount is fully paid. "The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is the imposition of costs against the defendants. "SO OREDERED."[11] On April 15, 1997, defendants-appellants filed a motion for reconsideration of the said decision. By resolution dated November 25, 1997, the Court of Appeals denied the motion. [12] Hence, defendants interposed the present recourse via petition for review on certiorari.[13] We find the petition meritorious. Basically, the issue revolves on the validity of the interest rate stipulated upon. Thus, the question presented is whether or not the stipulated rate of interest at 5.5% per month on the loan in the sum of P500,000.00, that plaintiffs extended to the defendants is usurious. In other words, is the Usury Law still effective, or has it been repealed by Central Bank Circular No. 905, adopted on December 22, 1982, pursuant to its powers under P.D. No. 116, as amended by P.D. No. 1684? We agree with petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant.13 However, we can not consider the rate "usurious" because this Court has consistently held that Circulr No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law[14] and that the Usury Law is now "legally inexistent".[15] In Security Bank and Trust Company vs. Regional Trial Court of Makati, Branch 61[16] the Court held that CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply suspended the latter's effectivity." Indeed, we have held that "a Central Bank Circular can not repeal a law. Only a law can repeal another law." [17] In the recent case of Florendo vs. Court of

Appeals[18], the Court reiterated the ruling that "by virtue of CB Circular 905, the Usury Law has been rendered ineffective". "Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon." [19] Nevertheless, we find the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory note iniquitous or unconscionable, and, hence, contrary to morals (" contra bonos mores"), if not against the law.[20] The stipulation is void.[21] The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.[22] Consequently, the Court of Appeals erred in upholding the stipulation of the parties. Rather, we agree with the trial court that, under the circumstances, interest at 12% per annum, and an additional 1% a month penalty charge as liquidated damages may be more reasonable. WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997. Instead, we render judgment REVIVING and AFFIRMING the decision dated December 9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the same parties. No pronouncement as to costs in this instance SO ORDERED. Narvasa, C.J. (Chairman), Romero, Kapunan, and Purisima, JJ., concur.

FIRST DIVISION

[G.R. No. 133498. April 18, 2002]

C.F. SHARP & CO., INC., petitioner, vs. NORTHWEST AIRLINES, INC., respondent. DECISION YNARES-SANTIAGO, J.: This is a petition for review under Rule 45 of the Rules of Court assailing the February 17, 1997 Decision [1] and the April 2, 1998 Resolution[2] of the Court of Appeals[3] in CA-G.R. SP No. 40996. The undisputed facts are as follows: On May 9, 1974, respondent, through its Japan Branch, entered into an International Passenger Sales Agency Agreement with petitioner, authorizing the latter to sell its air transport tickets. Petitioner failed to remit the proceeds of the ticket sales, for which reason, respondent filed a collection suit against petitioner before the Tokyo District Court which rendered judgment on January 29, 1981, ordering petitioner to pay respondent the amount of 83,158,1 95 Yen and damages for the delay at the rate of 6% per annum from August 28, 1980 up to and until payment is completed. [4] Unable to execute the decision in Japan, respondent filed a case to enforce said foreign judgment with the Regional Trial Court of Manila, Branch 54. [5] However, the case was dismissed on the ground of failure of the Japanese Court to acquire jurisdiction over the person of the petitioner. Respondent appealed to the Court of Appeals, which affirmed the decision of the trial court. Respondent filed a petition for review with this Court, docketed as G.R. No. 112573. On February 9, 1995, a decision was rendered, the dispositive portion of which reads: WHEREFORE, the instant petition is partly GRANTED, and the challenged decision is AFFIRMED insofar as it denied NORTHWESTs claims for attorneys fees, litigatio n expenses, and exemplary damages but REVERSED insofar as it sustained the trial courts dismissal of NORTHWESTs complaint in Civil Case No. 83 -17637 of Branch 54 of the Regional Trial Court of Manila, and another in its stead is hereby rendered ORDERING private respondent C.F. SHARP & COMPANY, INC. to pay to

NORTHWEST the amounts adjudged in the foreign judgment subject of said case, with interest thereon at the legal rate from the filing of the complaint therein until the said foreign judgment is fully satisfied. Costs against the private respondent. SO ORDERED.[6] Accordingly, the Regional Trial Court of Manila, Branch 54 , issued a writ of execution of the foregoing decision.[7] On November 22, 1995, the trial court modified its order for the execution of the decision, viz: WHEREFORE, in view of the foregoing, this Court hereby issues another order, as follows: the writ of execution is issued against defendant C.F. Sharp ordering said defendant to pay the plaintiff the sum of 83,158,195 Yen at the exchange rate prevailing on the date of the foreign judgment on January 29, 1981, plus 6% per annum until May 19, 1983; and from said date until full payment, 12% per annum (6% by way of damages and 6% interest) until the entire obligation is fully satisfied. SO ORDERED.[8] On December 18, 1995, petitioner filed a petition for certiorari under Rule 65, docketed as G.R. No. 122890, assailing the aforequoted order. On May 29, 1996, the case was referred to the Court of Appeals. Petitioner contended that it had already made partial payments; hence, it was liable only for the amount of 61,734,633 Yen. Moreover, it argued that it was not liable to pay additional interest on top of the 6% interest imposed in the foreign judgment. The Court of Appeals rendered the assailed decision on February 17, 1997. It sustained the imposition of additional interest on the liability of petitioner as adjudged in the foreign judgment. The appellate court likewise corrected the reckoning date of the imposition of the interests in accordance with the February 9, 1995 decision to be executed, but lowered the additional interest from 12% to 6% per annum. Further, it ruled that the basis of the conversion of petitioners liability in its peso equivalent should be the prevailing rate at the time of payment and not the rate on the date of the foreign judgment. The dispositive portion of the said decision reads: WHEREFORE, the petition is GRANTED. The assailed Orders dated October 13, 1995 and November 22, 1995 are annulled and set aside on the ground that they varied the final judgment of the First Division of the Supreme Court in G.R. No. 112573, entitled, NORTHWEST ORIENT AIRLINES, INC., Petitioner, versus, COURT OF APPEALS and C. F. SHARP & COMPANY, INC., Respondents. Respondent court is enjoined to execute the said final judgment with an unpaid principal balance of Y61,734,633 plus damages for delay at the rate of 6% per annum from August 28, 1980, until fully paid, which may be paid in local currency based on the conversion rate prevailing at the time of payment; plus 6% legal interest per annum from August 28, 1980, the date of the filing of the complaint in the foreign judgment. No costs. SO ORDERED.[9] On April 2, 1998, the Court of Appeals denied both the motion for reconsideration and the partial motion for reconsideration filed by petitioner and respondent, respectively. In the present recourse, petitioner questions the applicable conversion rate of its liability, and claims that a ruling thereon by the Court of Appeals effectively deprived it of due process of law because said rate was not among the issues submitted for resolution. The petition is without merit. In ruling that the applicable conversion rate of petitioners liability is the rate at the time of payment, the Court of Appeals cited the case of Zagala v. Jimenez,[10] interpreting the provisions of Republic Act No. 529, as amended by R.A. No. 4100. Under this law, stipulations on the satisfaction of obligations in foreign currency are void. Payments of monetary obligations, subject to certain exceptions, shall be discharged in the currency which is the legal tender in the Philippines. But since R.A. No. 529 does not provide for the rate of exchange for the payment of foreign currency obligations incurred after its enactment, the Court held in a number of cases[11] that the rate of exchange for the conversion in the peso equivalent should be the prevailing rate at the time of payment. Petitioner, however, contends that with the repeal of R.A. No. 529 by R.A. No. 8183, [12] the jurisprudence relied upon by the Court of Appeals is no longer applicable. Republic Act No. 529, as amended by R.A. No. 4100, provides:

SECTION 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a) transactions where the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial banking institutions so long as the funds are identifiable, as having emanated from the sources enumerated above; b) transactions affecting high-priority economic projects for agricultural, industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) forward exchange transactions entered into between banks or between banks and individuals or juridical persons; (d) import-export and other international banking, financial investment and industrial transactions. With the exception of the cases enumerated in items (a), (b), (c) and (d) in the foregoing provision, in which cases the terms of the parties agreement shall apply, every other domestic obligation heretofore or hereafter incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine currency, measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and currency, including Central Bank notes, heretofore or hereafter issued and declared by the Government of the Philippines shall be legal tender for all debts, public and private. Pertinent portion of Republic Act No. 8183 states: SECTION 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment. SEC. 2. Republic Act Numbered Five Hundred and Twenty-Nine (R.A. No. 529), as amended, entitled An Act to Assure the Uniform Value of Philippine Coin and Currency is hereby repealed. The repeal of R.A. No. 529 by R.A. No. 8183 has the effect of removing the prohibition on the stipulation of currency other than Philippine currency, such that obligations or transactions may now be paid in the currency agreed upon by the parties. Just like R.A. No. 529, however, the new law does not provide for the applicable rate of exchange for the conversion of foreign currency-incurred obligations in their peso equivalent. It follows, therefore, that the jurisprudence established in R.A. No. 529 regarding the rate of conversion remains applicable. Thus, in Asia World Recruitment, Inc. v. National Labor Relations Commission, [13] the Court, applying R.A. No. 8183, sustained the ruling of the NLRC that obligations in foreign currency may be discharged in Philippine currency based on the prevailing rate at the time of payment. The wisdom on which the jurisprudence interpreting R.A. No. 529 is based equally holds true with R.A. No. 8183. Verily, it is just and fair to preserve the real value of the foreign exchange- incurred obligation to the date of its payment.[14] We find no denial of due process in the instant case. Contrary to the argument of petitioner, the matter of the applicable conversion rate was one of the issues submitted for resolution before the Court of Appeals. Moreover, opportunity to be heard, which is the very essence of due process, was afforded petitioner when it filed a motion for reconsideration of the Court of Appeals decision. Petitioners contention that it is Article 1250 [15] of the Civil Code that should be applied is untenable. The rule that the value of the currency at the time of the establishment of the obligation shall be the basis of payment finds application only when there is an official pronouncement or declaration of the existence of an extraordinary inflation or deflation. [16] For its part, respondent prays for the modification of the Court of Appeals awar d of interest. While as a general rule, a party who has not appealed is not entitled to affirmative relief other than what was granted in the decision of the court below, law and jurisprudence authorize a tribunal to consider errors, although unassigned, if they involve (1) errors affecting the lower courts jurisdiction over the subject matter, (2) plain errors not specified, and (3) clerical errors. [17] In the case at bar, the Court of Appeals failure to apply the correct legal rate of interest, to which respondent is lawfully entitle d, amounts to a plain error. In Eastern Shipping Lines, Inc. v. Court of Appeals, [18] it was held that absent any stipulation, the legal rate of interest in obligations which consists in the payment of a sum of money, as in the present case, is 12% per annum. As stated in the decision of the Court in G.R. No. 112573, which is final and executory, petitioner is liable to pay respondent the amount adjudged in the foreign judgment, with interest thereon at the legal rate [12% per annum] from the filing of the complaint therein [on August 28, 1980] until the said foreign judgment is fully satisfied. Since petitioner already made partial payments, his obligation was reduced to 61,734,633 Yen. Thus, petitioner should pay respondent the amount of 61,734,633 Yen plus damages for the delay at the rate of 6% per annum from August 28, 1980 up to and until payment is completed, with interest thereon at the rate of 12% per annum from the filing of the complaint on August 28, 1980, until fully satisfied.

The Court is clothed with ample authority to review matters, even if they are not assigned as errors on appeal, if it finds that their consideration is necessary in arriving at a just decision of the case. Rules of procedure are mere tools designed to facilitate the attainment of justice. Their strict and rigid application, which would result in technicalities that tend to frustrate rather than promote substantial justice, must be avoided. Hence, substantive rights, like the applicable legal rate of interest on petitioners long due and demandable obligation, must not be prejudiced by a rigid and technical application of the rules. [19] WHEREFORE, in view of all the foregoing, the instant petition is DENIED. The February 17, 1997 decision and the April 2, 1998 resolution of the Court of Appeals in CA-G.R. SP No. 40996 are AFFIRMED with MODIFICATION. Petitioner is directed to pay respondent 61,734,633 Yen plus damages for the delay at the rate of 6% per annum from August 28, 1980 up to and until payment is completed, with interest at the rate of 12% per annum counted from the date of filing of the complaint on August 28, 1980, until fully satisfied. Petitioners liability may be paid in Philippine currency, comp uted at the exchange rate prevailing at the time of payment. SO ORDERED. Puno, and Sandoval-Gutierrez, JJ., concur. Davide, Jr., C.J., (Chairman), Kapunan, and Austria-Martinez, JJ., on official leave.