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 animalpower 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 BPIFB 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 insurersubrogee 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 extrajudicial 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
obligations

to

both

monetary

and

non-monetary

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-towear 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 nonpayment 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 CBMB 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-ininterest."
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 vice-president 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 defendantsappellants, 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 plaintiffappellee 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 mortgagecreditors 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.