[G.R. No. 133632.

February 15, 2002]

BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS
MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals
and its resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed
the judgment of the Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831,
for foreclosure of mortgage by petitioner BPI Investment Corporation (BPIIC for brevity) against
private respondents ALS Management and Development Corporation and Antonio K.
Litonjua,[1] consolidated with (b) Civil Case No. 52093, for damages with prayer for the issuance
of a writ of preliminary injunction by the private respondents against said petitioner.
The trial court had held that private respondents were not in default in the payment of their
monthly amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature
and made in bad faith. It awarded private respondents the amount of P300,000 for moral
damages, P50,000 for exemplary damages, and P50,000 for attorneys fees and expenses for
litigation. It likewise dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a
house on his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to
AIDC to secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents
ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the P500,000
balance of Roas indebtedness with AIDC. The latter, however, was not willing to extend the old
interest rate to private respondents and proposed to grant them a new loan of P500,000 to be
applied to Roas debt and secured by the same property, at an interest rate of 20% per annum
and service fee of 1% per annum on the outstanding principal balance payable within ten years
in equal monthly amortization of P9,996.58 and penalty interest at the rate of 21% per annum
per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the
above stipulations with the provision that payment of the monthly amortization shall
commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum
of P190,601.35. This reduced Roas principal balance to P457,204.90 which, in turn, was
liquidated when BPIIC applied thereto the proceeds of private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be
what was left of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the
ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30,
1984, amounted to Four Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100
Pesos (P475,585.31). A notice of sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged,
among others, that they were not in arrears in their payment, but in fact made an overpayment
as of June 30, 1984. They maintained that they should not be made to pay amortization before
the actual release of the P500,000 loan in August and September 1982. Further, out of
the P500,000 loan, only the total amount of P464,351.77 was released to private respondents.
Hence, applying the effects of legal compensation, the balance of P35,648.23 should be applied
to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093,
thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development
Corporation and Antonio K. Litonjua and against BPI Investment Corporation, holding that the
amount of loan granted by BPI to ALS and Litonjua was only in the principal sum of
P464,351.77, with interest at 20% plus service charge of 1% per annum, payable on equal
monthly and successive amortizations at P9,283.83 for ten (10) years or one hundred twenty
(120) months. The amortization schedule attached as Annex A to the Deed of Mortgage is
correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused
their publication in a newspaper of general circulation as defaulting debtors, and therefore
orders BPI to pay ALS and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.[2]
Both parties appealed to the Court of Appeals. However, private respondents appeal was
dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion
reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.
SO ORDERED.[3]
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the
delivery of the object of the contract. The contract of loan between BPIIC and ALS & Litonjua
was perfected only on September 13, 1982, the date when BPIIC released the purported
balance of the P500,000 loan after deducting therefrom the value of Roas indebtedness. Thus,
payment of the monthly amortization should commence only a month after the said date, as
can be inferred from the stipulations in the contract. This, despite the express agreement of the
parties that payment shall commence on May 1, 1981. From October 1982 to June 1984, the
total amortization due was only P194,960.43. Evidence showed that private respondents had
an overpayment, because as of June 1984, they already paid a total amount
of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the
mortgage and cause the publication in newspapers concerning private respondents
delinquency in the payment of their loan. This fact constituted sufficient ground for moral
damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this
petition, where BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE
RULE LAID DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES
AND ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO
THE RULE LAID DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a
simple loan is perfected upon the delivery of the object of the contract, the loan contract in this
case was perfected only on September 13, 1982. Petitioner claims that a contract of loan is a
consensual contract, and a loan contract is perfected at the time the contract of mortgage is
executed conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In the
present case, the loan contract was perfected on March 31, 1981, the date when the mortgage
deed was executed, hence, the amortization and interests on the loan should be computed
from said date.
Petitioner also argues that while the documents showed that the loan was released only on
August 1982, the loan was actually released on March 31, 1981, when BPIIC issued a
cancellation of mortgage of Frank Roas loan. This finds support in the registration on March 31,
1981 of the Deed of Absolute Sale executed by Roa in favor of ALS, transferring the title of the
property to ALS, and ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner
claims, the delay in the release of the loan should be attributed to private respondents. As BPIIC
only agreed to extend a P500,000 loan, private respondents were required to reduce Frank
Roas loan below said amount. According to petitioner, private respondents were only able to
do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code,[4] a
simple loan is perfected upon the delivery of the object of the contract, hence a real contract.
In this case, even though the loan contract was signed on March 31, 1981, it was perfected only
on September 13, 1982, when the full loan was released to private respondents.They submit
that petitioner misread Bonnevie. To give meaning to Article 1934, according to private
respondents, Bonnevie must be construed to mean that the contract to extend the loan was
perfected on March 31, 1981 but the contract of loan itself was only perfected upon the
delivery of the full loan to private respondents on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was
perfected on March 31, 1981, and their payment did not start a month thereafter, still no
default took place. According to private respondents, a perfected loan agreement imposes
reciprocal obligations, where the obligation or promise of each party is the consideration of the
other party. In this case, the consideration for BPIIC in entering into the loan contract is the
promise of private respondents to pay the monthly amortization. For the latter, it is the
promise of BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay if
the other does not comply or is not ready to comply in a proper manner with what is incumbent
upon him.Therefore, private respondents conclude, they did not incur in delay when they did
not commence paying the monthly amortization on May 1, 1981, as it was only on September
13, 1982when petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real
contract. It is perfected only upon the delivery of the object of the contract.[5] Petitioner
misapplied Bonnevie. The contract in Bonnevie declared by this Court as a perfected consensual
contract falls under the first clause of Article 1934, Civil Code. It is an accepted promise to
deliver something by way of simple loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44 SCRA 445,
petitioner applied for a loan of P500,000 with respondent bank. The latter approved the
application through a board resolution. Thereafter, the corresponding mortgage was executed
and registered. However, because of acts attributable to petitioner, the loan was not released.
Later, petitioner instituted an action for damages. We recognized in this case, a perfected
consensual contract which under normal circumstances could have made the bank liable for not
releasing the loan. However, since the fault was attributable to petitioner therein, the court did
not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for damages.
However, said contract does not constitute the real contract of loan which requires the delivery
of the object of the contract for its perfection and which gives rise to obligations only on the
part of the borrower.[6]
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on
the other, was perfected only on September 13, 1982, the date of the second release of the
loan. Following the intentions of the parties on the commencement of the monthly
amortization, as found by the Court of Appeals, private respondents obligation to pay
commenced only on October 13, 1982, a month after the perfection of the contract. [7]
We also agree with private respondents that a contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is the consideration for that of the other. [8]As
averred by private respondents, the promise of BPIIC to extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay the monthly amortization commencing on May 1,
1981, one month after the supposed release of the loan. 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 in a proper manner with what is incumbent upon him.[9] Only when a party has
performed his part of the contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in. Consequently, petitioner could only demand for
the payment of the monthly amortization after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract. Therefore, in computing the amount due
as of the date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting
date is October 13, 1982 and not May 1, 1981. Other points raised by petitioner in connection
with the first issue, such as the date of actual release of the loan and whether private
respondents were the cause of the delay in the release of the loan, are factual. Since petitioner
has not shown that the instant case is one of the exceptions to the basic rule that only
questions of law can be raised in a petition for review under Rule 45 of the Rules of
Court,[10] factual matters need not tarry us now. On these points we are bound by the findings
of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and exemplary
damages for it did not act maliciously when it initiated the foreclosure proceedings. It merely
exercised its right under the mortgage contract because private respondents were irregular in
their monthly amortization. It invoked our ruling in Social Security System vs. Court of Appeals,
120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of
Appeals the negligence of the appellant is not so gross as to warrant moral and temperate
damages, except that, said Court reduced those damages by only P5,000.00 instead of
eliminating them. Neither can we agree with the findings of both the Trial Court and
respondent Court that the SSS had acted maliciously or in bad faith. The SSS was of the belief
that it was acting in the legitimate exercise of its right under the mortgage contract in the face
of irregular payments made by private respondents and placed reliance on the automatic
acceleration clause in the contract. The filing alone of the foreclosure application should not be
a ground for an award of moral damages in the same way that a clearly unfounded civil action is
not among the grounds for moral damages.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said
damages because it insisted on the payment of amortization on the loan even before it was
released. Further, it did not make the corresponding deduction in the monthly amortization to
conform to the actual amount of loan released, and it immediately initiated foreclosure
proceedings when private respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their payment of
monthly amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in
bad faith. Consequently, we should rule out the award of moral and exemplary damages. [11]
However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of
mortgage, without checking and correspondingly adjusting its records on the amount actually
released to private respondents and the date when it was released. Such negligence resulted in
damage to private respondents, for which an award of nominal damages should be given in
recognition of their rights which were violated by BPIIC.[12] For this purpose, the amount
of P25,000 is sufficient.Lastly, as in SSS where we awarded attorneys fees because private
respondents were compelled to litigate, we sustain the award of P50,000 in favor of private
respondents as attorneys fees.WHEREFORE, the decision dated February 28, 1997, of the Court
of Appeals and its resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to
the award of damages. The award of moral and exemplary damages in favor of private
respondents is DELETED, but the award to them of attorneys fees in the amount of P50,000 is
UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal
damages. Costs against petitioner.
SO ORDERED.
[G.R. No. 146364. June 3, 2004]
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review[1] of the 21 June 2000 Decision[2] and 14 December 2000
Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the
11 November 1996 decision[3] of the Regional Trial Court of Quezon City, Branch 81,[4] affirming
the 15 December 1995 decision[5] of the Metropolitan Trial Court of Quezon City, Branch 31.[6]
The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the
rights over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a
house made of light materials on the lot. Pajuyo and his family lived in the house from 1979 to
7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the
house for free provided Guevarra would maintain the cleanliness and orderliness of the house.
Guevarra promised that he would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon
City, Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot
where the house stands because the lot is within the 150 hectares set aside by Proclamation
No. 137 for socialized housing. Guevarra pointed out that from December 1985 to September
1994, Pajuyo did not show up or communicate with him. Guevarra insisted that neither he nor
Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion
of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against
defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or persons claiming
any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as reasonable
compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.[7]
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed
from, being in accord with the law and evidence presented, and the same is hereby affirmed en
toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14
December 1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the
Court of Appeals, Guevarra filed with the Supreme Court a Motion for Extension of Time to File
Appeal by Certiorari Based on Rule 42 (motion for extension). Guevarra theorized that his
appeal raised pure questions of law. The Receiving Clerk of the Supreme Court received the
motion for extension on 13 December 1996 or one day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution[9] referring the
motion for extension to the Court of Appeals which has concurrent jurisdiction over the case.
The case presented no special and important matter for the Supreme Court to take cognizance
of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a
Resolution[10] granting the motion for extension conditioned on the timeliness of the filing of
the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras petition
for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No. Q-
96-26943 is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case filed
against defendant-appellant is without factual and legal basis.
SO ORDERED.[11]
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of
Appeals should have dismissed outright Guevarras petition for review because it was filed out
of time. Moreover, it was Guevarras counsel and not Guevarra who signed the certification
against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.[12]
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house
and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house
only by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made
Guevarras continued possession of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship
between Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return
possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an
ejectment suit, the RTC has no power to decide Guevarras rights under these laws. The RTC
declared that in an ejectment case, the only issue for resolution is material or physical
possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra
illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right
or title over the lot because it is public land. The assignment of rights between Perez and
Pajuyo, and the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo
and Guevarra are in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that
the Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a landlord and
tenant relationship. The Court of Appeals ruled that the Kasunduan is not a lease contract but
a commodatum because the agreement is not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate
court held that Guevarra has a better right over the property under Proclamation No.
137.President Corazon C. Aquino (President Aquino) issued Proclamation No. 137 on 7
September 1987. At that time, Guevarra was in physical possession of the property. Under
Article VI of the Code of Policies Beneficiary Selection and Disposition of Homelots and
Structures in the National Housing Project (the Code), the actual occupant or caretaker of the
lot shall have first priority as beneficiary of the project. The Court of Appeals concluded that
Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim that
Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the Supreme
Court was stamped 13 December 1996 at 4:09 PM by the Supreme Courts Receiving Clerk. The
Court of Appeals concluded that the motion for extension bore a date, contrary to Pajuyos
claim that the motion for extension was undated. Guevarra filed the motion for extension on
time on 13 December 1996 since he filed the motion one day before the expiration of the
reglementary period on 14 December 1996. Thus, the motion for extension properly complied
with the condition imposed by the Court of Appeals in its 28 January 1997 Resolution. The
Court of Appeals explained that the thirty-day extension to file the petition for review was
deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have dismissed
the petition for review because it was Guevarras counsel and not Guevarra who signed the
certification against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise
this issue in his Comment. The Court of Appeals held that Pajuyo could not now seek the
dismissal of the case after he had extensively argued on the merits of the case. This technicality,
the appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of thirty days
to file petition for review at the time when there was no more period to extend as the decision
of the Regional Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for Review even
though the certification against forum-shopping was signed only by counsel instead of by
petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a
commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court and in
holding that the ejectment case filed against defendant-appellant is without legal and factual
basis.
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q-96-
26943 and in holding that the parties are in pari delicto being both squatters, therefore, illegal
occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the National
Government Center Housing Project instead of deciding the same under the Kasunduan
voluntarily executed by the parties, the terms and conditions of which are the laws between
themselves.[13]
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive
issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for
review because the RTC decision had already become final and executory when the appellate
court acted on Guevarras motion for extension to file the petition. Pajuyo points out that
Guevarra had only one day before the expiry of his period to appeal the RTC decision.Instead of
filing the petition for review with the Court of Appeals, Guevarra filed with this Court an
undated motion for extension of 30 days to file a petition for review. This Court merely referred
the motion to the Court of Appeals. Pajuyo believes that the filing of the motion for extension
with this Court did not toll the running of the period to perfect the appeal. Hence, when the
Court of Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable
to the Court of Appeals by petition for review in cases involving questions of fact or mixed
questions of fact and law.[14] Decisions of the regional trial courts involving pure questions of
law are appealable directly to this Court by petition for review.[15] These modes of appeal are
now embodied in Section 2, Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra
thus filed his motion for extension to file petition for review before this Court on 14 December
1996. On 3 January 1997, Guevarra then filed his petition for review with this Court. A perusal
of Guevarras petition for review gives the impression that the issues he raised were pure
questions of law. There is a question of law when the doubt or difference is on what the law is
on a certain state of facts.[16] There is a question of fact when the doubt or difference is on the
truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras
petition for review raised these questions: (1) Do ejectment cases pertain only to possession of
a structure, and not the lot on which the structure stands? (2) Does a suit by a squatter against
a fellow squatter constitute a valid case for ejectment? (3) Should a Presidential Proclamation
governing the lot on which a squatters structure stands be considered in an ejectment suit filed
by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment
and the Presidential Proclamation. At first glance, the questions Guevarra raised appeared
purely legal. However, some factual questions still have to be resolved because they have a
bearing on the legal questions raised in the petition for review. These factual matters refer to
the metes and bounds of the disputed property and the application of Guevarra as beneficiary
of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for
review. In Lacsamana v. Second Special Cases Division of the Intermediate Appellate
Court,[18] we declared that the Court of Appeals could grant extension of time in appeals by
petition for review. In Liboro v. Court of Appeals,[19] we clarified that the prohibition against
granting an extension of time applies only in a case where ordinary appeal is perfected by a
mere notice of appeal. The prohibition does not apply in a petition for review where the
pleading needs verification. A petition for review, unlike an ordinary appeal, requires
preparation and research to present a persuasive position.[20] The drafting of the petition for
review entails more time and effort than filing a notice of appeal.[21] Hence, the Court of
Appeals may allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,[22] we held
that Liboros clarification of Lacsamana is consistent with the Revised Internal Rules of the
Court of Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for
filing petitions for review with the Court of Appeals. The extension, however, should be limited
to only fifteen days save in exceptionally meritorious cases where the Court of Appeals may
grant a longer period.
A judgment becomes final and executory by operation of law. Finality of judgment becomes a
fact on the lapse of the reglementary period to appeal if no appeal is perfected. [23] The RTC
decision could not have gained finality because the Court of Appeals granted the 30-day
extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras
motion for extension. The Court of Appeals gave due course to the motion for extension
because it complied with the condition set by the appellate court in its resolution dated 28
January 1997. The resolution stated that the Court of Appeals would only give due course to the
motion for extension if filed on time. The motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for
extension are (1) the date of receipt of the judgment or final order or resolution subject of the
petition, and (2) the date of filing of the motion for extension.[24] It is the date of the filing of
the motion or pleading, and not the date of execution, that determines the timeliness of the
filing of that motion or pleading. Thus, even if the motion for extension bears no date, the date
of filing stamped on it is the reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed
his motion for extension before this Court on 13 December 1996, the date stamped by this
Courts Receiving Clerk on the motion for extension. Clearly, Guevarra filed the motion for
extension exactly one day before the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical
grounds, Pajuyo did not ask the appellate court to deny the motion for extension and dismiss
the petition for review at the earliest opportunity. Instead, Pajuyo vigorously discussed the
merits of the case. It was only when the Court of Appeals ruled in Guevarras favor that Pajuyo
raised the procedural issues against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision
on the merits, is estopped from attacking the jurisdiction of the court. [25] Estoppel sets in not
because the judgment of the court is a valid and conclusive adjudication, but because the
practice of attacking the courts jurisdiction after voluntarily submitting to it is against public
policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to
sign the certification against forum shopping. Instead, Pajuyo harped on Guevarras counsel
signing the verification, claiming that the counsels verification is insufficient since it is based
only on mere information.
A partys failure to sign the certification against forum shopping is different from the partys
failure to sign personally the verification. The certificate of non-forum shopping must be signed
by the party, and not by counsel.[27] The certification of counsel renders the petition
defective.[28]
On the other hand, the requirement on verification of a pleading is a formal and not a
jurisdictional requisite.[29] It is intended simply to secure an assurance that what are alleged in
the pleading are true and correct and not the product of the imagination or a matter of
speculation, and that the pleading is filed in good faith.[30] The party need not sign the
verification. A partys representative, lawyer or any person who personally knows the truth of
the facts alleged in the pleading may sign the verification.[31]
We agree with the Court of Appeals that the issue on the certificate against forum shopping
was merely an afterthought. Pajuyo did not call the Court of Appeals attention to this defect at
the early stage of the proceedings. Pajuyo raised this procedural issue too late in the
proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to
Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will not
divest the inferior court of its jurisdiction over the ejectment case.[32] Even if the pleadings raise
the issue of ownership, the court may pass on such issue to determine only the question of
possession, especially if the ownership is inseparably linked with the possession.[33] The
adjudication on the issue of ownership is only provisional and will not bar an action between
the same parties involving title to the land.[34] This doctrine is a necessary consequence of the
nature of the two summary actions of ejectment, forcible entry and unlawful detainer, where
the only issue for adjudication is the physical or material possession over the real property. [35]
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners
of the contested property and that they are mere squatters. Will the defense that the parties to
the ejectment case are not the owners of the disputed lot allow the courts to renounce their
jurisdiction over the case? The Court of Appeals believed so and held that it would just leave
the parties where they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for
recovery of possession. The parties cannot present evidence to prove ownership or right to
legal possession except to prove the nature of the possession when necessary to resolve the
issue of physical possession.[36] The same is true when the defendant asserts the absence of
title over the property. The absence of title over the contested lot is not a ground for the courts
to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to
the physical possession of the premises, that is, to the possession de facto and not to the
possession de jure.[37] It does not even matter if a partys title to the property is
questionable,[38] or when both parties intruded into public land and their applications to own
the land have yet to be approved by the proper government agency.[39] Regardless of the actual
condition of the title to the property, the party in peaceable quiet possession shall not be
thrown out by a strong hand, violence or terror.[40] Neither is the unlawful withholding of
property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the
owner himself.[41] Whatever may be the character of his possession, if he has in his favor prior
possession in time, he has the security that entitles him to remain on the property until a
person with a better right lawfully ejects him.[42] To repeat, the only issue that the court has to
settle in an ejectment suit is the right to physical possession.
In Pitargue v. Sorilla,[43] the government owned the land in dispute. The government did not
authorize either the plaintiff or the defendant in the case of forcible entry case to occupy the
land. The plaintiff had prior possession and had already introduced improvements on the public
land. The plaintiff had a pending application for the land with the Bureau of Lands when the
defendant ousted him from possession. The plaintiff filed the action of forcible entry against
the defendant. The government was not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession
because while the application of the plaintiff was still pending, title remained with the
government, and the Bureau of Public Lands had jurisdiction over the case. We disagreed with
the defendant. We ruled that courts have jurisdiction to entertain ejectment suits even before
the resolution of the application. The plaintiff, by priority of his application and of his entry,
acquired prior physical possession over the public land applied for as against other private
claimants. That prior physical possession enjoys legal protection against other private claimants
because only a court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue[44] as squatters,
strictly speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant
entered the public land without the owners permission. Title to the land remained with the
government because it had not awarded to anyone ownership of the contested public land.
Both the plaintiff and the defendant were in effect squatting on government property. Yet, we
upheld the courts jurisdiction to resolve the issue of possession even if the plaintiff and the
defendant in the ejectment case did not have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because
of the public need to preserve the basic policy behind the summary actions of forcible entry
and unlawful detainer. The underlying philosophy behind ejectment suits is to prevent breach
of the peace and criminal disorder and to compel the party out of possession to respect and
resort to the law alone to obtain what he claims is his.[45] The party deprived of possession must
not take the law into his own hands.[46] Ejectment proceedings are summary in nature so the
authorities can settle speedily actions to recover possession because of the overriding need to
quell social disturbances.[47]
We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of
possessory actions involving these public lands before final award is made by the Lands
Department, and before title is given any of the conflicting claimants? It is one of utmost
importance, as there are public lands everywhere and there are thousands of settlers,
especially in newly opened regions. It also involves a matter of policy, as it requires the
determination of the respective authorities and functions of two coordinate branches of the
Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was
in force in this country before the American occupation, or in the new, we have a possessory
action, the aim and purpose of which is the recovery of the physical possession of real property,
irrespective of the question as to who has the title thereto. Under the Spanish Civil Code we
had the accion interdictal, a summary proceeding which could be brought within one year from
dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as
October 1, 1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the
Philippine Commission) we implanted the common law action of forcible entry (section 80 of
Act No. 190), the object of which has been stated by this Court to be to prevent breaches of the
peace and criminal disorder which would ensue from the withdrawal of the remedy, and the
reasonable hope such withdrawal would create that some advantage must accrue to those
persons who, believing themselves entitled to the possession of property, resort to force to
gain possession rather than to some appropriate action in the court to assert their claims.
(Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the enactment of the
first Public Land Act (Act No. 926) the action of forcible entry was already available in the courts
of the country. So the question to be resolved is, Did the Legislature intend, when it vested the
power and authority to alienate and dispose of the public lands in the Lands Department, to
exclude the courts from entertaining the possessory action of forcible entry between rival
claimants or occupants of any land before award thereof to any of the parties? Did Congress
intend that the lands applied for, or all public lands for that matter, be removed from the
jurisdiction of the judicial Branch of the Government, so that any troubles arising therefrom, or
any breaches of the peace or disorders caused by rival claimants, could be inquired into only by
the Lands Department to the exclusion of the courts? The answer to this question seems to us
evident. The Lands Department does not have the means to police public lands; neither does it
have the means to prevent disorders arising therefrom, or contain breaches of the peace
among settlers; or to pass promptly upon conflicts of possession. Then its power is clearly
limited to disposition and alienation, and while it may decide conflicts of possession in order
to make proper award, the settlement of conflicts of possession which is recognized in the
court herein has another ultimate purpose, i.e., the protection of actual possessors and
occupants with a view to the prevention of breaches of the peace. The power to dispose and
alienate could not have been intended to include the power to prevent or settle disorders or
breaches of the peace among rival settlers or claimants prior to the final award. As to this,
therefore, the corresponding branches of the Government must continue to exercise power
and jurisdiction within the limits of their respective functions. The vesting of the Lands
Department with authority to administer, dispose, and alienate public lands, therefore, must
not be understood as depriving the other branches of the Government of the exercise of the
respective functions or powers thereon, such as the authority to stop disorders and quell
breaches of the peace by the police, the authority on the part of the courts to take jurisdiction
over possessory actions arising therefrom not involving, directly or indirectly, alienation and
disposition.
Our attention has been called to a principle enunciated in American courts to the effect that
courts have no jurisdiction to determine the rights of claimants to public lands, and that until
the disposition of the land has passed from the control of the Federal Government, the courts
will not interfere with the administration of matters concerning the same. (50 C. J. 1093-1094.)
We have no quarrel with this principle. The determination of the respective rights of rival
claimants to public lands is different from the determination of who has the actual physical
possession or occupation with a view to protecting the same and preventing disorder and
breaches of the peace. A judgment of the court ordering restitution of the possession of a
parcel of land to the actual occupant, who has been deprived thereof by another through the
use of force or in any other illegal manner, can never be prejudicial interference with the
disposition or alienation of public lands. On the other hand, if courts were deprived of
jurisdiction of cases involving conflicts of possession, that threat of judicial action against
breaches of the peace committed on public lands would be eliminated, and a state of
lawlessness would probably be produced between applicants, occupants or squatters, where
force or might, not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession
between rivals or conflicting applicants or claimants would be no other than that of forcible
entry. This action, both in England and the United States and in our jurisdiction, is a summary
and expeditious remedy whereby one in peaceful and quiet possession may recover the
possession of which he has been deprived by a stronger hand, by violence or terror; its ultimate
object being to prevent breach of the peace and criminal disorder. (Supia and Batioco vs.
Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere possession as a fact, of
physical possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or
right to possession is never in issue in an action of forcible entry; as a matter of fact, evidence
thereof is expressly banned, except to prove the nature of the possession. (Second 4, Rule 72,
Rules of Court.) With this nature of the action in mind, by no stretch of the imagination can
conclusion be arrived at that the use of the remedy in the courts of justice would constitute an
interference with the alienation, disposition, and control of public lands. To limit ourselves to
the case at bar can it be pretended at all that its result would in any way interfere with the
manner of the alienation or disposition of the land contested? On the contrary, it would
facilitate adjudication, for the question of priority of possession having been decided in a final
manner by the courts, said question need no longer waste the time of the land officers making
the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the principle of pari delicto. We explained
the principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari
delicto potior est conditio defedentis. The law will not aid either party to an illegal agreement. It
leaves the parties where it finds them.[49]
The application of the pari delicto principle is not absolute, as there are exceptions to its
application. One of these exceptions is where the application of the pari delicto rule would
violate well-established public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary actions of forcible
entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that, regardless
of the actual condition of the title to the property, the party in peaceable quiet possession shall
not be turned out by strong hand, violence or terror. In affording this remedy of restitution the
object of the statute is to prevent breaches of the peace and criminal disorder which would
ensue from the withdrawal of the remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who, believing themselves entitled
to the possession of property, resort to force to gain possession rather than to some
appropriate action in the courts to assert their claims. This is the philosophy at the foundation
of all these actions of forcible entry and detainer which are designed to compel the party out of
possession to respect and resort to the law alone to obtain what he claims is his. [52]
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters
is fraught with danger. To shut out relief to squatters on the ground of pari delicto would
openly invite mayhem and lawlessness. A squatter would oust another squatter from
possession of the lot that the latter had illegally occupied, emboldened by the knowledge that
the courts would leave them where they are. Nothing would then stand in the way of the
ousted squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for
recovery of possession seek to prevent.[53] Even the owner who has title over the disputed
property cannot take the law into his own hands to regain possession of his property. The
owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are
squatters. The determination of priority and superiority of possession is a serious and urgent
matter that cannot be left to the squatters to decide. To do so would make squatters receive
better treatment under the law. The law restrains property owners from taking the law into
their own hands. However, the principle of pari delicto as applied by the Court of Appeals
would give squatters free rein to dispossess fellow squatters or violently retake possession of
properties usurped from them. Courts should not leave squatters to their own devices in cases
involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court
held that the pivotal issue in this case is who between Pajuyo and Guevarra has the priority
right as beneficiary of the contested land under Proclamation No. 137.[54] According to the
Court of Appeals, Guevarra enjoys preferential right under Proclamation No. 137 because
Article VI of the Code declares that the actual occupant or caretaker is the one qualified to
apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation
site under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the
land that it declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No.
137. Guevarra had the burden to prove that the disputed lot is within the coverage of
Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated
claim that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the
survey the project administrator conducted, he and not Pajuyo appeared as the actual occupant
of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo
allowed Guevarra to occupy the disputed property in 1985. President Aquino signed
Proclamation No. 137 into law on 11 March 1986. Pajuyo made his earliest demand for
Guevarra to vacate the property in September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation
No. 137 allegedly segregated the disputed lot, Guevarra never applied as beneficiary of
Proclamation No. 137. Even when Guevarra already knew that Pajuyo was reclaiming
possession of the property, Guevarra did not take any step to comply with the requirements of
Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and
resolve the issue of possession. However, the jurisdiction of the courts would be limited to the
issue of physical possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions involving public
land to determine the issue of physical possession. The determination of the respective rights
of rival claimants to public land is, however, distinct from the determination of who has the
actual physical possession or who has a better right of physical possession.[56] The
administrative disposition and alienation of public lands should be threshed out in the proper
government agency.[57]
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No. 137
was premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law.
Courts should not preempt the decision of the administrative agency mandated by law to
determine the qualifications of applicants for the acquisition of public lands. Instead, courts
should expeditiously resolve the issue of physical possession in ejectment cases to prevent
disorder and breaches of peace.[58]
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house built
on it. Guevarra expressly admitted the existence and due execution of
the Kasunduan.The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay
pahintulot kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng
walang bayad.Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at
lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent,
but Guevarra was under obligation to maintain the premises in good condition. Guevarra
promised to vacate the premises on Pajuyos demand but Guevarra broke his promise and
refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding
by a person from another of the possession of real property to which the latter is entitled after
the expiration or termination of the formers right to hold possession under a contract, express
or implied.[59]
Where the plaintiff allows the defendant to use his property by tolerance without any contract,
the defendant is necessarily bound by an implied promise that he will vacate on demand, failing
which, an action for unlawful detainer will lie.[60] The defendants refusal to comply with the
demand makes his continued possession of the property unlawful.[61] The status of the
defendant in such a case is similar to that of a lessee or tenant whose term of lease has expired
but whose occupancy continues by tolerance of the owner.[62]
This principle should apply with greater force in cases where a contract embodies the
permission or tolerance to use the property. The Kasunduan expressly articulated Pajuyos
forbearance. Pajuyo did not require Guevarra to pay any rent but only to maintain the house
and lot in good condition. Guevarra expressly vowed in the Kasunduan that he would vacate
the property on demand. Guevarras refusal to comply with Pajuyos demand to vacate made
Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one
of commodatum.
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.[63] 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.[64] 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.[65] If the bailor should
have urgent need of the thing, he may demand its return for temporary use.[66] 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.[67] Under the Civil Code, precarium is a kind
of commodatum.[68]
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.[69] The tenants withholding of the
property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum,
Guevarra as bailee would still have the duty to turn over possession of the property to Pajuyo,
the bailor. The obligation to deliver or to return the thing received attaches to contracts for
safekeeping, or contracts of commission, administration and commodatum.[70] These contracts
certainly involve the obligation to deliver or return the thing received.[71]
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they
illegally occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely
entered into the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had
benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has
a right to physical possession of the contested property. The Kasunduan is the undeniable
evidence of Guevarras recognition of Pajuyos better right of physical possession. Guevarra is
clearly a possessor in bad faith. The absence of a contract would not yield a different result, as
there would still be an implied promise to vacate.
Guevarra contends that there is a pernicious evil that is sought to be avoided, and that is
allowing an absentee squatter who (sic) makes (sic) a profit out of his illegal act.[72] Guevarra
bases his argument on the preferential right given to the actual occupant or caretaker under
Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the
property without paying any rent. There is also no proof that Pajuyo is a professional squatter
who rents out usurped properties to other squatters. Moreover, it is for the proper government
agency to decide who between Pajuyo and Guevarra qualifies for socialized housing. The only
issue that we are addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.[73] This is one of the
distinctions between forcible entry and unlawful detainer.[74] In forcible entry, the plaintiff is
deprived of physical possession of his land or building by means of force, intimidation, threat,
strategy or stealth. Thus, he must allege and prove prior possession.[75] But in unlawful
detainer, the defendant unlawfully withholds possession after the expiration or termination of
his right to possess under any contract, express or implied. In such a case, prior physical
possession is not required.[76]
Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras
transient right to possess the property ended as well. Moreover, it was Pajuyo who was in
actual possession of the property because Guevarra had to seek Pajuyos permission to
temporarily hold the property and Guevarra had to follow the conditions set by Pajuyo in
the Kasunduan. Control over the property still rested with Pajuyo and this is evidence of actual
possession.
Pajuyos absence did not affect his actual possession of the disputed property. Possession in the
eyes of the law does not mean that a man has to have his feet on every square meter of the
ground before he is deemed in possession.[77] One may acquire possession not only by physical
occupation, but also by the fact that a thing is subject to the action of ones will. [78]Actual or
physical occupation is not always necessary.[79]
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that squatters and intruders
who clandestinely enter into titled government property cannot, by such act, acquire any legal
right to said property.[80] We made this declaration because the person who had title or who
had the right to legal possession over the disputed property was a party in the ejectment suit
and that party instituted the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment
case. This case is between squatters. Had the government participated in this case, the courts
could have evicted the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we
cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the
aid of the courts in settling the issue of physical possession. Stripping both the plaintiff and the
defendant of possession just because they are squatters would have the same dangerous
implications as the application of the principle of pari delicto. Squatters would then rather
settle the issue of physical possession among themselves than seek relief from the courts if the
plaintiff and defendant in the ejectment case would both stand to lose possession of the
disputed property. This would subvert the policy underlying actions for recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on
the property until a person who has title or a better right lawfully ejects him. Guevarra is
certainly not that person. The ruling in this case, however, does not preclude Pajuyo and
Guevarra from introducing evidence and presenting arguments before the proper
administrative agency to establish any right to which they may be entitled under the law. [81]
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the
issue of physical possession does not affect title to the property nor constitute a binding and
conclusive adjudication on the merits on the issue of ownership.[82] The owner can still go to
court to recover lawfully the property from the person who holds the property without legal
title. Our ruling here does not diminish the power of government agencies, including local
governments, to condemn, abate, remove or demolish illegal or unauthorized structures in
accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys fees
as part of damages are awarded only in the instances enumerated in Article 2208 of the Civil
Code.[83] Thus, the award of attorneys fees is the exception rather than the rule.[84] Attorneys
fees are not awarded every time a party prevails in a suit because of the policy that no
premium should be placed on the right to litigate.[85] We therefore delete the attorneys fees
awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did
not dispute this factual finding of the two courts. We find the amount reasonable
compensation to Pajuyo. The P300 monthly rental is counted from the last demand to vacate,
which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated
14 December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE.The Decision
dated 11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No.
Q-96-26943, affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of
Quezon City, Branch 31 in Civil Case No. 12432, is REINSTATED with MODIFICATION. The award
of attorneys fees is deleted. No costs.
SO ORDERED.

G.R. No. 80294-95 September 21, 1988

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals promulgated
a long time ago can properly be considered res judicata by respondent Court of Appeals in the
present two cases between petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth
Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and
CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed
the Decision of the Honorable Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio
and Benguet in Civil Case No. 3607 (419) and Civil Case No. 3655 (429), with the dispositive
portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of
the Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs
of Juan Valdez, and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio
Octaviano (Leonardo Valdez, et al.). For lack or insufficiency of evidence, the plaintiffs' claim or
damages is hereby denied. Said defendant is ordered to pay costs. (p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's
conclusions that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-
R, in the two cases affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in
question; that the two lots were possessed by the predecessors-in-interest of private
respondents under claim of ownership in good faith from 1906 to 1951; that petitioner had
been in possession of the same lots as bailee in commodatum up to 1951, when petitioner
repudiated the trust and when it applied for registration in 1962; that petitioner had just been
in possession as owner for eleven years, hence there is no possibility of acquisitive prescription
which requires 10 years possession with just title and 30 years of possession without; that the
principle of res judicata on these findings by the Court of Appeals will bar a reopening of these
questions of facts; and that those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows
... The documents and records presented reveal that the whole controversy started when the
defendant Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the
Court of First Instance of Baguio Benguet on September 5, 1962 an application for registration
of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La Trinidad,
Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church building,
convents, high school building, school gymnasium, school dormitories, social hall, stonewalls,
etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their
Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and title thereto.
After trial on the merits, the land registration court promulgated its Decision, dated November
17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio
Octaviano (plaintiffs in the herein Civil Case No. 3607) appealed the decision of the land
registration court to the then Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of
Appeals rendered its decision, dated May 9, 1977, reversing the decision of the land
registration court and dismissing the VICAR's application as to Lots 2 and 3, the lots claimed by
the two sets of oppositors in the land registration case (and two sets of plaintiffs in the two
cases now at bar), the first lot being presently occupied by the convent and the second by the
women's dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of
Appeals to order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and
on May 17, 1977, the Heirs of Juan Valdez and Pacita Valdez filed their motion for
reconsideration praying that both Lots 2 and 3 be ordered registered in the names of the Heirs
of Juan Valdez and Pacita Valdez. On August 12,1977, the Court of Appeals denied the motion
for reconsideration filed by the Heirs of Juan Valdez on the ground that there was "no sufficient
merit to justify reconsideration one way or the other ...," and likewise denied that of the Heirs
of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the
decision of the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3,
docketed as G.R. No. L-46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs.
Court of Appeals and Heirs of Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan
Valdez and Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for
review, docketed as G.R. No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court
of Appeals, Vicar, Heirs of Egmidio Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR
on the one hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit.
Upon the finality of both Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872,
the Heirs of Octaviano filed with the then Court of First Instance of Baguio, Branch II, a Motion
For Execution of Judgment praying that the Heirs of Octaviano be placed in possession of Lot 3.
The Court, presided over by Hon. Salvador J. Valdez, on December 7, 1978, denied the motion
on the ground that the Court of Appeals decision in CA-G.R. No. 38870 did not grant the Heirs
of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for
certiorari and mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio
Octaviano vs. Hon. Salvador J. Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the
Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil
Case No. 3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs of Juan
Valdez filed Civil Case No. 3655 (429) on September 24, 1979, likewise for recovery of
possession of Lot 2 (Decision, pp. 199-201, Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented
one (1) witness, Fructuoso Valdez, who testified on the alleged ownership of the land in
question (Lot 3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C ); his written
demand (Exh. BB-4 ) to defendant Vicar for the return of the land to them; and the
reasonable rentals for the use of the land at P10,000.00 per month. On the other hand,
defendant Vicar presented the Register of Deeds for the Province of Benguet, Atty. Nicanor
Sison, who testified that the land in question is not covered by any title in the name of Egmidio
Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony of
Mons.William Brasseur when the plaintiffs admitted that the witness if called to the witness
stand, would testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75)
years continuously and peacefully and has constructed permanent structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute,
submitted the case on the sole issue of whether or not the decisions of the Court of Appeals
and the Supreme Court touching on the ownership of Lot 2, which in effect declared the
plaintiffs the owners of the land constitute res judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the
defense of ownership and/or long and continuous possession of the two lots in question since
this is barred by prior judgment of the Court of Appeals in CA-G.R. No. 038830-R under the
principle of res judicata. Plaintiffs contend that the question of possession and ownership have
already been determined by the Court of Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and
affirmed by the Supreme Court (Exh. 1, Minute Resolution of the Supreme Court). On his part,
defendant Vicar maintains that the principle of res judicata would not prevent them from
litigating the issues of long possession and ownership because the dispositive portion of the
prior judgment in CA-G.R. No. 038830-R merely dismissed their application for registration and
titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the
decision, and not its body, is the controlling pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to petitioner are as
follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY
PURCHASE BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ
AND OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ
AND OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN
POSSESSION OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND
THE PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS
SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE
IS A PRIME NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR
ORDINARY ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830
WAS AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF
LOTS 2 AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN
POSSESSION OF LOTS 2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO
1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS
BAILEE BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH
WITHOUT RIGHTS OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND
CONCLUSIVENESS OF THE DECISION IN CA G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and
05149, when it clearly held that it was in agreement with the findings of the trial court that the
Decision of the Court of Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of
ownership of Lots 2 and 3, declared that the said Court of Appeals Decision CA-G.R. No. 38830-
R) did not positively declare private respondents as owners of the land, neither was it declared
that they were not owners of the land, but it held that the predecessors of private respondents
were possessors of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951.
Petitioner was in possession as borrower in commodatum up to 1951, when it repudiated the
trust by declaring the properties in its name for taxation purposes. When petitioner applied for
registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for
eleven years. Ordinary acquisitive prescription requires possession for ten years, but always
with just title. Extraordinary acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of Appeals in
CA-G.R. No. 38830-R, affirmed by this Court, We see no error in respondent appellate court's
ruling that said findings are res judicata between the parties. They can no longer be altered by
presentation of evidence because those issues were resolved with finality a long time ago. To
ignore the principle of res judicata would be to open the door to endless litigations by
continuous determination of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R.
No. 38830-R, shows that it reversed the trial court's Decision 6 finding petitioner to be entitled
to register the lands in question under its ownership, on its evaluation of evidence and
conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years
possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement
of 10 years possession for ordinary acquisitive prescription because of the absence of just title.
The appellate court did not believe the findings of the trial court that Lot 2 was acquired from
Juan Valdez by purchase and Lot 3 was acquired also by purchase from Egmidio Octaviano by
petitioner Vicar because there was absolutely no documentary evidence to support the same
and the alleged purchases were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano.
Both Valdez and Octaviano had Free Patent Application for those lots since 1906. The
predecessors of private respondents, not petitioner Vicar, were in possession of the questioned
lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not
Lots 2 and 3, because the buildings standing thereon were only constructed after liberation in
1945. Petitioner Vicar only declared Lots 2 and 3 for taxation purposes in 1951. The
improvements oil Lots 1, 2, 3, 4 were paid for by the Bishop but said Bishop was appointed only
in 1947, the church was constructed only in 1951 and the new convent only 2 years before the
trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy
the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in
1962.
Private respondents were able to prove that their predecessors' house was borrowed by
petitioner Vicar after the church and the convent were destroyed. They never asked for the
return of the house, but when they allowed its free use, they became bailors
in commodatum and the petitioner the bailee. The bailees' failure to return the subject matter
of commodatum to the bailor did not mean adverse possession on the part of the borrower.
The bailee held in trust the property subject matter of commodatum. The adverse claim of
petitioner came only in 1951 when it declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive
prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were
possessors under claim of ownership in good faith from 1906; that petitioner Vicar was only a
bailee in commodatum; and that the adverse claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No.
38830-R. Its findings of fact have become incontestible. This Court declined to review said
decision, thereby in effect, affirming it. It has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of
discretion, when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is
governing, under the principle of res judicata, hence the rule, in the present cases CA-G.R. No.
05148 and CA-G.R. No. 05149. The facts as supported by evidence established in that decision
may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the
Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals
is AFFIRMED, with costs against petitioner.
SO ORDERED.

[G.R. No. 115324. February 19, 2003]

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner,
vs. HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals dated June
25, 1991 in CA-G.R. CV No. 11791 and of its Resolution[2] dated May 5, 1994, denying the
motion for reconsideration of said decision filed by petitioner Producers Bank of the
Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend
Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his
business, the Sterela Marketing and Services (Sterela for brevity). Specifically, Sanchez asked
private respondent to deposit in a bank a certain amount of money in the bank account of
Sterela for purposes of its incorporation. She assured private respondent that he could
withdraw his money from said account within a months time. Private respondent asked
Sanchez to bring Doronilla to their house so that they could discuss Sanchezs request. [3]
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi,
Doronillas private secretary, met and discussed the matter. Thereafter, relying on the
assurances and representations of Sanchez and Doronilla, private respondent issued a check in
the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private
respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in
opening a savings account in the name of Sterela in the Buendia, Makati branch of Producers
Bank of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to
deposit the check. They had with them an authorization letter from Doronilla authorizing
Sanchez and her companions, in coordination with Mr. Rufo Atienza, to open an account for
Sterela Marketing Services in the amount of P200,000.00. In opening the account, the
authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings
Account No. 10-1567 was thereafter issued to Mrs. Vives.[4]
Subsequently, private respondent learned that Sterela was no longer holding office in the
address previously given to him. Alarmed, he and his wife went to the Bank to verify if their
money was still intact. The bank manager referred them to Mr. Rufo Atienza, the assistant
manager, who informed them that part of the money in Savings Account No. 10-1567 had been
withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told them that
Mrs. Vives could not withdraw said remaining amount because it had to answer for some
postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and Sanchez
opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for
Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said current
account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover
payment thereof, Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or withdraw the money in Savings
Account No. 10-1567 because he was the sole proprietor of Sterela.[5]
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he
received a letter from Doronilla, assuring him that his money was intact and would be returned
to him. On August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve
Thousand Pesos (P212,000.00) in favor of private respondent. However, upon presentment
thereof by private respondent to the drawee bank, the check was dishonored. Doronilla
requested private respondent to present the same check on September 15, 1979 but when the
latter presented the check, it was again dishonored.[6]
Private respondent referred the matter to a lawyer, who made a written demand upon
Doronilla for the return of his clients money. Doronilla issued another check for P212,000.00 in
private respondents favor but the check was again dishonored for insufficiency of funds. [7]
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court
(RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was
docketed as Civil Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and
Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985 while the case was
pending before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157, promulgated
its Decision in Civil Case No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J.
Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives
jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest at the legal
rate from the filing of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.[8]
Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated June
25, 1991, the appellate court affirmed in toto the decision of the RTC.[9] It likewise denied with
finality petitioners motion for reconsideration in its Resolution dated May 5, 1994. [10]
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION
BETWEEN THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN
AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS BANK
MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING
PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER
SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE
REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS
OF THE REGIONAL TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN
SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR
ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER
COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER
DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS
ACCOUNT DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY
DAMAGES, P40,000.00 FOR ATTORNEYS FEES AND THE COSTS OF SUIT.[11]
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto
on September 25, 1995. The Court then required private respondent to submit a rejoinder to
the reply. However, said rejoinder was filed only on April 21, 1997, due to petitioners delay in
furnishing private respondent with copy of the reply[12] and several substitutions of counsel on
the part of private respondent.[13] On January 17, 2001, the Court resolved to give due course to
the petition and required the parties to submit their respective memoranda. [14]Petitioner filed
its memorandum on April 16, 2001 while private respondent submitted his memorandum on
March 22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple
loan (mutuum) since all the elements of a mutuum are present: first, what was delivered by
private respondent to Doronilla was money, a consumable thing; and second, the transaction
was onerous as Doronilla was obliged to pay interest, as evidenced by the check issued by
Doronilla in the amount of P212,000.00, or P12,000 more than what private respondent
deposited in Sterelas bank account.[15] Moreover, the fact that private respondent sued his
good friend Sanchez for his failure to recover his money from Doronilla shows that the
transaction was not merely gratuitous but had a business angle to it. Hence, petitioner argues
that it cannot be held liable for the return of private respondents P200,000.00 because it is not
privy to the transaction between the latter and Doronilla.[16]
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not be faulted for
allowing Doronilla to withdraw from the savings account of Sterela since the latter was the sole
proprietor of said company. Petitioner asserts that Doronillas May 8, 1979 letter addressed to
the bank, authorizing Mrs. Vives and Sanchez to open a savings account for Sterela, did not
contain any authorization for these two to withdraw from said account. Hence, the authority to
withdraw therefrom remained exclusively with Doronilla, who was the sole proprietor of
Sterela, and who alone had legal title to the savings account.[17] Petitioner points out that no
evidence other than the testimonies of private respondent and Mrs. Vives was presented
during trial to prove that private respondent deposited his P200,000.00 in Sterelas account for
purposes of its incorporation.[18] Hence, petitioner should not be held liable for allowing
Doronilla to withdraw from Sterelas savings account.
Petitioner also asserts that the Court of Appeals erred in affirming the trial courts decision since
the findings of fact therein were not accord with the evidence presented by petitioner during
trial to prove that the transaction between private respondent and Doronilla was a mutuum,
and that it committed no wrong in allowing Doronilla to withdraw from Sterelas savings
account.[19]
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not
liable for the actual damages suffered by private respondent, and neither may it be held liable
for moral and exemplary damages as well as attorneys fees.[20]
Private respondent, on the other hand, argues that the transaction between him and Doronilla
is not a mutuum but an accommodation,[21] since he did not actually part with the ownership of
his P200,000.00 and in fact asked his wife to deposit said amount in the account of Sterela so
that a certification can be issued to the effect that Sterela had sufficient funds for purposes of
its incorporation but at the same time, he retained some degree of control over his money
through his wife who was made a signatory to the savings account and in whose possession the
savings account passbook was given.[22]
He likewise asserts that the trial court did not err in finding that petitioner, Atienzas employer,
is liable for the return of his money. He insists that Atienza, petitioners assistant manager,
connived with Doronilla in defrauding private respondent since it was Atienza who facilitated
the opening of Sterelas current account three days after Mrs. Vives and Sanchez opened a
savings account with petitioner for said company, as well as the approval of the authority to
debit Sterelas savings account to cover any overdrawings in its current account. [23]
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a petition for
review filed with this Court. The Court has repeatedly held that it is not its function to analyze
and weigh all over again the evidence presented by the parties during trial.[24] The Courts
jurisdiction is in principle limited to reviewing errors of law that might have been committed by
the Court of Appeals.[25] Moreover, factual findings of courts, when adopted and confirmed by
the Court of Appeals, are final and conclusive on this Court unless these findings are not
supported by the evidence on record.[26] There is no showing of any misapprehension of facts
on the part of the Court of Appeals in the case at bar that would require this Court to review
and overturn the factual findings of that court, especially since the conclusions of fact of the
Court of Appeals and the trial court are not only consistent but are also amply supported by the
evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between
private respondent and Doronilla was a commodatum and not a mutuum. A circumspect
examination of the records reveals that the transaction between them was
a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in
this wise:
By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in which case the contract is
simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing,
such as money, the contract would be a mutuum. However, there are some instances where
a commodatum may have for its object a consumable thing. Article 1936 of the Civil Code
provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
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.
The rule is that the intention of the parties thereto shall be accorded primordial consideration
in determining the actual character of a contract.[27] In case of doubt, the contemporaneous
and subsequent acts of the parties shall be considered in such determination. [28]
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows
that private respondent agreed to deposit his money in the savings account of Sterela
specifically for the purpose of making it appear that said firm had sufficient capitalization for
incorporation, with the promise that the amount shall be returned within thirty (30)
days.[29]Private respondent merely accommodated Doronilla by lending his money without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from Sterelas savings account and would be
returned to private respondent after thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00 which the
latter deposited in Sterelas account together with an additional P12,000.00, allegedly
representing interest on the mutuum, did not convert the transaction from a commodatum into
a mutuum because such was not the intent of the parties and because the
additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935
of the Civil Code expressly states that [t]he bailee in commodatum acquires the use of the thing
loaned but not its fruits. Hence, it was only proper for Doronilla to remit to private respondent
the interest accruing to the latters money deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily liable for the
return of private respondents money because it was not privy to the transaction between
Doronilla and private respondent. The nature of said transaction, that is, whether it is
a mutuum or a commodatum, has no bearing on the question of petitioners liability for the
return of private respondents money because the factual circumstances of the case clearly
show that petitioner, through its employee Mr. Atienza, was partly responsible for the loss of
private respondents money and is liable for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of
Sterela for Savings Account No. 10-1567 expressly states that
2. Deposits and withdrawals must be made by the depositor personally or upon his written
authority duly authenticated, and neither a deposit nor a withdrawal will be permitted except
upon the production of the depositor savings bank book in which will be entered by the Bank
the amount deposited or withdrawn.[30]
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant
Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without
presenting the passbook (which Atienza very well knew was in the possession of Mrs. Vives),
not just once, but several times. Both the Court of Appeals and the trial court found that
Atienza allowed said withdrawals because he was party to Doronillas scheme of defrauding
private respondent:
XXX
But the scheme could not have been executed successfully without the knowledge, help and
cooperation of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of
the defendant bank.Indeed, the evidence indicates that Atienza had not only facilitated the
commission of the fraud but he likewise helped in devising the means by which it can be done
in such manner as to make it appear that the transaction was in accordance with banking
procedure.
To begin with, the deposit was made in defendants Buendia branch precisely because Atienza
was a key officer therein. The records show that plaintiff had suggested that the P200,000.00
be deposited in his bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted
that it must be in defendants branch in Makati for it will be easier for them to get a
certification. In fact before he was introduced toplaintiff, Doronilla had already prepared a
letter addressed to the Buendia branch manager authorizing Angeles B. Sanchez and company
to open a savings account for Sterela in the amount of P200,000.00, as per coordination with
Mr. Rufo Atienza, Assistant Manager of the Bank x x x (Exh. 1). This is a clear manifestation that
the other defendants had been in consultation with Atienza from the inception of the
scheme. Significantly, there were testimonies and admission that Atienza is the brother-in-law
of a certain Romeo Mirasol, a friend and business associate of Doronilla.
Then there is the matter of the ownership of the fund. Because of the coordination between
Doronilla and Atienza, the latter knew before hand that the money deposited did not belong to
Doronilla nor to Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia
Vives that the money belonged to her and her husband and the deposit was merely to
accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the
only ones empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In
the signature card pertaining to this account (Exh. J), the authorized signatories were Inocencia
Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking procedure that
withdrawals of savings deposits could only be made by persons whose authorized signatures
are in the signature cards on file with the bank. He, however, said that this procedure was not
followed here because Sterela was owned by Doronilla. He explained that Doronilla had the full
authority to withdraw by virtue of such ownership. The Court is not inclined to agree with
Atienza. In the first place, he was all the time aware that the money came from Vives and did
not belong to Sterela. He was also told by Mrs. Vives that they were only accommodating
Doronilla so that a certification can be issued to the effect that Sterela had a deposit of so much
amount to be sued in the incorporation of the firm. In the second place, the signature of
Doronilla was not authorized in so far as that account is concerned inasmuch as he had not
signed the signature card provided by the bank whenever a deposit is opened. In the third
place, neither Mrs. Vives nor Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is an
accepted practice that whenever a withdrawal is made in a savings deposit, the bank requires
the presentation of the passbook. In this case, such recognized practice was dispensed
with. The transfer from the savings account to the current account was without the submission
of the passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear in a
certification signed by Estrella Dumagpi that a duplicate passbook was issued to Sterela
because the original passbook had been surrendered to the Makati branch in view of a loan
accommodation assigning the savings account (Exh. C). Atienza, who undoubtedly had a hand in
the execution of this certification, was aware that the contents of the same are not true. He
knew that the passbook was in the hands of Mrs. Vives for he was the one who gave it to
her. Besides, as assistant manager of the branch and the bank official servicing the savings and
current accounts in question, he also was aware that the original passbook was never
surrendered. He was also cognizant that Estrella Dumagpi was not among those authorized to
withdraw so her certification had no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that
Atienzas active participation in the perpetration of the fraud and deception that caused the
loss. The records indicate that this account was opened three days later after the P200,000.00
was deposited. In spite of his disclaimer, the Court believes that Atienza was mindful and
posted regarding the opening of the current account considering that Doronilla was all the
while in coordination with him. That it was he who facilitated the approval of the authority to
debit the savings account to cover any overdrawings in the current account (Exh. 2) is not hard
to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x
x x.[31]
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for
damages caused by their employees acting within the scope of their assigned tasks. To hold the
employer liable under this provision, it must be shown that an employer-employee relationship
exists, and that the employee was acting within the scope of his assigned task when the act
complained of was committed.[32] Case law in the United States of America has it that a
corporation that entrusts a general duty to its employee is responsible to the injured party for
damages flowing from the employees wrongful act done in the course of his general authority,
even though in doing such act, the employee may have failed in its duty to the employer and
disobeyed the latters instructions.[33]
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not
deny that Atienza was acting within the scope of his authority as Assistant Branch Manager
when he assisted Doronilla in withdrawing funds from Sterelas Savings Account No. 10-1567, in
which account private respondents money was deposited, and in transferring the money
withdrawn to Sterelas Current Account with petitioner. Atienzas acts of helping Doronilla, a
customer of the petitioner, were obviously done in furtherance of petitioners interests[34]even
though in the process, Atienza violated some of petitioners rules such as those stipulated in its
savings account passbook.[35] It was established that the transfer of funds from Sterelas savings
account to its current account could not have been accomplished by Doronilla without the
invaluable assistance of Atienza, and that it was their connivance which was the cause of
private respondents loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil
Code, petitioner is liable for private respondents loss and is solidarily liable with Doronilla and
Dumagpi for the return of the P200,000.00 since it is clear that petitioner failed to prove that it
exercised due diligence to prevent the unauthorized withdrawals from Sterelas savings account,
and that it was not negligent in the selection and supervision of Atienza. Accordingly, no error
was committed by the appellate court in the award of actual, moral and exemplary damages,
attorneys fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court
of Appeals are AFFIRMED.
SO ORDERED.
G.R. No. 154878 March 16, 2007
CAROLYN M. GARCIA, Petitioner,
vs.
RICA MARIE S. THIO, Respondent.
DECISION
CORONA, J.:
Assailed in this petition for review on certiorari1 are the June 19, 2002 decision2 and August 20,
2002 resolution3of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the
February 28, 1997 decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M.
Garcia a crossed check4 dated February 24, 1995 in the amount of US$100,000 payable to the
order of a certain Marilou Santiago.5 Thereafter, petitioner received from respondent every
month (specifically, on March 24, April 26, June 26 and July 26, all in 1995) the amount of
US$3,0006 and P76,5007 on July 26,8 August 26, September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another crossed check9 dated June 29, 1995
in the amount of P500,000, also payable to the order of Marilou Santiago.10 Consequently,
petitioner received from respondent the amount of P20,000 every month on August 5,
September 5, October 5 and November 5, 1995.11
According to petitioner, respondent failed to pay the principal amounts of the loans
(US$100,000 and P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a
complaint for sum of money and damages in the RTC of Makati City, Branch 58 against
respondent, seeking to collect the sums of US$100,000, with interest thereon at 3% a month
from October 26, 1995 and P500,000, with interest thereon at 4% a month from November 5,
1995, plus attorneys fees and actual damages.12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of
US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on
October 26, 1995.13 The amount of this loan was covered by the first check. On June 29, 1995,
respondent again borrowed the amount of P500,000 at an agreed monthly interest of 4%, the
maturity date of which was on November 5, 1995.14 The amount of this loan was covered by
the second check. For both loans, no promissory note was executed since petitioner and
respondent were close friends at the time.15 Respondent paid the stipulated monthly interest
for both loans but on their maturity dates, she failed to pay the principal amounts despite
repeated demands.161awphi1.nt
Respondent denied that she contracted the two loans with petitioner and countered that it was
Marilou Santiago to whom petitioner lent the money. She claimed she was merely asked by
petitioner to give the crossed checks to Santiago.17 She issued the checks for P76,000
and P20,000 not as payment of interest but to accommodate petitioners request that
respondent use her own checks instead of Santiagos.18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner.19 It found that
respondent borrowed from petitioner the amounts of US$100,000 with monthly interest of 3%
and P500,000 at a monthly interest of 4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is
hereby rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount
of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from October
26, 1995 until fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully paid.
3. P100,000.00 as and for attorneys fees; and
4. P50,000.00 as and for actual damages.
For lack of merit, [respondents] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan
between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows that
[respondent] received money from [petitioner]. What is evident is the fact that [respondent]
received a MetroBank [crossed] check dated February 24, 1995 in the sum of US$100,000.00,
payable to the order of Marilou Santiago and a CityTrust [crossed] check dated June 29, 1995 in
the amount of P500,000.00, again payable to the order of Marilou Santiago, both of which were
issued by [petitioner]. The checks received by [respondent], being crossed, may not be
encashed but only deposited in the bank by the payee thereof, that is, by Marilou Santiago
herself.
It must be noted that crossing a check has the following effects: (a) the check may not be
encashed but only deposited in the bank; (b) the check may be negotiated only onceto one
who has an account with the bank; (c) and the act of crossing the check serves as warning to
the holder that the check has been issued for a definite purpose so that he must inquire if he
has received the check pursuant to that purpose, otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and
delivery to the payee in contemplation of law since the latter is not the person who could take
the checks as a holder, i.e., as a payee or indorsee thereof, with intent to transfer title thereto.
Neither could she be deemed as an agent of Marilou Santiago with respect to the checks
because she was merely facilitating the transactions between the former and [petitioner].
With the foregoing circumstances, it may be fairly inferred that there were really no contracts
of loan that existed between the parties. x x x (emphasis supplied)22
Hence this petition.23
As a rule, only questions of law may be raised in a petition for review on certiorari under Rule
45 of the Rules of Court. However, this case falls under one of the exceptions, i.e., when the
factual findings of the CA (which held that there were no contracts of loan between petitioner
and respondent) and the RTC (which held that there were contracts of loan) are contradictory.24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the
object of the contract.25 This is evident in Art. 1934 of the Civil Code which 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 the
delivery of the object of the contract. (Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received by the
debtor when the checks were encashed) the debtor acquires ownership of such money or loan
proceeds and is bound to pay the creditor an equal amount.26
It is undisputed that the checks were delivered to respondent. However, these checks were
crossed and payable not to the order of respondent but to the order of a certain Marilou
Santiago. Thus the main question to be answered is: who borrowed money from petitioner
respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were made payable
to Santiago.27She maintains that it was also upon respondents instruction that both checks
were delivered to her (respondent) so that she could, in turn, deliver the same to
Santiago.28 Furthermore, she argues that once respondent received the checks, the latter had
possession and control of them such that she had the choice to either forward them to Santiago
(who was already her debtor), to retain them or to return them to petitioner. 29
We agree with petitioner. Delivery is the act by which the res or substance thereof is placed
within the actual or constructive possession or control of another.30 Although respondent did
not physically receive the proceeds of the checks, these instruments were placed in her control
and possession under an arrangement whereby she actually re-lent the amounts to Santiago.
Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago.31 It was highly
improbable that petitioner would grant two loans to a complete stranger without requiring as
much as promissory notes or any written acknowledgment of the debt considering that the
amounts involved were quite big. Respondent, on the other hand, already had transactions
with Santiago at that time.32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in
both parties list of witnesses) testified that respondents plan was for petitioner to lend her
money at a monthly interest rate of 3%, after which respondent would lend the same amount
to Santiago at a higher rate of 5% and realize a profit of 2%.33 This explained why respondent
instructed petitioner to make the checks payable to Santiago. Respondent has not shown any
reason why Ruiz testimony should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount
of P76,000 each (peso equivalent of US$3,000) for eight months to cover the monthly interest.
For the P500,000 loan, she also issued her own checks in the amount of P20,000 each for four
months.34 According to respondent, she merely accommodated petitioners request for her to
issue her own checks to cover the interest payments since petitioner was not personally
acquainted with Santiago.35 She claimed, however, that Santiago would replace the checks with
cash.36 Her explanation is simply incredible. It is difficult to believe that respondent would put
herself in a position where she would be compelled to pay interest, from her own funds, for
loans she allegedly did not contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule that for
evidence to be believed, it must not only proceed from the mouth of a credible witness, but
must be credible in itself such as the common experience of mankind can approve as probable
under the circumstances. We have no test of the truth of human testimony except its
conformity to our knowledge, observation, and experience. Whatever is repugnant to these
belongs to the miraculous, and is outside of juridical cognizance.37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not
petitioner, who was listed as one of her (Santiagos) creditors.38
Last, respondent inexplicably never presented Santiago as a witness to corroborate her
story.39 The presumption is that "evidence willfully suppressed would be adverse if
produced."40 Respondent was not able to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent did not borrow
the amounts of US$100,000 and P500,000 from petitioner. We instead agree with the ruling of
the RTC making respondent liable for the principal amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and P500,000 loans respectively. There was no written proof of the interest
payable except for the verbal agreement that the loans would earn 3% and 4% interest per
month. Article 1956 of the Civil Code provides that "[n]o interest shall be due unless it has been
expressly stipulated in writing."
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant
to Article 2209 of the Civil Code. It is well-settled that:
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.41
Hence, respondent is liable for the payment of legal interest per annum to be computed from
November 21, 1995, the date when she received petitioners demand letter.42 From the finality
of the decision until it is fully paid, the amount due shall earn interest at 12% per annum, the
interim period being deemed equivalent to a forbearance of credit.43
The award of actual damages in the amount of P50,000 and P100,000 attorneys fees is deleted
since the RTC decision did not explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August 20,
2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET ASIDE.
The February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266
is AFFIRMED with the MODIFICATION that respondent is directed to pay petitioner the
amounts of US$100,000 and P500,000 at 12% per annum interest from November 21, 1995
until the finality of the decision. The total amount due as of the date of finality will earn interest
of 12% per annum until fully paid. The award of actual damages and attorneys fees is deleted.
SO ORDERED.

MARIANO UN OCAMPO III, G.R. Nos. 156547-51

Petitioner,
- versus -
PEOPLE OF THE PHILIPPINES,
These are consolidated petitions for review on certiorari[1] of the Sandiganbayans Decision
promulgated on March 8, 2002 and its Resolution promulgated on January 6, 2003.
The Decision and Resolution of the Sandiganbayan held petitioners Mariano Un Ocampo III and
Andres S. Flores guilty of malversation of public funds in Crim. Case Nos. 16794 and 16795.

The facts are as follows:

During the incumbency of President Corazon C. Aquino, Tarlac Province was chosen as one of
the four provinces that would serve as a test case on decentralization of local government
administration.

For this purpose, the Department of Budget and Management (DBM) released National Aid for
Local Government Units (NALGU) funds in the total amount of P100 million to the Province of
Tarlac. The NALGU is a fund set aside in the General Appropriations Act to assist local
governments in their various projects and services. The distribution of this fund is entirely
vested with the Secretary of the DBM.

Petitioner Ocampo, provincial governor of Tarlac from February 22, 1988 up to June 30, 1992,
loaned out P56.6 million of the P100 million to the Lingkod Tarlac Foundation, Inc. (LTFI) for the
implementation of various livelihood projects. The loan was made pursuant to a Memorandum
of Agreement (MOA) entered into by the Province of Tarlac, represented by petitioner Ocampo,
and LTFI, represented by petitioner Flores, on August 8, 1988.

LTFI is a private non-stock corporation with petitioner Ocampo as its first chairperson and
petitioner Andres S. Flores as its executive director. The Sandiganbayan, in its Resolution
dated January 6, 2000, admitted the annexes[2] submitted by petitioner Ocampo, which
annexes proved that petitioner Ocampo resigned as chairperson and trustee of the LTFI prior
to August 8, 1988, the date when petitioner Ocampo and LTFI entered into the MOA.

How the P56.6 million released to LTFI was utilized became the subject matter of 25 criminal
cases. In a Resolution in G.R. Nos. 103754-78 dated October 22, 1992,[3]this Court quashed 19
of the 25 Informations filed against petitioner Ocampo. The Fifth Division of the Sandiganbayan
dismissed one case[4] on demurrer to evidence. In its Decision promulgated on March 8, 2002,
the Fifth Division of the Sandiganbayan dismissed two[5] of five criminal cases for malversation
of public funds against petitioners. On motion for reconsideration, the Sandiganbayan
dismissed one[6] more case in a Resolution promulgated on January 6, 2003. The two remaining
cases are the subject matters in the instant consolidated petitions.

The Informations of the remaining two cases filed on May 28, 1991 state:

Crim. Case No. 16794

That on or about the periods between November 2, 1988 to February 27, 1989, or sometime
subsequent thereto, in the Province of Tarlac, Philippines and within the jurisdiction of this
Honorable Court, accused Mariano Un Ocampo III, then the Governor of the province of Tarlac
and at the same time President-Chairman of the Board of Trustees of the Lingkod Tarlac
Foundation, Inc. (LTFI), a private entity, having received by reason of his position, public funds
amounting to more than Fifty Two Million Pesos (P52,000,000) x x x from the National Aid for
Local Government Unit (NALGU) funds, which he is accountable by reason of his official
duties, did then and there with intent to defraud the government aforethought release out of
the aforesaid funds thru the said LTFI, the amount of EIGHT MILLION EIGHT HUNDRED SIXTY
THOUSAND PESOS (P8,860,000) x x x for the payment of the importation of Juki Embroidery
Machines which actually cost SEVEN MILLION SIX HUNDRED SEVENTY NINE THOUSAND FIVE
HUNDRED THIRTY PESOS AND FIFTY TWO CENTAVOS (P7,679,530.52) x x x thereby leaving a
balance of P1,180,463.48 which ought to have been returned, but far from returning the said
amount, accused Mariano Un Ocampo III, in connivance with his co-accused, Andres S. Flores
and William Uy wilfully, unlawfully and feloniously misapply, misappropriate and convert for
their own personal use and benefit the said amount resulting to the damage and prejudice of
the government in the aforesaid sum of One Million One Hundred Eighty Thousand Four
Hundred Sixty Three Pesos and Forty Eight Centavos (P1,180,463.48).

CONTRARY TO LAW.

Crim. Case No. 16795

That on or about the periods between November 2, 1988 to February 27, 1989, or sometime
subsequent thereto, in the Province of Tarlac, Philippines and within the jurisdiction of this
Honorable Court, accused Mariano Un Ocampo III, then the Governor of the province of Tarlac,
and at the same time President-Chairman of the Board of Trustees of the Lingkod Tarlac
Foundation, Inc. (LTFI), a private entity, having received by reason of his position, public funds
amounting to more than Fifty Two Million Pesos (P52,000,000.00) x x x from the National Aid
for Local Government Unit (NALGU) Funds, which he is accountable by reason of his official
duties, caused the withdrawal by co-accused Andres S. Flores on April 28, 1989, then Executive
Officer, LTFI, from the PHILIPPINE NATIONAL BANK LTFI account the sum of FIFTY EIGHT
THOUSAND PESOS (P58,000.00), portion of the said NALGU funds deposited by LTFI under
Account No. 490-555744, both accused conniving and confederating with one another, with
intent to gain and to defraud the government, did then and there, wilfully, unlawfully and
feloniously misappropriate, misapply and convert the same to their own personal use and
benefit to the damage and prejudice of the government in the aforesaid amount of P58,000.00,
Philippine Currency.

CONTRARY TO LAW.[7]

The Prosecution relied mainly on an audit conducted by the Commission on Audit on LTFI
from February 12, 1990 up to April 2, 1990. The audit covered the period from July 1,
1988 to December 31, 1989 and was confined to the examination of the loans granted by the
Provincial Government of Tarlac for the implementation of its Rural Industrialization Can
Happen Program. The result of the audit was embodied in Special Audit Report No. 90-91,
offered as Exhibit B by the prosecution.

According to the Sandiganbayan, the money trail with respect to the two cases, as proven by
the prosecution, is as follows:

(1) Accused Ocampo released P11.5 Million to LTFI, P7,023,836.00 of which was
intended for the purchase of 400 embroidery machines;

(2) The total amount released was deposited by LTFI to the Rural Bank of Tarlac, Inc.;

(3) Within two (2) months from the deposit, a total of P5,465,000.00 was withdrawn
and given to William Uy (LTFIs broker for the importation of the machines);
(4) This amount (P5,465,000) was thereafter deposited to the personal account of
Willam Uy and/or Andres Flores under S/A No. 26127;

(5) Another account (PNB S/A No. 490-555744-6) was opened by LTFI by Andres
Flores, this time with PNB, intended solely for the purchase of the machines;

(6) A check in the amount of P3,395,000.00 dated February 27, 1989, was remitted for
the payment of the machines;

(7) This amount, together with the P5,465,000.00 placed on the personal account of
William Uy and/or Andres Flores, made up the cost of he machines or a total
of P8,860,000.00 as recorded in the books of LTFI;

(8) To the PNB account was added a total of P4,332,261.00 deposited on different dates
from March 6 to April 17, 1989 which funds came from S/A No. 26127;

(9) Thus, the total amount on deposit with PNB was P7,727,261.00 plus interest;

(10) Of this amount, P7,679,530.52 was used for the opening of the LC (for the payment
of the machines) leaving a balance of P47,730,48.00 plus interest;

(11) Between the amount listed in the books of the corporation (P8,860,000) and the
amount of the LC (P7,679,530), a discrepancy of P1,180,496.48 existed.

(12) Between the total amount deposited in PNB S/A No. 490-555744-
6 (P7,727,261.00) and the total amount withdrawn from the account for the payment of the
machines (P7,679,530.52), a balance of P47,730.48 remained. This balance (plus interest), in
the amount of P58,000.00, was later withdrawn upon authorization of accused Flores.[8]
Petitioner Ocampo did not testify regarding the subject cases on the ground that he was not
competent to testify on the disbursements made by LTFI but only as to the receipt of the
NALGU funds from the government.

The Sandiganbayan declared that petitioner Ocampo as governor of Tarlac, who personally
received the NALGU funds from the DBM and thereafter released some of them to the LTFI,
was duty bound to put up regular and effective measures for the monitoring of the projects
approved by him.

According to the Sandiganbayan, Sec. 203(t) of the Local Government Code obligated provincial
governors to adopt measures to safeguard all the lands, buildings, records, monies, credits and
other property rights of the province. However, petitioner Ocampo, as governor of Tarlac,
neglected to set up safeguards for the proper handling of the NALGU funds in the hands of LTFI
which resulted in the disappearance of P1,132,739 and P58,000 of the said funds. The
Sandiganbayan held:

For such gross and inexcusable negligence, accused is liable for malversation. In so ruling, we
are guided by the oft-repeated principle that malversation may be committed through a
positive act of misappropriation of public funds or passively though negligence by allowing
another to commit such misappropriation (Cabello vs. Sandiganbayan, 197 SCRA 94
[1991]).Although accused was charged with willful malversation, he can validly be convicted of
malversation through negligence where the evidence sustains the latter mode of committing
the offense (Cabello, supra).[9]

Further, the Sandiganbayan stated that under Sec. 203(f) of the Local Government Code of
1983,[10] the provincial governor, as chief executive of the provincial government, has the
power to represent the province in all its business transactions and sign on its behalf all bonds,
contracts and obligations and other official documents made in accordance with law or
ordinance.

Sec. 2 (c) of Rule XI[11] of the Rules and Regulations Implementing the Local Government Code
of 1983 provides that the local chief executive of a local government unit shall [r]epresent the
respective local units in all their business transactions and sign on its behalf all bonds, contracts
and obligations and other official documents made in accordance with law or ordinance. Sec. 2
of Rule VI[12] states that [t]he power to sue, to acquire and convey real or personal property,
and to enter into contracts shall be exercised by the local chief executive upon authority of
the Sanggunian concerned. Thus, the Sandiganbayan declared that since the required authority
from the Sangguniang Panlalawigan was not shown to have been obtained by petitioner
Ocampo, the MOA is ineffective as far as the Province of Tarlac is concerned.

Petitioner Flores, as executive director of LTFI, was charged with malversation of public funds in
connivance with a public officer. However, the Sandiganbayan found that there was no
conspiracy between the petitioners, and held petitioner Flores guilty of malversation through
his independent acts under Art. 222 of the Revised Penal Code,[13]since the purpose of Art. 222
is to extend the provisions of the Penal Code on malversation to private individuals. According
to the Sandiganbayan, petitioner Flores bound himself, as a signatory of the MOA representing
LTFI, to receive NALGU funds from the province of Tarlac. In such capacity, he had charge of
these funds.
In Crim. Case No. 16794, petitioner Flores was found to have charge of missing NALGU funds
deposited in his personal account in the amount of P1,132,739, which formed part of the
discrepancy of the actual cost of the embroidery machines and the NALGU funds released for
payment of the said machines.

In defense, petitioner Flores claimed that the broker for the importation of the machines made
an initial payment to the supplier of the machines, which initial payment would explain the
discrepancy between the reported cost as stated in the books of the corporation and the letter
of credit. However, the Sandiganbayan stated that the explanation was hearsay as the broker
was not presented in court, and there was no proof of the initial payment.

In Crim. Case No. 16795, the Sandiganbayan held that petitioner Flores failure to explain the
purpose of the withdrawal on April 28, 1989 of P58,000 upon his authorization, considering that
he was in charge of the PNB savings account, made him liable for malversation of public funds.

Petitioners presented five documents to show that LTFIs obligations to the Province of Tarlac, in
the amount of P56.6 million, have been extinguished. The documents are as follows:

1) The Tripartite Memorandum of Agreement (TMOA) dated May 23, 1990 executed
by the Province of Tarlac, LTFI and the Barangay Unity for Industrial andLeadership
Development (BUILD) Foundation whereby the liability of LTFI in favor of the Province of Tarlac
was transferred and assumed by BUILD in the total amount of P40 million.

2) Resolution No. 76 of the Sangguniang Panlalawigan of Tarlac dated April 5, 1990

showing that the authority of petitioner Ocampo in entering into the TMOA was with prior
approval of the Sangguniang Panlalawigan.

3) A Deed of Assignment between Tarlac and LTFI whereby the latter assigned its loan
portfolios (including interests and certificates of time deposit), the Juki embroidery machines
and other assignable documents to the Province of Tarlac in the total amount of P16,618,403.

4) Resolution No. 199 of the Sangguniang Panlalawigan of Tarlac dated October 18,
1990 authorizing petitioner Ocampo to enter into the Deed of Assignment with LTFI.

5) A certified photocopy of a document dated June 16, 1992 issued by the OIC
provincial treasurer of Tarlac whereby the treasurer affirmed the existence of the above
documents.

The Sandiganbayan declared that the documents showing the extinguishment of LTFIs
obligations to the Province of Tarlace do not mitigate the liability of petitioners since the crime
is consummated as of asportation, akin to the taking of anothers property in theft. It held that
the return of the amount malversed is neither an exempting circumstance nor a ground for
extinguishing the criminal liability of petitioners.

On March 8, 2002, the Fifth Division of the Sandiganbayan rendered a Decision acquitting
petitioners of the crime of malversation of public funds in Crim. Case Nos. 16796 and 16802,
but finding them guilty of the crime in Crim. Case Nos. 16787, 16794 and 16795. The dispositive
portion of the Decision reads:
WHEREFORE, premises considered, accused Mariano Un Ocampo III and Andres S. Flores are
hereby found GUILTY beyond reasonable doubt of the crime of malversation of Public Funds
under Crim. Case No. 16787 and are sentenced to suffer the indeterminate penalty of (10)
years, and one (1) day of prision mayor, as minimum, to eighteen (18) years, eight (8) months
and one (1) day of reclusion temporal as maximum and to pay a fine of sixty-six thousand nine
hundred thirty-two pesos and seventy centavos (P66,932.70). They shall also suffer the penalty
of perpetual special disqualification. Costs against the accused.

For Crim. Case No. 16794, accused Mariano Un Ocampo III and Andres S. Flores are hereby
found GUILTY beyond reasonable doubt of the crime of Malversation of Public Funds and are
sentenced to suffer the indeterminate penalty of (10) years, and one (1) day of prision mayor,
as minimum, to eighteen (18) years, eight (8) months and one (1) day of reclusion temporal as
maximum and to pay a fine of one million one hundred thirty-two thousand seven hundred
thirty-nine pesos (P1,132,739.00). They shall also suffer the penalty of perpetual special
disqualification. Costs against the accused.

For Crim. Case No. 16795, accused Mariano Un Ocampo III and Andres S. Flores are hereby
found GUILTY beyond reasonable doubt of the crime of Malversation of Public Funds and are
sentenced to suffer the indeterminate penalty of (10) years, and one (1) day of prision mayor,
as minimum, to eighteen (18) years, eight (8) months and one (1) day of reclusion temporal as
maximum and to pay a fine of fifty-eight thousand pesos (P58,000.00). They shall also suffer the
penalty of perpetual special disqualification. Costs against the accused.

For Crim. Case No. 16796, on ground that the crime was not committed by the
accused, accused Mariano Un Ocampo III and Andres S. Flores are hereby ACQUITTED of the
crime charged. The surety bonds posted by them for their provisional liberty are cancelled.

For Crim. Case No. 16802, on ground of reasonable doubt, accused Mariano Un Ocampo III and
Andres S. Flores are hereby ACQUITTED of the crime charged. The surety bonds posted by them
for their provisional liberty are cancelled.

SO ORDERED.[14]

Petitioners separately filed a motion for reconsideration of the Decision.

In a Resolution promulgated on January 6, 2003, the Sandiganbayan reconsidered its Decision
in Crim. Case No. 16787, and acquitted petitioners of the crime charged. In that case, the
prosecution alleged that P5 million of the NALGU funds loaned to LTFI were placed in time
deposits with the Rural Bank of Tarlac and earned a total interest ofP116,932.77, of which
amount only P50,000.00 was recorded in the books of LTFI. The unrecorded interest
of P66,932.77 was said to have been withdrawn from December 27, 1988 to February 2,
1989 and allegedly malversed by petitioners. The Sandiganbayan held that as this Court has
already labeled the subject agreement as one of loan, the said interest are private funds, hence,
not the proper subject for malversation of public funds. Thus, petitioners were acquitted in
Crim. Case No. 16787.

Petitioners thereafter filed their respective petitions, which were consolidated by the Court in a
Resolution dated February 20, 2006.

The pertinent issues raised by petitioners may be summarized as follows:

1) Whether or not petitioners Ocampo and Flores are guilty of the crime of malversation of
public funds under Art. 217 and Art. 220 respectively of the Revised Penal Code;

2) Whether or not the Sandiganbayan erred in holding that the MOA is void and did not bind
the Province of Tarlac on the ground that the MOA was entered into by petitioner Ocampo
without authority from the Sangguniang Panlalawigan in violation of the Local Government
Code of 1983.

First Issue: Whether or not petitioners Ocampo and Flores are guilty of the crime
of malversation of public funds under Art. 217 and Art. 220 respectively of the Revised Penal
Code?

Crucial to the resolution of the first issue is the nature of the transaction entered into by
the Province of Tarlac and LTFI.
Petitioners claim that in the instant cases, the public funds alleged to have been malversed
were loaned by the Province of Tarlac to LTFI per the MOA; hence, LTFI acquired ownership of
the funds which thus shed their public character and became private funds.
Petitioner Ocampo also asserts that the Sandiganbayan impliedly ruled that the funds were
private in character and owned by LTFI when it ruled in Crim. Case No. 16787 that since this
Court has already labeled the subject agreement as one of loan, the interests from the loan are
private funds; hence, not the proper subject for malversation of public funds. Having declared
the interests earned by the funds loaned to LTFI as private funds, the Sandiganbayan should
have also declared the funds loaned as private.

Petitioners arguments are meritorious.

The MOA states:

xxx
WHEREAS, the First Party [the Provincial Government of Tarlac], in order to vigorously pursue
its livelihood program for rural development, has identified the need to establish a RICH (Rural
Industrialization Can Happen) Program;

WHEREAS, the First Party now realizes the effectivity and efficiency of designating a
professional private non-profit organization to implement the various livelihood projects under
the RICH Program;

WHEREAS, the Second Party [Lingkod Tarlac Foundation], has represented that it has the
technical expertise required by the First Party in the implementation of the various livelihood
projects under the RICH Program;

WHEREAS, the First Party desires to engage the Second Party and the latter agrees as the
implementing arm of the Provincial Government for its livelihood projects;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Parties
hereby agree as follows:

ARTICLE I
UNDERTAKINGS OF THE FIRST PARTY

1. The First Party shall provide all the data and information as may be required by [the]
Second Party in the implementation of the RICH Program;

ARTICLE III
DESCRIPTION OF THE PRIORITY PROJECTS

A. Program For Lease Purchase Agreements on equipment, machineries, buildings and

structures:
xxx

B. Direct Lending Pogram:

Under this scheme, the Lingkod Tarlac Foundation shall engage in direct lending operations to
proponents of livelihood activities under the Rural Industrialization Can Happen (RICH
PROGRAM) at variable interest rates and loan conditions depending on the viability and nature
of the livelihood projects availing of the loan.

C. Direct Borrowing by Lingkod Tarlac Foundation:

The Lingkod Tarlac Foundation shall be allowed to borrow funds directly from the Provincial
government to fund Lingkod Tarlac Foundation projects provided the projects are livelihood
projects under the Rural Industrialization Can Happen (RICH Program).

D. Other project financing schemes that may be developed for the RICH Program.
ARTICLE IV
CONDITIONS FOR RELEASE OF FUNDS

The First Party shall release in lump sum the appropriate funds for the approved
projects covered by individual loan documents upon signing of [the] respective loan
agreement and approval of the Commission on Audit.

ARTICLE V
TERMS OF REPAYMENT

1. The Second Party shall repay the First Party only the total amount of capital without
interest in consideration of the following:

a) The Second Party shall shoulder all its operating expenses.

b) The Second Party shall not charge the Province any management fees or whatever
fees.
c) The Second Party shall, whenever necessary, assure the beneficiaries of the project
interests and management fees at rates lower than the commercial financial rates.

2. The terms of repayment shall be based on the projects ability to pay without sacrificing
on the projects viability.

ARTICLE VI
SUCCESSORS AND ASSIGNEES
Except as may be mutually agreed in writing, neither party can assign, sublet, or transfer its
interest or duties under this Agreement.

ARTICLE VII
TERMS OF THE AGREEMENT

This Agreement shall exist for as long as the Program exists or any extension thereof.

IN WITNESS WHEREOF, the Parties have hereunto set their hands on this 8th day of August,
1988 in Tarlac, Tarlac.

LINGKOD TARLAC FOUNDATION PROVINCE OF TARLAC

Second Party First Party
(Signed) (Signed)
ANDRES S, FLORES MARIANO UN OCAMPO III
Executive Director Governor

CONCURRED IN BY:
(Signed)
GUILLERMO N. CARAGUE
Secretary of Budget
& Management

The MOA shows that LTFI is allowed to borrow funds directly from the Provincial Government
to fund Lingkod Tarlac Foundation projects provided the projects are livelihood projects under
the Rural Industrialization Can Happen Program. Moreover, the agreement stipulates under the
Conditions for Release of Funds that the Province of Tarlac shall release in lump sum the
appropriate funds for the approved projects covered by individual loan documents upon
signing of the respective loan agreement....[15]

In Crim. Case No. 16794, the fund alleged to have been malversed in the amount
of P1,180,496.48 represents the discrepancy of the cost of the Juki embroidery machines as
listed in the books of LTFI and the amount actually paid to open the letter of credit for the
payment of the machines. In the books of LTFI, the cost of the Juki embroidery machines was
listed as P8,860,000, while the amount paid to open the letter of credit for the payment of the
machines was P7,679,530.52. Petitioner Flores was held liable only up to the amount
of P1,132,739.

In Crim. Case No. 16795, the fund alleged to have been malversed in the amount of P58,000
is the money left (P47,730) in PNB S/A No. 490-555744-6 after the withdrawal of the purchase
price of the Juki embroidery machines, plus interest. The amount of P58,000 was withdrawn
upon the authorization of petitioner Flores. The withdrawal was neither reflected as deposit in
the bank accounts of LTFI nor spent by it.

In both cases, the money trail proven by the prosecution shows that the subject funds or the
money used for the purchase of the Juki embroidery machines came from the release of
the Province of Tarlac through petitioner Ocampo of NALGU funds in the amount of P11.5
million to LTFI on October 24, 1988. The release of the funds was covered by a loan document
in accordance with the MOA which states that the Province of Tarlac shall release in lump sum
the appropriate funds for the approved projects covered by individual loan documents upon
signing of the respective loan agreement....
The Report on the Special Audit of LTFI[16] stated:

. . . For the period July 1988 to December 1989, LTFI received a total of P56.6 million which
consisted of six releases and covered by individual loan agreements, as follows:

Date Amount
08 30 88 P7, 000, 000
10 24 88 11,500, 000
12 08 88 1,500, 000
02 22 89 4,000, 000
04 12 89 18,000, 000
06 14 89 12,718, 403
Total P56,618, 403

xxx
On October 24, 1988, the Provincial Government of Tarlac approved and released an amount
of P11,500,000 to Lingkod Tarlac Foundation, Inc. (LTFI) for the Rural Industrialization Can
Happen (RICH) Program. Of the amount released, P7,023,836 was intended for the purchase
of 400 sets embroidery machines for the Embroidery Skills Training Project.[17]

Based on the foregoing, it is clear that the funds released by the Province of Tarlac, including
the money allegedly malversed by petitioners in Crim. Case Nos. 16794 and 16795, were in the
nature of a loan to LTFI.

Art. 1953 of the Civil Code provides that [a] person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.

Hence, petitioner Ocampo correctly argued that the NALGU funds shed their public character
when they were lent to LTFI as it acquired ownership of the funds with an obligation to repay
the Province of Tarlac the amount borrowed. The relationship between
the Province of Tarlac and the LTFI is that of a creditor and debtor. Failure to pay the
indebtedness would give rise to a collection suit.

The Sandiganbayan convicted petitioner Ocampo of malversation of public funds under Art. 217
of the Revised Penal Code for his gross and inexcusable negligence in not setting up safeguards
in accordance with Sec. 203(t) of the Local Government Code[18] for the proper handling of the
NALGU funds in the hands of LTFI which resulted in the disappearance of P1,132,739 allegedly
malversed in Crim. Case No. 16794 and the disappearance of P58,000 in Crim. Case No. 16795.
In his petition, petitioner Ocampo states that he made sure that proper safeguards were in
place within LTFI to ensure the proper handling of NALGU funds by LTFI. On August 5, 1988,
before the Province of Tarlac and LTFI entered into the MOA, LTFIs Articles of Incorporation
were amended to add the following:

TENTH: That no part of the net income of the Foundation shall inure to the benefit of any
member of the Foundation and that at least seventy percent (70%) of the funds shall be used
for the projects and not more than thirty percent (30%) of said funds shall be used for
administrative purposes.

Petitioner Ocampo argues that since he had resigned from LTFI both as chairperson and as
trustee on June 22, 1988, he ceased to become accountable for the handling of the NALGU
funds after the same were loaned to LTFI pursuant to the MOA dated August 8,
1988. Consequently, he may not be held criminally liable for disbursements made by LTFI since
he had nothing to do with its operations after his resignation.

Malversation may be committed by appropriating public funds or property; by taking or

misappropriating the same; by consenting, or through abandonment or negligence, by
permitting any other person to take such public funds or property; or by being otherwise guilty
of the misappropriation or malversation of such funds or property.[19]

The essential elements common to all acts of malversation under Art. 217 of the Revised Penal
Code[20] are:

(a) That the offender be a public officer;

(b) That he had the custody or control of funds or property by reason of the duties of his
office;
(c) That those funds or property were public funds or property for which he was
accountable;
(d) That he appropriated, took, misappropriated or consented or, through abandonment or
negligence, permitted another person to take them.[21]
There can be no malversation of public funds by petitioner Ocampo in the instant cases since
the loan of P11.5 million transferred ownership and custody of the funds, which included the
sum of money allegedly malversed, to LTFI for which Ocampo could no longer be held
accountable. Thus, contrary to the allegation of the Office of the Special Prosecutor, petitioner
Ocampo cannot be held culpable for malversation committed through negligence in adopting
measures to safeguard the money of the Province of Tarlac, since the same were neither in his
custody nor was he accountable therefor after the loan to LTFI.

Thus, petitioner Flores, as the executive director of LTFI, cannot also be held liable for
malversation of public funds in a contract of loan which transferred ownership of the funds to
LTFI making them private in character. Liwanag v. Court of Appeals[22] held:

. . . in a contract of loan once the money is received by the debtor, ownership over the same is
transferred. Being the owner, the borrower can dispose of it for whatever purpose he may
deem proper.

The Sandiganbayan erred when it stated that the intention of the parties was for the funds to
remain public, citing the MOA which allegedly provided, thus:

The Province shall have the right to have access to all resources and records of either LTF[I] or
BUILD and may conduct COA examination or audit on any or all matter affecting the loans or
assets covered by this agreement and funds from the Province of Tarlac.

A review of the MOA did not show the presence of such provision. But the cited provision is
contained in the TMOA, which was later entered into by the Province of Tarlac, LTFI and BUILD,
whereby LTFI transferred part of its obligation to BUILD.

What is controlling in the instant cases is that the parties entered into a contract of loan
for each release of NALGU funds. The second release on October 24, 1988included the subject
funds in controversy. By virtue of the contract of loan, ownership of the subject funds
was transferred to LTFI making them private in character, and therefore not subject of the
instant cases of malversation of public funds.
The Court notes that the obligation of LTFI to repay the NALGU Funds of P56,618,403 obtained
by it from the Province of Tarlac pursuant to the MOA was extinguished as follows:

(1) BUILD assumed LTFIs principal loan of P40 million;

(2) LTFI ceded, transferred and assigned to the Province of Tarlac all the rights and interests
of LTFI in certain loans including interests, certificate of time deposit and certain Juki
embroidery machines in the total amount of P16,618,403.

Second Issue: Whether or not the Sandiganbayan erred in holding that the MOA is void and did
not bind the Province of Tarlac on the ground that the MOA was entered into by petitioner
Ocampo without authority from the Sangguniang Panlalawigan in violation of the Local
Government Code of 1983?

In its Resolution dated January 6, 2003, the Sandiganbayan concedes that the transaction
between the Province of Tarlac through petitioner Ocampo and the LTFI was one of
loan. However, it stated that since Ocampo was not authorized by the Sangguniang
Panlalawigan to enter into the MOA as required by the Local Government Code of 1983, the
MOA did not bind the province nor did it give any benefits to the LTFI because a void contract
has no effect whatsoever.

Petitioner Ocampo alleges that he had ample authority to enter into the MOA for the following
reasons:

1) NALGU funds received by the Province of Tarlac came straight from the national
government and were intended for a specific purpose, that is, the implementation of various
livelihood projects in the Province of Tarlac, as evidenced by the exchange of correspondence
between him (petitioner Ocampo) and DBM Secretary Guillermo N. Carague.[23]
2) On July 15, 1988, the DBM released a revolving fund for the implementation of
various livelihood projects in the Province of Tarlac under Advice Allotment No. BCS-0183-88-
301.[24] In August 1988, he (petitioner Ocampo) informed the DBM that
the Province of Tarlac had designated LTFI as the implementing arm for its livelihood projects,
and requested authority to extend loans to LTFI, which request was approved by the DBM
Secretary.[25]

3) The DBMs approval of petitioner Ocampos request constituted the authority of

petitioner Ocampo to enter into the MOA with LTFI.

4) DBM also approved and concurred with the terms of the MOA as evidenced by the
DBM Secretarys signature on the MOA.

Petitioner Ocampo also asserts that Sec. 203(f) of the Local Government Code of 1983,[26] which
authorized the provincial governor to enter into business transactions on behalf of the
province, did not expressly require the concurrence of the provincial board unlike its
counterpart provision in the Local Government Code of 1991.[27]

Further, petitioner Ocampo states that in any case, the lack of authority of one who enters into
a contract in the name of another does not render the contract void under Art. 1409 of the Civil
Code,[28] as ruled by the Sandiganbayan, but only unenforceable under Art. 1403(1) of the Civil
Code. He points out that unenforceable contracts are susceptible of ratification, and in this
case, the Provincial Board of Tarlac can be deemed to have ratified the MOA when it passed the
following resolutions:

(1) Resolution No. 76, which confirmed and ratified the TMOA among the Province of
Tarlac, LTFI and the BUILD, whereby the liability of LTFI in favor of the Province of Tarlac in the
total amount of P40 million was transferred to and assumed by BUILD;[29] and

(2) Resolution No. 199, which authorized petitioner Ocampo to sign the Deed of
Assignment between the Province of Tarlac and LTFI, whereby LTFI assigned loans, sewing
machines and other assignable documents in favor of the Province of Tarlac to settle the
balance of its obligation in the amount of P16,618,403.00. [30]
The Court holds that since petitioner Ocampo was not duly authorized by the Sangguniang
Panlalawigan to enter into the MOA, the agreement is an unenforceable contract under Sec.
1403 of the Civil Code:

Art. 403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority
or legal representation, or who has acted beyond his powers; x x x.

Unenforceable contracts are governed by the following provisions of the Civil Code:

Art. 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in
Title X of this Book.
Art. 1317. No one may contract in the name of another without being authorized by the latter,
or unless he has by law or right to represent him.

A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it
is revoked by the other contracting party.[31]

The Court finds that the MOA has been impliedly ratified by the Sangguniang Panlalawigan as it
has not directly impugned the validity of the MOA despite knowledge of this
controversy. Implied ratification is also shown by the following acts:

1) The Sangguniang Panlalawigan subsequently recognized the transfer of

liabilities of LTFI in favor of the Province of Tarlac to BUILD in the amount of P40 million
contained in a TMOA.[32]
2) It authorized petitioner Ocampo to sign in behalf of the Province of Tarlac the
Deed of Assignment entered into by the Province of Tarlac and LTFI[33] which extinguished the
remaining loan obligations of LTFI obtained under the MOA.

WHEREFORE, the consolidated petitions are GRANTED. The Decision of the Sandiganbayan
promulgated on March 8, 2002 and its Resolution promulgated on January 6, 2003 are SET
ASIDE. Petitioner Mariano Un Ocampo III and petitioner Andres S. Flores are
hereby ACQUITTED of the crime of malversation of public funds in Crim. Case Nos. 16794 and
16795.

[G.R. No. 144516. February 11, 2004]

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COMMISSION ON
AUDIT, respondent.
DECISION
CARPIO, J.:
The Case
In this special civil action for certiorari,[1] the Development Bank of the Philippines (DBP) seeks
to set aside COA Decision No. 98-403[2] dated 6 October 1998 (COA Decision) and COA
Resolution No. 2000-212[3] dated 1 August 2000 issued by the Commission on Audit (COA). The
COA affirmed Audit Observation Memorandum (AOM) No. 93-2,[4] which disallowed in audit the
dividends distributed under the Special Loan Program (SLP) to the members of the DBP Gratuity
Plan.
Antecedent Facts
The DBP is a government financial institution with an original charter, Executive Order No.
81,[5] as amended by Republic Act No. 8523[6] (DBP Charter). The COA is a constitutional body
with the mandate to examine and audit all government instrumentalities and investment of
public funds.[7]
The COA Decision sets forth the undisputed facts of this case as follows:
xxx [O]n February 20, 1980, the Development Bank of the Philippines (DBP) Board of Governors
adopted Resolution No. 794 creating the DBP Gratuity Plan and authorizing the setting up of
a retirement fund to cover the benefits due to DBP retiring officials and employees under
Commonwealth Act No. 186, as amended. The Gratuity Plan was made effective on June 17,
1967 and covered all employees of the Bank as of May 31, 1977.
On February 26, 1980, a Trust Indenture was entered into by and between the DBP and the
Board of Trustees of the Gratuity Plan Fund, vesting in the latter the control and administration
of the Fund. The trustee, subsequently, appointed the DBP Trust Services Department (DBP-
TSD) as the investment manager thru an Investment Management Agreement, with the end in
view of making the income and principal of the Fund sufficient to meet the liabilities of DBP
under the Gratuity Plan.
In 1983, the Bank established a Special Loan Program availed thru the facilities of the DBP
Provident Fund and funded by placements from the Gratuity Plan Fund. This Special Loan
Program was adopted as part of the benefit program of the Bank to provide financial assistance
to qualified members to enhance and protect the value of their gratuity benefits because
Philippine retirement laws and the Gratuity Plan do not allow partial payment of retirement
benefits. The program was suspended in 1986 but was revived in 1991 thru DBP Board
Resolution No. 066 dated January 5, 1991.
Under the Special Loan Program, a prospective retiree is allowed the option to utilize in the
form of a loan a portion of his outstanding equity in the gratuity fund and to invest it in a
profitable investment or undertaking. The earnings of the investment shall then be applied to
pay for the interest due on the gratuity loan which was initially set at 9% per annum subject to
the minimum investment rate resulting from the updated actuarial study. The excess or balance
of the interest earnings shall then be distributed to the investor-members.
Pursuant to the investment scheme, DBP-TSD paid to the investor-members a total
of P11,626,414.25 representing the net earnings of the investments for the years 1991 and
1992. The payments were disallowed by the Auditor under Audit Observation Memorandum
No. 93-2 dated March 1, 1993, on the ground that the distribution of income of the Gratuity
Plan Fund (GPF) to future retirees of DBP is irregular and constituted the use of public funds for
private purposes which is specifically proscribed under Section 4 of P.D. 1445. [8]
AOM No. 93-2 did not question the authority of the Bank to set-up the [Gratuity Plan] Fund and
have it invested in the Trust Services Department of the Bank.[9] Apart from requiring the
recipients of the P11,626,414.25 to refund their dividends, the Auditor recommended that the
DBP record in its books as miscellaneous income the income of the Gratuity Plan Fund
(Fund).The Auditor reasoned that the Fund is still owned by the Bank, the Board of Trustees is a
mere administrator of the Fund in the same way that the Trust Services Department where the
fund was invested was a mere investor and neither can the employees, who have still an
inchoate interest [i]n the Fund be considered as rightful owner of the Fund. [10]
In a letter dated 29 July 1996,[11] former DBP Chairman Alfredo C. Antonio requested then COA
Chairman Celso D. Gangan to reconsider AOM No. 93-2. Chairman Antonio alleged that the
express trust created for the benefit of qualified DBP employees under the Trust
Agreement[12] (Agreement) dated 26 February 1980 gave the Fund a separate legal
personality. The Agreement transferred legal title over the Fund to the Board of Trustees and
all earnings of the Fund accrue only to the Fund. Thus, Chairman Antonio contended that the
income of the Fund is not the income of DBP.
Chairman Antonio also asked COA to lift the disallowance of the P11,626,414.25 distributed as
dividends under the SLP on the ground that the latter was simply a normal loan transaction. He
compared the SLP to loans granted by other gratuity and retirement funds, like the GSIS, SSS
and DBP Provident Fund.
The Ruling of the Commission on Audit
On 6 October 1998, the COA en banc affirmed AOM No. 93-2, as follows:
The Gratuity Plan Fund is supposed to be accorded separate personality under the
administration of the Board of Trustees but that concept has been effectively eliminated when
the Special Loan Program was adopted. xxx
The Special Loan Program earns for the GPF an interest of 9% per annum, subject to adjustment
after actuarial valuation. The investment scheme managed by the TSD accumulated more than
that as evidenced by the payment of P4,568,971.84 in 1991 and P7,057,442,41 in 1992, to the
member-borrowers. In effect, the program is grossly disadvantageous to the government
because it deprived the GPF of higher investment earnings by the unwarranted entanglement
of its resources under the loan program in the guise of giving financial assistance to the availing
employees. xxx
Retirement benefits may only be availed of upon retirement. It can only be demanded and
enjoyed when the employee shall have met the last requisite, that is, actual retirement under
the Gratuity Plan. During employment, the prospective retiree shall only have an inchoate right
over the benefits. There can be no partial payment or enjoyment of the benefits, in whatever
guise, before actual retirement. xxx
PREMISES CONSIDERED, the instant request for reconsideration of the disallowance amounting
to P11,626,414.25 has to be, as it is hereby, denied.[13]
In its Resolution of 1 August 2000, the COA also denied DBPs second motion for
reconsideration. Citing the Courts ruling in Conte v. COA,[14] the COA concluded that the SLP
was actually a supplementary retirement benefit in the guise of financial assistance, thus:
At any rate, the Special Loan Program is not just an ordinary and regular transaction of the
Gratuity Plan Fund, as the Bank innocently represents. xxx It is a systematic investment mix
conveniently implemented in a special loan program with the least participation of the
beneficiaries, by merely filing an application and then wait for the distribution of net
earnings. The real objective, of course, is to give financial assistance to augment the value of
the gratuity benefits, and this has the same effect as the proscribed supplementary
pension/retirement plan under Section 28 (b) of C(ommonwealth) A(ct) 186.
This Commission may now draw authority from the case of Conte, et al. v. Commission on
Audit (264 SCRA 19 [1996]) where the Supreme Court declared that financial assistance granted
to retiring employees constitute supplementary retirement or pension benefits. It was there
stated:
xxx Said Sec. 28 (b) as amended by R.A. 4968 in no uncertain terms bars the creation of any
insurance or retirement plan other than the GSIS for government officers and employees, in
order to prevent the undue and iniquitous proliferation of such plans. It is beyond cavil that
Res. 56 contravenes the said provision of law and is therefore, invalid, void and of no effect. To
ignore this and rule otherwise would be tantamount to permitting every other government
office or agency to put up its own supplementary retirement benefit plan under the guise of
such financial assistance.[15]
Hence, the instant petition filed by DBP.
The Issues
The DBP invokes justice and equity on behalf of its employees because of prevailing economic
conditions. The DBP reiterates that the income of the Fund should be treated and recorded as
separate from the income of DBP itself, and charges that COA committed grave abuse of
discretion:
1. IN CONCLUDING THAT THE ADOPTION OF THE SPECIAL LOAN PROGRAM CONSTITUTES A
CIRCUMVENTION OF PHILIPPINE RETIREMENT LAWS;
2. IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM IS GROSSLY DISADVANTAGEOUS TO THE
GOVERNMENT;
3. IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM CONSTITUTES A SUPPLEMENTARY
RETIREMENT BENEFIT.[16]
The Office of the Solicitor General (OSG), arguing on behalf of the COA, questions the standing
of the DBP to file the instant petition. The OSG claims that the trustees of the Fund or the DBP
employees themselves should pursue this certiorari proceeding since they would be the ones to
return the dividends and not DBP.
The central issues for resolution are: (1) whether DBP has the requisite standing to file the
instant petition for certiorari; (2) whether the income of the Fund is income of DBP; and (3)
whether the distribution of dividends under the SLP is valid.
The Ruling of the Court
The petition is partly meritorious.
The standing of DBP to file this petition for certiorari
As DBP correctly argued, the COA en banc implicitly recognized DBPs standing when it ruled on
DBPs request for reconsideration from AOM No. 93-2 and motion for reconsideration from the
Decision of 6 October 1998. The supposed lack of standing of the DBP was not even an issue in
the COA Decision or in the Resolution of 1 August 2000.
The OSG nevertheless contends that the DBP cannot question the decisions of the COA en
banc since DBP is a government instrumentality. Citing Section 2, Article IX-D of the
Constitution,[17] the OSG argued that:
Petitioner may ask the lifting of the disallowance by COA, since COA had not yet made a
definitive and final ruling on the matter in issue. But after COA denied with finality the motion
for reconsideration of petitioner, petitioner, being a government instrumentality, should accept
COAs ruling and leave the matter of questioning COAs decision with the concerned investor-
members.[18]
These arguments do not persuade us.
Section 2, Article IX-D of the Constitution does not bar government instrumentalities from
questioning decisions of the COA. Government agencies and government-owned and controlled
corporations have long resorted to petitions for certiorari to question rulings of the
COA.[19] These government entities filed their petitions with this Court pursuant to Section 7,
Article IX of the Constitution, which mandates that aggrieved parties may bring decisions of the
COA to the Court on certiorari.[20] Likewise, the Government Auditing Code expressly provides
that a government agency aggrieved by a COA decision, order or ruling may raise the
controversy to the Supreme Court on certiorari in the manner provided by law and the Rules of
Court.[21] Rule 64 of the Rules of Court now embodies this procedure, to wit:
SEC 2. Mode of review. A judgment or final order or resolution of the Commission on Elections
and the Commission on Audit may be brought by the aggrieved party to the Supreme Court
on certiorari under Rule 65, except as hereinafter provided.
The novel theory advanced by the OSG would necessarily require persons not parties to the
present case the DBP employees who are members of the Plan or the trustees of the Fund to
avail of certiorari under Rule 65. The petition for certiorari under Rule 65, however, is not
available to any person who feels injured by the decision of a tribunal, board or officer
exercising judicial or quasi-judicial functions. The person aggrieved under Section 1 of Rule 65
who can avail of the special civil action of certiorari pertains only to one who was a party in the
proceedings before the court a quo,[22] or in this case, before the COA. To hold otherwise would
open the courts to numerous and endless litigations.[23] Since DBP was the sole party in the
proceedings before the COA, DBP is the proper party to avail of the remedy of certiorari.
The real party in interest who stands to benefit or suffer from the judgment in the suit must
prosecute or defend an action.[24] We have held that interest means material interest, an
interest in issue that the decision will affect, as distinguished from mere interest in the question
involved, or a mere incidental interest.[25]
As a party to the Agreement and a trustor of the Fund, DBP has a material interest in the
implementation of the Agreement, and in the operation of the Gratuity Plan and the Fund as
prescribed in the Agreement. The DBP also possesses a real interest in upholding the legitimacy
of the policies and programs approved by its Board of Directors for the benefit of DBP
employees. This includes the SLP and its implementing rules, which the DBP Board of Directors
confirmed.
The income of the Gratuity Plan Fund
The COA alleges that DBP is the actual owner of the Fund and its income, on the following
grounds: (1) DBP made the contributions to the Fund; (2) the trustees of the Fund are merely
administrators; and (3) DBP employees only have an inchoate right to the Fund.
The DBP counters that the Fund is the subject of a trust, and that the Agreement transferred
legal title over the Fund to the trustees. The income of the Fund does not accrue to DBP. Thus,
such income should not be recorded in DBPs books of account.[26]
A trust is a fiduciary relationship with respect to property which involves the existence of
equitable duties imposed upon the holder of the title to the property to deal with it for the
benefit of another.[27] A trust is either express or implied. Express trusts are those which the
direct and positive acts of the parties create, by some writing or deed, or will, or by words
evincing an intention to create a trust.[28]
In the present case, the DBP Board of Governors (now Board of Directors) Resolution No. 794
and the Agreement executed by former DBP Chairman Rafael Sison and the trustees of the Plan
created an express trust, specifically, an employees trust. An employees trust is a trust
maintained by an employer to provide retirement, pension or other benefits to its
employees.[29] It is a separate taxable entity[30] established for the exclusive benefit of the
employees.[31]
Resolution No. 794 shows that DBP intended to establish a trust fund to cover the retirement
benefits of certain employees under Republic Act No. 1616[32] (RA 1616). The principal and
income of the Fund would be separate and distinct from the funds of DBP. We quote the salient
portions of Resolution No. 794, as follows:
2. Trust Agreement designed for in-house trustees of three (3) to be appointed by the Board of
Governors and vested with control and administration of the funds appropriated annually by
the Board to be invested in selective investments so that the income and principal of said
contributions would be sufficient to meet the required payments of benefits as officials and
employees of the Bank retire under the Gratuity Plan; xxx
The proposed funding of the gratuity plan has decided advantages on the part of the Bank over
the present procedure, where the Bank provides payment only when an employee retires or on
pay as you go basis:
1. It is a definite written program, permanent and continuing whereby the Bank provides
contributions to a separate trust fund, which shall be exclusively used to meet its liabilities to
retiring officials and employees; and
2. Since the gratuity plan will be tax qualified under the National Internal Revenue Code and RA
4917, the Banks periodic contributions thereto shall be deductible for tax purposes and the
earnings therefrom tax free.[33] (Emphasis supplied)
In a trust, one person has an equitable ownership in the property while another person owns
the legal title to such property, the equitable ownership of the former entitling him to the
performance of certain duties and the exercise of certain powers by the latter.[34] A person who
establishes a trust is the trustor. One in whom confidence is reposed as regards property for
the benefit of another is the trustee. The person for whose benefit the trust is created is the
beneficiary.[35]
In the present case, DBP, as the trustor, vested in the trustees of the Fund legal title over the
Fund as well as control over the investment of the money and assets of the Fund. The powers
and duties granted to the trustees of the Fund under the Agreement were plainly more than
just administrative, to wit:
1. The BANK hereby vests the control and administration of the Fund in the TRUSTEES for the
accomplishment of the purposes for which said Fund is intended in defraying the benefits of
the PLAN in accordance with its provisions, and the TRUSTEES hereby accept the trust xxx
2. The TRUSTEES shall receive and hold legal title to the money and/or property comprising
the Fund, and shall hold the same in trust for its beneficiaries, in accordance with, and for the
uses and purposes stated in the provisions of the PLAN.
3. Without in any sense limiting the general powers of management and administration given
to TRUSTEES by our laws and as supplementary thereto, the TRUSTEES shall manage,
administer, and maintain the Fund with full power and authority:
xxx
b. To invest and reinvest at any time all or any part of the Fund in any real estate (situated
within the Philippines), housing project, stocks, bonds, mortgages, notes, other securities or
property which the said TRUSTEES may deem safe and proper, and to collect and receive all
income and profits existing therefrom;
c. To keep and maintain accurate books of account and/or records of the Fund xxx.
d. To pay all costs, expenses, and charges incurred in connection with the administration,
preservation, maintenance and protection of the Fund xxx to employ or appoint such agents or
employees xxx.
e. To promulgate, from time to time, such rules not inconsistent with the conditions of this
Agreement xxx.
f. To do all acts which, in their judgment, are needful or desirable for the proper and
advantageous control and management of the Fund xxx.[36] (Emphasis supplied)
Clearly, the trustees received and collected any income and profit derived from the Fund, and
they maintained separate books of account for this purpose. The principal and income of the
Fund will not revert to DBP even if the trust is subsequently modified or terminated. The
Agreement states that the principal and income must be used to satisfy all of the liabilities to
the beneficiary officials and employees under the Gratuity Plan, as follows:
5. The BANK reserves the right at any time and from time to time (1) to modify or amend in
whole or in part by written directions to the TRUSTEES, any and all of the provisions of this
Trust Agreement, or (2) to terminate this Trust Agreement upon thirty (30) days prior notice in
writing to the TRUSTEES; provided, however, that no modification or amendment which affects
the rights, duties, or responsibilities of the TRUSTEES may be made without the TRUSTEES
consent; and provided, that such termination, modification, or amendment prior to the
satisfaction of all liabilities with respect to eligible employees and their beneficiaries, does
not permit any part of the corpus or income of the Fund to be used for, or diverted to,
purposes other than for the exclusive benefit of eligible employees and workers as provided
for in the PLAN. In the event of termination of this Trust Agreement, all cash, securities, and
other property then constituting the Fund less any amounts constituting accrued benefits to
the eligible employees, charges and expenses payable from the Fund, shall be paid over or
delivered by the TRUSTEES to the members in proportion to their accrued
benefits.[37] (Emphasis supplied)
The resumption of the SLP did not eliminate the trust or terminate the transfer of legal title to
the Funds trustees. The records show that the Funds Board of Trustees approved the SLP upon
the request of the DBP Career Officials Association.[38] The DBP Board of Directors only
confirmed the approval of the SLP by the Funds trustees.
The beneficiaries or cestui que trust of the Fund are the DBP officials and employees who will
retire under Commonwealth Act No. 186[39] (CA 186), as amended by RA 1616. RA 1616
requires the employer agency or government instrumentality to pay for the retirement gratuity
of its employees who rendered service for the required number of years.[40] The Government
Service Insurance System Act of 1997[41] still allows retirement under RA 1616 for certain
employees.
As COA correctly observed, the right of the employees to claim their gratuities from the Fund is
still inchoate. RA 1616 does not allow employees to receive their gratuities until they
retire. However, this does not invalidate the trust created by DBP or the concomitant transfer
of legal title to the trustees. As far back as in Government v. Abadilla,[42] the Court held that it
is not always necessary that the cestui que trust should be named, or even be in esse at the
time the trust is created in his favor. It is enough that the beneficiaries are sufficiently certain or
identifiable.[43]
In this case, the GSIS Act of 1997 extended the option to retire under RA 1616 only to
employees who had entered government service before 1 June 1977.[44] The DBP employees
who were in the service before this date are easily identifiable. As of the time DBP filed the
instant petition, DBP estimated that 530 of its employees could still retire under RA 1616. At
least 60 DBP employees had already received their gratuities under the Fund.[45]
The Agreement indisputably transferred legal title over the income and properties of the Fund
to the Funds trustees. Thus, COAs directive to record the income of the Fund in DBPs books of
account as the miscellaneous income of DBP constitutes grave abuse of discretion. The income
of the Fund does not form part of the revenues or profits of DBP, and DBP may not use such
income for its own benefit. The principal and income of the Fund together constitute the res or
subject matter of the trust. The Agreement established the Fund precisely so that it would
eventually be sufficient to pay for the retirement benefits of DBP employees under RA 1616
without additional outlay from DBP. COA itself acknowledged the authority of DBP to set up the
Fund. However, COAs subsequent directive would divest the Fund of income, and defeat the
purpose for the Funds creation.
The validity of the Special Loan Program
and the disallowance of P11,626,414.25
In disallowing the P11,626,414.25 distributed as dividends under the SLP, the COA relied
primarily on Republic Act No. 4968 (RA 4968) which took effect on 17 June 1967. RA 4968
added the following paragraph to Section 28 of CA 186, thus:
(b) Hereafter no insurance or retirement plan for officers or employees shall be created by any
employer. All supplementary retirement or pension plans heretofore in force in any
government office, agency, or instrumentality or corporation owned or controlled by the
government, are hereby declared inoperative or abolished: Provided, That the rights of those
who are already eligible to retire thereunder shall not be affected.
Even assuming, however, that the SLP constitutes a supplementary retirement plan, RA 4968
does not apply to the case at bar. The DBP Charter, which took effect on 14 February 1986,
expressly authorizes supplementary retirement plans adopted by and effective in DBP, thus:
SEC. 34. Separation Benefits. All those who shall retire from the service or are separated
therefrom on account of the reorganization of the Bank under the provisions of this
Charter shall be entitled to all gratuities and benefits provided for under existing laws and/or
supplementary retirement plans adopted by and effective in the Bank: Provided, that any
separation benefits and incentives which may be granted by the Bank subsequent to June 1,
1986, which may be in addition to those provided under existing laws and previous retirement
programs of the Bank prior to the said date, for those personnel referred to in this section shall
be funded by the National Government; Provided, further, that, any supplementary retirement
plan adopted by the Bank after the effectivity of this Chapter shall require the prior approval of
the Minister of Finance.
xxx.
SEC. 37. Repealing Clause. All acts, executive orders, administrative orders, proclamations, rules
and regulations or parts thereof inconsistent with any of the provisions of this charter are
hereby repealed or modified accordingly.[46] (Emphasis supplied)
Being a special and later law, the DBP Charter[47] prevails over RA 4968. The DBP originally
adopted the SLP in 1983. The Court cannot strike down the SLP now based on RA 4968 in view
of the subsequent DBP Charter authorizing the SLP.
Nevertheless, the Court upholds the COAs disallowance of the P11,626,414.25 in dividends
distributed under the SLP.
According to DBP Board Resolution No. 0036 dated 25 January 1991, the SLP allows a
prospective retiree to utilize in the form of a loan, a portion of their outstanding equity in the
Gratuity Plan Fund and to invest [the] proceeds in a profitable investment or
undertaking.[48] The basis of the loanable amount was an employees gratuity fund
credit,[49] that is to say, what an employee would receive if he retired at the time he availed of
the loan.
In his letter dated 26 October 1983 proposing the confirmation of the SLP, then DBP Chairman
Cesar B. Zalamea stated that:
The primary objective of this proposal therefore is to counteract the unavoidable decrease in
the value of the said retirement benefits through the following scheme:
I. To allow a prospective retiree the option to utilize in the form of a loan, a portion of his
standing equity in the Gratuity Fund and to invest it in a profitable investment or
undertaking. The income or appreciation in value will be for his own account and should
provide him the desired hedge against inflation or erosion in the value of the peso. This is being
proposed since Philippine retirement laws and the Gratuity Plan do not allow partial
payment of retirement benefits, even the portion already earned, ahead of actual
retirement.[50] (Emphasis supplied)
As Chairman Zalamea himself noted, neither the Gratuity Plan nor our laws on retirement allow
the partial payment of retirement benefits ahead of actual retirement. It appears that DBP
sought to circumvent these restrictions through the SLP, which released a portion of an
employees retirement benefits to him in the form of a loan. Certainly, the DBP did this for
laudable reasons, to address the concerns of DBP employees on the devaluation of their
retirement benefits. The remaining question is whether RA 1616 and the Gratuity Plan allow
this scheme.
We rule that it is not allowed.
The right to retirement benefits accrues only upon certain prerequisites. First, the conditions
imposed by the applicable law in this case, RA 1616 must be fulfilled.[51] Second, there must be
actual retirement.[52] Retirement means there is a bilateral act of the parties, a voluntary
agreement between the employer and the employees whereby the latter after reaching a
certain age agrees and/or consents to severe his employment with the former.[53]
Severance of employment is a condition sine qua non for the release of retirement benefits.
Retirement benefits are not meant to recompense employees who are still in the employ of the
government. That is the function of salaries and other emoluments.[54] Retirement benefits are
in the nature of a reward granted by the State to a government employee who has given the
best years of his life to the service of his country.[55]
The Gratuity Plan likewise provides that the gratuity benefit of a qualified DBP employee shall
only be released upon retirement under th(e) Plan.[56] As the COA correctly pointed out, this
means that retirement benefits can only be demanded and enjoyed when the employee shall
have met the last requisite, that is, actual retirement under the Gratuity Plan.[57]
There was thus no basis for the loans granted to DBP employees under the SLP. The rights of
the recipient DBP employees to their retirement gratuities were still inchoate, if not a mere
expectancy, when they availed of the SLP. No portion of their retirement benefits could be
considered as actually earned or outstanding before retirement. Prior to retirement, an
employee who has served the requisite number of years is only eligible for, but not yet entitled
to, retirement benefits.
The DBP contends that the SLP is merely a normal loan transaction, akin to the loans granted by
the GSIS, SSS and the DBP Provident Fund.
The records show otherwise.
In a loan transaction or mutuum, the borrower or debtor acquires ownership of the amount
borrowed.[58] As the owner, the debtor is then free to dispose of or to utilize the sum he
loaned,[59] subject to the condition that he should later return the amount with the stipulated
interest to the creditor.[60]
In contrast, the amount borrowed by a qualified employee under the SLP was not even released
to him. The implementing rules of the SLP state that:
The loan shall be available strictly for the purpose of investment in the following investment
instruments:
a. 182 or 364-day term Time deposits with DBP
b. 182 or 364-day T-bills /CB Bills
c. 182 or 364-day term DBP Blue Chip Fund
The investment shall be registered in the name of DBP-TSD in trust for availee-investor for his
sole risk and account. Choice of eligible terms shall be at the option of availee-
investor. Investments shall be commingled by TSD and Participation Certificates shall be issued
to each availee-investor.
xxx
IV. LOANABLE TERMS
xxx
e. Allowable Investment Instruments Time Deposit DBP T-Bills/CB Bills and DBP Blue Chip
Fund. TSD shall purchase new securities and/or allocate existing securities portfolio of
GPF depending on liquidity position of the Fund xxx.
xxx
g. Security The loan shall be secured by GS, Certificate of Time Deposit and/or BCF Certificate of
Participation which shall be registered in the name of DBP-TSD in trust for name of availee-
investor and shall be surrendered to the TSD for safekeeping.[61] (Emphasis supplied)
In the present case, the Fund allowed the debtor-employee to borrow a portion of his gratuity
fund credit solely for the purpose of investing it in certain instruments specified by DBP.The
debtor-employee could not dispose of or utilize the loan in any other way. These instruments
were, incidentally, some of the same securities where the Fund placed its investments. At the
same time the Fund obligated the debtor-employee to assign immediately his loan to DBP-TSD
so that the amount could be commingled with the loans of other employees. The DBP-TSD the
same department which handled and had custody of the Funds accounts then purchased or re-
allocated existing securities in the portfolio of the Fund to correspond to the employees loans.
Simply put, the amount ostensibly loaned from the Fund stayed in the Fund, and remained
under the control and custody of the DBP-TSD. The debtor-employee never had any control or
custody over the amount he supposedly borrowed. However, DBP-TSD listed new or existing
investments of the Fund corresponding to the loan in the name of the debtor-employee, so that
the latter could collect the interest earned from the investments.
In sum, the SLP enabled certain DBP employees to utilize and even earn from their retirement
gratuities even before they retired. This constitutes a partial release of their retirement
benefits, which is contrary to RA 1616 and the Gratuity Plan. As we have discussed, the latter
authorizes the release of gratuities from the earnings and principal of the Fund only upon
retirement.
The Gratuity Plan will lose its tax-exempt status if the retirement benefits are released prior to
the retirement of the employees. The trust funds of employees other than those of private
employers are qualified for certain tax exemptions pursuant to Section 60(B) formerly Section
53(b) of the National Internal Revenue Code.[62] Section 60(B) provides:
Section 60. Imposition of Tax.
(A) Application of Tax. The tax imposed by this Title upon individuals shall apply to the income
of estates or of any kind of property held in trust, including:
xxx
(B) Exception. The tax imposed by this Title shall not apply to employees trust which forms part
of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of
his employees (1) if contributions are made to the trust by such employer, or employees, or
both for the purpose of distributing to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it
is impossible, at any time prior to the satisfaction of all liabilities with respect to employees
under the trust, for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his
employees: xxx (Emphasis supplied)
The Gratuity Plan provides that the gratuity benefits of a qualified DBP employee shall be
released only upon retirement under th(e) Plan. If the earnings and principal of the Fund are
distributed to DBP employees prior to their retirement, the Gratuity Plan will no longer qualify
for exemption under Section 60(B). To recall, DBP Resolution No. 794 creating the Gratuity Plan
expressly provides that since the gratuity plan will be tax qualified under the National Internal
Revenue Code xxx, the Banks periodic contributions thereto shall be deductible for tax
purposes and the earnings therefrom tax free. If DBP insists that its employees may receive
the P11,626,414.25 dividends, the necessary consequence will be the non-qualification of the
Gratuity Plan as a tax-exempt plan.
Finally, DBP invokes justice and equity on behalf of its affected employees. Equity cannot
supplant or contravene the law.[63] Further, as evidenced by the letter of former DBP Chairman
Zalamea, the DBP Board of Directors was well aware of the proscription against the partial
release of retirement benefits when it confirmed the SLP. If DBP wants to enhance and protect
the value of xxx (the) gratuity benefits of its employees, DBP must do so by investing the money
of the Fund in the proper and sound investments, and not by circumventing restrictions
imposed by law and the Gratuity Plan itself.
We nevertheless urge the DBP and COA to provide equitable terms and a sufficient period
within which the affected DBP employees may refund the dividends they received under the
SLP. Since most of the DBP employees were eligible to retire within a few years when they
availed of the SLP, the refunds may be deducted from their retirement benefits, at least for
those who have not received their retirement benefits.
WHEREFORE, COA Decision No. 98-403 dated 6 October 1998 and COA Resolution No. 2000-
212 dated 1 August 2000 are AFFIRMED with MODIFICATION. The income of the Gratuity Plan
Fund, held in trust for the benefit of DBP employees eligible to retire under RA 1616, should not
be recorded in the books of account of DBP as the income of the latter.
SO ORDERED.

[G.R. No. 147758. June 26, 2002]

SPOUSES ARSENIO R. REYES and NIEVES S. REYES, petitioners, vs. COURT OF APPEALS and
PABLO V. REYES, respondents.
DECISION
BELLOSILLO, J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals promulgated
on 14 July 2000 in CA-G.R. CV No. 51437 and its Resolution[2] of 2 April 2001 denying
reconsideration.
This petition arose from a civil case for collection of a sum of money with preliminary
attachment filed by respondent Pablo V. Reyes against his first cousin petitioner Arsenio R.
Reyes and spouse Nieves S. Reyes. According to private respondent, petitioner-spouses
borrowed from him P600,000.00 with interest at five percent (5%) per month, which
totalled P1,726,250.00 at the time of filing of the Complaint. The loan was to be used
supposedly to buy a lot in Paraaque. It was evidenced by an acknowledgment receipt[3] dated
15 July 1990 signed by the petitioner-spouses Arsenio R. Reyes and Nieves S. Reyes and witness
Romeo Rueda, which read:
This is to acknowledge receipt (of) the sum of Five hundred thousand pesos (P500,000.00) from
(?) broken down as follows:
3/16/90 -- P300,000.00 7/19/90 chk.168514
7/14/90 -- P200,000.00 + P100,000
Total amt. P500,000.00, with corresponding interest at five percent per month (5%) due and
payable every 15th day of the month for a period of six months.
Petitioners paid the interests on the loan with the following BPI Family Bank checks[4] drawn
against their personal account:
Check No. 147749 16 April 1990 P 15,000.00
Check No. 147827 17 May 1990 P 9,000.00
Check No. 147877 15 June 1990 P 9,000.00
Check No. 147862 13 July 1990 P 15,000.00
Check No. 159586 3 May 1991 P 36,000.00
TOTAL P 84,000.00
Petitioners also turned over to private respondent their Nissan pickup truck worth P400,000.00
in partial payment of the loan, and on 30 January 1993 petitioner Arsenio executed a deed of
absolute sale[5] over the vehicle in favor of respondent. Respondent's wife Araceli Reyes issued
an acknowledgment receipt[6] therefor. Subsequently, petitioners failed to make any further
payments despite written demand for payment on 24 August 1993.[7]
In their Answer petitioners admitted their loan from respondent but averred that there was a
novation so that the amount loaned was actually converted into respondent's contribution to a
partnership formed between them on 23 March 1990.[8] According to petitioner Nieves,
sometime in 1989 respondent Pablo went to their house and proposed to petitioner Arsenio
the formation of a partnership to develop the property petitioners planned to buy. He agreed
and on 23 March 1990 they executed their Articles of Partnership of Feliz Casa Realty
Development, Ltd. Each partner was to contribute a capital of P2,000,000.00. Arsenio's
contribution was his P1,000,000.00 investment with the owner of the real property to be
purchased. Respondent Pablo contributed only P500,000.00.[9]
While the partnership existed, respondent received a total amount of P84,000.00 in BPI Family
Bank checks as advances from the partnership funds.[10] In October 1990 respondent wanted to
withdraw from the partnership and asked for the return of his investment. Petitioners agreed
to convert his contribution into a non-interest-bearing loan of petitioners. In view of the
conversion, the advances to respondent through the BPI Family Bank checks would be
deducted from his investment. Petitioners were also forced to turn over their Nissan pickup
truck to respondent to pay the obligation.[11]
Prior to the conversion of respondent's contribution into a loan, respondent approached
petitioner Nieves and asked her to write an acknowledgment receipt dated 15 July 1990 for the
sum of P500,000.00.According to respondent, the receipt would be shown only to his family to
assure them that he had invested the money with petitioners. Petitioner Nieves agreed and
respondent dictated the words of the receipt to her. The five percent (5%) interest in the
receipt would reflect the amount respondent would receive in the profits of the
investment. Later, respondent intercalated the date "7/19/90" and the figures "P100,000.00"
and "chk. 168514," to reflect the check he issued to petitioner Nieves. Two (2) days later,
respondent retrieved the amount of P100,000.00 in cash from Nieves.[12]
On 30 August 1995 the trial court decided in favor of respondent Pablo V. Reyes. It found that
petitioners had incurred an obligation in his favor in the amount of P600,000.00 evidenced by
the promissory note dated 15 July 1990. The evidence presented by petitioners failed to
convince the trial court that the loan obligation was novated into a contribution to the
partnership. Petitioners were ordered to pay respondent the amount of P1,472,850.00 with
legal interest from the date of filing of the complaint, P15,000.00 as attorney's fees
plus P600.00 as appearance fee for every hearing of the case, plus costs of suit.[13]
The Court of Appeals likewise found petitioners liable and held that they secured a loan
of P500,000.00 from respondent which was delivered to them on two (2) separate occasions as
reflected in their acknowledgment receipt: P300,000.00 on 16 March 1990 and P200,000.00 on
14 July 1990. On 15 July 1990 petitioner Nieves wrote an acknowledgment receipt of the same
date at respondent Pablo's request.
When the partnership was formed on 23 March 1990 the loan of P300,000.00 became part of
respondent's capital contribution to the partnership. However, the amount remained a loan as
evidenced by the acknowledgment receipt and the bank checks received from petitioners. The
receipt was executed months after the partnership was formed and was clearly valid and
binding. The amounts of the checks respondent received on 16 April 1990 and 13 July 1990,
each for P15,000.00, were equivalent to the five percent (5%) interest of the loan
of P300,000.00. The amounts received on 17 May 1990 and 15 June 1990, each for P9,000.00,
were substantial payments for the interest. At the time these payments were made, the
interest for the loan of P200,000.00 was not yet due. The appellate court further ruled that the
interest of five percent (5%) per month was not usurious as it was freely agreed upon by the
parties and expressly stipulated in writing.[14]
Hence, the Court of Appeals ordered petitioners to pay respondent P500,000.00 with interest
at five percent (5%) per month from 15 July 1990. The amount of P400,000.00 was to be
deducted from the principal loan beginning 5 February 1993, less the interest payments in the
total amount of P69,000.00 when final payment of the total amount would be made.[15]
In this petition for review, petitioners allege that there was a grave misapprehension of facts on
the part of the appellate court because it failed to consider the following established facts and
events and relate these events to the dates when they occurred: (a) That as of 23 March 1990,
a partnership was forged between the parties; (b) That the P500,000.00 given by respondent to
petitioners was originally his capital contribution to the partnership; (c) That the receipt dated
15 July 1990 is a simulated document and therefore should not be given any evidentiary weight
and should be declared invalid and legally non-existent; (d) That the checks issued from 16 April
1990 to 13 July 1990 in the total amount of P48,000.00 should be considered as advances from
petitioners to respondent during the time the partnership was existing and there was no
conversion yet of respondent's contribution of P500,000.00 into a loan obligation of
petitioners; (e) That respondent's initial capital contribution of P500,000.00 was converted into
a non-interest-bearing loan only in October 1990; (f) Hence, the check for P36,000.00 issued to
respondent by petitioners on 3 May 1991 was plainly in payment of subject loan agreed on by
the parties after respondent's withdrawal of his mentioned investment in the partnership in
October 1990; (g) That during the existence of the partnership from 23 March 1990 to
September 1990, there was definitely no loan to speak of; and, (h) That the total amount of the
payments made by petitioners to respondent as of the date of filing of the complaint
is P484,000.00 and therefore the unpaid balance is only P16,000.00.[16]
In opposing the petition, respondent states that it raises questions of fact which are not
allowed in a petition for review on certiorari. The findings of fact of the Court of Appeals are
final and conclusive and cannot be reviewed by the Court. Petitioners are changing their theory
of defense this late in the proceedings because they have alleged different defenses before the
courts below.
Petitioners alleged in their Answer that there was originally a loan of P600,000.00 which was
later converted into respondent's contribution to the partnership. But in their appeal to the
appellate court and in the present petition, they contend that the amount involved is
only P500,000.00 which was respondent's contribution to the partnership, later converted into
a non-interest-bearing loan. Further, petitioners are precluded from arguing that the
promissory note does not reflect the true intent of the parties since this issue was not raised in
their answer but only for the first time on appeal to the Court of Appeals.[17]
While it is true that petitioners failed to raise the question of the genuineness of the
acknowledgment receipt, respondent also failed to timely object to the parol evidence
consisting of the testimony of petitioner Nieves during the trial to prove that the
acknowledgment receipt was a simulated document. In fact, respondent participated in the trial
and even cross-examined petitioner Nieves on this point.
Under the Rules of Court, any objection to the admissibility of evidence should be made at the
time such evidence is offered or soon thereafter as the objection to its admissibility becomes
apparent,[18]otherwise the objection will be considered waived and such evidence will form part
of the records of the case as competent and admissible.[19] Failure to object to the parol
evidence constitutes a waiver to its admissibility.[20] By his cross-examination, respondent has
waived his right to object to parol evidence.[21] He cannot now contend that this issue was not
raised before the trial court as this was threshed out during the trial.
The general rule is that only questions of law may be raised in a petition for review
on certiorari. The appellate jurisdiction of this Court in cases brought to it from the Court of
Appeals is limited to reviewing and revising the errors of law incurred by the latter, the findings
of fact of the Court of Appeals being final as to the former. Its only power will be to determine
if the legal conclusions drawn from the findings of fact are correct. Barring a showing that the
findings complained of are totally devoid of support in the record, such findings must stand, for
the Court is not expected or required to examine or refute the oral and documentary evidence
submitted by the parties.[22] This is the general rule, which in the instant case, we are not
inclined to disturb.
In civil cases, the party having the burden of proof must establish his case by preponderance of
evidence,[23] or that evidence which is of greater weight or is more convincing than that which is
in opposition to it. It does not mean absolute truth; rather, it means that the testimony of one
side is more believable than the other side, and that the probability of truth is on one side than
on the other.[24] In the case at bar, respondent has successfully overcome the burden of proof.
The Court of Appeals relied on the acknowledgment receipt to hold petitioners liable for the
amount of money loaned, finding it to be a valid and binding promissory note. We agree. It is
valid and binding between the parties who executed it, as a document evidencing the loan
agreement they had entered into. Petitioners' defense that it is a simulated document which
does not reflect the true intent and agreement of the parties is not persuasive. Petitioners'
testimonial evidence cannot stand against the acknowledgment receipt presented by
respondent.
In their Answer in the court below, petitioners alleged that they first obtained a loan and this
was subsequently converted to respondent's contribution to the partnership.[25] Nieves'
testimony that the amount was originally respondent's partnership contribution which was
later converted into a loan contradicts this. It has been ruled that an allegation in a pleading is
not evidence but is a declaration that has to be proved by evidence.[26] If evidence contrary to
the allegation is presented, such evidence controls, not the allegation in the pleading itself,
although admittedly it may dent the credibility of the witness,[27] as in this case. Variance
between petitioners' allegations and Nieves' testimony convinced the trial court that she was
an unreliable witness. It was precisely for this reason that the trial court rejected her testimony
on this point and resolved that the evidence did not support petitioners' allegation that there
was a novation of the loan.[28] The trial court concluded that the money in question was the
object of a loan between the parties and this loan was never the subject of any novation.
The Court of Appeals likewise found that there was no novation, which is defined as the
extinguishment of an obligation by a subsequent one which terminates it, either by changing its
object or principal conditions, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.[29] For novation to take place, the
following requisites must concur: (a) there must be a previous valid obligation; (b) there must
be an agreement of the parties concerned to a new contract; (c) there must be the
extinguishment of the old contract; and, (d) there must be the validity of the new contract.[30]
In the case at bar, the third requisite is not present. The parties did agree that the amount
loaned would be converted into respondent's contribution to the partnership, but this
conversion did not extinguish the loan obligation. The date when the acknowledgment
receipt/promissory note was made negates the claim that the loan agreement was extinguished
through novation since the note was made while the partnership was in existence.
Significantly, novation is never presumed. It must appear by express agreement of the parties,
or by their acts that are too clear and unequivocal to be mistaken for anything else. An
obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified
by changing only the terms of payment and adding other obligations not incompatible with the
old one, or wherein the old contract is merely supplemented by the new one. [31]
When questioned as to why she executed the acknowledgment receipt, Nieves answered that
she did so only at respondent's request, allowing the latter to dictate the contents of the
receipt. The execution of the receipt was supposedly for the reason that respondent needed to
reassure his family that he had indeed invested his money in a profitable venture. If that was
the case, Nieves should have objected to the inclusion of the statement of interest payments in
the receipt. There was no need to disguise the intended profits as interest payments. Using
petitioners' reasoning, they belonged to the same family so there was no need to conceal the
true nature of the transaction. The statement of the interest payments negates the allegation
that it is merely an acknowledgment receipt and not a promissory note. The appellate court
was correct in concluding that the amount remained a loan despite the partnership agreement.
But as to the amount of the loan, the trial court and the Court of Appeals differed. The trial
court held it to be P600,000.00 while the appellate court fixed it at P500,000.00. We agree with
the appellate court. The promissory note shows that the amount of P100,000.00 was merely
intercalated by respondent in his own handwriting and was not initialed by petitioners to show
their conformity thereto.
However, we cannot agree with the disposition of the appellate court to apply the payment
of P400,000.00 to the principal of the loan. Instead, the amount should first be applied to the
unpaid interest in accordance with the application of payments provided in Art. 1253 of the
Civil Code.[32]
WHEREFORE, the assailed Decision of 14 July 2000 in CA-G.R. CV No. 51437 and the Resolution
of 2 April 2001 of respondent Court of Appeals are MODIFIED. Petitioner-spouses Arsenio R.
Reyes and Nieves S. Reyes are ordered to pay respondent Pablo V. Reyes P500,000.00 with
interest at five percent (5%) per month from 15 July 1990, minus the P484,000.00
corresponding to the value of the pickup truck of P400,000.00 and the interest payments
of P84,000.00 previously paid. No costs.
SO ORDERED.

[G.R. No. 114398. October 24, 1997]

CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF APPEALS and THE PEOPLE OF THE
PHILIPPINES, represented by the Solicitor General, respondents.
DECISION
ROMERO, J.:
Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC), Branch
93, Quezon City, in an information which reads as follows:
That on or between the month of May 19, 1988 and August, 1988 in Quezon City, Philippines
and within the jurisdiction of this Honorable Court, the said accused, with intent of gain, with
unfaithfulness, and abuse of confidence, did then and there, willfully, unlawfully and feloniously
defraud one ISIDORA ROSALES, in the following manner, to wit: on the date and in the place
aforementioned, said accused received in trust from the offended party cash money amounting
to P536,650.00, Philippine Currency, with the express obligation involving the duty to act as
complainants agent in purchasing local cigarettes (Philip Morris and Marlboro cigarettes), to
resell them to several stores, to give her commission corresponding to 40% of the profits; and
to return the aforesaid amount of offended party, but said accused, far from complying her
aforesaid obligation, and once in possession thereof, misapplied, misappropriated and
converted the same to her personal use and benefit, despite repeated demands made upon
her, accused failed and refused and still fails and refuses to deliver and/or return the same to
the damage and prejudice of the said ISIDORA ROSALES, in the aforementioned amount and in
such other amount as may be awarded under the provision of the Civil Code.
CONTRARY TO LAW.
The antecedent facts are as follows:
Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house of
complainant Isidora Rosales (Rosales) and asked her to join them in the business of buying and
selling cigarettes. Convinced of the feasibility of the venture, Rosales readily agreed. Under
their agreement, Rosales would give the money needed to buy the cigarettes while Liwanag
and Tabligan would act as her agents, with a corresponding 40% commission to her if the goods
are sold; otherwise the money would be returned to Rosales. Consequently, Rosales gave
several cash advances to Liwanag and Tabligan amounting to P633,650.00.
During the first two months, Liwanag and Tabligan made periodic visits to Rosales to report on
the progress of the transactions. The visits, however, suddenly stopped, and all efforts by
Rosales to obtain information regarding their business proved futile.
Alarmed by this development and believing that the amounts she advanced were being
misappropriated, Rosales filed a case of estafa against Liwanag.
After trial on the merits, the trial court rendered a decision dated January 9, 1991, finding
Liwanag guilty as charged. The dispositive portion of the decision reads thus:
WHEREFORE, the Court holds, that the prosecution has established the guilt of the accused,
beyond reasonable doubt, and therefore, imposes upon the accused, Carmen Liwanag, an
Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS OF
PRISION CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF PRISION MAYOR
AS MAXIMUM, AND TO PAY THE COSTS.
The accused is likewise ordered to reimburse the private complainant the sum of P526,650.00,
without subsidiary imprisonment, in case of insolvency.
SO ORDERED.
Said decision was affirmed with modification by the Court of Appeals in a decision dated
November 29, 1993, the decretal portion of which reads:
WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed with the
correction of the nomenclature of the penalty which should be: SIX (6) YEARS, EIGHT (8)
MONTHS and TWENTY ONE (21) DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS
and EIGHT (8) MONTHS of reclusion temporal, as maximum. In all other respects, the decision is
AFFIRMED.
SO ORDERED.
Her motion for reconsideration having been denied in the resolution of March 16, 1994,
Liwanag filed the instant petition, submitting the following assignment of errors:
1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN AFFIRMING THE CONVICTION OF THE
ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY THE CONTRACT THAT EXIST
(sic) BETWEEN THE ACCUSED-PETITIONER AND COMPLAINANT IS EITHER THAT OF A SIMPLE
LOAN OR THAT OF A PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF THE
MONEY OF THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT CRIMINAL.
2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING THE ACCUSED-
PETITIONER ON GROUNDS OF REASONABLE DOUBT BY APPLYING THE EQUIPOISE RULE.
Liwanag advances the theory that the intention of the parties was to enter into a contract of
partnership, wherein Rosales would contribute the funds while she would buy and sell the
cigarettes, and later divide the profits between them.[1] She also argues that the transaction can
also be interpreted as a simple loan, with Rosales lending to her the amount stated on an
installment basis.[2]
The Court of Appeals correctly rejected these pretenses.
While factual findings of the Court of Appeals are conclusive on the parties and not reviewable
by the Supreme Court, and carry more weight when these affirm the factual findings of the trial
court,[3] we deem it more expedient to resolve the instant petition on its merits.
Estafa is a crime committed by a person who defrauds another causing him to suffer damages,
by means of unfaithfulness or abuse of confidence, or of false pretenses of fraudulent acts. [4]
From the foregoing, the elements of estafa are present, as follows: (1) that the accused
defrauded another by abuse of confidence or deceit; and (2) that damage or prejudice capable
of pecuniary estimation is caused to the offended party or third party,[5] and it is essential that
there be a fiduciary relation between them either in the form of a trust, commission or
administration.[6]
The receipt signed by Liwanag states thus:
May 19, 1988 Quezon City
Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY SIX THOUSAND AND
SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine Currency, to purchase cigarrets (sic) (Philip
& Marlboro) to be sold to customers. In the event the said cigarrets (sic) are not sold, the
proceeds of the sale or the said products (shall) be returned to said Mrs. Isidora P. Rosales the
said amount of P526,650.00 or the said items on or before August 30, 1988.
(SGD & Thumbedmarked) (sic)
CARMEN LIWANAG
26 H. Kaliraya St.
Quezon City
Signed in the presence of:
(Sgd) Illegible (Sgd) Doming Z. Baligad
The language of the receipt could not be any clearer. It indicates that the money delivered to
Liwanag was for a specific purpose, that is, for the purchase of cigarettes, and in the event the
cigarettes cannot be sold, the money must be returned to Rosales.
Thus, even assuming that a contract of partnership was indeed entered into by and between
the parties, we have ruled that when money or property have been received by a partner for a
specific purpose (such as that obtaining in the instant case) and he later misappropriated it,
such partner is guilty of estafa.[7]
Neither can the transaction be considered a loan, since in a contract of loan once the money is
received by the debtor, ownership over the same is transferred.[8] Being the owner, the
borrower can dispose of it for whatever purpose he may deem proper.
In the instant petition, however, it is evident that Liwanag could not dispose of the money as
she pleased because it was only delivered to her for a single purpose, namely, for the purchase
of cigarettes, and if this was not possible then to return the money to Rosales. Since in this case
there was no transfer of ownership of the money delivered, Liwanag is liable for conversion
under Art. 315, par. 1(b) of the Revised Penal Code.
WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals dated
November 29, 1993, is AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 186738 September 27, 2010

PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE PHILIPPINE
ISLANDS,1) Petitioner,
vs.
LIWAYWAY ABASOLO, Respondent.
DECISION
CARPIO MORALES, J.:
Leonor Valenzuela-Rosales inherited two parcels of land situated in Palanan, Sta. Cruz, Laguna
(the properties), registered as Original Certificates of Title Nos. RO-527 and RO-528. After she
passed away, her heirs executed on June 14, 1993 a Special Power of Attorney (SPA) in favor of
Liwayway Abasolo (respondent) empowering her to sell the properties.2
Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the properties which were
being sold for P2,448,960, but as she had no available cash, she broached the idea of first
mortgaging the properties to petitioner Prudential Bank and Trust Company (PBTC), the
proceeds of which would be paid directly to respondent. Respondent agreed to the proposal.
On Corazon and respondents consultation with PBTCs Head Office, its employee, Norberto
Mendiola (Mendiola), allegedly advised respondent to issue an authorization for Corazon to
mortgage the properties, and for her (respondent) to act as one of the co-makers so that the
proceeds could be released to both of them.
To guarantee the payment of the property, Corazon executed on August 25, 1995 a Promissory
Note for P2,448,960 in favor of respondent.
By respondents claim, in October 1995, Mendiola advised her to transfer the properties first to
Corazon for the immediate processing of Corazons loan application with assurance that the
proceeds thereof would be paid directly to her (respondent), and the obligation would be
reflected in a bank guarantee.
Heeding Mendiolas advice, respondent executed a Deed of Absolute Sale over the properties in
favor of Corazon following which or on December 4, 1995, Transfer Certificates of Title Nos.
164159 and 164160 were issued in the name of Corazon.
Corazons application for a loan with PBTCs Tondo Branch was approved on December 1995.
She thereupon executed a real estate mortgage covering the properties to secure the payment
of the loan. In the absence of a written request for a bank guarantee, the PBTC released the
proceeds of the loan to Corazon.
Respondent later got wind of the approval of Corazons loan application and the release of its
proceeds to Corazon who, despite repeated demands, failed to pay the purchase price of the
properties.
Respondent eventually accepted from Corazon partial payment in kind consisting of one owner
type jeepney and four passenger jeepneys,3 plus installment payments, which, by the trial
courts computation, totaled P665,000.
In view of Corazons failure to fully pay the purchase price, respondent filed a complaint for
collection of sum of money and annulment of sale and mortgage with damages, against
Corazon and PBTC (hereafter petitioner), before the Regional Trial Court (RTC) of Sta. Cruz,
Laguna.4
In her Answer,5 Corazon denied that there was an agreement that the proceeds of the loan
would be paid directly to respondent. And she claimed that the vehicles represented full
payment of the properties, and had in fact overpaid P76,040.
Petitioner also denied that there was any arrangement between it and respondent that the
proceeds of the loan would be released to her.6 It claimed that it "may process a loan
application of the registered owner of the real property who requests that proceeds of the loan
or part thereof be payable directly to a third party [but] the applicant must submit a letter
request to the Bank."7
On pre-trial, the parties stipulated that petitioner was not a party to the contract of sale
between respondent and Corazon; that there was no written request that the proceeds of the
loan should be paid to respondent; and that respondent received five vehicles as partial
payment of the properties.8
Despite notice, Corazon failed to appear during the trial to substantiate her claims.
By Decision of March 12, 2004,9 Branch 91 of the Sta. Cruz, Laguna RTC rendered judgment in
favor of respondent and against Corazon who was made directly liable to respondent, and
against petitioner who was made subsidiarily liable in the event that Corazon fails to pay. Thus
the trial court disposed:
WHEREFORE, premises considered, finding the plaintiff has established her claim against the
defendants, Corazon Marasigan and Prudential Bank and Trust Company, judgment is hereby
rendered in favor of the plaintiff ordering:
Defendant Corazon Marasigan to pay the plaintiff the amount of P1,783,960.00 plus three
percent (3%) monthly interest per month from August 25, 1995 until fully paid. Further, to pay
the plaintiff the sum equivalent to twenty percent five [sic] (25%) of P1,783,960.00 as
attorneys fees.
Defendant Prudential Bank and Trust Company to pay the plaintiff the amount of P1,783,960.00
or a portion thereof plus the legal rate of interest per annum until fully paid in the event that
Defendant Corazon Marasigan fails to pay the said amount or a portion thereof.
Other damages claimed not duly proved are hereby dismissed.
So Ordered.10 (emphasis in the original; underscoring partly in the original, partly supplied)
In finding petitioner subsidiarily liable, the trial court held that petitioner breached its
understanding to release the proceeds of the loan to respondent:
Liwayway claims that the bank should also be held responsible for breach of its obligation to
directly release to her the proceeds of the loan or part thereof as payment for the subject lots.
The evidence shows that her claim is valid. The Bank had such an obligation as proven by
evidence. It failed to rebut the credible testimony of Liwayway which was given in a frank,
spontaneous, and straightforward manner and withstood the test of rigorous cross-
examination conducted by the counsel of the Bank. Her credibility is further strengthened by
the corroborative testimony of Miguela delos Reyes who testified that she went with Liwayway
to the bank for several times. In her presence, Norberto Mendiola, the head of the loan
department, instructed Liwayway to transfer the title over the subject lots to Corazon to
facilitate the release of the loan with the guarantee that Liwayway will be paid upon the release
of the proceeds.
Further, Liwayway would not have executed the deed of sale in favor of Corazon had Norberto
Mendiola did not promise and guarantee that the proceeds of the loan would be directly paid
to her. Based on ordinary human experience, she would not have readily transferred the title
over the subject lots had there been no strong and reliable guarantee. In this case, what caused
her to transfer title is the promise and guarantee made by Norberto Mendiola that the
proceeds of the loan would be directly paid to her. 11 (emphasis underscoring supplied)
On appeal, the Court of Appeals by Decision of January 14, 200812, affirmed the trial courts
decision with modification on the amount of the balance of the purchase price which was
reduced from P1,783,960 to P1,753,960. It disposed:
WHEREFORE, premises considered, the assailed Decision dated March 12, 2004 of the Regional
Trial Court of Sta. Cruz, Laguna, Branch 91, is AFFIRMED WITH MODIFICATION as to the
amount to be paid which is P1,753,960.00.
SO ORDERED.13 (emphasis in the original; underscoring supplied)
Petitioners motion for reconsideration having been denied by the appellate court by
Resolution of February 23, 2009, the present petition for review was filed.
The only issue petitioner raises is whether it is subsidiarily liable.
The petition is meritorious.
In the absence of a lender-borrower relationship between petitioner and Liwayway, there is no
inherent obligation of petitioner to release the proceeds of the loan to her.
To a banking institution, well-defined lending policies and sound lending practices are essential
to perform its lending function effectively and minimize the risk inherent in any extension of
credit.
Thus, Section X302 of the Manual of Regulations for Banks provides:
X-302. To ensure that timely and adequate management action is taken to maintain the quality
of the loan portfolio and other risk assets and that adequate loss reserves are set up and
maintained at a level sufficient to absorb the loss inherent in the loan portfolio and other risk
assets, each bank shall establish a system of identifying and monitoring existing or potential
problem loans and other risk assets and of evaluating credit policies vis--vis prevailing
circumstances and emerging portfolio trends. Management must also recognize that loss
reserve is a stabilizing factor and that failure to account appropriately for losses or make
adequate provisions for estimated future losses may result in misrepresentation of the banks
financial condition.
In order to identify and monitor loans that a bank has extended, a system of documentation is
necessary. Under this fold falls the issuance by a bank of a guarantee which is essentially a
promise to repay the liabilities of a debtor, in this case Corazon. It would be contrary to
established banking practice if Mendiola issued a bank guarantee, even if no request to that
effect was made.
The principle of relativity of contracts in Article 1311 of the Civil Code supports petitioners
cause:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by their nature,
or by stipulation or by provision of law. The heir is not liable beyond the value of the property
he received from the decedent.
If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person. (underscoring supplied)
For Liwayway to prove her claim against petitioner, a clear and deliberate act of conferring a
favor upon her must be present. A written request would have sufficed to prove this, given the
nature of a banking business, not to mention the amount involved.
Since it has not been established that petitioner had an obligation to Liwayway, there is no
breach to speak of. Liwayways claim should only be directed against Corazon. Petitioner cannot
thus be held subisidiarily liable.
To the Court, Liwayway did not rely on Mendiolas representations, even if he indeed made
them. The contract for Liwayway to sell to Corazon was perfected from the moment there was
a meeting of minds upon the properties-object of the contract and upon the price. Only the
source of the funds to pay the purchase price was yet to be resolved at the time the two
inquired from Mendiola. Consider Liwayways testimony:
Q: We are referring to the promissory note which you aforementioned a while ago, why did this
promissory note come about?
A: Because the negotiation was already completed, sir, and the deed of sale will have to be
executed, I asked the defendant (Corazon) to execute the promissory note first before I could
execute a deed of absolute sale, for assurance that she really pay me, sir.14 (emphasis and
underscoring supplied)
That it was on Corazons execution of a promissory note that prompted Liwayway to finally
execute the Deed of Sale is thus clear.
The trial Courts reliance on the doctrine of apparent authority that the principal, in this case
petitioner, is liable for the obligations contracted by its agent, in this case Mendiola, does not
lie. Prudential Bank v. Court of Appeals15 instructs:
[A] banking corporation is liable to innocent third persons where the representation is made in
the course of its business by an agent acting within the general scope of his authority even
though, in the particular case, the agent is secretly abusing his authority and attempting to
perpetuate fraud upon his principal or some person, for his own ultimate
benefit.16 (underscoring supplied)
The onus probandi that attempt to commit fraud attended petitioners employee Mendiolas
acts and that he abused his authority lies on Liwayway. She, however, failed to discharge the
onus. It bears noting that Mendiola was not privy to the approval or disallowance of Corazons
application for a loan nor that he would benefit by the approval thereof.
Aside from Liwayways bare allegations, evidence is wanting to show that there was collusion
between Corazon and Mendiola to defraud her. Even in Liwayways Complaint, the allegation of
fraud is specifically directed against Corazon.17
IN FINE, Liwayways cause of action lies against only Corazon.
WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals, in so far as it holds
petitioner, Prudential Bank and Trust Company (now Bank of the Philippine Islands), subsidiary
liable in case its co-defendant Corazon Marasigan, who did not appeal the trial courts decision,
fails to pay the judgment debt, is REVERSED and SET ASIDE. The complaint against petitioner is
accordingly DISMISSED.
SO ORDERED.

G.R. No. 156132 February 6, 2007

CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS FINANCE CORPORATION,
doing business under the name and style of FNCB Finance, Petitioners,
vs.
MODESTA R. SABENIANO, Respondent.
RESOLUTION
CHICO-NAZARIO, J.:
On 16 October 2006, this Court promulgated its Decision1 in the above-entitled case, the
dispositive portion of which reads
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed Decision of
the Court of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already modified by its
Resolution, dated 20 November 2002, is hereby AFFIRMED WITH MODIFICATION, as follows
1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding. Petitioner Citibank
is ORDERED to return to respondent the principal amounts of the said PNs, amounting to Three
Hundred Eighteen Thousand Eight Hundred Ninety-Seven Pesos and Thirty-Four Centavos
(P318,897.34) and Two Hundred Three Thousand One Hundred Fifty Pesos (P203,150.00),
respectively, plus the stipulated interest of Fourteen and a half percent (14.5%) per annum,
beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US Dollars and
Ninety-Nine Cents (US$149,632.99) from respondents Citibank-Geneva accounts to petitioner
Citibank in Manila, and the application of the same against respondents outstanding loans with
the latter, is DECLARED illegal, null and void. Petitioner Citibank is ORDERED to refund to
respondent the said amount, or its equivalent in Philippine currency using the exchange rate at
the time of payment, plus the stipulated interest for each of the fiduciary placements and
current accounts involved, beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral damages in the amount of Three
Hundred Thousand Pesos (P300,000.00); exemplary damages in the amount of Two Hundred
Fifty Thousand Pesos (P250,000.00); and attorneys fees in the amount of Two Hundred
Thousand Pesos (P200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the balance of her outstanding loans,
which, from the respective dates of their maturity to 5 September 1979, was computed to be in
the sum of One Million Sixty-Nine Thousand Eight Hundred Forty-Seven Pesos and Forty
Centavos (P1,069,847.40), inclusive of interest. These outstanding loans shall continue to earn
interest, at the rates stipulated in the corresponding PNs, from 5 September 1979 until
payment thereof.
Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent Motion to Clarify
and/or Confirm Decision with Notice of Judgment on 20 October 2006; while, petitioners
Citibank, N.A. and FNCB Finance2 filed their Motion for Partial Reconsideration of the foregoing
Decision on 6 November 2006.
The facts of the case, as determined by this Court in its Decision, may be summarized as
follows.
Respondent was a client of petitioners. She had several deposits and market placements with
petitioners, among which were her savings account with the local branch of petitioner Citibank
(Citibank-Manila3 ); money market placements with petitioner FNCB Finance; and dollar
accounts with the Geneva branch of petitioner Citibank (Citibank-Geneva). At the same time,
respondent had outstanding loans with petitioner Citibank, incurred at Citibank-Manila, the
principal amounts aggregating to P1,920,000.00, all of which had become due and demandable
by May 1979. Despite repeated demands by petitioner Citibank, respondent failed to pay her
outstanding loans. Thus, petitioner Citibank used respondents deposits and money market
placements to off-set and liquidate her outstanding obligations, as follows

Respondents outstanding obligation (principal and interest as of

26 October 1979) P 2,156,940.58

Less: Proceeds from respondents money market placements

with petitioner FNCB Finance (principal and interest as of 5
September 1979) (1,022,916.66)

Deposits in respondents bank accounts with petitioner

Citibank (31,079.14)

Proceeds of respondents money market placements and

dollar accounts with Citibank-Geneva (peso equivalent as of
26 October 1979) (1,102,944.78)

Balance of respondents obligation P 0.00

Respondent, however, denied having any outstanding loans with petitioner Citibank. She
likewise denied that she was duly informed of the off-setting or compensation thereof made by
petitioner Citibank using her deposits and money market placements with petitioners. Hence,
respondent sought to recover her deposits and money market placements.
Respondent instituted a complaint for "Accounting, Sum of Money and Damages" against
petitioners, docketed as Civil Case No. 11336, before the Regional Trial Court (RTC) of Makati
City. After trial proper, which lasted for a decade, the RTC rendered a Decision 4 on 24 August
1995, the dispositive portion of which reads
WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:
(1) Declaring as illegal, null and void the setoff effected by the defendant Bank [petitioner
Citibank] of plaintiffs [respondent Sabeniano] dollar deposit with Citibank, Switzerland, in the
amount of US$149,632.99, and ordering the said defendant [petitioner Citibank] to refund the
said amount to the plaintiff with legal interest at the rate of twelve percent (12%) per annum,
compounded yearly, from 31 October 1979 until fully paid, or its peso equivalent at the time of
payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant Bank [petitioner
Citibank] in the amount of P1,069,847.40 as of 5 September 1979 and ordering the plaintiff
[respondent Sabeniano] to pay said amount, however, there shall be no interest and penalty
charges from the time the illegal setoff was effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims interposed by the parties against each other.
Costs against the defendant Bank.
All the parties appealed the afore-mentioned RTC Decision to the Court of Appeals, docketed as
CA-G.R. CV No. 51930. On 26 March 2002, the appellate court promulgated its Decision, 5 ruling
entirely in favor of respondent, to wit
Wherefore, premises considered, the assailed 24 August 1995 Decision of the court a quo is
hereby AFFIRMED with MODIFICATION, as follows:
1. Declaring as illegal, null and void the set-off effected by the defendant-appellant Bank of the
plaintiff-appellants dollar deposit with Citibank, Switzerland, in the amount of US$149,632.99,
and ordering defendant-appellant Citibank to refund the said amount to the plaintiff-appellant
with legal interest at the rate of twelve percent (12%) per annum, compounded yearly, from 31
October 1979 until fully paid, or its peso equivalent at the time of payment;
2. As defendant-appellant Citibank failed to establish by competent evidence the alleged
indebtedness of plaintiff-appellant, the set-off of P1,069,847.40 in the account of Ms.
Sabeniano is hereby declared as without legal and factual basis;
3. As defendants-appellants failed to account the following plaintiff-appellants money market
placements, savings account and current accounts, the former is hereby ordered to return the
same, in accordance with the terms and conditions agreed upon by the contending parties as
evidenced by the certificates of investments, to wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN No. 22526) issued on 17
March 1977, P318,897.34 with 14.50% interest p.a.;
(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN No. 22528) issued on 17
March 1977, P203,150.00 with 14.50 interest p.a.;
(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No. 04952), issued on 02 June
1977, P500,000.00 with 17% interest p.a.;
(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No. 04962), issued on 02 June
1977, P500,000.00 with 17% interest per annum;
(v) The Two Million (P2,000,000.00) money market placements of Ms. Sabeniano with the Ayala
Investment & Development Corporation (AIDC) with legal interest at the rate of twelve percent
(12%) per annum compounded yearly, from 30 September 1976 until fully paid;
4. Ordering defendants-appellants to jointly and severally pay the plaintiff-appellant the sum of
FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way of moral damages, FIVE HUNDRED
THOUSAND PESOS (P500,000.00) as exemplary damages, and ONE HUNDRED THOUSAND
PESOS (P100,000.00) as attorneys fees.
Acting on petitioners Motion for Partial Reconsideration, the Court of Appeals issued a
Resolution,6 dated 20 November 2002, modifying its earlier Decision, thus
WHEREFORE, premises considered, the instant Motion for Reconsideration is PARTIALLY
GRANTED as Sub-paragraph (V) paragraph 3 of the assailed Decisions dispositive portion is
hereby ordered DELETED.
The challenged 26 March 2002 Decision of the Court is AFFIRMED with MODIFICATION.
Since the Court of Appeals Decision, dated 26 March 2002, as modified by the Resolution of the
same court, dated 20 November 2002, was still principally in favor of respondent, petitioners
filed the instant Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court.
After giving due course to the instant Petition, this Court promulgated on 16 October 2006 its
Decision, now subject of petitioners Motion for Partial Reconsideration.1awphi1.net
Among the numerous grounds raised by petitioners in their Motion for Partial Reconsideration,
this Court shall address and discuss herein only particular points that had not been considered
or discussed in its Decision. Even in consideration of these points though, this Court remains
unconvinced that it should modify or reverse in any way its disposition of the case in its earlier
Decision.
As to the off-setting or compensation of respondents outstanding loan balance with her dollar
deposits in Citibank-Geneva
Petitioners take exception to the following findings made by this Court in its Decision, dated 16
October 2006, disallowing the off-setting or compensation of the balance of respondents
outstanding loans using her dollar deposits in Citibank-Geneva
Without the Declaration of Pledge, petitioner Citibank had no authority to demand the
remittance of respondents dollar accounts with Citibank-Geneva and to apply them to her
outstanding loans. It cannot effect legal compensation under Article 1278 of the Civil Code
since, petitioner Citibank itself admitted that Citibank-Geneva is a distinct and separate entity.
As for the dollar accounts, respondent was the creditor and Citibank-Geneva is the debtor; and
as for the outstanding loans, petitioner Citibank was the creditor and respondent was the
debtor. The parties in these transactions were evidently not the principal creditor of each
other.
Petitioners maintain that respondents Declaration of Pledge, by virtue of which she supposedly
assigned her dollar accounts with Citibank-Geneva as security for her loans with petitioner
Citibank, is authentic and, thus, valid and binding upon respondent. Alternatively, petitioners
aver that even without said Declaration of Pledge, the off-setting or compensation made by
petitioner Citibank using respondents dollar accounts with Citibank-Geneva to liquidate the
balance of her outstanding loans with Citibank-Manila was expressly authorized by respondent
herself in the promissory notes (PNs) she signed for her loans, as well as sanctioned by Articles
1278 to 1290 of the Civil Code. This alternative argument is anchored on the premise that all
branches of petitioner Citibank in the Philippines and abroad are part of a single worldwide
corporate entity and share the same juridical personality. In connection therewith, petitioners
deny that they ever admitted that Citibank-Manila and Citibank-Geneva are distinct and
separate entities.
Petitioners call the attention of this Court to the following provision found in all of the
PNs7 executed by respondent for her loans
At or after the maturity of this note, or when same becomes due under any of the provisions
hereof, any money, stocks, bonds, or other property of any kind whatsoever, on deposit or
otherwise, to the credit of the undersigned on the books of CITIBANK, N.A. in transit or in their
possession, may without notice be applied at the discretion of the said bank to the full or
partial payment of this note.
It is the petitioners contention that the term "Citibank, N.A." used therein should be deemed
to refer to all branches of petitioner Citibank in the Philippines and abroad; thus, giving
petitioner Citibank the authority to apply as payment for the PNs even respondents dollar
accounts with Citibank-Geneva. Still proceeding from the premise that all branches of petitioner
Citibank should be considered as a single entity, then it should not matter that the respondent
obtained the loans from Citibank-Manila and her deposits were with Citibank-Geneva.
Respondent should be considered the debtor (for the loans) and creditor (for her deposits) of
the same entity, petitioner Citibank. Since petitioner Citibank and respondent were principal
creditors of each other, in compliance with the requirements under Article 1279 of the Civil
Code,8 then the former could have very well used off-setting or compensation to extinguish the
parties obligations to one another. And even without the PNs, off-setting or compensation was
still authorized because according to Article 1286 of the Civil Code, "Compensation takes place
by operation of law, even though the debts may be payable at different places, but there shall
be an indemnity for expenses of exchange or transportation to the place of payment."
Pertinent provisions of Republic Act No. 8791, otherwise known as the General Banking Law of
2000, governing bank branches are reproduced below
SEC. 20. Bank Branches. Universal or commercial banks may open branches or other offices
within or outside the Philippines upon prior approval of the Bangko Sentral.
Branching by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as
outlets for the presentation and/or sale of the financial products of its allied undertaking or its
investment house units.
A bank authorized to establish branches or other offices shall be responsible for all business
conducted in such branches and offices to the same extent and in the same manner as though
such business had all been conducted in the head office. A bank and its branches and offices
shall be treated as one unit.
xxxx
SEC. 72. Transacting Business in the Philippines. The entry of foreign banks in the Philippines
through the establishment of branches shall be governed by the provisions of the Foreign Banks
Liberalization Act.
The conduct of offshore banking business in the Philippines shall be governed by the provisions
of Presidential Decree No. 1034, otherwise known as the "Offshore Banking System Decree."
xxxx
SEC. 74. Local Branches of Foreign Banks. In case of a foreign bank which has more than one
(1) branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose
of this Act, and all references to the Philippine branches of foreign banks shall be held to refer
to such units.
SEC. 75. Head Office Guarantee. In order to provide effective protection of the interests of the
depositors and other creditors of Philippine branches of a foreign bank, the head office of such
branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.
Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a
foreign bank shall have preferential rights to the assets of such branch in accordance with
existing laws.
Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law, lays down the
policies and regulations specifically concerning the establishment and operation of local
branches of foreign banks. Relevant provisions of the said statute read
Sec. 2. Modes of Entry. - The Monetary Board may authorize foreign banks to operate in the
Philippine banking system through any of the following modes of entry: (i) by acquiring,
purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by
investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary
incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking
authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry:
Provided, further, That a foreign bank or a Philippine corporation may own up to a sixty percent
(60%) of the voting stock of only one (1) domestic bank or new banking subsidiary.
Sec. 5. Head Office Guarantee. - The head office of foreign bank branches shall guarantee
prompt payment of all liabilities of its Philippine branches.
It is true that the afore-quoted Section 20 of the General Banking Law of 2000 expressly states
that the bank and its branches shall be treated as one unit. It should be pointed out, however,
that the said provision applies to a universal9 or commercial bank,10 duly established and
organized as a Philippine corporation in accordance with Section 8 of the same statute, 11 and
authorized to establish branches within or outside the Philippines.
The General Banking Law of 2000, however, does not make the same categorical statement as
regards to foreign banks and their branches in the Philippines. What Section 74 of the said law
provides is that in case of a foreign bank with several branches in the country, all such branches
shall be treated as one unit. As to the relations between the local branches of a foreign bank
and its head office, Section 75 of the General Banking Law of 2000 and Section 5 of the Foreign
Banks Liberalization Law provide for a "Home Office Guarantee," in which the head office of the
foreign bank shall guarantee prompt payment of all liabilities of its Philippine branches. While
the Home Office Guarantee is in accord with the principle that these local branches, together
with its head office, constitute but one legal entity, it does not necessarily support the view that
said principle is true and applicable in all circumstances.
The Home Office Guarantee is included in Philippine statutes clearly for the protection of the
interests of the depositors and other creditors of the local branches of a foreign bank. 12 Since
the head office of the bank is located in another country or state, such a guarantee is necessary
so as to bring the head office within Philippine jurisdiction, and to hold the same answerable
for the liabilities of its Philippine branches. Hence, the principle of the singular identity of that
the local branches and the head office of a foreign bank are more often invoked by the clients
in order to establish the accountability of the head office for the liabilities of its local branches.
It is under such attendant circumstances in which the American authorities and jurisprudence
presented by petitioners in their Motion for Partial Reconsideration were rendered.
Now the question that remains to be answered is whether the foreign bank can use the
principle for a reverse purpose, in order to extend the liability of a client to the foreign banks
Philippine branch to its head office, as well as to its branches in other countries. Thus, if a client
obtains a loan from the foreign banks Philippine branch, does it absolutely and automatically
make the client a debtor, not just of the Philippine branch, but also of the head office and all
other branches of the foreign bank around the world? This Court rules in the negative.
There being a dearth of Philippine authorities and jurisprudence on the matter, this Court, just
as what petitioners have done, turns to American authorities and jurisprudence. American
authorities and jurisprudence are significant herein considering that the head office of
petitioner Citibank is located in New York, United States of America (U.S.A.).
Unlike Philippine statutes, the American legislation explicitly defines the relations among
foreign branches of an American bank. Section 25 of the United States Federal Reserve
Act13 states that
Every national banking association operating foreign branches shall conduct the accounts of
each foreign branch independently of the accounts of other foreign branches established by it
and of its home office, and shall at the end of each fiscal period transfer to its general ledger
the profit or loss accrued at each branch as a separate item.
Contrary to petitioners assertion that the accounts of Citibank-Manila and Citibank-Geneva
should be deemed as a single account under its head office, the foregoing provision mandates
that the accounts of foreign branches of an American bank shall be conducted independently of
each other. Since the head office of petitioner Citibank is in the U.S.A., then it is bound to treat
its foreign branches in accordance with the said provision. It is only at the end of its fiscal
period that the bank is required to transfer to its general ledger the profit or loss accrued at
each branch, but still reporting it as a separate item. It is by virtue of this provision that the
Circuit Court of Appeals of New York declared in Pan-American Bank and Trust Co. v. National
City Bank of New York14 that a branch is not merely a tellers window; it is a separate business
entity.
The circumstances in the case of McGrath v. Agency of Chartered Bank of India, Australia &
China15 are closest to the one at bar. In said case, the Chartered Bank had branches in several
countries, including one in Hamburg, Germany and another in New York, U.S.A., and yet
another in London, United Kingdom. The New York branch entered in its books credit in favor of
four German firms. Said credit represents collections made from bills of exchange delivered by
the four German firms. The same four German firms subsequently became indebted to the
Hamburg branch. The London branch then requested for the transfer of the credit in the name
of the German firms from the New York branch so as to be applied or setoff against the
indebtedness of the same firms to the Hamburg branch. One of the question brought before
the U.S. District Court of New York was "whether or not the debts and the alleged setoffs
thereto are mutual," which could be answered by determining first whether the New York and
Hamburg branches of Chartered Bank are individual business entities or are one and the same
entity. In denying the right of the Hamburg branch to setoff, the U.S. District Court ratiocinated
that
The structure of international banking houses such as Chartered bank defies one rigorous
description. Suffice it to say for present analysis, branches or agencies of an international bank
have been held to be independent entities for a variety of purposes (a) deposits payable only
at branch where made; Mutaugh v. Yokohama Specie Bank, Ltd., 1933, 149 Misc. 693, 269
N.Y.S. 65; Bluebird Undergarment Corp. v. Gomez, 1931, 139 Misc. 742, 249 N.Y.S. 319; (b)
checks need be honored only when drawn on branch where deposited; Chrzanowska v. Corn
Exchange Bank, 1916, 173 App. Div. 285, 159 N.Y.S. 385, affirmed 1919, 225 N.Y. 728, 122 N.E.
877; subpoena duces tecum on foreign banks record barred; In re Harris, D.C.S.D.N.Y. 1939, 27
F. Supp. 480; (d) a foreign branch separate for collection of forwarded paper; Pan-American
Bank and Trust Company v. National City Bank of New York, 2 Cir., 1925, 6 F. 2d 762, certiorari
denied 1925, 269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in law there is nothing innately
unitary about the organization of international banking institutions.
Defendant, upon its oral argument and in its brief, relies heavily on Sokoloff v. National City
Bank of New York, 1928, 250 N.Y. 69, 164 N.E. 745, as authority for the proposition that
Chartered Bank, not the Hamburg or New York Agency, is ultimately responsible for the
amounts owing its German customers and, conversely, it is to Chartered Bank that the German
firms owe their obligations. The Sokoloff case, aside from its violently different fact situation, is
centered on the legal problem of default of payment and consequent breach of contract by a
branch bank. It does not stand for the principle that in every instance an international bank
with branches is but one legal entity for all purposes. The defendant concedes in its brief (p.
15) that there are purposes for which the various agencies and branches of Chartered Bank may
be treated in law as separate entities. I fail to see the applicability of Sokoloff either as a guide
to or authority for the resolution of this problem. The facts before me and the cases
catalogued supra lend weight to the view that we are dealing here with Agencies independent
of one another.
xxxx
I hold that for instant purposes the Hamburg Agency and defendant were independent business
entities, and the attempted setoff may not be utilized by defendant against its debt to the
German firms obligated to the Hamburg Agency.
Going back to the instant Petition, although this Court concedes that all the Philippine branches
of petitioner Citibank should be treated as one unit with its head office, it cannot be persuaded
to declare that these Philippine branches are likewise a single unit with the Geneva branch. It
would be stretching the principle way beyond its intended purpose.
Therefore, this Court maintains its original position in the Decision that the off-setting or
compensation of respondents loans with Citibank-Manila using her dollar accounts with
Citibank-Geneva cannot be effected. The parties cannot be considered principal creditor of the
other. As for the dollar accounts, respondent was the creditor and Citibank-Geneva was the
debtor; and as for the outstanding loans, petitioner Citibank, particularly Citibank-Manila, was
the creditor and respondent was the debtor. Since legal compensation was not possible,
petitioner Citibank could only use respondents dollar accounts with Citibank-Geneva to
liquidate her loans if she had expressly authorized it to do so by contract.
Respondent cannot be deemed to have authorized the use of her dollar deposits with Citibank-
Geneva to liquidate her loans with petitioner Citibank when she signed the PNs16 for her loans
which all contained the provision that
At or after the maturity of this note, or when same becomes due under any of the provisions
hereof, any money, stocks, bonds, or other property of any kind whatsoever, on deposit or
otherwise, to the credit of the undersigned on the books of CITIBANK, N.A. in transit or in their
possession, may without notice be applied at the discretion of the said bank to the full or
partial payment of this note.
As has been established in the preceding discussion, "Citibank, N.A." can only refer to the local
branches of petitioner Citibank together with its head office. Unless there is any showing that
respondent understood and expressly agreed to a more far-reaching interpretation, the
reference to Citibank, N.A. cannot be extended to all other branches of petitioner Citibank all
over the world. Although theoretically, books of the branches form part of the books of the
head office, operationally and practically, each branch maintains its own books which shall only
be later integrated and balanced with the books of the head office. Thus, it is very possible to
identify and segregate the books of the Philippine branches of petitioner Citibank from those of
Citibank-Geneva, and to limit the authority granted for application as payment of the PNs to
respondents deposits in the books of the former.
Moreover, the PNs can be considered a contract of adhesion, the PNs being in standard printed
form prepared by petitioner Citibank. Generally, stipulations in a contract come about after
deliberate drafting by the parties thereto, there are certain contracts almost all the provisions
of which have been drafted only by one party, usually a corporation. Such contracts are called
contracts of adhesion, because the only participation of the party is the affixing of his signature
or his "adhesion" thereto. This being the case, the terms of such contract are to be construed
strictly against the party which prepared it.17
As for the supposed Declaration of Pledge of respondents dollar accounts with Citibank-
Geneva as security for the loans, this Court stands firm on its ruling that the non-production
thereof is fatal to petitioners cause in light of respondents claim that her signature on such
document was a forgery. It bears to note that the original of the Declaration of Pledge is with
Citibank-Geneva, a branch of petitioner Citibank. As between respondent and petitioner
Citibank, the latter has better access to the document. The constant excuse forwarded by
petitioner Citibank that Citibank-Geneva refused to return possession of the original
Declaration of Pledge to Citibank-Manila only supports this Courts finding in the preceding
paragraphs that the two branches are actually operating separately and independently of each
other.
Further, petitioners keep playing up the fact that respondent, at the beginning of the trial,
refused to give her specimen signatures to help establish whether her signature on the
Declaration of Pledge was indeed forged. Petitioners seem to forget that subsequently,
respondent, on advice of her new counsel, already offered to cooperate in whatever manner so
as to bring the original Declaration of Pledge before the RTC for inspection. The exchange of the
counsels for the opposing sides during the hearing on 24 July 1991 before the RTC reveals the
apparent willingness of respondents counsel to undertake whatever course of action necessary
for the production of the contested document, and the evasive, non-committal, and
uncooperative attitude of petitioners counsel.18
Lastly, this Courts ruling striking down the Declaration of Pledge is not entirely based on
respondents allegation of forgery. In its Decision, this Court already extensively discussed why
it found the said Declaration of Pledge highly suspicious and irregular, to wit
First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of
Assignment of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Court
would think that petitioner Citibank would take greater cautionary measures with the
preparation and execution of the Declaration of Pledge because it involved respondents "all
present and future fiduciary placements" with a Citibank branch in another country, specifically,
in Geneva, Switzerland. While there is no express legal requirement that the Declaration of
Pledge had to be notarized to be effective, even so, it could not enjoy the same prima
facie presumption of due execution that is extended to notarized documents, and petitioner
Citibank must discharge the burden of proving due execution and authenticity of the
Declaration of Pledge.
Second, petitioner Citibank was unable to establish the date when the Declaration of Pledge
was actually executed. The photocopy of the Declaration of Pledge submitted by petitioner
Citibank before the RTC was undated. It presented only a photocopy of the pledge because it
already forwarded the original copy thereof to Citibank-Geneva when it requested for the
remittance of respondents dollar accounts pursuant thereto. Respondent, on the other hand,
was able to secure a copy of the Declaration of Pledge, certified by an officer of Citibank-
Geneva, which bore the date 24 September 1979. Respondent, however, presented her
passport and plane tickets to prove that she was out of the country on the said date and could
not have signed the pledge. Petitioner Citibank insisted that the pledge was signed before 24
September 1979, but could not provide an explanation as to how and why the said date was
written on the pledge. Although Mr. Tan testified that the Declaration of Pledge was signed by
respondent personally before him, he could not give the exact date when the said signing took
place. It is important to note that the copy of the Declaration of Pledge submitted by the
respondent to the RTC was certified by an officer of Citibank-Geneva, which had possession of
the original copy of the pledge. It is dated 24 September 1979, and this Court shall abide by the
presumption that the written document is truly dated. Since it is undeniable that respondent
was out of the country on 24 September 1979, then she could not have executed the pledge on
the said date.
Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printed
form. It was constituted in favor of Citibank, N.A., otherwise referred to therein as the Bank. It
should be noted, however, that in the space which should have named the pledgor, the name
of petitioner Citibank was typewritten, to wit
The pledge right herewith constituted shall secure all claims which the Bank now has or in the
future acquires against Citibank, N.A., Manila (full name and address of the Debtor), regardless
of the legal cause or the transaction (for example current account, securities transactions,
collections, credits, payments, documentary credits and collections) which gives rise thereto,
and including principal, all contractual and penalty interest, commissions, charges, and costs.
The pledge, therefore, made no sense, the pledgor and pledgee being the same entity. Was a
mistake made by whoever filled-out the form? Yes, it could be a possibility. Nonetheless,
considering the value of such a document, the mistake as to a significant detail in the pledge
could only be committed with gross carelessness on the part of petitioner Citibank, and raised
serious doubts as to the authenticity and due execution of the same. The Declaration of Pledge
had passed through the hands of several bank officers in the country and abroad, yet,
surprisingly and implausibly, no one noticed such a glaring mistake.
Lastly, respondent denied that it was her signature on the Declaration of Pledge. She claimed
that the signature was a forgery. When a document is assailed on the basis of forgery, the best
evidence rule applies
Basic is the rule of evidence that when the subject of inquiry is the contents of a document, no
evidence is admissible other than the original document itself except in the instances
mentioned in Section 3, Rule 130 of the Revised Rules of Court. Mere photocopies of
documents are inadmissible pursuant to the best evidence rule. This is especially true when the
issue is that of forgery.
As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing
evidence and the burden of proof lies on the party alleging forgery. The best evidence of a
forged signature in an instrument is the instrument itself reflecting the alleged forged
signature. The fact of forgery can only be established by a comparison between the alleged
forged signature and the authentic and genuine signature of the person whose signature is
theorized upon to have been forged. Without the original document containing the alleged
forged signature, one cannot make a definitive comparison which would establish forgery. A
comparison based on a mere xerox copy or reproduction of the document under controversy
cannot produce reliable results.
Respondent made several attempts to have the original copy of the pledge produced before the
RTC so as to have it examined by experts. Yet, despite several Orders by the RTC, petitioner
Citibank failed to comply with the production of the original Declaration of Pledge. It is
admitted that Citibank-Geneva had possession of the original copy of the pledge. While
petitioner Citibank in Manila and its branch in Geneva may be separate and distinct entities,
they are still incontestably related, and between petitioner Citibank and respondent, the
former had more influence and resources to convince Citibank-Geneva to return, albeit
temporarily, the original Declaration of Pledge. Petitioner Citibank did not present any evidence
to convince this Court that it had exerted diligent efforts to secure the original copy of the
pledge, nor did it proffer the reason why Citibank-Geneva obstinately refused to give it back,
when such document would have been very vital to the case of petitioner Citibank. There is
thus no justification to allow the presentation of a mere photocopy of the Declaration of Pledge
in lieu of the original, and the photocopy of the pledge presented by petitioner Citibank has nil
probative value. In addition, even if this Court cannot make a categorical finding that
respondents signature on the original copy of the pledge was forged, it is persuaded that
petitioner Citibank willfully suppressed the presentation of the original document, and takes
into consideration the presumption that the evidence willfully suppressed would be adverse to
petitioner Citibank if produced.
As far as the Declaration of Pledge is concerned, petitioners failed to submit any new evidence
or argument that was not already considered by this Court when it rendered its Decision.
As to the value of the dollar deposits in Citibank-Geneva ordered refunded to respondent
In case petitioners are still ordered to refund to respondent the amount of her dollar accounts
with Citibank-Geneva, petitioners beseech this Court to adjust the nominal values of
respondents dollar accounts and/or her overdue peso loans by using the values of the
currencies stipulated at the time the obligations were established in 1979, to address the
alleged inequitable consequences resulting from the extreme and extraordinary devaluation of
the Philippine currency that occurred in the course of the Asian crisis of 1997. Petitioners base
their request on Article 1250 of the Civil Code which reads, "In case an extraordinary inflation
or deflation of the currency stipulated should supervene, the value of the currency at the time
of the establishment of the obligation shall be the basis of payment, unless there is an
agreement to the contrary."
It is well-settled that Article 1250 of the Civil Code becomes applicable only when there is
extraordinary inflation or deflation of the currency. Inflation has been defined as the sharp
increase of money or credit or both without a corresponding increase in business transaction.
There is inflation when there is an increase in the volume of money and credit relative to
available goods resulting in a substantial and continuing rise in the general price
level.19 In Singson v. Caltex (Philippines), Inc.,20 this Court already provided a discourse as to
what constitutes as extraordinary inflation or deflation of currency, thus
We have held extraordinary inflation to exist when there is a decrease or increase in the
purchasing power of the Philippine currency which is unusual or beyond the common
fluctuation in the value of said currency, and such increase or decrease could not have been
reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of
the establishment of the obligation.
An example of extraordinary inflation, as cited by the Court in Filipino Pipe and Foundry
Corporation vs. NAWASA, supra, is that which happened to the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early 1921, the
value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled
to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached
4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas & Victor R. Abola, Economics, An
Introduction [Third Edition]).
As reported, "prices were going up every week, then every day, then every hour. Women were
paid several times a day so that they could rush out and exchange their money for something of
value before what little purchasing power was left dissolved in their hands. Some workers tried
to beat the constantly rising prices by throwing their money out of the windows to their waiting
wives, who would rush to unload the nearly worthless paper. A postage stamp cost millions of
marks and a loaf of bread, billions." (Sidney Rutberg, "The Money Balloon", New York: Simon
and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd ed.)
The supervening of extraordinary inflation is never assumed. The party alleging it must lay
down the factual basis for the application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records and
statistics submitted by plaintiff-appellant proved that there has been a decline in the
purchasing power of the Philippine peso, but this downward fall cannot be considered
"extraordinary" but was simply a universal trend that has not spared our country. Similarly,
in Huibonhoa vs. Court of Appeals, the Court dismissed plaintiff-appellant's unsubstantiated
allegation that the Aquino assassination in 1983 caused building and construction costs to
double during the period July 1983 to February 1984. In Serra vs. Court of Appeals, the Court
again did not consider the decline in the peso's purchasing power from 1983 to 1985 to be so
great as to result in an extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also raises as basis for the application of
Article 1250 the Philippine economic crisis in the early 1980s --- when, based on petitioner's
evidence, the inflation rate rose to 50.34% in 1984. We hold that there is no legal or factual
basis to support petitioner's allegation of the existence of extraordinary inflation during this
period, or, for that matter, the entire time frame of 1968 to 1983, to merit the adjustment of
the rentals in the lease contract dated July 16, 1968. Although by petitioner's evidence there
was a decided decline in the purchasing power of the Philippine peso throughout this period,
we are hard put to treat this as an "extraordinary inflation" within the meaning and intent of
Article 1250.
Rather, we adopt with approval the following observations of the Court of Appeals on
petitioner's evidence, especially the NEDA certification of inflation rates based on consumer
price index:
xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded 100% in any
single year; (b) the highest official inflation rate recorded was in 1984 which reached only
50.34%; (c) over a twenty one (21) year period, the Philippines experienced a single-digit
inflation in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and
1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and
1989) when the Philippines experienced double-digit inflation rates, the average of those rates
was only 20.88%; (e) while there was a decline in the purchasing power of the Philippine
currency from the period 1966 to 1986, such cannot be considered as extraordinary; rather, it is
a normal erosion of the value of the Philippine peso which is a characteristic of most currencies.
"Erosion" is indeed an accurate description of the trend of decline in the value of the peso in
the past three to four decades. Unfortunate as this trend may be, it is certainly distinct from the
phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of extraordinary inflation are not to be applied
without an official declaration thereof by competent authorities.
The burden of proving that there had been extraordinary inflation or deflation of the currency
is upon the party that alleges it. Such circumstance must be proven by competent evidence,
and it cannot be merely assumed. In this case, petitioners presented no proof as to how much,
for instance, the price index of goods and services had risen during the intervening period. 21 All
the information petitioners provided was the drop of the U.S. dollar-Philippine peso exchange
rate by 17 points from June 1997 to January 1998. While the said figure was based on the
statistics of the Bangko Sentral ng Pilipinas (BSP), it is also significant to note that the BSP did
not categorically declare that the same constitute as an extraordinary inflation. The existence of
extraordinary inflation must be officially proclaimed by competent authorities, and the only
competent authority so far recognized by this Court to make such an official proclamation is the
BSP.22
Neither can this Court, by merely taking judicial notice of the Asian currency crisis in 1997,
already declare that there had been extraordinary inflation. It should be recalled that the
Philippines likewise experienced economic crisis in the 1980s, yet this Court did not find that
extraordinary inflation took place during the said period so as to warrant the application of
Article 1250 of the Civil Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on equitable
considerations. Among the maxims of equity are (1) he who seeks equity must do equity, and
(2) he who comes into equity must come with clean hands. The latter is a frequently stated
maxim which is also expressed in the principle that he who has done inequity shall not have
equity.23 Petitioner Citibank, hence, cannot invoke Article 1250 of the Civil Code because it does
not come to court with clean hands. The delay in the recovery24 by respondent of her dollar
accounts with Citibank-Geneva was due to the unlawful act of petitioner Citibank in using the
same to liquidate respondents loans. Petitioner Citibank even attempted to justify the off-
setting or compensation of respondents loans using her dollar accounts with Citibank-Geneva
by the presentation of a highly suspicious and irregular, and even possibly forged, Declaration
of Pledge.
The damage caused to respondent of the deprivation of her dollar accounts for more than two
decades is unquestionably relatively more extensive and devastating, as compared to whatever
damage petitioner Citibank, an international banking corporation with undoubtedly substantial
capital, may have suffered for respondents non-payment of her loans. It must also be
remembered that petitioner Citibank had already considered respondents loans paid or
liquidated by 26 October 1979 after it had fully effected compensation thereof using
respondents deposits and money market placements. All this time, respondents dollar
accounts are unlawfully in the possession of and are being used by petitioner Citibank for its
business transactions. In the meantime, respondents businesses failed and her properties were
foreclosed because she was denied access to her funds when she needed them most. Taking
these into consideration, respondents dollar accounts with Citibank-Geneva must be deemed
to be subsisting and continuously deposited with petitioner Citibank all this while, and will only
be presently withdrawn by respondent. Therefore, petitioner Citibank should refund to
respondent the U.S. $149,632.99 taken from her Citibank-Geneva accounts, or its equivalent in
Philippine currency using the exchange rate at the time of payment, plus the stipulated interest
for each of the fiduciary placements and current accounts involved, beginning 26 October 1979.
As to respondents Motion to Clarify and/or Confirm Decision with Notice of Judgment
Respondent, in her Motion, is of the mistaken notion that the Court of Appeals Decision, dated
26 March 2002, as modified by the Resolution of the same court, dated 20 November 2002,
would be implemented or executed together with this Courts Decision.
This Court clarifies that its affirmation of the Decision of the Court of Appeals, as modified, is
only to the extent that it recognizes that petitioners had liabilities to the respondent. However,
this Courts Decision modified that of the appellate courts by making its own determination of
the specific liabilities of the petitioners to respondent and the amounts thereof; as well as by
recognizing that respondent also had liabilities to petitioner Citibank and the amount thereof.
Thus, for purposes of execution, the parties need only refer to the dispositive portion of this
Courts Decision, dated 16 October 2006, should it already become final and executory, without
any further modifications.
As the last point, there is no merit in respondents Motion for this Court to already declare its
Decision, dated 16 October 2006, final and executory. A judgment becomes final and executory
by operation of law and, accordingly, the finality of the judgment becomes a fact upon the
lapse of the reglementary period without an appeal or a motion for new trial or reconsideration
being filed.25 This Court cannot arbitrarily disregard the reglementary period and declare a
judgment final and executory upon the mere motion of one party, for to do so will be a culpable
violation of the right of the other parties to due process.
IN VIEW OF THE FOREGOING, petitioners Motion for Partial Reconsideration of this Courts
Decision, dated 16 October 2006, and respondents Motion for this Court to declare the same
Decision already final and executory, are both DENIED for lack of merit.
SO ORDERED.

G.R. No. 146918 May 2, 2006

CITIBANK, N.A., Petitioner,
vs.
SPS. LUIS and CARMELITA CABAMONGAN and their sons LUISCABAMONGAN, JR. and LITO
CABAMONGAN, Respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated January 26, 2001
and the Resolution2dated July 30, 2001 of the Court of Appeals (CA) in CA-G.R. CV No. 59033.
The factual background of the case is as follows:
On August 16, 1993, spouses Luis and Carmelita Cabamongan opened a joint "and/or" foreign
currency time deposit in trust for their sons Luis, Jr. and Lito at the Citibank, N.A., Makati
branch, with Reference No. 60-22214372, in the amount of $55,216.69 for a term of 182 days
or until February 14, 1994, at 2.5625 per cent interest per annum.3 Prior to maturity, or on
November 10, 1993, a person claiming to be Carmelita went to the Makati branch and pre-
terminated the said foreign currency time deposit by presenting a passport, a Bank of America
Versatele Card, an ATM card and a Mabuhay Credit Card.4 She filled up the necessary forms for
pre-termination of deposits with the assistance of Account Officer Yeye San Pedro. While the
transaction was being processed, she was casually interviewed by San Pedro about her personal
circumstances and investment plans.5Since the said person failed to surrender the original
Certificate of Deposit, she had to execute a notarized release and waiver document in favor of
Citibank, pursuant to Citibank's internal procedure, before the money was released to her.6 The
release and waiver document7 was not notarized on that same day but the money was
nonetheless given to the person withdrawing.8 The transaction lasted for about 40 minutes.9
After said person left, San Pedro realized that she left behind an identification card. 10 Thus, San
Pedro called up Carmelita's listed address at No. 48 Ranger Street, Moonwalk Village, Las Pinas,
Metro Manila on the same day to have the card picked up.11 Marites, the wife of Lito, received
San Pedro's call and was stunned by the news that Carmelita preterminated her foreign
currency time deposit because Carmelita was in the United States at that time.12 The
Cabamongan spouses work and reside in California. Marites made an overseas call to Carmelita
to inform her about what happened.13 The Cabamongan spouses were shocked at the news. It
seems that sometime between June 10 and 16, 1993, an unidentified person broke in at the
couple's residence at No. 3268 Baldwin Park Boulevard, Baldwin Park, California. Initially, they
reported that only Carmelita's jewelry box was missing, but later on, they discovered that other
items, such as their passports, bank deposit certificates, including the subject foreign currency
deposit, and identification cards were also missing.14 It was only then that the Cabamongan
spouses realized that their passports and bank deposit certificates were lost.15
Through various overseas calls, the Cabamongan spouses informed Citibank, thru San Pedro,
that Carmelita was in the United States and did not preterminate their deposit and that the
person who did so was an impostor who could have also been involved in the break-in of their
California residence. San Pedro told the spouses to submit the necessary documents to support
their claim but Citibank concluded nonetheless that Carmelita indeed preterminated her
deposit. In a letter dated September 16, 1994, the Cabamongan spouses, through counsel,
made a formal demand upon Citibank for payment of their preterminated deposit in the
amount of $55,216.69 with legal interests.16 In a letter dated November 28, 1994, Citibank,
through counsel, refused the Cabamongan spouses' demand for payment, asserting that the
subject deposit was released to Carmelita upon proper identification and verification. 17
On January 27, 1995, the Cabamongan spouses filed a complaint against Citibank before the
Regional Trial Court of Makati for Specific Performance with Damages, docketed as Civil Case
No 95-163 and raffled to Branch 150 (RTC).18
In its Answer dated April 20, 1995, Citibank insists that it was not negligent of its duties since
the subject deposit was released to Carmelita only upon proper identification and verification. 19
At the pre-trial conference the parties failed to arrive at an amicable settlement. 20 Thus, trial on
the merits ensued.
For the plaintiffs, the Cabamongan spouses themselves and Florenda G. Negre, Documents
Examiner II of the Philippine National Police (PNP) Crime Laboratory in Camp Crame, Quezon
City, testified. The Cabamongan spouses, in essence, testified that Carmelita could not have
preterminated the deposit account since she was in California at the time of the
incident.21 Negre testified that an examination of the questioned signature and the samples of
the standard signatures of Carmelita submitted in the RTC showed a significant divergence. She
concluded that they were not written by one and the same person.22
For the respondent, Citibank presented San Pedro and Cris Cabalatungan, Vice-President and
In-Charge of Security and Management Division. Both San Pedro and Cabalatungan testified
that proper bank procedure was followed and the deposit was released to Carmelita only upon
proper identification and verification.23
On July 1, 1997, the RTC rendered a decision in favor of the Cabamongan spouses and against
Citibank, the dispositive portion of which reads, thus:
WHEREFORE, premises considered, defendant Citibank, N.A., is hereby ordered to pay the
plaintiffs the following:
1) the principal amount of their Foreign Currency Deposit (Reference No. 6022214372)
amounting to $55,216.69 or its Phil. Currency equivalent plus interests from August 16, 1993
until fully paid;
2) Moral damages of P50,000.00;
3) Attorney's fees of P50,000.00; and
4) Cost of suit.
SO ORDERED.24
The RTC reasoned that:
xxx Citibank, N.A., committed negligence resulting to the undue suffering of the plaintiffs. The
forgery of the signatures of plaintiff Carmelita Cabamongan on the questioned documents has
been categorically established by the handwriting expert. xxx Defendant bank was clearly
remiss in its duty and obligations to treat plaintiff's account with the highest degree of care,
considering the nature of their relationship. Banks are under the obligation to treat the
accounts of their depositors with meticulous care. This is the reason for their established
procedure of requiring several specimen signatures and recent picture from potential
depositors. For every transaction, the depositor's signature is passed upon by personnel to
check and countercheck possible irregularities and therefore must bear the blame when they
fail to detect the forgery or discrepancy.25
Despite the favorable decision, the Cabamongan spouses filed on October 1, 1997 a motion to
partially reconsider the decision by praying for an increase of the amount of the damages
awarded.26 Citibank opposed the motion.27 On November 19, 1997, the RTC granted the motion
for partial reconsideration and amended the dispositive portion of the decision as follows:
From the foregoing, and considering all the evidence laid down by the parties, the dispositive
portion of the court's decision dated July 1, 1997 is hereby amended and/or modified to read as
follows:
WHEREFORE, defendant Citibank, N.A., is hereby ordered to pay the plaintiffs the following:
1) the principal amount of their foreign currency deposit (Reference No. 6022214372)
amounting to $55,216.69 or its Philippine currency equivalent (at the time of its actual payment
or execution) plus legal interest from Aug. 16, 1993 until fully paid.
2) moral damages in the amount of P200,000.00;
3) exemplary damages in the amount of P100,000.00;
4) attorney's fees of P100,000.00;
5) litigation expenses of P200,000.00;
6) cost of suit.
SO ORDERED.28
Dissatisfied, Citibank filed an appeal with the CA, docketed as CA-G.R. CV No. 59033.29 On
January 26, 2001, the CA rendered a decision sustaining the finding of the RTC that Citibank was
negligent, ratiocinating in this wise:
In the instant case, it is beyond dispute that the subject foreign currency deposit was pre-
terminated on 10 November 1993. But Carmelita Cabamongan, who works as a nursing aid (sic)
at the Sierra View Care Center in Baldwin Park, California, had shown through her Certificate of
Employment and her Daily Time Record from the [sic] January to December 1993 that she was
in the United States at the time of the incident.
Defendant Citibank, N.A., however, insists that Carmelita was the one who pre-terminated the
deposit despite claims to the contrary. Its basis for saying so is the fact that the person who
made the transaction on the incident mentioned presented a valid passport and three (3) other
identification cards. The attending account officer examined these documents and even
interviewed said person. She was satisfied that the person presenting the documents was
indeed Carmelita Cabamongan. However, such conclusion is belied by these following
circumstances.
First, the said person did not present the certificate of deposit issued to Carmelita
Cabamongan. This would not have been an insurmountable obstacle as the bank, in the
absence of such certificate, allows the termination of the deposit for as long as the depositor
executes a notarized release and waiver document in favor of the bank. However, this simple
procedure was not followed by the bank, as it terminated the deposit and actually delivered the
money to the impostor without having the said document notarized on the flimsy excuse that
another department of the bank was in charge of notarization. The said procedure was
obviously for the protection of the bank but it deliberately ignored such precaution. At the very
least, the conduct of the bank amounts to negligence.
Second, in the internal memorandum of Account Officer Yeye San Pedro regarding the incident,
she reported that upon comparing the authentic signatures of Carmelita Cabamongan on file
with the bank with the signatures made by the person claiming to be Cabamongan on the
documents required for the termination of the deposit, she noticed that one letter in the latter
[sic] signatures was different from that in the standard signatures. She requested said person to
sign again and scrutinized the identification cards presented. Presumably, San Pedro was
satisfied with the second set of signatures made as she eventually authorized the termination
of the deposit. However, upon examination of the signatures made during the incident by the
Philippine National Police (PNP) Crime Laboratory, the said signatures turned out to be
forgeries. As the qualifications of Document Examiner Florenda Negre were established and she
satisfactorily testified on her findings during the trial, we have no reason to doubt the validity
of her findings. Again, the bank's negligence is patent. San Pedro was able to detect
discrepancies in the signatures but she did not exercise additional precautions to ascertain the
identity of the person she was dealing with. In fact, the entire transaction took only 40 minutes
to complete despite the anomalous situation. Undoubtedly, the bank could have done a better
job.
Third, as the bank had on file pictures of its depositors, it is inconceivable how bank employees
could have been duped by an impostor. San Pedro admitted in her testimony that the woman
she dealt with did not resemble the pictures appearing on the identification cards presented
but San Pedro still went on with the sensitive transaction. She did not mind such disturbing
anomaly because she was convinced of the validity of the passport. She also considered as
decisive the fact that the impostor had a mole on her face in the same way that the person in
the pictures on the identification cards had a mole. These explanations do not account for the
disparity between the pictures and the actual appearance of the impostor. That said person
was allowed to withdraw the money anyway is beyond belief.
The above circumstances point to the bank's clear negligence. Bank transactions pass through a
successive [sic] of bank personnel, whose duty is to check and countercheck transactions for
possible errors. While a bank is not expected to be infallible, it must bear the blame for failing
to discover mistakes of its employees despite established bank procedure involving a battery of
personnel designed to minimize if not eliminate errors. In the instant case, Yeye San Pedro, the
employee who primarily dealt with the impostor, did not follow bank procedure when she did
not have the waiver document notarized. She also openly courted disaster by ignoring
discrepancies between the actual appearance of the impostor and the pictures she presented,
as well as the disparities between the signatures made during the transaction and those on file
with the bank. But even if San Pedro was negligent, why must the other employees in the
hierarchy of the bank's work flow allow such thing to pass unnoticed and unrectified? 30
The CA, however, disagreed with the damages awarded by the RTC. It held that, insofar as the
date from which legal interest of 12% is to run, it should be counted from September 16, 1994
when extrajudicial demand was made. As to moral damages, the CA reduced it to P100,000.00
and deleted the awards of exemplary damages and litigation expenses. Thus, the dispositive
portion of the CA decision reads:
WHEREFORE, the decision of the trial court dated 01 July 1997, and its order dated 19
November 1997, are hereby AFFIRMED with the MODIFICATION that the legal interest for
actual damages awarded in the amount of $55,216.69 shall run from 16 September 1994;
exemplary damages amounting to P100,000.00 and litigation expenses amounting
to P200,000.00 are deleted; and moral damages is reduced to P100,000.00.
Costs against defendant.
SO ORDERED.31
The Cabamongan spouses filed a motion for partial reconsideration on the matter of the award
of damages in the decision.32 On July 30, 2001, the
CA granted in part said motion and modified its decision as follows:
1. The actual damages in amount of $55,216.69, representing the amount of appellees' foreign
currency time deposit shall earn an interest of 2.5625% for the period 16 August 1993 to 14
February 1994, as stipulated in the contract;
2. From 16 September 1994 until full payment, the amount of $55,216.69 shall earn interest at
the legal rate of 12% per annum, and;
3. The award of moral damages is reduced to P50,000.00.33
Dissatisfied, both parties filed separate petitions for review on certiorari with this Court. The
Cabamongan spouses' petition, docketed as G.R. No. 149234, was denied by the Court per its
Resolution dated October 17, 2001.34 On the other hand, Citibank's petition was given due
course by the Court per Resolution dated December 10, 2001 and the parties were required to
submit their respective memoranda.35
Citibank poses the following errors for resolution:
1. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND GRAVELY ABUSED ITS
DISCRETION IN UPHOLDING THE LOWER COURT'S DECISION WHICH IS NOT BASED ON CLEAR
EVIDENCE BUT ON GRAVE MISAPPREHENSION OF FACTS.
2. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING THE DECISION OF THE
TRIAL COURT AWARDING MORAL DAMAGES WHEN IN FACT THERE IS NO BASIS IN LAW AND
FACT FOR SAID AWARD.
3. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE PRINCIPAL
AMOUNT OF US$55,216.69 SHOULD EARN INTEREST AT THE RATE OF 12% PER ANNUM FROM
16 SEPTEMBER 1994 UNTIL FULL PAYMENT.36
Anent the first ground, Citibank contends that the CA erred in affirming the RTC's finding that it
was negligent since the said courts failed to appreciate the extra diligence of a good father of a
family exercised by Citibank thru San Pedro.
As to the second ground, Citibank argues that the Cabamongan spouses are not entitled to
moral damages since moral damages can be awarded only in cases of breach of contract where
the bank has acted willfully, fraudulently or in bad faith. It submits that it has not been shown
in this case that Citibank acted willfully, fraudulently or in bad faith and mere negligence, even
if the Cabamongan spouses suffered mental anguish or serious anxiety on account thereof, is
not a ground for awarding moral damages.
On the third ground, Citibank avers that the interest rate should not be 12% but the stipulated
rate of 2.5625% per annum. It adds that there is no basis to pay the interest rate of 12% per
annum from September 16, 1994 until full payment because as of said date there was no legal
ground yet for the Cabamongan spouses to demand payment of the principal and it is only after
a final judgment is issued declaring that Citibank is obliged to return the principal amount of
US$55,216.69 when the right to demand payment starts and legal interest starts to run.
On the other hand, the Cabamongan spouses contend that Citibank's negligence has been
established by evidence. As to the interest rate, they submit that the stipulated interest of
2.5635% should apply for the 182-day contract period from August 16, 1993 to February 14,
1993; thereafter, 12% should apply. They further contend that the RTC's award of exemplary
damages of P100,000.00 should be maintained. They submit that the CA erred in treating the
award of litigation expenses as lawyer's fees since they have shown that they incurred actual
expenses in litigating their claim against Citibank. They also contend that the CA erred in
reducing the award of moral damages in view of the degree of mental anguish and emotional
fears, anxieties and nervousness suffered by them.37
Subsequently, Citibank, thru a new counsel, submitted a Supplemental
Memorandum,38 wherein it posits that, assuming that it was negligent, the Cabamongan
spouses were guilty of contributory negligence since they failed to notify Citibank that they had
migrated to the United States and were residents thereat and after having been victims of a
burglary, they should have immediately assessed their loss and informed Citibank of the
disappearance of the bank certificate, their passports and other identification cards, then the
fraud would not have been perpetuated and the losses avoided. It further argues that since the
Cabamongan spouses are guilty of contributory negligence, the doctrine of last clear chance is
inapplicable.
Citibank's assertion that the Cabamongan spouses are guilty of contributory negligence and
non-application of the doctrine of last clear chance cannot pass muster since these contentions
were raised for the first time only in their Supplemental Memorandum. Indeed, the records
show that said contention were neither pleaded in the petition for review and the
memorandum nor in Citibank's Answer to the complaint or in its appellant's brief filed with the
CA. To consider the alleged facts and arguments raised belatedly in a supplemental pleading to
herein petition for review at this very late stage in the proceedings would amount to trampling
on the basic principles of fair play, justice and due process.391avvphil.net
The Court has repeatedly emphasized that, since the banking business is impressed with public
interest, of paramount importance thereto is the trust and confidence of the public in general.
Consequently, the highest degree of diligence40 is expected,41 and high standards of integrity
and performance are even required, of it.42By the nature of its functions, a bank is "under
obligation to treat the accounts of its depositors with meticulous care, 43 always having in mind
the fiduciary nature of their relationship."44
In this case, it has been sufficiently shown that the signatures of Carmelita in the forms for
pretermination of deposits are forgeries. Citibank, with its signature verification procedure,
failed to detect the forgery. Its negligence consisted in the omission of that degree of diligence
required of banks. The Court has held that a bank is "bound to know the signatures of its
customers; and if it pays a forged check, it must be considered as making the payment out of its
own funds, and cannot ordinarily charge the amount so paid to the account of the depositor
whose name was forged."45 Such principle equally applies here.
Citibank cannot label its negligence as mere mistake or human error. Banks handle daily
transactions involving millions of pesos.46 By the very nature of their works the degree of
responsibility, care and trustworthiness expected of their employees and officials is far greater
than those of ordinary clerks and employees.47 Banks are expected to exercise the highest
degree of diligence in the selection and supervision of their employees.48
The Court agrees with the observation of the CA that Citibank, thru Account Officer San Pedro,
openly courted disaster when despite noticing discrepancies in the signature and photograph of
the person claiming to be Carmelita and the failure to surrender the original certificate of time
deposit, the pretermination of the account was allowed. Even the waiver document was not
notarized, a procedure meant to protect the bank. For not observing the degree of diligence
required of banking institutions, whose business is impressed with public interest, Citibank is
liable for damages.
As to the interest rate, Citibank avers that the claim of the Cabamongan spouses does not
constitute a loan or forbearance of money and therefore, the interest rate of 6%, not 12%,
applies.
The Court does not agree.
The time deposit subject matter of herein petition is a simple loan. The provisions of the New
Civil Code on simple loan govern the contract between a bank and its depositor. Specifically,
Article 1980 thereof categorically provides that ". . . savings . . . deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loan." Thus, the
relationship between a bank and its depositor is that of a debtor-creditor, the depositor being
the creditor as it lends the bank money, and the bank is the debtor which agrees to pay the
depositor on demand.
The applicable interest rate on the actual damages of $55,216.69, should be in accordance with
the guidelines set forth in Eastern Shipping Lines, Inc. v. Court of Appeals49 to wit:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest, in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum
to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date 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.50
Thus, in a loan or forbearance of money, the interest due should be that stipulated in writing,
and in the absence thereof, the rate shall be 12% per annum counted from the time of demand.
Accordingly, the stipulated interest rate of 2.562% per annum shall apply for the 182-day
contract period from August 16, 1993 to February 14, 1994. For the period from the date of
extra-judicial demand, September 16, 1994, until full payment, the rate of 12% shall apply. As
for the intervening period between February 15, 1994 to September 15, 1994, the rate of
interest then prevailing granted by Citibank shall apply since the time deposit provided for roll
over upon maturity of the principal and interest.51
As to moral damages, in culpa contractual or breach of contract, as in the case before the
Court, moral damages are recoverable only if the defendant has acted fraudulently or in bad
faith,52 or is found guilty of gross negligence amounting to bad faith, or in wanton disregard of
his contractual obligations.53 The act of Citibank's employee in allowing the pretermination of
Cabamongan spouses' account despite the noted discrepancies in Carmelita's signature and
photograph, the absence of the original certificate of time deposit and the lack of notarized
waiver dormant, constitutes gross negligence amounting to bad faith under Article 2220 of the
Civil Code.
There is no hard-and-fast rule in the determination of what would be a fair amount of moral
damages since each case must be governed by its own peculiar facts. The yardstick should be
that it is not palpably and scandalously excessive.54 The amount of P50,000.00 awarded by the
CA is reasonable and just. Moreover, said award is deemed final and executory insofar as
respondents are concerned considering that their petition for review had been denied by the
Court in its final and executory Resolution dated October 17, 2001 in G.R. No. 149234.
Finally, Citibank contends that the award of attorney's fees should be deleted since such award
appears only in the dispositive portion of the decision of the RTC and the latter failed to
elaborate, explain and justify the same.
Article 2208 of the New Civil Code enumerates the instances where such may be awarded and,
in all cases, it must be reasonable, just and equitable if the same were to be granted. Attorney's
fees as part of damages are not meant to enrich the winning party at the expense of the losing
litigant. They are not awarded every time a party prevails in a suit because of the policy that no
premium should be placed on the right to litigate.55 The award of attorney's fees is the
exception rather than the general rule. As such, it is necessary for the court to make findings of
facts and law that would bring the case within the exception and justify the grant of such
award. The matter of attorney's fees cannot be mentioned only in the dispositive portion of the
decision.56 They must be clearly explained and justified by the trial court in the body of its
decision. Consequently, the award of attorney's fees should be deleted.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision and Resolution
are AFFIRMED with MODIFICATIONS, as follows:
1. The interest shall be computed as follows:
a. The actual damages in principal amount of $55,216.69, representing the amount of foreign
currency time deposit shall earn interest at the stipulated rate of 2.5625% for the period August
16, 1993 to February 14, 1994;
b. From February 15, 1994 to September 15, 1994, the principal amount of $55,216.69 and the
interest earned as of February 14, 1994 shall earn interest at the rate then prevailing granted
by Citibank;
c. From September 16, 1994 until full payment, the principal amount of $55,216.69 and the
interest earned as of September 15, 1994, shall earn interest at the legal rate of 12% per
annum;
2. The award of attorney's fees is DELETED.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 159912 August 17, 2007

UNITED COCONUT PLANTERS BANK, Petitioner,
vs.
SPOUSES SAMUEL and ODETTE BELUSO, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, which seeks to
annul the Court of Appeals Decision1 dated 21 January 2003 and its Resolution2 dated 9
September 2003 in CA-G.R. CV No. 67318. The assailed Court of Appeals Decision and
Resolution affirmed in turn the Decision3 dated 23 March 2000 and Order4 dated 8 May 2000 of
the Regional Trial Court (RTC), Branch 65 of Makati City, in Civil Case No. 99-314, declaring void
the interest rate provided in the promissory notes executed by the respondents Spouses
Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United Coconut Planters Bank
(UCPB).
The procedural and factual antecedents of this case are as follows:
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under a Credit
Agreement whereby the latter could avail from the former credit of up to a maximum amount
of P1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other
than their promissory notes, a real estate mortgage over parcels of land in Roxas City, covered
by Transfer Certificates of Title No. T-31539 and T-27828, as additional security for the
obligation. The Credit Agreement was subsequently amended to increase the amount of the
Promissory Notes Line to a maximum of P2.35 Million pesos and to extend the term thereof to
28 February 1998.
The spouses Beluso availed themselves of the credit line under the following Promissory Notes:

PN # Date of PN Maturity Date Amount Secured

8314-96-00083-3 29 April 1996 27 August 1996 P 700,000

8314-96-00085-0 2 May 1996 30 August 1996 P 500,000

8314-96-000292-2 20 November 1996 20 March 1997 P 800,000

The three promissory notes were renewed several times. On 30 April 1997, the payment of the
principal and interest of the latter two promissory notes were debited from the spouses
Belusos account with UCPB; yet, a consolidated loan for P1.3 Million was again released to the
spouses Beluso under one promissory note with a due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line extended to them by UCPB, the
spouses Beluso executed two more promissory notes for a total of P350,000.00:

PN # Date of PN Maturity Date Amount Secured

97-00363-1 11 December 1997 28 February 1998 P 200,000

98-00002-4 2 January 1998 28 February 1998 P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two promissory
notes were never released or credited to their account and, thus, claimed that the principal
indebtedness was only P2 Million.
In any case, UCPB applied interest rates on the different promissory notes ranging from 18% to
34%. From 1996 to February 1998 the spouses Beluso were able to pay the total sum
of P763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and penalty on the
obligations of the spouses Beluso, as follows:

PN # Amount Secured Interest Penalty Total

97-00363-1 P 200,000 31% 36% P 225,313.24

 97-00366-6 P 700,000 30.17% 32.786% P 795,294.72
(7 days) (102 days)

97-00368-2 P 1,300,000 28% 30.41% P 1,462,124.54

(2 days) (102 days)

98-00002-4 P 150,000 33% 36% P 170,034.71

(102 days)

The spouses Beluso, however, failed to make any payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation
of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso failed to comply therewith.
On 28 December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to
secure their credit line, which, by that time, already ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and
Damages against UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of the case as
follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest rate used by
[UCPB] void and the foreclosure and Sheriffs Certificate of Sale void. [UCPB] is hereby ordered
to return to [the spouses Beluso] the properties subject of the foreclosure; to pay [the spouses
Beluso] the amount of P50,000.00 by way of attorneys fees; and to pay the costs of suit. [The
spouses Beluso] are hereby ordered to pay [UCPB] the sum of P1,560,308.00.5
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration,6 prompting UCPB to
appeal the RTC Decision with the Court of Appeals. The Court of Appeals affirmed the RTC
Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the Regional Trial
Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby AFFIRMED subject to the
modification that defendant-appellant UCPB is not liable for attorneys fees or the costs of suit.7
On 9 September 2003, the Court of Appeals denied UCPBs Motion for Reconsideration for lack
of merit. UCPB thus filed the present petition, submitting the following issues for our
resolution:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH DECLARED
VOID THE PROVISION ON INTEREST RATE AGREED UPON BETWEEN PETITIONER AND
RESPONDENTS
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE COMPUTATION BY THE TRIAL COURT OF
RESPONDENTS INDEBTEDNESS AND ORDERED RESPONDENTS TO PAY PETITIONER THE
AMOUNT OF ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED EIGHT
PESOS (P1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH ANNULLED
THE FORECLOSURE BY PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED
"INCORRECT COMPUTATION" OF RESPONDENTS INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT WHICH FOUND
PETITIONER LIABLE FOR VIOLATION OF THE TRUTH IN LENDING ACT
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND
REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE DISMISSAL OF THE CASE BECAUSE THE
RESPONDENTS ARE GUILTY OF FORUM SHOPPING8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision found in the
promissory notes of the spouses Beluso is void, as the interest rates and the bases therefor
were determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE BELUSO
(BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS BANK
(LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of
______________ PESOS, (P_____), Philippine Currency, with interest thereon at the rate
indicative of DBD retail rate or as determined by the Branch Head.9
UCPB asserts that this is a reversible error, and claims that while the interest rate was not
numerically quantified in the face of the promissory notes, it was nonetheless categorically
fixed, at the time of execution thereof, at the "rate indicative of the DBD retail rate." UCPB
contends that said provision must be read with another stipulation in the promissory notes
subjecting to review the interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of
interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.10
In this regard, UCPB avers that these are valid reference rates akin to a "prevailing rate" or
"prime rate" allowed by this Court in Polotan v. Court of Appeals.11 Furthermore, UCPB argues
that even if the proviso "as determined by the branch head" is considered void, such a
declaration would not ipso facto render the connecting clause "indicative of DBD retail rate"
void in view of the separability clause of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained in this
AGREEMENT, or documents executed in connection herewith shall be declared invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the remaining
provisions hereof shall not in any way be affected or impaired.12
According to UCPB, the imposition of the questioned interest rates did not infringe on the
principle of mutuality of contracts, because the spouses Beluso had the liberty to choose
whether or not to renew their credit line at the new interest rates pegged by petitioner. 13 UCPB
also claims that assuming there was any defect in the mutuality of the contract at the time of its
inception, such defect was cured by the subsequent conduct of the spouses Beluso in availing
themselves of the credit line from April 1996 to February 1998 without airing any protest with
respect to the interest rates imposed by UCPB. According to UCPB, therefore, the spouses
Beluso are in estoppel.14
We agree with the Court of Appeals, and find no merit in the contentions of UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals,15 where we held:
In order that obligations arising from contracts may have the force of law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence,
even assuming that the P1.8 million loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to increase the interest
rate at will during the term of the loan, that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to
take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
The provision stating that the interest shall be at the "rate indicative of DBD retail rate or as
determined by the Branch Head" is indeed dependent solely on the will of petitioner UCPB.
Under such provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a
rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB
is given this choice, the rate should be categorically determinable in both choices. If either of
these two choices presents an opportunity for UCPB to fix the rate at will, the bank can easily
choose such an option, thus making the entire interest rate provision violative of the principle
of mutuality of contracts.
Not just one, but rather both, of these choices are dependent solely on the will of UCPB.
Clearly, a rate "as determined by the Branch Head" gives the latter unfettered discretion on
what the rate may be. The Branch Head may choose any rate he or she desires. As regards the
rate "indicative of the DBD retail rate," the same cannot be considered as valid for being akin to
a "prevailing rate" or "prime rate" allowed by this Court in Polotan. The interest rate in Polotan
reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of Security Bank
and Trust Company. x x x.16
In this provision in Polotan, there is a fixed margin over the reference rate: 3%. Thus, the
parties can easily determine the interest rate by applying simple arithmetic. On the other hand,
the provision in the case at bar does not specify any margin above or below the DBD retail rate.
UCPB can peg the interest at any percentage above or below the DBD retail rate, again giving it
unfettered discretion in determining the interest rate.
The stipulation in the promissory notes subjecting the interest rate to review does not render
the imposition by UCPB of interest rates on the obligations of the spouses Beluso valid.
According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased by the LENDER
considering among others the prevailing financial and monetary conditions; or the rate of
interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or the resulting profitability to the LENDER after due
consideration of all dealings with the BORROWER.17
It should be pointed out that the authority to review the interest rate was given UCPB alone as
the lender. Moreover, UCPB may apply the considerations enumerated in this provision as it
wishes. As worded in the above provision, UCPB may give as much weight as it desires to each
of the following considerations: (1) the prevailing financial and monetary condition; (2) the rate
of interest and charges which other banks or financial institutions charge or offer to charge for
similar accommodations; and/or (3) the resulting profitability to the LENDER (UCPB) after due
consideration of all dealings with the BORROWER (the spouses Beluso). Again, as in the case of
the interest rate provision, there is no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two options of UCPB
as to the interest to be imposed, as both options violate the principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel 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. 18
The interest rate provisions in the case at bar are illegal not only because of the provisions of
the Civil Code on mutuality of contracts, but also, as shall be discussed later, because they
violate the Truth in Lending Act. Not disclosing the true finance charges in connection with the
extensions of credit is, furthermore, a form of deception which we cannot countenance. It is
against the policy of the State as stated in the Truth in Lending Act:
Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its
citizens from a lack of awareness of the true cost of credit to the user by assuring a full
disclosure of such cost with a view of preventing the uninformed use of credit to the detriment
of the national economy.19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the offending
provisions are found in the promissory notes themselves, not in the credit line. In fixing the
interest rates in the promissory notes to cover the renewed credit line, UCPB still reserved to
itself the same two options (1) a rate indicative of the DBD retail rate; or (2) a rate as
determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the interest rates
imposed by UCPB, both failed to include in their computation of the outstanding obligation of
the spouses Beluso the legal rate of interest of 12% per annum. Furthermore, the penalty
charges were also deleted in the decisions of the RTC and the Court of Appeals. Section 2.04,
Article II on "Interest and other Bank Charges" of the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section 2.01 of this
ARTICLE, any principal obligation of the CLIENT hereunder which is not paid when due shall be
subject to a penalty charge of one percent (1%) of the amount of such obligation per month
computed from due date until the obligation is paid in full. If the bank accelerates teh (sic)
payment of availments hereunder pursuant to ARTICLE VIII hereof, the penalty charge shall be
used on the total principal amount outstanding and unpaid computed from the date of
acceleration until the obligation is paid in full.20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly and severally,
agree to pay an additional sum equivalent to twenty-five percent (25%) of the total due on the
Note as attorneys fee, aside from the expenses and costs of collection whether actually
incurred or not, and a penalty charge of one percent (1%) per month on the total amount due
and unpaid from date of default until fully paid.21
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to Section 9.06
of the Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights under this
AGREEMENT, the Note(s), the collaterals and other related documents, the BANK shall be
entitled to recover attorneys fees equivalent to not less than twenty-five percent (25%) of the
total amounts due and outstanding exclusive of costs and other expenses.22
Another alleged computational error pointed out by UCPB is the negation of the Compounding
Interest agreed upon by the parties under Section 2.02 of the Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part of the principal
and shall be subject to the same interest rate as herein stipulated.23 and paragraph 3 of the
subject promissory notes:
Interest not paid when due shall be added to, and become part of the principal and shall
likewise bear interest at the same rate.24
UCPB lastly avers that the application of the spouses Belusos payments in the disputed
computation does not reflect the parties agreement.1avvphi1 The RTC deducted the payment
made by the spouses Beluso amounting to P763,693.00 from the principal of P2,350,000.00.
This was allegedly inconsistent with the Credit Agreement, as well as with the agreement of the
parties as to the facts of the case. In paragraph 7 of the spouses Belusos Manifestation and
Motion on Proposed Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the parties
agreed that the amount of P763,693.00 was applied to the interest and not to the principal, in
accord with Section 3.03, Article II of the Credit Agreement on "Order of the Application of
Payments," which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be applied in
accordance with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any.25
Thus, according to UCPB, the interest charges, penalty charges, and attorneys fees had been
erroneously excluded by the RTC and the Court of Appeals from the computation of the total
amount due and demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by UCPB is for a
considerably bigger amount and, therefore, the demand should be considered void. There
being no valid demand, according to the spouses Beluso, there would be no default, and
therefore the interests and penalties would not commence to run. As it was likewise improper
to foreclose the mortgaged properties or file a case against the spouses Beluso, attorneys fees
were not warranted.
We agree with UCPB on this score. Default commences upon judicial or extrajudicial
demand.26 The excess amount in such a demand does not nullify the demand itself, which is
valid with respect to the proper amount. A contrary ruling would put commercial transactions
in disarray, as validity of demands would be dependent on the exactness of the computations
thereof, which are too often contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are
considered in default with respect to the proper amount and, therefore, the interests and the
penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually recognized
that said legal interest should be imposed, thus: "There being no valid stipulation as to interest,
the legal rate of interest shall be charged."27 It seems that the RTC inadvertently overlooked its
non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal rate of interest in
both the body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the respondent
Bank is null and void, only the legal rate of interest which is 12% per annum can be legally
charged and imposed by the bank, which would amount to only about P599,000.00 since 1996
up to August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:
xxxx
2. By way of example for the public good against the Banks taking unfair advantage of the
weaker party to their contract, declaring the legal rate of 12% per annum, as the imposable rate
of interest up to February 28, 1999 on the loan of 2.350 million.28
All these show that the spouses Beluso had acknowledged before the RTC their obligation to
pay a 12% legal interest on their loans. When the RTC failed to include the 12% legal interest in
its computation, however, the spouses Beluso merely defended in the appellate courts this
non-inclusion, as the same was beneficial to them. We see, however, sufficient basis to impose
a 12% legal interest in favor of petitioner in the case at bar, as what we have voided is merely
the stipulated rate of interest and not the stipulation that the loan shall earn interest.
We must likewise uphold the contract stipulation providing the compounding of interest. The
provisions in the Credit Agreement and in the promissory notes providing for the compounding
of interest were neither nullified by the RTC or the Court of Appeals, nor assailed by the
spouses Beluso in their petition with the RTC. The compounding of interests has furthermore
been declared by this Court to be legal. We have held in Tan v. Court of Appeals,29 that:
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.
As regards the imposition of penalties, however, although we are likewise upholding the
imposition thereof in the contract, we find the rate iniquitous. Like in the case of grossly
excessive interests, the penalty stipulated in the contract may also be reduced by the courts if it
is iniquitous or unconscionable.30
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be iniquitous
considering the fact that this penalty is already over and above the compounded interest
likewise imposed in the contract. If a 36% interest in itself has been declared unconscionable by
this Court,31 what more a 30.41% to 36% penalty, over and above the payment of compounded
interest? UCPB itself must have realized this, as it gave us a sample computation of the spouses
Belusos obligation if both the interest and the penalty charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable therefor even if there
had been no demand. Filing a case in court is the judicial demand referred to in Article
116932 of the Civil Code, which would put the obligor in delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the spouses Beluso
were forced to litigate the issue on the illegality of the interest rate provision of the promissory
notes. The award of attorneys fees, it must be recalled, falls under the sound discretion of the
court.33 Since both parties were forced to litigate to protect their respective rights, and both are
entitled to the award of attorneys fees from the other, practical reasons dictate that we set off
or compensate both parties liabilities for attorneys fees. Therefore, instead of awarding
attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award of
attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded legal interest
of 12% per annum and a penalty charge of 12% per annum. We also hold that, instead of
awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion of the award
of attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already been
consolidated on 19 February 2001 and 20 March 2001 in the name of UCPB, as the spouses
Beluso failed to exercise their right of redemption which expired on 25 March 2000. The RTC,
however, annulled the foreclosure of mortgage based on an alleged incorrect computation of
the spouses Belusos indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale are present in
the case at bar. Furthermore, the annulment of the foreclosure proceedings and the certificates
of sale were mooted by the subsequent issuance of new certificates of title in the name of said
bank. UCPB claims that the spouses Belusos action for annulment of foreclosure constitutes a
collateral attack on its certificates of title, an act proscribed by Section 48 of Presidential Decree
No. 1529, otherwise known as the Property Registration Decree, which provides:
Section 48. Certificate not subject to collateral attack. A certificate of title shall not be subject
to collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in
accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an excessive
demand on their account, they cannot be said to be in default for refusing to pay the same.
Consequently, according to the spouses Beluso, the "enforcement of such illegal and
overcharged demand through foreclosure of mortgage" should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since we already
found that a valid demand was made by UCPB upon the spouses Beluso, despite being
excessive, the spouses Beluso are considered in default with respect to the proper amount of
their obligation to UCPB and, thus, the property they mortgaged to secure such amounts may
be foreclosed. Consequently, proceeds of the foreclosure sale should be applied to the extent
of the amounts to which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale are present in
this case. The grounds for the proper annulment of the foreclosure sale are the following: (1)
that there was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the
purchaser; (2) that the sale had not been fairly and regularly conducted; or (3) that the price
was inadequate and the inadequacy was so great as to shock the conscience of the court.34
Liability for Violation of Truth in Lending Act
The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for UCPBs alleged
violation of Republic Act No. 3765, otherwise known as the Truth in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth in Lending Act
which mandates the filing of an action to recover such penalty must be made under the
following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be
liable to such person in the amount of P100 or in an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is greater, except that
such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty
may be brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the original complaint
did not explicitly allege a violation of the Truth in Lending Act and no action to formally admit
the amended petition [which expressly alleges violation of the Truth in Lending Act] was made
either by [respondents] spouses Beluso and the lower court. x x x."35
UCPB further claims that the action to recover the penalty for the violation of the Truth in
Lending Act had been barred by the one-year prescriptive period provided for in the Act. UCPB
asserts that per the records of the case, the latest of the subject promissory notes had been
executed on 2 January 1998, but the original petition of the spouses Beluso was filed before the
RTC on 9 February 1999, which was after the expiration of the period to file the same on 2
January 1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals
ruled:
Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending
Act and no action to formally admit the amended petition was made either by [respondents]
spouses Beluso and the lower court. In such transactions, the debtor and the lending
institutions do not deal on an equal footing and this law was intended to protect the public
from hidden or undisclosed charges on their loan obligations, requiring a full disclosure thereof
by the lender. We find that its infringement may be inferred or implied from allegations that
when [respondents] spouses Beluso executed the promissory notes, the interest rate
chargeable thereon were left blank. Thus, [petitioner] UCPB failed to discharge its duty to
disclose in full to [respondents] Spouses Beluso the charges applicable on their loans.36
We agree with the Court of Appeals. The allegations in the complaint, much more than the title
thereof, are controlling. Other than that stated by the Court of Appeals, we find that the
allegation of violation of the Truth in Lending Act can also be inferred from the same allegation
in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the
provision of their promissory note granting respondent bank the power to unilaterally fix the
interest rates, which rate was not determined in the promissory note but was left solely to the
will of the Branch Head of the respondent Bank, x x x.37
The allegation that the promissory notes grant UCPB the power to unilaterally fix the interest
rates certainly also means that the promissory notes do not contain a "clear statement in
writing" of "(6) the finance charge expressed in terms of pesos and centavos; and (7) the
percentage that the finance charge bears to the amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation."38Furthermore, the spouses
Belusos prayer "for such other reliefs just and equitable in the premises" should be deemed to
include the civil penalty provided for in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the violation of the Truth in
Lending Act has already prescribed is likewise without merit. The penalty for the violation of the
act is P100 or an amount equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is greater, except that such liability shall not
exceed P2,000.00 on any credit transaction.39 As this penalty depends on the finance charge
required of the borrower, the borrowers cause of action would only accrue when such finance
charge is required. In the case at bar, the date of the demand for payment of the finance charge
is 2 September 1998, while the foreclosure was made on 28 December 1998. The filing of the
case on 9 February 1999 is therefore within the one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be
inferred nor implied from the allegations made in the complaint.40 Pertinent provisions of the
Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any
person any information in violation of this Act or any regulation issued thereunder shall be
liable to such person in the amount of P100 or in an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is the greater, except
that such liability shall not exceed P2,000 on any credit transaction. Action to recover such
penalty may be brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any action under this subsection in which
any person is entitled to a recovery, the creditor shall be liable for reasonable attorneys fees
and court costs as determined by the court.
xxxx
(c) Any person who willfully violates any provision of this Act or any regulation issued
thereunder shall be fined by not less than P1,000 or more than P5,000 or imprisonment for not
less than 6 months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said
Act gives rise to both criminal and civil liabilities. Section 6(c) considers a criminal offense the
willful violation of the Act, imposing the penalty therefor of fine, imprisonment or both. Section
6(a), on the other hand, clearly provides for a civil cause of action for failure to disclose any
information of the required information to any person in violation of the Act. The penalty
therefor is an amount of P100 or in an amount equal to twice the finance charge required by
the creditor in connection with such transaction, whichever is greater, except that the liability
shall not exceed P2,000.00 on any credit transaction. The action to recover such penalty may be
instituted by the aggrieved private person separately and independently from the criminal case
for the same offense.
In the case at bar, therefore, the civil action to recover the penalty under Section 6(a) of the
Truth in Lending Act had been jointly instituted with (1) the action to declare the interests in
the promissory notes void, and (2) the action to declare the foreclosure void. This joinder is
allowed under Rule 2, Section 5 of the Rules of Court, which provides:
SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the alternative or
otherwise, as many causes of action as he may have against an opposing party, subject to the
following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties;
(b) The joinder shall not include special civil actions or actions governed by special rules;
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes
of action falls within the jurisdiction of said court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of money, the
aggregate amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act since the same
was not alleged in the complaint, UCPB is actually asserting a violation of due process. Indeed,
due process mandates that a defendant should be sufficiently apprised of the matters he or she
would be defending himself or herself against. However, in the 1 July 1999 pre-trial brief filed
by the spouses Beluso before the RTC, the claim for civil sanctions for violation of the Truth in
Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act in not
informing the borrower in writing before the execution of the Promissory Notes of the interest
rate expressed as a percentage of the total loan, the respondent bank instead is liable to pay
petitioners double the amount the bank is charging petitioners by way of sanction for its
violation.41
In the same pre-trial brief, the spouses Beluso also expressly raised the following issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in Lending Act
provision to express the interest rate as a simple annual percentage of the loan?42
These assertions are so clear and unequivocal that any attempt of UCPB to feign ignorance of
the assertion of this issue in this case as to prevent it from putting up a defense thereto is
plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has jurisdiction to try and
adjudicate the alleged violation of the Truth in Lending Act, considering that the present action
allegedly involved a single credit transaction as there was only one Promissory Note Line.
We disagree. We have already ruled that the action to recover the penalty under Section 6(a) of
the Truth in Lending Act had been jointly instituted with (1) the action to declare the interests
in the promissory notes void, and (2) the action to declare the foreclosure void. There had been
no question that the above actions belong to the jurisdiction of the RTC. Subsection (c) of the
above-quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to different venues or
jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes
of action falls within the jurisdiction of said court and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan or mutuum,
since the former is merely a preparatory contract to the contract of loan or mutuum. Under
such credit line, the bank is merely obliged, for the considerations specified therefor, to lend to
the other party amounts not exceeding the limit provided. The credit transaction thus occurred
not when the credit line was opened, but rather when the credit line was availed of. In the case
at bar, the violation of the Truth in Lending Act allegedly occurred not when the parties
executed the Credit Agreement, where no interest rate was mentioned, but when the parties
executed the promissory notes, where the allegedly offending interest rate was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of the subject
promissory notes after their execution, then they were duly notified of the terms thereof, in
substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that the
disclosure statement must be furnished prior to the consummation of the transaction:
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.
The rationale of this provision is to protect users of credit from a lack of awareness of the true
cost thereof, proceeding from the experience that banks are able to conceal such true cost by
hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount,
and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate
the true cost of their loan, to enable them to give full consent to the contract, and to properly
evaluate their options in arriving at business decisions. Upholding UCPBs claim of substantial
compliance would defeat these purposes of the Truth in Lending Act. The belated discovery of
the true cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.
In addition, the promissory notes, the copies of which were presented to the spouses Beluso
after execution, are not sufficient notification from UCPB. As earlier discussed, the interest rate
provision therein does not sufficiently indicate with particularity the interest rate to be applied
to the loan covered by said promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in RTC, Makati City)
on the ground that the spouses Beluso instituted another case (Civil Case No. V-7227) before
the RTC of Roxas City, involving the same parties and issues. UCPB claims that while Civil Case
No. V-7227 initially appears to be a different action, as it prayed for the issuance of a temporary
restraining order and/or injunction to stop foreclosure of spouses Belusos properties, it poses
issues which are similar to those of the present case.43 To prove its point, UCPB cited the
spouses Belusos Amended Petition in Civil Case No. V-7227, which contains similar allegations
as those in the present case. The RTC of Makati denied UCPBs Motion to Dismiss Case No. 99-
314 for lack of merit. Petitioner UCPB raised the same issue with the Court of Appeals, and is
raising the same issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the RTC of Roxas City, a
Petition for Injunction Against Foreclosure, is the propriety of the foreclosure before the true
account of spouses Beluso is determined. On the other hand, the issue in Case No. 99-314
before the RTC of Makati City is the validity of the interest rate provision. The spouses Beluso
claim that Civil Case No. V-7227 has become moot because, before the RTC of Roxas City could
act on the restraining order, UCPB proceeded with the foreclosure and auction sale. As the act
sought to be restrained by Civil Case No. V-7227 has already been accomplished, the spouses
Beluso had to file a different action, that of Annulment of the Foreclosure Sale, Case No. 99-314
with the RTC, Makati City.
Even if we assume for the sake of argument, however, that only one cause of action is involved
in the two civil actions, namely, the violation of the right of the spouses Beluso not to have their
property foreclosed for an amount they do not owe, the Rules of Court nevertheless allows the
filing of the second action. Civil Case No. V-7227 was dismissed by the RTC of Roxas City before
the filing of Case No. 99-314 with the RTC of Makati City, since the venue of litigation as
provided for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the following
instances:
SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a motion to dismiss
based on paragraphs (f), (h) and (i) of section 1 hereof shall bar the refiling of the same action
or claim. (n)
Improper venue as a ground for the dismissal of an action is found in paragraph (c) of Section 1,
not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the answer to the complaint or
pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same cause;
(f) That the cause of action is barred by a prior judgment or by the statute of limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has been paid, waived,
abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the provisions of the
statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied with. 44 (Emphases
supplied.)
When an action is dismissed on the motion of the other party, it is only when the ground for
the dismissal of an action is found in paragraphs (f), (h) and (i) that the action cannot be refiled.
As regards all the other grounds, the complainant is allowed to file same action, but should take
care that, this time, it is filed with the proper court or after the accomplishment of the
erstwhile absent condition precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration filed by the
spouses Beluso on 15 January 1999 with the RTC of Roxas City, which Motion had not yet been
ruled upon when the spouses Beluso filed Civil Case No. 99-314 with the RTC of Makati. Hence,
there were allegedly two pending actions between the same parties on the same issue at the
time of the filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This will
still not change our findings. It is indeed the general rule that in cases where there are two
pending actions between the same parties on the same issue, it should be the later case that
should be dismissed. However, this rule is not absolute. According to this Court in Allied
Banking Corporation v. Court of Appeals45 :
In these cases, it is evident that the first action was filed in anticipation of the filing of the later
action and the purpose is to preempt the later suit or provide a basis for seeking the dismissal
of the second action.
Even if this is not the purpose for the filing of the first action, it may nevertheless be dismissed
if the later action is the more appropriate vehicle for the ventilation of the issues between the
parties. Thus, in Ramos v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case should yield to the earlier case.
What is required merely is that there be another pending action, not a prior pending action.
Considering the broader scope of inquiry involved in Civil Case No. 4102 and the location of the
property involved, no error was committed by the lower court in deferring to the Bataan court's
jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant considerations in
determining which action should be dismissed: (1) the date of filing, with preference generally
given to the first action filed to be retained; (2) whether the action sought to be dismissed was
filed merely to preempt the later action or to anticipate its filing and lay the basis for its
dismissal; and (3) whether the action is the appropriate vehicle for litigating the issues between
the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an action for
injunction against a foreclosure sale that has already been held, while Civil Case No. 99-314
before the RTC of Makati City includes an action for the annulment of said foreclosure, an
action certainly more proper in view of the execution of the foreclosure sale. The former case
was improperly filed in Roxas City, while the latter was filed in Makati City, the proper venue of
the action as mandated by the Credit Agreement. It is evident, therefore, that Civil Case No. 99-
314 is the more appropriate vehicle for litigating the issues between the parties, as compared
to Civil Case No. V-7227. Thus, we rule that the RTC of Makati City was not in error in not
dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with the following
MODIFICATIONS:
1. In addition to the sum of P2,350,000.00 as determined by the courts a quo, respondent
spouses Samuel and Odette Beluso are also liable for the following amounts:
a. Penalty of 12% per annum on the amount due46 from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due47 from date of demand;
2. The following amounts shall be deducted from the liability of the spouses Samuel and Odette
Beluso:
a. Payments made by the spouses in the amount of P763,692.00. These payments shall be
applied to the date of actual payment of the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of the time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This amount shall be
deducted from the liability of the spouses Samuel and Odette Beluso on 9 February 1999 to the
following in the order that they are listed, to wit:
i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
3. The foreclosure of mortgage is hereby declared VALID. Consequently, the amounts which the
Regional Trial Court and the Court of Appeals ordered respondents to pay, as modified in this
Decision, shall be deducted from the proceeds of the foreclosure sale.
SO ORDERED.