CASES IN CREDIT TRANSACTIONS
defendant, Catholic Vicar Apostolic of the Mountain Province to
1. Catholic Vicar vs CA
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN
VALDEZ, respondents.
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
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,
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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
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 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. B—B-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;
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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 judicatabetween 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
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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.
2. Tolentino v Gonzales
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 26085 August 12, 1927
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants,
vs.
BENITO GONZALEZ SY CHIAM, defendants-appellee.
Araneta and Zaragoza for appellants.
Eusebio Orense for appelle.
JOHNSON, J.:
PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL
The principal questions presented by this appeal are:
(a) Is the contract in question a pacto de retro or a mortgage?
(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and
agrees to pay a certain amount per month as rent, may such rent render such a
contract usurious when the amount paid as rent, computed upon the purchase price,
amounts to a higher rate of interest upon said amount than that allowed by law?
(c) May the contract in the present case may be modified by parol evidence?
ANTECEDENT FACTS
Sometime prior to the 28th day of November, 1922, the appellants purchased of the
Luzon Rice Mills, Inc., a piece or parcel of land with the camarin located thereon,
situated in the municipality of Tarlac of the Province of Tarlac for the price of
P25,000, promising to pay therefor in three installments. The first installment of
P2,000 was due on or before the 2d day of May, 1921; the second installment of
P8,000 was due on or before 31st day of May, 1921; the balance of P15,000 at 12
per cent interest was due and payable on or about the 30th day of November, 1922.
One of the conditions of that contract of purchase was that on failure of the purchaser
(plaintiffs and appellants) to pay the balance of said purchase price or any of the
installments on the date agreed upon, the property bought would revert to the original
owner.
The payments due on the 2d and 31st of May, 1921, amounting to P10,000 were paid
so far as the record shows upon the due dates. The balance of P15,000 due on said
contract of purchase was paid on or about the 1st day of December, 1922, in the
manner which will be explained below. On the date when the balance of P15,000 with
interest was paid, the vendor of said property had issued to the purchasers transfer
certificate of title to said property, No. 528. Said transfer certificate of title (No. 528)
5
was transfer certificate of title from No. 40, which shows that said land was originally
registered in the name of the vendor on the 7th day of November, 1913.
PRESENT FACTS
On the 7th day of November, 1922 the representative of the vendor of the property in
question wrote a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying
the latter that if the balance of said indebtedness was not paid, an action would be
brought for the purpose of recovering the property, together with damages for non
compliance with the condition of the contract of purchase. The pertinent parts of said
letter read as follows:
Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente,
procederemos judicialmente contra Vd. para reclamar la devolucion del camarin y los
daños y perjuicios ocasionados a la compañia por su incumplimiento al contrato.
Somos de Vd. atentos y S. S.
SMITH, BELL & CO., LTD.
By (Sgd.) F. I. HIGHAM
Treasurer.
General Managers
LUZON RICE MILLS INC.
According to Exhibits B and D, which represent the account rendered by the vendor,
there was due and payable upon said contract of purchase on the 30th day of
November, 1922, the sum P16,965.09. Upon receiving the letter of the vendor of said
property of November 7, 1922, the purchasers, the appellants herein, realizing that
they would be unable to pay the balance due, began to make an effort to borrow
money with which to pay the balance due, began to make an effort to borrow money
with which to pay the balance of their indebtedness on the purchase price of the
property involved. Finally an application was made to the defendant for a loan for the
purpose of satisfying their indebtedness to the vendor of said property. After some
negotiations the defendants agreed to loan the plaintiffs to loan the plaintiffs the sum
of P17,500 upon condition that the plaintiffs execute and deliver to him a pacto de
retro of said property.
In accordance with that agreement the defendant paid to the plaintiffs by means of a
check the sum of P16,965.09. The defendant, in addition to said amount paid by
check, delivered to the plaintiffs the sum of P354.91 together with the sum of P180
which the plaintiffs paid to the attorneys for drafting said contract of pacto de retro,
making a total paid by the defendant to the plaintiffs and for the plaintiffs of P17,500
upon the execution and delivery of said contract. Said contracts was dated the 28th
day of November, 1922, and is in the words and figures following:
Sepan todos por la presente:
Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores
de edad, residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y
transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy
Chiam, mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta
Ciudad de Manila.
MANIFESTAMOS Y HACEMOS CONSTAR:
Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en
consideracion a la cantidad de diecisiete mil quinientos pesos (P17,500) moneda
filipina, que en este acto hemos recibido a nuestra entera satisfaccion de Don Benito
Gonzalez Sy Chiam, cedemos, vendemos y traspasamos a favor de dicho Don
Benito Gonzalez Sy Chiam, sus herederos y causahabientes, una finca que, segun el
Certificado de Transferencia de Titulo No. 40 expedido por el Registrador de Titulos
de la Provincia de Tarlac a favor de "Luzon Rice Mills Company Limited" que al
incorporarse se donomino y se denomina "Luzon Rice Mills Inc.," y que esta
corporacion nos ha transferido en venta absoluta, se describe como sigue:
Un terreno (lote No. 1) con las mejoras existentes en el mismo, situado en el
Municipio de Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por el E.
con propiedad de la Manila Railroad Co.; y por el S. con un camino. Partiendo de un
punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds. 17' E.859.42 m. del
mojon de localizacion No. 2 de la Oficina de Terrenos en Tarlac; y desde dicho punto
1 N. 81 gds. 31' O., 77 m. al punto 2; desde este punto N. 4 gds. 22' E.; 54.70 m. al
punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4; desde este punto S.
2 gds. 42' E., 61.48 m. al punto de partida; midiendo una extension superficcial de
cuatro mil doscientos diez y seis metros cuadrados (4,216) mas o menos. Todos los
puntos nombrados se hallan marcados en el plano y sobre el terreno los puntos 1 y 2
estan determinados por mojones de P. L. S. de 20 x 20 x 70 centimetros y los puntos
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3 y 4 por mojones del P. L. S. B. L.: la orientacion seguida es la verdadera, siendo la
declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, 1.º de febrero de
1913.
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años
contados desde el dia 1.º de diciembre de 1922, devolvemos al expresado Don
Benito Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos
(P17,500) queda obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos la
finca arriba descrita; pero si transcurre dicho plazo de cinco años sin ejercitar el
derecho de retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento
la finca arriba descrita, sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y cinco pesos
(P375) moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito
Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si el
conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara
lugar a la terminacion de este arrendamieno y a la perdida del derecho de retracto
que nos hemos reservado, como si naturalmente hubiera expirado el termino para
ello, pudiendo en su virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca y
desahuciarnos de la misma.
Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta
escritura en los precisos terminos en que la dejan otorgada los conyuges Severino
Tolentino y Potenciana Manio.
En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por
cuadruplicado en Manila, hoy a 28 de noviembre de 1922.
(Fdo.) SEVERINO TOLENTINO
(Fda.) POTENCIANA MANIO
(Fdo.) BENITO GONZALEZ SY CHIAM
Firmado en presencia de:
(Fdos.) MOISES M. BUHAIN
B. S. BANAAG
An examination of said contract of sale with reference to the first question above,
shows clearly that it is a pacto de retro and not a mortgage. There is no pretension on
the part of the appellant that said contract, standing alone, is a mortgage. The
pertinent language of the contract is:
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) años
contados desde el dia 1.º de diciembre de 1922, devolvemos al expresado Don
Benito Gonzales Sy Chiam el referido precio de diecisiete mil quinientos pesos
(P17,500) queda obligado dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la
finca arriba descrita; pero si transcurre dicho plazo de cinco (5) años sin ejercitar al
derecho de retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.
Language cannot be clearer. The purpose of the contract is expressed clearly in said
quotation that there can certainly be not doubt as to the purpose of the plaintiff to sell
the property in question, reserving the right only to repurchase the same. The
intention to sell with the right to repurchase cannot be more clearly expressed.
It will be noted from a reading of said sale of pacto de retro, that the vendor,
recognizing the absolute sale of the property, entered into a contract with the
purchaser by virtue of which she became the "tenant" of the purchaser. That contract
of rent appears in said quoted document above as follows:
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento
la finca arriba descrita, sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, sera de trescientos setenta y cinco pesos
(P375) moneda filipina, cada mes.
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(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito
Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si le
conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
From the foregoing, we are driven to the following conclusions: First, that the contract
of pacto de retro is an absolute sale of the property with the right to repurchase and
not a mortgage; and, second, that by virtue of the said contract the vendor became
the tenant of the purchaser, under the conditions mentioned in paragraph 3 of said
contact quoted above.
It has been the uniform theory of this court, due to the severity of a contract of pacto
de retro, to declare the same to be a mortgage and not a sale whenever the
interpretation of such a contract justifies that conclusion. There must be something,
however, in the language of the contract or in the conduct of the parties which shows
clearly and beyond doubt that they intended the contract to be a "mortgage" and not a
pacto de retro. (International Banking Corporation vs. Martinez, 10 Phil., 252; Padilla
vs. Linsangan, 19 Phil., 65; Cumagun vs. Alingay, 19 Phil., 415; Olino vs. Medina, 13
Phil., 379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757;
Villa vs. Santiago, 38 Phil., 157.)
We are not unmindful of the fact that sales with pacto de retro are not favored and
that the court will not construe an instrument to one of sale with pacto de retro, with
the stringent and onerous effect which follows, unless the terms of the document and
the surrounding circumstances require it.
While it is general rule that parol evidence is not admissible for the purpose of varying
the terms of a contract, but when an issue is squarely presented that a contract does
not express the intention of the parties, courts will, when a proper foundation is laid
therefor, hear evidence for the purpose of ascertaining the true intention of the
parties.
In the present case the plaintiffs allege in their complaint that the contract in question
is a pacto de retro. They admit that they signed it. They admit they sold the property
in question with the right to repurchase it. The terms of the contract quoted by the
plaintiffs to the defendant was a "sale" with pacto de retro, and the plaintiffs have
shown no circumstance whatever which would justify us in construing said contract to
be a mere "loan" with guaranty. In every case in which this court has construed a
contract to be a mortgage or a loan instead of a sale with pacto de retro, it has done
so, either because the terms of such contract were incompatible or inconsistent with
the theory that said contract was one of purchase and sale. (Olino vs. Medina, supra;
Padilla vs. Linsangan, supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs.
Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to indicate the
nature of the conveyance of the land was "pledged" instead of "sold". In the case of
Manlagnit vs. Dy Puico, while the vendor used to the terms "sale and transfer with the
right to repurchase," yet in said contract he described himself as a "debtor" the
purchaser as a "creditor" and the contract as a "mortgage". In the case of Rodriguez
vs. Pamintuan and De Jesus the person who executed the instrument, purporting on
its face to be a deed of sale of certain parcels of land, had merely acted under a
power of attorney from the owner of said land, "authorizing him to borrow money in
such amount and upon such terms and conditions as he might deem proper, and to
secure payment of the loan by a mortgage." In the case of Villa vs. Santiago (38 Phil.,
157), although a contract purporting to be a deed of sale was executed, the supposed
vendor remained in possession of the land and invested the money he had obtained
from the supposed vendee in making improvements thereon, which fact justified the
court in holding that the transaction was a mere loan and not a sale. In the case of
Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments from
the vendor, and such acceptance of partial payments is absolutely incompatible with
the idea of irrevocability of the title of ownership of the purchaser at the expiration of
the term stipulated in the original contract for the exercise of the right of repurchase."
Referring again to the right of the parties to vary the terms of written contract, we
quote from the dissenting opinion of Chief Justice Cayetano S. Arellano in the case of
Government of the Philippine Islands vs. Philippine Sugar Estates Development Co.,
which case was appealed to the Supreme Court of the United States and the
contention of the Chief Justice in his dissenting opinion was affirmed and the decision
of the Supreme Court of the Philippine Islands was reversed. (See decision of the
Supreme Court of the United States, June 3, 1918.)1 The Chief Justice said in
discussing that question:
According to article 1282 of the Civil Code, in order to judge of the intention of the
contracting parties, consideration must chiefly be paid to those acts executed by said
parties which are contemporary with and subsequent to the contract. And according
to article 1283, however general the terms of a contract may be, they must not be
held to include things and cases different from those with regard to which the
interested parties agreed to contract. "The Supreme Court of the Philippine Islands
held the parol evidence was admissible in that case to vary the terms of the contract
between the Government of the Philippine Islands and the Philippine Sugar Estates
8
Development Co. In the course of the opinion of the Supreme Court of the United
States Mr. Justice Brandeis, speaking for the court, said:
It is well settled that courts of equity will reform a written contract where, owing to
mutual mistake, the language used therein did not fully or accurately express the
agreement and intention of the parties. The fact that interpretation or construction of a
contract presents a question of law and that, therefore, the mistake was one of law is
not a bar to granting relief. . . . This court is always disposed to accept the
construction which the highest court of a territory or possession has placed upon a
local statute. But that disposition may not be yielded to where the lower court has
clearly erred. Here the construction adopted was rested upon a clearly erroneous
assumption as to an established rule of equity. . . . The burden of proof resting upon
the appellant cannot be satisfied by mere preponderance of the evidence. It is settled
that relief by way of reformation will not be granted unless the proof of mutual mistake
be of the clearest and most satisfactory character.
The evidence introduced by the appellant in the present case does not meet with that
stringent requirement. There is not a word, a phrase, a sentence or a paragraph in
the entire record, which justifies this court in holding that the said contract of pacto de
retro is a mortgage and not a sale with the right to repurchase. Article 1281 of the
Civil Code provides: "If the terms of a contract are clear and leave no doubt as to the
intention of the contracting parties, the literal sense of its stipulations shall be
followed." Article 1282 provides: "in order to judge as to the intention of the
contracting parties, attention must be paid principally to their conduct at the time of
making the contract and subsequently thereto."
We cannot thereto conclude this branch of our discussion of the question involved,
without quoting from that very well reasoned decision of the late Chief Justice
Arellano, one of the greatest jurists of his time. He said, in discussing the question
whether or not the contract, in the case of Lichauco vs. Berenguer (20 Phil., 12), was
a pacto de retro or a mortgage:
The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer
declares and states that he is the proprietor in fee simple of two parcels of fallow
unappropriated crown land situated within the district of his pueblo. The first has an
area of 73 quiñones, 8 balitas and 8 loanes, located in the sitio of Batasan, and its
boundaries are, etc., etc. The second is in the sitio of Panantaglay, barrio of
Calumpang has as area of 73 hectares, 22 ares, and 6 centares, and is bounded on
the north, etc., etc."
In the executory part of the said instrument, it is stated:
'That under condition of right to repurchase (pacto de retro) he sells the said
properties to the aforementioned Doña Cornelia Laochangco for P4,000 and upon the
following conditions: First, the sale stipulated shall be for the period of two years,
counting from this date, within which time the deponent shall be entitled to
repurchase the land sold upon payment of its price; second, the lands sold shall,
during the term of the present contract, be held in lease by the undersigned who shall
pay, as rental therefor, the sum of 400 pesos per annum, or the equivalent in sugar at
the option of the vendor; third, all the fruits of the said lands shall be deposited in the
sugar depository of the vendee, situated in the district of Quiapo of this city, and the
value of which shall be applied on account of the price of this sale; fourth, the
deponent acknowledges that he has received from the vendor the purchase price of
P4,000 already paid, and in legal tender currency of this country . . .; fifth, all the
taxes which may be assessed against the lands surveyed by competent authority,
shall be payable by and constitute a charge against the vendor; sixth, if, through any
unusual event, such as flood, tempest, etc., the properties hereinbefore enumerated
should be destroyed, wholly or in part, it shall be incumbent upon the vendor to repair
the damage thereto at his own expense and to put them into a good state of
cultivation, and should he fail to do so he binds himself to give to the vendee other
lands of the same area, quality and value.'
xxx xxx xxx
The opponent maintained, and his theory was accepted by the trial court, that
Berenguer's contract with Laochangco was not one of sale with right of repurchase,
but merely one of loan secured by those properties, and, consequently, that the
ownership of the lands in questions could not have been conveyed to Laochangco,
inasmuch as it continued to be held by Berenguer, as well as their possession, which
he had not ceased to enjoy.
Such a theory is, as argued by the appellant, erroneous. The instrument executed by
Macario Berenguer, the text of which has been transcribed in this decision, is very
clear. Berenguer's heirs may not go counter to the literal tenor of the obligation, the
exact expression of the consent of the contracting contained in the instrument, Exhibit
C. Not because the lands may have continued in possession of the vendor, not
because the latter may have assumed the payment of the taxes on such properties,
nor yet because the same party may have bound himself to substitute by another any
one of the properties which might be destroyed, does the contract cease to be what it
is, as set forth in detail in the public instrument. The vendor continued in the
9
possession of the lands, not as the owner thereof as before their sale, but as the
lessee which he became after its consummation, by virtue of a contract executed in
his favor by the vendee in the deed itself, Exhibit C. Right of ownership is not implied
by the circumstance of the lessee's assuming the responsibility of the payment is of
the taxes on the property leased, for their payment is not peculiarly incumbent upon
the owner, nor is such right implied by the obligation to substitute the thing sold for
another while in his possession under lease, since that obligation came from him and
he continues under another character in its possession—a reason why he guarantees
its integrity and obligates himself to return the thing even in a case of force majeure.
Such liability, as a general rule, is foreign to contracts of lease and, if required, is
exorbitant, but possible and lawful, if voluntarily agreed to and such agreement does
not on this account involve any sign of ownership, nor other meaning than the will to
impose upon oneself scrupulous diligence in the care of a thing belonging to another.
The purchase and sale, once consummated, is a contract which by its nature
transfers the ownership and other rights in the thing sold. A pacto de retro, or sale
with right to repurchase, is nothing but a personal right stipulated between the
vendee and the vendor, to the end that the latter may again acquire the ownership of
the thing alienated.
It is true, very true indeed, that the sale with right of repurchase is employed as a
method of loan; it is likewise true that in practice many cases occur where the
consummation of a pacto de retro sale means the financial ruin of a person; it is also,
unquestionable that in pacto de retro sales very important interests often intervene, in
the form of the price of the lease of the thing sold, which is stipulated as an additional
covenant. (Manresa, Civil Code, p. 274.)
But in the present case, unlike others heard by this court, there is no proof that the
sale with right of repurchase, made by Berenguer in favor of Laonchangco is rather a
mortgage to secure a loan.
We come now to a discussion of the second question presented above, and that is,
stating the same in another form: May a tenant charge his landlord with a violation of
the Usury Law upon the ground that the amount of rent he pays, based upon the real
value of the property, amounts to a usurious rate of interest? When the vendor of
property under a pacto de retro rents the property and agrees to pay a rental value
for the property during the period of his right to repurchase, he thereby becomes a
"tenant" and in all respects stands in the same relation with the purchaser as a tenant
under any other contract of lease.
The appellant contends that the rental price paid during the period of the existence of
the right to repurchase, or the sum of P375 per month, based upon the value of the
property, amounted to usury. Usury, generally speaking, may be defined as
contracting for or receiving something in excess of the amount allowed by law for the
loan or forbearance of money—the taking of more interest for the use of money than
the law allows. It seems that the taking of interest for the loan of money, at least the
taking of excessive interest has been regarded with abhorrence from the earliest
times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.) During the middle ages the
people of England, and especially the English Church, entertained the opinion, then,
current in Europe, that the taking of any interest for the loan of money was a
detestable vice, hateful to man and contrary to the laws of God. (3 Coke's Institute,
150; Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we look back upon
history, we shall find that there is scarcely any people, ancient or modern, that have
not had usury laws. . . . The Romans, through the greater part of their history, had the
deepest abhorrence of usury. . . . It will be deemed a little singular, that the same
voice against usury should have been raised in the laws of China, in the Hindu
institutes of Menu, in the Koran of Mahomet, and perhaps, we may say, in the laws of
all nations that we know of, whether Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is condemned by
the Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the
owner of a property to enter into a contract with the tenant for the payment of a
specific amount of rent for the use and occupation of said property, even though the
amount paid as "rent," based upon the value of the property, might exceed the rate of
interest allowed by law? That question has never been decided in this jurisdiction. It
is one of first impression. No cases have been found in this jurisdiction answering that
question. Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring
the effect of receiving or taking usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or forbearance of
any money, goods, chattels or credits, etc. The central idea of said statute is to
prohibit a rate of interest on "loans." A contract of "loan," is very different contract
from that of "rent". A "loan," as that term is used in the statute, signifies the giving of a
sum of money, goods or credits to another, with a promise to repay, but not a promise
to return the same thing. To "loan," in general parlance, is to deliver to another for
temporary use, on condition that the thing or its equivalent be returned; or to deliver
for temporary use on condition that an equivalent in kind shall be returned with a
compensation for its use. The word "loan," however, as used in the statute, has a
10
technical meaning. It never means the return of the same thing. It means the return of
an equivalent only, but never the same thing loaned. A "loan" has been properly
defined as an advance payment of money, goods or credits upon a contract or
stipulation to repay, not to return, the thing loaned at some future day in accordance
with the terms of the contract. Under the contract of "loan," as used in said statute,
the moment the contract is completed the money, goods or chattels given cease to
be the property of the former owner and becomes the property of the obligor to be
used according to his own will, unless the contract itself expressly provides for a
special or specific use of the same. At all events, the money, goods or chattels, the
moment the contract is executed, cease to be the property of the former owner and
becomes the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." In a contract of "rent"
the owner of the property does not lose his ownership. He simply loses his control
over the property rented during the period of the contract. In a contract of "loan" the
thing loaned becomes the property of the obligor. In a contract of "rent" the thing still
remains the property of the lessor. He simply loses control of the same in a limited
way during the period of the contract of "rent" or lease. In a contract of "rent" the
relation between the contractors is that of landlord and tenant. In a contract of "loan"
of money, goods, chattels or credits, the relation between the parties is that of obligor
and obligee. "Rent" may be defined as the compensation either in money, provisions,
chattels, or labor, received by the owner of the soil from the occupant thereof. It is
defined as the return or compensation for the possession of some corporeal
inheritance, and is a profit issuing out of lands or tenements, in return for their use. It
is that, which is to paid for the use of land, whether in money, labor or other thing
agreed upon. A contract of "rent" is a contract by which one of the parties delivers to
the other some nonconsumable thing, in order that the latter may use it during a
certain period and return it to the former; whereas a contract of "loan", as that word is
used in the statute, signifies the delivery of money or other consumable things upon
condition of returning an equivalent amount of the same kind or quantity, in which
cases it is called merely a "loan." In the case of a contract of "rent," under the civil
law, it is called a "commodatum."
From the foregoing it will be seen that there is a while distinction between a contract
of "loan," as that word is used in the statute, and a contract of "rent" even though
those words are used in ordinary parlance as interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount of rent to
be paid for the use and occupation of the property may depend upon a thousand
different conditions; as for example, farm lands of exactly equal productive capacity
and of the same physical value may have a different rental value, depending upon
location, prices of commodities, proximity to the market, etc. Houses may have a
different rental value due to location, conditions of business, general prosperity or
depression, adaptability to particular purposes, even though they have exactly the
same original cost. A store on the Escolta, in the center of business, constructed
exactly like a store located outside of the business center, will have a much higher
rental value than the other. Two places of business located in different sections of the
city may be constructed exactly on the same architectural plan and yet one, due to
particular location or adaptability to a particular business which the lessor desires to
conduct, may have a very much higher rental value than one not so located and not
so well adapted to the particular business. A very cheap building on the carnival
ground may rent for more money, due to the particular circumstances and
surroundings, than a much more valuable property located elsewhere. It will thus be
seen that the rent to be paid for the use and occupation of property is not necessarily
fixed upon the value of the property. The amount of rent is fixed, based upon a
thousand different conditions and may or may not have any direct reference to the
value of the property rented. To hold that "usury" can be based upon the comparative
actual rental value and the actual value of the property, is to subject every landlord to
an annoyance not contemplated by the law, and would create a very great
disturbance in every business or rural community. We cannot bring ourselves to
believe that the Legislature contemplated any such disturbance in the equilibrium of
the business of the country.
In the present case the property in question was sold. It was an absolute sale with the
right only to repurchase. During the period of redemption the purchaser was the
absolute owner of the property. During the period of redemption the vendor was not
the owner of the property. During the period of redemption the vendor was a tenant of
the purchaser. During the period of redemption the relation which existed between
the vendor and the vendee was that of landlord and tenant. That relation can only be
terminated by a repurchase of the property by the vendor in accordance with the
terms of the said contract. The contract was one of rent. The contract was not a loan,
as that word is used in Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no
right to make contracts for parties. They made their own contract in the present case.
There is not a word, a phrase, a sentence or paragraph, which in the slightest way
indicates that the parties to the contract in question did not intend to sell the property
in question absolutely, simply with the right to repurchase. People who make their
own beds must lie thereon.
11
What has been said above with reference to the right to modify contracts by parol
evidence, sufficiently answers the third questions presented above. The language of
the contract is explicit, clear, unambiguous and beyond question. It expresses the
exact intention of the parties at the time it was made. There is not a word, a phrase, a
sentence or paragraph found in said contract which needs explanation. The parties
thereto entered into said contract with the full understanding of its terms and should
not now be permitted to change or modify it by parol evidence.
With reference to the improvements made upon said property by the plaintiffs during
the life of the contract, Exhibit C, there is hereby reserved to the plaintiffs the right to
exercise in a separate action the right guaranteed to them under article 361 of the
Civil Code.
For all of the foregoing reasons, we are fully persuaded from the facts of the record,
in relation with the law applicable thereto, that the judgment appealed from should be
and is hereby affirmed, with costs. So ordered.
Avanceña, C. J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.
Separate Opinions
MALCOLM, J., dissenting:
I regret to have to dissent from the comprehensive majority decision. I stand squarely
on the proposition that the contract executed by the parties was merely a clever
device to cover up the payment of usurious interest. The fact that the document
purports to be a true sale with right of repurchase means nothing. The fact that the
instrument includes a contract of lease on the property whereby the lessees as
vendors apparently bind themselves to pay rent at the rate of P375 per month and
whereby "Default in the payment of the rent agreed for two consecutive months will
terminate this lease and will forfeit our right of repurchase, as though the term had
expired naturally" does mean something, and taken together with the oral testimony
is indicative of a subterfuge hiding a usurious loan. (Usury Law, Act No. 2655, sec. 7,
as amended; Padilla vs. Linsangan [1911], 19 Phil., 65; U. S. vs. Tan Quingco Chua
[1919], 39 Phil., 552; Russel vs. Southard [1851], 53 U. S., 139 Monagas vs.
Albertucci y Alvarez [1914], 235 U. S., 81; 10 Manresa, Codigo Civil Español, 3rd ed.,
p. 318.) The transaction should be considered as in the nature of an equitable
mortgage. My vote is for a modification of the judgment of the trial court.
3. Guingona v City Fiscal
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-60033 April 4, 1984
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA
SANTOS, petitioners,
vs.
THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY
FISCAL FELIZARDO N. LOTA and CLEMENT DAVID, respondents.
MAKASIAR, Actg. C.J.:ñé+.£ªwph!1
This is a petition for prohibition and injunction with a prayer for the immediate
issuance of restraining order and/or writ of preliminary injunction filed by petitioners
on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on the same
date, a temporary restraining order was duly issued ordering the respondents, their
officers, agents, representatives and/or person or persons acting upon their
(respondents') orders or in their place or stead to refrain from proceeding with the
preliminary investigation in Case No. 8131938 of the Office of the City Fiscal of
Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David
filed a motion to lift restraining order which was denied in the resolution of this Court
dated May 18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit public
respondents from proceeding with the preliminary investigation of I.S. No. 81-31938,
in which petitioners were charged by private respondent Clement David, with estafa
and violation of Central Bank Circular No. 364 and related regulations regarding
foreign exchange transactions principally, on the ground of lack of jurisdiction in that
12
the allegations of the charged, as well as the testimony of private respondent's
principal witness and the evidence through said witness, showed that petitioners'
obligation is civil in nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by the
Solicitor General in its Comment dated June 28,1982, as follows:têñ.£îhqwâ£
On December 23,1981, private respondent David filed I.S. No. 81-
31938 in the Office of the City Fiscal of Manila, which case was
assigned to respondent Lota for preliminary investigation (Petition,
p. 8).
In I.S. No. 81-31938, David charged petitioners (together with one
Robert Marshall and the following directors of the Nation Savings
and Loan Association, Inc., namely Homero Gonzales, Juan
Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac,
Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa
and violation of Central Bank Circular No. 364 and related Central
Bank regulations on foreign exchange transactions, allegedly
committed as follows (Petition, Annex "A"):têñ.£îhqwâ£
"From March 20, 1979 to March, 1981, David
invested with the Nation Savings and Loan
Association, (hereinafter called NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on
savings account deposits (jointly with his sister,
Denise Kuhne), US$10,000.00 on time deposit,
US$15,000.00 under a receipt and guarantee of
payment and US$50,000.00 under a receipt
dated June 8, 1980 (au jointly with Denise
Kuhne), that David was induced into making the
aforestated investments by Robert Marshall an
Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA
President, petitioner Martin, then NSLA
Executive Vice-President of NSLA and petitioner
Santos, then NSLA General Manager; that on
March 21, 1981 N LA was placed under
receivership by the Central Bank, so that David
filed claims therewith for his investments and
those of his sister; that on July 22, 1981 David
received a report from the Central Bank that only
P305,821.92 of those investments were entered
in the records of NSLA; that, therefore, the
respondents in I.S. No. 81-31938
misappropriated the balance of the investments,
at the same time violating Central Bank Circular
No. 364 and related Central Bank regulations on
foreign exchange transactions; that after
demands, petitioner Guingona Jr. paid only
P200,000.00, thereby reducing the amounts
misappropriated to P959,078.14 and
US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit
(Petition, Annex' B') in which they stated the following.têñ.£îhqwâ£
"That Martin became President of NSLA in March
1978 (after the resignation of Guingona, Jr.) and
served as such until October 30, 1980, while
Santos was General Manager up to November
1980; that because NSLA was urgently in need
of funds and at David's insistence, his
investments were treated as special- accounts
with interest above the legal rate, an recorded in
separate confidential documents only a portion of
which were to be reported because he did not
want the Australian government to tax his total
earnings (nor) to know his total investments; that
all transactions with David were recorded except
the sum of US$15,000.00 which was a personal
loan of Santos; that David's check for
US$50,000.00 was cleared through Guingona,
Jr.'s dollar account because NSLA did not have
one, that a draft of US$30,000.00 was placed in
the name of one Paz Roces because of a
pending transaction with her; that the Philippine
Deposit Insurance Corporation had already
reimbursed David within the legal limits; that
majority of the stockholders of NSLA had filed
13
 Special Proceedings No. 82-1695 in the Court of
First Instance to contest its (NSLA's) closure; that
after NSLA was placed under receivership,
Martin executed a promissory note in David's
favor and caused the transfer to him of a nine
and on behalf (9 1/2) carat diamond ring with a
net value of P510,000.00; and, that the liabilities
of NSLA to David were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex'
C') stated the following:têñ.£îhqwâ£
"That he had no hand whatsoever in the
transactions between David and NSLA since he
(Guingona Jr.) had resigned as NSLA president
in March 1978, or prior to those transactions; that
he assumed a portion o; the liabilities of NSLA to
David because of the latter's insistence that he
placed his investments with NSLA because of his
faith in Guingona, Jr.; that in a Promissory Note
dated June 17, 1981 (Petition, Annex "D") he
(Guingona, Jr.) bound himself to pay David the
sums of P668.307.01 and US$37,500.00 in
stated installments; that he (Guingona, Jr.)
secured payment of those amounts with second
mortgages over two (2) parcels of land under a
deed of Second Real Estate Mortgage (Petition,
Annex "E") in which it was provided that the
mortgage over one (1) parcel shall be cancelled
upon payment of one-half of the obligation to
David; that he (Guingona, Jr.) paid P200,000.00
and tendered another P300,000.00 which David
refused to accept, hence, he (Guingona, Jr.) filed
Civil Case No. Q-33865 in the Court of First
Instance of Rizal at Quezon City, to effect the
release of the mortgage over one (1) of the two
parcels of land conveyed to David under second
mortgages."
At the inception of the preliminary investigation before respondent
Lota, petitioners moved to dismiss the charges against them for
lack of jurisdiction because David's claims allegedly comprised a
purely civil obligation which was itself novated. Fiscal Lota denied
the motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners
filed the instant petition because: (a) the production of the
Promisory Notes, Banker's Acceptance, Certificates of Time
Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e., civil
obligations on the part of NSLA which were novated when
Guingona, Jr. and Martin assumed them; and (b) David's principal
witness allegedly testified that the duplicate originals of the
aforesaid instruments of indebtedness were all on file with NSLA,
contrary to David's claim that some of his investments were not
record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available
administrative remedies because to do so would be futile (Petition,
p. 9) [pp. 153-157, rec.].
As correctly pointed out by the Solicitor General, the sole issue for resolution is
whether public respondents acted without jurisdiction when they investigated the
charges (estafa and violation of CB Circular No. 364 and related regulations
regarding foreign exchange transactions) subject matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in nature and
therefore, public respondents have no jurisdiction over the charge of estafa.
A casual perusal of the December 23, 1981 affidavit. complaint filed in the Office of
the City Fiscal of Manila by private respondent David against petitioners Teopisto
Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert
Marshall and the other directors of the Nation Savings and Loan Association, will
show that from March 20, 1979 to March, 1981, private respondent David, together
with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association
the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and
Certificates of Time Deposits and the sum of P13,531.94 on savings account
deposits covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14
(pp. 15-16, roc.). It appears further that private respondent David, together with his
14
sister, made investments in the aforesaid bank in the amount of US$75,000.00 (p. 17,
rec.).
Moreover, the records reveal that when the aforesaid bank was placed under
receivership on March 21, 1981, petitioners Guingona and Martin, upon the request
of private respondent David, assumed the obligation of the bank to private
respondent David by executing on June 17, 1981 a joint promissory note in favor of
private respondent acknowledging an indebtedness of Pl,336,614.02 and
US$75,000.00 (p. 80, rec.). This promissory note was based on the statement of
account as of June 30, 1981 prepared by the private respondent (p. 81, rec.). The
amount of indebtedness assumed appears to be bigger than the original claim
because of the added interest and the inclusion of other deposits of private
respondent's sister in the amount of P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the
said indebtedness, and petitioner Guingona executed another promissory note
antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of
P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in
favor of private respondent (p. 25, rec.). The aforesaid promissory notes were
executed as a result of deposits made by Clement David and Denise Kuhne with the
Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David,
before this Court indisputably show that he has indeed invested his money on time
and savings deposits with the Nation Savings and Loan Association.
It must be pointed out that when private respondent David invested his money on
nine. and savings deposits with the aforesaid bank, the contract that was perfected
was a contract of simple loan or mutuum and not a contract of deposit. Thus, Article
1980 of the New Civil Code provides that:têñ.£îhqwâ£
Article 1980. Fixed, savings, and current deposits of-money in
banks and similar institutions shall be governed by the provisions
concerning simple loan.
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114,119 [1975],
We said:têñ.£îhqwâ£
It should be noted that fixed, savings, and current deposits of
money in banks and similar institutions are hat true deposits. are
considered simple loans and, as such, are not preferred credits
(Art. 1980 Civil Code; In re Liquidation of Mercantile Batik of China
Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 414; Pacific
Coast Biscuit Co. vs. Chinese Grocers Association 65 Phil. 375;
Fletcher American National Bank vs. Ang Chong UM 66 PWL 385;
Pacific Commercial Co. vs. American Apothecaries Co., 65 PhiL
429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the
Philippines (96 SCRA 102 [1980]) that:têñ.£îhqwâ£
Bank deposits are in the nature of irregular deposits. They are
really 'loans because they earn interest. All kinds of bank deposits,
whether fixed, savings, or current are to be treated as loans and
are to be covered by the law on loans (Art. 1980 Civil Code Gullas
vs. Phil. National Bank, 62 Phil. 519). Current and saving deposits,
are loans to a bank because it can use the same. The petitioner
here in making time deposits that earn interests will respondent
Overseas Bank of Manila was in reality a creditor of the respondent
Bank and not a depositor. The respondent Bank was in turn a
debtor of petitioner. Failure of the respondent Bank to honor the
time deposit is failure to pay its obligation as a debtor and not a
breach of trust arising from a depositary's failure to return the
subject matter of the deposit(Emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and
Loan Association is that of creditor and debtor; consequently, the ownership of the
amount deposited was transmitted to the Bank upon the perfection of the contract
and it can make use of the amount deposited for its banking operations, such as to
pay interests on deposits and to pay withdrawals. While the Bank has the obligation
to return the amount deposited, it has, however, no obligation to return or deliver
the same money that was deposited. And, the failure of the Bank to return the
amount deposited will not constitute estafa through misappropriation punishable
under Article 315, par. l(b) of the Revised Penal Code, but it will only give rise to civil
liability over which the public respondents have no- jurisdiction.
WE have already laid down the rule that:têñ.£îhqwâ£
15
In order that a person can be convicted under the above-quoted
provision, it must be proven that he has the obligation to deliver
or return the some money, goods or personal property that he
received Petitioners had no such obligation to return the same
money, i.e., the bills or coins, which they received from private
respondents. This is so because as clearly as stated in criminal
complaints, the related civil complaints and the supporting sworn
statements, the sums of money that petitioners received were
loans.
The nature of simple loan is defined in Articles 1933 and 1953 of
the Civil Code.têñ.£îhqwâ£
"Art. 1933. — By the contract of loan, one of the
parties delivers to another, either something not
consumable so that the latter may use the same
for a certain time- and return it, in which case the
contract is called a commodatum; or money
or other consumable thing, upon the condition
that the same amount of the same kind and
quality shall he paid in which case the contract is
simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a
stipulation to pay interest.
"In commodatum the bailor retains the ownership
of the thing loaned while in simple loan,
ownership passes to the borrower.
"Art. 1953. — A person who receives a loan of
money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and
quality."
It can be readily noted from the above-quoted provisions that in
simple loan (mutuum), as contrasted to commodatum the borrower
acquires ownership of the money, goods or personal property
borrowed Being the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not be
considered misappropriation thereof' (Yam vs. Malik, 94 SCRA 30,
34 [1979]; Emphasis supplied).
But even granting that the failure of the bank to pay the time and savings deposits of
private respondent David would constitute a violation of paragraph 1(b) of Article 315
of the Revised Penal Code, nevertheless any incipient criminal liability was deemed
avoided, because when the aforesaid bank was placed under receivership by the
Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to
private respondent David, thereby resulting in the novation of the original contractual
obligation arising from deposit into a contract of loan and converting the original trust
relation between the bank and private respondent David into an ordinary debtor-
creditor relation between the petitioners and private respondent. Consequently, the
failure of the bank or petitioners Guingona and Martin to pay the deposits of private
respondent would not constitute a breach of trust but would merely be a failure to pay
the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it may
however, prevent the rise of criminal liability as long as it occurs prior to the filing of
the criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69
[1968]) We held that:têñ.£îhqwâ£
As pointed out in People vs. Nery, novation prior to the filing of the
criminal information — as in the case at bar — may convert the
relation between the parties into an ordinary creditor-debtor
relation, and place the complainant in estoppel to insist on the
original transaction or "cast doubt on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580-
581 [1983] ), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964]
), declaring that:têñ.£îhqwâ£
The novation theory may perhaps apply prior to the filling of the
criminal information in court by the state prosecutors because up to
that time the original trust relation may be converted by the parties
into an ordinary creditor-debtor situation, thereby placing the
16
 complainant in estoppel to insist on the original trust. But after the
justice authorities have taken cognizance of the crime and
instituted action in court, the offended party may no longer divest
the prosecution of its power to exact the criminal liability, as
distinguished from the civil. The crime being an offense against the
state, only the latter can renounce it (People vs. Gervacio, 54 Off.
Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs. Montanes, 8
Phil. 620).
It may be observed in this regard that novation is not one of the
means recognized by the Penal Code whereby criminal liability can
be extinguished; hence, the role of novation may only be to either
prevent the rise of criminal habihty or to cast doubt on the true
nature of the original basic transaction, whether or not it was such
that its breach would not give rise to penal responsibility, as when
money loaned is made to appear as a deposit, or other similar
disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; U.S. vs.
Villareal, 27 Phil. 481).
In the case at bar, there is no dispute that petitioners Guingona and Martin executed
a promissory note on June 17, 1981 assuming the obligation of the bank to private
respondent David; while the criminal complaint for estafa was filed on December 23,
1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long
before the filing of the criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided but
there will still be a civil liability on the part of petitioners Guingona and Martin to pay
the assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of Central Bank
Circular No. 364 and other related regulations regarding foreign exchange
transactions by accepting foreign currency deposit in the amount of US$75,000.00
without authority from the Central Bank. They contend however, that the US dollars
intended by respondent David for deposit were all converted into Philippine currency
before acceptance and deposit into Nation Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
1. It appears from the records that when respondent David was about to make a
deposit of bank draft issued in his name in the amount of US$50,000.00 with the
Nation Savings and Loan Association, the same had to be cleared first and converted
into Philippine currency. Accordingly, the bank draft was endorsed by respondent
David to petitioner Guingona, who in turn deposited it to his dollar account with the
Security Bank and Trust Company. Petitioner Guingona merely accommodated the
request of the Nation Savings and loan Association in order to clear the bank draft
through his dollar account because the bank did not have a dollar account.
Immediately after the bank draft was cleared, petitioner Guingona authorized Nation
Savings and Loan Association to withdraw the same in order to be utilized by the
bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos
before they were accepted and deposited in Nation Savings and Loan Association,
because the bank is presumed to have followed the ordinary course of the business
which is to accept deposits in Philippine currency only, and that the transaction was
regular and fair, in the absence of a clear and convincing evidence to the contrary
(see paragraphs p and q, Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners
despite the fact that it was raised. in petitioners' reply filed on May 7, 1982 to private
respondent's comment and in the July 27, 1982 reply to public respondents' comment
and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding
more support to the conclusion that the US$75,000.00 were really converted into
Philippine currency before they were accepted and deposited into Nation Savings
and Loan Association. Considering that this might adversely affect his case,
respondent David should have promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in nature
and that there is no clear showing that they engaged in foreign exchange
transactions, We hold that the public respondents acted without jurisdiction when
they investigated the charges against the petitioners. Consequently, public
respondents should be restrained from further proceeding with the criminal case for to
allow the case to continue, even if the petitioners could have appealed to the Ministry
of Justice, would work great injustice to petitioners and would render meaningless the
proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of
prohibition and injunction, this court has recognized the resort to the extraordinary
writs of prohibition and injunction in extreme cases, thus:têñ.£îhqwâ£
17
 On the issue of whether a writ of injunction can restrain the
proceedings in Criminal Case No. 3140, the general rule is that
"ordinarily, criminal prosecution may not be blocked by court
prohibition or injunction." Exceptions, however, are allowed in the
following instances:têñ.£îhqwâ£
"1. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law
in an oppressive and vindictive manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional
rights;
"5. in proper cases, because the statute relied
upon is unconstitutional or was held invalid" (
Primicias vs. Municipality of Urdaneta,
Pangasinan, 93 SCRA 462, 469-470 [1979];
citing Ramos vs. Torres, 25 SCRA 557 [1968];
and Hernandez vs. Albano, 19 SCRA 95, 96
[1967]).
Likewise, in Lopez vs. The City Judge, et al. ( 18 SCRA 616, 621-622 [1966]), We
held that:têñ.£îhqwâ£
The writs of certiorari and prohibition, as extraordinary legal
remedies, are in the ultimate analysis, intended to annul void
proceedings; to prevent the unlawful and oppressive exercise of
legal authority and to provide for a fair and orderly administration of
justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took
cognizance of a petition for certiorari and prohibition although the
accused in the case could have appealed in due time from the
order complained of, our action in the premises being based on the
public welfare policy the advancement of public policy. In Dimayuga
vs. Fajardo, 43 Phil. 304, We also admitted a petition to restrain the
prosecution of certain chiropractors although, if convicted, they
could have appealed. We gave due course to their petition for the
orderly administration of justice and to avoid possible oppression
by the strong arm of the law. And in Arevalo vs. Nepomuceno, 63
Phil. 627, the petition for certiorari challenging the trial court's
action admitting an amended information was sustained despite the
availability of appeal at the proper time.
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY
RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS
AGAINST THE PRIVATE RESPONDENT.
SO ORDERED.1äwphï1.ñët
4. Compania agricola de ultramar v Nepomuceno
EN BANC
G.R. No. L-32778 November 14, 1930
Involuntary insolvency of Mariano Velasco and Co., et al. COMPAÑIA AGRICOLA DE
ULTRAMAR, claimant-appellee,
vs.
VICENTE NEPOMUCENO, assignee-appellant.
The appellant in his own behalf.
Eusebio Orense and Nicolas Belmonte for appellee.
OSTRAND, J.:
It appears from the record that on March 17, 1927, the registered partnerships,
Mariano Velasco & Co., Mariano Velasco, Sons, & Co., and Mariano Velasco & Co.,
Inc., were, on petition of the creditors, declared insolvent by the Court of First
Instance of Manila.
On the 16th day of April, 1927, the Compania Agricola de Ultramar filed a claim
against one of the insolvents Mariano Velasco & Co., claiming the sum of P10,000,
with the agreed interest thereon at the rate of 6 per cent per annum from April 5,
1918, until its full payment was a deposit with said Mariano Velasco & Co. and asked
the court to declare it a preferred claim.
18
The assignee of the insolvency answered the claim by interposing a general denial.
The claim was thereupon referred by the court to a Commissioner to receive the
evidence, and on September 23, 1929, the court rendered a decision declaring that
the alleged deposit was a preferred claim for the sum mentioned, with interest at 6
per cent per annum from April 5, 1918, until paid. From this decision the assignee
appealed.
The evidence presented by the claimant Compania Agricola de Ultramar consisted of
a receipt in writing, and the testimony of Jose Velasco who was manager of Mariano
Velasco & Co. at the time the note was executed. The receipt reads as follow
(translation):
MANILA, P. I., April 5, 1918.
Received from the "Compania Agricola de Ultramar" the sum of ten thousand
Philippine pesos as a deposit at the interest of six per cent annually, for the term of
three months from date.
In witness thereof, I sign the present.
MARIANO VELASCO & CO.
By (Sgd.) JOSE VELASCO
Manager.
P10,000.00.
In his testimony, Jose Velasco stated that his signature on the receipt was authentic
and that he received the said sum of P10,000 from the appellee and deposited it with
the bank in the current account of Mariano Velasco & Co.
In our opinion the court below erred in finding that the claim of the appellee should be
considered a deposit and a preferred claim. In the case of Gavieres vs. De Tavera (1
Phil., 17), very similar to the present case, this court held that the transaction therein
involved was a loan and not a deposit. The facts of the case were that in 1859
Ignacia de Gorricho delivered P3,000 to Felix Pardo de Tavera. The agreement
between them read as follows (translation):
Received of Señorita Ignacia de Gorricho the sum of 3,000 pesos, gold (3,000
pesos), as a deposit payable on two months' notice in advance, with interest at 6
percent per annum with a hypothecation of the goods now owned by me or which
may be owned hereafter, as security of the payment.
In witness whereof I sign in Binondo, January 31, 1859.
FELIX PARDO DE TAVERA
After the death of both parties, Gavieres, as plaintiff and successor in interest of the
deceased Ignacia de Gorricho, brought the action against Trinidad H. Pardo de
Tavera, the successor in interest of the deceased Felix Pardo de Tavera, for the
collection of the sum of P1,423.75, the remaining portion of the 3,000 pesos. The
plaintiff Gavieres alleged that the money was delivered to Felix Pardo de Tavera as a
deposit, but the defendant insisted that the agreement above quoted was not a
contract of deposit but one of loan. This court said:
Although in the document in question a deposit is spoken of, nevertheless from an
examination of the entire document it clearly appears that the contract was a loan
and that such was the intention of the parties. It is unnecessary to recur to the
cannons of interpretation to arrive at this conclusion. The obligation of the depository
to pay interest at the rate of 6 per cent to the depositor suffices to cause the
obligation to be considered as a loan and makes it likewise evident that it was the
intention of the parties that the depository should have the right to make use of the
amount deposited, since it was stipulated that the amount could be collected after
notice of two months in advance. Such being the case, the contract lost the character
of a deposit and acquired that of a loan. (Art. 1768, Civil Code.)
In the case of Javellana vs. Lim (11 Phil., 141) this court, speaking through Justice
Torres said:
Authority from the court having been previously obtained, the complaint was
amended on the 10th of January, 1907; it was then alleged, that on the 26th of May,
1897, the defendants executed and subscribed a document in favor of the plaintiff
reading as follows:
We have received from Angel Javellana, as a deposit without interest, the sum of two
thousand six hundred and eighty-six pesos and fifty-eight cents of pesos fuertes,
which we will return to the said gentleman, jointly and severally on the 20th of
January, 1898. — Jaro, 26th of May 1879. — Signed: JOSE LIM. — Signed:
CEFERINO DOMINGO LIM.
19
That, when the obligation became due, the defendants begged the plaintiff for an
extension of time for the payment thereof binding themselves to pay interest at the
rate of 15 per cent on the amount of their indebtedness, to which the plaintiff
acceded; that on the 15th of May, 1902, the debtors paid on account of interest due
the sum of 1,000 pesos, with the exception of which they had not paid any other sum
on account of either capital or interest, notwithstanding the requests made by the
plaintiff, who had thereby been subjected to loss and damages.
xxx xxx xxx
The document of indebtedness inserted in the complaint states that the plaintiff left on
deposit with the defendants a given sum of money which they were jointly and
severally obliged to return on a certain date fixed in the document; but that,
nevertheless, when the document appearing as Exhibit 2, written in the Visayan
dialect and followed by a translation into Spanish was executed, it was
acknowledged, at the date thereof, the 15th of November, 1902 that the amount
deposited had not yet been returned to the creditor, whereby he was subjected to
losses and damages amounting to 830 pesos since the 20th of January, 1898, when
the return was again stipulated with the further agreement that the amount deposited
should bear interest at the rate of 15 per cent per annum from the aforesaid date of
January 20, and that the 1,000 pesos paid to the depositor on the 15th of May, 1900,
according to the receipt issued by him to the debtors, would be included, and that the
said rate of interest would obtain until the debtors paid the creditor the said amount in
full. In this second document the contract between the parties, which is a real loan of
money with interest, appears perfectly defined, notwithstanding the fact that in the
original document executed by the debtors on the 26th of May, 1897, it is called a
deposit; so that when they bound themselves jointly and severally to refund the sum
of 2,686.58 pesos to the depositor, Javellana, they did not engage to return the same
coins received and of which the amount deposited consisted, and they could have
accomplished the return agreed upon by the delivery of a sum equal to the one
received by them. For this reason it must be understood that the debtors were
lawfully authorized to make use of the amount deposited, which they have done, as
subsequently shown when asking for an extension of the time for the return thereof,
inasmuch as, acknowledging that they have subjected the lender, their creditor, to
losses and damages for not complying with what had been stipulated, and being
conscious that they had used, for their own profit and gain, the money that they
received apparently as a deposit, they engaged to pay interest to the creditor from
the date named until the time when the refund should be made. Such conduct on the
part of the debtors is unquestionable evidence that the transaction entered in to
between the interested parties was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that —
"The depository cannot make use of the thing deposited without the express
permission of the depositor."
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that —
"When the depository has permission to make use of the thing deposited, the contract
loses the character of a deposit and becomes a loan or bailment."
"The permission not be presumed, and its existence must be proven."
xxx xxx xxx
Moreover, for the reasons above set forth it may, as a matter of course, be inferred
that there was no renewal of the contract of deposit converted into a loan, because,
as has already been stated, the defendants received said amount by virtue of a real
loan contract under the name of a deposit, since the so-called bailees were forthwith
authorized to dispose of the amount deposited. This they have done, as has been
clearly shown.lawphil.net
The two cases quoted are sufficient to show that the ten thousand pesos delivered by
the appellee to Mariano Velasco & Co. cannot de regarded as a technical deposit.
But the appellee argues that it is at least an "irregular deposit." This argument is, we
think, sufficiently answered in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319).
There this court said:
. . . Manresa, in his Commentaries on the Civil Code (vol. 11, p. 664), states that
there are three points of difference between a loan and an irregular deposit. The first
difference which he points out consists in the fact that in an irregular deposit the only
benefit is that which accrues to the depositor, while in a loan the essential cause for
the transaction is the necessity of the borrower. The contract in question does not
fulfill this requirement of an irregular deposit. It is very apparent that it was not for the
sole benefit of Rogers. It, like any other loan of money, was for the benefit of both
parties. The benefit which Smith, Bell & Co. received was the use of the money; the
benefit which Rogers received was the interest on his money. In the letter in which
Smith, Bell & Co. on the 30th of June, 1888, notified the plaintiff of the reduction of
20
the interest, they said: "We call your attention to this matter in order that you may if
you think best employ your money in some other place."
Nor does the contract in question fulfill the third requisite indicated by Manresa, which
is, that in an irregular deposit, the depositor can demand the return of the article at
any time, while a lender is bound by the provisions of the contract and cannot seek
restitution until the time for payment, as provided in the contract, has arisen. It is
apparent from the terms of this documents that the plaintiff could not demand his
money at any time. He was bound to give notice of his desire for its return and then to
wait for six months before he could insist upon payment.
In the present case the transaction in question was clearly not for the sole benefit of
the Compania Agricola de Ultramar; it was evidently for the benefit of both parties.
Neither could the alleged depositor demand payment until the expiration of the term
of three months.
For the reasons stated, the appealed judgment is reversed, and we hold that the
transaction in question must be regarded as a loan, without preference. Without
costs. So ordered.
Johnson, Street, Malcolm, Villamor, Johns and Villa-Real, JJ., concur.
Separate Opinions
ROMUALDEZ, J., dissenting:
We are here concerned, I take it, with an irregular deposit and following Manresa's
commentaries on this point (11 Manresa, 694-697, 3d edition), as well as the case he
cites from the Supreme Court of Spain, decided on April 8, 1881, I am of the opinion
that although the deposit in question earned interest, it was a preferred credit .The
judgment appealed from should therefore, as I think, be affirmed.
Avanceña, C.J., concurs.
5. Monte de Piedad v Javier (cant find in net)
6. Mina v Pascual
EN BANC
G.R. No. L-8321 October 14, 1913
ALEJANDRA MINA, ET AL., plaintiffs-appellants,
vs.
RUPERTA PASCUAL, ET AL., defendants-appellees.
N. Segundo for appellants.
Iñigo Bitanga for appellees.
ARELLANO, C.J.:
Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla
acquired during his lifetime, on March 12, 1874, a lot in the center of the town of
Laoag, the capital of the Province of Ilocos Norte, the property having been awarded
to him through its purchase at a public auction held by the alcalde mayor of that
province. The lot has a frontage of 120 meters and a depth of 15.
Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on
a part of the said lot, embracing 14 meters of its frontage by 11 meters of its depth.
Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs,
Alejandro Mina, et al., were recognized without discussion as his heirs.
Andres Fontanilla, the former owner of the warehouse, also having died, the children
of Ruperta Pascual were recognized likes without discussion, though it is not said
how, and consequently are entitled to the said building, or rather, as Ruperta Pascual
herself stated, to only six-sevenths of one-half of it, the other half belonging, as it
appears, to the plaintiffs themselves, and the remaining one-seventh of the first one-
half to the children of one of the plaintiffs, Elena de Villanueva. The fact is that the
plaintiffs and the defendants are virtually, to all appearance, the owners of the
warehouse; while the plaintiffs are undoubtedly, the owners of the part of the lot
occupied by that building, as well as of the remainder thereof.
This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the
guardian of her minor children, the herein defendants, petitioned the Curt of First
Instance of Ilocos Norte for authorization to sell "the six-sevenths of the one-half of
21
the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs — that is
Alejandra Mina, et al. — opposed the petition of Ruperta Pascual for the reason that
the latter had included therein the lot occupied by the warehouse, which they claimed
was their exclusive property. All this action was taken in a special proceeding in re
guardianship.
The plaintiffs did more than oppose Pascual's petition; they requested the court,
through motion, to decide the question of the ownership of the lot before it pass upon
the petition for the sale of the warehouse. But the court before determining the matter
of the ownership of the lot occupied by the warehouse, ordered the sale of this
building, saying:
While the trial continues with respect to the ownership of the lot, the court orders the
sale at public auction of the said warehouse and of the lot on which it is built, with the
present boundaries of the land and condition of the building, at a price of not less
than P2,890 Philippine currency . . . .
So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the
other defendant in this case, for the price mentioned.
The plaintiffs insisted upon a decision of the question of the ownership of the lot, and
the court decided it by holding that this land belonged to the owner of the warehouse
which had been built thereon thirty years before.
The plaintiffs appealed and this court reversed the judgment of the lower court and
held that the appellants were the owners of the lot in question. 1
When the judgment became final and executory, a writ of execution issued and the
plaintiffs were given possession of the lot; but soon thereafter the trial court annulled
this possession for the reason that it affected Cu Joco, who had not been a party to
the suit in which that writ was served.
It was then that the plaintiffs commenced the present action for the purpose of having
the sale of the said lot declared null and void and of no force and effect.
An agreement was had ad to the facts, the ninth paragraph of which is as follows:
9. That the herein plaintiffs excepted to the judgment and appealed therefrom
to the Supreme Court which found for them by holding that they are the owners of the
lot in question, although there existed and still exists a commodatum by virtue of
which the guardianship (meaning the defendants) had and has the use, and the
plaintiffs the ownership, of the property, with no finding concerning the decree of the
lower court that ordered the sale.
The obvious purport of the cause "although there existed and still exists a
commodatum," etc., appears to be that it is a part of the decision of the Supreme
Court and that, while finding the plaintiffs to be the owners of the lot, we recognized in
principle the existence of a commodatum under which the defendants held the lot.
Nothing could be more inexact. Possibly, also, the meaning of that clause is that,
notwithstanding the finding made by the Supreme Court that the plaintiffs were the
owners, these former and the defendants agree that there existed, and still exists, a
commodatum, etc. But such an agreement would not affect the truth of the contents
of the decision of this court, and the opinions held by the litigants in regard to this
point could have no bearing whatever on the present decision.
Nor did the decree of the lower court that ordered the sale have the least influence in
our previous decision to require our making any finding in regard thereto, for, with or
without that decree, the Supreme Court had to decide the ownership of the lot
consistently with its titles and not in accordance with the judicial acts or proceedings
had prior to the setting up of the issue in respect to the ownership of the property that
was the subject of the judicial decree.
What is essentially pertinent to the case is the fact that the defendant agree that the
plaintiffs have the ownership, and they themselves only the use, of the said lot.
On this premise, the nullity of the sale of the lot is in all respects quite evident,
whatsoever be the manner in which the sale was effected, whether judicially or
extrajudicially.
He who has only the use of a thing cannot validly sell the thing itself. The effect of the
sale being a transfer of the ownership of the thing, it is evident that he who has only
the mere use of the thing cannot transfer its ownership. The sale of a thing effected
by one who is not its owner is null and void. The defendants never were the owners
of the lot sold. The sale of it by them is necessarily null and void. On cannot convey
to another what he has never had himself.
The returns of the auction contain the following statements:
I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization
conferred upon me on the 31st of July, 1909, by the Court of First Instance of Ilocos
22
Norte, proceeded with the sale at public auction of the six-sevenths part of the one-
half of the warehouse constructed of rubble stone, etc.
Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction
all the land and all the rights title, interest, and ownership in the said property to Cu
Joco, who was the highest bidder, etc.
Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs
and assigns, all the interest, ownership and inheritance rights and others that, as the
guardian of the said minors, I have and may have in the said property, etc.
The purchaser could not acquire anything more than the interest that might be held
by a person to whom realty in possession of the vendor might be sold, for at a judicial
auction nothing else is disposed of. What the minor children of Ruperta Pascual had
in their possession was the ownership of the six-sevenths part of one-half of the
warehouse and the use of the lot occupied by his building. This, and nothing more,
could the Chinaman Cu Joco acquire at that sale: not the ownership of the lot; neither
the other half, nor the remaining one-seventh of the said first half, of the warehouse.
Consequently, the sale made to him of this one-seventh of one-half and the entire
other half of the building was null and void, and likewise with still more reason the
sale of the lot the building occupies.
The purchaser could and should have known what it was that was offered for sale
and what it was that he purchased. There is nothing that can justify the acquisition by
the purchaser of the warehouse of the ownership of the lot that this building occupies,
since the minors represented by Ruperta Pascual never were the owners of the said
lot, nor were they ever considered to be such.
The trial court, in the judgment rendered, held that there were no grounds for the
requested annulment of the sale, and that the plaintiffs were entitled to the P600
deposited with the clerk of the court as the value of the lot in question. The
defendants, Ruperta Pascual and the Chinaman Cu Joco, were absolved from the
complaint, without express finding as to costs.
The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be
compelled to accept the price set on the lot by expert appraisers, not even though the
plaintiffs be considered as coowner of the warehouse. It would be much indeed that,
on the ground of coownership, they should have to abide by and tolerate the sale of
the said building, which point this court does not decide as it is not a question
submitted to us for decision, but, as regards the sale of the lot, it is in all respects
impossible to hold that the plaintiffs must abide by it and tolerate, it, and this
conclusion is based on the fact that they did not give their consent (art. 1261, Civil
Code), and only the contracting parties who have given it are obliged to comply (art.
1091, idem).
The sole purpose of the action in the beginning was to obtain an annulment of the
sale of the lot; but subsequently the plaintiffs, through motion, asked for an
amendment by their complaint in the sense that the action should be deemed to be
one for the recovery of possession of a lot and for the annulment of its sale. The
plaintiff's petition was opposed by the defendant's attorney, but was allowed by the
court; therefore the complaint seeks, after the judicial annulment of the sale of the lot,
to have the defendants sentenced immediately to deliver the same to the plaintiffs.
Such a finding appears to be in harmony with the decision rendered by the Supreme
Court in previous suit, wherein it was held that the ownership of the lot lay in the
plaintiffs, and for this reason steps were taken to give possession thereof to the
defendants; but, as the purchaser Cu Joco was not a party to that suit, the present
action is strictly one for recover against Cu Joco to compel him, once the sale has
been annulled, to deliver the lot to its lawful owners, the plaintiffs.
As respects this action for recovery, this Supreme Court finds:
1. That it is a fact admitted by the litigating parties, both in this and in the previous
suit, that Andres Fontanilla, the defendants' predecessor in interest, erected the
warehouse on the lot, some thirty years ago, with the explicit consent of his brother
Francisco Fontanilla, the plaintiff's predecessor in interest.
2. That it also appears to be an admitted fact that the plaintiffs and the defendants
are the coowners of the warehouse.
3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla
nor his successors paid any consideration or price whatever for the use of the lot
occupied by the said building; whence it is, perhaps, that both parties have
denominated that use a commodatum.
Upon the premise of these facts, or even merely upon that of the first of them, the
sentencing of the defendants to deliver the lot to the plaintiffs does not follow as a
necessary corollary of the judicial declaration of ownership made in the previous suit,
nor of that of the nullity of the sale of the lot, made in the present case.
23
The defendants do not hold lawful possession of the lot in question.1awphil.net
But, although both litigating parties may have agreed in their idea of the
commodatum, on account of its not being, as indeed it is not, a question of fact but of
law, yet that denomination given by them to the use of the lot granted by Francisco
Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts are not to be
interpreted in conformity with the name that the parties thereto agree to give them,
but must be construed, duly considering their constitutive elements, as they are
defined and denominated by law.
By the contract of loan, one of the parties delivers to the other, either anything not
perishable, in order that the latter may use it during the certain period and return it to
the former, in which case it is called commodatum . . . (art. 1740, Civil Code).
It is, therefore, an essential feature of the commodatum that the use of the thing
belonging to another shall for a certain period. Francisco Fontanilla did not fix any
definite period or time during which Andres Fontanilla could have the use of the lot
whereon the latter was to erect a stone warehouse of considerable value, and so it is
that for the past thirty years of the lot has been used by both Andres and his
successors in interest. The present contention of the plaintiffs that Cu Joco, now in
possession of the lot, should pay rent for it at the rate of P5 a month, would destroy
the theory of the commodatum sustained by them, since, according to the second
paragraph of the aforecited article 1740, "commodatum is essentially gratuitous," and,
if what the plaintiffs themselves aver on page 7 of their brief is to be believed, it never
entered Francisco's mind to limit the period during which his brother Andres was to
have the use of the lot, because he expected that the warehouse would eventually
fall into the hands of his son, Fructuoso Fontanilla, called the adopted son of Andres,
which did not come to pass for the reason that Fructuoso died before his uncle
Andres. With that expectation in view, it appears more likely that Francisco intended
to allow his brother Andres a surface right; but this right supposes the payment of an
annual rent, and Andres had the gratuitous use of the lot.
Hence, as the facts aforestated only show that a building was erected on another's
ground, the question should be decided in accordance with the statutes that, thirty
years ago, governed accessions to real estate, and which were Laws 41 and 42, title
28, of the third Partida, nearly identical with the provisions of articles 361 and 362 of
the Civil Code. So, then, pursuant to article 361, the owner of the land on which a
building is erected in good faith has a right to appropriate such edifice to himself, after
payment of the indemnity prescribed in articles 453 and 454, or to oblige the builder
to pay him the value of the land. Such, and no other, is the right to which the plaintiff
are entitled.
For the foregoing reasons, it is only necessary to annul the sale of the said lot which
was made by Ruperta Pascual, in representation of her minor children, to Cu Joco,
and to maintain the latter in the use of the lot until the plaintiffs shall choose one or
the other of the two rights granted them by article 361 of the Civil Code.1awphil.net
The judgment appealed from is reversed and the sale of the lot in question is held to
be null and void and of no force or effect. No special finding is made as to the costs
of both instances.
Torres, Johnson, Carson, Moreland and Trent, JJ., concur.
7. Mercado v aguilar 45 off gz Supp5 118 (net not found)
8. Delos Santos v jarra (Sentencia)
EN BANC
G.R. No. L-4150 February 10, 1910
FELIX DE LOS SANTOS, plaintiff-appelle,
vs.
AGUSTINA JARRA, administratrix of the estate of Magdaleno Jimenea, deceased,
defendant-appellant.
Matias Hilado, for appellant.
Jose Felix Martinez, for appellee.
TORRES, J.:
On the 1st of September, 1906, Felix de los Santos brought suit against Agustina
Jarra, the administratrix of the estate of Magdaleno Jimenea, alleging that in the latter
part of 1901 Jimenea borrowed and obtained from the plaintiff ten first-class
carabaos, to be used at the animal-power mill of his hacienda during the season of
1901-2, without recompense or remuneration whatever for the use thereof, under the
sole condition that they should be returned to the owner as soon as the work at the
mill was terminated; that Magdaleno Jimenea, however, did not return the carabaos,
notwithstanding the fact that the plaintiff claimed their return after the work at the mill
was finished; that Magdaleno Jimenea died on the 28th of October, 1904, and the
24
defendant herein was appointed by the Court of First Instance of Occidental Negros
administratrix of his estate and she took over the administration of the same and is
still performing her duties as such administratrix; that the plaintiff presented his claim
to the commissioners of the estate of Jimenea, within the legal term, for the return of
the said ten carabaos, but the said commissioners rejected his claim as appears in
their report; therefore, the plaintiff prayed that judgment be entered against the
defendant as administratrix of the estate of the deceased, ordering her to return the
ten first-class carabaos loaned to the late Jimenea, or their present value, and to pay
the costs.
The defendant was duly summoned, and on the 25th of September, 1906, she
demurred in writing to the complaint on the ground that it was vague; but on the 2d of
October of the same year, in answer to the complaint, she said that it was true that
the late Magdaleno Jimenea asked the plaintiff to loan him ten carabaos, but that he
only obtained three second-class animals, which were afterwards transferred by sale
by the plaintiff to the said Jimenea; that she denied the allegations contained in
paragraph 3 of the complaint; for all of which she asked the court to absolve her of
the complaint with the cost against the plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose Felix Martinez notified
the defendant and her counsel, Matias Hilado, that he had made an agreement with
the plaintiff to the effect that the latter would not compromise the controversy without
his consent, and that as fees for his professional services he was to receive one half
of the amount allowed in the judgment if the same were entered in favor of the
plaintiff.
The case came up for trial, evidence was adduced by both parties, and either exhibits
were made of record. On the 10th of January, 1907, the court below entered
judgment sentencing Agustina Jarra, as administratrix of the estate of Magdaleno
Jimenea, to return to the plaintiff, Felix de los Santos, the remaining six second and
third class carabaos, or the value thereof at the rate of P120 each, or a total of P720
with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a writing
dated January 19, moved for anew trial on the ground that the findings of fact were
openly and manifestly contrary to the weight of the evidence. The motion was
overruled, the defendant duly excepted, and in due course submitted the
corresponding bill of exceptions, which was approved and submitted to this court.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff for the loan
of ten carabaos which are now claimed by the latter, as shown by two letters
addressed by the said Jimenea to Felix de los Santos; but in her answer the said
defendant alleged that the late Jimenea only obtained three second-class carabaos,
which were subsequently sold to him by the owner, Santos; therefore, in order to
decide this litigation it is indispensable that proof be forthcoming that Jimenea only
received three carabaos from his son-in-law Santos, and that they were sold by the
latter to him.
The record discloses that it has been fully proven from the testimony of a sufficient
number of witnesses that the plaintiff, Santos, sent in charge of various persons the
ten carabaos requested by his father-in-law, Magdaleno Jimenea, in the two letters
produced at the trial by the plaintiff, and that Jimenea received them in the presence
of some of said persons, one being a brother of said Jimenea, who saw the animals
arrive at the hacienda where it was proposed to employ them. Four died of rinderpest,
and it is for this reason that the judgment appealed from only deals with six surviving
carabaos.
The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not
evidenced by any trustworthy documents such as those of transfer, nor were the
declarations of the witnesses presented by the defendant affirming it satisfactory; for
said reason it can not be considered that Jimenea only received three carabaos on
loan from his son-in-law, and that he afterwards kept them definitely by virtue of the
purchase.
By the laws in force the transfer of large cattle was and is still made by means of
official documents issued by the local authorities; these documents constitute the title
of ownership of the carabao or horse so acquired. Furthermore, not only should the
purchaser be provided with a new certificate or credential, a document which has not
been produced in evidence by the defendant, nor has the loss of the same been
shown in the case, but the old documents ought to be on file in the municipality, or
they should have been delivered to the new purchaser, and in the case at bar neither
did the defendant present the old credential on which should be stated the name of
the previous owner of each of the three carabaos said to have been sold by the
plaintiff.
From the foregoing it may be logically inferred that the carabaos loaned or given on
commodatum to the now deceased Magdaleno Jimenea were ten in number; that
they, or at any rate the six surviving ones, have not been returned to the owner
thereof, Felix de los Santos, and that it is not true that the latter sold to the former
25
three carabaos that the purchaser was already using; therefore, as the said six
carabaos were not the property of the deceased nor of any of his descendants, it is
the duty of the administratrix of the estate to return them or indemnify the owner for
their value.
The Civil Code, in dealing with loans in general, from which generic denomination the
specific one of commodatum is derived, establishes prescriptions in relation to the
last-mentioned contract by the following articles:
ART. 1740. By the contract of loan, one of the parties delivers to the other, either
anything not perishable, in order that the latter may use it during a certain period and
return it to the former, in which case it is called commodatum, or money or any other
perishable thing, under the condition to return an equal amount of the same kind and
quality, in which case it is merely called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a stipulation to pay interest.
ART. 1741. The bailee acquires retains the ownership of the thing loaned. The bailee
acquires the use thereof, but not its fruits; if any compensation is involved, to be paid
by the person requiring the use, the agreement ceases to be a commodatum.
ART. 1742. The obligations and rights which arise from the commodatum pass to the
heirs of both contracting parties, unless the loan has been in consideration for the
person of the bailee, in which case his heirs shall not have the right to continue using
the thing loaned.
The carabaos delivered to be used not being returned by the defendant upon
demand, there is no doubt that she is under obligation to indemnify the owner thereof
by paying him their value.
Article 1101 of said code reads:
Those who in fulfilling their obligations are guilty of fraud, negligence, or delay, and
those who in any manner whatsoever act in contravention of the stipulations of the
same, shall be subjected to indemnify for the losses and damages caused thereby.
The obligation of the bailee or of his successors to return either the thing loaned or its
value, is sustained by the supreme tribunal of Sapin. In its decision of March 21,
1895, it sets out with precision the legal doctrine touching commodatum as follows:
Although it is true that in a contract of commodatum the bailor retains the ownership
of the thing loaned, and at the expiration of the period, or after the use for which it
was loaned has been accomplished, it is the imperative duty of the bailee to return
the thing itself to its owner, or to pay him damages if through the fault of the bailee
the thing should have been lost or injured, it is clear that where public securities are
involved, the trial court, in deferring to the claim of the bailor that the amount loaned
be returned him by the bailee in bonds of the same class as those which constituted
the contract, thereby properly applies law 9 of title 11 of partida 5.
With regard to the third assignment of error, based on the fact that the plaintiff Santos
had not appealed from the decision of the commissioners rejecting his claim for the
recovery of his carabaos, it is sufficient to estate that we are not dealing with a claim
for the payment of a certain sum, the collection of a debt from the estate, or payment
for losses and damages (sec. 119, Code of Civil Procedure), but with the exclusion
from the inventory of the property of the late Jimenea, or from his capital, of six
carabaos which did not belong to him, and which formed no part of the inheritance.
The demand for the exclusion of the said carabaos belonging to a third party and
which did not form part of the property of the deceased, must be the subject of a
direct decision of the court in an ordinary action, wherein the right of the third party to
the property which he seeks to have excluded from the inheritance and the right of
the deceased has been discussed, and rendered in view of the result of the evidence
adduced by the administrator of the estate and of the claimant, since it is so provided
by the second part of section 699 and by section 703 of the Code of Civil Procedure;
the refusal of the commissioners before whom the plaintiff unnecessarily appeared
can not affect nor reduce the unquestionable right of ownership of the latter,
inasmuch as there is no law nor principle of justice authorizing the successors of the
late Jimenea to enrich themselves at the cost and to the prejudice of Felix de los
Santos.
For the reasons above set forth, by which the errors assigned to the judgment
appealed from have been refuted, and considering that the same is in accordance
with the law and the merits of the case, it is our opinion that it should be affirmed and
we do hereby affirm it with the costs against the appellant. So ordered.
Arellano, C.J., Johnson, Moreland and Elliott, JJ., concur.
26
Carson, J., reserves his vote.
9. Ansaldo v Beck
EN BANC
G.R. No. L-46240 November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.
Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain furniture
which she lent him for his use. She appealed from the judgment of the Court of First
Instance of Manila which ordered that the defendant return to her the three has
heaters and the four electric lamps found in the possession of the Sheriff of said city,
that she call for the other furniture from the said sheriff of Manila at her own expense,
and that the fees which the Sheriff may charge for the deposit of the furniture be paid
pro rata by both parties, without pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's house on
M. H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the
contract of lease between the plaintiff and the defendant, the former gratuitously
granted to the latter the use of the furniture described in the third paragraph of the
stipulation of facts, subject to the condition that the defendant would return them to
the plaintiff upon the latter's demand. The plaintiff sold the property to Maria Lopez
and Rosario Lopez and on September 14, 1936, these three notified the defendant of
the conveyance, giving him sixty days to vacate the premises under one of the
clauses of the contract of lease. There after the plaintiff required the defendant to
return all the furniture transferred to him for them in the house where they were
found. On November 5, 1936, the defendant, through another person, wrote
to the plaintiff reiterating that she may call for the furniture in the ground floor of the
house. On the 7th of the same month, the defendant wrote another letter to the
plaintiff informing her that he could not give up the three gas heaters and the four
electric lamps because he would use them until the 15th of the same month when the
lease in due to expire. The plaintiff refused to get the furniture in view of the fact that
the defendant had declined to make delivery of all of them. On November
15th, before vacating the house, the defendant deposited with the Sheriff all the
furniture belonging to the plaintiff and they are now on deposit in the warehouse
situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly
applied the law: in holding that they violated the contract by not calling for all the
furniture on November 5, 1936, when the defendant placed them at their disposal; in
not ordering the defendant to pay them the value of the furniture in case they are not
delivered; in holding that they should get all the furniture from the Sheriff at their
expenses; in ordering them to pay-half of the expenses claimed by the Sheriff for the
deposit of the furniture; in ruling that both parties should pay their respective legal
expenses or the costs; and in denying pay their respective legal expenses or the
costs; and in denying the motions for reconsideration and new trial. To dispose of the
case, it is only necessary to decide whether the defendant complied with his
obligation to return the furniture upon the plaintiff's demand; whether the latter is
bound to bear the deposit fees thereof, and whether she is entitled to the costs of
litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because under
it the plaintiff gratuitously granted the use of the furniture to the defendant, reserving
for herself the ownership thereof; by this contract the defendant bound himself to
return the furniture to the plaintiff, upon the latters demand (clause 7 of the contract,
Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation
voluntarily assumed by the defendant to return the furniture upon the plaintiff's
demand, means that he should return all of them to the plaintiff at the latter's
residence or house. The defendant did not comply with this obligation when he
merely placed them at the disposal of the plaintiff, retaining for his benefit the three
gas heaters and the four eletric lamps. The provisions of article 1169 of the Civil
Code cited by counsel for the parties are not squarely applicable. The trial court,
therefore, erred when it came to the legal conclusion that the plaintiff failed to comply
with her obligation to get the furniture when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the plaintiff,
upon the latter's demand, the Court could not legally compel her to bear the
expenses occasioned by the deposit of the furniture at the defendant's behest. The
latter, as bailee, was not entitled to place the furniture on deposit; nor was the plaintiff
under a duty to accept the offer to return the furniture, because the defendant wanted
to retain the three gas heaters and the four electric lamps.
27

As to the value of the furniture, we do not believe that the plaintiff is entitled to the
payment thereof by the defendant in case of his inability to return some of the
furniture because under paragraph 6 of the stipulation of facts, the defendant has
neither agreed to nor admitted the correctness of the said value. Should the
defendant fail to deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the parties may desire to
present.
The costs in both instances should be borne by the defendant because the plaintiff is
the prevailing party (section 487 of the Code of Civil Procedure). The defendant was
the one who breached the contract of commodatum, and without any reason he
refused to return and deliver all the furniture upon the plaintiff's demand. In these
circumstances, it is just and equitable that he pay the legal expenses and other
judicial costs which the plaintiff would not have otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to return and deliver
to the plaintiff, in the residence to return and deliver to the plaintiff, in the residence or
house of the latter, all the furniture described in paragraph 3 of the stipulation of facts
Exhibit A. The expenses which may be occasioned by the delivery to and deposit of
the furniture with the Sheriff shall be for the account of the defendant. the defendant
shall pay the costs in both instances. So ordered.
10. Martinez v Ramos
EN BANC
G.R. No. L-9417 December 4, 1914
PEDRO MARTINEZ, plaintiff-appellee,
vs.
ANTONINO RAMOS, in his own behalf and as administrator of the estate of his father
Julian Ramos, defendant-appellant and ALEJANDRA RAMOS, defendant-appellee.
P. Joya Admana for appellant.
No appearance for appellees.
ARELLANO, C. J.:
On May 2, 1900, Antonino Ramos signed an obligation to the following effect in favor
of Pedro Martinez:1awphil.net
I hereby declare to be a fact that by order of my father, Julian Ramos, I have received
from Pedro Martinez one thousand nine hundred pesos ($1,900) as a loan without
interest, which I will return within three years, and I sign. — Manila, May 2, 1900. —
(Sgd.) Antonino Ramos.
Antonino Ramos was appointed judicial administrator of the estate of his deceased
father, Julian Ramos, and against him as such, and personally, in that special
proceeding, Pedro Martinez filed suit for the fulfillment of that obligation, for Antonino
Ramos alleged that by order of his father he had contracted it, and that subsequently
he had transferred to some of his coheirs the business started with the money. But
the committee of appraisal of the estate, in its report rendered on February 9, 1912,
decided that this was not a debt against the estate, but against the heirs who had
acknowledged it when presented to them. On March 7 of the same year Antonino
Ramos appealed from the decision of the committee; suit was instituted in the Court
of First Instance of Batangas and carried forward to judgment whereby he was
sentenced to pay to the plaintiff the sum of 1,450 pesos Mexican currency, reduced
to its equivalent in conant at the rate of 30 per cent, the final rate fixed for the official
exchange of the former money with the latter, with legal interest from the filing of the
complaint until total payment, and the costs, the estate of the deceased Julian Ramos
being absolved from the complaint. A sum paid on account was deducted in the
judgment from the total of the obligation.
Antonino Ramos appealed from this judgment and alleges here as the sole
assignment of error the fact that the trial court regarded the obligation in question as
a personal one of the appellant's, attempting to base it on acts that occurred
apparently, subsequent to the loan, whereby the borrower transferred to his parents
the business in which had been invested the money received as an accommodation
or loan from the lender, and on the fact that all or some of his coheirs had
acknowledged such sum as a debt of the testamentary administration of said parents
of Antonino Ramos and coheirs. But such assignment of error cannot be sustained.
One who receives as a loan money or other fungible thing, acquires ownership
thereof and is bound to return to his creditor an equal amount of the same kind and
quality. (Civil Code, art. 1753.)
In the instrument of obligation Antonino Ramos says:
28
I have received from Pedro Martinez one thousand nine hundred pesos as a loan
without interest, which I will return within three years, and I sign.
The contract consists in that Antonino, and nobody else, will return to Pedro Martinez
in the time stipulated the 1,900 pesos; and the allegations set up are of no avail
against the wording of the contents of the instrument.1awphil.net
Obligation arising from contracts have legal force between the contracting parties and
must be fullfilled in accordance with their stipulations. (Civil Code, art. 1091.)
Contracts that may have been made subsequent to the one under consideration,
either between Antonio Ramos and his parents or between himself and his coheirs,
wherein the lender Pedro Martinez has not intervened, cannot be alleged against the
plaintiff Pedro Martinez, on the principle that the force of the law of contrast cannot be
extended to parties who do not intervene therein.
The judgment appealed from is affirmed, with the costs against the appellant.
Torres, Johnson, Carson, Moreland, Trent and Araullo, JJ., concur.
11. Testate Estate of Velayo v Fernando
EN BANC
G.R. No. L-4120 October 25, 1951
Testate estate of the deceased VALERIANA VELAYO. AMANDA DE GUZMAN,
administratrix-appellant, vs. FELINO CH. FERNANDO and MERCEDES T. DE
FERNANDO, claimants-appellees.
Lorenzo G. Valentin for appellant.
Arcadio Ejercito for appellees.
BAUTISTA ANGELO, J.: chanrobles virtual law library
The estate of the deceased Valeriana Velayo became indebted to Dr. Felino Ch.
Fernando and his wife Mercedes T. Fernando because of a loan obtained by the
deceased in the amount of P12,000 with an annual interest of 10 per cent secured by
two deeds of mortgage executed on September 15, 1942, and December 29,
1942.chanroblesvirtualawlibrary chanrobles virtual law library
The administratrix is agreeable to pay the principal of the loan but to the interests,
invoking in her favor the moratorium law. It was agreed to sell the properties
mortgage and to pay out of the proceeds the principal in the amount of P12,000 with
the understanding that the balance will be deposited in court until after the question
as to whether the interests should be paid shall have been determined. After the
parties had submitted their respective memoranda in support of their respective
contentions, the Court, on June 20, 1950, issued an order holding that the
moratorium law has the effect of suspending merely the payment of the interests, not
of condoning them and, therefore, ordered the administratrix to pay said interests in
accordance with the stipulations agreed upon in the deeds of mortgage under
consideration. From this order the administratrix appealed.chanroblesvirtualawlibrary
chanrobles virtual law library
The only question to be determined is whether the moratorium law has the effect of
condoning the interest due on a monetary obligation or of merely suspending its
payment as in the case of the principal obligation.chanroblesvirtualawlibrary
chanrobles virtual law library
Executive Order No. 25, as amended by Executive Order No. 32, provides:
1. Enforcement of payment of all debts and other monetary obligations payable
within the Philippines, except debts and other monetary obligations entered into in
any area after declaration by Presidential Proclamation that such area has been freed
from enemy occupation and control, is temporarily suspended pending action by the
Commonwealth Government.
Interpreting the effect of moratorium law on a monetary obligation, this Court in a
recent case said:
The law on debt moratorium does not condone debts or the payments of obligations.
It merely suspends collection and payment. The right to such suspension may be
invoked by the debtor; but he may also waive or renounce it. (Araneta vs. Marta Cui
Vda. de Sanson, 47 Off. Gaz., 2849; Phil. 142.)
It, therefore, appears that the moratorium law has merely the effect of suspending the
collection or payment of the obligation. It does not condone the debt. Inasmuch as
the interest is but an accessory to the obligation, the same manner. The accessory
follows the principal. The moratorium order is couched in the clear terms. It says that
the enforcement of the payment of a debt or other monetary obligations "is
temporarily suspended pending action by the Commonwealth Government". When
29
the law is clear there is no room for interpretation.chanroblesvirtualawlibrary
chanrobles virtual law library
In this connection, it would not be amiss to invite attention to Republic Act No. 401
approved by Congress on June 18, 1949, which provides for the condonation of all
unpaid interests accruing from January 1, 1942, to December 31, 1945, on all
obligations outstanding on December 8, 1941. Said Act condones all unpaid interests
due during the period above mentioned in favor of the Government or government-
owned or controlled corporations under certain conditions. Section 1 of said Act
contains a declaration of policy on the matter, and it says:
SEC. 1. Declaration of Policy. - Rehabilitation of those who have suffered the
ravages of war constitutes a prime concern of the Government. In order to afford
opportunities to debtors of the Government or Government-owned or controlled
corporations to rehabilitate themselves, and to enable them to pay their prewar
obligations under terms and conditions beneficial to them, it is the declared policy of
the State that the condonation of the interests contemplated herein be extended.
While it is true that the condonation of interests is made only as regards debts due to
the Government or any government-owned or controlled corporations, the declaration
of policy is very significant for it indicates the trend of mind of the lawmaker regarding
the effects of moratorium or monetary obligations. If the interests due on debts owed
to the Government are not deemed condoned by virtue of the moratorium order so
much so that an express legislation was necessary to effect their condonation, there
is every reason to suppose that the interests due on other kinds of monetary
obligations are not likewise condoned simply because of the existence of the
moratorium law. Said Act No. 401 is a clear indication that the moratorium law does
not have the effect of condoning the interests but merely of suspending their payment
as correctly interpreted by the lower court.chanroblesvirtualawlibrary chanrobles
virtual law library
Wherefore, the order appealed from is affirmed, with costs against the
appellant.chanroblesvirtualawlibrary chanrobles virtual law library
Paras, C.J., Feria, Pablo, Bengzon, Padilla, Tuason, Reyes and Jugo, JJ., concur.
12. Overseas Bank v Cordero
SECOND DIVISION
G.R. No. L-33582 March 30, 1982
THE OVERSEAS BANK OF MANILA, petitioner,
vs.
VICENTE CORDERO and COURT OF APPEALS, respondents.
ESCOLIN, J.:
Again, We are confronted with another case involving the Overseas Bank of Manila,
filed by one of its depositors.
This is a petition for review on certiorari of the decision of the Court of Appeals which
affirmed the judgment of the Court of First Instance of Manila, holding petitioner bank
liable to respondent Vicente Cordero in the amount of P80,000.00 representing the
latter's time deposit with petitioner, plus interest thereon at 6% per annum until fully
paid, and costs.
On July 20, 1967, private respondent opened a one-year time deposit with petitioner
bank in the amount of P80,000.00 to mature on July 20, 1968 with interest at the rate
of 6% per annum. However, due to its distressed financial condition, petitioner was
unable to pay Cordero his said time deposit together with the interest. To enforce
payment, Cordero instituted an action in the Court of First Instance of Manila.
Petitioner, in its answer, raised as special defense the finding by the Monetary Board
of its state of insolvency. It cited the Resolution of August 1, 1968 of the Monetary
Board which authorized petitioner's board of directors to suspend all its operations,
and the Resolution of August 13, 1968 of the same Board, ordering the
Superintendent of Banks to take over the assets of petitioner for purposes of
liquidation.
Petitioner contended that although the Resolution of August 13, 1968 was then
pending review before the Supreme Court, 1 it effectively barred or abated the action
of respondent for even if judgment be ultimately rendered in favor of Cordero,
satisfaction thereof would not be possible in view of the restriction imposed by the
Monetary Board, prohibiting petitioner from issuing manager's and cashier's checks
and the provisions of Section 85 of Rep. Act 337, otherwise known as the General
Banking Act, forbidding its directors and officers from making any payment out of its
funds after the bank had become insolvent. It was further claimed that a judgment in
favor of respondent would create a preference in favor of a particular creditor to the
prejudice of other creditors and/or depositors of petitioner bank.
30

After pre-trial, petitioner filed on November 29, 1968, a motion to dismiss, reiterating
the same defenses raised in its answer. Finding the same unmeritorious, the lower
court denied the motion and proceeded with the trial on the merits. In due time, the
lower court rendered the aforesaid decision. Dissatisfied, petitioner appealed to the
Court of Appeals, which affirmed the decision of the lower court.
Hence, this petition for review on certiorari.
The issues raised in this petition are quite novel. Petitioner stands firm on its
contentions that the suit filed by respondent Cordero for recovery of his time deposit
is barred or abated by the state of insolvency of petitioner as found by the Monetary
Board of the Central Bank of the Philippines; and that the judgment rendered in favor
of respondent would in effect create a preference in his favor to the prejudice of other
creditors of the bank.
Certain supervening events, however, have rendered these issues moot and
academic. The first of these supervening events is the letter of Julian Cordero,
brother and attorney-in-fact of respondent Vicente Cordero, addressed to the
Commercial Bank of Manila (Combank), successor of petitioner Overseas Bank of
Manila. In this letter dated February 13, 1981, copy of which was furnished this Court,
it appears that respondent Cordero had received from the Philippine Deposit
Insurance Company the amount of P10,000.00.
The second is a Manifestation by the same Julian Cordero dated July 3, 1981,
acknowledging receipt of the sum of P73,840.00. Said Manifestation is in the nature
of a quitclaim, pertinent portions of which We quote:
I, the undersigned acting for and in behalf of my brother Vicente R. Cordero who
resides in Canada and by virtue of a Special Power of Attorney issued by Vicente
Romero, our Consul General in Vancouver, Canada, xerox copy attached, do hereby
manifest to this honorable court that we have decided to waive all and any damages
that may be awarded to the above-mentioned case and we hereby also agree to
accept the amount of Seventy Three Thousand Eight Hundred Forty Pesos
(P73,840.00) representing the principal and interest as computed by the Commercial
Bank of Manila. We also agree to hold free and harmless the Commercial Bank of
Manila against any claim by any third party or any suit that may arise against this
agreement of payment.
... We also confirm receipt of Seventy Three Thousand Eight Hundred Forty Pesos
(P73,840.00) with our full satisfaction. ...
When asked to comment on this Manifestation, counsel for Combank filed on August
12, 1981 a Comment confirming and ratifying the same, particularly the portions
which state:
We also agree to hold free and harmless the Commercial Bank any third party or any
suit that may arise against this agreement of payment, and
We also confirm receipt of Seventy Three Thousand Eight Hundred Forty Pesos
(P73,840.00) with our full satisfaction.
However, upon further examination, this Court noted the absence of the alleged
special power of attorney executed by private respondent in favor of Julian Cordero.
When directed to produce the same, Julian Cordero submitted the following
explanatory Comment, to which was attached the special power of attorney executed
by respondent Vicente Cordero:
3. This manifestation (referring to the Manifestation of July 3, 1981) applies
only to third party claims, suit and other damages. It does not mean waiving the
interest it should earn while the bank is closed and also the attorney's fees as
decided by the lower court. It is very clear. I did not waive the attorney's fees because
it belongs to our attorney and interest because it belongs to us and we are entitled to
it.
Thus, with the principal claim of respondent having been satisfied, the only remaining
issue to be determined is whether respondent is entitled to (1) interest on his time
deposit during the period that petitioner was closed and (2) to attorney's fees.
We find the answer to be in the negative.
The pronouncement made by this Court, per Justice Barredo, in the recent case of
Overseas Bank of Manila vs. Court of Appeals 2 is explicit and categorical. We quote:
It is a matter of common knowledge which we take judicial notice of, that what
enables a bank to pay stipulated interest on money deposited with it is that thru the
other aspects of its operation, it is able to generate funds to cover the payment of
such interest. Unless a bank can lend money, engage in international transactions,
acquire foreclosed mortgaged properties or their proceeds and generally engage in
31
other banking and financing activities, from which it can derive income, it is
inconceivable how it can carry on as a depository obligated to pay stipulated interest.
... Consequently, it should be deemed read into every contract of deposit with a bank
that the obligation to pay interest on the deposit ceases the moment the operation of
the bank is completely suspended by the duly constituted authority, the Central Bank.
We consider it of trivial consequence that the stoppage of the bank's operations by
the Central Bank has been subsequently declared illegal by the Supreme Court, for
before the Court's order, the bank had no alternative under the law than to obey the
orders of the Central Bank. Whatever be the juridical significance of the subsequent
action of the Supreme Court, the stubborn fact remained that the petitioner was
totally crippled from then on from earning the income needed to meet its obligations
to its depositors. If such a situation cannot, strictly speaking be legally denominated
as "force majeure" as maintained by private respondent, We hold it is a matter of
simple equity that it be treated as such.
And concluding, this Court stated:
Parenthetically, We may add for the guidance of those who might be concerned and
so that unnecessary litigations may be avoided from further clogging the dockets of
the courts that in the light of the consideration expounded in the above opinion, the
same formula that exempts petitioner from the payment of interest to its depositors
during the whole period of factual stoppage of its operations by orders of the Central
Bank, modified in effect by the decision as well as the approval of a formula of
rehabilitation by this Court, should be, as a matter of consistency, applicable or
followed in respect to all other obligations of petitioner which could not be paid during
the period of its actual complete closure.
Neither can respondent Cordero recover attorney's fees. The trial court found that
herein petitioner's refusal to pay was not due to a wilful and dishonest refusal to
comply with its obligation but to restrictions imposed by the Central Bank. 3 Since
respondent did not appeal from this decision, he is now barred from contesting the
same.
WHEREFORE, that portion of the lower court's decision ordering petitioner to pay
interest on Cordero's time deposit is set aside. It appearing that the amount of the
latter's time deposit had been fully paid, this case is hereby dismissed. No costs.
SO ORDERED.
13. Reformina v Tumol
EN BANC
G.R. No. L-59096 October 11, 1985
PACITA F. REFORMINA and HEIRS OF FRANCISCO REFORMINA, petitioners,
vs.
THE HONORABLE VALERIANO P. TOMOL, JR., as Judge of the Court of First
Instance, Branch XI, CEBU CITY, SHELL REFINING COMPANY (PHILS.), INC., and
MICHAEL, INCORPORATED, respondents.
Mateo Canonoy for petitioners.
Reynaldo A. Pineda, Reyes, Santayana, Tayao and Picaso Law Office for respondent
Shell.
Marcelo Fernan & Associates for respondent Michael, Inc.
CUEVAS, J.:
How much, by way of legal interest, should a judgment debtor pay the judgment
creditor- is the issue raised by the REFORMINAS (herein petitioners) in this Petition
for Review on certiorari of the Resolution of the Hon. respondent Judge Valeriano P.
Tomol, Jr. of the then Court of First Instance of Cebu-Branch XI, issued in Civil Case
No.
R-11279, an action for Recovery of Damages for injury to Person and Loss of
Property.
The dispositive portion of the assailed Resolution reads as follows—
In light (sic) of the foregoing, the considered view here that by legal interest is meant
six (6%) percent as provided for by Article 2209 of the Civil Code. Let a writ of
execution be issued.
SO ORDERED.1
Petitioners' motion for the reconsideration of the questioned Resolution having been
denied, they now come before Us through the instant petition praying for the setting
aside of the said Resolution and for a declaration that the judgment in their favor
32
should bear legal interest at the rate of twelve (12%) percent per annum pursuant to
Central Bank Circular No. 416 dated July 29, 1974.
Hereunder are the pertinent antecedents:
On June 7, 1972, judgment was rendered by the Court of First instance of Cebu in
Civil Case No. R-11279, 2 the dispositive portion of which reads—
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party
defendants and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay
jointly and severally the following persons:
(a) ...
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita Ill together with its accessories,
fishing gear and equipment minus P80,000.00 which is the value of the insurance
recovered and the amount of P10,000.00 a month as the estimated monthly loss
suffered by them as a result of the fire of May 6, 1969 up to the time they are actually
paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest
from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with
costs against defendants and third party plaintiffs.
On appeal to the then Court of Appeals, the trial court's judgment was modified to
reads as follows—
WHEREFORE. the judgment appealed from is modified such that defendants-
appellants Shell Refining Co. (Phils.), Inc. and Michael, Incorporated are hereby
ordered to pay ... The two (2) defendants- appellants are also directed to pay
P100,000.00 with legal interests from the filing of the complaint until paid as
compensatory and moral damages and P41,000.00 compensation for the value of the
lost boat with legal interest from the filing of the complaint until fully paid to Pacita F.
Reformina and the heirs of Francisco Reformina. The liability of the two defendants
for an the awards is solidary.
xxx xxx xxx
Except as modified above, the rest of the judgment appealed from is affirmed. The
defendants-appellants shall pay costs in favor of the plaintiffs. Appellants Shell and
Michael and third party defendant Anita L. Abellanosa shall shoulder their respective
costs.
SO ORDERED. 3
The said decision having become final on October 24, 1980, the case was remanded
to the lower court for execution and this is where the controversy started. In the
computation of the "legal interest" decreed in the judgment sought to be executed,
petitioners claim that the "legal interest" should be at the rate of twelve (12%) percent
per annum, invoking in support of their aforesaid submission, Central Bank of the
Philippines Circular No. 416. Upon the other hand, private respondents insist that
said legal interest should be at the rate of six (6%) percent per annum only, pursuant
to and by authority of Article 2209 of the New Civil Code in relation to Articles 2210
and 2211 thereof.
In support of their stand, petitioners contend that Central Bank Circular No. 416 which
provides —
By virtue of the authority granted to it under Section 1 of Act 2655, as amended,
otherwise known as the "Usury Law" the Monetary Board in its Resolution No. 1622
dated July 29, 1974, has prescribed that the rate of interest for the loan or
forbearance of any money, goods, or credits and the rate allowed in judgments, in the
absence of express contract as to such rate of interest, shall be twelve (12%) per
cent per annum. This Circular shall take effect immediately. (Italics supplied)
includes the judgment sought to be executed in this case, because it is covered by
the phrase 2nd the rate allowed in judgments in the absence of express contract as
to such rate of interest ... " in the aforequoted circular.
The petition is devoid of merit. Consequently, its dismissal is in order.
Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and
promulgated by the Monetary Board pursuant to the authority granted to the Central
Bank by P.D. No. 116, which amended Act No. 2655, otherwise known as the Usury
Law. The amendment from which said authority emanated reads as follows—
33
Section 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate
or rates of interest for the loan or renewal thereof or the forbearance of any money,
goods or credits, and to change such rate or rates whenever warranted by prevailing
economic and social conditions: Provided, That such changes shall not be made
oftener than once every twelve months.
In the exercise of the authority herein granted, the Monetary Board may prescribe
higher maximum rates for consumer loans or renewals thereof as well as such loans
made by pawnshops, finance companies and other similar credit institutions although
the rates prescribed for these institutions need not necessarily be uniform. (Italics
supplied)
Acting pursuant to this grant of authority, the Monetary Board increased the rate of
legal interest from that of six (6%) percent per annum originally allowed under Section
I of Act No. 2655 to twelve (12%) percent per annum.
It will be noted that Act No. 2655 deals with interest on (1) loans; (2) forbearances of
any money, goods, or credits; and (3) rate allowed in judgments.
The issue now is—what kind of judgment is referred to under the said law. Petitioners
maintain that it covers all kinds of monetary judgment.
The contention is devoid of merit.
The judgments spoken of and referred to are Judgments in litigations involving loans
or forbearance of any 'money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money, goods
or credits does not fall within the coverage of the said law for it is not within the ambit
of the authority granted to the Central Bank. The Monetary Board may not tread on
forbidden grounds. It cannot rewrite other laws. That function is vested solely with the
legislative authority. It is axiomatic in legal hermeneutics that statutes should be
construed as a whole and not as a series of disconnected articles and phrases. In the
absence of a clear contrary intention, words and phrases in statutes should not be
interpreted in isolation from one another. 4 A word or phrase in a statute is always
used in association with other words or phrases and its meaning may thus be
modified or restricted by the latter.5
Another formidable argument against the tenability of petitioners' stand are the
whereases of PD No. 116 which brought about the grant of authority to the Central
Bank and which reads thus—
WHEREAS, the interest rate, together with other monetary and credit policy
instruments, performs a vital role in mobilizing domestic savings and attracting capital
resources into preferred areas of investments;
WHEREAS, the monetary authorities have recognized the need to amend the present
Usury. Law to allow for more flexible interest rate ceilings that would be more
responsive to the requirements of changing economic conditions;
WHEREAS, the availability of adequate capital resources is, among other factors, a
decisive element in the achievement of the declared objective of accelerating the
growth of the national economy.
Coming to the case at bar, the decision herein sought to be executed is one rendered
in an Action for Damages for injury to persons and loss of property and does not
involve any loan, much less forbearances of any money, goods or credits. As
correctly argued by the private respondents, the law applicable to the said case is
Article 2209 of the New Civil Code which reads—
Art. 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of interest agreed upon, and in the absence of
stipulation, the legal interest which is six percent per annum.
The above provision remains untouched despite the grant of authority to the Central
Bank by Act No. 2655, as amended. To make Central Bank Circular No. 416
applicable to any case other than those specifically provided for by the Usury Law will
make the same of doubtful constitutionality since the Monetary Board will be
exercising legislative functions which was beyond the intendment of P.D. No. 116.
IN VIEW OF THE FOREGOING CONSIDERATIONS, and finding the instant petition
to be without merit, the same is hereby DISMISSED with costs against petitioners.
SO ORDERED.
14. Phil Rabbit Bus Lines v Cruz
FIRST DIVISION
G.R. No. 71017 July 28, 1986
34
PHILIPPINE RABBIT BUS LINES, INC., petitioner,
vs.
HON. LEONARDO I. CRUZ, Presiding Judge, Branch LVI, RTC, Third Judicial
Region & PEDRO MANABAT, respondents.
RESOLUTION
NARVASA, J.:
In Civil Case No. 2244 of the Court of First Instance (now Regional Trial Court,
Branch LVI) of Angeles City, Pedro Manabat, (the private respondent) obtained
judgment against Philippine Rabbit Bus Lines, Inc. (petitioner) the dispositive portion
of which reads:
WHEREFORE, in view of the above findings, this Court renders judgment in favor of
the plaintiff Pedro Manabat, and against the defendant, the Philippine Rabbit Bus
Lines, Incorporated, sentencing the latter to pay the former, Pedro Manabat as actual
and compensatory damages the amount of P72,500 with legal interest thereon from
the filing of the complaint until fully paid, and the costs of this suit. 1
The judgment having become final and executory following its affirmance by the
Intermediate Appellate Court, Manabat sought its execution and, at his instance, the
deputy sheriff of Angeles City garnished funds of Philippine Rabbit on deposit with
Manila Bank in said City to the extent of P155,150.00. This amount was released by
the Bank's manager by means of a check drawn in favor of the sheriff and was
thereafter paid to the private respondent. 2 The amount of P155,150.00 included
interest at the rate of twelve (12%) percent per annum on the award of P72,500.00
computed from the date of the filing of the complaint, as prescribed in the judgment.
Philippine Rabbit moved to dissolve the garnishment, asserting that while it was
willing to pay the award, the interest chargeable should be only six (6%) percent, not
twelve (12%) percent, per annum and upon being rebuffed, has come to this Court for
relief.
The issue raised:
Whether or not Circular No. 416 of the Central Bank of the Philippines, issued
pursuant to authority granted under Act No. 2655, as amended (The Usury Law), and
prescribing that:
... the rate of interest for the loan, or forbearance of any money, goods, or credits and
the rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall be twelve (12 %) percent per annum
is applicable to judgments that do not involve loans or forbearances of money, etc.,
is not one of first impression.
In Reformina vs. Tomol, Jr. 3 decided October 11, 1985, essentially the same factual
premises obtained, the only difference being that in said case, which concerned also
a judgment awarding damages for loss or injury to person or property, the interest
appeared to have been computed at six (6%) percent, and it was the judgment
creditors who came to this Court on their contention that the rate should be twelve
(12%) percent instead. The Court en banc unanimously rejected that contention, the
majority opinion holding, inter alia, that:
Central Bank Circular No. 416 which took effect on July 29, 1974 was issued and
promulgated by the Monetary Board pursuant to the authority granted to the Central
Bank by P.D. No. 116, which amended Act No. 2655, otherwise known as the Usury
Law. The amendment from said authority emanates reads as follows-
Section 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate
or rates of interest for the loan or renewal thereof or the forbearance of any money,
goods or credit, and to change such rate or rates whenever warranted by prevailing
economic and social conditions. Provided, That such changes shall not be made
oftener than once every twelve months.
In the exercise of the authority herein granted, the Monetary Board may prescribe
higher maximum rates for consumer loans or renewals thereof as well as such loans
made by pawnshops, finance companies and other similar credit institutions although
the rates prescribed for these institutions need not necessarily be uniform.'
(Emphasis supplied)
Acting pursuant to this grant of authority, the Monetary Board increased the rate of
legal interest from that of the six (6%) percent per annum originally allowed under
Section 1 of Act No. 2655 to twelve (12%) percent per annum.
It will be noted that Act No. 2655 deals with interest on (1) loans: (2) forbearances of
any money, goods, or credits, and (3) rate allowed in judgments. The issue now is
35
what-kind of judgment is referred to under the said law. Petitioners maintain that it
covers all kinds of monetary judgment.
The contention is devoid of merit.
The judgments spoken of and referred to are judgments in litigations involving loans
or forbearance of any money, goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or forbearance of any money, goods
or credits does not fall within the coverage of the said law for it is not within the ambit
of the authority granted to the Central Bank. The Monetary Board may not tread on
forbidden grounds. It cannot rewrite other laws. That function is vested solely with the
legislative authority. It is axiomatic in legal hermeneutics that statutes should be
construed as a whole and not as a series of disconnected articles and phrases. In the
absence of a clear contrary intention, words and phrases in statutes should not be
interpreted in isolation from one another. A word or phrase in a statute is always used
in association with other words or phrases and its meaning may thus be modified or
restricted by the latter.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered
in an Action for Damages for injury to persons and loss of property and does not
involve any loan, much less forbearances of any money, goods or credits. As
correctly argued by private respondents, the law applicable to the said case is Article
2209 of the New Civil Code which reads—
Art. 2209.— If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnify for damages, there being no stipulation to the
contrary, shall be the payment of interest agreed upon, and in the absence of
stipulation, the legal interest which is six percent per annum.
The above provisions remains untouched despite the grant of authority to the Central
Bank by Act No. 2655, as amended. To make Central Bank Circular No. 416
applicable to any case other than those specifically provided for by the Usury Law
well make the same of doubtful constitutionality since the Monetary Board will be
exercising legislative functions which was beyond the intendment of P.D. No. 116.
There is no reason to depart or deviate from that ruling here. It seems quite clear that
Section 1-a of Act No. 2655, as amended-which, as distinguished from sec.1 of the
same law, appears to be the actual and operative grant of authority to the Monetary
Board of the Central Bank to prescribe maximum rates of interest where the parties
have not stipulated thereon in excluding mention of rates allowed in judgments,
should, at the least, be construed as limiting the authority thus granted only to loans
or forbearances of money, etc., and to judgments involving such loans or
forbearances.
WHEREFORE, the petition is granted. It being obvious, as pointed out by the
petitioner, 4 that of the amount of P155,150.00 garnished and turned over to the
private respondent, the sum of P 82,650.00 represents interest computed at the rate
of twelve (12%) percent per annum, one-half of the last-stated sum, or P41,325.00,
represents interest in excess of the applicable rate of six (6%) percent per annum, the
order of the respondent Court complained of is vacated and set aside, and the private
respondent is ordered to refund to petitioner said excess of P41,325.00. No
pronouncement as to costs in this instance.
SO ORDERED.
15. Gregorio araneta v Tuason de paterno
EN BANC
G.R. No. L-2886 August 22, 1952
GREGORIO ARANETA, INC., plaintiff-appellant,
vs.
PAZ TUASON DE PATERNO and JOSE VIDAL, defendants-appellants.
Araneta and Araneta for appellant.
Ramirez and Ortigas for defendants-appellants.
Perkins, Ponce Enrile and Contreras And La O and Feria for appellee.
TUASON, J.:
This is a three-cornered contest between the purchasers, the seller, and the
mortgagee of certain portions (approximately 40,703 square meters) of a big block of
residential land in the district of Santa Mesa, Manila. The plaintiff, which is the
purchaser, and the mortgagee elevated this appeal. Though not an appellant, the
seller and mortgagor has made assignments of error in her brief, some to strengthen
the judgment and others for the purpose of new trial.
The case is extremely complicated and multiple issues were raised.
36
The salient facts in so far as they are not controverted are these. Paz Tuason de
Paterno is the registered owner of the aforesaid land, which was subdivided into city
lots. Most of these lots were occupied by lessees who had contracts of lease which
were to expire on December 31,1952, and carried a stipulation to the effect that in the
event the owner and lessor should decide to sell the property the lessees were to be
given priority over other buyers if they should desire to buy their leaseholds, all things
being equal. Smaller lots were occupied by tenants without formal contract.
In 1940 and 1941 Paz Tuason obtained from Jose Vidal several loans totalling
P90,098 and constituted a first mortgage on the aforesaid property to secure the
debt. In January and April, 1943, she obtained additional loans of P30,000 and
P20,000 upon the same security. On each of the last-mentioned occasions the
previous contract of mortgage was renewed and the amounts received were
consolidated. In the first novated contract the time of payment was fixed at two years
and in the second and last at four years. New conditions not relevant here were also
incorporated into the new contracts.
There was, besides, a separate written agreement entitled "Penalidad del Documento
de Novacion de Esta Fecha" which, unlike the principal contracts, was not registered.
The tenor of this separate agreement, all copies, of which were alleged to have been
destroyed or lost, was in dispute and became the subject of conflicting evidence. The
lower court did not make categorical findings on this point, however, and it will be our
task to do so at the appropriate place in this decision.
In 1943 Paz Tuason decided to sell the entire property for the net amount of
P400,000 and entered into negotiations with Gregorio Araneta, Inc. for this purpose.
The result of the negotiations was the execution on October 19, 1943, of a contract
called "Promesa de Compra y Venta" and identified as Exhibit "1." This contract
provided that subject to the preferred right of the lessees and that of Jose Vidal as
mortgagee, Paz Tuason would sell to Gregorio Araneta, Inc. and the latter would buy
for the said amount of P400,000 the entire estate under these terms.
El precio sera pagado como sigue: un 40 por ciento juntamente con la carta de
aceptacion del arrendatario, un 20 por ciento delprecio al otorgarse la escritura de
compromiso de venta, y el remanente 40 por ciento al otorgarse la escritura de venta
definitiva, la cual sera otorgada despues de que se habiese canceladola hipoteca a
favor de Jose Vidal que pesa sobre dichos lotes. Lacomision del 5 por ciento que
corresponde a Jose Araneta serapagada al otorgarse la escritura de compromiso de
venta.
Paz Tuason se obliga a entregar mediante un propio las cartasque dirigira a este
efecto a los arrendatarios, de conformidad con el formulario adjunto, que se marca
como Apendice A.
Expirado el plazo arriba mencionado, Paz Tuason otorgara las escrituras
correspondientes de venta a los arrendatarios que hayan decidido comprar sus
respectivos lotes.
9. Los alquieres correspondientes a este año se prorratearan entre la vendedora y el
comprador, correspondiendo al comprador los alquileres correspondientes a
Noviembre y Diciembre de este año y asimismo sera por cuenta del comprador el
amillaramiento correspondiente a dichos meses.
10. Paz Tuason, reconoce haver recibido en este acto de Gregorio Araneta, Inc., la
suma de Ciento Noventa Mil Pesos (P190,000)como adelanto del precio de venta
que Gregorio Araneta, Inc., tuviere que pagar a Paz Tuason.
La cantidad que Paz Tuason recibe en este acto sera aplicadapor ella a saldar su
deuda con Jose Vidal, los amillaramientos, sobre el utilizado por Paz Tuason para
otros fines.
11. Una vez determinados los lotes que Paz Tuason podra vendera Gregorio
Araneta, Inc., Paz Tuason otorgara una escritura deventa definitiva sobre dichos
lotes a favor de Gregorio Araneta, Inc.
Gregorio Araneta, Inc., pagara el precio de venta como sigue: 90 por ciento del
mismo al otorgarse la escritura de venta definitiva descontandose de la cantidad que
entonces se tenga que pagar de adelanto de P190,000 que se entrega en virtud de
esta escritura. El 10 por ciento remanente se pagara a Paz Tuazon, una vez se haya
cancelado la hipoteca que pesa actualmente sobre el terreno.
No obstante la dispuesto en el parrafo 8, cualquier arrendatario que decida comprar
el lote que occupa con contrato de arrendamiento podra optar por pedir el
otorgamiento inmediato a su favor el acto de la escritura de venta definitiva pagando
en el acto el 50 por ciento del precio (ademas del 40 por ciento que debio incluir en
su carta de aceptacion) y el remanente de 10 por ciento inmediatemente despues de
cancelarse la hipoteca que pesa sobre el terreno.
12. Si la mencionada cantidad de P190,000 excediere del 90 por ciento de la
cantidad que Gregorio Araneta, Inc., tuviere que vender a dicho comprador, el saldo
37
sera pagado inmediatamente por Paz Tuazon, tomandolo de las cantidades que
reciba de los arrendatarios como precio de venta. 3,373.38

In furtherance of this promise to buy and sell, letters were sent the lessees giving No. C-286443 in favor of Jose Vidal
them until August 31, 1943, an option to buy the lots they occupied at the price and
terms stated in said letters. Most of the tenants who held contracts of lease took 30,000.00
advantage of the opportunity thus extended and after making the stipulated payments
were giving their deeds of conveyance. These sales, as far as the record would show, No. C-286442 in favor of Jose Vidal
have been respected by the seller.
143,150.00
With the elimination of the lots sold or be sold to the tenants there remained
unencumbered, except for the mortgage to Jose Vidal, Lots 1, 8-16 and 18 which Total
have an aggregate area of 14,810.20 square meters; and on December 2, 1943, Paz
Tuason and Gregorio Araneta, Inc. executed with regard to these lots an absolute P190,000.00
deed of sale, the terms of which, except in two respects, were similar to those of the
sale to the lessees. This deed, copy of which is attached to the plaintiff's complaint as The return of the sum of P64,825.01 was made by the Vendor to the Vendee in a
Exhibit A, provided, among other things, as follows: liquidation which reads as follows:

The aforesaid lots are being sold by he Vendor to the Vendee separately at the prices Hemos recibido de Da. Paz Tuason de Paterno la cantidad de Sesenta y Cuatro mil
mentioned in paragraph (6) of the aforesaid contract entitled "Promesa de Compra y Ochocientos Veinticinco Pesos y un centimo (P64,825.01) enconcepto de devolucion
Venta," making a total sum of One Hundred Thirty-Nine Thousand Eighty-three pesos que nos hace del excesode lo pagadoa ella de
and Thirty-two centavos (P139,083.32), ninety (90%) per cent of which amount, i.e.,
the sum of One Hundred Twenty-five Thousand One Hundred Seventy-four Pesos P190,000.00
and Ninety-nine centavos (P125,174.99), the Vendor acknowledges to have received
by virtue of the advance of One Hundred Ninety Thousand (P190,000) Pesos made Menos el 90% de P139,083.32, importe de los lotes que vamos a comprar
by the Vendee to the Vendor upon the execution of the aforesaid contract entitled
"Promesa de Compra y Venta". The balance of Sixty-Four Thousand Eight Hundred 125,174.99
Twenty-five Pesos and One centavo (P64,825.01) between the sum of P125,174.99,
has been returned by the Vendor to the Vendee, which amount the Vendee Exceso
acknowledges to have received by these presents;
64,825.01
The aforesaid sum of P190,000 was delivered by the Vendee to the Vendor by virtue
of four checks issued by the Vendee against the Bank of the Philippine Islands, as Cheque BIF No. D-442988 de Simplicio del Rosario
follows:
21,984.20
No. C-286445 in favor of Paz Tuason de Paterno
Cheque PNB No. 177863-K de L.E. Dumas
P13,476.62
21,688.60
No. C-286444 in favor of the City Treasurer, Manila
38
Cheque PNB No. 267682-K de Alfonso Sycip Por;
(Fdo.) "JOSE ARANETA
20,000.00 Presidente

Cheque PNB No. 83940 de Josefina de Pabalan Recibido cheque No. C-288642 BIF-P493.23

4,847.96 Por:
(Fdo.) "M.J. GONZALEZ
Billetes recibidos de Alfonso Sycip
In view of the foregoing liquidation, the vendor acknowledges fully and
42.96 unconditionally, having received the sum of P125,174.99 of the present legal
currency and hereby expressly declares that she will not hold the Vendee responsible
P68,563.21 for any loss that she might suffer due to the fact that two of the checks paid to her by
the Vendee were issued in favor of Jose Vidal and the latter has, up to the present
Menos las comisiones de 5 % recibidas de Josefina de Pabalan time, not yet collected the same.

P538.60 The ten (10%) per cent balance of the purchase price not yet paid in the total sum of
P13,908.33 will be paid by the Vendee to the Vendor when the existing mortgage
L.E. Dumas over the property sold by the Vendor to the Vendee is duly cancelled in the office of
the Register of Deeds, or sooner at the option of the Vendee.
1,084.43
This Deed of Sale is executed by the Vendor free from all liens and encumbrances,
Angela S. Tuason with the only exception of the existing lease contracts on parcels Nos. 1, 10, 11, and
16, which lease contracts will expire on December 31, 1953, with the understanding,
1,621.94 however, that this sale is being executed free from any option or right on the part of
the lessees to purchase the lots respectively leased by them.
3,244.97
It is therefore clearly understood that the Vendor will pay the existing mortgage on
P65,318.24 her property in favor of Jose Vidal.

Menos cheque BIF No. C-288642 a favor de Da. Paz Tuason de Paterno que le The liquidation of the amounts respectively due between the Vendor and the Vendee
entregamos como exceso in connection with the rents and real estate taxes as stipulated in paragraph (9) of the
contract entitled "Promesa de Compara y Venta" will be adjusted between the parties
493.23 in a separate document.

P64,825.01 Should any of the aforesaid lessees of lots Nos. 2, 3, 4, 5, 6, 7, 9 and 17 fail to carry
out their respective obligations under the option to purchase exercised by them so
Manila, Noviembre 2, 1943 that the rights of the lessee to purchase the respective property leased by him is
cancelled, the Vendor shall be bound to sell the same to the herein Vendee, Gregorio
GREGORIO ARANETA, INCORPORATED
39
Araneta, Incorporated, in conformity with the terms and conditions provided in the
aforesaid contract of "Promesa de Compra y Venta";
The documentary stamps to be affixed to this deed will be for the account of the
Vendor while the expenses for the registration of this document will be for the
account of the Vendee.
The remaining area of the property of the Vendor subject to Transfer Certificates of
Title Nos. 60471 and 60472, are lots Nos. 2, 3, 4, 5, 6, 7, 9, and 17, all of the
Consolidation of lots Nos. 20 and 117 of plan II-4755, G.L.R.O. Record No. 7680.
Before the execution of the above deed, that is, on October 20, 1943, the day
immediately following the signing of the agreement to buy and sell, Paz Tuason had
offered to Vidal the check for P143,150 mentioned in Exhibit A, in full settlement of
her mortgage obligation, but the mortgagee had refused to receive that check or to
cancel the mortgage, contending that by the separate agreement before mentioned
payment of the mortgage was not to be effected totally or partially before the end of
four years from April, 1943.
Because of this refusal of Vidal's Paz Tuason, through Atty. Alfonso Ponce Enrile,
commenced an action against the mortgagee in October or the early paret of
November 1943. the record of that case was destroyed and no copy of the complaint
was presented in evidence. Attached to the complaint or deposited with the clerk of
court by Attorney Ponce Enrile simultaneously with the docketing of the suit were the
check for P143,150 previously turned down by Vidal, another certified check for
P12,932.61, also drawn by Gregorio Araneta, Inc., in favor of Vidal, and one ordinary
check for P30,000 issued by Paz Tuazon. These three checks were supposed to
cover the whole indebtedness to Vidal including the principal and interest up to that
time and the penalty provided in the separate agreement.
But the action against Vidal never came on for trial and the record and the checks
were destroyed during the war operations in January or February, 1945; and neither
was the case reconstituted afterward. This failure of the suit for the cancellation of
Vidal's mortgage, coupled with the destruction of the checks tendered to the
mortgagee, the nullification of the bank deposit on which those checks had been
drawn, and the tremendous rise of real estate value following the termination of the
war, gave occasion to the breaking off the schemes outlined in Exhibits 1 and A; Paz
Tuason after liberation repudiated them for the reasons to be hereafter set forth. The
instant action was the offshoot, begun by Gregorio Araneta, Inc. to compel Paz
Tuason to deliver to the plaintiff a clear title to the lots described in Exhibit A free from
all liens and encumbrances, and a deed of cancellation of the mortgage to Vidal.
Vidal came into the case in virtue of a summon issued by order of the court, and filed
a cross-claim against Paz Tuazon to foreclose his mortgage.
It should be stated that the outset that all the parties are in agreement that Vidal's
loans are still outstanding. Paz Tuason's counsel concede that the tender of payment
to Vidal was legally defective and did not operate to discharge the mortgage, while
the plaintiff is apparently uninterested in this feature of the case considering the
matter one largely between the mortgagor and the mortgagee, although to a certain
degree this notion is incorrect. At any rate, the points of discord between Paz Tuason
and Vidal concern only the accrual of interest on the loans, Vidal's claim to attorney's
fees, and the application of the debt moratorium law which the debtor now invokes.
These matters will be taken up in the discussion of the controversy between Paz
Tuason and Jose Vidal.
The principal bone of contention between Gregorio Araneta, Inc., and Paz Tuason
was the validity of the deed of sale of Exhibit A on which the suit was predicated. The
lower court's judgment was that this contract was invalid and was so declared, "sin
per juicio de que la demandada Paz Tuason de Paterno pague a la entidad
demandante todas las cantidades que habia estado recibiendo de lareferida entidad
demandante, en concepto de pago de losterrenos, en moneda corriente, segun el
cambio que debiaregir al tiempo de otorgarse la escritura segun la escalade
"Ballentine", descontando, sin embargo, de dichas cantidades cualesquiera que la
demandante haya estadorecibiendo como alquileres de los terrenos
supuestamentevendidos a ella." The court based its opinion that Exhibit 1. His Honor,
Judge Sotero Rodas, agreedwith the defendant that under paragraph 8 of Exhibit 1
there was to be no absolute sale to Gregorio Araneta, Inc., unless Vidal's mortgage
was cancelled.
In our opinion the trial court was in error in its interpretation of Exhibit 1. The
contemplated execution of an absolute deed of sale was not contingent on the
cancellation of Vidal's mortgage. What Exhibit 1 did provide (eleventh paragraph) was
that such deed of absolute sale should be executed "una vez determinado los lotes
que Paz Tuason podra vender a Gregorio Araneta, Inc." The lots which could be sold
to Gregorio Araneta, Inc. were definitely known by October 31, 1943, which was the
expiry of the tenants' option to buy, and the lots included in the absolute of which the
occupants' option to buy lapsed unconditionally. Such deed as Exhibit A was then in
a condition to be made.
40
Vidal's mortgage was not an obstacle to the sale. An amount had been set aside to
take care of it, and the parties, it would appear, were confident that the suit against
the mortgagee would succeed. The only doubt in their minds was in the amount to
which Vidal was entitled. The failure of the court to try and decide that the case was
not foreseen either.
This refutes, were think, the charge that there was undue rush on the part of the
plaintiff to push across the sale. The fact that simultaneously with Exhibit A similar
deeds were given the lessees who had elected to buy their leaseholds, which
comprise an area about twice as big as the lots described in Exhibit A, and the further
fact that the sale to the lessees have never been questioned and the proceeds
thereof have been received by the defendant, should add to dispel any suspicion of
bad faith on the part of the plaintiff. If anyone was in a hurry it could have been the
defendant. The clear preponderance of the evidence that Paz Tuason was pressed
for cash and that the payment of the mortgage was only an incident, or a necessary
means to effectuate the sale. Otherwise she could have settled her mortgage
obligation merely by selling a portion of her estate, say, some of the lots leased to
tenants who, except two who were in concentration camps, were only too anxious to
buy and own the lots on which their houses were built.
Whatever the terms of Exhibit 1, the plaintiff and the defendant were at perfect liberty
to make a new agreement different from or even contrary to the provisions of that
document. The validity of the subsequent sale must of necessity depend on what it
said and not on the provisions of the promise to buy and sell.
It is as possible proof or fraud that the discrepancies between the two documents
bear some attention. It was alleged that Attorneys Salvador Araneta and J. Antonio
Araneta who the defendant said had been her attorneys and had drawn Exhibit A,
and not informed or had misinformed her about its contents; that being English, she
had not read the deed of sale; that if she had not trusted the said attorneys she would
not have been so foolish as to affix her signature to a contract so one-sided.
The evidence does not support the defendant. Except in two particulars, Exhibit A
was a substantial compliance with Exhibit 1 in furtherance of which Exhibit A was
made. One departure was the proviso that 10 per cent of the purchase price should
be paid only after Vidal's mortgage should have been cancelled. This provisional
deduction was not onerous or unusual. It was not onerous or unusual that the vendee
should withhold a relatively small portion of the purchase price before all the
impediments to the final consummation of the sale had been removed. The tenants
who had bought their lots had been granted the privilege to deduct as much as 40 per
cent of the stipulated price pending discharge of the mortgage, although his
percentage was later reduced to 10 as in the case of Gregorio Araneta, Inc. It has
also been that the validity of the sales to the tenants has not been contested; that
these sales embraced in the aggregate 24,245.40 square meters for P260,916.68 as
compared to 14,811.20 square meters sold to Gregorio Araneta, Inc. for
P139,083.32; that the seller has already received from the tenant purchasers 90 per
cent of the purchase money.
There is good reason to believe that had Gregorio Araneta, Inc. not insisted on
charging to the defendant the loss of the checks deposited with the court, the sale in
question would have gone the smooth way of the sales to the tenants. Thus Dindo
Gonzales, defendant's son, declared:
P. Despues de haberse presentado esta demanda, recuerda usted haber tenido
conversacion con Salvador Araneta acerca de este asunto?
R. Si Señor.
P. Usted fue quien se acerco al señor Salvador Araneta?
R. Si, señor.
P. Quiero usted decir al Honorable Juzgado que era lo que usted dijo al señor
Salvador Araneta?
R. No creo que es propio que yo diga, por tratarse de mi madre.
P. En otras palabras, usted quiere decir que no quiere usted que se vuelva decir o
repetir ante este Honorable Juzgado lo que usted dijo al señor Salvador Araneta,
pues, se trata de su madre?
R. No, señor.
P. Puede usted decirnos que quiso usted decir cuando que no quisiera decir?
R. Voy a decir lo que Salvador Araneta, yo me acerque a Don Salvador Araneta, y yo
le dije que es una verguenza de que nosotros, en la familia tengamos que ir a la
Corte por este, y tambien dije que mi madre de por si quiere vender el terreno a ellos,
porque mi madre quiere pagar al señor Vidal, y que es una verguenza, siendo entre
parientes, tener que venir por este; era lo que yo dije al señor Salvador Araneta.
41

xxx xxx xxx
P. No recuerda usted tambien dijo al señor Salvador Araneta que usted no
comulgaba con ella (su madre) en este asunto?
R. Si, Señor; porque yo creia que mi madre solamente queria anular esta venta, pero
cuando me dijo el señor La O y sus abogados que, encima de quitar la propiedad,
todavia tendria ella que pagar al señor Vidal, este no veso claro.
xxx xxx xxx
P. Ahora bien; de tal suerte que, tal como nosotros desperendemos de su testimonio,
tanto, usted como, su madre, esteban muy conformes en la venta, es asi?
R. Si, señor.
The other stipulation embodied in Exhibit A which had no counterpart in Exhibit 1 was
that by which Gregorio Araneta Inc. would hold Paz Tuason liable for the lost checks
and which, as stated, appeared to be at the root of the whole trouble between the
plaintiff and the defendant.
The stipulation reads:
In view of the foregoing liquidation, the Vendor acknowledges fully and
unconditionally, having received the sum of P125,174.99 of the present legal
currency and hereby expressly declares that she will not hold the Vendee responsible
for any loss that she might suffer due to the fact that two of the checks paid to her by
the Vendee were used in favor of Jose Vidal and the latter has, up to the present
time, not yet collected the same.
It was argued that no person in his or her right senses would knowingly have agreed
to a covenant so iniquitous and unreasonable.
In the light of all the circumstances, it is difficult to believe that the defendant was
deceived into signing Exhibit A, in spite of the provision of which she and her son
complaint. Intelligent and well educated who had been managing her affairs, she had
an able attorney who was assisting her in the suit against Vidal, a case which was
instituted precisely to carry into effect Exhibit A or Exhibit 1, and a son who is leading
citizen and a business-man and knew the English language very well if she did not.
Dindo Gonzalez took active part in, if he was not the initiator of the negotiations that
led to the execution of Exhibit 1, of which he was an attesting witness besides. If the
defendant signed Exhibit A without being apprised of its import, it can hardly be
conceived that she did not have her attorney or her son read it to her afterward. The
transaction involved the alienation of property then already worth a fortune and now
assessed by the defendant at several times higher. Doubts in defendant's veracity
are enhanced by the fact that she denied or at least pretended in her answer to be
ignorant of the existence of Exhibit A, and that only after she was confronted with the
signed copy of the document on the witness did she spring up the defense of fraud. It
would look as if she gambled on the chance that no signed copy of the deed had
been saved from the war. She could not have forgotten having signed so important a
document even if she had not understood some of its provisions.
From the unreasonableness and inequity of the aforequoted Exhibit A it is not to be
presumed that the defendant did not understand it. It was highly possible that she did
not attach much importance to it, convinced that Vidal could be forced to accept the
checks and not foreseeing the fate that lay in store for the case against the
mortgagee.
Technical objections are made against the deed of sale.
First of these is that Jose Araneta, since deceased, was defendant's agent and at the
same time the president of Gregorio Araneta, Inc.
The trial court found that Jose Araneta was not Paz Tuason's agent or broker. This
finding is contrary to the clear weight of the evidence, although the point would be
irrelevant, if the court were right in its holding that Exhibit A was void on another
ground, i.e., it was inconsistent with Exhibit 1.
Without taking into account defendant's Exhibit 7 and 8, which the court rejected and
which, in our opinion, should have been admitted, Exhibit 1 is decisive of the
defendant's assertion. In paragraph 8 of Exhibit 1 Jose Araneta was referred to as
defendant's agent or broker "who acts in this transaction" and who as such was to
receive a commission of 5 per cent, although the commission was to be charged to
the purchasers, while in paragraph 13 the defendant promised, in consideration of
Jose Araneta's services rendered to her, to assign to him all her right, title and
interest to and in certain lots not embraced in the sales to Gregorio Araneta, Inc. or
the tenants.
42
However, the trial court hypothetically admitting the existence of the relation of
principal and agent between Paz Tuason and Jose Araneta, pointed out that not Jose
Araneta but Gregorio Araneta, Inc. was the purchaser, and cited the well-known
distinction between the corporation and its stockholders. In other words, the court
opined that the sale to Gregorio Araneta, Inc. was not a sale to Jose Araneta the
agent or broker.
The defendant would have the court ignore this distinction and apply to this case the
other well-known principle which is thus stated in 18 C.J.S. 380: "The courts, at law
and in equity, will disregard the fiction of corporate entity apart from the members of
the corporation when it is attempted to be used as a means of accomplishing a fraud
or an illegal act.".
It will at once be noted that this principle does not fit in with the facts of the case at
bar. Gregorio Araneta, Inc. had long been organized and engaged in real estate
business. The corporate entity was not used to circumvent the law or perpetrate
deception. There is no denying that Gregorio Araneta, Inc. entered into the contract
for itself and for its benefit as a corporation. The contract and the roles of the parties
who participated therein were exactly as they purported to be and were fully revealed
to the seller. There is no pretense, nor is there reason to suppose, that if Paz Tuason
had known Jose Araneta to Gregorio Araneta, Inc's president, which she knew, she
would not have gone ahead with the deal. From her point of view and from the point
of view of public interest, it would have made no difference, except for the brokerage
fee, whether Gregorio Araneta, Inc. or Jose Araneta was the purchaser. Under these
circumstances the result of the suggested disregard of a technicality would be, not to
stop the commission of deceit by the purchaser but to pave the way for the evasion of
a legitimate and binding commitment buy the seller. The principle invoked by the
defendant is resorted to by the courts as a measure or protection against deceit and
not to open the door to deceit. "The courts," it has been said, "will not ignore the
corporate entity in order to further the perpetration of a fraud." (18 C.J.S. 381.)
The corporate theory aside, and granting for the nonce that Jose Araneta and
Gregorio Araneta, Inc. were identical and that the acts of one where the acts of the
other, the relation between the defendant and Jose Araneta did not fall within the
purview of article 1459 of the Spanish Civil Code.1
Agency is defined in article 1709 in broad term, and we have not come across any
commentary or decision dealing directly with the precise meaning of agency as
employed in article 1459. But in the opinion of Manresa(10 Manresa 4th ed. 100),
agent in the sense there used is one who accepts another's representation to perform
in his name certain acts of more or less transcendency, while Scaevola (Vol. 23, p.
403) says that the agent's in capacity to buy his principal's property rests in the fact
that the agent and the principal form one juridicial person. In this connection
Scaevola observes that the fear that greed might get the better of the sentiments of
loyalty and disinterestedness which should animate an administrator or agent, is the
reason underlying various classes of incapacity enumerated in article 1459. And as
American courts commenting on similar prohibition at common law put it, the law
does not trust human nature to resist the temptations likely to arise of antogonism
between the interest of the seller and the buyer.
So the ban of paragraph 2 of article 1459 connotes the idea of trust and confidence;
and so where the relationship does not involve considerations of good faith and
integrity the prohibition should not and does not apply. To come under the prohibition,
the agent must be in a fiduciary with his principal.
Tested by this standard, Jose Araneta was not an agent within the meaning of article
1459. By Exhibits 7 and 8 he was to be nothing more than a go-between or
middleman between the defendant and the purchaser, bringing them together to
make the contract themselves. There was no confidence to be betrayed. Jose
Araneta was not authorize to make a binding contract for the defendant. He was not
to sell and he did not sell the defendant's property. He was to look for a buyer and the
owner herself was to make, and did make, the sale. He was not to fix the price of the
sale because the price had been already fixed in his commission. He was not to
make the terms of payment because these, too, were clearly specified in his
commission. In fine, Jose Araneta was left no power or discretion whatsoever, which
he could abuse to his advantage and to the owner's prejudice.
Defendant's other ground for repudiating Exhibit A is that the law firm of Araneta &
Araneta who handled the preparation of that deed and represented by Gregorio
Araneta, Inc. were her attorneys also. On this point the trial court's opinion is likewise
against the defendant.
Since attorney Ponce Enrile was the defendant's lawyer in the suit against Vidal, it
was not likely that she employed Atty. Salvador Araneta and J. Antonio Araneta as
her attorneys in her dealings with Gregorio Araneta, Inc., knowing, as she did, their
identity with the buyer. If she had needed legal counsels, in this transaction it seems
certain that she would have availed herself of the services of Mr. Ponce Enrile who
was allegedly representing her in another case to pave the way for the sale.
43
The fact that Attys. Salvador and Araneta and J. Antonio Araneta drew Exhibits 1 and
A, undertook to write the letters to the tenants and the deeds of sale to the latter, and
charged the defendant the corresponding fees for all this work, did not themselves
prove that they were the seller's attorneys. These letters and documents were
wrapped up with the contemplated sale in which Gregorio Araneta, Inc. was
interested, and could very well have been written by Attorneys Araneta and Araneta
in furtherance of Gregorio Araneta's own interest. In collecting the fees from the
defendant they did what any other buyer could have appropriately done since all such
expenses normally were to be defrayed by the seller.
Granting that Attorney Araneta and Araneta were attorneys for the defendant, yet
they were not forbidden to buy the property in question. Attorneys are only prohibited
from buying their client's property which is the subject of litigation. (Art. 1459, No. 5,
Spanish Civil Code.) The questioned sale was effected before the subject thereof
became involved in the present action. There was already at the time of the sale a
litigation over this property between the defendant and Vidal, but Attys. Salvador
Araneta and J. Antonio Araneta were not her attorneys in that case.
From the pronouncement that Exhibit A is valid, however, it does not follow that the
defendant should be held liable for the loss of the certified checks attached to the
complaint against Vidal or deposited with the court, or of the funds against which they
had been issued. The matter of who should bear this loss does not depend upon the
validity of the sale but on the extent and scope of the clause hereinbefore quoted as
applied to the facts of the present case.
The law and the evidence on this branch of the case revealed these facts, of some of
which passing mention has already been made.
The aforesaid checks, one for P143,150 and one for P12,932.61, were issued by
Gregorio Araneta, Inc. and payable to Vidal, and were drawn against the Bank of the
Philippines with which Gregorio Araneta, Inc. had a deposit in the certification stated
that they were to be "void if not presented for payment date of acceptance" office
(Bank) within 90 days from date of acceptance."
Under banking laws and practice, by the clarification" the funds represented by the
check were transferred from the credit of the maker to that of the payee or holder,
and, for all intents and purposes, the latter became the depositor of the drawee bank,
with rights and duties of one such relation." But the transfer of the corresponding
funds from the credit of the depositor to that of that of the payee had to be co-
extensive with the life of the checks, which in the case was 90 days. If the checks
were not presented for payment within that period they became invalid and the funds
were automatically restored to the credit of the drawer though not as a current deposit
but as special deposit. This is the consensus of the evidence for both parties which
does not materially differ on this proposition.
The checks were never collected and the account against which they were drawn
was not used or claimed by Gregorio Araneta, Inc.; and since that account "was
opened during the Japanese occupation and in Japanese currency," the checks
"became obsolete as the account subject thereto is considered null and void in
accordance with Executive Order No. 49 of the President of the Philippines",
according to the Bank.
Whether the Bank of the Philippines could lawfully limit the negotiability of certified
checks to a period less than the period provided by the Statute of Limitations does
not seem material. The limitation imposed by the Bank as to time would adversely
affect the payee, Jose Vidal, who is not trying to recover on the instruments but on
the contrary rejected them from the outset, insisting that the payment was premature.
As far as Vidal was concerned, it was of no importance whether the certification was
or was not restricted. On the other hand, neither the plaintiff nor the defendant now
insists that Vidal should present, or should have presented, the checks for collection.
They in fact agree that the offer of those checks to Vidal did not, for technical reason,
work to wipe out the mortgage.
But as to Gregorio Araneta and Paz Tuason, the conditions specified in the
certification and the prevailing regulations of the Bank were the law of the case. Not
only this, but they were aware of and abided by those regulations and practice, as
instanced by the fact that the parties presented testimony to prove those regulations
and practice. And that Gregorio Araneta, Inc. knew that Vidal had not cashed the
checks within 90 days is not, and could not successfully be denied.
In these circumstances, the stipulation in Exhibit A that the defendant or seller "shall
not hold the vendee responsible for any loss of these checks" was unconscionable,
void and unenforceable in so far as the said stipulation would stretch the defendant's
liability for this checks beyond 90 days. It was not in accord with law, equity or good
conscience to hold a party responsible for something he or she had no access to and
could not make use of but which was under the absolute control and disposition of
the other party. To make Paz Tuason responsible for those checks after they expired
and when they were absolutely useless would be like holding an obligor to answer for
the loss or destruction of something which the obligee kept in its safe with no power
given the obligor to protect it or interfere with the obligee's possession.
44

To the extent that the contract Exhibit A would hold the vendor responsible for those
checks after they had lapsed, the said contract was without consideration. The
checks having become obsolete, the benefit in exchange for which the defendant had
consented to be responsible for them had vanished. The sole motivation on her part
for the stipulation was the fact that by the checks the mortgage might or was to be
released. After 90 days the defendant stood to gain absolutely nothing by them,
which had become veritable scraps of paper, while the ownership of the deposit had
reverted to the plaintiff which alone could withdraw and make use of it.
What the plaintiff could and should have done if the disputed stipulation was to be
kept alive was to keep the funds accessible for the purpose of paying the mortgage,
by writing new checks either to Vidal or to the defendant, as was done with the check
for P30,000, or placing the deposit at the defendant's disposal. The check for
P30,000 intended for the penalty previously had been issued in the name of Vidal
and certified, too, but by mutual agreement it was changed to an ordinary check
payable to Paz Tuason. Although that check was also deposited with the court and
lost, its loss undoubtedly was imputable to the defendant's account, and she did not
seem to disown her liability for it.
Let it be remembered that the idea of certifying the lost checks was all the plaintiff's.
The plaintiff would not trust the defendant and studiously so arranged matters that
she could not by any possibility put a finger on the money. For all the practical intents
and purposes the plaintiff dealt directly with the mortgagee and excluded the
defendant from meddling in the manner of payment to Vidal. And let it also be kept in
mind that Gregorio Araneta, Inc. was not a mere accommodator in writing these
checks. It was as much interested in the cancellation of the mortgage as Paz Tuason.
Coming down to Vidal's cross-claim Judge Rodas rendered no judgment other than
declaring that the mortgage remained intact and subsisting. The amount to be paid
Vidal was not named and the question whether interest and attorney's fees were due
was not passed upon. The motion for reconsideration of the decision by Vidal's
attorney's praying that Paz Tuason be sentenced to pay the creditor P244,917.90
plus interest at the rate of 1 percent monthly from September 10, 1948 and that the
mortgaged property be ordered sold in case of default within 90 days, and another
motion by the defendant seeking specification of the amount she had to pay the
mortgagee were summarily denied by Judge Potenciano Pecson, to whom the
motions were submitted, Judge Rodas by that time having been appointed to the
Court of Appeals.
All the facts and evidence on this subject are on the record, however, and we may
just as well determine from these facts and evidence the amount to which the
mortgagee is entitled, instead of remanding the case for new trial, if only to avoid
further delay if the disposition of this case.
It is obvious that Vidal had a right to judgment for his credit and to foreclose the
mortgage if the credit was not paid.
There is no dispute as to the amount of the principal and there is agreement that the
loans made in 1943, in Japanese war notes, should be computed under the
Ballantyne conversion table. As has been said, where the parties do not see eye-to-
eye was in regard to the mortgagee's claim to attorney's fees and interest from
October, 1943, which was reached a considerable amount. It was contended that,
having offered to pay Vidal her debt in that month, the defendant was relieved
thereafter from paying such interest.
It is to be recalled that Paz Tuason deposited with the court three checks which were
intended to cover the principal and interest up to October, 1943, plus the penalty
provided in the instrument "Penalidad del Documento de Novacion de Esta Fecha."
The mortgagor maintains that although these checks may not have constituted a valid
payment for the purpose of discharging the debt, yet they did for the purpose of
stopping the running of interest. The defendant draws attention to the following
citations:
An offer in writing to pay a particular sum of money or to deliver a written instrument
or specific personal property is, if rejected, equivalent to the actual production and
tender of the money, instrument or property. (Sec. 24, Rule 123.)
It is not accord with either the letter or the spirit of the law to impose upon the person
affecting a redemption of property, in addition to 12 per cent interest per annum up to
the time of the offer to redeem, a further payment of 6 per cent per annum from the
date of the officer to redeem. (Fabros vs. Villa Agustin, 18 Phil., 336.)
A tender by the debtor of the amount of this debt, if made in the proper manner, will
suspend the running of interest on the debt for the time of such tender. (30 Am. Jur.,
42.)
In the case of Fabrosa vs. Villa Agustin, supra, a parcel of land had been sold on
execution to one Tabliga. Within the period of redemption Fabros, to whom the land
had been mortgaged by the execution debtor, had offered to redeem the land from
45
the execution creditor and purchaser at public auction. The trial court ruled that the
redemptioner was not obliged to pay the stipulated interest of 12 per cent after he
offered to redeem the property; nevertheless he was sentenced to pay 6 per cent
interest from the date of the offer.
This court on appeal held that "there is no reason for this other (6 per cent) interest,
which appears to be a penalty for delinquency while there was no delinquency." The
court cited an earlier decision, Martinez vs. Campbell, 10 Phil., 626, where this
doctrine was laid down: "When the right of redemption is exercised within the term
fixed by section 465 of the Code of Civil Procedure, and an offer is made of the
amount due for the repurchase of the property to which said right refers, it is neither
reasonable nor just that the repurchaser should pay interest on the redemption
money after the time when he offered to repurchase and tendered the money
therefor."
In the light of these decisions and law, the next query is; Did the mortgagor have the
right under the contract to pay the mortgage on October 20, 1943? The answer to this
question requires an inquiry into the provision of the "Penalidad del Documento de
Novacion de Esta Fecha."
Vidal introduced oral evidence to the effect that he reserved unto himself in that
agreement the right "to accept or refuse the total payment of the loan outstanding . . .,
if at the time of such offer of payment he considered it advantageous to his interest."
This was gist of Vidal's testimony and that of Lucio M. Tiangco, one of Vidal's former
attorneys who, as notary public, had authenticated the document. Vidal's above
testimony was ordered stricken out as hearsay, for Vidal was blind and, according to
him, only had his other lawyer read the document to him.
We are of the opinion that the court erred in excluding Vidal's statement. There is no
reason to suspect that Vidal's attorney did not correctly read the paper to him. The
reading was a contemporaneous incident of the writing and the circumstances under
which the document was read precluded every possibility of design, premeditation, or
fabrication.
Nevertheless, Vidal's testimony, like the testimony of Lucio M. Tiangco's, was based
on recollection which, with the lapse of time, was for from infallible. By contrast, the
testimony of Attorneys Ponce Enrile, Salvador Araneta, and J. Antonio Araneta does
not suffer from such weakness and is entitled to full faith and credit. The document
was the subject of a close and concerted study on their part with the object of finding
the rights and obligations of the mortgagee and the mortgagor in the premises and
mapping out the course to be pursued. And the results of their study and deliberation
were translated into concrete action and embodied in a letter which has been
preserved. In line with the results of their study, action was instituted in court to
compel acceptance by Vidal of the checks consigned with the complaint, and before
the suit was commenced, and with the document before him, Atty. Ponce Enrile, in
behalf of his client, wrote Vidal demanding that he accept the payment and execute a
deed of cancellation of the mortgage. In his letter Atty. Ponce Enrile reminded Vidal
that the recital in the "Penalidad del Documento de Novacion de Esta Fecha" was "to
the effect that should the debtor wish to pay the debt before the expiration of the
period the reinstated (two years) such debtor would have to pay, in addition to
interest due, the penalty of P30,000 — this is in addition to the penalty clause of 10
per cent of the total amount due inserted in the document of mortgage of January 20,
1943."
Atty. Ponce Enrile's concept of the agreement, formed after mature and careful
reading of it, jibes with the only possible reason for the insertion of the penalty
provision. There was no reason for the penalty unless it was for defendant's paying
her debt before the end of the agreed period. It was to Vidal's interest that the
mortgage be not settled in the near future, first, because his money was earning good
interest and was guaranteed by a solid security, and second, which was more
important, he, in all probability, shared the common belief that Japanese war notes
were headed for a crash and that four years thence, judging by the trends of the war,
the hostilities would be over.
To say, as Vidal says, that the debtor could not pay the mortgage within four years
and, at the same time, that there would be penalty if she paid after that period, would
be a contradiction. Moreover, adequate remedy was provided for failure to pay or
after the expiration of the mortgage: increased rate or interest, foreclosure of the
mortgage, and attorney's fees.
It is therefore to be concluded that the defendant's offer to pay Vidal in October,
1943, was in accordance with the parties' contract and terminated the debtor's
obligation to pay interest. The technical defects of the consignation had to do with the
discharge of the mortgage, which is conceded on all sides to be still in force because
of the defects. But the matter of the suspension of the running of interest on the loan
stands of a different footing and is governed by different principles. These principles
regard reality rather than technicality, substance rather than form. Good faith of the
offer or and ability to make good the offer should in simple justice excuse the debtor
from paying interest after the offer was rejected. A debtor can not be considered
delinquent who offered checks backed by sufficient deposit or ready to pay cash if the
46
creditor chose that means of payment. Technical defects of the offer cannot be
adduced to destroy its effects when the objection to accept the payment was based
on entirely different grounds. If the creditor had told the debtor that he wanted cash or
an ordinary check, which Vidal now seems to think Paz Tuason should have
tendered, certainly Vidal's wishes would have been fulfilled, gladly.
The plain truth was that the mortgagee bent all his efforts to put off the payment, and
thanks to the defects which he now, with obvious inconsistency, points out, the
mortgage has not perished with the checks.
Falling within the reasons for the stoppage of interest are attorney's fees. In fact there
is less merit in the claim for attorney's fees than in the claim for interest; for the
creditor it was who by his refusal brought upon himself this litigation, refusal which, as
just shown, resulted greatly to his benefit.
Vidal, however, is entitled to the penalty, a point which the debtor seems to a grant.
The suspension of the running of the interest is premised on the thesis that the debt
was considered paid as of the date the offer to pay the principal was made. It is
precisely the mortgagor's contention that he was to pay said penalty if and when she
paid the mortgage before the expiration of the four-year period provided in the
mortgage contract. This penalty was designed to take the place of the interest which
the creditor would be entitled to collect if the duration of the mortgage had not been
cut short and from which interest the debtor has been relieved. "In obligations with a
penalty clause the penalty shall substitute indemnity for damages and the payment of
interest. . ." (Art. 1152, Civil Code of Spain.).
To summarize, the following are our findings and decision:
The contract of sale Exhibit A was valid and enforceable, but the loss of the checks
for P143,150 and P12,932.61 and invalidation of the corresponding deposit is to be
borne by the buyer. Gregorio Araneta, Inc. the value of these checks as well as the
several payments made by Paz Tuason to Gregorio Araneta, Inc. shall be deducted
from the sum of P190,000 which the buyer advanced to the seller on the execution of
Exhibit 1.
The buyer shall be entitled to the rents on the land which was the subject of the sale,
rents which may have been collected by Paz Tuason after the date of the sale.
Paz Tuason shall pay Jose Vidal the amount of the mortgage and the stipulated
interest up to October 20,1943, plus the penalty of P30,000, provided that the loans
obtained during the Japanese occupation shall be reduced according to the
Ballantyne scale of payment, and provided that the date basis of the computation as
to the penalty is the date of the filing of the suit against Vidal.
Paz Tuason shall pay the amount that shall have been found due under the contracts
of mortgage within 90 days from the time the court's judgment upon the liquidation
shall have become final, otherwise the property mortgaged shall be ordered sold
provided by law.
Vidal's mortgage is superior to the purchaser's right under Exhibit A, which is hereby
declared subject to said mortgage. Should Gregorio Araneta, Inc. be forced to pay
the mortgage, it will be subrogated to the right of the mortgagee.
This case will be remanded to the court of origin with instruction to hold a rehearing
for the purpose of liquidation as herein provided. The court also shall hear and decide
all other controversies relative to the liquidation which may have been overlooked at
this decision, in a manner not inconsistent with the above findings and judgment.
The mortgagor is not entitled to suspension of payment under the debt moratorium
law or orders. Among other reasons: the bulk of the debt was a pre-war obligation
and the moratorium as to such obligations has been abrogated unless the debtor has
suffered war damages and has filed claim for them; there is no allegation or proof that
she has. In the second place, the debtor herself caused her creditor to be brought
into the case which resulted in the filing of the cross-claim to foreclose the mortgage.
In the third place, prompt settlement of the mortgage is necessary to the settlement of
the dispute and liquidation between Gregorio Araneta, Inc. and Paz Tuason. If for no
other reason, Paz Tuason would do well to forego the benefits of the moratorium law.
There shall be no special judgments as to costs of either instance.
Paras, C.J., Pablo, Bengzon, Padilla, Bautista Angelo and Labrador, JJ., concur.
RESOLUTION
December 22, 1952
TUASON, J.:
47
The motion for reconsideration of the plaintiff, Gregorio Araneta, Inc., and the
defendant, Paz Tuason de Paterno, are in large part devoted to the question,
extensively discussed in the decision, of the validity of the contract of sale Exhibit A.
The arguments are not new and at least were given due consideration in the
deliberation and study of the case. We find no reason for disturbing our decision on
this phase of the case.
The plaintiff-appellant's alternative proposition — to wit: "Should this Honorable Court
declare that the purchase price was not paid and that plaintiff has to bear the loss
due to the invalidation of the occupation currency, its loss should be limited to: (a) the
purchase price of P139,083.32 less P47,825.70 which plaintiff paid and the defendant
actually collected during the occupation, or the sum of P92,233.32, or at most, (b) the
purchase price of the lot in the sum of P139,083.32," — as well as the alleged over-
payment by the defendant-appellee, may be taken up in the liquidation under the
reservation in the judgment that "the court (below) shall hold a rehearing for the
purpose of liquidation as herein provided" and "shall also hear and decide all other
controversies relative to the liquidation which may have been overlooked in this
decision, in the manner not inconsistent with the above findings and judgment."
These payments and disbursement are matters of accounting which, not having been
put directly in issue or given due attention at the trial and in the appealed decision,
can better be treshed out in the proposed rehearing where each party will have an
opportunity to put forward his views and reasons, with supporting evidence if
necessary, on how the various items in question should be regarded and credited, in
the light of our decision.
As to Jose Vidal's motion: There is nothing to add to or detract from what has been
said in the decision relative to the interest on the loans and attorney's fees. There are
no substantial features of the case that have not been weighed carefully in arriving at
our conclusions. It is our considered opinion that the decision is in accord with law,
reason and equity.
The vehement protest that this court should not modify the conclusion of the lower
court on interest and attorney's fees is actually and entirely contrary to the cross-
claimant's own suggestion in his brief. From page 20 of his brief, we copy these
passages:
We submit that this Honorable Court is in a position now to render judgment in the
foreclosure of mortgage suit as no further issue of fact need be acted upon by the
trial court. Defendant Paz Tuason has admitted the amount of capital due. That is a
fact. She only requests that interest be granted up to October 20,1943, and that the
moratorium law be applied. Whether this is possible or not is a legal question, which
can be decided by this court. Unnecessary loss of time and expenses to the parties
herein will be avoided by this Honorable Court by rendering judgment in the
foreclosure of mortgage suit as follows:
xxx xxx xxx
In reality, the judgment did not adjudicate the foreclosure of the mortgage nor did it fix
the amount due on the mortgage. The pronouncement that the mortgage was in full
force and effect was a conclusion which the mortgagor did not and does not now
question. There was therefore virtually no decision that could be executed.
Vidal himself moved in the Court of First Instance for amendment of the decision
alleging, correctly, that "the court failed to act on the cross-claim of Jose Vidal dated
April 22, 1947, where he demanded foreclosure of the mortgage . . . ." That motion
like Paz Tuason's motion to complete the judgment, was summarily denied.
In strict accordance with the procedure, the case should have been remanded to the
court of origin for further proceedings in the form stated by Paz Tuason's counsel.
Both the mortgagor and the mortgagee agree on this. We did not follow the above
course believing it best, in the interest of the parties themselves and following Vidal's
attorney's own suggestion, to decide the controversies between Vidal and Paz
Tuason upon the records and the briefs already submitted.
The three motions for reconsideration are denied.
Paras, C.J., Pablo, Bengzon, Padilla, Montemayor, Jugo, Bautista Angelo and
Labrador, JJ., concur.
RESOLUTION
January 26, 1953
TUASON, J.:
In the second motion for reconsideration by defendant-appellee it is urged that the
sale be resolved for failure of plaintiff-appellant to pay the entire purchase price of the
property sold.
48

Rescission of the contract, it is true, was alternative prayer in the cross-complaint, but
the trial court declared the sale void in accordance with the main contention of the
defendant, and passed no judgment on the matter of rescission. For this reason, and
because rescission was not pressed on appeal, we deemed unnecessary, if not
uncalled for, any pronouncement touching this point.
In the second place, the nonpayment of a portion, albeit big portion, of the price was
not, in our opinion, such failure as would justify recission under Articles 1124 and
1505 et seq. of the Civil Code of Spain, which was still in force when this case was
tried. "The general rule is that recission will not be permitted for a slight or casual
breach of the contract, but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties." (Song Fo & Co. vs. Hawaiian-
Philippine Co., 47 Phil., 821, 827.)
In the present case, the vendee did not fail or refuse to pay by plan or design,
granting there was failure or refusal to pay. As a matter of fact, the portion of the
purchase price which is said not to have been satisfied until now was actually
received by checks by the vendor and deposited by her with the court in the suit
against Vidal, in accordance with the understanding if not express agreement
between vendor and vendee. The question of who should bear the loss of this
amount, the checks having been destroyed and the funds against which they were
drawn having become of no value, was one of the most bitterly debated issues, and
in adjudging the vendee to be the party to shoulder the said loss and ordering the
said vendee to pay the amount to the vendor, this Court's judgment was not, and was
not intended to be, in the nature of an extension of time of payment. In contemplation
of the Civil Code there was no default, except possibly in connection with the alleged
overcharges by the vendee arising from honest mistakes of accounting, mistakes
which, by our decision, are to be corrected in a new trial thereby ordered.
The second motion for reconsideration is, therefore, denied.
Paras, C.J., Pablo, Bengzon, Padilla, Montemayor, Reyes, Jugo, Bautista Angelo and
Labrador, JJ., concur.
16. Palileo v Cosio
EN BANC
G.R. No. L-7667 November 28, 1955
CHERIE PALILEO, plaintiff-appellee,
vs.
BEATRIZ COSIO, defendant-appellant.
Claro M. Recto for appellant.
Bengson, Villegas, Jr. and Villar for appellee.
BAUTISTA ANGELO, J.:
Plaintiff filed a complaint against defendant in the Court of First Instance of Manila
praying that (1) the transaction entered into between them on December 18, 1951 be
declared as one of loan, and the document executed covering the transaction as one
of equitable mortgage to secure the payment of said loan; (2) the defendant be
ordered to credit to the plaintiff with the necessary amount from the sum received by
the defendant from the Associated Insurance & Surety Co., Inc. and to apply the
same to the payment of plaintiff's obligation thus considering it as fully paid; and (3)
the defendant be ordered to pay to plaintiff the difference between the alleged
indebtedness of plaintiff and the sum received by defendant from the aforementioned
insurance company, plus the sum allegedly paid to defendant as interest on the
alleged indebtedness.
On December 19, 1952, defendant filed her answer setting up as special defense that
the transaction entered into between the plaintiff and defendant is one of sale with
option to repurchase but that the period for repurchase had expired without plaintiff
having returned the price agreed upon as a result of which the ownership of the
property had become consolidated in the defendant. Defendant also set up certain
counterclaims which involve a total amount of P4,900.
On April 7, 1953, the case was set for trial on the merits, but because of several
postponements asked by the parties, the same has to be set anew for trial on
January 12, 1954. On this date, neither the defendant nor her counsel appeared,
even if the latter had been notified of the postponement almost a month earlier, and
so the court received the evidence of the plaintiff. On January 18, 1954, the court,
having in view the evidence presented, rendered judgment granting the relief prayed
for in the complaint.
On February 2, 1954, the original counsel for the defendant was substituted and the
new counsel immediately moved that the judgment be set aside on the ground that,
due to mistake or excusable negligence, defendant was unable to present her
49
evidence and the decision was contrary to law, and this motion having been denied,
defendant took the present appeal.
The important issue to be determined in this appeal is whether the lower court
committed a grave abuse of discretion in not reopening the case to give defendant an
opportunity to present her evidence considering that the failure of her original counsel
to appear was due to mistake or execusable negligence which ordinary prudence
could not have guarded against.
The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February
11, 1953, said counsel showed interest in the early disposal of this case by moving
the court to have it set for trial. The first date set was April 7, 1953, but no hearing
was had on that date because plaintiff had moved to postpone it. The case was next
set for hearing on April 28, 1953, but on motion again of plaintiff, the hearing was
transferred to November 6, 1953. Then, upon petition of defendant, the trial had to be
moved to December 15, 1953, and because Atty. Guerrero could not appear on said
date because of a case he had in Cebu City, the hearing was postponed to January
18, 1954.
And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty.
Guerrero was appointed Undersecretary of Foreign Affairs. It is now contended that
the appointment was so sudden and unexpected that Atty. Guerrero, after taking his
oath, was unable to wind up his private cases or make any preparation at all. It is
averred that "The days that followed his appointment were very busy days for
defendant's former counsel. There was an immediate need for clearing the backlog of
official business, including the reorganization of the Department of Foreign Affairs
and our Foreign Service, and more importantly, he had to assist the Secretary of
Foreign Affairs in negotiations of national importance like the Japanese reparations,
and the revision of the trade agreement with the United States, that, Atty. Guerrero
had to work as much as fourteen hours daily . . . Because of all these unavoidable
confusion that followed in the wake of Atty. Guerrero's sudden and unexpected
appointment, the trial of this case scheduled for January 18, 1954 escaped his
memory, and consequently, Atty. Guerrero and the defendant were unable to appear
when the case was called for trial." These reasons, — it is intimated, — constitute
excusable negligence which ordinary prudence could not have guarded against and
should have been considered by the trial court as sufficient justification to grant the
petition of defendant for a rehearing.
It is a well-settled rule that the granting of a motion to set aside a judgment or order
on the ground of mistake or excusable negligence is addressed to the sound
discretion of the court (see Coombs vs. Santos, 24 Phil., 446; Daipan vs. Sigabu, 25,
Phil., 184). And an order issued in the exercise of such discretion is ordinarily not to
be disturbed unless it is shown that the court has gravely abused such discretion.
(See Tell vs. Tell, 48 Phil., 70; Macke vs. Camps, 5 Phil., 185; Calvo vs. De
Gutierrez, 4 Phil., 203; Manzanares vs. Moreta, 38 Phil., 821; Salva vs. Palacio and
Leuterio, 90 Phil., 731.) In denying the motion for reopening the trial court said: "After
going over the same arguments, this Court is of the opinion, and so holds that the
decision of this Court of January 18, 1954 should not be disturbed." Considering the
stature, ability and experience of counsel Leon Ma. Guerrero, and the fact that he
was given almost one month notice before the date set for trial, we are persuaded to
conclude that the trial court did not abuse its discretion in refusing to reconsider its
decision.
Coming now to the merits of the case, we note that the lower court made the
following findings: On December 18, 1951, plaintiff obtained from defendant a loan in
the sum of P12,000 subject to the following conditions: (a) that plaintiff shall pay to
defendant an interest in the amount of P250 a month; (b) that defendant shall deduct
from the loan certain obligations of plaintiff to third persons amounting to P4,550, plus
the sum of P250 as interest for the first month; and (c) that after making the above
deductions, defendant shall deliver to plaintiff only the balance of the loan of P12,000.
Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total
of P2,250.00 corresponding to nine months from December 18, 1951, on the basis of
P250.00 a month, which is more than the maximum interest authorized by law. To
secure the payment of the aforesaid loan, defendant required plaintiff to sign a
document known as "Conditional Sale of Residential Building", purporting to convey
to defendant, with right to repurchase, a two-story building of strong materials
belonging to plaintiff. This document did not express the true intention of the parties
which was merely to place said property as security for the payment of the loan.
After the execution of the aforesaid document, defendant insured the building against
fire with the Associated Insurance & Surety Co., Inc. for the sum of P15,000, the
insurance policy having been issued in the name of defendant. The building was
partly destroyed by fire and, after proper demand, defendant collected from the
insurance company an indemnity of P13,107.00. Plaintiff demanded from defendant
that she be credited with the necessary amount to pay her obligation out of the
insurance proceeds but defendant refused to do so. And on the strength of these
facts, the court rendered decision the dispositive part of which reads as follows:
50
Wherefore, judgment is hereby rendered declaring the transaction had between
plaintiff and defendant, as shown in Exhibit A, an equitable mortgage to secure the
payment of the sum of P12,000 loaned by the defendant to plaintiff; ordering the
defendant to credit the sum of P13,107 received by the defendant from the
Associated Insurance & surety Co., Inc. to the payment of plaintiff's obligation in the
sum of P12,000.00 as stated in the complaint, thus considering the agreement of
December 18, 1951 between the herein plaintiff and defendant completely paid and
leaving still a balance in the sum of P1,107 from the insurance collected by
defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for nine
months as interest on the sum of P12,000 loaned to plaintiff and the legal interest
allowed by law in this transaction does not exceed 12 per cent per annum, or the sum
of P1,440 for one year, so the herein plaintiff and overpaid the sum of P810 to the
defendant, which this Court hereby likewise orders the said defendant to refund to
herein plaintiff, plus the balance of P1,107 representing the difference of the sum
loan of P12,000 and the collected insurance of P13,107 from the insurance company
abovementioned to which the herein plaintiff is entitled to receive, and to pay the
costs.
The question that now arises is: Is the trial court justified in considering the obligation
of plaintiff fully compensated by the insurance amount and in ordering defendant to
refund to plaintiff the sum of P1,107 representing the difference of the loan of
P12,000 and the sum of P13,107 collected by said defendant from the insurance
company notwithstanding the fact that it was not proven that the insurance was taken
for the benefit of the mortgagor?
Is is our opinion that on this score the court is in error for its ruling runs counter to the
rule governing an insurance taken by a mortgagee independently of the mortgagor.
The rule is that "where a mortgagee, independently of the mortgagor, insures the
mortgaged property in his own name and for his own interest, he is entitled to the
insurance proceeds in case of loss, but in such case, he is not allowed to retain his
claim against the mortgagor, but is passed by subrogation to the insurer to the extent
of the money paid." (Vance on Insurance, 2d ed., p. 654)Or, stated in another way,
"the mortgagee may insure his interest in the property independently of the
mortgagor. In that event, upon the destruction of the property the insurance money
paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount
due under the mortgage debt remains unchanged. The mortgagee, however, is not
allowed to retain his claim against the mortgagor, but it passes by subrogation to the
insurer, to the extent of the insurance money paid." (Vance on Insurance, 3rd ed., pp.
772-773) This is the same rule upheld by this Court in a case that arose in this
jurisdiction. In the case mentioned, an insurance contract was taken out by the
mortgagee upon his own interest, it being stipulated that the proceeds would be paid
to him only and when the case came up for decision, this Court held that the
mortgagee, in case of loss, may only recover upon the policy to the extent of his
credit at the time of the loss. It was declared that the mortgaged had no right of action
against the mortgagee on the policy. (San Miguel Brewery vs. Law Union, 40 Phil.,
674.)
It is true that there are authorities which hold that "If a mortgagee procures insurance
on his separate interest at his own expense and for his own benefit, without any
agreement with the mortgagor with respect thereto, the mortgagor has no interest in
the policy, and is not entitled to have the insurance proceeds applied in reduction of
the mortgage debt" (19 R.C.L., p. 405), and that, furthermore, the mortgagee "has still
a right to recover his whole debt of the mortgagor." (King vs. State Mut. F. Ins. Co., 7
Cush. 1; Suffolk F. Ins. Co. vs. Boyden 9 Allen, 123; See also Loomis vs. Eagle Life
& Health Ins. Co., 6 Gray, 396; Washington Mills Emery Mfg. Co. vs. Weymouth & B.
Mut. F. Ins. Co., 135 Mass. 506; Foster vs. Equitable Mut. F. Ins. Co., 2 Gray 216.)
But these authorities merely represent the minority view (See case note, 3 Lawyers'
Report Annotated, new series, p. 79). "The general rule and the weight of authority is,
that the insurer is thereupon subrogated to the rights of the mortgagee under the
mortgage. This is put upon the analogy of the situation of the insurer to that of a
surety." (Jones on Mortgages, Vol. I, pp. 671-672.)
Considering the foregoing rules, it would appear that the lower court erred in
declaring that the proceeds of the insurance taken out by the defendant on the
property mortgaged inured to the benefit of the plaintiff and in ordering said defendant
to deliver to the plaintiff the difference between her indebtedness and the amount of
insurance received by the defendant, for, in the light of the majority rule we have
above enunciated, the correct solution should be that the proceeds of the insurance
should be delivered to the defendant but that her claim against the plaintiff should be
considered assigned to the insurance company who is deemed subrogated to the
rights of the defendant to the extent of the money paid as indemnity.
Consistent with the foregoing pronouncement, we therefore modify the judgment of
the lower court as follows:(1) the transaction had between the plaintiff and defendant
as shown in Exhibit A is merely an equitable mortgage intended to secure the
payment of the loan of P12,000;(2) that the proceeds of the insurance amounting to
P13,107.00 was properly collected by defendant who is not required to account for it
to the plaintiff; (3) that the collection of said insurance proceeds shall not be deemed
to have compensated the obligation of the plaintiff to the defendant, but bars the latter
from claiming its payment from the former; and (4) defendant shall pay to the plaintiff
51
the sum of P810.00 representing the overpayment made by plaintiff by way of interest
on the loan. No pronouncement as to costs.
Bengzon, Montemayor, Reyes, A., Jugo, Labrador , Concepcion, and Reyes, J.B.L.,
JJ., concur.
17. Lopez and javellana v El Hogar Filipino
EN BANC
G.R. No. L-22678 January 12, 1925
BUENAVENTURA LOPEZ and ROSARIO JAVELONA, plaintiffs-appellants,
vs.
EL HOGAR FILIPINO, Sociedad Mutua de Construccion y Prestamos, defendant-
appellant;
and REGISTRAR OF DEEDS OF OCCIDENTAL NEGROS, defendant-appellee.
Jose P. Melencio, Hilado and Hilado, and Francisco, Lualhati and Lopez for plaintiffs-
appellants.
W.H. Lawrence, Montinola and Hontiveros, Antonio Sanz, and Fisher, DeWitt,
Perkins and Brady for defendant- appellant.
No appearance for appellee.
VILLAMOR, J.:
This litigation arose out a loan of P84,000 which the defendant El Hogar Filipino had
made to the spouses Buenaventura Lopez and Rosario Javelona on March 17, 1920.
Beginning May 31, 1921, the debtors failed to make the monthly payments stipulated
in the contract; wherefore, the board of directors of El Hogar Filipino, at the expiration
of the three months of delinquency provided for in clause 9 of the document, Exhibit
1, copied hereinafter declared the loan due and payable.
The mortgaged properties were sold publicly in an extrajudicial sale and were
purchased by El Hogar Filipino. The debtors filed a complaint, praying: (a) For the
annulment of the contract evidenced by Exhibit 1, as being usurious; (b) for the
annulment of the extrajudicial sale of the mortgaged properties, as well as the
cancellation of all registrations, annotations or recordations of the same and of the
certificates of title that may have been issued in that connection by the register of
deeds; (c) for the return of all the interest and fines paid by them; (d) for reasonable
attorney's fees; and (e) for any other equitable remedy and costs.
For answer to this complaint, the defendant El Hogar Filipino set up two cross-
complaints, praying for the reasons stated: (a) That the plaintiffs' complaint be
dismissed with costs; (b) that El Hogar Filipino be placed in possession of the
properties in litigation; (c) as ancillary remedy, that the plaintiffs be ordered to pay into
the court within not less than three months the amount of P87,505.53, Philippine
currency, plus the agreed interest at 9% per annum from June 29, 1922, and the
costs in accordance with section 256 of the Code of Civil Procedure, as amended by
Act No. 2640 of the Legislature, failing which, that all the mortgaged properties, with
all their improvements, choses in action, and natural and civil fruits pending or
accrued at the date of the maturity of the obligation, that is, on June 29, 1922, be sold
in order to pay the creditor El Hogar Filipino; and (d) that El Hogar Filipino be granted
any other remedy that may be just and equitable.
On account of its importance on the decision of this case, the contract of loan and
mortgage, Exhibit 1, is copied verbatim as follows:
MORTGAGE
This indenture made and entered into at the City of Manila, P.I., between El Hogar
Filipino, Sociedad Mutua de Construccion y Prestamos (The Philippine Mutual Home
Building and Loan Association), a corporation domiciled in the City of Manila, P. I.
(hereinafter referred to as the "association), represented herein by its president,
Francisco Ortigas, by virtue of the powers conferred upon him by the by-laws of the
association and the resolution of the board of directors, adopted on the 22nd day of
January and on the 1st day of February, 1920, party of the first part, and the spouses
Buenaventura Lopez (husband) and Rosario Javelona (wife), property owners, of
age, and residents of Iloilo, Iloilo, P.I. (hereinafter referred to as "the debtors"), parties
of the second part.
WITNESSETH:
That the spouses Buenaventura Lopez and Rosario Javelona, availing themselves of
the rights conferred upon them by the by-laws as shareholders of the association and
being the absolute owners of the real estate hereinafter described, have made
application to the board of directors of the association for a loan, which has been
granted, subject to the following conditions:
First. The association hereby grants unto the spouses Buenaventura Lopez and
Rosario Javelona a loan of eighty-four thousand pesos (P84,000), Philippine
52
currency, being the face value of the four hundred twenty (420) shares of common
Class A stock of the association subscribed for by the debtors.
Second. The debtors acknowledge having received the said sum of eighty-four
thousand pesos (P84,000), which they promise to repay as follows:
They will pay to the treasurer of the association monthly, on or before the 5th day of
every month, the sum of one peso (P1) for each share of Class A stock subscribed
for by them until the surrender or cash value of said stock, as determined by the by-
laws and regulations of the association now in force, shall equal the said sum of
eighty-four thousand pesos (P84,000), the amount of the loan by them received from
the association, or such lesser sum as the principal loan shall have been reduced to
by reason of payments made by the debtors in reduction thereof in accordance with
the conditions of paragraph three hereof; and as soon as the surrender value of said
stock shall equal the sum owed by reason of the loan herein granted said stock shall
be surrendered and cancelled and the value thereof applied by the association to the
payment of the amount owed by the debtors on said loan, and the president of the
association shall execute in favor of the debtors the necessary instruments of
cancellation of the mortgage hereinafter created, the expenses of said cancellation to
be charged against the debtors.
Third. It is agreed that the debtors may make partial payments in reduction of this
loan provided such payments shall not be less than two hundred pesos (P200), or
any multiple thereof; all payments made hereunder shall be applied to the reduction
of the principal of this loan on the last day of the month in which the same shall be
paid and the stipulated interest shall be proportionately reduced from and after said
date.
Fourth. The debtors agree that during the time they shall be indebted to the
association, by reason of the aforesaid loan, they will pay interest at the rate of 9 per
cent per annum, from the 15th day of March, 1920, said interest being payable
monthly in advance at the offices of the association in the City of Manila and at the
same time that the installments on the 420 shares of Class A stock by them
subscribed for are payable.
Fifth. In the event of the failure of the debtors to pay the installments when due, as
well as the interest stipulated herein, on or before the 5th day of each month,
commencing March, 1920, the debtors agree to pay to the association, by way of fine
for delinquency, the sum of three centavos for every peso they may fail to pay, and a
like sum for each month, or fraction thereof, which shall elapse until the amount of
their delinquencies shall have been satisfied.
Sixth. Notwithstanding the personal responsibility which shall arise from the failure of
the debtors to perform their obligations under this agreement, the debtors guarantee
the repayment of the loan herein granted, and the payment of the agreed monthly
installments on the 420 shares of stock subscribed for by them, as well as the
payment of the stipulated interest and fines, and to that end they hereby execute a
first mortgage upon their real property which is described as follows:
(Description of property)
Seventh. As additional security for the performance of the obligations herein
contained, the debtors pledge to the association the 420 shares of Class A stock of
the association by them subscribed for the face value of eighty-four thousand pesos
(P84,000).
Eighth. The debtors hereby grant unto the manager of the association, whoever he
may be, an irrevocable power of attorney, in case they should fail for three
successive months to pay their agreed monthly installments upon the stock
subscribed for by them, as well as the agreed interest, to collect and receive the rents
and profits of the mortgaged property and to apply them, or such part thereof as may
be necessary to the payment of the delinquent monthly installments; it being
understood that, should the manager of the association exercise the power here
granted, he shall return to the debtors any balance remaining in his hands after the
payment of all delinquencies specified in this paragraph.
Ninth. It is agreed that should the debtors fail, for three consecutive months, to pay
the monthly installments on the stock by them subscribed for, together with the
stipulated interest on this loan, and to perform any of their other obligations contained
in the second, fourth, fifth, eleventh, twelfth, thirteenth, sixteenth, seventeenth, and
twenty-first paragraphs of this agreement, they shall lose the benefit of the period
granted to them in this agreement within which to repay to the association the loan
herein granted them and said loan shall then become due and payable, at the
election of the association, and the association may proceed to enforce its rights with
respect to all of the securities given by the debtors.
Tenth. The debtors hereby grant unto the manager of the association, whoever he
may be, full and irrevocable power of attorney in order that, in the event that the debt
herein created shall remain unpaid because of the failure of the debtors to fulfill any
53
of the obligations required of them in the second, fourth, fifth, eleventh, twelfth,
thirteenth, sixteenth, seventeenth, and twenty-first paragraphs ... of this agreement,
the association having, by resolution of its board of directors, previously determined
to exercise its right to declare the loan due and payable, and publication of notices for
three consecutive weeks in a newspaper of general circulation in this city having
been made, he (said manager) may proceed to sell at public auction, without court
proceedings, in the presence of any notary public or auctioneer selected by the board
of directors, the real property herein mortgaged, he being also authorized, under
irrevocable power of attorney, to execute all necessary instruments of sale in favor of
the highest bidder at the sale; it being understood, nevertheless, that said
instruments of sale shall not issue until 30 days, from the date of sale, shall have
expired; it being understood, further, that if within said thirty days, from the date of
sale, the debtors shall pay to the association the entire debt owed by them on said
date, including interest and costs of sale, less the surrender value of their shares of
stock, said sale shall be of no effect and the agent of the association shall execute a
cancellation of the mortgage herein created, the expenses of said cancellation to be
paid by the debtors.
Eleventh. The debtors agree not to sell or mortgage the property hereby mortgaged
without the consent of the association in writing, signed by the president or other
person acting in his stead.
Twelfth. The debtors shall insure the buildings, now erected on the mortgaged
premises, against fire in such company and for such sum as the association may
deem proper, the policies to be delivered to the association duly indorsed by the
debtors, it being expressly agreed that in case of loss the association, through its
manager, whoever he may be, shall be authorized to collect the insurance money
from the insurance company to be applied on the debt unless, by agreement with the
debtors, it shall be applied to the reconstruction of the building; it being further
understood that if the debtors shall fail to insure the property, the association may
effect the insurance in whatever company or companies it sees fit, charging the cost
thereof to the debtors who agree to reimburse the association immediately for all
sums expended by it in insuring the property, together with interest thereon at the
rate of 15 per cent per annum from the date of such payment and until the same shall
be repaid by the debtors.
Thirteenth. It is stipulated that the debtors shall not create any incumbrance upon the
mortgaged property in favor of third persons or make any lease thereof which might
be recordable nor make any agreement in which rent for more than one month in
advance is payable without first having obtained the written consent of the
association; it being understood that a breach of this covenant shall cause the debt
herein created to become immediately due and payable and the association to be
authorized to proceed at once to enforce payment thereof in the manner specified in
paragraph ten hereof.
Fourteenth. In the event that the association shall sell the mortgaged property for any
of the causes specified in this agreement and the proceeds of such sale shall exceed
the total amount owed by the debtors to the association for any and all causes, after
deducting the surrender value of their shares of stock, such excess shall be returned
to the debtors within 15 days from the date of the execution of the deed of
conveyance in favor of the highest bidder at the sale.
Fifteenth. It is expressly agreed that the association may bid at any sale of the
mortgaged property and in the event the bid of the association shall be higher than
that of any other bidder taking part in the sale, the manager of the association,
whoever he may be, is authorized to execute in favor of the association, as the agent
of the debtors, the necessary instruments of conveyance, in the manner and form
prescribed in paragraph ten of this agreement.
Sixteenth. The debtors shall pay all taxes now due or hereafter to become due upon
the premises herein mortgaged or the rents thereof and shall comply with all rules
and regulations prescribed by the health and other government authorities.
Seventeenth. The debtors shall keep the buildings now erected upon the mortgaged
premises in good order of repair during the life of this agreement and to the
satisfaction of whatever architect the association may employ to inspect the same,
and to that end the debtors hereby grant unto the association an irrevocable license
to permit the agents of the association to enter upon the mortgaged premises to
inspect the same at such times as they may deem necessary; it being understood
that if the debtors shall fail to permit inspections of the property or to make the repairs
demanded by the association as agreed herein, they shall forfeit the right to the time
given them under this agreement within which to repay the loan granted them by this
instrument, the loan shall thereby become due and payable and the association may
proceed to collect it in the manner prescribed in paragraph ten hereof.
Eighteenth. It is expressly understood that should the premises herein mortgaged be
destroyed by earthquake, typhoon, fire, act of war, or in any other manner, while this
contract is in force, or by reason thereof it should suffer any damage or deterioration
the repair of which will cost 20 per cent or more of the value of the premises, the loan
herein granted shall immediately become due and payable to the association, which,
54
at its election, is authorized to proceed to collect the same unless the debtors shall,
within 15 days after demand by the association, give security satisfactory to the
association, that the premises shall be rebuilt.
Nineteenth. It is further agreed that, in the event of the condemnation of the
mortgaged premises, any sum to which the debtors may become entitled by reason
of said condemnation proceedings shall be paid to the association to be applied to
the payment of whatever sum may then be owing to the association from the debtors
unless, in the event that only a part of the premises is taken by condemnation
proceedings, it shall be agreed by the association and the debtors that the proceeds
of such partial condemnation shall be used in the improvement and rebuilding of the
premises upon the remaining portion of the land herein mortgaged; and for that
purpose an irrevocable power of attorney is hereby granted to the manager of the
association, whoever he may be, to collect the indemnity in any such condemnation
proceedings from any person or persons who shall be obliged to pay the same.
Twentieth. It is agreed that all payments required of the debtors under this agreement
shall, at the election of the association, be paid in gold coin of the United States at
the rate of one gold dollar for each two pesos, Philippine currency, owed by the
debtors.
Twenty-first. It is further agreed that the debtors shall be obliged to show to the
manager of the association, whoever he may be, on or before the last day on which
any taxes shall be due and payable on the mortgaged premises, the receipts showing
payment of said taxes, and any breach of this agreement by the debtors shall
authorize the association to proceed to enforce its rights as provided in paragraph ten
hereof; and in the event that the debtors shall fail to pay taxes the association may
pay them, all sums so paid by the association to be considered as a part of the
principal of the loan herein granted and to bear interest at the rate of 15 per cent until
paid.
Twenty-second. All sums disbursed by the association on account of insurance
premiums, taxes, or other account of the debtors shall not only be considered as a
part of this loan, increasing the principal amount thereof, but the repayment thereof to
the association shall be secured by the mortgage herein created upon the real estate
of the debtors and shall be due and payable in cash to the association immediately
after said disbursements shall have been declared payable in the manner prescribed
for the payment of the shares of stock subscribed for by the debtors.
In witness whereof the parties have hereunto set their hands, at the City of Manila,
this 13th day of March, 1920, the president of the association, Francisco Ortigas,
signing for and in representation of the association, by virtue of the powers vested in
him by the by-laws and regulations of the association in force on this date, and the
debtor, (Mrs. Rosario Javelona, (signing) in Iloilo on the 17th day of March, 1920.
(Sgd.) BUENAVENTURA LOPEZ
ROSARIO JAVELONA
FRANCISCO ORTIGAS
Witnesses:
At Manila. (Sgd.) FERNANDO HERNANDEZ
S. CHOFRE
At Iloilo. (Sgd.) MARIANO LOPEZ
F.C. BUENAFLOR
The parties submitted to the court an agreed statement of facts as follows:
STIPULATION
Now come the parties in the above entitled cause, and stipulate and agree that the
following facts are true:
1. Plaintiffs are husband and wife, of legal age, and residents of the municipality of
Silay, Province of Occidental Negros, Philippine Islands.
2. The defendant El Hogar Filipino is, and at all times herein mentioned was, a
building and loan association organized and existing as a domestic corporation under
and by virtue of the Philippine Corporation Law.
3. The defendant, Geronimo Paredes, is, and at all times herein mentioned was, the
duly appointed, qualified and acting register of deeds of the Province of Occidental
Negros, Philippine Islands.
4. On or about March 13th, 1920, in the City of Manila, Philippine Islands, plaintiffs
executed a mortgage on real estate, a duplicate of which, marked Exhibit 1, is
annexed to the original answer of the said defendant, dated September 19, 1922; and
at the time of the execution of said mortgage the said defendant received from the
55
Philippine National Bank, a former creditor of plaintiffs, the certificate of title to the
property described in said deed of mortgage.
5. The lands described in said deed of mortgage are all situated in the Province of
Occidental Negros, Philippine Islands.
6. The said mortgage was duly recorded in the office of the register of deeds of said
province in accordance with the requirements of existing law concerning the
registration of mortgages on real estates registered in accordance with the Land
Registration Act.
7. Exercising the right claimed by it under clause 10 of the said deed of mortgage
(Exhibit 1), the defendant El Hogar Filipino on or about the 29th day of June, 1922,
after its board of directors had taken advantage of the option to treat the debt as due
and demandable, and after the publication of notices in accordance with the
provisions of said clause 10, caused each and everyone of the parcels of land
described in said deed of mortgage to be sold at public extrajudicial auction by a
licensed auctioneer, but without any judicial proceeding whatever.
8. At said public extrajudicial auction the defendant El Hogar Filipino was the only
bidder, and all of said parcels of land, with the improvements thereon, were
adjudicated to said defendant by the said licensed auctioneer for the sum of
P87,505.53.
9. Thereupon said auctioneer executed a public document, certifying his proceedings
in said sale (offered in evidence as Exhibit 10 of El Hogar Filipino), and thirty days
thereafter the manager of El Hogar Filipino executed a deed of sale of said property
to said El Hogar Filipino (a true copy of which is in evidence herein as Exhibit 11 of El
Hogar Filipino).
10. Thereafter, the defendant El Hogar Filipino filed for record in the office of the
register of deeds of the Province of Occidental Negros the originals of the deeds in
evidence as Exhibit 10 and 11, executed in favor of the said defendant, covering all
the parcels of land described in the said deed of sale and in the deed of mortgage
hereinabove mentioned, which deed of sale was executed, as above set forth, as the
result of the said public extrajudicial auction sale, and at the same time it presented
to the registrar of deeds the owner's duplicate certificate of title to said parcels of
land, and demanded that the sale to El Hogar Filipino be registered, the certificate of
title standing in the name of plaintiffs cancelled, and the corresponding new certificate
of title issued to El Hogar Filipino in accordance with the said deed of sale, Exhibits
10 and 11.
11. The defendant registrar of deeds refused to record the deed of sale to El Hogar
Filipino, to cancel the certificate of title in the name of plaintiffs, and to issue a new
certificate of title to El Hogar Filipino, pending the final disposition of this case.
12. Plaintiffs herein were not shareholders of El Hogar Filipino prior to the execution
by them of the deed of mortgage, Exhibit 1.
13. No loan of its funds is made by El Hogar Filipino, except to shareholders.
14. Plaintiffs are now in possession of the properties described in the deed of
mortgage, Exhibit 1, and refuse to deliver the same to El Hogar Filipino.
15. As borrowers, plaintiffs undertook, and were required under the contract set forth
in said deed of mortgage, to pay each year P7,560, as interest at the rate of nine per
centum per annum upon the P84,000 mentioned in said deed, by monthly
installments, and to continue making such payments until the value of the said 420
shares, for which, as stated in Exhibit 1, they had subscribed, composed of their
monthly payments (including entrance fees) and their share in the profits, shall
amount to P200 per share, or the total value of P84,000, and when the said shares
shall have reached the said value, they were to be withdrawn, cancelled and
appropriated by the corporation and the mortgage cancelled.
16. The sum of P12,164.25 credited to plaintiffs as the value of their shares for the
purpose of determining the balance for the collection of which El Hogar Filipino
caused the mortgaged property to be sold at extrajudicial sale for the realization of
the mortgage herein mentioned, was composed of the sums paid by the said plaintiffs
on account of their subscription to the shares and the dividends earned, received and
prorated to said shares.
17. On or about March 17, 1921, and April 29, 1920, Mr. Jose Reguera, a duly
authorized agent of El Hogar Filipino, entered into a supplementary agreement with
plaintiffs, incorporated into his letters written on behalf of El Hogar Filipino, as
hereinafter set forth, it being understood that the letter of April 29, 1920, although
erroneously addressed to Gil Lopez, was really addressed to Buenaventura Lopez,
who received the same in an envelope properly addressed to him. Such letters are
respectively of the following tenor:
56
"Iloilo, April 29, 1920. Loan No. 917. Mr. Gil Lopez — Dear Sir: Confirming our verbal
arrangement concerning the payment of monthly dues and interest upon your loan,
we notify you that in accordance with said agreement you will make an annual
payment of P12,600 on March 17, 1921, and on the same date of each successive
year, it being expressly understood and agreed that the slightest delay or default in
payment on such date of the complete annual installment will operate to produce the
rescission of this special concession, and the payment will be due and demandable
strictly in accordance with the conditions stipulated in the deed of mortgage, and in
this case fines or surcharges which may have accrued shall all be payable.
"Please sign at the foot your conformity, returning this letter and retaining the
duplicate. Yours very truly, El Hogar Filipino (Sgd.) J. Reguera, Agent, ("Accepted,
(Sgd.) B.L.")."
"Iloilo, March 17, 1921. Mr. Buenaventura Lopez, Silay — Dear Sir: Please be
informed that from the first of this month the annual payment on your loan No. 921,
as amortization and interest, is due, amounting to the total of P12,600. As the
payment should have been, but was not, made at the time indicated, you are
reminded of it in accordance with instructions from the head office, to the end that the
payment may be made with the least possible delay. Yours very truly, (Sgd.) J.
Reguera, Agent."
18. It is stipulated that the sum of P12,600 referred to in the letters above transcribed,
is made up of P5,040, as partial payments at the rate of P420 a month on account of
420 ordinary shares subscribed for by plaintiffs, and the sum of P7,560, as annual
interest upon the P84,000 mentioned in the deed of mortgage at the rate of nine per
centum per annum.
19. Plaintiffs failed to pay the taxes on the land described in the mortgage, Exhibit 1,
for the years 1921 and 1922, for reasons not important in this case, but which are the
subject-matter of another suit against Miguel J. Ossorio and the Victorias Milling
Company, now pending in this court, as a consequence of which the land was
declared confiscated; within the time allowed by law El Hogar Filipino deposited in the
provincial treasury of Occidental Negros the sum of P1,707.84, which sum was
accepted by the treasury upon the understanding that it would remain as a deposit
while El Hogar Filipino negotiated for the repurchase of the property.
20. Subject to the provisions of the law, all borrowing shareholders of El Hogar
Filipino are required to pay a premium of 16.67 per centum of the amount of the loan,
which is fixed by the board of directors.
21. Also subject to the provisions of the law, premiums collected from shareholders
are considered by El Hogar Filipino as a profit earned in the year in which the loan is
made.
22. Also subject to the provisions of the law, the net profits earned by El Hogar
Filipino, including interest upon loans, premiums paid by borrowing shareholders,
fines collected from shareholders for delinquency in the payment of dues on shares
or of interest, entrance fees, and other source, are determined at the end of each
year prorated to shareholders in proportion to their respective participations in the
total paid in capital, such participations consisting of the dues paid on account of the
par value of subscribed shares and the accumulated profits earned in preceding
years.
23. As shown by Exhibit 1, plaintiffs subscribed for 420 ordinary shares of El Hogar
Filipino, and obligated themselves in the same manner as other holders of such
shares, to pay P1 per month on each share to the corporation until such time as the
payments so made, plus the part of the profits of the corporation pertaining to such
shares, should equal the par value of P200 per share, the sum of P5,040 being the
total annual payment required of them as dues upon their 420 shares.
24. Plaintiffs, as shareholders, participated proportionately with other shareholders in
the benefit derived by El Hogar Filipino from the premium charged against plaintiffs
for their loan secured by said mortgage, and the profits derived from similar premiums
paid by other borrowing shareholders.
25. The defendant El Hogar Filipino offers as documentary proof, in addition to that
attached to the deposition of the witness, Señor Lopez, the receipt dated March 17,
1920, No. 896, for the sum of P50, as Exhibit 12; Receipt No. 1298, dated March 17,
1920, for the sum of P89.50, as Exhibit 13, Receipt No. 5232, dated March 17, 1920,
as Exhibit 14; Receipt No. 1451, dated March 17, 1920, for the sum of P1,554, as
Exhibit 15; and Receipt No. 1064, dated March 17, 1920, for the sum of P14,000, as
Exhibit 16. It is stipulated that said receipts, Exhibits Nos. 12, 13, 14, 15, and 16 were
introduced by plaintiffs, in whose possession they had been. Plaintiffs stated, in
connection with the said receipts, Exhibits Nos. 12, 13, 14, 15 and 16, that the sums
of money mentioned therein were paid by El Hogar Filipino for their account, said
sums having been deducted from the gross amount of the loan.
57
26. Plaintiffs reserve their objection to the materiality of the facts set forth in FISHER, DEWITT, PERKINS & BRADY
paragraph eighteen of this stipulation, and contend that said facts are immaterial
upon the ground that they do not relate to any issue made by the pleadings herein. By (Sgd.) F.C. FISHER
Attorneys for the defendant
Bacolod, Occidental Negros, January 31, 1923.
HILADO & HILADO
MONTINOLA, MONTINOLA & HONTIVEROS
FISHER, DEWITT, PERKINS & BRADY By (Sgd.) EMILIO Y. HILADO
Attorneys for the plaintiffs
By (Sgd.) F.C. FISHER
Attorneys for the defendant El Hogar Filipino GERONIMO PAREDES
Register of Deeds of Occidental Negros
HILADO & HILADO
By (Sgd.) SIMEON BITANGA
(Sgd.) EMILIO Y. HILADO Deputy Fiscal
Attorneys for Plaintiffs
The defendant register of deeds filed an answer, adopting as his the allegations of
(Sgd.) GERONIMO PAREDES the amended complaint, dated January 30, 1923, and of the reply dated January 24,
Register of Deeds of Occidental Negros 1923, of the plaintiffs to the cross-complaint of El Hogar Filipino.

By (Sgd.) SIMEON BITANGA
Fiscal Delegado
On the same date the parties entered into an agreement as follows:
STIPULATION
It is hereby agreed that the amended complaint dated January 30, 1923, shall be
understood as presented nunc pro tunc instead of the amended complaint of
December 18, 1922; that the answer and cross-complaint of El Hogar Filipino of
January 4, 1923, shall be taken as answer and cross-complaint to the amended
complaint of January 30, 1923; and that the replication of the plaintiffs dated January
24, 1923, to the said answer and cross-complaint shall be deemed existing; and that
the answer of the register of deeds of January 31, 1923, shall be deemed as
reproduced with respect to the above mentioned pleadings, as amended, of the
parties litigant.
Bacolod, January 31, 1923.
MONTINOLA, MONTINOLA & HONTIVEROS
The court a quo rendered a decision, (a) declaring the contract of mortgage Exhibit 1
null ab initio and consequently clause 10 thereof also null and void; (b) annulling the
extrajudicial sale of the properties in litigation described in paragraph 3 of the
amended complaint, and therefore declaring null and void also all the acts documents
made thereafter in accordance with clause 10 of the contract, particularly the
documents marked Exhibits 10 and 11 and all recordations and registrations of those
documents made by the register of deeds and all certificates of transfer issued by
virtue thereof in favor of El Hogar Filipino; (c) ordering El Hogar Filipino to return to
the plaintiffs the sum of P12,600 with legal interest from the date of the filing of the
original complaint plus the sum of P5,000, as attorney's fees; and (d) dismissing the
two cross-complaints of El Hogar Filipino, with costs against the defendant.
Defendant's counsel moved for a new trial on the ground that the evidence was not
sufficient to justify the decision and that the decision was contrary to law. With the
objection of the plaintiffs, the court by an order dated April 10, 1924, reconsidered its
original decision, and summarizing the points raised by the parties in their briefs, to
wit: (a) Whether or not the contract contained in Exhibit 1 in question was usurious;
(b) whether or not the provision of clause 10 of Exhibit 1 was valid; and (c) whether or
not El Hogar Filipino, a corporation organized under the laws of these Islands, had
the right to recover the amount actually lent by virtue of Exhibit 1, rendered a decision
58
declaring that the contract contained in Exhibit 1 was usurious, that clause 10 of the
said contract was null and void, but set aside so much of its decision of August 14,
1923, as held that El Hogar Filipino had no right to recover from the plaintiffs the
amount of the loan; and by thus amending its decision, the court ordered the
plaintiffs, Buenaventura Lopez and Rosario Javelona, to return to the defendant El
Hogar Filipino the amount of P66,682 with legal interest from March 17, 1920, until
fully paid.
Plaintiffs and defendant excepted to the amended decision. Plaintiffs prayed,
furthermore, for a new trial on the ground that the judgment was not supported by the
evidence and that it was against the law, which motion was denied by the court, and
both parties perfected bills of exceptions and took the case to this court.
Plaintiffs urge that the trial court erred: (a) In not holding that the mortgage
transaction was void as to both principal and interest; (b) in holding that plaintiffs
must return to the defendant corporation the sum of P66,682; (c) in allowing legal
interest on the aforesaid sum from the date of the execution of the mortgage; and (d)
in overruling plaintiffs' motion for new trial.
The questions raised by the plaintiffs-appellants are not new in this jurisdiction. In the
case of Delgado vs. Alonso Duque Valgona (44 Phil., 739), this court cited with
approval the decision in the case of Moncrief vs. Palmer (114 Atl., 181; 17 A. L. R.,
119), in which it was held that the debtor seeking equity must do equity by returning
to the creditor the capital that he may have received. In discussing the law applicable
to the case, this court, among other things, said the following:
"The provisions of the Rhode Island statute with reference to usury are drastic.
Chapter 434, Public Laws 1909, amended by chapter 838, Public Laws 1912. The
violation of the act is punishable as a misdemeanor, every contract made in violation
of it is void, and the borrower may recover in an action at law, not only the interest,
but any portion of the principal paid by him upon such usurious contract. The
complainant's solicitor has presented to us a very comprehensive and able argument
in support of his contention that equity should recognize the view of public policy
emphatically expressed in the legislative act, and should cancel the usurious and void
contract. This argument would have more persuasive force if the question were a new
one. The settled and nearly universal practice of courts of equity is opposed to the
complainant's contention. The statutes of different states have various provisions
directed towards the prevention of the extortion and oppression of usury. Whatever
may be the method adopted by the legislature, however, although the legislative
provision may go to the limit of our statute and declare the contract void and
unenforceable, nevertheless courts of equity, in the absence of statute specifically
constraining them to act differently, have insisted upon the equitable principle that he
"who seeks equity must do equity," and have required the borrower, before he can be
given the relief of cancellation of the contract, to perform the moral obligation resting
upon him, and pay or offer to pay the principal of the loan with the legal interest."
Commenting upon the foregoing decision, Mr. Justice Street, who penned the
decision of this court in the Delgado vs. Alonso Duque Valgona case, supra, said:
The doctrine of that case we consider applicable here; and without expressing any
opinion upon the broader question whether capital lent upon a usurious contract can
be recovered in an aggressive action by the creditor, we are content to hold that
when the debtor in a usurious contract sees fit, or finds it necessary to apply to the
court for equitable relief, he will, as a condition to the granting of such relief, be
required to restore what he received from the other party. In the present case both
parties are before the court in the attitude of suppliants, each asking relief from the
contract in question; and in order to avoid the possibility of further litigation, as well as
to secure complete justice, an order will be entered requiring the plaintiff, as a
condition of the satisfaction of the judgment in his favor, to reconvey to the defendant
the same twelve parcels acquired by the plaintiff from the defendant.
In the case of Go Chioco vs. Martinez (45 Phil., 256), this court held the following:
Under Act No. 2655, all usurious loan is void, but this does not mean that the debtor
may keep the principal received by him as loan, thus unjustly enriching himself to the
damage of the creditor, but that the creditor has no right of action for the recovery of
the stipulated interest, although he may use for the recovery of the principal loaned.
In the course of the decision and after examining the several provisions of the Usury
Law, we held that: "... The law, in declaring usurious loans to be void, determines its
effects and makes them to consist in the reimbursement of the interest paid during
the two years preceding the making of the claim, the payment of attorney's fees and
provides further for the institution of criminal action for the imposition of the penalty
fixed by the law. ..."
This doctrine was applied in the case of Gui Jong & Co. vs. Rivera and Avellar (45
Phil., 778) recently decided by this court with the concurrence of all the justices who
took part in its decision. In that case, the defendant maintained that, inasmuch as the
transaction was usurious and was therefore void, he was relieved from all
responsibility and that the plaintiff had no right to recover anything of him. The court
59
held: "Where a mortgagor admits that he got the money and owes it to the plaintiff, he
is not released from the payment of the debt because the transaction was usurious,"
and "Although the interest was usurious, it did not operate as a payment or
satisfaction of the original loan, and this is specially true where no interest was ever
paid."
In the course of the decision, the court aptly makes these remarks: "Upon what
theory can the defendant breach his own contract and rely upon its enforcement?
Upon what legal principle can he deny liability upon a contract which he repudiated
and failed to perform? How and in what manner has the defendant paid the amount
of the original loan, which he admits having received? Upon what legal or equitable
principle can he defeat the payment of the amount of the original loan for the reason
that he failed and neglected to perform his own contract? By no fiction or rule of law
would the fact that the interest was usurious and was never paid by the defendant
operate as a payment or satisfaction of the original loan.
In any event, he should pay the plaintiff the amount which he justly owes him. That
question was squarely met and decided in the case of Aguilar vs. Rubiato and
Gonzales Vila (40 Phil., 570), which upon legal principle was followed in Delgado vs.
Alonso Duque Valgona (44 Phil., 739), and which was cited and approved in Go
Chioco vs. Martinez (45 Phil., 256).
It was held in the case of Hodges vs. Gelbolinga (R.G. No. 21760, decided August 8,
1924),1 that the trial court erred in holding the entire contract void and in dismissing
the complaint, because the interest was in excess of 24 per cent per annum. The
court said: "... In the opinion in the case of Go Chioco vs. Martinez (45 Phil., 256), the
majority of this court held that, in an action upon a usurious loan, the lender can
recover the capital actually lent, together with interest thereon from the time of the
institution of his action. According to this doctrine, the contract is unenforcible only to
the extent of the stipulated usurious interest."
Thus it will be seen that the jurisprudence of this court on the question raised by
plaintiffs' appeal is decidedly to the effect that the Usury Law (Act No. 2655), by its
letter and spirit, does not deprive the lender of his right to recover of the borrower the
money actually loaned — this only in the case that the interest collected is usurious.
The law, as it is now, does not provide for the forfeiture of the capital in favor of the
debtor in usurious contracts and while we may believe it to be more convenient to
forfeit the capital, as a drastic measure to eradicate the evil of usury, we should not,
however, resolve a legal question by abiding by our opinion regarding its
convenience, but should be guided by what we understand is the intent of the law.
There was a law (Act No. 2073), enacted by the Philippine Commission in 1911,
establishing the rate of legal interest and fixing the effect of usury in the Moro
Province, in the Mountain Province, and in the Provinces of Agusan and Nueva
Vizcaya, of which section 6 provides that "whenever it satisfactorily appears to a court
that any bond, bill, note, assurance, pledge, conveyance, contract, security, or
evidence of debt has been taken or received in violation of the provisions of this Act,
the court shall declare the same to be void, and enjoin any proceeding thereon, and
shall order the same to be cancelled and given up." But the present law (Act No.
2655, as amended by Act No. 2992) does not contain the same prohibitory provision
as the former law, and the silence of Act No. 2655 upon this point, in conjunction with
the express prohibition contained in Act No. 2073, shows that that prohibition was
intentionally omitted from the present law and that the Legislature, in so omitting such
provision from the new law, expressly intended to open the door of the courts to the
creditor and allow him to claim the return of his capital.
The fact must specially be borne in mind that Commission Bill No. 217, introduced in
1914 by Commissioner Martin, in its section 1, contained a provision to the effect that
"any contract which directly or indirectly called for the payment of interest in excess of
12 per cent per annum shall be null and void, not only as to the interest, but also as
to the capital invested." But such provision was eliminated from the Usury Law, as
finally passed by the Legislature on February 24, 1916. Not only this, but in the
explanatory statement of the same Act No. 2655, which repealed all other Acts
incompatible with its provisions, it was expressly said that in cases of violation of the
Usury Law, a fine equivalent to four times the excess of the interest collected, or a
corresponding subsidiary imprisonment in case of insolvency, would be better than,
and preferable to, the forfeiture of the capital. Is this not a conclusive proof that, in the
enactment of the Usury Law, the Legislature did not contemplate the forfeiture of the
capital in usurious contracts?
Plaintiffs' attorney, however, argue vigorously upon the significance of the word "void"
as used in section 7 of the Usury Law, contending that usurious contracts, because
expressly banned by the law as absolutely null and void, should not be given any
effect by the courts.
It must be observed, first of all, that the intention of the legislator must be
ascertained, not from the consideration of a single word or a particular phrase of the
law, but from the context of the whole law or from a portion thereof as compared with
the whole. (25 R.C.L., p. 1007 and cases cited.) As was said by Chief Justice
Marshall in Pennington vs. Coxe (2 Cranch, 33; 2 Law. ed., 199), "that a law is the
best expositor of itself; that every part of an act is to be taken into view for the
60
purpose of discovering the mind of the legislature; and that the details of one part
may contain regulations restricting the extent of general expressions used in another
part of the same act, are among those plain rules laid down by common sense for the
exposition of statutes which have been uniformly acknowledged. ..."
We are in accord with plaintiffs' counsel that if the Legislature had used a clear and
unambiguous language, the law must be enforced according to its clear and evident
intent. However, this is not so with the case at bar. The Legislature contended itself
with employing the word "void," a word very frequently used with little precision to
mean whatever is voidable or void, so that when it is used in a law, the context of the
law must be resorted to, before giving it its exact meaning.
The words "void" and "voidable" are not often used with exact discrimination; indeed
in some books there is great want of precision in the use of them and much confusion
has resulted from the looseness in the use of these words. The terms have frequently
been used indiscriminately and what is merely voidable is frequently called void. So
often has the word "void" been used in the sense of voidable that it may be said to
have almost lost its primary meaning; so that when it is found in a statute or judicial
opinion, it is ordinarily necessary to resort to the context in order to determine
precisely what meaning is to be given to it. Indeed it is said that the term "void" is
oftener used to point out what may be avoided than to indicate a nullity. (40 Cyc.,
214, 215.)
In the present case, what is the meaning of the word "void" as used in sections 7 and
8 of the Usury Law? It will be noted that section 7 avoids all usurious contracts, but
immediately after this provision, it recognizes the validity of usurious negotiable
instruments whenever acquired in good faith by a third person; so that the usurious
contract which is void is not absolutely void, but perfectly valid under certain
circumstances.
Again, section 8 makes void and of no effect whatever loans are payable in
agricultural products and seeds, unless the price of the products is fixed by referring
to the current price thereof at the time of the performance of the obligation; and
according to section 10, the lender violating this law should be compelled to return to
the borrower an amount equivalent only to what he may have received as interest. It
results from the very context of the law, therefore, that the lawmaker in using the
word "void" did not intend that the transaction should be a complete nullity, but merely
a nullity in respect to the agreed interest.
This conclusion has been upheld by the majority of this court in the case of Go
Chioco vs. Martinez, supra. We then held that:
The other questions raised in this appeal refer to whether a debtor, who has paid
usurious interest, can recover the amount paid by him on account of the principal and
whether the usurious creditor has a right to recover the principal loaned, and not paid
by the debtor. The resolution on these two questions depends upon the interpretation
of section 7 of Act No. 2655 which provides:
"All conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of
debt, and all deposits of goods or other things, whereupon or whereby there shall be
reserved, secured, taken, or received, directly or indirectly, a higher rate or greater
sum or value for the loan or forbearance of money, goods, or credits than is
hereinbefore allowed, shall be void: Provided, however, That no merely clerical error
in the computation of interest, made without intent to evade any of the provisions of
this Act, shall render a contract void: And provided further, That nothing herein
contained shall be construed to prevent the purchase by an innocent purchaser of
negotiable mercantile paper, usurious or otherwise, for valuable consideration before
maturity, when there has been no intent on the part of said purchaser to evade the
provisions of this Act and said purchase was not a part of the original usurious
transaction. In any case, however, the maker of said note shall have the right to
recover from said original holder the whole interest paid by him thereon and, in case
of litigation, also the costs and such attorney's fees as may be allowed by the court."
As may be seen, notwithstanding the provision as to the nullity of the usurious note,
in case the same is indorsed to an innocent third person, the innocent purchaser is
entitled to collect the amount, with interest, from the maker and the maker is entitled
to recover from the original holder thereof only the interest paid by him, and, in case
of litigation, the costs and attorney's fees as may be allowed by the court. Therefore,
the only effect of the nullity of the note is the recovery of the interest paid by the
debtor, not the value of the note.
If, on account of the nullity of a usurious note, the original holder thereof, or the
payee, has no right to recover any amount upon said note, there is no reason why, in
case the same is transferred to a third person who acquires it in good faith and for a
consideration, the payee should be benefited by the amount collected by him from
the transferee as payment of the note endorsed and not repay the maker the value of
the same. Likewise, if by virtue of such a nullity, nothing can be collected by the
holder of the note, there is no reason why the reimbursement of the interest should
be limited to the amount collected during the two years immediately preceding the
61
date on which the action for the recovery thereof was instituted, and should not
include all the interest collected prior to said period. And it is because the law limits
the effect of the nullity to the reimbursement of the interest paid during the period of
two years preceding the filing of the complaint, which provision being of a penal
nature must be strictly construed so that it should not include the reimbursement of
the principal paid and the unpaid principal which is not provided in the law.
That the legislator did not have in mind that the usurious creditor should lose the
capital loaned by him is further made apparent by the provisions of section 8 of Act
No. 2655 as amended by Act No. 2992. Said section reads thus:
"All loans under which payment is to be made in agricultural products or seed or in
any other kind of commodities shall also be null and void unless they provide that
such products or seed or other commodities shall be appraised at the time when the
obligation falls due at the current local market price: Provided, That unless otherwise
stated in a document written in a language or dialect intelligible to the debtor and
subscribed in the presence of not less than two witnesses, any contract advancing
money to be repaid later in agricultural products or seed or any other kind of
commodities shall be understood to be a loan, and any person or corporation having
paid otherwise shall be entitled in case action is brought within two years after such
payment or delivery to recover all the products or seed delivered as interest, or the
value thereof, together with the costs and attorney's fees in such sum as may be
allowed by the court. Nothing contained in this section shall be construed to prevent
the lender from taking interest for the money lent, provided such interest be not in
excess of the rates herein fixed."
Under this legal provision, in case of a usurious contract, by virtue of which payments
are to be made in agricultural products, seeds or other fruits, the debtor may recover
from the usurious creditor only what he might deliver as interest, which shows, in our
opinion, that what he might have paid as principal is not recoverable. Now, if it is held
that in another kind of a usurious contract, the debtor may recover not only the
interest paid but also the principal, how can it be explained that by the mere fact of
the debt being payable in fruits, the debtor is not entitled to recover the principal
which he might have paid? The conclusion is inevitable that the nullity of a usurious
loan provided in the law means only that the lender cannot demand payment of the
stipulated usurious interest.
Moreover, section 10 of Act No. 2655 as amended by Act No. 2992 provides:
"Without prejudice to the proper civil action, violations of this Act shall be subject to
criminal prosecution and the guilty person shall, upon conviction, be sentenced to a
fine of not less than fifty pesos nor more than two hundred pesos or to imprisonment
for not less than ten days nor more than six months, or both, in the discretion of the
court, and to return the entire sum received as interest from the party aggrieved, and
in case of nonpayment, to suffer subsidiary imprisonment at the rate of one day for
every two pesos: Provided, That in case of corporations, associations, societies or
companies the manager, administrator or gerente or the person who has charge of
the management or administration of the business shall be criminally responsible for
any violation of this Act."
As may be seen, this legal provision requires the restitution only of what might have
been received by the convicted usurer as interest. If the intention of the legislator was
to confiscate the principal loaned, he would not have limited himself to the statement
that the interest collected must be refunded.
In interpreting Act No. 2655, the fact must not be lost sight of that in August, 1911,
the Philippine Commission enacted Act No. 2073, which fixes and defines the legal
rate of interest, declares the effect of usury on contracts, and provides for other
purposes in the Moro Province, Mountain Province, and in the Provinces of Agusan
and Nueva Vizcaya. Section 3 of this Act provides:
"SEC. 3. All bonds, bills, notes, assurances, conveyances, chattel mortgages, and all
other contracts and securities whatsoever, and all deposits of goods, or anything
whatever, whereupon or whereby there shall be reserved, secured, or taken any
greater sum or value for the loan or forbearance of any money, goods, or things in
action, than is above prescribed, shall be void, except as to bona fide purchasers of
negotiable paper, as hereinafter provided, in good faith, for a valuable consideration,
before maturity: Provided, That no merely clerical error in the computation of interest,
made with no intent to avoid the provisions of this Act, shall render the contract
usurious: And provided further, That the payment of interest in advance for one year
at a rate not to exceed fifteen per centum per annum shall not be construed to
constitute usury: And provided further, That nothing herein shall be construed to
prevent the purchase of negotiable mercantile paper, usurious or otherwise, for a
valuable consideration, by an innocent purchaser, free from all equities, at any price,
before the maturity of the same, when there has been no intent to evade the
provisions of this Act, or where said purchase has not been a part of the original
usurious transaction. In any case, however, where the original holder of a usurious
note sells the same to an innocent purchaser, the maker of said note or his
62
representative shall have the right to recover back from the said original holder the
amount of principal and interest paid by him on said note."
The phraseology of section 7 of Act No. 2655 is so similar to the language of section
3 of Act No. 2073 that it may well be said that Act No. 2655 was drafted after Act No.
2073 for the whole Philippines, which Act (No. 2655) fixes the rate of interest on
loans, declares the effect of receiving or collecting usurious interest and provides for
other purposes. A comparison of the terms of the laws above quoted shows only one
essential difference, and that is, that while section 3 of the former Act No. 2073 gives
the debtor the right to recover not only the usurious interest but also the principal,
section 7 of the later Act, that is, Act No. 2655, authorizes the debtor to recover only
what he might have paid. In view of this fact, there is no room for doubt that the
Philippine Legislature, in enacting Act No. 2655, deemed the provision of section 3 of
Act No. 2073 to be unjust as to the confiscation of the principal and so it provided in
Act No. 2655 that the debtor may recover only the interest paid, attorney's fees and
costs.
xxx xxx xxx
And, if we turn our attention on the Acts above cited, Nos. 2073 and 2655, it will be
seen that section 6 of the former Act provides:
"Whenever it satisfactorily appears to a court that any bond, bill, note, assurance,
pledge, conveyance, contract, security, or evidence of debt has been taken or
received in violation of the provisions of this Act, the court shall declare the same to
be void, and enjoin any proceeding thereon, and shall order the same to be cancelled
and given up."
This provision shows that under that law, it was expressly prohibited to maintain any
action on usurious contracts. Then there is no doubt that the creditor cannot institute
any action for the recovery of the capital or part of the capital loaned. Undoubtedly,
the legislator, in enacting Act No. 2073, deemed it reasonable that the creditor should
lose the capital, because, aside from the fact that in that Act no penalty was provided
for against usury other than the loss of all the interest paid by the debtor in case the
usurious instrument was negotiated (sec. 3), and of the interest paid in the two years
preceding the filing of the complaint in all other cases (sec. 2); in said Act only one
rate of interest quite liberal was fixed, namely, 15 per cent per annum according to
section 1 and building and loan associations as well as pawn shops were exempted
from every limitation according to section 7.
But the Act now in force, No. 2655, as amended by Act No. 2992, contains no such
prohibitive provision as that of the former Act No. 2073 and the silence of Act No.
2655 in this respect, in contra-distinction with the express prohibition of Act No. 2073,
shows that said prohibition was intentionally omitted from the law now in force, and
that the Legislature, in omitting such rule from the new law, did not intend to bar the
creditor from coming into court for the recovery of his capital. And the reason for such
an omission is clear if it is taken into account that Act No. 2655 made the situation of
the creditor quite difficult in these respects: (a) No creditor is exempt from the law
(section 2); (b) the maximum rates were fixed, which were to be applicable to building
and loan associations and pawn shops (section 4); (c) the general rate of interest was
reduced to 12 per cent on loans with securities of real properties and 14 per cent if
there are no such securities (sections 2 and 3); (d) in case of litigation, the judge shall
sentence the creditor to pay attorney's fees to the debtor (sections 6 and 8); (e) usury
was made a crime and is punishable by a fine equal to the interest stipulated, or
subsidiary imprisonment in case of insolvency (section 10). We believe that these
new penalties and restrictions were inserted by the Legislature in lieu of the loss of
the capital provided by Act No. 2073.
And the foregoing conclusion is fully sustained not only by the history of the Usury
Law, but also by the preamble of the law itself. By the history, because the bill of the
Commission No. 217 prepared by Commissioner Martin in 1914 in its section 1
contained a provision to the effect that "any contract which directly or indirectly
provides for the payment of any interest in excess of 12 per cent per annum shall be
null and void not only as to the interest but as to the principal invested," which
provision was eliminated from the Usury Law as it was finally passed by the
Legislature. By the preamble, because speaking of the necessity of the intervention
of the prosecuting attorney in actions resulting from the violation of the Usury Law, as
well as of the penal sanction, said preamble gives the following reasoning: "We
believe it to be a sound proposition that the fiscal should intervene in the actions
arising from the violation of the proposed provisions set out in the original bill,
because, among other reasons, those poor persons unable to employ an attorney will
be represented and thus the law would not be a dead letter. But without the penal
clause, it seems that such intervention is not proper. But, why not insert such clause?
We would not be the first and only nation which would do such a thing. We are of the
opinion that a fine equivalent to four times the amount in excess of the interest
charged or subsidiary imprisonment in case of insolvency, would be sufficient and
better than the forfeiture of the principal." Therefore, there can be no room for doubt
that it was not the intention of the Philippine Legislature to forfeit the principal in
condemning usury by means of a law.
63
In support of this opinion, we may also cite the decision of the United States Supreme
Court in the case of McBroom vs. Scottish Mortgage & Land Investment Co. of New
Mexico (153 U. S., 318 Law. ed., 729), referring to the interpretation of the Usury Law
of New Mexico, where it says that:
Was the contract between the parties void as to the amount loaned with legal interest
thereon, because it provided for, or in its execution involved, the payment of usurious
interest? The plaintiff insists that it was, and, consequently, that a cause of action
accrued immediately upon the payment of the bonus of $6,500 to the company's
agent, or at least from the first payment of interest for a fixed period. This question
must first receive attention.
Of course, effect must be given to the intention of the legislature as manifested by the
words of the statute, interpreted according to their natural signification. And in
ascertaining that intention all of its provisions must be considered together. As said in
Harris vs. Runnels (53 U.S., 12 How., 79, 84 [13; 901, 903]): "Before the rule can be
applied in any case of a statute prohibiting or enjoining things to be done, with a
prohibition and a penalty, or a penalty only for doing a thing which it forbids, the
statute must be examined as a whole to find out whether or not the makers of it
meant that a contract in contravention of it should be void, or that it was not to be so.
In other words, whatever may be the structure of the statute in respect to prohibition
and penalty, or penalty alone, that it is not to be taken for granted that the legislature
meant that contracts in contravention of it were to be void, in the sense that they were
not to be enforced in a court of justice." So, in Pratt vs. Short (79 N.Y., 437, 445; 35
Am. Rep., 531): "Prohibitory statute may itself point out the consequences of its
violation; and if on a consideration of the whole statute, it appears that the legislature
intended to define such consequences and to exclude any other penalty or forfeiture
than such as is declared in the statute itself, no other will be enforced, and if an
action can be maintained on the transaction of which the prohibited transaction was a
part, without sanctioning the illegality, such action will be entertained." (See also
Pangborn vs. Westlake, 36 Iowa, 546, 549, and authorities there cited.)
The statute of New Mexico does not declare a contract providing for usurious interest
to be absolutely void in respect to the amount loaned and legal interest thereon, but
only imposes a fine upon any person or corporation charging, collecting, or receiving
a higher rate of interest than twelve per cent per annum, and forfeits to the person,
from whom such interest is collected or received, or to his executors, administrators,
or assigns, double the amount so collected or received — the action to recover such
penalty to be brought within three years after the cause of action accrues. Construing
sections 1736, 1737, and 1738 together, the statute does not prohibit the recovery of
the amount loaned with legal interest. No such consequence, as the forfeiture of the
principal and legal interest, is visited upon the lender. And that seems to be the view
expressed by the supreme court of the territory of New Mexico, when, construing the
local statute, in Miligan vs. Cromwell (3 N. M., 330), it said: "If it should not be legal to
recover more than 12 per cent interest per annum upon written contracts, the
converse of that proposition would seem to follow as a necessary consequence that it
shall be lawful to recover on such contract 12 per cent interest per annum." It is true
that, by necessary implication, the contract is void as to any of interest stipulated to
be paid, in excess of the highest rate allowed by the statute. But as the statute only
imposes a fine for charging, collecting, or receiving usurious interest, and give to the
borrower a right to recover double the amount of such interest collected or received
from him, the courts ought not to declare the contract void as to principal and legal
interest. That would add a penalty not prescribed by the statute.
Another argument advanced by counsel for plaintiffs, maintaining that the defendant
El Hogar Filipino cannot take anything under the contract of mortgage and loan, is
that the defendant corporation is without corporate power to enter into such kind of a
contract, and therefore its act is ultra vires. In their briefs as appellees plaintiffs allege
that the loan made to them is an agricultural loan, and the maximum interest allowed
by Act No. 2655 for such a contract is 12 per cent per annum. This law, however,
does not make any distinction between loans whether agricultural, urban, industrial,
or commercial. All loans secured by mortgage upon real property, whether for
agricultural purposes, industrial, or commercial, or for the construction or acquisition
of urban properties cannot earn more than 12 per cent per annum interest, in
accordance with the general rule established in section 2 of the said law; but loan and
building associations may charge up to 18 per cent per annum interest in accordance
with the exception contained in the same section.
Although not stated in so many words, we perceive from plaintiffs' brief that building
and loan associations cannot make loans except for the construction and acquisition
of homes.
Aside from the fact that there is nothing in Exhibit 1 showing (nor did the plaintiffs
show) that the loan made was for agricultural purposes, the law, in describing building
and loan associations, says:
All corporations whose capital stock is required or is permitted to be paid in by the
stockholders in regular, equal, periodical payments and whose purpose is to
accumulate the savings of its stockholders, to repay to said stockholders their
accumulated savings and profits upon surrender of their stock, to encourage industry,
64
frugality, and home building among its stockholders, and to loan its funds and funds
borrowed for the purpose to stockholders on the security of unencumbered real
estate and the pledge of shares of capital stock owned by the stockholders as
collateral security, shall be known as building and loan corporations, and the words
"mutual building and loan association" shall form part of the name of every such
corporation. (Sec. 171, Act No. 1459.)
It will thus be seen that one of the principal purposes for which this kind of
corporation is organized is to lend its funds and funds borrowed for the purpose to
stockholders on the security of unencumbered real estate and the pledge of shares of
capital stock owned by the stockholders as additional security. What is the purpose
mentioned by the law? According to the same section, the purpose is (a) to
accumulate the savings of its stockholders; (b) to repay to said stockholders their
accumulated savings and profits upon surrender of their stock; (c) to encourage
industry, frugality and home building among its stockholders.
In the case of El Hogar Filipino vs. Rafferty (37 Phil., 995), this court said:
A building and loan association is an organization created for the purpose of
accumulating a fund by the weekly, monthly or yearly subscriptions or savings of its
members, to assist them in building or purchasing for themselves dwellings or real
estate, by loaning to them the requisite money from the funds of the society. To all
particular intent it may be said to be to enable a number of associates to have and
invest their savings to mutual advantage, so that, from time to time, any individual
among them may receive, out of the accumulation of the pittances which each
contributes periodically, a sum, by way of loan, wherewith to build or pay for a home,
and ultimately making it absolutely his own by the payment of such small amounts
from time to time. Building and loan associations are institutions in modern society
and are now recognized as important factors in the social and economic development
of the country. The controlling idea is the massing of the separate earnings of wage-
workers and the savings of persons of small means, in such a manner as to aid them
in procuring homes for themselves. It is the organization of thrift and self-help, a
practical application of the maxim that in "union there is strength."
It must be noted, however, that although the controlling idea in building and loan
associations is that of accumulating the separate earnings of wage-workers and the
savings of persons of small means in such a manner as to aid them in building up
homes for themselves, this idea, nevertheless, is not exclusive, because the law itself
determines the various purposes which such associations may pursue in their
operations. The characteristic of these associations is the mutual benefit for its
members, as defined in the Rafferty case, supra.
Upon this point Sundheim in his work on Law of Building and Loan Associations,
sections 5 and 7, has the following to say:
All these names are misleading and convey no exact idea of what an association is.
The name has no legal or practical significance, except that, by usage, it has become
descriptive of a peculiar class of corporations with especial rights and powers defined
by statute. Many associations to-day do not use the word "building" in their corporate
title, but style themselves "Savings and Loan Associations," which is more descriptive
and less misleading. The term "building and loan associations" would seem to imply
that they were engaged in the business of building. This was or is seldom true,
although in some jurisdictions they seem to have that power. The borrower may, if he
so desires, build a house with the money advanced, or he may use it in any trade or
business. The association merely loans or advances the money and the use to which
it is put is none of its concern.
xxx xxx xxx
They are the most economically conducted financial institutions in the world, and
have, despite this, suffered the least financial loss. They have grown to such an
extent to recent years that they no longer restrict their money to the home buyer, but
loan their money to the mere investor or dealer in real estate. They are the holders of
large mortgages secured upon farms, factories and other business properties and
rows of stores and dwellings. This is not an abuse of their powers or departure from
their main purposes, but only a natural and proper expansion along healthy and
legitimate lines. All legislation in recent years has been to enlarge and broaden their
powers, not to confine and restrict them. The courts have been liberal in the
construction of these specially delegated powers, and, as a result, they have grown
and changed as conditions required. Judge Endlich, no doubt the greatest authority
on these institutions, well says: "It is indeed, to be noted that the legislature has
attempted no definition of what constitutes a building association. It has assumed that
certain features and methods are essential to it, and there is no room for doubt that
without them no corporation, whatever its label, can claim to be a building
association. But it has not excluded the possibility that, consistently with these
essential features, the legitimate development of the business of these associations
may add other which, at the date of enactment, were not foreseen and against which,
therefore, it is not to be taken as implying any prohibition."
65
On the hypothesis that the loan in question is usurious, and leaving for the later
discussion the determination of the amount of the loan which is also the subject of the
appeal of the defendant, it is our opinion, in view of the foregoing, and so hold, that
the errors assigned by the plaintiffs are groundless and should be overruled.
Let us now consider the appeal of the defendant El Hogar Filipino from the judgment
of the trial court pronouncing the contract Exhibit 1 usurious and therefore void, as
well as the power to sell contained in clause 10 of the said contract.
Defendant assigns as errors committed by the court the following: (a) Its holding that
the contract Exhibit 1 is usurious and void; (b) its holding that the power to sell given
in said contract Exhibit 1 is void; (c) the computation of the principal of the loan
evidenced by said contract Exhibit 1 at P66,682; (d) the holding that the plaintiffs are
entitled to recover P12,600 heretofore paid and P5,000, attorney's fees, or any sum
whatever, of the defendant El Hogar Filipino; (e) its failure to award possession of the
property in question to El Hogar Filipino under the allegations of its first cross-
complaint herein; and (f) the overruling of the motion for a new trial on the question of
usury and the validity of paragraph 10 of the contract Exhibit 1.
It is proper to examine the manner of operation of loan and building associations, as
prescribed by the Corporation Law, for the purpose of determining whether the
contract in question is really usurious.
Section 182 of the Corporation Law, Act No. 1459, provides:
Every loan made by the corporation must be properly evidenced by note or other
instrument in writing and must be secured by a first mortgage ... on ... real estate and
also by the pledge to the corporation of shares of stock of the corporation the
matured value of which shall at least equal the amount loaned: . . .
As this section of the law is of a mandatory character and has not been either tacitly
or expressly repealed by Act No. 2655 or by any other Act, El Hogar Filipino was
under the obligation to comply with its provisions in making the loan now in question,
and for this purpose, paragraph 7 was inserted in Exhibit 1, to wit:
As additional security for the performance of the obligations herein contained, the
debtors pledge to the association the 420 shares of Class A stock of the association
by them subscribed for of the nominal face value of eighty-four thousand pesos.
(P84,00).
As to the manner and time of paying the loan of P84,000, paragraph 2 of the said
Exhibit 1 provides that:
The debtors acknowledge having received the said sum of eighty-four thousand
pesos (84,00), which they promise to replay as follows:
They will pay to the treasurer of the association monthly, on or before the 5th day of
every month, the sum of one peso (P1) for each share of Class A stock subscribed
for by them until the surrender or cash value of said stock, as determined by the by-
laws and regulations of the association now in force, shall equal the said sum of
eighty-four thousand pesos (P84,000), the amount of the loan by them received from
the association, or such lesser sum as the principal loan shall have been reduced to
by reason of payments made by the debtors in reduction thereof in accordance with
the conditions of paragraph three hereof; and as soon as the surrender value of said
stock shall equal the sum owed by reason of the loan herein granted said stock shall
be surrendered and cancelled and the value thereof applied by the association to the
payment of the amount owed by the debtors on said loan, and the president of the
association shall execute in favor of the debtors the necessary instruments of
cancellation of the mortgage hereinafter created, the expense of said cancellation to
be charged against the debtors.
This paragraph or clause of the contract is likewise in accordance with section 174 of
the Corporation Law which reads as follows:
. . . The dues on each share of stock subscribed for by a stockholder shall continue to
be paid by the stockholder to the corporation until the share has been duly withdrawn,
cancelled, or forfeited, or until the shares has reached its matured value; that is to
say, when the dues paid on each share and the net earnings thereof, in accordance
with the by-laws, shall amount to the par value of the share . . . .
The par value of each share of stock is two hundred pesos, according to section 175
and, until the same is fully paid, the dues cannot, according to the same section, be
applied to any other account, except to the completion of the payment of the shares
of stock.
If the shares of stock were encumbered, this fact would not authorize the association
to apply the dues towards the reduction of the amount loaned because section 174
does not make any discrimination about shares of stock of any kind, but on the
contrary includes all shares that have not reached their matured value.
66
Furthermore, section 180 further supports clearly this criterion when it provides that:
. . . Provided, however, That if shares pledged to the corporation as security for loans
shall mature before the loan is repaid the matured value may be paid to the holder in
cash as in this section provided or may be credited to the loan at the option of the
board of directors.
If the dues on the shares pledged should be applied to the reduction of the capital
loaned, then the last quoted section would never have any application, for there
would never be a case where the "shares pledged ... shall mature before the loan is
repaid."
Contrariwise, it might happen that the loan might be paid before the shares should
have reached their maturity value, if the borrower avails himself of the right granted
him in paragraph 3 of Exhibit 1, to wit:
It is agreed that the debtors may make partial payments in reduction of their loan,
provided such payments shall not be less than two hundred pesos (P200), or any
multiple thereof.
All this simply shows that El Hogar Filipino has adopted this system of operating, not
for the purpose of evading the Usury Law, as held by the trial court, but because the
Corporation Law, which came into effect long before the enactment of the Usury Law,
does not permit it to accept securities of real estate, but must demand the pledge of
shares of capital stock as additional security.
In the case of Martinez vs. Graño (42 Phil., 35) this court said:
It is a matter of common knowledge that a building and loan association, such as El
Hogar Filipino, upon making a loan, requires the borrower to become subscriber to a
sufficient number of shares of the stock of the association to amortize the loan upon
maturity of the shares; and the borrower is further required to make certain payments
upon these shares contemporaneously with the payments of the interest upon the
loan, . . .
With these premises before us, which reveal the nerve of the case, let us now
consider the most important argument, affecting the peculiar way of operation of
mutual building and loan associations.
The trial court and the plaintiffs maintain that the monthly payment of P420 as dues,
at P1 per share, is a partial payment of the capital loaned; but, as paragraph 4
provides that while the borrowers are indebted to the association they shall pay
interest at the rate of 9 per cent per annum on the amount of P84,000, it might
happen that the debt might be reduced to an insignificant amount, but nevertheless
the debtors would still have to continue paying P7,560 as annual interest.
If the P420 of monthly dues had been applied from the beginning to the reduction of
the amount of the capital loaned, (a) it would have been violative of section 177 of the
Corporation Law which provides: "Payment of dues on shares of stock shall
commence from the time that such shares were issued;" (b) it would also violate the
provisions of section 174 which reads: "... The dues on each share of stock
subscribed for by a stockholder shall continue to be paid by the stockholder to the
corporation until the share has been duly withdrawn, cancelled, or forfeited, ...;"(c) it
would violate section 182 of the same law because the loan would have been
secured by real estate only, as there cannot be additional security on shares of stock
upon which no dues are paid; (d) the subscription to the capital stock would have
been nominal only, and thereby section 181 of the law would have been infringed,
which prohibits these associations from lending money except to shareholders; (e) it
would openly violate paragraph 2 of the contract Exhibit 1 which categorically
provides that such payments shall be for the shares of stock until the surrender or
cash value of said stock shall equal the sum of P84,000 and, as soon as the
surrender value of said stock shall equal the amount due, said stock shall be
surrendered and cancelled and the value thereof shall be applied to the payment of
the amount owed by the debtors, etc.
If in accordance with the law and the contract Exhibit 1, the dues shall be applied to
the payment of the shares until they shall reach the amount of P48,000, all
arguments predicated upon the proposition that such dues must be applied to the
reduction of the debt before reaching the amount of P48,000) are inadmissible in
sound logic.
The criterion of the court below upon this point is expressed in the following
paragraphs:
In such a way although the payments made by the debtors in accordance with
paragraph 2 and other conditions of the contract were really actually applied to the
original principal of the debt, the latter would be reduced to such an extent that the
maximum rate of interest allowed by law of 18 per cent per annum would be less than
67
the fixed annual interest of P7,560, and still the debtors would be bound to pay said
interest of P7,560, etc. (Page 11, trial courts decision.)
Under clause 4 of the contract Exhibit 1, and clause 15 of the stipulation of facts, so
long as there remains any part, however insignificant, of the P84,000 which has been
made to appear as the amount of the loan, the borrowers are to pay interest at nine
per centum per annum on the whole P84,000. So that, for example, even though the
value of the shares should reach P42,001, which is applied to the loan, it would
reduce the debt to P41,999, in any given year, but the borrowers would have to pay
interest at nine per centum per annum on P84,000, just the same, or P7,560. (Page
45, appellees' brief.)
We are unable to accept the theory maintained in the above quoted paragraphs.
Supposing for a while that the shares of stock had attained a value of P42,001, this
amount could not be applied to the reduction of the loan without the consent of El
Hogar Filipino, as it would allow one of the parties to violate the contract without the
consent of the other. But if El Hogar Filipino had consented to this, we cannot see
why it should follow that under the contract El Hogar Filipino could still collect interest
upon P84,000, because paragraph 3 of Exhibit 1 provides that:
It is agreed that the debtors may make partial payments in reduction of this loan
provided such payments shall not be less than two hundred pesos (P200), or any
multiple thereof; all payments made hereunder shall be applied in reduction of the
principal of this loan on the last day of the month in which the same shall be paid and
the stipulated interest shall be proportionately reduced from and after said date.
In such a case we presume that El Hogar Filipino, in order to be within the law, would
require the debtors to subscribe for shares of stock whose value will be equivalent to
P41,990, the balance of the debt, if the debtors were not willing to pay the said
balance then and there.
On the other hand, the judgment appealed from makes the following findings of fact:
That the annual profits of El Hogar Filipino from all sources of revenue are liquidated
at the end of every year and are prorated to its shareholders in proportion to their
respective participations, said participations being the amount of their dues paid upon
the subscribed shares of stock and of the accumulated profits of previous years (par.
19), and that the sum of P12,164.25 credited to the plaintiffs as the value of their
shares in order to determine the balance unpaid for which El Hogar Filipino, in
foreclosing the mortgage, caused the extrajudicial sale of the property mortgaged
herein, included the amount of dues paid by the plaintiffs upon their shares of stock,
as well as the dividends corresponding to said shares of stock.
If the dues upon the shares of stock earn dividends, as found by the trial court and as
agreed upon by the parties, this runs counter to the proposition that interest must be
reduced proportionately every month. To state it more clearly, one of the same
amount cannot be applied to the payment of shares and at the same time to the
reduction of the loan, neither can it earn dividends and at the same time cause a
reduction of interest. When the payment is applied to the value of the shares, it has
the effect of increasing the participation in the capital of the association of him who
pays, and naturally the compensation is the increased of his participation in the
profits of the association; but when it is applied to the reduction of the debt, its only
effect is to reduce the amount of the obligation and, consequently, it works a
reduction of the interest.
All of this confusion could have been avoided if at the outset the debtors had been
recognized as being debtors and stockholders at the same time of the association. As
such stockholders, they are vested with all the rights and obligations of every
stockholder with the only difference that they cannot dispose of their shares because
they are pledged to the association.
In the case of Freemansburg Building & Loan Assn. vs. Watts (199 Pa., 221; 48 Atl.,
1075), it was held that:
. . . In carrying out the plan on which building associations are organized and
conducted, it is not intended that a stockholder, who borrows of the association, will
discharge the debt he incurs by direct payments on account of it. He prays at stated
periods the dues on his stock, the interest on the money borrowed, and, when the
premium bid for the loan has not been deducted, the installments on it. When by the
receipt of dues, interest, premiums and fines for nonpayments of dues, all of the
stock belongs, becomes full paid or matured, the value of his stock equals the
amount of his debt, and the transaction is then ended by the surrender of the stock by
him and the cancellation of his obligation by the association.
Frequently, the obligations taken by building associations from borrowing members
very imperfectly express the true relation of the parties to each other, as determined
by the object in view and the rules for the government of the association, but they
should never be considered as establishing a new relation at variance with the
fundamental principles on which such associations are organized and conducted,
unless the language used will admit of no other construction. . . .
68
In Corpus Juris (volume 9, page 957), it is said that:
. . . He occupies the dual relation of borrower and stockholder, each of which is
distinct from the other. . . .
On page 978 it adds that:
Generally, a building and loan association loan is unpaid until final settlement or
maturity of the borrower's shares, . . .
And on page 979 we find that:
In the majority of jurisdictions, ... payments on stock are not ipso facto payments on
the loan and do not operate of themselves to extinguish it pro tanto, even though the
stock has been assigned as collateral. In a few jurisdictions, especially those which
allow and require all payments to the association to be applied on the loan, the rule is
otherwise as to stock payments . . . .
If in other jurisdictions there can be any doubt about this point, that is not the case,
however, in this jurisdiction because Act No. 1459 is very clear upon this matter, and
clearer yet are the provisions of the contract Exhibit 1, to the effect that the monthly
payments of P1 per share shall be applied exclusively to the maturity value of the
shares and that the amount of the loan would not be totally paid (except by voluntary
partial payments as provided by paragraph 3) until the surrender or cash value of the
shares shall be equal to, and shall cancel, the amount loaned.
Lastly, Exhibit 3 shows that on the very day that the loan was made the following
amount was deducted:
Dues for three months upon shares subscribed for, P1,260.
This shows that with the consent of the plaintiffs the amount of the first three monthly
payments were applied to the payment of the shares and not to the reduction of the
loan. Furthermore, plaintiffs should have known that the following monthly payments
would be applied to the same account, as was covenanted in Exhibit 1 and, knowing
it, they never made any protest.
If the solution of the case should hinge upon the provisions regulating the application
of payments, we would find article 1172 of the Civil Code providing that:
A person owing several debts of the same kind to a single creditor may declare, at
the time of making a payment, to which of them it is to be applied.
If the debtor should accept from the creditor a receipt which recites the application to
be given the payment, he cannot contest it, unless there should be ground for treating
the contract as void.
From whatever point of view the case of the plaintiffs is considered, we find that it is
neither supported by the law, nor by the contract, nor by the subsequent acts of the
plaintiffs; on the contrary we believe that the application of the dues to the payment of
the subscribed shares of stock is in accordance with Act No. 1459 and with the
contract Exhibit 1, and is not in violation of Act No. 2655.
Another ground of the judgment of the lower court for holding the contract Exhibit 1
usurious, is that accordance with paragraph 5, any default in the payment of the
dues, or of the interest, has the effect of imposing a fine upon the debtors of three
centavos per month for each peso in arrears, and the further penalty of 3 per cent per
month thereon, equivalent to 36 per cent annum, that is, double the maximum rate of
18 per cent permitted by section 2 Act No. 2655.
The 18 per cent fixed in section 2 of Act No. 2655 as the maximum rate of interest
that may be collected by building and loan associations must be understood to refer
only to the amount loaned, as otherwise it might be construed to authorize the
collection of 18 per cent per year upon premiums, 18 per cent upon fines, and 18 per
cent upon interest. It is unimportant that the rate of monthly fines should exceed 18
per cent annum because what should not exceed 18 per cent per annum is the sum
total of the three items, "fines," "interest," and "premiums." If this is so, it is evident
that the 18 per cent does not refer to the monthly dues, but to the amount of the loan.
To what does the 36 per cent mentioned in the judgment refer? The judgment
appealed from is silent, but it undoubtedly refers to the interest that the debtors have
been compelled to pay for their delinquency, consisting of a fine of three centavos per
month for each peso that they failed to pay, and not to the dues because the fines
thus imposed for delinquency are applicable alike to all shareholders whether debtors
of the association or not. The interest that plaintiffs must pay was fixed at 9 per cent
per annum upon the sum loaned; and supposing that the debtors are delinquent for
one full year, it would result that they would pay 36 per cent of 9 per cent of the
principal which, mathematically speaking, represents 3.24 per cent of the loan. In
other words, supposing that the debtor should pay the monthly interest, but with 12
69
fines, as each month's interest is only one-twelfth part if 9 per cent per annum, that is,
seventy-five hundredths of 1 per cent, it would result that the 12 fines would
aggregate twenty-seven hundredths of 1 per cent per month, equivalent to 3.24 per
cent per annum. It will, thus, be seen that 36 per cent of the annual interest (P7,560)
would be but 3.24 per cent of the whole loan (P84,000).
The argument relative to the premium is expounded by the court as follows:
Furthermore, it appears that the rate of premium charged by El Hogar Filipino to the
herein plaintiffs was 16.67 per cent of the amount of the loan. This premium plus the
9 per cent interest of the first year amounts to 25.67 per cent of the amount of the
loan, which is in excess of the 18 per cent per annum allowed by the Usury Law for
premiums, interest, and fines.
If the contract had been entered into to last one year only, there would undoubtedly
be a flagrant violation of section 2 of Act No. 2655. But, as the contract did not have a
fixed date of maturity, but provided that it would become extinguished when the
shares should reach their maturity value of P84,000 and the experience of the years
of existence of the defendant corporation justifies the assumption that the term of the
loan would be ten years approximately, the question that remains for determination is
whether or not the contract of loan for two or more years is usurious, when in
accordance therewith, the creditor may, in one year, collect more than the legal rate
of interest.
Act No. 2655 limits the amount that may be charged for the use of money in
proportion to the amount of the loan and the length of the time of its use. In
accordance with the present day practice, the first element is based upon 100 units
and is termed per centum, while the second is based upon one year and is denoted
by the phrase per annum. The prohibition is against collecting in excess of the rate of
many units per centum per annum, but there is nothing in the law fixing the
proportional part that may be collected each year. Twenty pesos paid for the use of
one hundred pesos in two years is equivalent to 10 per cent per annum, as evident
as ten pesos is the payment for the use of the same amount for one year.
In the case of Fowler vs. Equitable Trust Company (141 U.S., 384; 35 Law. ed., 786),
where the maximum legal rate of interest was 10 per cent, and the loan was for five
years, with interest at the maximum rate, and where 3 per cent per annum, that is, 15
per cent of the total, was deducted at the time of making the loan, the balance of 7
per cent to be paid annually, the court held that the collection of the said discount did
not make the transaction usurious.
In the case of Pierce, Wright & Co. vs. Davey (43 Neb., 45; 61 N.W., 92), a
promissory note for $1,750 was executed to cover a loan at 10 per cent per annum,
the maximum rate of interest allowed, it being agreed that the note would earn 7 per
cent interest per annum, and the amount of $208.50 was deducted at the time of
making the loan. It was held that the transaction was not usurious even though the
amount collected in the first year of the loan was far in excess of the maximum
allowed by law, for the reason that the rate for the whole time of the loan did not
exceed the limit. The analogy between the interest deducted in that case and the
premium deducted in the case at bar is very evident. If the intention of the lawmaker
had been to prohibit the collection by inserting in the law these or similar phrases: "6,
12, 14, or 18 per cent in any one year of the contract" instead of the "6 per cent per
year, 12 per cent per year, 14 per cent per year, or 18 per cent per year, etc." that
appear in sections 1, 2, and 3 of the said law.
In the absence of a contrary provision, where the same interest is not paid each year,
it would seem the justice requires that the average interest be taken by dividing the
sum total of the interest of all the years by the number of years so as to obtain a right
figure for comparison. Otherwise, the courts will be forced to declare usurious a loan
made for ten years, with real estate security, where it is stipulated that the debtor
shall pay 1 per cent interest during the first nine years and 12 ½ per cent during the
last year — which would be clearly unjust because the one-half of 1 per cent excess
in the last year is more than compensated by the 11 per cent less that he paid during
the first nine years.
In the instant case, where the date of maturity was the date when the shares of stock
should reach their maturity value, assuming that the term of the contract would be ten
years, it would result that in that first year the amount collected would be 16.67 per
cent premium plus 9 per cent interest, making a total of 25.67 per cent, which is 7.67
per cent interest in excess of that allowed by law; but, as in each of the nine
succeeding years there would be collected only 9 per cent, the debtor would at the
end have paid in all 9 per cent less than the maximum allowed by law.
Regarding the return of the interest paid in advance, the final provision of section 6 of
Act No. 2655 is as follows:
Provided, however, That the creditor shall not be obliged to return the interest
collected by him in advance when the debtor shall have paid the obligation before it is
due, . . . .
70
Act No. 2073, enacted by the Philippine Commission for the Moro Province, Mountain
Province, and the Provinces of Agusan and Nueva Vizcaya, and which undoubtedly
was considered in the preparation of Act No. 2655, provides in section 3 as follows:
. . . And provided further, That the payment of interest in advance for one year at a
rate not to exceed fifteen per centum per annum shall not be construed to constitute
usury.
It must be noted that this provision was reenacted in Act No. 2655, but omitting
therefrom the one-year limit which clearly would make us think that interest may be
collected in advance without that limitation.
In the case of loans running several years the exaction of a part of the interest in
advance for the full period of the loan has been held not to render the loan usurious;
but where a loan is to run for several years, it has been held that to deduct in
advance the highest rate of interest for the entire period of the loan would constitute
usury.
. . . It would certainly seem that the exaction of the interest in advance for the entire
period of a loan which was to run for a long time would render the transaction
usurious where such exaction would absorb so much of the principal as to leave to
the borrower very little of the amount agreed on to be loaned. (29 Am. & Eng. Encyc.
of Law, 492.)
Summarizing the foregoing, it may be said that the interest agreed upon in the
contract Exhibit 1 is 9 per cent per annum plus one-tenth of the premium, that is,
1.667 per cent, making a total of 10.667 per cent per annum. Adding to this the 3.24
per cent fines already discussed, there is a maximum total of 13.907 per cent per
annum, which is far below the maximum rate of interest fixed by law.
It may happen, however, that the debtor in a contract of loan like the one before us,
availing himself of the right granted him in paragraph 3 of Exhibit 1 of making partial
payments upon the loan, may, because beneficial to his interests, pay the whole
amount of the debt within the first year of the loan; could it then be maintained that
the lender has committed usury?
It is a fact that by virtue of paragraph 9, the violation by the debtor of his obligation
might result in the debt becoming at once due and payable — in this case also the
rate of annual interest and premium would exceed 18 per cent on account of the
shortening of the time. In both cases, however, the fact must be borne in mind that
the resulting excessive interest is not the result of the obligation of the contract but of
acts and omissions wholly independent of the will of the lender.
Discounting promissory notes is very usual at the local banks. If in discounting a 90-
day promissory note the bank collects 2 ½ per cent interest in advance and on the
following day the debtor. To suit his convenience, insists on withdrawing the note
from the bank, and the latter accepts its full payment, could the debtor accuse the
bank of violating the Usury Law, for having collected from him 2 ½ per cent for a
single day that he used the money, that is, 900 per cent interest per annum?
If this were sound logic, it would follow that the legal acts performed by the creditor
could be made illegal at the will of the debtor; that the interest collected, and which
was not usurious at the time of making the loan, could be turned usurious at the
pleasure of the debtor, thus giving the latter an easy and convenient way of ruining
his creditors.
The amount of the premium is determined and based upon the faithful compliance
with the obligation and of the consequent running of the entire time of the loan and
the reason for the absence of a provision for the adjustment in case of the premature
maturity of the obligation by default of the debtor or on account of the convenience of
cancelling the entire obligation before it falls due is to give substantial inducement to
the compliance of the contract and at the same time establish an effective penalty for
its violation. If the normal time of the loan were 10 years and the maturity, for non-
compliance of the provisions of the contract, takes place at end of five years, it would
result that the one-half of the earned premiums would have been granted by the
contract of loan and the other half would have constituted a penalty for the violation of
the contract.
The test of usury in a contract is whether it would, if performed, result in securing a
greater rate of profit on the subject-matter than is allowed by law. . . . (Webb, Usury,
sec. 29.)
. . . It is on the assumption that contracts will be performed according to their
stipulations by the parties to them, and not upon the supposition that they will be
violated, their legality should be determined. It would be an anomaly to make the
violation of a contract the test of its legality. . . . (Crider vs. San Antonio Real Estate
Building & Loan Assn., 13 Tex. Civ. App., 399; 37 S. W., 237.)
When an excessive rate of interest is made payable only in case of default in
payment of the principal, the higher rate is not for the use of money, but imposed as a
71
penalty for nonperformance of the contract. By his own act the debtor may relieve
himself of the excessive payment. Whether such penalty for the nonperformance of
the contract is held enforceable or not, all authorities are agreed that the contract is
not usurious, but remains a valid and enforceable obligation against the debtor. (39
Cyc., 953.)
Where a borrower has agreed to pay a rate of interest not forbidden by law, but has
stipulated that, in the event of his not making payment at the time specified, the
obligation shall bear a higher rate of interest, either from default or from the date of its
execution, or that some specific sum shall be paid in addition to the principal and
interest contracted for, the increased rate is generally regarded as a penalty and not
within the usury laws. . . . (27 R.C.L., 232.)
It will be observed that the American cases, while holding that the penalties for
violations are not against the usury laws, the courts generally incline towards finding
a way to relieve the debtor of such a heavy burden. This tendency is based upon the
repugnance of the common law towards the imposition of fines. In the laws of this
jurisdiction, however, there is no such policy and nowhere in Act No. 2655 is there a
provision preventing the stipulation and enforcement of a penalty in case of violation
of the contract. Indeed, section 6 clearly provides for such a penalty, permitting the
lender to retain the interest for the whole period of the contract, as advance payment,
because it does not distinguish between voluntary and compulsory payment.
The validity of such a penalty was expressly upheld by this court in the case of Go
Chioco vs. Martinez, supra, wherein it was held that "the parties to a contract of loan
may validly agreed upon a penalty in case the obligation is not fulfilled, besides the
interest not prohibited by the Usury Law, is a proposition generally admitted. . . .
In the case of Cissna Loan Co. vs. Gawley (87 Wash., 438; 151 Pac., 792; L.R.A.
[1916 B], 807), the defendants had taken a loan of a sum of money and executed a
series of 96 promissory notes falling due in successive months, the nominal value of
each promissory note including interest at the legal rate until their maturity. Each note
contained a provision to the effect that default upon any of them will result in the
whole series becoming immediately due and payable. Defendants paid the first 21
notes, but failed to pay the others. Plaintiff filed an action for the recovery of the
unpaid promissory notes and for the foreclosure of the security, against which a
defense of usury was pleaded. The Supreme Court of the United States said:
Since, therefore, the interest reserved does not exceed the maximum statutory rate if
paid according to the terms of the contract of loan, it remains to inquire whether the
accelerating clauses of the contract render it usurious. The usual test for the
existence of usury is, will the contract, if performed, result in producing to the lender a
rate of interest greater that the maximum rate permitted by the statute, and was such
result intended? And the courts generally hold that stipulations in the contract to the
effect that default in the payment of interest, or of an installment of the principal, shall
accelerate the maturity of the entire debt are not usurious, even though the contract,
if enforced according to the terms of the default, will result in giving the lender a rate
of interest greater than the maximum statutory rate. They regard the excessive rate
after maturity as in the nature of liquidated damages or penalties, to be enforced only
to the extent that they are not unconscionable (citing cases and other authorities).
xxx xxx xxx
Tested by these rules, the notes are not usurious for the reason assigned by the
respondents (defendants). The lender cannot, by the terms of the notes, exact from
the borrowers, of his own volition, a greater rate of interest than the maximum rate
permitted by the statute. This right, if it accrues to it at all, accrues by reason of the
default of the borrowers, and this we hold, as we believe with the weight of authority,
cannot make a contract illegal which would otherwise be legal if performed by the
borrowers (quoting from Crider vs. San Antonio Real Estate Building & Loan Assn.,
supra).
But the trial court seems to have rested its decision in part on the fact that the notes
were payable before maturity at the option of the borrowers, at an advanced rate of
interest which would render them usurious if so paid. But we cannot think this fact
justifies the conclusion that the notes are usurious. Such a payment would be
voluntary on the part of the borrowers. They were in no way obligated to pay the loan
before maturity. The agreement was thus in the nature of a penalty which the lender
exacted for the privilege of paying before maturity. Not being capable of enforcement
by him, it was not usurious. . . .
Other cases that are applicable may be found in the annotations on page 812, L.R.A.,
1916 B, following the case of Cissna Loan Co. vs. Gawley, supra, and in the
annotations to Smithwick vs. Whitley (28 L.R.A. [N.S.], 113).
The trial court, in deciding the motion for new trial presented by El Hogar Filipino, in
connection with the premium says: "In the first place, the court believes that a mutual
building and loan association has no right to charge interest for the amount of the
premium that it collects upon granting a loan; secondly, a transaction is evidently
usurious where the defendant cannot in any way use the money for which he paid
72
interest, and interest is generally nothing more than the payment for the use of
money or a compensation for the forbearance of the creditor in the collection of his
credit.
If interest paid by a debtor upon a sum of money that he has not received is usurious,
the borrowers in the present case could allege that they were not obliged to pay
interest on the amount of money that was deducted from the loan in accordance with
Exhibit 3, which was used for the payment of the deed and its registration, of the
internal revenue stamps and interest pertaining to two months and fourteen days,
etc., and similarly, as El Hogar Filipino retained P38,047 plus P11.50 from the
amount of the loan in order to cancel a lien in favor of the National Bank upon the real
estate mortgaged to the former, the debtors likewise were not obliged to pay interest
upon these amounts, because they were sums of money which they did not use. It
was forgotten that if the plaintiffs desired to obtain a loan from El Hogar Filipino they
had to pay first those same amounts of money that were deducted from the loan.
They could have paid them with their own money, in which case they would have
received the full amount of the loan, but they elected to have the lender pay said
amounts by deducting the same from the loan that they were negotiating. It cannot be
said, therefore, that said amounts were not used by the debtors.
Referring to the amounts appearing in Exhibit 3, that were deducted by El Hogar
Filipino, we do not believe that it can be said that the said amounts were not used by
the plaintiffs, specially if we bear in mind that the latter agreed to apply them to the
payments that they had to make before they could obtain the loan.
The stamps on the mortgage deed and on the shares of stock subscribed for by the
plaintiffs amounting to P14 and P84, respectively, were necessary expenses that did
not benefit in the least the defendant entity, as also the fees of P50.50 charged by the
registrar of deeds, because these three amounts went into the public treasury.
The expenses of appraisal and execution of the document amounting to P50 and
P25, respectively, are reasonable expenses incurred for the survey of the mortgaged
lands and in proportion to the amount of the loan.
The entrance fees charged by the association for the issuance of shares of stock,
amounting to P420 at the rate of P1 per share, are permitted by section 176 of the
Corporation Law and have absolutely nothing to do with the loan, for such fees are
paid by all shareholders, whether debtors of the association or not. If the plaintiffs had
taken out their shares of stock without borrowing money, or had negotiated the loan
five months afterwards, they would have had to pay just the same amount of
entrance fees.
With regard to the interest collected in advance, amounting to P294 for the fourteen
days of the month of March and P1,260 for the months of April and May, we have
already said that Act No. 2655 expressly allows such collections in advance.
The dues for the subscribed shares of stock amounting to P420 for the month of
March and P840 for the months of April and May were paid by the plaintiffs as
shareholders and not as debtors.
As to the premium of P14,000, — we have already dealt with it, — its collection is
authorized by the Corporation Law and this was recognized in paragraph 20 of the
stipulation of facts.
Lastly, with regard to the amount retained by El Hogar Filipino paying plaintiffs' debt
to the National Bank, amounting to P38,047.99, plus P11.50 for interest, plaintiffs not
only did not deny it, but on the contrary have expressly admitted same.
Now, section 184 of Act No. 1459 says:
The rate of interest on all loans may be fixed in the by-laws or may be prescribed
from time to time by the board of directors.
Let it be noted that the law does not say "net loans," that is, after deducting the
premium, but merely loans in general. And as section 181 of the same Corporation
Law provides that: "... The premium may be deducted from the amount of the loan or
such proposition may be so deducted as may be prescribed in the by-laws, ..." and El
Hogar Filipino, exercising this right, deducted at once the whole amount of the
premium from the amount of the loan, it would seem clear that, in accordance with
the existing laws, building and loan associations may charge interest upon the gross
amount of the loan, that is, including premium, and, in harmony with these laws, this
contract of loan was entered into and the intent of the parties is evident that a nine
per cent annum interest shall be paid upon P84,000, the total amount of the loan, and
not upon P66,682, as erroneously found by the trial court. (Fitzgerald vs. Hennepin
Country Catholic Building & Loan Assn., 56 Minn., 424; 57 W.W., 1066; Montgomery
Mutual Building & Loan Assn. vs. Robinson, 69 Ala., 413; Citizen's Mutual, etc., Assn.
vs. Webster, 25 Barb., 263; Vermont L. and T. Co. vs. Whithed, 2 N.D., 83; 49 W.W.,
318.)
73
If EL Hogar Filipino could for a moment deviate from the system of operation imposed
upon it by the Corporation Law, and had given a loan of P70,000 to the plaintiffs
charging therefor an annual interest of 18 per cent only, the plaintiffs would pay for
interest alone the sum of P12,600 per annum and nobody would mark the transaction
usurious. In that case, plaintiffs would have to pay the very same P12,600 per year
as agreed in the contract, Exhibit 1, until they can reduce the amount of the loan and
if they should not pay any part thereof during twenty-five years, after the lapse of so
long a period of time, they would still be owing the same P70,000.
The contract that is now attacked as usurious by the plaintiffs binds Lopez to pay
P12,600 annually for his loan, but gives him the benefit of applying P5,040 out of the
P12,600 towards the payment of 420 shares of stock, so that when these attain their
maturity value, the same would be applied to the payment of the P84,000 debt.
Computing the dividend of these shares at 10 per cent per annum, which is the
dividend declared for the last two years (sworn statement of Lutgardo Lopez, page
118, B.E.), they would attain their maturity value at the end of 120 months, or if this
were not exact, then after 130 or 140 months. In other words, we might have to wait
10, 11, or 12 years, but at the end of these periods, the debt would be extinguished.
If by charging the whole P12,600 as interest, El Hogar Filipino does not commit
usury, we do not think it can be reasonably maintained that, by giving the debtor the
right to apply a part of that amount of interest to the payment of the shares of stock,
and thus enable him to extinguish his debt after 10 or 12 years, the lender commits
usury.
As to the assignment of error with reference to the return to the plaintiffs of P12,600
paid by them as interest and the recovery of P5,000 as attorneys' fees, we deem it
necessary to make matter clear.
The right to recover interest and attorneys' fees, given by section 6 of Act No. 2655,
is not a natural consequence following the stipulation of excessive interest, but
springs from the actual and real payment of said interest.
If a person makes a note, promising to return the principal plus 20 per cent interest,
but actually pays 10 per cent only, only the note may be void under section 7, but the
debtor cannot recover in whole or in part the 10 per cent by him paid, because the
right to recover interest, according to section 6, is granted only to "any person or
corporation who ... shall have paid or delivered a high rate or greater sum or value
than is hereinbefore allowed to be taken or received, . . . ."
In the present case, the record does not show that the plaintiffs had paid or delivered
excessive interest; so that, even if the loan were usurious, the adjudication is
improper.
The defendant, lastly, assigns as errors of the court below the declaration of nullity to
award to El Hogar Filipino the possession of the property sold extrajudicially to it. In
the case of El Hogar Filipino vs. Paredes (45 Phil., 178), it was held that:
A stipulation in a mortgage of real property authorizing the mortgagee, upon default
of the mortgagor in the payment of the mortgage debt and after publication for three
successive weeks in a paper of general circulation, to expose the property to public
sale and allowing the mortgagee to become a bidder at such sale, is valid.
This doctrine was applied in the case at Descals vs. Handelsman (R.G. No. 22422,
decided September 30, 1924).2 In view thereof, we are of the opinion that the court a
quo erred in holding paragraph 10 of the contract, Exhibit 1, void, and in refusing to
award possession to the defendant of the mortgaged properties, which were sold to
it.
The defendant, but principally the plaintiffs, have attached to their briefs numerous
computation tables of interest, which we believe it is unnecesary to examine
exhaustively as in the resolution of this court, the decisive point for determination is
whether the facts herein proven show that the defendant in the instant case has
charged the plaintiffs usurious interest.
At the time of the execution of the contract, Exhibit 1, the following charges were
deducted:
Premium (see Exhibit 16) P14,000.00
Interest, 14 days of March, 1920, at 9 per cent per annum (Exhibit 3) 294.00
Id. for April and May, 1920, charged in advance (Exhibit 3) 1,260.00
Total .....................................................
15,554.00
Payments made by debtors or debited to their account during life of loan:
Interest, June 1, 1920, to May 31, 1921 ........................................... P7,560.00
Exhibits 8 and 9 testimony of Lutgardo Lopez (page 8) and paragraphs 17 and 18 of
agreement of facts show that on March 21, 1921, Buenaventura Lopez and Miguel
Osorio executed a promissory note in favor of the company for the amount of
P12,600, equivalent to the annual payment for the period of from June 1, 1920, to
74
May 31, 1921, that is, P7,560, interest at 9 per cent plus P5,040 as dues on the
shares.
Interest at 9 per cent from June 1, 1921, to May 31, 1922 (Exhibit 2)
.............................................................................................. P7,560.00
Id., 29 days of June, 1922 (Exhibit 2) ............................................... 609.00
Fines for interest of 12 months (Exhibit 2) ..................................... 1,474.20
Collections and charges made after signing the deed .......................................
P17,283.20
The sum of amounts collected at the time of signing the deed and the payments
made by debtors or amounts debited to their account during the life of the loan until
the date when the properties were sold on June 29, 1922 (Exhibit 10)
.........................................................................................................
32,757.20
As the loan lasted 821 days and was P84,000, it is clear that defendant collected for
premiums, interest and fines the amount of P14,363.69 per annum, equivalent to
17.09 per cent, 18 per cent per year upon P84,000 would be P15,120 or P756.31
more than what the defendant collected.
In the account we excluded fines charged for delay in the payment of dues upon the
shares of stock, since those fines were collected irrespective of the loan, but on
account of the subscription to the stock and delinquent shareholders, whether
debtors of the company or not, are bound to pay same. But even adding the amounts
charged as dues by El Hogar Filipino (Exhibit 2)
......................................................................................................................
831.60
to the .............................................................................................................................
32,757.20
the result would be a total of .....................................................................................
33,588.80
which, divided by 821 days, length of time of the loan, would give P14,728.34 per
year, equivalent to 17.53 per cent on the P84,000 and 391.68 less than the maximum
of P15,120 allowed by law.
In view of the foregoing, the judgment appealed from should be, as is hereby,
reversed, hereby declaring that the contract of loan and mortgage here in question is
not usurious; that the value of the loan is P84,000; that paragraph 10 of the contract
of loan is valid and that the defendant has the right to the possession of the
properties sold to it in the extrajudicial sale; and that the plaintiffs have no right to
recover of the defendant the amount of P12,600 paid as interest, nor the amount of
P5,000, as attorneys' fees.
Without special pronouncement as to costs. So ordered.
Johnson, Street, and Romualdez, JJ., concur.
Avanceña, J., concurs in the result.
18. Gui Jong and Co v Rivera
EN BANC
G.R. No. L-21310 March 6, 1924
GUI JONG & CO., Plaintiff-Appellant, vs. JOSE RIVERA and REGINA
AVELLAR, Defendants-Appellants.
Powell and Hill and B. F. Borchardt for appellant.
Hilado and Hilado for appellees.
STATEMENT chanrobles virtual law library
March 25, 1920, the defendants executed a mortgage to the plaintiff on all the sugar
cane planted and sown during the agricultural years of 1920 and 1921 on the
hacienda Santa Julia, situated in the municipality of Himamaylan, Occidental Negros,
estimated to yield 2,500 piculs of sugar approximately, and upon ten different
carabaos, which are specifically described in the mortgage. Also one-half of a parcel
of agricultural land in the sitio of Kabigtagan, municipality of Kabankalan, Province of
Occidental Negros, containing an area of thirty-two hectares, also specifically
described. The mortgage recites that it is executed as security for the payment to the
plaintiff of the sum of P8,000, with interest at the rate of 12 per cent per annum in the
nature of a loan. Also that:
Fourth. The mortgagor is under obligation to consign to the mortgage 2,500 piculs of
sugar approximately of the crops mortgaged of the year 1920-1921 actually existing
75
on the lands above indicated, which crop shall be 2,500 piculs
approximately.chanroblesvirtualawlibrary chanrobles virtual law library
Fifth. The debtor hereby binds himself to sell to the mortgagee all the sugar he may
harvest up to the amount of P8,000, with interest thereon; provided, that the purchase
to be made by the creditor of said sugar must be on the basis of P1.50 less for each
picul than the price the same may have in the Iloilo market on the date or dates of its
arrival.chanroblesvirtualawlibrary chanrobles virtual law library
Sixth. All transportation expenses and internal revenue shall be for the account of the
mortgagor." It further provides that should the mortgagor violate any of the conditions,
he should pay the further sum of P500 as attorney's fees. The mortgagee was duly
signed, witnessed, acknowledged and filed for record.
For a breach of its conditions, the plaintiff commenced this action. Among other
things, the complaint alleges that between March 25, 1920, and April 15, 1921,
plaintiff furnished the defendants various sums of money and merchandise, on which
the defendants agreed to pay interest at the rate of 12 per cent per annum, the full
amount of which with interest to April, 1921, is P18,166.79. An itemized list of the
items is attached to, and made a part of, the complaint. It is then alleged that
notwithstanding the provisions of the mortgage, the defendants delivered only 866.20
piculs of sugar on February 14, 1921, the value of which was P6,265.92, for which
defendants were duly credited; that there is now due and owing from the defendants
to the plaintiff the sum of P11,900.87, with interest from April 15, 1921, at the rate of
12 per cent per annum; that under the terms of the contract, the plaintiff is entitled to
recover P500 as attorney's fees, and prays judgment for the respective amounts,
"and for such other relief as the court may deem just and equitable." chanrobles
virtual law library
For answer, the defendants made a general denial, and, as a special defense, "allege
that the contract and contracts upon which the suits is based are usurious in that the
rate of interest is greater than that allowed by law, that is to say, the same is in
excess of 12 per cent and also because the contracts called for payment of the
alleged debt and loans in crops and there is no provision in said contract and
contracts that the said crops should be taken over by the plaintiff at their market
value," and they pray that the complaint be dismissed, the contract be declared null
and void, and for damages resulting from the attachment upon the
property.chanroblesvirtualawlibrary chanrobles virtual law library
Upon such issues, the trial court found from the evidence that, under the terms and
conditions of the mortgage, the plaintiff had loaned and advanced to the defendant,
Jose Rivera, money and merchandise to the value of P18,166.79, upon which the
defendant had only paid P6,265.92, the agreed price of the 866.20 piculs of sugar,
leaving a balance due and owing plaintiff of
P11,900.87.chanroblesvirtualawlibrary chanrobles virtual law library
The court also found that all of the loan was usurious, with the exception of P3,500,
and rendered judgment for that amount, with interest on P1,500 at the rate of 12 per
cent from April 28, 1920, and legal interest on the remaining P2,000 from the date of
the filing of the complaint, and absolved the defendant Regina Avellar, upon the
theory that it had not been proven that she had anything whatever to do with Exhibits
1 and 2, covering the P3,500 transaction, and denied the right of the plaintiff to
recover attorney's fees. From this decision plaintiff appeals, specifying the following
assignments of error:
1. The court erred in rendering judgment condemning the defendant Jose Rivera to
pay the plaintiff only the sum of P3,500 instead of P11,900.87, the difference
between the total amount advanced to the defendants, P18,166.79, and the
P6,265.92, value of the 866 piculs of sugar delivered by the defendants to
plaintiff.chanroblesvirtualawlibrary chanrobles virtual law library
2. The court erred in not allowing P500 to plaintiff as attorney's
fees.chanroblesvirtualawlibrary chanrobles virtual law library
3. The court erred in deciding that the P1.50 less per picul to be paid by the plaintiff to
the defendants was in the form of interest, and consequently
usurious.chanroblesvirtualawlibrary chanrobles virtual law library
4. The judgment of the lower court is contrary to the weight of the
evidence.chanroblesvirtualawlibrary chanrobles virtual law library
5. The judgment of the lower court is contrary to
law.chanroblesvirtualawlibrary chanrobles virtual law library
JOHNS, J.:
76
It will be noted that the appellant does not make any assignment of error as to the
decision of the court in absolving the defendant Regina Avellar. Neither is it
discussed in its brief.chanroblesvirtualawlibrary chanrobles virtual law library
The mortgage was executed to secure the amount of the original loan of P8,000, and
the trial court found as a fact that all other amounts were advanced and loaned to the
defendant Jose Rivera upon the same conditions as those stated in the mortgage. It
specifically provides that the P8,000 shall draw interest at the rate of 12 per cent per
annum, and that the estimated crop of 2,500 piculs of sugar shall be assigned to the
mortgagee, and that the proceeds of sale shall be applied in satisfaction of the debt.
It further recites "that the purchase to be made by the creditor of sugar must be on
the basis of P1.50 less for each picul than the price the same may have in the Iloilo
market on the date or dates of its arrival." In other words, that Jose Rivera bound
himself to deliver to the plaintiff the amount of the crop estimated to be 2,500 piculs,
and to sell it to plaintiff at P1.50 less than the market price of
sugar.chanroblesvirtualawlibrary chanrobles virtual law library
If the transaction had been carried out as agreed upon between the parties, the
plaintiff would not only have received 12 per cent interest on the amount of his loan,
but in addition he would have received the further sum of P3,750, the difference
between the market price of the sugar and the price which plaintiff was to pay for it.
The plaintiff contends that he was to be paid the P1.50 per picul for his commission
and expenses in the handling and sale of the sugar. But the mortgage will not bear
that construction. It does not contain any provision of that nature. It is very apparent
that the promise of Jose Rivera to sell the sugar to plaintiff for P1.50 less than the
market price, in addition to interest at 12 per cent per annum, was one of the
inducements for the making of the loan.chanroblesvirtualawlibrary chanrobles virtual
law library
We agree with the trial court that the mortgage upon its face should be construed as
a usurios transaction. It found that the total amount of plaintiff's claim was
P18,166.79. But as pointed out in the appellees' brief, that the complaint, or
P1,394.34. Hence, it follows that, exclusive of interest, the actual amount loaned to
the defendant was P16,772.45. Deducting from this P6,265.92, the value of the sugar
delivered to plaintiff, it leaves a balance due and owing of P10,506.53, which,
exclusive of interest, is the amount which the trial court found was due and owing
from Jose Rivera to the plaintiff. As a matter of fact, there is no dispute about the
amount. In legal effect, the defendant admits that amount to be correct, but contends
that because the transaction was usurious, it was void and, therefore, he is released
from all liability, and that plaintiff is not entitled to recover
anything.chanroblesvirtualawlibrary chanrobles virtual law library
In other words, in legal effect, Jose Rivera admits that he got that amount of money
and that he owes it to the plaintiff, but because the transaction was usurious, that he
is released from the debt, and plaintiff cannot enforce his claim. That position is not
tenable. If the defendant had paid the debt and had complied with his contract, he
would then be in a position to recover any usurious interest which he paid. But, here,
the defendant breached the contract and only delivered about one-third of the amount
of sugar which he agreed to deliver, and the court finds as a fact that, exclusive of
interest, there is now due and owing the plaintiff the sum of
P10,506.53.chanroblesvirtualawlibrary chanrobles virtual law library
Upon what theory can the defendant breach his own contract and rely upon its
enforcement? Upon what legal principle can he deny liability upon a contract which
he repudiated and failed to perform? How and in what manner has the defendant
paid the amount of the original loan, which he admits having received? Upon what
legal or equitable principle can he defeat the payment of the amount of the original
loan for the reason that he failed and neglected to perform his own contract? By no
fiction or rule of law would the fact that the interest was usurious and was never paid
by the defendant operate as a payment or satisfaction of the original
loan.chanroblesvirtualawlibrary chanrobles virtual law library
In any event, he should pay the plaintiff the amount which he justly owes him. That
question was squarely met and decided in the case of Aguilar vs. Rubiato and
Gonzalez Vila (40 Phil., 570), which upon legal principle was followed in
Delgado vs. Alonso Duque Valgona, decided by this court on March 31, 1923, and
reported in the Philippine Reports, vol. 44, page 739, and which was cited and
approved in Go Chioco vs. Martinez, decided by this court on October 17, 1923, p.
256, ante, where the syllabus says:
2. USURIOUS LOAN; ACTION TO RECOVER PRINCIPAL. - Under Act No. 2655, all
usurious loan is void, but this does not mean that the debtor may keep the principal
received by him as loan, thus unjustly enriching himself to the damage of the creditor,
but that the creditor has no right of action for the recovery of the stipulated interest,
although he may sue for the recovery of the principal loaned.
That is this case. Upon that decision the plaintiff is entitled to judgment for the full
amount of its claim against the defendant Jose
Rivera.chanroblesvirtualawlibrary chanrobles virtual law library
77
The judgment of the lower court is reversed, and one will be entered here in favor of
the plaintiff and against the defendant, Jose Rivera, for the sum of P10,506.53, with
interest on P1,500 of that amount at the rate of 12 per cent per annum from the 28th
day of April, 1920, and with interest upon the balance of that amount from April 19,
1921, the supposed date of the filing of the original complaint, at the rate of 6 per cent
per annum, and with costs in this and the lower court, but without attorney's
fees.chanroblesvirtualawlibrary chanrobles virtual law library
It further appearing that an attachment was issued and levied upon the property of
the defendant to secure plaintiff's claim, it is further ordered that the property so
attached be sold to satisfy the judgment. So ordered.
Johnson, Street, Malcolm, Avanceña, Ostrand and Romualdez, JJ., concur.
19. Aguilar v Rubiato
FIRST DIVISION
[G.R. No. 14823. December 9, 1919. ]
HILARIA AGUILAR, Plaintiff-Appellant, v. JUAN RUBIATO, Defendant-Appellant, and
MANUEL GONZALEZ VILA, Defendant-Appellee.
Francisco A. Delgado for plaintiff and Appellant.
Abaya & Pamatmat for defendant and Appellant.
No appearance for Appellee.
SYLLABUS
1. CONTRACTS; NULLITY; FRAUD; INADEQUACY OF PRICE. — Where the
inadequacy of the price in an agreement is so great that the mind revolts at it and is
such as a reasonable man would neither directly nor indirectly be likely to consent to,
a strong reason exists for annuling a contract.
2. ID.; ID.; ID.; ID. — R, the owner of land valued at P26,000, was induced through
the connivance of two or three other men to sign the second page of a power of
attorney in favor of one of them, G, which purported to authorize G to sell the
property with right of repurchase for a sum not to exceed P1,000. G sold the property
to A for P800 under a pacto de retro. R having failed to pay the rent, A endeavors to
obtain possession of the land. Held: That the so-called power of attorney was a sham
document, and that R is only liable for the loan which he received.
3. ID.; USURY; INTEREST. — As interest at the rate of 60 per cent per annum is
usurious, and as the loan thus fails to name a lawful rate of interest, on and after the
date when the Usury Law became effective, a defendant would be liable for the legal
rate of interest, which is 6 per cent per annum.
4. ID.; ID.; ID. — Under similar circumstances, a defendant would only be liable for
interest at the legal rate of 6 per cent per annum for a contract made prior to the
enactment of a Usury Law. (See art. 1255 of the Civil Code.)
5. PLEADING AND PRACTICE; COMPLAINT; DISCREPANCY BETWEEN DEMAND
AND ALLEGATIONS. — "The demand in the complaint is no part of the statement of
the cause of action, and does not give it character. The facts alleged do this, and the
plaintiff is entitled to so much relief as they warrant." (Sutherland on Code Pleading,
Vol. I, sec. 186; Code of Civil Procedure, sec. 126.)
DECISION
MALCOLM, J. :
As certainly as may be ascertained, the facts of record in this case are believed to be
the following:chanrob1es virtual 1aw library
Juan Rubiato is a resident of the municipality of Nagcarlan, Province of Laguna, of
somewhat ordinary intelligence and astuteness. Early in the year 1915, he was the
owner of various parcels of land having a potential value of approximately P26,000.
Rubiato was desirous of obtaining a loan of not to exceed P1,000. Being in this state
of mind, two men, Manuel Gonzalez Vila a procurador judicial and one Gregorio
Azucena, and possibly another, one Marto Encarnacion, came to the house of
Rubiato and there induced him to sign the second page of a power of attorney in
favor of Manuel Gonzalez Vila. This power of attorney, introduced in evidence as
Exhibit A, reads as follows:jgc:chanrobles.com.ph
"To all whom it may concern:jgc:chanrobles.com.ph
78
"I, Juan Rubiato e Isles, of age, married, a resident of the barrio of Rizal, municipality
of Nagcarlan, Province of Laguna, Philippine Islands, do hereby freely and voluntarily
set forth the following:jgc:chanrobles.com.ph
"First. That I own and possess the full and absolute dominion over eight parcels of
land (planted with about two thousand five hundred coconut trees) situated in the
aforesaid barrio, municipality of Nagcarlan, Province of Laguna, P. I.; that the
description and boundaries of same are duly described in the possessory title (dated
the 15th day of January, 1896) (titulo posesorio) issued to me by the former Spanish
sovereignty; that same is inscribed in the register of property of said province under
numbers 141, 144, 146, 148, 150, 152, 154 and 156; that these facts are proven by
the certificate, written on the legal official papers numbered 0.153.826, 0.460.498,
0.455.683 and 0.460.459 and duly authorized by registrar, Sr. Antonio Roura, . . .
"Second. That being unable, on account of illness, to go in person to Manila, I hereby
declare that I grant to Sr. Manuel Gonzalez Vila, a resident of the municipality of San
Pablo, Province of Laguna, P. I., any power whatever required by law to secure in
said city a loan not exceeding one thousand pesos (P1,000), Philippine currency; that
he shall secure same in my name and representation; that he may secure same
either under the rate of interest and conditions considered most convenient and
beneficial for my interests, or under pacto de retro; that furthermore he has ample
power to execute, sign and ratify, as though he were myself, any writing necessary
for the mortgage of my land described in the aforementioned document; and that he
holds this special power of attorney over said lands to the end that same may be
used as a guaranty of the loan to be secured.." . .
By reason of the power thus given, Manuel Gonzalez Vila on April 29, 1915,
formulated the document introduced in evidence as Exhibit C, by which the lands of
Rubiato were sold to Hilaria Aguilar of Manila, for the sum of P800, with right of
repurchase within one year, Rubiato to remain in possession of the land as lessee
and to pay P120 every three months as lease rent. Hilaria Aguilar never saw the
lands in question and did not know, until after she had consulted her attorney, exactly
what her rights were. Manuel Gonzalez Vila received from Hilaria Aguilar the P800
mentioned in Exhibit C as the selling price of the land. Whether this money was then
passed on to Juan Rubiato is uncertain, although it is undeniable that Hilaria Aguilar
has never been paid the money she advanced.
The one year mentioned in the pacto de retro having expired without Hilaria Aguilar
having received the principal nor any part of the lease rent, she began action against
Juan Rubiato and Manuel Gonzalez Vila to consolidate the eight parcels of land in
her name. After due trial, the trial judge, the Hon. Manuel Camus, rendered a
decision in which he recited the facts somewhat, although not exactly, as
hereinbefore set forth. The court found that the power of attorney only authorized
Manuel Gonzalez Vila to obtain a loan subject to a mortgage, and not to sell the
property. The judgment handed down was to the effect that the plaintiff Hilaria Aguilar
recover from the defendant Juan Rubiato the sum of P800 with interest at the rate of
60 per cent per annum from April 29, 1915 until May 1, 1916, and with interest at the
rate of 12 per cent per annum from May 1, 1916, until the payment of the principal,
with the costs against the defendant. Both parties appealed.
The points raised by the plaintiff-appellant going as they do to the facts and these
being as hereinbefore stated, no lengthy discussion of plaintiff’s five assignments of
error need be indulged in. The issue is not precisely relative to an interpretation of the
power of attorney. The court is under no necessity of seizing on inexact language in
order to hold that the document authorized a mortgage and not a sale. The so-called
power of attorney might indeed be construed as authorizing Vila to sell the property of
Rubiato. And it might indeed be construed under a conception similar to that of the
trial court’s as a loan guaranteed by a mortgage. But the controlling fact is, that the
power of attorney was in reality no power of attorney but a sham document.
In addition to the evidence, there is one very cogent reason which impels us to the
conclusion that Rubiato is only responsible to the plaintiff for a loan. It is — that the
inadequacy of the price which Vila obtained for the eight parcels of land belonging to
Rubiato is so great that the mind revolts at it. It is an agreement which a reasonable
man would neither directly nor indirectly be likely to enter into or to consent to. To
hold that the power of attorney signed by Rubiato authorized Vila to enter into the
instant contract of sale would be equivalent to holding, if we may be permitted to use
the language of Lord Hardwicke, that "a man in his senses and not under delusion"
would dispose of lands worth P26,000 for P1,000, and would pay interest thereon at
the rate of 60 per cent per annum. (See 6 R. C. L., 679, 841.)
The members of this t after most particular and cautious consideration, having in view
all the facts and all the natural tendencies of mankind, consider that Rubiato is only
responsible to the plaintiff for the loan of P800.
The points advanced by defendant-appellant likewise necessitate only brief
consideration. While entertaining some doubt as to the justice of requiring Rubiato to
pay back the amount of P800, we do not feel authorized in disturbing this finding of
the trial court. It may well be that Vila and his partners, acting as middlemen,
fabricated the document which Rubiato signed, secured the money from Hilaria
79
Aguilar, and then pocketed the same. Yet as minor details somewhat corroborative of
the result reached by the trial court, are the undeniable facts that Rubiato admitted
his desire to obtain a loan, that Hilaria Aguilar made such a loan, and that while the
testimony of Vila is not overly truthful, in this one respect we do have his forceful
statement that the money was paid over to Rubiato. That payment of the sum of
P800 was not explicitly prayed for in the complaint, does not deprive the court of
power to render judgment for this amount, because it is a rule of good pleading that
"the demand in the complaint is no part of the statement of the cause of action, and
does not give it character. The facts alleged do this, and the plaintiff is entitled to so
much relief as they warrant." (Sutherland on Code Pleading, Vol. I, sec. 186; Code of
Civil Procedure, sec. 126.)
The only remaining question which merits resolution, on which the plaintiff and
defendants flatly disagree, relates to the interest which should be allowed. The trial
court, it will be remembered, permitted the plaintiff to recover interest at the rate of 60
per cent per annum from April 29, 1915, when the pacto de retro was formulated, until
May 1, 1916, the date when the Usury Law, Act No. 2655, went into effect, and
interest at the rate of 12 per cent per annum after that date. It is, of course, true, as
previously decided by this court in United States v. Constantino Tan Quingco Chua
([1919], 39 Phil., 552), that usury laws, such as that in force in the Philippines, are to
be construed prospectively and not retrospectively. As stated in the decision just
cited, "The reason is, that if the contract is legal at its inception, it cannot be rendered
illegal by any subsequent legislation, for this would be tantamount to the impairment
of the obligation of the contract." As we have held that the defendant is under
obligation to the plaintiff for a mere loan, as this loan fails to name a lawful rate of
interest, and as interest at the rate of 60 per cent per annum is unquestionably
exorbitant and usurious under the Usury Law, on and after the date when this law
became effective, the defendant would be liable for the legal rate of interest, which is
6 per cent per annum. We would even go further and hold that he-would be liable
only for such interest prior to the enactment of the Usury Law. This we can do under
the sanction of article 1255 of the Civil Code which condemns agreements contrary to
morals and public policy.
Judgment is affirmed, with the sole modification that the plaintiff shall only recover
interest at the rate of 6 per cent per annum on the sum of P800 from April 29, 1915
until paid, without special finding as to costs in this instance. So ordered.
Arellano, C.J., Torres, Araullo, Street and Avanceña, JJ., concur.
20. Go Chioco v Martinez
EN BANC
G.R. Nos. L-19864 and 19685 October 17, 1923
J. J. GO CHIOCO, plaintiff-appellant,
vs.
E. MARTINEZ, ET AL., defendants-appellees,
and
ORTIGA HERMANOS, plaintiffs-appellants,
vs.
J. J. GO CHIOCO, defendant-appellant-appellee.
Gibbs, McDonough and Johnson for Ortiga as appellant.
Araneta and Zaragoza for J. J. Go Chioco as appellant-appellee.
Gibbs and McDonough for Ortiga Hermanos as appellee.
Fisher, DeWitt, Perkins and Kincaid as amici curiae.
VILLAMOR, J.:
It appears from the record that on June 2, 1919, J. J. Go Chioco made a loan of
P40,000 to Ortiga Hermanos, and to that effect a promissory note, Exhibit 2, was
executed, wherein Ortiga Hermanos, Chan Lin Cun, and E. Martinez promised to pay,
jointly and severally, said sum within three months from the above mentioned date.
On the same day, Ortiga Hermanos, together with Chan Lin Cun and E. Martinez,
signed another promissory note for the amount of P1,800 payable within three
months from said date, and on the same date Ortiga Hermanos, through their
manager, E. Martinez, delivered to J.J. Go Chioco check, Exhibit 1, drawn against the
Bank of the Philippine Islands for the amount of P1,800, which was cashed by said J.
J. Go Chioco.
When the note became due and the makers could not pay it, the same was cancelled
and another note, Exhibit 3, was executed in the sum of P40,000 for the period of
three months, which was signed, as the former, by the defendants, Ortiga Hermanos,
Chan Lin Cun, and E. Martinez. On the same date another note was delivered by the
same debtors in favor of J. J. Go Chioco for the sum of P1,800 as well as a check
payable to order, Exhibits 2-B, drawn against the Bank of the Philippine Islands and
80
signed by Ortiga Hermanos. Said check for the sum of P1,800 was cashed by the
plaintiff, J. J. Go Chioco.
When the second note because due the makers failed to pay it, and, for that reason,
the note was cancelled and Exhibit 4 executed and signed by the same parties. On
the same date, that is, on December 2, 1919, Ortiga Hermanos delivered to J. J. Go
Chioco the note, Exhibit 4-A, for the sum of P1,800 as well as the check Exhibit 3-B,
drawn against the Bank of the Philippine Islands for the same amount which was
cashed by J. J. Go Chioco.
On March 2, 1920, when the last mentioned note became due, the defendants also
failed to pay the same and for that reason the note was again cancelled and another
note executed and signed by the same parties, making it appear that it should be
paid within one month and, for that reason, the other note, signed by the debtors, was
for P600 only, as well as the amount of the check given by Ortiga Hermanos, on
March 1, 1920, drawn against the Philippine National Bank, which was cashed by J.
J. Go Chioco.
On April 2, 1920, the date upon which the last mentioned note should have been
paid, the defendants also failed to satisfy it and for this reason the note was again
novated, stipulating that the period would be for three months. On the same date the
three debtors delivered their note, Exhibit 6-A, for the amount of P1,800.
The debtors also failed to satisfy his debt within the period stipulated and,
consequently, the note was novated and on July the 2d, Exhibit 7 was signed by
Ortiga Hermanos, Chan Lin Cun and E. Martinez, which is another note for a period
of three months. On the same date the same parties delivered another note for the
amount of P1,800 to J. J. Go Chioco, payable within three months and on the
following day, July 3, 1920, Ortiga Hermanos delivered to J. J. Go Chioco Exhibit 6-A
against the Bank of the Philippine Islands for the same amount of P1,800.
Again, the note was not paid at maturity and for that reason the same was novated
on October 2, 1920, and signed by Ortiga Hermanos, Chan Lin Cun and E. Martinez,
and on the same date Ortiga Hermanos delivered to J. J. Go Chioco another
promissory note for P1,800 and a check against the China Bank Corporation for the
same amount. When the last mentioned promissory note became due and debtors
being unable to meet it, a promissory note Exhibit A was again executed ands signed
by Ortiga Hermanos, Chan Lin Cun and E, Martinez in the sum of P40,000, in favor of
J. J. Go Chioco payable within three months from date.
The promissory note, Exhibit A, as inserted in the complaint, is as follows:
By these presents, three months from date we promise to pay to the order of Mr. J. J.
Go Chioco the sum of forty thousand pesos (P40,000), Philippine currency, value
received in cash from said Go Chioco for commercial transactions.
Manila, January 2, 1921.
(Sgd.) "ORTIGA HERMANOS "CHAN LIN CUN "E.
MARTINEZ
Due April 2, 1921.
This promissory note was not novated at its maturity as the former ones; but it
appears that on April 4, 1921, Ortigas Hermanos paid P5,000 and on May 20, 1921,
P20,000, that is, a total sum of P254,000. The refusal of Ortiga Hermanos to pay said
promissory note in full gave rise to the complaint of J. J. Go Chioco, filed on October
4, 1921, asking the court to render judgment against the defendants for the amount of
P15,000 with legal interest and costs.
The defendants E. Martinez and Chan Lin Cun filed a separate answer praying for
the dismissal of the complaint, with costs, the return of the sum of P5,857, which
represents the interest paid on said promissory note of P40,000 at the rate of 18 per
cent per annum, and the payment of P1,500 as attorney's fees.
The defendant Ortiga Hermanos answered the complaint praying that the promissory
note for the amount of P40,000 be declared null and void, for the reason that they
had paid a usurious rate of interest, namely, 18 per cent per annum; that they be
absolved from the complaint and that judgment in their favor be rendered for the
amount of P1,500 as attorney's fees, with costs, and that the plaintiff be ordered to
return the sum of P25,000 paid on account of the principal.
Thereafter, the defendant Ortiga Hermanos, on November 9, 1921, filed another and
separate complaint against J. J. Go Chioco praying that a judgment be rendered in
their favor for P11, 850 which represents in interest paid at the rate of 18 per cent per
annum, plus P1,500 as attorney's fees, with costs.
By agreement of parties, both cases were heard together, it having been stipulated
between them that the evidence adduced in either case will be considered in the
other.
81

Honorable Judge Carlos Imperial, who heard the case, in a decision dated June 24,
1922, held:
(a) That the interest of 18 per cent per annum stipulated by the contending parties in
these two cases is null and usurious;
(b) That in accordance with the provisions of section 7 of Act No. 2655, the
promissory note, Exhibit A, executed by Ortiga Hermanos, Chan Lin Cun and E.
Martinez, in the sum of P40,000 payable within three months, and on which a
usurious rate of interest of 18 per cent per annum had been paid, is null and void,
and that, as a result, the plaintiff J. J. Go Chioco has no right to recover the balance
of said promissory note which amounts to P15,000 from either Ortiga Hermanos or
their sureties, Chan Lin Cun and E. Martinez; and
(c) That J. J. Go Chioco should refund to Ortiga Hermanos, their manager, or their
duly authorized representative, the total amount of P11, 850 which represents the
usurious interest collected from December 2, 1919, to the date of the filing of the
complaint, together with legal interest from November 9, 1921, when Ortiga
Hermanos filed their complaint, and said Go Chioco should likewise pay Ortiga
Hermanos, Chan Lin Cun and E. Martinez the sum of P3,000 as attorneys' fees of
Messrs. A. D. Gibbs and Thos D. Aitken, at the rate of P1,500 each, together with
costs of both instances.
From this decision parties appealed, and the motion for new trial based on the ground
that the decision is contrary to the law and not justified by the evidence having been
denied, both parties brought said case to the Supreme Court by bill of exceptions.
The appellant J. J. Go Chioco assigned as errors of the trial court the following: (1) In
finding that he usurious interest upon the said promissory note of P40,000 has been
paid from December 2, 1920, at the rate of 18 per cent per annum, that is, the
amount of P11,850 and in sentencing him to pay Ortiga Hermanos said sum with
legal interest thereon from the filing of the complaint of Ortiga Hermanos; (2) in
sentencing J.J. Go Chioco to pay the sum of P3,000 as attorney's fees of Messr. A.D.
Gibbs and Thos. D. Aitken at P1,500 each; (3) in not sentencing Ortiga Hermanos to
pay the amount of P15,000, with legal interest thereon from the filing of his complaint
(Go Chioco's); and (4) in sentencing J.J. Go Chioco to the payment of costs.
On the other hand, the appellant Ortiga Hermanos, alleges that the trial court
committed an error in overruling their counterclaim for the amount of P25,000 paid on
account of the principal of a usurious promissory note, and in not sentencing J.J. Go
Chioco to pay said sum of P25,000.
The facts, as found by the trial court, necessary for a clear understanding of this
case, briefly stated, are as follows: (1) That the plaintiff made a loan to the defendant.
Ortiga Hermanos of the sum of P40,000 and that interest at the rate of 18 per cent
per annum has been paid; (2) that the defendant paid the plaintiff, as interest on said
amount, including the payments in April and July, 1921, to wit, P2,253.50 (P3.50 for
stamps), from December 2, 1919, the total sum of P11,850, which, together with the
P1,500 as attorney's fees, constitutes the prayer of the defendants complaint. (3) that
the defendant Ortiga Hermanos paid the plaintiff, on two different occasions on
account of said loan of P40,000, the amount of P25,000 which was set out in his
counterclaim; and (4) that according to the complaint filed by J.J. Go Chioco of the
sum of P40,000 loaned there still remains a balance of P15,000 to be paid.
In view of the facts just stated and from the errors assigned by both parties, the
questions to be decided are: (1) Whether or not the defendant has paid the plaintiff a
usurious rate of interest, namely, 18 per cent annum upon the promissory note for the
amount of P40,000; (2) whether or not the debtor who has paid a usurious rate of
interest can recover the amount paid on account of the principal as well as the
usurious interest paid, together with attorney's fees and cost; and (3) whether or not
the usurious creditor has a right to recover his capital loaned to and not paid by the
debtor.
I. That J.J. Go Chioco has collected interest at the rate of 18 per cent per annum
upon the amount of P40,000 which he loaned to Ortiga Hermanos, may be inferred
from the evidence and was so found by the trial court.
J.J. Go Chioco himself admits having collected the amount mentioned in the
promissory notes and checks signed by Ortiga Hermanos in the amount of P1,800
each, but alleges that of that amount, P400 was paid as penalty for failure to pay the
promissory notes at their maturity. That is to say, of the amount of P1,800 which
represents the interest at 18 per cent per annum on the capital of P40,000 he
collected 4 per cent as penalty and 14 per cent as interest.
The trial court, in analyzing the testimony of the witness J.J. Go Chioco, states:
The explanations given by J.J. Go Chioco of said operations is undoubtedly
ingenious, but in the opinion of this court, is far from being satisfactory and
acceptable. There is nothing in the record to indicate, apart from his own testimony,
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that the parties have stipulated any penalty for failure to pay at maturity any of the
promissory notes executed, and the fact that all interest was collected by the creditor
in advance and before the promissory notes became due, shows conclusively that no
penalty was agreed upon by the parties. Indeed it would seem that no such penal
clause was necessary, since it was clearly stipulated that the sum loaned would earn
a stipulated interest; furthermore, if such an agreement had existed, there is no
reason why same should not have appeared in writing, either in the promissory note
itself or in any other document disclosing such contractual obligation. What appears
clear and can be inferred from all the documentary evidence adduced and of record
is that, J.J. Go Chioco required and collected as interest upon the amount of P40,000
he had loaned, profits amounting to 18 per cent which is in violation of section 3 of
Act No. 2655 of the Philippine Legislature, which enjoins and prohibits any person
from charging a rate of interest in excess of 14 per cent per annum upon any loan not
guaranteed in the manner provided for in section 2 of the said Act.
After examining the evidence before us, we are unable to find anything which will
warrant the reversal or modification of the above conclusion arrived at by the trial
court.
From the record it appears that the first promissory note should have become due
within three months, that is, on September 2, 1919. On the same date, June 2, 1919,
Ortiga Hermanos signed a promissory note for P1,800 which should likewise have
become due on September 2, 1919, and at the same time issued a check for the
amount of P1,800 which was collected by J.J. go Chioco. This operation was
repeated several times every three months, with the exception of the promissory note
of March 2, 1920, for which a period of one month only was fixed. So it clear that
whenever the note for P40,000 was novated, Ortiga Hermanos signed a promissory
note for P1,800, together with the corresponding check, which was collected by the
creditor J.J. Go Chioco. It is therefore evident that Ortiga Hermanos paid J.J. Go
Chioco in advance the interest at 18 per cent per annum upon the loan of P40,000.
We hold that the contention of J.J. Go Chioco that he has only charged 14 per cent
upon the loan P40,000 as interest and 4 per cent as penalty for failure to pay the
notes, is untenable. The checks issued by Ortiga Hermanos and cashed by J.J. Go
Chioco are negotiable instruments and they represents an unconditional obligation to
pay the amount therein stated of P1,800 which, if we take into consideration the value
of the loan, represents the interest at the rate of 18 per cent per annum.
In accordance with section 285 of the Code of Civil Procedure, the agreement to pay
interest, reduced to writing in the promissory notes for P1,800, is considered as
containing all those terms stipulated by the parties, and therefore there can be,
between the parties and their representatives or successors in interest, no evidence
of the terms of the agreement other than the contents of the writing, except in the
following cases:
(1) Where a mistake or imperfection of the writing, or its failure to express the true
intent and agreement of the parties, is put in issue by the pleadings;
(2) Where the validity of the agreement is the fact in dispute.
As far as the record goes, said promissory notes of P1,800 were not put in issue
during the trial nor is there any discussion as to their validity. Said notes recite a
specific obligation and its language is not subject to ambiguity. J.J. Go Chioco
cannot, therefore, change, by his mere testimony, the terms of said notes in the
sense that part of the amount therein stated was collected as penalty.
Moreover, the fact that the interest in question was collected quarterly and in
advance, with the exception of one case wherein the interest was collected for one
month, shows, in our opinion, that the transaction was for the collection of interest,
since you cannot charge or collect anything in advance as penalty for failure to fulfill
an obligation which was not yet enforceable.
That the parties to a contract of loan may validly agree upon a penalty in case the
obligation is not fulfilled, beside the interest not prohibited by the Usury Law, is a
proposition generally admitted, but in the case at bar, the alleged penalty, collected in
advance before the maturity of the obligation, far from fulfilling its object to compel the
debtor to duly pay his obligation, is scheme to avert his compliance with the Usury
Law.
Supposing that the agreement, if there was any, to pay a penalty in case the
promissory note, at its maturity is not paid, is in substance similar to the agreement to
pay attorney's fees, as the attorney for J.J. Go Chioco alleges, such an agreement is
however, subject to the limitation indicated in the case of Bachrach Garage and
Taxicab Company vs. Golingco (39 Phil., 912), quoted by counsel for J.J. Go Chioco.
In that case the court said:
The stipulation that in case of noncompliance the debtor shall pay a fixed amount for
the fees of the attorney who may be employed by the creditor for the purpose of
enforcing compliance with the obligation is not deemed to be an interest within the
purview of Act No. 2655, and neither is the computation fixed by said Act applicable
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thereto. It is not an indemnity for gain which cannot be realized, but an amount which
the creditor spends and which constitutes a loss really suffered by reason of the
noncompliance with the obligation.
When the amount stipulated for the attorney's fees is so exorbitant that it exceeds
that which should justly be paid for that purpose, the excess shall be considered as
indirect or simulated interest, according to the spirit of the law, and should therefore
be subject to the computation. In the case at bar, the 12 1/2 per cent to which the trial
court reduced the 25 per cent stipulated represents, in our opinion, the amount which
the plaintiff was justly obliged to pay for his attorney's fees, and should not be
considered as interest in the computation of the latter.
But, in the case at bar, there is an unsurmountable difficulty which prevents us from
considering as penalty 4 per cent of the total 18 per cent paid by Ortiga Hermanos as
interest, and that difficulty lies in the lack of evidence upon such alleged agreement
as to the penalty. In the case of Bachrach Garage and Taxicab Company vs.
Golingco, supra, it appears from the promissory note itself, signed by the defendant
and his sureties, that in case the services of an attorney will be necessary for the
collection of said note, the defendant promised to pay to the holder of the same 25
per cent of the principal and interest upon said note as attorney's fees; while in the
case at bar there is no such clause in the promissory note signed by Ortiga
Hermanos. In that case, the plaintiff was compelled to sue in order to collect his note,
engaging the services of an attorney; while in the case at bar, the plaintiff J. J. Go
Chioco was compelled only to file a complaint on November, 1921, to recover from
Ortiga Hermanos the sum of P15,000, the balance of the original capital of P40,000,
having collected, as it was already said, interest in advance at the rate of 18 per cent
from December 2, 1919, to November 2, 1921. From the foregoing, we are of the
opinion and so hold that Ortiga Hermanos paid J.J. Go Chioco upon the loan of
P40,000, interest at the rate of 18 per cent per annum which is in violation of section
3 of Act No. 2655, that is, the Usury Law.
With this conclusion at which we arrive, it is evident that Ortiga Hermanos, having
paid to J.J. Go Chioco that amount of P11,850 as usurious interest from December 2,
1919, up to the filing of his complaint, have, under section 6 of Act No. 2655, the right
to recover said sum of P11,850 together with P1,500 which the trial court granted
them as attorney's fees of Mr. A.D. Gibbs and costs.
As to the attorney's fees, counsel for J.J. Go Chioco assigned as error of the trial
court in granting P1,500 to attorney Thos. D. Aitken, who represented the other
defendants Chan Lin Cun and E. Martinez. Counsel alleges that all of the amount
representing interest was paid by Ortiga Hermanos, and the sureties Chan Lin Cun
and E. Martinez could not therefore successfully maintain an action to recover any
interest nor attorney's fees. We agree with this contention and it is our opinion that
J.J. Go Chioco is not bound to pay the attorney's fees of the sureties Chan Lin Cun
and E. Martinez. Therefore, the judgment appealed from should be modified in this
respect, by deducting P1,500 from the sum of 3,000 allowed by the trial court.
II and III. The other questions raised in this appeal refer to whether a debtor, who has
paid usurious interest, can recover the amount paid by him on account of the
principal and whether the usurious creditor has right to recover the principal loaned,
and not paid by the debtor. The resolution on these two questions depends upon the
interpretation of section 7 of Act No. 2655 which provides:
All conveyances, mortgages, bonds, bills, notes, and other contracts or evidences of
debt, and all deposits of goods or other things, whereupon or whereby there shall be
reserved, secured, taken, or received directly or indirectly, a higher rate or greater
sum or value for the loan or forbearance of money, goods, or credits than is
hereinbefore allowed, shall be void: Provided, however, That no merely clerical error
in the computation of interest, made without intent to evade any of the provisions of
this Act, shall render a contract void: And provided further, That nothing herein
contained shall be construed to prevent the purchase by an innocent purchaser of
negotiable mercantile paper, usufurious or otherwise, valuable consideration before
maturity, when there has been no intent on the part of said purchaser to evade the
provisions of this act and said purchase was not a part of the original usurious
transaction. In any case, however, the maker of said note shall have the right to
recover from said original holder the whole interest paid by him thereon and, in case
of litigation, also the costs and such attorney's fees as may be allowed by the court.
As may be seen, notwithstanding the provision as to the nullity of the usurious note,
in case the same is endorsed to an innocent third person, the innocent purchaser is
entitled to collect the amount, with interest, from the maker and the maker is entitled
to recover from the original holder thereof only the interest by him, and, in case of
litigation, the costs and attorney's fees as may be allowed by the court. Therefore, the
only effect of the nullity of the note is the recovery of the interest paid by the debtor,
not the value of the note.
If, on account of the nullity of a usurious note, the original holder thereof, or the
payee, has no right to recover any amount upon said note, there is no reason why, in
case the same is transferred to a third person who acquires it in good faith and for a
consideration, the payee should be benefited by the amount collected by him from
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the transferee as payment of the note endorsed and not repay the maker the value of
the same. Likewise, if by virtue of such a nullity, nothing can be collected by the
holder of the note, there is no reason why the reimbursement of the interest should
be limited to the amount collected during the two years immediately preceding the
date on which the action for the recovery thereof was instituted, and should not
include all the interest collected prior to said period. And it is because the law limits
the effect of the nullity to the reimbursement of the interest paid during the period of
two years preceding the filing of the complaint, which provision being of a penal
nature must be strictly construed so that it should not include the reimbursement of
the principal paid and the unpaid principal which is not provided in law.
That the legislator did not have in mind that the usurious creditor should be lose the
capital loaned by him is further made apparent by the provisions of section 8 of Act
No. 2655 as amended by Act No. 2992. Said section reads thus:
All loans under which payment is to be made in agricultural products or seed or in any
other kind of commodities shall also be null and void unless they provide that such
products or seed or other commodities shall be appraised at the time when the
obligation falls due at the current local market price: Provided, That unless otherwise
stated in a document written in a language or dialect intelligible to the debtor and
subscribed in the presence of not less than two witnesses, any contract advancing
money to be repaid later in agricultural products or seed or any other kind of
commodities shall be understood to be a loan, and any person or corporation having
paid otherwise shall be entitled in case action is brought within two years after such
payment or delivery to recover all the products or seed delivered as interest, or the
value thereof, together with the costs and attorney's fees in such sum as may be
allowed by the court. Nothing contained in this section shall be construed to prevent
the lender from taking interest for the money lent. provided such interest be not in
excess of the rates herein fixed.
Under this legal provision, in case of a usurious contract, by virtue of which payments
are to be made on agricultural products, seeds or other fruits, the debtor may recover
from the usurious creditor only what he might deliver as interest, which shows, in our
opinion, that what he might have paid as principal is not recoverable. Now, if it is held
that in another kind of a usurious contract, the debtor may recover not only the
interest paid but also the principal, how can it be explained that by the mere fact of
the debt being payable in fruits, the debtor is not entitled to recover the principal
which he might have paid? The conclusion is inevitable that the nullity of a usurious
loan provided in the law means only that the lender cannot demand payment of the
stipulated usurious interest.
Moreover, section 10 of Act No. 2655 as amended by Act No. 2992 provides:
Without prejudice to the proper civil action, violations of this Act shall be subject to
criminal prosecution and the guilty person, upon conviction, be sentenced to a fine of
not less than fifty pesos nor more than two hundred pesos, or to imprisonment for not
less than ten days nor more that six months, or both, in the discretion of the court,
and to return the entire sum received as interest from the party aggrieved, and in
case of nonpayment, to suffer subsidiary imprisonment at the rate of one day for
every two pesos: Provided, That in case of corporations, associations, societies or
companies the manager, administrator or gerente or the person who was has charge
of the management or administration of the business shall be criminally responsible
for any violation of this Act.
As may be seen, this legal provision requires the restitution only of what might have
been received by the convicted usurer as interest. If the intention of the legislator was
to confiscate the principal loaned, he would not have limited himself to the statement
that the interest collected must be refunded.
In interpreting Act No. 2655, the fact must not be lost sight of that in August, 1911,
the Philippine Commission enacted Act No. 2073, which fixes and defines the legal
rate of interest, declares the effect of usury on contracts, and provides for other
purposes in the Moro Province, Mountain Province, and in the provinces of Agusan
and Nueva Vizcaya. Section 3 of this Act provides:
Sec. 3. All bonds, bills, notes, assurances, conveyances, chattel mortgages, and all
other contracts and securities whatsoever, and all deposits of goods, or anything
whatever, whereupon or whereby there shall be reserved, secured, or taken any
greater sum or value for the loan or forbearance of any money, goods, or things in
action, than is above prescribed, shall be void, except as to bona fide purchasers of
negotiable paper, as hereinafter provided, in good faith, for a valuable consideration,
before maturity: Provided, That no merely clerical error in the computation of interest,
made with no intent to avoid the provisions of this Act, shall render the contract
usurious: And provided further, That the payment of interest in advance for one year
at a rate not to exceed fifteen per centum per annum shall not be construed to
constitute usury: And provided further, That nothing herein shall be construed to
prevent the purchase of negotiable mercantile paper, usurious or otherwise, for a
valuable consideration, by an innocent purchaser, free from all equities, at any price,
before the maturity of the same, when there has been no intent to evade the
provisions of this Act, or where said purchaser has not been a part of the original
85
usurious transaction. In any case, however, where the original holder of a usurious
note sells the same to an innocent purchaser, the maker of said note or his
representative shall have the right to recover back from the said original holder the
amount of principal and interest paid by him on said note.
The phraseology of section 7 of Act No. 2655 is so similar to the language of section
3 of Act No. 2073 that it may well be said that Act No. 2655 was drafted after Act No.
2073 for the whole Philippines, which Act (No. 2655) fixes the rate of interest on
loans, declares the effect of receiving or collecting usurious interest and provides for
other purposes. A comparison of the terms of the laws above quoted shows only one
essential difference, and that is, that while section 3 of the former Act No. 2073 gives
the debtor the right to recover not only the usurious interest but also the principal,
section 7 of the later Act, that is, Act No. 2655, authorizes the debtor to recover only
what he might have paid. In view of this fact, there is no room for doubt that the
Philippines Legislature, in enacting Act No. 2655, deemed the provision of section 3
of Act No. 2073 to be unjust as to the confiscation of the principal and so it provided
in Act No. 2655 that the debtor may recover only the interest paid, attorney's fees and
costs.
In the case of Delgado vs. Alonso Duque Valgona (44 Phil., 739), decided March 31,
1923, the decision in the case of Moncrief vs. Palmer (114 Atl., 181; 17 A. L. R. 119,
120), is quoted with approval wherein it was held that "he who seeks equity must do
equity" by repaying the creditor the capital which he might have received by virtue of
the usurious contract. In discussing the law applicable to the case, the court, among
other things, said:
"The provision of the Rhode Island statue with reference to usury are drastic. Chapter
434, Public Laws 1909, amended by chapter 838, Public Laws 1912. The violation of
the act is punishable as a misdemeanor, every contract made in violation of it is void,
and the borrower may recover in an action at law, not only the interest, but any
portion of the principal paid by him upon such usurious contract. The complaint's
solicitor has presented to us a very comprehensive and able argument in support of
his contention that equity should recognize the view of public policy emphatically
expressed in the legislative act, and should cancel the usurious and void contract.
This argument would have more persuasive force if the question were a new one.
The settled and nearly universal practice of courts of equity is opposed to the
complainant's contention. The statutes of different states have various provisions
directed towards the prevention of the extortion and oppression of usury. Whatever
may be the method adopted by the legislature, however, although the legislative
provision may go to the limit of our statute and declare the contract void and
unenforceable, nevertheless courts of equity, in the absence of statute specifically
constraining them to act differently, have insisted upon the equitable principle that he
"who seeks equity must do equity," and have required the borrower, before he can be
given the relief of cancellation of the contract, to perform the moral obligation resting
upon him, and pay or offer to pay the principal of the loan with legal interest."
Commenting upon the former decision rendered in the case of Delgado vs. Alonso
Duque Valgona, supra, Mr. Justice Street who wrote the opinion of the court said:
The doctrine of that case we consider applicable here; and without expressing any
opinion upon the broader question whether capital lent upon a usurious contract can
be recovered in an aggressive action by the creditor, we are content to hold that
when the debtor in a usurious contract see fit, or finds it necessary to apply to the
court for equitable relief, he will, as a condition to the granting of such relief, be
required to restore what he received from the other party. In the present case both
parties are before the court in the attitude of suppliants, each asking for relief from
the contract in question; and in order to avoid the possibility of further litigation, as
well as to secure complete justice, an order will be entered requiring the plaintiff, as a
condition of the satisfaction of the judgment in his favor, to reconvey to the defendant
the same twelve parcels acquired by the plaintiff from the defendant.
The essential facts in that case are: On the first of February, 1918, Alonso Duque
Valgona, the defendant, sold certain lands to Luciano Delgado, the plaintiff, and to
secure the payment of the purchase price, Delgado executed, at the same time, a
deed of mortgage in favor of the defendant on the same lands and also on two other
large parcels, of which the plaintiff was already the owner, situated in the municipality
of Tinambac, Province of Camarines Sur. The conditions of this mortgage, so far as
essentially pertaining to this case, are contained in clauses A to E, inclusive, of
paragraph 2, and which in substance are as follows: (a) The mortgagor (Delgado)
promised to pay to the mortgagee (Alonso Duque Valgona) the sum of P15,000 in
one installment; (b) to secure the payment of this amount the debtor executed a
mortgage in favor of the creditor of fourteen parcels of land described in paragraph
one of said deed; (c) as long as the debt subsists, the debtor binds himself to pay
interest in the sum of P2,250 in two semi-annual installments of P1,175 each, which,
as may be observed, exceeds the other amount by P100; (d) the creditor gives the
debtor the period of twelve years from the date of the deed within which to pay the
P5,000 above mentioned. Lastly, in clause E, it is stipulated that if the debtor fails to
pay within the twelve years, the creditor may, at the expiration of this period, take
possession of the lands mortgaged.
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The mortgage in question having been held usurious, because it was found that the
stipulated interest exceeded 15 per cent per annum, the court rendered judgment in
favor of the plaintiff, the mortgagor, for the recovery of the usurious interest paid by
him, that is, P2,625, with interest thereon, plus P1,000 attorney's fees; and reversed
the judgment appealed from in so far as the defendant was adjudged entitled to
recover the sum of P15,000, which was the amount of the mortgage deed, and
ordered the plaintiff, the usurious debtor, to return to the defendant creditor the twelve
parcels of land which were the subject matter of the sale, the price of which was
secured by the mortgage, thus the result being that if the creditor did not succeed in
recovering the P15,000 which he had paid to the debtor in lieu thereof he recovered
the twelve parcels of land which were the consideration of the mortgage.
In the case before us, we have J. J. Go Chioco claiming from Ortiga Hermanos the
payment of P15,000, the unpaid balance of the capital, loaned and Ortiga Hermanos
in turn demanding from J. J. Go Chioco the repayment of the usurious interest paid
by him, plus attorney's fees and costs, besides the P25,000 paid on account of the
loan of P40,000.
In view of the fact that we are called upon to pass upon the claim of the creditor J. J.
Go Chioco, we are now compelled to render our opinion on the question whether or
not a creditor has direct action against the debtor for the recovery of the capital
loaned upon a stipulation of usurious interest. As is well known, usury is an act
prohibited by law and to determine the rights and action of the parties in interest, it is
necessary to take into account the legal provisions applicable in each jurisdiction.
And, if we return our attention on the Acts above cited, Nos. 2073 and 2655, it will be
seen that section 6 of the former Act provides:
Whenever its satisfactorily appears to a court that any bond, bill, note, assurance,
pledge, conveyance, contract, security, or evidence of debt has been taken or
received in violation of the provisions of this Act, the court shall declare the same to
be void, and enjoin any proceeding thereon, and shall order the same to be cancelled
any given up.
This provision shows that under the law, it was expressly prohibited to maintain any
action on usurious contracts. Then there is no doubt that the creditor cannot institute
any action for the recovery of the capital or part of the capital loaned. Undoubtedly,
the legislator, in enacting Act No. 2073, deemed it reasonable that the creditor should
lose the capital, because, aside from the fact that in that Act no penalty was provided
for against usury other than the loss of all the interest paid by the debtor in case the
usurious instrument was negotiated (section 3), and of the interest paid in the two
years preceding the filing of the complaint in all other cases (section 2); in said Act
only one rate of interest quite liberal was fixed; namely, 15 per cent per annum
according to section 1 and building and loan associations as well as pawn shops
were exempted from every limitation according to section 7.
But the Act now in force, No. 2655, as amended by Act No. 2992, contains no such
prohibitive provisions as that of the former Act No. 2073 and the silence of Act No.
2655 in this respect, in contra-distinction with the express prohibition of Act No. 2073,
shows that said prohibition was intentionally omitted from the law now in force, and
that the Legislature, in omitting such rule from the new law did, not intend to bar the
creditor from coming into court for the recovery of his capital. And the reason for such
an omission is clear if it is taken into account that Act No. 2655 made the situation of
the creditor quiet difficult in these respects: (a) No creditor is exempt from the law
(section 2); (b) the maximum rates were fixed, which were to be applicable to building
and loan associations and pawn shops (section 4); (c) the general rate of interest was
reduced to 12 per cent on loans with securities of real properties and 14 per cent if
there are no such securities (sections 2 and 3); (d) in case of litigation, the judge shall
sentence the creditor to pay attorney's fees to the debtor (sections 6 and 8); (e) usury
was made a crime and is punishable by a fine equal to the interest stipulated, or
subsidiary imprisonment in case of insolvency (section 10). We believe that these
new penalties and restrictions were inserted by the Legislature in lieu of the loss of
the capital provided by Act No. 2073.
And the foregoing conclusion is fully sustained not only by the history of the Usury
Law, but also by the preamble of the law itself. By the history, because the bill of the
Commission No. 217 prepared by Commissioner Martin in 1914 in its section 1
contained a provision to the effect that "any contract which directly or indirectly
provides for the payment of any interest in excess of 12 per cent per annum shall be
null and void not only as to the interest but as to the principal invested," which
provision was eliminated from the Usury Law as it was finally passed by the
Legislature. By the preamble, because speaking of the necessity of the intervention
of the prosecuting attorney in actions resulting from the violation of the Usury Law, as
well as the penal sanction, said preamble gives the following reasoning: "We believe
it to be a sound proposition that the fiscal should intervene in the actions arising from
the violation of the proposed provisions set out in the original bill, because, among
other reasons, poor persons unable to employ an attorney will be represented and
thus the law would not be a dead letter. But without the penal clause, it seems that
such intervention is not proper. But, why not insert such clause? We would not be the
first and only nation which would do such a thing. We are of the opinion that a fine
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equivalent to four times the amount in excess of the interest charged or subsidiary
imprisonment in case of insolvency, would be sufficient and better than the forfeiture
of the principal." Therefore, there can be no room for doubt that it was not the
intention of the Philippine Legislature to forfeit the principal in condemning usury by
means of a law.
Page on Contracts, vol. 1, pages 757 et seq., in dealing with the effect of usurious
executory contracts, says:
A contract usurious in its nature will not be enforced by the courts. Whether such
contract is illegal or merely void is a difficult question to answer, as the exact effect of
such contract depends on the wording and construction of the statute by which such
excessive rate of interest is forbidden. Such statutes in terms, varying in different
jurisdictions, provide with considerable exactness the effect of such transactions; and
the courts rarely feel authorized to apply thereto the common law principles of illegal
or void contracts, in addition to the express requirements of the statute. This rests
upon the familiar principal that were a statute creates a new right or offense and
provides a specific remedy or punishment, that remedy alone can apply. In some
jurisdictions, apart from the question of the right to recover the principal, which is
hereafter discussed, it is held that the other provisions of an inseverable usurious
contract, such as a valid provision for attorney's fees, are themselves enforceable if
no other objection than that of usury exists thereto. Where this view obtains such
contracts are not illegal. Further, in some jurisdictions, collateral securities are
enforced up to the amount lawfully due. Where this view obtain such contracts cannot
be classed as illegal, in the sense in which the term is used at common law. Under
usury statutes the principal loaned may be recovered. The effect of the usury statutes
is for the most part confined to the interest paid or agreed to be paid. Under many
statutes an agreement for usury causes a forfeiture of the entire interest, leaving only
the principal to be recovered.
Discussing, in another passage, the discharge of collateral securities, the same
author adds:
. . . The provisions of certain statutes, however, make securities in contracts given on
a usurious consideration absolutely void, and require their cancellation without
conditions. Under such statutes an offer to repay the amount borrowed is not
necessary in order to enable the debtor to have such contracts or conveyances
cancelled. In a suit by the debtor for cancellation, he may have the amount paid in by
him as usurious interest applied in payment of the principal, even if he could not
maintain a separate action in equity to recover it. If the creditor is seeking to enforce
a usurious contract, equity may in a proper case restrain him from enforcing it,
without requiring the previous payment of the amount due. Thus in an action by the
creditor to enforce the usurious contract, the debtor may interpose usury as a
defense without paying or tendering the amount of the debt. If the statute prevents
recovery of interest on a usurious contract, the creditor can recover only the amount
actually loaned by him. (Carpenter vs. Lewis, 60 S.C., 23; 38 S. E., 244.)
When the law provides that the penalty for usury is the confiscation of all the interest
was stipulated, the lender may, in an action based upon the contract, recover the
amount actually lent or paid without interest. (39 Cyc., 1007.)
In support of this proposition, the following doctrines are cited:
If the rate of interest, stipulated in writing, was higher than ten per cent, only the
principal could be recovered." (Alston vs. Brashears, 4 Ark., 422.)
Where it appears from the decree itself that a portion of the amount reported to be
due by the master is "tainted with usury," the same being admitted by complainants, it
was error to allow any sum whatever for interest, Chapter 4022 laws at Florida acts of
1891, providing that "only the actual principal sum of such usurious contracts can be
enforced either at law or in equity." (Lyle and Lyle vs. Winn and Winn, 45 Fla., 419.)
Under the statue providing that in case of usury the defendant shall be entitled to
costs, the plaintiff, upon being allowed recovery for principal, less penalties, is not
entitled to attorney's fee or costs. (Libert vs. Unfried, 47 Wash. [Rem.], 186.)
By the laws of Mississippi (Stat. 25 June, 1822), where an usurious rate of interest
has been stipulated, the lender can recover only the principal. (Coxe vs. Rowley, 12
Robinson's Rep., 237.)
Under the Usury Act of 18754, the penalty for taking more than legal interest was a
forfeiture of the interest and the excess of interest. If it had already been paid it could
be recovered by suit, or by way of set-off against a suit for the principal, within the
time allowed by that act, but in either event — whether payment had been made or
not — only interest (both legal and usurious) was forfeited, and the lender had a right
to recover the principal actually loaned. (Lanier vs. Cox, 65 Ga., 265.)
We believe that the doctrines laid down in the cases above cited are applicable in this
jurisdiction as, in fact, the Usury Law provides for the loss in favor of the debtor of the
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stipulated usurious interest which might have been paid during the two years
preceding the claim of the debtor.
But counsel for Ortiga Hermanos argues in support of his contention that they are
entitled to recover the P25,000 paid on account of the principal, that the consideration
of the note is the payment of interest at 18 per cent, and the contract being void on
account of the illegality of the consideration, application should be made in this case
of articles 1305 and 1306 of the Civil Code.
The contention of counsel for Ortiga Hermanos in this respect is untenable. "Every
statute is understood to contain, by implication, if not by its express terms, all such
provisions as may be necessary to effectuate its object and purpose, or to make
effective the rights, powers, privileges, or jurisdiction which it grants, and also all such
collateral and subsidiary consequences as may be fairly and logically from its terms."
(Black on Interpretation of Laws, page 62.) In our opinion, the Usury Act, No. 2655,
as amended by Act No. 2992, contains all that is necessary for the application of its
provisions. Section 1 of the Act fixes the interest of loans in default of agreement
between the parties; sections 2, 3, and 4 fix the interest on certain loans and prohibit
the collection of interest in excess of the limitation fixed; section 5 regulates the
collection of interest upon interest; sections 6, 7 and 8 determine the effects of the
collection of a usurious interest and of loans wherein said interest was stipulated or
paid; section 9 requires the making of an oath in answers to a complaint for the
recovery of usurious interest; section 10 contains the repealing clause and section 12
fixes the date on which the Act was to take effect. The law, in declaring usurious
loans to be void, determines its effects and makes them to consist in the
reimbursement of the interest paid during the two years preceding the making of the
claim, the payment of attorney's fees and provides further for the institution of criminal
action for the imposition of the penalty fixed by the law. And with regards to the
capital lent, we have said in another part of this decision that the law did not intend to
close the courts to the creditor for relief in the recovery of his principal. In view
thereof, we are of the opinion and so hold, that articles 1305 and 1306 of the Civil
Code are not applicable to the case at bar.
Furthermore, "it has been said that the law of usury is penal in its nature and
therefore should be strictly construed. Thus, while courts, under a statute, avoiding
the entire contract for usury, will uphold the defense according to the letter of the
statute, they will grant affirmative relief, not expressly given by such statute, only on
payment of the money actually loaned and legal interest. And this is because, while it
is the duty of courts to give effect to the letter of statute against oppression of the
borrower, they will not extend the letter of the statute to relief oppresive of the lender."
(R. C. L. vol. 27, page 207.) And in fact to uphold the contention of Ortiga Hermanos
would be to permit a debtor to enrich himself with the money lent, to the prejudice of
the creditor; it would be to extend the effects of usurious loans to other matters not
mentioned in the Law; it would be increase the restrictions provided by the
Legislature which is beyond the jurisdiction of the courts.
Having thus resolved the question which we have considered in this appeal, the
errors assigned by both appellants are consequently disposed of.
Therefore, the judgment appealed from is affirmed in so far as J. J. Go Chioco is
sentenced to return to Ortiga Hermanos the usurious interest paid during the two
years preceding the claim; namely, P11,850, the legal interest thereon, from
November 9, 1921, the date of the filing of the complaint, plus P1,500 as attorney's
fees and the costs. And the same is reversed in so far as the defendants Ortiga
Hermanos and their sureties, Chan Lin Cu and E. Martinez are absolved from the
payment of the balance of the capital lent, which is P15,000, and in so far as J. J. Go
Chioco is sentenced to pay P1,500 as fees of the attorney for the defendant's
sureties. And it is adjudged that Ortiga Hermanos and their sureties should pay jointly
to J. J. Go Chioco the sum of P15,000, the unpaid balance of the capital lent, with
legal interest thereon from October 4, 1921, when the complaint was filed. (Aguilar
vs. Rubiato and Gonzales Villa, 40 Phil., 570.) 1awph!l.net
Without special pronouncement as to the costs in this instance. So ordered.
Araullo, C.J., Avanceña, Johns and Romualdez, JJ., concur.
21. Government of the Philippines Islands vSchenkel and Gonzales
EN BANC
G.R. No. L-41715 August 7, 1935
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
MARIANO CONDE, defendant-appellant.
Isabel Artacho-Ocampo for appellant.
Office of the Solicitor-General Hilado for appellee.
IMPERIAL, J.:
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The Government of the Philippine Islands brought this action to recover from the
defendant the amount of a promissory note executed by him, together with the
stipulated interest, and to foreclose the mortgage constituted by said defendant on a
real property to secure the obligation contracted by him.
The defendant appealed from the judgment ordering him to pay to the plaintiff the
sum of P10,678.75 with interest thereon at eight per cent (8%) per annum, computed
semi-annually, with costs. It was provided in the same judgment that the defendant
should make payment or deposit it with the clerk of court within three (3) months and,
in case of failure to do so, the mortgaged property should be sold and the proceeds
thereof applied to satisfy the judgment. The present appeal was taken by the
defendant to modify the judgment in so far as it orders him to pay compound interest.
There is no question as to the existence of the debt and the defendant's default. the
promissory note incorporated with the mortgage deed which was duly registered in
the registry of deeds, contains a stipulation to the effect that the defendant would pay
interest at the rate of eight percent (8%) per annum, payable semi-annually, on the
capital of P8,300 and on any other amount due and unpaid. Pursuant to this
stipulation, the plaintiff liquidated the defendant's account and charged him the
interest accrued semi-annually plus the interest on the interest so liquidated and the
unpaid capital, resulting in the amount stated in the judgment.
The defendant contends that to collect the interest accrued semi-annually plus the
interest on said interest at eight per cent (8%) per annum violates the Usury Law
because the rate of interest so charged would exceed twelve per cent (12%) per
annum. This contention lacks merit because it is well settled in this jurisdiction that
when there is an express agreement to charge interest on interest, such fact should
not be taken into consideration in determining whether or not the stipulated interest
exceeds the limit prescribed by the Usury Law. (Government of the Philippine Islands
vs. Schenkel and Gonzales, 43 Phil., 616; Villaruel vs. Alvayda and Vicencio, 46
Phil., 277; Valdezco vs. Francisco, 52 Phil., 350.)
In the last case above cited, this court, passing upon the same question then raised,
stated as follows:
Defendant also contends in this instance that the transaction between her and
plaintiff is usurious, because interest was charged on interest due, so that if the
former is added to the stipulated interest, the sum would exceed the rate fixed by law.
It is sufficient to state on this point that such interest upon interest was collected on
March 20, 1924, and defendant claims it only in her answer to this case filed February
12, 1927. The law fixes the period of two years within which to claim the usurious
interest, and this period has already elapsed (Arevalo vs. Dimayuga, 49 Phil., 894).
Furthermore, this court has already held (Government of the Philippine Islands vs.
Schenkel and Gonzales, 43 Phil., 616; Villaruel vs. Alvayda and Vicencio 46 Phil.,
277), that interest charged upon the stipulated interest, if agreed upon, should not
counted in determining whether the interest exceeds the legal rate or not.1avvphil.ñet
The stipulation in question is contrary to no law, morals nor public order, and is
perfectly valid and binding (article 1255, Civil Code). And the obligations arising
therefrom to perform them in accordance with their stipulation (article 1091, Civil
Code).
Finding no merit in any of the three assignments of error relied upon by the
defendant, and the appealed judgment being in accordance with law, it is affirmed in
all its parts, with the costs of this instance to the appellant. So ordered.
Malcolm, Villa-Real, Butte, and Goddard, JJ., concur.
22. Villaruel v Aluayda (error 404)
23. Cu Unjieng v mabalacat Sugar
SECOND DIVISION
[G.R. No. 45351. June 29, 1940.]
CU UNJIENG E HIJOS, Plaintiff-Appellee, v. THE MABALACAT SUGAR CO., ET
AL., Defendants. THE MABALACAT SUGAR CO., Appellant.
Isidro Vamenta for Appellant.
Duran & Lim and Pablo L. Meer for Appellee.
SYLLABUS
1. JUDGMENTS CONDITIONED UPON A CONTINGENCY; NULLITY. — The order
of November 13, 1935, was conditioned upon a contingency, namely, the outcome of
the Berkenkotter case that was then pending appeal in this court. It did not dispose
definitely of the issue as to who should be awarded the amount of P36,793 99 —
whether the plaintiff-appellee or the defendant-appellant. The order provided that the
sum should be awarded to the appellee if Berkenkotter should win the case, or to the
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appellant should Berkenkotter lose the case in this court. And this is not a final
disposition of the case. We have once held that orders or judgments of this kind,
subject to the performance of a condition precedent, are not final until the condition is
performed. (Jaucian v. Querol, 38 Phil., 707, 715.) Before the condition is performed
or the contingency has happened, the judgment is not effective and is not capable of
execution. In truth, such judgment contains no disposition at all and is a mere
anticipated statement of what the court shall do in the future when a particular event
should happen. For this reason, as a general rule, judgments of such kind,
conditioned upon a contingency, are held to be null and void. (33 C. J., 1196.) "A
judgment must be definitive. By this is meant that the decision itself must purport to
decide finally the rights of the parties upon the issue submitted, by specifically
denying or granting the remedy sought by the action." (3 C. J., 1102). And when a
definitive judgment cannot thus be rendered because it depends upon a contingency,
the proper procedure is to render no judgment at all and defer the same until the
contingency has passed.
2. INTERLOCUTORY OR PROVISIONAL ORDERS; VACATION OR
ABANDONMENT. — It is a well-settled rule that interlocutory or provisional orders
are subject to vacation or amendment at any time before final judgment is rendered
or has become executory.
DECISION
MORAN, J.:
Judgment for the plaintiff, Cu Unjieng e Hijos, was rendered in a foreclosure suit
instituted against the defendant, the Mabalacat Sugar Company. A writ of execution
was later issued and the mortgaged property, consisting of a sugar central, ordered
sold at public auction. At the sale, one B. H. Berkenkotter, filed a third-party claim
over certain machineries of the central, but a bond having been filed by the plaintiff,
the sheriff proceeded with the public auction, at which said plaintiff was the highest
bidder for P177,000. The sale was confirmed by the trial court, and, upon appeal to
this court, the order of confirmation was affirmed. On motion, the receiver in
possession of the property sold was caused to deliver the same to the plaintiff, and at
that time the judgment debt, together with interests thereon, amounted to
P226,036.80.
In the meantime, Berkenkotter instituted a separate proceedings against plaintiff Cu
Unjieng e Hijos for the vindication of his claim over the machineries which constituted
the subject matter of his third-party claim. From an adverse decision of the trial court,
he appealed to this Court. While Berkenkotter’s appeal was pending, the Mabalacat
Sugar Company presented, on October 11,1934, a petition in the trial court, praying
that it be declared entitled to the proceeds of the central during the period of its
receivership, aggregating P36,793.99. In this connection, it should be remembered
that the judgment debt at the time the property sold was delivered to the plaintiff,
amounted to P226,036.80, and that the mortgaged property was sold to the plaintiff
for P177,000, leaving thus a balance of P49,036.80. But the defendant contended
that the sum of P177,000 offered by the plaintiff at the auction sale was so offered for
the mortgaged property with the exclusion of the machineries, valued at P50,000,
which were the subject matter of Berkenkotter’s third-party claim, and that should
Berkenkotter lose his appeal in this Court and the machineries thus claimed by him
be declared included in the property sold at public auction, plaintiff should be charged
not only with the amount of P177,000 but also with the sum of P50,000, or a total of
P227,000 which covered the entire amount of the judgment debt. Plaintiff opposed
defendant’s claim, contending that the sum of P177,000 he offered at the public
auction was for the whole property mortgaged including the machineries claimed by
Berkenkotter, and that, therefore, he was entitled to a deficiency judgment to which
the net proceeds of the central during the period of its receivership should be applied.
After due hearing, the trial court issued its order of November 13, 1935, the pertinent
portion of which is as follows:chanrob1es virtual 1aw library
A quien debe adjudicarse dicho saldo? La parte demandante lo reclama en virtud de
su derecho a un deficiency judgment, y la parte demandada porque, segun ella, todo
el credito de la demandante ha sido pagada con la central, incluyendo su maquinaria
y demas mejoras.
x x x
"Segun esto, dicho saldo de P36,733.99 . . . debe corresponder a la demandada si
los demandantes han ganado el litigio en Manila sobre ciertas partes de la
maquinaria avaluadas en P50,000, porque, entonces, habran cobrado todo su
credito. De este efecto, cualquiera de ellas presentara una copia certificada de la
decision en dicho asunto."cralaw virtua1aw library
From this order, plaintiff announced its intention to appeal, but before perfecting his
bill of exceptions, he filed in the same court a petition, which was later amended, for a
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deficiency judgment. Defendant opposed the petition, claiming that the question definitive judgment cannot thus be rendered because it depends upon a contingency,
raised therein had already been adjudged in the court’s order of November 13, 1935, the proper procedure is to render no judgment at all and defer the same until the
above quoted. Later, the defendant, in compliance with one of the directions contingency has passed.
contained in said order, presented an urgent motion, praying that it be permitted to
file a certified copy of the decision of the Supreme Court in the Berkenkotter’s case. The order of November 13, 1935, expressly directed the parties or any of them to
The trial court acceded to this motion, and on March 28, 1936, received the certified introduce in court a certified copy of the judgment which the Supreme Court shall
copy as evidence. According to the decision thus presented in evidence, render in the Berkenkotter case. This requirement was proper, for only after such
Berkenkotter lost his appeal in this court. On May 29, 1936, the trial court overruled decision is rendered and a certified copy thereof presented to the trial court could a
defendant’s opposition to plaintiff’s petition for a deficiency judgment and adjudged final order be issued reciting how the contingency has happened and setting
said plaintiff entitled thereto, ordering, at the same time, that the sum of P36,793.99 definitely the rights of the parties in accordance therewith. But the certified copy was
representing the net proceeds of the receivership and which has already been turned presented in court on March 28, 1936, and no final order has as yet been issued
over to the plaintiff, be applied to the judgment debt, and rendering a deficiency thereon. There was, therefore, nothing which could legally bar the issuance of the
judgment in the amount of P36,737.99, which was the last balance unpaid. This order second order of May 29, 1936. It is a well-settled rule that interlocutory or provisional
is the subject of the present appeal. orders are subject to vacation or amendment at any time before final judgment is
rendered or has become executory. We conclude that the second order is valid.
There are, therefore, two orders involved in this appeal, the first dated November 13,
1935, and the second, May 29, 1936. Defendant-appellant contends that the second As to whether or not in the execution made of the sugar central to the plaintiff-
order is null and void, for it has been rendered without jurisdiction, and that, even if it appellee, the machineries claimed by Berkenkotter were included, we find in the
were valid, the same is erroneous. As to the nullity of the second order, which was in record no sufficient ground to disturb the conclusions of the lower court.
effect a reversal of the first order, defendant’s contention is predicated on the theory
that the lower court has lost all jurisdiction to amend or reverse the first order which Order is affirmed, with costs against Appellant.
had already become final and executory before the second order was issued.
Diaz, Laurel, and Concepcion, JJ., concur.
The order of November 13, 1935, was conditioned upon a contingency, namely, the
outcome of the Berkenkotter case that was then pending appeal in this Court. It did AVANCEÑA, C.J. :chanrob1es virtual 1aw library
not dispose definitely of the issue as to who should be awarded the amount of
P36,793.99 — whether the plaintiff- appellee or the defendant-appellant. The order I concur in the result.
provided that the sum should be awarded to the appellee if Berkenkotter should win
the case, or to the appellant should Berkenkotter lose the case in this Court. And this IMPERIAL, J.:
is not a final disposition of the case. We have once held that orders or judgments of
this kind, subject to the performance of a condition precedent, are not final until the
condition is performed. (Jaucian v. Querol, 38 Phil., 707, 715.) Before the condition is
performed or the contingency has happened, the judgment is not effective and is not
capable of execution. In truth, such judgment contains no disposition at all and is a
mere anticipated statement of what the court shall do in the future when a particular
event should happen. For this reason, as a general rule, judgments of such kind,
conditioned upon a contingency, are held to be null and void. (33 C. J., 1196.) "A
judgment must be definitive. By this is meant that the decision it- self must purport to
decide finally the rights of the parties upon the issue submitted, by specifically
denying or granting the remedy sought by the action." (33 C. J., 1102.) And when a
92