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11/9/2017 G.R. No.
L-19190
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Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19190 November 29, 1922
THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.
VENANCIO CONCEPCION, defendant-appellant.
Recaredo Ma. Calvo for appellant.

Attorney-General Villa-Real for appellee.
MALCOLM, J.:
By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine National Bank,
Venancio Concepcion, President of the Philippine National Bank, between April 10, 1919, and May 7, 1919,
authorized an extension of credit in favor of "Puno y Concepcion, S. en C." in the amount of P300,000. This
special authorization was essential in view of the memorandum order of President Concepcion dated May 17,
1918, limiting the discretional power of the local manager at Aparri, Cagayan, to grant loans and discount
negotiable documents to P5,000, which, in certain cases, could be increased to P10,000. Pursuant to this
authorization, credit aggregating P300,000, was granted the firm of "Puno y Concepcion, S. en C.," the only
security required consisting of six demand notes. The notes, together with the interest, were taken up and paid by
July 17, 1919.
"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion contributed
P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente Puno, P20,000; and
Rosario San Agustin, "casada con Gral. Venancio Concepcion," P50,000. Member Miguel S. Concepcion was the
administrator of the company.
On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and as member of the
board of directors of this bank, was charged in the Court of First Instance of Cagayan with a violation of section 35
of Act No. 2747. He was found guilty by the Honorable Enrique V. Filamor, Judge of First Instance, and was
sentenced to imprisonment for one year and six months, to pay a fine of P3,000, with subsidiary imprisonment in
case of insolvency, and the costs.
Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference must hereafter
repeatedly be made, reads as follows: "The National Bank shall not, directly or indirectly, grant loans to any of the
members of the board of directors of the bank nor to agents of the branch banks." Section 49 of the same Act
provides: "Any person who shall violate any of the provisions of this Act shall be punished by a fine not to exceed
ten thousand pesos, or by imprisonment not to exceed five years, or by both such fine and imprisonment." These
two sections were in effect in 1919 when the alleged unlawful acts took place, but were repealed by Act No. 2938,
approved on January 30, 1921.
Counsel for the defense assign ten errors as having been committed by the trial court. These errors they have
argued adroitly and exhaustively in their printed brief, and again in oral argument. Attorney-General Villa-Real, in
an exceptionally accurate and comprehensive brief, answers the proposition of appellant one by one.
The question presented are reduced to their simplest elements in the opinion which follows:
I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, a "loan" within the meaning of section 35 of Act No. 2747?
Counsel argue that the documents of record do not prove that authority to make a loan was given, but only show
the concession of a credit. In this statement of fact, counsel is correct, for the exhibits in question speak of a
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11/9/2017 G.R. No. L-19190
"credito" (credit) and not of a " prestamo" (loan).
The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a
lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490; Bouvier's Law Dictionary.) A
"loan" means the delivery by one party and the receipt by the other party of a given sum of money, upon an
agreement, express or implied, to repay the sum loaned, with or without interest. (Payne vs. Gardiner [1864], 29 N.
Y., 146, 167.) The concession of a "credit" necessarily involves the granting of "loans" up to the limit of the amount
fixed in the "credit,"
II. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.," by Venancio
Concepcion, President of the Philippine National Bank, a "loan" or a "discount"?
Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan," it does not prohibit what is
commonly known as a "discount."
In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of the Insular
Auditor whether section 37 of Act No. 2612 was intended to apply to discounts as well as to loans. The ruling of
the Acting Insular Auditor, dated August 11, 1916, was to the effect that said section referred to loans alone, and
placed no restriction upon discount transactions. It becomes material, therefore, to discover the distinction
between a "loan" and a "discount," and to ascertain if the instant transaction comes under the first or the latter
denomination.
Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an actual, live,
transaction. But in its last analysis, to discount a paper is only a mode of loaning money, with, however, these
distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest is taken at the expiration of
a credit; (2) a discount is always on double-name paper; a loan is generally on single-name paper.
Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not discounts, yet the
conclusion is inevitable that the demand notes signed by the firm "Puno y Concepcion, S. en C." were not discount
paper but were mere evidences of indebtedness, because (1) interest was not deducted from the face of the
notes, but was paid when the notes fell due; and (2) they were single-name and not double-name paper.
The facts of the instant case having relation to this phase of the argument are not essentially different from the
facts in the Binalbagan Estate case. Just as there it was declared that the operations constituted a loan and not a
discount, so should we here lay down the same ruling.
III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, an "indirect loan" within the meaning of section 35 of Act
No. 2747?
Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect loan." In this
connection, it should be recalled that the wife of the defendant held one-half of the capital of this partnership.
In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the intention of
the Legislature. In this instance, the purpose of the Legislature is plainly to erect a wall of safety against
temptation for a director of the bank. The prohibition against indirect loans is a recognition of the familiar maxim
that no man may serve two masters — that where personal interest clashes with fidelity to duty the latter almost
always suffers. If, therefore, it is shown that the husband is financially interested in the success or failure of his
wife's business venture, a loan to partnership of which the wife of a director is a member, falls within the
prohibition.
Various provisions of the Civil serve to establish the familiar relationship called a conjugal partnership. (Articles
1315, 1393, 1401, 1407, 1408, and 1412 can be specially noted.) A loan, therefore, to a partnership of which the
wife of a director of a bank is a member, is an indirect loan to such director.
That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the acknowledged
fact that in this instance the defendant was tempted to mingle his personal and family affairs with his official duties,
and to permit the loan P300,000 to a partnership of no established reputation and without asking for collateral
security.
In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the Supreme Court of
Maryland said:
What then was the purpose of the law when it declared that no director or officer should borrow of the bank,
and "if any director," etc., "shall be convicted," etc., "of directly or indirectly violating this section he shall be
punished by fine and imprisonment?" We say to protect the stockholders, depositors and creditors of the
bank, against the temptation to which the directors and officers might be exposed, and the power which as
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such they must necessarily possess in the control and management of the bank, and the legislature
unwilling to rely upon the implied understanding that in assuming this relation they would not acquire any
interest hostile or adverse to the most exact and faithful discharge of duty, declared in express terms that
they should not borrow, etc., of the bank.
In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the Binalbagan Estate decision, it was said:
We are of opinion the statute forbade the loan to his copartnership firm as well as to himself directly. The
loan was made indirectly to him through his firm.
IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a violation of section 35
of Act No. 2747 in relation with section 49 of the same Act, when these portions of Act No. 2747 were repealed by
Act No. 2938, prior to the finding of the information and the rendition of the judgment?
As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to section 35 of the
same Act, provides a punishment for any person who shall violate any of the provisions of the Act. It is contended,
however, by the appellant, that the repeal of these sections of Act No. 2747 by Act No. 2938 has served to take
away the basis for criminal prosecution.
This same question has been previously submitted and has received an answer adverse to such contention in the
cases of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs. Concepcion ([1922], 43 Phil., 653); and Ong
Chang Wing and Kwong Fok vs. United States ([1910], 218 U. S., 272; 40 Phil., 1046). In other words, it has been
the holding, and it must again be the holding, that where an Act of the Legislature which penalizes an offense,
such repeals a former Act which penalized the same offense, such repeal does not have the effect of thereafter
depriving the courts of jurisdiction to try, convict, and sentenced offenders charged with violations of the old law.
V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, in violation of section 35 of Act No. 2747, penalized by this
law?
Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank, and since section
49 of said Act provides a punishment not on the bank when it violates any provisions of the law, but on a person
violating any provisions of the same, and imposing imprisonment as a part of the penalty, the prohibition contained
in said section 35 is without penal sanction. la w p h !l.n e t
The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to the board of
directors, and to each director separately and individually. (People vs. Concepcion, supra.)
VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National Bank, in extending
the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." constitute a legal defense?
Counsel argue that if defendant committed the acts of which he was convicted, it was because he was misled by
rulings coming from the Insular Auditor. It is furthermore stated that since the loans made to the copartnership
"Puno y Concepcion, S. en C." have been paid, no loss has been suffered by the Philippine National Bank.
Neither argument, even if conceded to be true, is conclusive. Under the statute which the defendant has violated,
criminal intent is not necessarily material. The doing of the inhibited act, inhibited on account of public policy and
public interest, constitutes the crime. And, in this instance, as previously demonstrated, the acts of the President
of the Philippine National Bank do not fall within the purview of the rulings of the Insular Auditor, even conceding
that such rulings have controlling effect.
Morse, in his work, Banks and Banking, section 125, says:
It is fraud for directors to secure by means of their trust, and advantage not common to the other
stockholders. The law will not allow private profit from a trust, and will not listen to any proof of honest intent.
JUDGMENT
On a review of the evidence of record, with reference to the decision of the trial court, and the errors assigned by
the appellant, and with reference to previous decisions of this court on the same subject, we are irresistibly led to
the conclusion that no reversible error was committed in the trial of this case, and that the defendant has been
proved guilty beyond a reasonable doubt of the crime charged in the information. The penalty imposed by the trial
judge falls within the limits of the punitive provisions of the law.
Judgment is affirmed, with the costs of this instance against the appellant. So ordered.
Araullo, C. J., Johnson, Street, Avanceña, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.
11/9/2017 G.R. No. L-17474
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SUPREME COURT
Manila
EN BANC
G.R. No. L-17474 October 25, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas, petitioner-
appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.

Office of the Solicitor General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal
Industry three bulls: a Red Sindhi with a book value of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of
P744.46, for a period of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government
charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7 May 1949 of the contract,
the borrower asked for a renewal for another period of one year. However, the Secretary of Agriculture and
Natural Resources approved a renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950
and requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal
Industry that he would pay the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at
a value with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October 1950 the
Director of Animal Industry advised him that the book value of the three bulls could not be reduced and that they
either be returned or their book value paid not later than 31 October 1950. Jose V. Bagtas failed to pay the book
value of the three bulls or to return them. So, on 20 December 1950 in the Court of First Instance of Manila the
Republic of the Philippines commenced an action against him praying that he be ordered to return the three bulls
loaned to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of
P199.62, both with interests, and costs; and that other just and equitable relief be granted in (civil No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo, answered that because of the bad
peace and order situation in Cagayan Valley, particularly in the barrio of Baggao, and of the pending appeal he
had taken to the Secretary of Agriculture and Natural Resources and the President of the Philippines from the
refusal by the Director of Animal Industry to deduct from the book value of the bulls corresponding yearly
depreciation of 8% from the date of acquisition, to which depreciation the Auditor General did not object, he could
not return the animals nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court render judgment —
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value of the three bulls plus the
breeding fees in the amount of P626.17 with interest on both sums of (at) the legal rate from the filing of this
complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the court granted on 18 October and
issued on 11 November 1958. On 2 December 1958 granted an ex-parte motion filed by the plaintiff on November
1958 for the appointment of a special sheriff to serve the writ outside Manila. Of this order appointing a special
sheriff, on 6 December 1958, Felicidad M. Bagtas, the surviving spouse of the defendant Jose Bagtas who died on
23 October 1951 and as administratrix of his estate, was notified. On 7 January 1959 she file a motion alleging
that on 26 June 1952 the two bull Sindhi and Bhagnari were returned to the Bureau Animal of Industry and that
sometime in November 1958 the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid on
Hacienda Felicidad Intal, and praying that the writ of execution be quashed and that a writ of preliminary injunction
be issued. On 31 January 1959 the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto.
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On the same day, 6 February, the Court denied her motion. Hence, this appeal certified by the Court of Appeals to
this Court as stated at the beginning of this opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late defendant, returned the Sindhi
and Bhagnari bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong,
Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its objection
of 31 January 1959 to the appellant's motion to quash the writ of execution the appellee prays "that another writ of
execution in the sum of P859.53 be issued against the estate of defendant deceased Jose V. Bagtas." She cannot
be held liable for the two bulls which already had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huk in November 1953
upon the surrounding barrios of Hacienda Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that
as such death was due to force majeure she is relieved from the duty of returning the bull or paying its value to the
appellee. The contention is without merit. The loan by the appellee to the late defendant Jose V. Bagtas of the
three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May 1949, later on renewed for
another year as regards one bull, was subject to the payment by the borrower of breeding fee of 10% of the book
value of the bulls. The appellant contends that the contract was commodatum and that, for that reason, as the
appellee retained ownership or title to the bull it should suffer its loss due to force majeure. A contract of
commodatum is essentially gratuitous.1 If the breeding fee be considered a compensation, then the contract would
be a lease of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities of a
possessor in bad faith, because she had continued possession of the bull after the expiry of the contract. And
even if the contract be commodatum, still the appellant is liable, because article 1942 of the Civil Code provides
that a bailee in a contract of commodatum —
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting
the bailee from responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was renewed for another
period of one year to end on 8 May 1950. But the appellant kept and used the bull until November 1953 when
during a Huk raid it was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of
the appellant the bulls had each an appraised book value, to with: the Sindhi, at P1,176.46, the Bhagnari at
P1,320.56 and the Sahiniwal at P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event
the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of the bull or the payment of
its value being a money claim should be presented or filed in the intestate proceedings of the defendant who died
on 23 October 1951, is not altogether without merit. However, the claim that his civil personality having ceased to
exist the trial court lost jurisdiction over the case against him, is untenable, because section 17 of Rule 3 of the
Rules of Court provides that —
After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the
legal representative of the deceased to appear and to be substituted for the deceased, within a period of
thirty (30) days, or within such time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply with section 16 of Rule 3 which
provides that —
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to inform the court promptly
of such death . . . and to give the name and residence of the executory administrator, guardian, or other
legal representative of the deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that Felicidad M. Bagtas had been issue
letters of administration of the estate of the late Jose Bagtas and that "all persons having claims for monopoly
against the deceased Jose V. Bagtas, arising from contract express or implied, whether the same be due, not due,
or contingent, for funeral expenses and expenses of the last sickness of the said decedent, and judgment for
monopoly against him, to file said claims with the Clerk of this Court at the City Hall Bldg., Highway 54, Quezon
City, within six (6) months from the date of the first publication of this order, serving a copy thereof upon the
aforementioned Felicidad M. Bagtas, the appointed administratrix of the estate of the said deceased," is not a
notice to the court and the appellee who were to be notified of the defendant's death in accordance with the
above-quoted rule, and there was no reason for such failure to notify, because the attorney who appeared for the
defendant was the same who represented the administratrix in the special proceedings instituted for the
administration and settlement of his estate. The appellee or its attorney or representative could not be expected to
know of the death of the defendant or of the administration proceedings of his estate instituted in another court
11/9/2017 G.R. No. L-17474
that if the attorney for the deceased defendant did not notify the plaintiff or its attorney of such death as required
by the rule.
As the appellant already had returned the two bulls to the appellee, the estate of the late defendant is only liable
for the sum of P859.63, the value of the bull which has not been returned to the appellee, because it was killed
while in the custody of the administratrix of his estate. This is the amount prayed for by the appellee in its objection
on 31 January 1959 to the motion filed on 7 January 1959 by the appellant for the quashing of the writ of
execution.
Special proceedings for the administration and settlement of the estate of the deceased Jose V. Bagtas having
been instituted in the Court of First Instance of Rizal (Q-200), the money judgment rendered in favor of the
appellee cannot be enforced by means of a writ of execution but must be presented to the probate court for
payment by the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal,
JJ., concur.
Barrera, J., concurs in the result.
Footnotes
1 Article 1933 of the Civil Code.
The Lawphil Project - Arellano Law Foundation
11/9/2017 Producers Bank of the Phil vs CA : 115324 : February 19, 2003 : J. Callejo Sr : Second Division
SECOND DIVISION
[G.R. No. 115324. February 19, 2003]
PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK),

petitioner, vs. HON. COURT OF APPEALS AND FRANKLIN VIVES,
respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision[1] of the Court of Appeals dated June 25,
1991 in CA-G.R. CV No. 11791 and of its Resolution[2] dated May 5, 1994, denying the motion for
reconsideration of said decision filed by petitioner Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles
Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela
Marketing and Services (Sterela for brevity). Specifically, Sanchez asked private respondent to deposit in
a bank a certain amount of money in the bank account of Sterela for purposes of its incorporation. She
assured private respondent that he could withdraw his money from said account within a months time.
Private respondent asked Sanchez to bring Doronilla to their house so that they could discuss Sanchezs
request.[3]
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronillas
private secretary, met and discussed the matter. Thereafter, relying on the assurances and
representations of Sanchez and Doronilla, private respondent issued a check in the amount of Two
Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs.
Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in the name of
Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only Sanchez, Mrs.
Vives and Dumagpi went to the bank to deposit the check. They had with them an authorization letter from
Doronilla authorizing Sanchez and her companions, in coordination with Mr. Rufo Atienza, to open an
account for Sterela Marketing Services in the amount of P200,000.00. In opening the account, the
authorized signatories were Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account
No. 10-1567 was thereafter issued to Mrs. Vives.[4]
Subsequently, private respondent learned that Sterela was no longer holding office in the address
previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was still intact.
The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed them that part
of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and that only P90,000.00
remained therein. He likewise told them that Mrs. Vives could not withdraw said remaining amount
because it had to answer for some postdated checks issued by Doronilla. According to Atienza, after
Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account No.
10-0320 for Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said current account,
Sterela, through Doronilla, obtained a loan of P175,000.00 from the Bank. To cover payment thereof,
Doronilla issued three postdated checks, all of which were dishonored. Atienza also said that Doronilla
http://sc.judiciary.gov.ph/jurisprudence/2003/feb2003/115324.htm 1/8
could assign or withdraw the money in Savings Account No. 10-1567 because he was the sole proprietor
of Sterela.[5]
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he
received a letter from Doronilla, assuring him that his money was intact and would be returned to him. On
August 13, 1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand Pesos
(P212,000.00) in favor of private respondent. However, upon presentment thereof by private respondent
to the drawee bank, the check was dishonored. Doronilla requested private respondent to present the
same check on September 15, 1979 but when the latter presented the check, it was again dishonored.[6]
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the
return of his clients money. Doronilla issued another check for P212,000.00 in private respondents favor
but the check was again dishonored for insufficiency of funds.[7]
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC)
in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as
Civil Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC.
However, Sanchez passed away on March 16, 1985 while the case was pending before the trial court. On
October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil Case No. 44485, the
dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J. Doronila, Estrella
Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest at the legal rate from the filing of the
complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.[8]
Petitioner appealed the trial courts decision to the Court of Appeals. In its Decision dated June 25,
1991, the appellate court affirmed in toto the decision of the RTC.[9] It likewise denied with finality
petitioners motion for reconsideration in its Resolution dated May 5, 1994.[10]
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN
THE DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT
ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS BANK

MANAGER, MR. RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING
PETITIONER (Sic. Should be PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER
SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE
REGIONAL TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS
OF THE REGIONAL TRIAL COURT WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN
SALUDARES VS. MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR
ACTS COMMITTED BY AN EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER
COURT THAT HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER
DEFENDANTS FOR THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT
DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00
FOR ATTORNEYS FEES AND THE COSTS OF SUIT.[11]
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on
September 25, 1995. The Court then required private respondent to submit a rejoinder to the reply.
However, said rejoinder was filed only on April 21, 1997, due to petitioners delay in furnishing private
respondent with copy of the reply[12] and several substitutions of counsel on the part of private respondent.
[13]
On January 17, 2001, the Court resolved to give due course to the petition and required the parties to
submit their respective memoranda.[14] Petitioner filed its memorandum on April 16, 2001 while private
respondent submitted his memorandum on March 22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple loan
(mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent
to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was
obliged to pay interest, as evidenced by the check issued by Doronilla in the amount of P212,000.00, or
P12,000 more than what private respondent deposited in Sterelas bank account.[15] Moreover, the fact
that private respondent sued his good friend Sanchez for his failure to recover his money from Doronilla
shows that the transaction was not merely gratuitous but had a business angle to it. Hence, petitioner
argues that it cannot be held liable for the return of private respondents P200,000.00 because it is not
privy to the transaction between the latter and Doronilla.[16]
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing
Doronilla to withdraw from the savings account of Sterela since the latter was the sole proprietor of said
company. Petitioner asserts that Doronillas May 8, 1979 letter addressed to the bank, authorizing Mrs.
Vives and Sanchez to open a savings account for Sterela, did not contain any authorization for these two
to withdraw from said account. Hence, the authority to withdraw therefrom remained exclusively with
Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to the savings account.[17]
Petitioner points out that no evidence other than the testimonies of private respondent and Mrs. Vives
was presented during trial to prove that private respondent deposited his P200,000.00 in Sterelas
account for purposes of its incorporation.[18] Hence, petitioner should not be held liable for allowing
Doronilla to withdraw from Sterelas savings account.
Petitioner also asserts that the Court of Appeals erred in affirming the trial courts decision since the
findings of fact therein were not accord with the evidence presented by petitioner during trial to prove that
the transaction between private respondent and Doronilla was a mutuum, and that it committed no wrong
in allowing Doronilla to withdraw from Sterelas savings account.[19]
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for
the actual damages suffered by private respondent, and neither may it be held liable for moral and
exemplary damages as well as attorneys fees.[20]
Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a
mutuum but an accommodation,[21] since he did not actually part with the ownership of his P200,000.00
and in fact asked his wife to deposit said amount in the account of Sterela so that a certification can be
issued to the effect that Sterela had sufficient funds for purposes of its incorporation but at the same time,
he retained some degree of control over his money through his wife who was made a signatory to the
savings account and in whose possession the savings account passbook was given.[22]
He likewise asserts that the trial court did not err in finding that petitioner, Atienzas employer, is liable
for the return of his money. He insists that Atienza, petitioners assistant manager, connived with Doronilla
in defrauding private respondent since it was Atienza who facilitated the opening of Sterelas current
account three days after Mrs. Vives and Sanchez opened a savings account with petitioner for said
company, as well as the approval of the authority to debit Sterelas savings account to cover any
overdrawings in its current account.[23]
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a petition for review
filed with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all over
again the evidence presented by the parties during trial.[24] The Courts jurisdiction is in principle limited to
reviewing errors of law that might have been committed by the Court of Appeals.[25] Moreover, factual
findings of courts, when adopted and confirmed by the Court of Appeals, are final and conclusive on this
Court unless these findings are not supported by the evidence on record.[26] There is no showing of any
misapprehension of facts on the part of the Court of Appeals in the case at bar that would require this
Court to review and overturn the factual findings of that court, especially since the conclusions of fact of
the Court of Appeals and the trial court are not only consistent but are also amply supported by the
evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between private
respondent and Doronilla was a commodatum and not a mutuum. A circumspect examination of the
records reveals that the transaction between them was a commodatum. Article 1933 of the Civil Code
distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use
the same for a certain time and return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the
borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such
as money, the contract would be a mutuum. However, there are some instances where a commodatum
may have for its object a consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the
object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the
parties is to lend consumable goods and to have the very same goods returned at the end of the period
agreed upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract.[27] In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination.[28]
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that
private respondent agreed to deposit his money in the savings account of Sterela specifically for the
purpose of making it appear that said firm had sufficient capitalization for incorporation, with the promise
that the amount shall be returned within thirty (30) days.[29] Private respondent merely accommodated
Doronilla by lending his money without consideration, as a favor to his good friend Sanchez. It was
however clear to the parties to the transaction that the money would not be removed from Sterelas
savings account and would be returned to private respondent after thirty (30) days.
Doronillas attempts to return to private respondent the amount of P200,000.00 which the latter
deposited in Sterelas account together with an additional P12,000.00, allegedly representing interest on
the mutuum, did not convert the transaction from a commodatum into a mutuum because such was not
the intent of the parties and because the additional P12,000.00 corresponds to the fruits of the lending of
the P200,000.00. Article 1935 of the Civil Code expressly states that [t]he bailee in commodatum
acquires the use of the thing loaned but not its fruits. Hence, it was only proper for Doronilla to remit to
private respondent the interest accruing to the latters money deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily liable for the return of
private respondents money because it was not privy to the transaction between Doronilla and private
respondent. The nature of said transaction, that is, whether it is a mutuum or a commodatum, has no
bearing on the question of petitioners liability for the return of private respondents money because the
factual circumstances of the case clearly show that petitioner, through its employee Mr. Atienza, was partly
responsible for the loss of private respondents money and is liable for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of
Sterela for Savings Account No. 10-1567 expressly states that
2. Deposits and withdrawals must be made by the depositor personally or upon his written authority duly authenticated,
and neither a deposit nor a withdrawal will be permitted except upon the production of the depositor savings
bank book in which will be entered by the Bank the amount deposited or withdrawn.[30]
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant
Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom even without presenting the
passbook (which Atienza very well knew was in the possession of Mrs. Vives), not just once, but several
times. Both the Court of Appeals and the trial court found that Atienza allowed said withdrawals because
he was party to Doronillas scheme of defrauding private respondent:
XXX
But the scheme could not have been executed successfully without the knowledge, help and cooperation of Rufo
Atienza, assistant manager and cashier of the Makati (Buendia) branch of the defendant bank. Indeed, the evidence
indicates that Atienza had not only facilitated the commission of the fraud but he likewise helped in devising the means by
which it can be done in such manner as to make it appear that the transaction was in accordance with banking
procedure.
To begin with, the deposit was made in defendants Buendia branch precisely because Atienza was a key officer therein.
The records show that plaintiff had suggested that the P200,000.00 be deposited in his bank, the Manila Banking
Corporation, but Doronilla and Dumagpi insisted that it must be in defendants branch in Makati for it will be easier for
them to get a certification. In fact before he was introduced to plaintiff, Doronilla had already prepared a letter addressed
to the Buendia branch manager authorizing Angeles B. Sanchez and company to open a savings account for Sterela in
the amount of P200,000.00, as per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank x x x (Exh. 1).
This is a clear manifestation that the other defendants had been in consultation with Atienza from the inception of the
scheme. Significantly, there were testimonies and admission that Atienza is the brother-in-law of a certain Romeo
Mirasol, a friend and business associate of Doronilla.
Then there is the matter of the ownership of the fund. Because of the coordination between Doronilla and Atienza, the
latter knew before hand that the money deposited did not belong to Doronilla nor to Sterela. Aside from such
foreknowledge, he was explicitly told by Inocencia Vives that the money belonged to her and her husband and the
deposit was merely to accommodate Doronilla. Atienza even declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the only ones empowered to
withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the signature card pertaining to this account (Exh.
J), the authorized signatories were Inocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the usual banking
procedure that withdrawals of savings deposits could only be made by persons whose authorized signatures are in the
signature cards on file with the bank. He, however, said that this procedure was not followed here because Sterela was
owned by Doronilla. He explained that Doronilla had the full authority to withdraw by virtue of such ownership. The
Court is not inclined to agree with Atienza. In the first place, he was all the time aware that the money came from Vives
and did not belong to Sterela. He was also told by Mrs. Vives that they were only accommodating Doronilla so that a
certification can be issued to the effect that Sterela had a deposit of so much amount to be sued in the incorporation of
the firm. In the second place, the signature of Doronilla was not authorized in so far as that account is concerned
inasmuch as he had not signed the signature card provided by the bank whenever a deposit is opened. In the third place,
neither Mrs. Vives nor Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is an accepted practice that
whenever a withdrawal is made in a savings deposit, the bank requires the presentation of the passbook. In this case,
such recognized practice was dispensed with. The transfer from the savings account to the current account was without
the submission of the passbook which Atienza had given to Mrs. Vives. Instead, it was made to appear in a certification
signed by Estrella Dumagpi that a duplicate passbook was issued to Sterela because the original passbook had been
surrendered to the Makati branch in view of a loan accommodation assigning the savings account (Exh. C). Atienza, who
undoubtedly had a hand in the execution of this certification, was aware that the contents of the same are not true. He
knew that the passbook was in the hands of Mrs. Vives for he was the one who gave it to her. Besides, as assistant
manager of the branch and the bank official servicing the savings and current accounts in question, he also was aware
that the original passbook was never surrendered. He was also cognizant that Estrella Dumagpi was not among those
authorized to withdraw so her certification had no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that Atienzas active participation in
the perpetration of the fraud and deception that caused the loss. The records indicate that this account was opened three
days later after the P200,000.00 was deposited. In spite of his disclaimer, the Court believes that Atienza was mindful
and posted regarding the opening of the current account considering that Doronilla was all the while in coordination with
him. That it was he who facilitated the approval of the authority to debit the savings account to cover any overdrawings
in the current account (Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x.[31]
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for
damages caused by their employees acting within the scope of their assigned tasks. To hold the
employer liable under this provision, it must be shown that an employer-employee relationship exists, and
that the employee was acting within the scope of his assigned task when the act complained of was
committed.[32] Case law in the United States of America has it that a corporation that entrusts a general
duty to its employee is responsible to the injured party for damages flowing from the employees wrongful
act done in the course of his general authority, even though in doing such act, the employee may have
failed in its duty to the employer and disobeyed the latters instructions.[33]
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny
that Atienza was acting within the scope of his authority as Assistant Branch Manager when he assisted
Doronilla in withdrawing funds from Sterelas Savings Account No. 10-1567, in which account private
respondents money was deposited, and in transferring the money withdrawn to Sterelas Current Account
with petitioner. Atienzas acts of helping Doronilla, a customer of the petitioner, were obviously done in
furtherance of petitioners interests[34] even though in the process, Atienza violated some of petitioners
rules such as those stipulated in its savings account passbook.[35] It was established that the transfer of
funds from Sterelas savings account to its current account could not have been accomplished by Doronilla
without the invaluable assistance of Atienza, and that it was their connivance which was the cause of
private respondents loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil
Code, petitioner is liable for private respondents loss and is solidarily liable with Doronilla and Dumagpi
for the return of the P200,000.00 since it is clear that petitioner failed to prove that it exercised due
diligence to prevent the unauthorized withdrawals from Sterelas savings account, and that it was not
negligent in the selection and supervision of Atienza. Accordingly, no error was committed by the
appellate court in the award of actual, moral and exemplary damages, attorneys fees and costs of suit to
private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals are AFFIRMED.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing and Austria-Martinez, JJ., concur.
[1] Justice Asaali S. Isnani, Ponente, with Justices Rodolfo A. Nocon, Presiding Justice, and Antonio M. Martinez,
concurring.
[2] Rollo, pp. 54-55.
[3] Id. at 37.
[4] Ibid.
[5] Id. at 37-38.
[6] Id. at 38.
[7] Id.
[8] Id. at 63.
[9] Id. at 35-47.
[10] Id. at 54-55.
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FIRST DIVISION
CAROLYN M. GARCIA, G.R. No. 154878

Petitioner,
Present:
PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ.
RICA MARIE S. THIO,

Respondent. Promulgated:
March 16, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
CORONA, J.:
[1] [2]
Assailed in this petition for review on certiorari are the June 19, 2002 decision and August 20, 2002
[3]
resolution of the Court of Appeals (CA) in CA-G.R. CV No. 56577 which set aside the February 28,
1997 decision of the Regional Trial Court (RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner Carolyn M.
[4]
Garcia a crossed check dated February 24, 1995 in the amount of US$100,000 payable to the order
[5]
of a certain Marilou Santiago. Thereafter, petitioner received from respondent every month
[6]
(specifically, on March 24, April 26, June 26 and July 26, all in 1995) the amount of US$3,000 and
[7] [8]
P76,500 on July 26, August 26, September 26 and October 26, 1995.
http://sc.judiciary.gov.ph/jurisprudence/2007/march2007/154878.htm 1/9
11/9/2017 G.R. No. 154878
[9]
In June 1995, respondent received from petitioner another crossed check dated June 29, 1995
[10]
in the amount of P500,000, also payable to the order of Marilou Santiago. Consequently, petitioner
received from respondent the amount of P20,000 every month on August 5, September 5, October 5
[11]
and November 5, 1995.
According to petitioner, respondent failed to pay the principal amounts of the loans (US$100,000
and P500,000) when they fell due. Thus, on February 22, 1996, petitioner filed a complaint for sum of
money and damages in the RTC of Makati City, Branch 58 against respondent, seeking to collect the
sums of US$100,000, with interest thereon at 3% a month from October 26, 1995 and P500,000, with
[12]
interest thereon at 4% a month from November 5, 1995, plus attorneys fees and actual damages.
Petitioner alleged that on February 24, 1995, respondent borrowed from her the amount of
US$100,000 with interest thereon at the rate of 3% per month, which loan would mature on October 26,
[13]
1995. The amount of this loan was covered by the first check. On June 29, 1995, respondent again
borrowed the amount of P500,000 at an agreed monthly interest of 4%, the maturity date of which was
[14]
on November 5, 1995. The amount of this loan was covered by the second check. For both loans,
[15]
no promissory note was executed since petitioner and respondent were close friends at the time.
Respondent paid the stipulated monthly interest for both loans but on their maturity dates, she failed to
[16]
pay the principal amounts despite repeated demands.
Respondent denied that she contracted the two loans with petitioner and countered that it was
Marilou Santiago to whom petitioner lent the money. She claimed she was merely asked by petitioner to
[17]
give the crossed checks to Santiago. She issued the checks for P76,000 and P20,000 not as
payment of interest but to accommodate petitioners request that respondent use her own checks instead
[18]
of Santiagos.
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[19]
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. It found that
respondent borrowed from petitioner the amounts of US$100,000 with monthly interest of 3% and
[20]
P500,000 at a monthly interest of 4%:
WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby
rendered in favor of [petitioner], sentencing [respondent] to pay the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month from
October 26, 1995 until fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995 until fully
paid.
3. P100,000.00 as and for attorneys fees; and

4. P50,000.00 as and for actual damages.
For lack of merit, [respondents] counterclaim is perforce dismissed.
With costs against [respondent].
[21]
IT IS SO ORDERED.
On appeal, the CA reversed the decision of the RTC and ruled that there was no contract of loan
between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate her claim that
[respondent] indeed borrowed money from her. There is nothing in the record that shows that [respondent]
received money from [petitioner]. What is evident is the fact that [respondent] received a MetroBank
[crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable to the order of Marilou
Santiago and a CityTrust [crossed] check dated June 29, 1995 in the amount of P500,000.00, again payable to
the order of Marilou Santiago, both of which were issued by [petitioner]. The checks received by
[respondent], being crossed, may not be encashed but only deposited in the bank by the payee thereof,
that is, by Marilou Santiago herself.
It must be noted that crossing a check has the following effects: (a) the check may not be encashed but
only deposited in the bank; (b) the check may be negotiated only onceto one who has an account with the bank;
(c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a
holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the issuance and delivery to the
payee in contemplation of law since the latter is not the person who could take the checks as a holder, i.e., as a
payee or indorsee thereof, with intent to transfer title thereto. Neither could she be deemed as an agent of
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Marilou Santiago with respect to the checks because she was merely facilitating the transactions between the
former and [petitioner].
With the foregoing circumstances, it may be fairly inferred that there were really no contracts of loan that
[22]
existed between the parties. x x x (emphasis supplied)
[23]
Hence this petition.
As a rule, only questions of law may be raised in a petition for review on certiorari under Rule 45
of the Rules of Court. However, this case falls under one of the exceptions, i.e., when the factual
findings of the CA (which held that there were no contracts of loan between petitioner and respondent)
[24]
and the RTC (which held that there were contracts of loan) are contradictory.
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the delivery of the
[25]
object of the contract. This is evident in Art. 1934 of the Civil Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding upon the
parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of
the contract. (Emphasis supplied)
Upon delivery of the object of the contract of loan (in this case the money received by the debtor when
the checks were encashed) the debtor acquires ownership of such money or loan proceeds and is
[26]
bound to pay the creditor an equal amount.
It is undisputed that the checks were delivered to respondent. However, these checks were
crossed and payable not to the order of respondent but to the order of a certain Marilou Santiago. Thus
the main question to be answered is: who borrowed money from petitioner respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were made payable to
[27]
Santiago. She maintains that it was also upon respondents instruction that both checks were
[28]
delivered to her (respondent) so that she could, in turn, deliver the same to Santiago. Furthermore,
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she argues that once respondent received the checks, the latter had possession and control of them such
that she had the choice to either forward them to Santiago (who was already her debtor), to retain them
[29]
or to return them to petitioner.
We agree with petitioner. Delivery is the act by which the res or substance thereof is placed within
[30]
the actual or constructive possession or control of another. Although respondent did not physically
receive the proceeds of the checks, these instruments were placed in her control and possession under
an arrangement whereby she actually re-lent the amounts to Santiago.
Several factors support this conclusion.
[31]
First, respondent admitted that petitioner did not personally know Santiago. It was highly
improbable that petitioner would grant two loans to a complete stranger without requiring as much as
promissory notes or any written acknowledgment of the debt considering that the amounts involved
[32]
were quite big. Respondent, on the other hand, already had transactions with Santiago at that time.
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose name appeared in
both parties list of witnesses) testified that respondents plan was for petitioner to lend her money at a
monthly interest rate of 3%, after which respondent would lend the same amount to Santiago at a higher
[33]
rate of 5% and realize a profit of 2%. This explained why respondent instructed petitioner to make
the checks payable to Santiago. Respondent has not shown any reason why Ruiz testimony should not
be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in the amount of
P76,000 each (peso equivalent of US$3,000) for eight months to cover the monthly interest. For the
[34]
P500,000 loan, she also issued her own checks in the amount of P20,000 each for four months.
According to respondent, she merely accommodated petitioners request for her to issue her own checks
[35]
to cover the interest payments since petitioner was not personally acquainted with Santiago. She
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[36]
claimed, however, that Santiago would replace the checks with cash. Her explanation is simply
incredible. It is difficult to believe that respondent would put herself in a position where she would be
compelled to pay interest, from her own funds, for loans she allegedly did not contract. We declared in
one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the rule that for evidence to be believed,
it must not only proceed from the mouth of a credible witness, but must be credible in itself such as the common
experience of mankind can approve as probable under the circumstances. We have no test of the truth of human
testimony except its conformity to our knowledge, observation, and experience. Whatever is repugnant to these
[37]
belongs to the miraculous, and is outside of juridical cognizance.
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was respondent, not
[38]
petitioner, who was listed as one of her (Santiagos) creditors.
[39]
Last, respondent inexplicably never presented Santiago as a witness to corroborate her story.
[40]
The presumption is that evidence willfully suppressed would be adverse if produced. Respondent
was not able to overturn this presumption.
We hold that the CA committed reversible error when it ruled that respondent did not borrow the
amounts of US$100,000 and P500,000 from petitioner. We instead agree with the ruling of the RTC
making respondent liable for the principal amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly interest for the
US$100,000 and P500,000 loans respectively. There was no written proof of the interest payable except
for the verbal agreement that the loans would earn 3% and 4% interest per month. Article 1956 of the
Civil Code provides that [n]o interest shall be due unless it has been expressly stipulated in writing.
Be that as it may, while there can be no stipulated interest, there can be legal interest pursuant to
Article 2209 of the Civil Code. It is well-settled that:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the
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rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand
[41]
under and subject to the provisions of Article 1169 of the Civil Code.
Hence, respondent is liable for the payment of legal interest per annum to be computed from
[42]
November 21, 1995, the date when she received petitioners demand letter. From the finality of the
decision until it is fully paid, the amount due shall earn interest at 12% per annum, the interim period
[43]
being deemed equivalent to a forbearance of credit.
The award of actual damages in the amount of P50,000 and P100,000 attorneys fees is deleted
since the RTC decision did not explain the factual bases for these damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision and August
20, 2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577 are REVERSED and SET
ASIDE. The February 28, 1997 decision of the Regional Trial Court in Civil Case No. 96-266 is
AFFIRMED with the MODIFICATION that respondent is directed to pay petitioner the amounts of
US$100,000 and P500,000 at 12% per annum interest from November 21, 1995 until the finality of the
decision. The total amount due as of the date of finality will earn interest of 12% per annum until fully
paid. The award of actual damages and attorneys fees is deleted.
SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
11/9/2017 Pajuyo vs CA : 146364 : June 3, 2004 : J. Carpio : First Division : Decision
FIRST DIVISION
[G.R. No. 146364. June 3, 2004]
COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE

GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review[1] of the 21 June 2000 Decision[2] and 14 December 2000
Resolution of the Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11
November 1996 decision[3] of the Regional Trial Court of Quezon City, Branch 81,[4] affirming the 15
December 1995 decision[5] of the Metropolitan Trial Court of Quezon City, Branch 31.[6]
The Antecedents
In June 1979, petitioner Colito T. Pajuyo (Pajuyo) paid P400 to a certain Pedro Perez for the rights
over a 250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made of
light materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra (Guevarra) executed a
Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that
he would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra
vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City,
Branch 31 (MTC).
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where
the house stands because the lot is within the 150 hectares set aside by Proclamation No. 137 for
socialized housing. Guevarra pointed out that from December 1985 to September 1994, Pajuyo did not
show up or communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of
the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against defendant, ordering the
latter to:
http://sc.judiciary.gov.ph/jurisprudence/2004/jun2004/146364.htm 1/17
A) vacate the house and lot occupied by the defendant or any other person or persons claiming any
right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as reasonable
compensation for the use of the premises starting from the last demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.[7]
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 (RTC).
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC
decision reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed from, being in accord
with the law and evidence presented, and the same is hereby affirmed en toto.
SO ORDERED.[8]
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December
1996 to file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of Appeals,
Guevarra filed with the Supreme Court a Motion for Extension of Time to File Appeal by Certiorari Based
on Rule 42 (motion for extension). Guevarra theorized that his appeal raised pure questions of law. The
Receiving Clerk of the Supreme Court received the motion for extension on 13 December 1996 or one
day before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution[9] referring the
motion for extension to the Court of Appeals which has concurrent jurisdiction over the case. The case
presented no special and important matter for the Supreme Court to take cognizance of at the first
instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution[10] granting
the motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevaras petition for
review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No. Q-96-26943 is
REVERSED and SET ASIDE; and it is hereby declared that the ejectment case filed against defendant-appellant is
without factual and legal basis.
SO ORDERED.[11]
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of Appeals
should have dismissed outright Guevarras petition for review because it was filed out of time. Moreover, it
was Guevarras counsel and not Guevarra who signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyos motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.[12]
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and not
the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by tolerance.
Thus, Guevarras refusal to vacate the house on Pajuyos demand made Guevarras continued possession
of the house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship between
Pajuyo and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the house on
demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137, the Revised
National Government Center Housing Project Code of Policies and other pertinent laws. In an ejectment
suit, the RTC has no power to decide Guevarras rights under these laws. The RTC declared that in an
ejectment case, the only issue for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally
occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or
title over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and the
Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra are in pari
delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between
Pajuyo and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court of
Appeals ruled that the Kasunduan is not a lease contract but a commodatum because the agreement is
not for a price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held
that Guevarra has a better right over the property under Proclamation No. 137. President Corazon C.
Aquino (President Aquino) issued Proclamation No. 137 on 7 September 1987. At that time, Guevarra
was in physical possession of the property. Under Article VI of the Code of Policies Beneficiary Selection
and Disposition of Homelots and Structures in the National Housing Project (the Code), the actual
occupant or caretaker of the lot shall have first priority as beneficiary of the project. The Court of Appeals
concluded that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked Pajuyos claim that
Guevarra filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed before the Supreme Court
was stamped 13 December 1996 at 4:09 PM by the Supreme Courts Receiving Clerk. The Court of
Appeals concluded that the motion for extension bore a date, contrary to Pajuyos claim that the motion for
extension was undated. Guevarra filed the motion for extension on time on 13 December 1996 since he
filed the motion one day before the expiration of the reglementary period on 14 December 1996. Thus,
the motion for extension properly complied with the condition imposed by the Court of Appeals in its 28
January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file the petition
for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyos argument that the appellate court should have dismissed the
petition for review because it was Guevarras counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after he
had extensively argued on the merits of the case. This technicality, the appellate court opined, was clearly
an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of thirty

days to file petition for review at the time when there was no more period to extend as the
decision of the Regional Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for Review even
though the certification against forum-shopping was signed only by counsel instead of by
petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a
commodatum, instead of a Contract of Lease as found by the Metropolitan Trial Court and
in holding that the ejectment case filed against defendant-appellant is without legal and
factual basis.
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q-
96-26943 and in holding that the parties are in pari delicto being both squatters, therefore,
illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the
National Government Center Housing Project instead of deciding the same under the
Kasunduan voluntarily executed by the parties, the terms and conditions of which are the
laws between themselves.[13]
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive
issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarras petition for review
because the RTC decision had already become final and executory when the appellate court acted on
Guevarras motion for extension to file the petition. Pajuyo points out that Guevarra had only one day
before the expiry of his period to appeal the RTC decision. Instead of filing the petition for review with the
Court of Appeals, Guevarra filed with this Court an undated motion for extension of 30 days to file a
petition for review. This Court merely referred the motion to the Court of Appeals. Pajuyo believes that the
filing of the motion for extension with this Court did not toll the running of the period to perfect the appeal.
Hence, when the Court of Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to
the Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact
and law.[14] Decisions of the regional trial courts involving pure questions of law are appealable directly to
this Court by petition for review.[15] These modes of appeal are now embodied in Section 2, Rule 41 of the
1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus
filed his motion for extension to file petition for review before this Court on 14 December 1996. On 3
January 1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarras petition
for review gives the impression that the issues he raised were pure questions of law. There is a question
of law when the doubt or difference is on what the law is on a certain state of facts.[16] There is a question
of fact when the doubt or difference is on the truth or falsity of the facts alleged.[17]
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarras petition
for review raised these questions: (1) Do ejectment cases pertain only to possession of a structure, and
not the lot on which the structure stands? (2) Does a suit by a squatter against a fellow squatter constitute
a valid case for ejectment? (3) Should a Presidential Proclamation governing the lot on which a squatters
structure stands be considered in an ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal. However,
some factual questions still have to be resolved because they have a bearing on the legal questions
raised in the petition for review. These factual matters refer to the metes and bounds of the disputed
property and the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review. In
Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,[18] we declared
that the Court of Appeals could grant extension of time in appeals by petition for review. In Liboro v.
Court of Appeals,[19] we clarified that the prohibition against granting an extension of time applies only in
a case where ordinary appeal is perfected by a mere notice of appeal. The prohibition does not apply in a
petition for review where the pleading needs verification. A petition for review, unlike an ordinary appeal,
requires preparation and research to present a persuasive position.[20] The drafting of the petition for
review entails more time and effort than filing a notice of appeal.[21] Hence, the Court of Appeals may
allow an extension of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,[22] we held
that Liboros clarification of Lacsamana is consistent with the Revised Internal Rules of the Court of
Appeals and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions for
review with the Court of Appeals. The extension, however, should be limited to only fifteen days save in
exceptionally meritorious cases where the Court of Appeals may grant a longer period.
A judgment becomes final and executory by operation of law. Finality of judgment becomes a fact on
the lapse of the reglementary period to appeal if no appeal is perfected.[23] The RTC decision could not
have gained finality because the Court of Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarras motion
for extension. The Court of Appeals gave due course to the motion for extension because it complied with
the condition set by the appellate court in its resolution dated 28 January 1997. The resolution stated that
the Court of Appeals would only give due course to the motion for extension if filed on time. The motion for
extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for extension
are (1) the date of receipt of the judgment or final order or resolution subject of the petition, and (2) the
date of filing of the motion for extension.[24] It is the date of the filing of the motion or pleading, and not the
date of execution, that determines the timeliness of the filing of that motion or pleading. Thus, even if the
motion for extension bears no date, the date of filing stamped on it is the reckoning point for determining
the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his
motion for extension before this Court on 13 December 1996, the date stamped by this Courts Receiving
Clerk on the motion for extension. Clearly, Guevarra filed the motion for extension exactly one day before
the lapse of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on technical grounds,
Pajuyo did not ask the appellate court to deny the motion for extension and dismiss the petition for review
at the earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was only when
the Court of Appeals ruled in Guevarras favor that Pajuyo raised the procedural issues against Guevarras
petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the
merits, is estopped from attacking the jurisdiction of the court.[25] Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking the
courts jurisdiction after voluntarily submitting to it is against public policy.[26]
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarras failure to sign
the certification against forum shopping. Instead, Pajuyo harped on Guevarras counsel signing the
verification, claiming that the counsels verification is insufficient since it is based only on mere
information.
A partys failure to sign the certification against forum shopping is different from the partys failure to
sign personally the verification. The certificate of non-forum shopping must be signed by the party, and not
by counsel.[27] The certification of counsel renders the petition defective.[28]
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.[29] It is intended simply to secure an assurance that what are alleged in the pleading are true
and correct and not the product of the imagination or a matter of speculation, and that the pleading is filed
in good faith.[30] The party need not sign the verification. A partys representative, lawyer or any person
who personally knows the truth of the facts alleged in the pleading may sign the verification.[31]
We agree with the Court of Appeals that the issue on the certificate against forum shopping was
merely an afterthought. Pajuyo did not call the Court of Appeals attention to this defect at the early stage
of the proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve
the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment case.[32] Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession, especially if
the ownership is inseparably linked with the possession.[33] The adjudication on the issue of ownership is
only provisional and will not bar an action between the same parties involving title to the land.[34] This
doctrine is a necessary consequence of the nature of the two summary actions of ejectment, forcible entry
and unlawful detainer, where the only issue for adjudication is the physical or material possession over the
real property.[35]
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of the
contested property and that they are mere squatters. Will the defense that the parties to the ejectment
case are not the owners of the disputed lot allow the courts to renounce their jurisdiction over the case?
The Court of Appeals believed so and held that it would just leave the parties where they are since they
are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession except
to prove the nature of the possession when necessary to resolve the issue of physical possession.[36] The
same is true when the defendant asserts the absence of title over the property. The absence of title over
the contested lot is not a ground for the courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to the
physical possession of the premises, that is, to the possession de facto and not to the possession de
jure.[37] It does not even matter if a partys title to the property is questionable,[38] or when both parties
intruded into public land and their applications to own the land have yet to be approved by the proper
government agency.[39] Regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be thrown out by a strong hand, violence or terror.[40] Neither is the
unlawful withholding of property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the owner
himself.[41] Whatever may be the character of his possession, if he has in his favor prior possession in
time, he has the security that entitles him to remain on the property until a person with a better right lawfully
ejects him.[42] To repeat, the only issue that the court has to settle in an ejectment suit is the right to
physical possession.
In Pitargue v. Sorilla,[43] the government owned the land in dispute. The government did not authorize
either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The plaintiff had
prior possession and had already introduced improvements on the public land. The plaintiff had a pending
application for the land with the Bureau of Lands when the defendant ousted him from possession. The
plaintiff filed the action of forcible entry against the defendant. The government was not a party in the case
of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession because
while the application of the plaintiff was still pending, title remained with the government, and the Bureau
of Public Lands had jurisdiction over the case. We disagreed with the defendant. We ruled that courts
have jurisdiction to entertain ejectment suits even before the resolution of the application. The plaintiff, by
priority of his application and of his entry, acquired prior physical possession over the public land applied
for as against other private claimants. That prior physical possession enjoys legal protection against other
private claimants because only a court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue[44] as squatters, strictly
speaking, their entry into the disputed land was illegal. Both the plaintiff and defendant entered the public
land without the owners permission. Title to the land remained with the government because it had not
awarded to anyone ownership of the contested public land. Both the plaintiff and the defendant were in
effect squatting on government property. Yet, we upheld the courts jurisdiction to resolve the issue of
possession even if the plaintiff and the defendant in the ejectment case did not have any title over the
contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the
public need to preserve the basic policy behind the summary actions of forcible entry and unlawful
detainer. The underlying philosophy behind ejectment suits is to prevent breach of the peace and criminal
disorder and to compel the party out of possession to respect and resort to the law alone to obtain what
he claims is his.[45] The party deprived of possession must not take the law into his own hands.[46]
Ejectment proceedings are summary in nature so the authorities can settle speedily actions to recover
possession because of the overriding need to quell social disturbances.[47]
We further explained in Pitargue the greater interest that is at stake in actions for recovery of
possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of possessory actions
involving these public lands before final award is made by the Lands Department, and before title is given any of the
conflicting claimants? It is one of utmost importance, as there are public lands everywhere and there are thousands of
settlers, especially in newly opened regions. It also involves a matter of policy, as it requires the determination of the
respective authorities and functions of two coordinate branches of the Government in connection with public land
conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was in force in this country
before the American occupation, or in the new, we have a possessory action, the aim and purpose of which is the
recovery of the physical possession of real property, irrespective of the question as to who has the title thereto. Under
the Spanish Civil Code we had the accion interdictal, a summary proceeding which could be brought within one year
from dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291); and as early as October 1,
1901, upon the enactment of the Code of Civil Procedure (Act No. 190 of the Philippine Commission) we implanted the
common law action of forcible entry (section 80 of Act No. 190), the object of which has been stated by this Court to
be to prevent breaches of the peace and criminal disorder which would ensue from the withdrawal of the
remedy, and the reasonable hope such withdrawal would create that some advantage must accrue to those
persons who, believing themselves entitled to the possession of property, resort to force to gain possession
rather than to some appropriate action in the court to assert their claims. (Supia and Batioco vs. Quintero and
Ayala, 59 Phil. 312, 314.) So before the enactment of the first Public Land Act (Act No. 926) the action of forcible
entry was already available in the courts of the country. So the question to be resolved is, Did the Legislature intend,
when it vested the power and authority to alienate and dispose of the public lands in the Lands Department, to exclude
the courts from entertaining the possessory action of forcible entry between rival claimants or occupants of any land
before award thereof to any of the parties? Did Congress intend that the lands applied for, or all public lands for that
matter, be removed from the jurisdiction of the judicial Branch of the Government, so that any troubles arising therefrom,
or any breaches of the peace or disorders caused by rival claimants, could be inquired into only by the Lands
Department to the exclusion of the courts? The answer to this question seems to us evident. The Lands Department does
not have the means to police public lands; neither does it have the means to prevent disorders arising therefrom, or
contain breaches of the peace among settlers; or to pass promptly upon conflicts of possession. Then its power is
clearly limited to disposition and alienation, and while it may decide conflicts of possession in order to make
proper award, the settlement of conflicts of possession which is recognized in the court herein has another
ultimate purpose, i.e., the protection of actual possessors and occupants with a view to the prevention of
breaches of the peace. The power to dispose and alienate could not have been intended to include the power
to prevent or settle disorders or breaches of the peace among rival settlers or claimants prior to the final
award. As to this, therefore, the corresponding branches of the Government must continue to exercise power and
jurisdiction within the limits of their respective functions. The vesting of the Lands Department with authority to
administer, dispose, and alienate public lands, therefore, must not be understood as depriving the other
branches of the Government of the exercise of the respective functions or powers thereon, such as the
authority to stop disorders and quell breaches of the peace by the police, the authority on the part of the
courts to take jurisdiction over possessory actions arising therefrom not involving, directly or indirectly,
alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that courts have no jurisdiction to
determine the rights of claimants to public lands, and that until the disposition of the land has passed from the control of
the Federal Government, the courts will not interfere with the administration of matters concerning the same. (50 C. J.
1093-1094.) We have no quarrel with this principle. The determination of the respective rights of rival claimants to public
lands is different from the determination of who has the actual physical possession or occupation with a view to
protecting the same and preventing disorder and breaches of the peace. A judgment of the court ordering restitution of
the possession of a parcel of land to the actual occupant, who has been deprived thereof by another through the use of
force or in any other illegal manner, can never be prejudicial interference with the disposition or alienation of public lands.
On the other hand, if courts were deprived of jurisdiction of cases involving conflicts of possession, that
threat of judicial action against breaches of the peace committed on public lands would be eliminated, and a
state of lawlessness would probably be produced between applicants, occupants or squatters, where force or
might, not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession between rivals or conflicting
applicants or claimants would be no other than that of forcible entry. This action, both in England and the United States
and in our jurisdiction, is a summary and expeditious remedy whereby one in peaceful and quiet possession may recover
the possession of which he has been deprived by a stronger hand, by violence or terror; its ultimate object being to
prevent breach of the peace and criminal disorder. (Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The
basis of the remedy is mere possession as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva,
37 Phil. 752.) The title or right to possession is never in issue in an action of forcible entry; as a matter of fact, evidence
thereof is expressly banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules of Court.) With this
nature of the action in mind, by no stretch of the imagination can conclusion be arrived at that the use of the remedy in the
courts of justice would constitute an interference with the alienation, disposition, and control of public lands. To limit
ourselves to the case at bar can it be pretended at all that its result would in any way interfere with the manner of the
alienation or disposition of the land contested? On the contrary, it would facilitate adjudication, for the question of
priority of possession having been decided in a final manner by the courts, said question need no longer waste the time of
the land officers making the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code[48] embody the principle of pari delicto. We explained the
principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio and in pari delicto potior est
conditio defedentis. The law will not aid either party to an illegal agreement. It leaves the parties where it finds them.[49]
The application of the pari delicto principle is not absolute, as there are exceptions to its application.
One of these exceptions is where the application of the pari delicto rule would violate well-established
public policy.[50]
In Drilon v. Gaurana,[51] we reiterated the basic policy behind the summary actions of forcible entry
and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of the actual condition of
the title to the property, the party in peaceable quiet possession shall not be turned out by strong hand, violence or terror.
In affording this remedy of restitution the object of the statute is to prevent breaches of the peace and criminal disorder
which would ensue from the withdrawal of the remedy, and the reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing themselves entitled to the possession of property, resort to force
to gain possession rather than to some appropriate action in the courts to assert their claims. This is the philosophy at the
foundation of all these actions of forcible entry and detainer which are designed to compel the party out of possession to
respect and resort to the law alone to obtain what he claims is his.[52]
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is
fraught with danger. To shut out relief to squatters on the ground of pari delicto would openly invite
mayhem and lawlessness. A squatter would oust another squatter from possession of the lot that the latter
had illegally occupied, emboldened by the knowledge that the courts would leave them where they are.
Nothing would then stand in the way of the ousted squatter from re-claiming his prior possession at all
cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery
of possession seek to prevent.[53] Even the owner who has title over the disputed property cannot take the
law into his own hands to regain possession of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters.
The determination of priority and superiority of possession is a serious and urgent matter that cannot be
left to the squatters to decide. To do so would make squatters receive better treatment under the law. The
law restrains property owners from taking the law into their own hands. However, the principle of pari
delicto as applied by the Court of Appeals would give squatters free rein to dispossess fellow squatters
or violently retake possession of properties usurped from them. Courts should not leave squatters to their
own devices in cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of
Appeals refused to rule on the issue of physical possession. Nevertheless, the appellate court held that
the pivotal issue in this case is who between Pajuyo and Guevarra has the priority right as beneficiary of
the contested land under Proclamation No. 137.[54] According to the Court of Appeals, Guevarra enjoys
preferential right under Proclamation No. 137 because Article VI of the Code declares that the actual
occupant or caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation site
under Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it
declared open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No. 137. He
failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras unsubstantiated claim
that he is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the project
administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo
allowed Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No.
137 into law on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property in
September 1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No. 137.
Even when Guevarra already knew that Pajuyo was reclaiming possession of the property, Guevarra did
not take any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and
Guevarra has a pending application over the lot, courts should still assume jurisdiction and resolve the
issue of possession. However, the jurisdiction of the courts would be limited to the issue of physical
possession only.
In Pitargue,[55] we ruled that courts have jurisdiction over possessory actions involving public land to
determine the issue of physical possession. The determination of the respective rights of rival claimants
to public land is, however, distinct from the determination of who has the actual physical possession or
who has a better right of physical possession.[56] The administrative disposition and alienation of public
lands should be threshed out in the proper government agency.[57]
The Court of Appeals determination of Pajuyo and Guevarras rights under Proclamation No. 137 was
premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts should not
preempt the decision of the administrative agency mandated by law to determine the qualifications of
applicants for the acquisition of public lands. Instead, courts should expeditiously resolve the issue of
physical possession in ejectment cases to prevent disorder and breaches of peace.[58]
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of the house built on it.
Guevarra expressly admitted the existence and due execution of the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay pahintulot kay G.
Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng walang bayad. Kaugnay nito, kailangang
panatilihin nila ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but
Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to vacate
the premises on Pajuyos demand but Guevarra broke his promise and refused to heed Pajuyos demand
to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a
person from another of the possession of real property to which the latter is entitled after the expiration or
termination of the formers right to hold possession under a contract, express or implied.[59]
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which, an
action for unlawful detainer will lie.[60] The defendants refusal to comply with the demand makes his
continued possession of the property unlawful.[61] The status of the defendant in such a case is similar to
that of a lessee or tenant whose term of lease has expired but whose occupancy continues by tolerance of
the owner.[62]
This principle should apply with greater force in cases where a contract embodies the permission or
tolerance to use the property. The Kasunduan expressly articulated Pajuyos forbearance. Pajuyo did not
require Guevarra to pay any rent but only to maintain the house and lot in good condition. Guevarra
expressly vowed in the Kasunduan that he would vacate the property on demand. Guevarras refusal to
comply with Pajuyos demand to vacate made Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable so
that the latter may use the same for a certain time and return it.[63] An essential feature of commodatum is
that it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for
a certain period.[64] Thus, the bailor cannot demand the return of the thing loaned until after expiration of
the period stipulated, or after accomplishment of the use for which the commodatum is constituted.[65] If
the bailor should have urgent need of the thing, he may demand its return for temporary use.[66] If the use
of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the
contractual relation is called a precarium.[67] Under the Civil Code, precarium is a kind of commodatum.
[68]
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the
property in good condition. The imposition of this obligation makes the Kasunduan a contract different
from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case
law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would result in the termination of the lease.[69] The tenants
withholding of the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra
as bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The
obligation to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of
commission, administration and commodatum.[70] These contracts certainly involve the obligation to
deliver or return the thing received.[71]
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a
squatter. Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally
occupy. Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely entered into
the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it. The
Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a
right to physical possession of the contested property. The Kasunduan is the undeniable evidence of
Guevarras recognition of Pajuyos better right of physical possession. Guevarra is clearly a possessor in
bad faith. The absence of a contract would not yield a different result, as there would still be an implied
promise to vacate.
Guevarra contends that there is a pernicious evil that is sought to be avoided, and that is allowing an
absentee squatter who (sic) makes (sic) a profit out of his illegal act.[72] Guevarra bases his argument on
the preferential right given to the actual occupant or caretaker under Proclamation No. 137 on socialized
housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property
without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out
usurped properties to other squatters. Moreover, it is for the proper government agency to decide who
between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are addressing is
physical possession.
Prior possession is not always a condition sine qua non in ejectment.[73] This is one of the
distinctions between forcible entry and unlawful detainer.[74] In forcible entry, the plaintiff is deprived of
physical possession of his land or building by means of force, intimidation, threat, strategy or stealth.
Thus, he must allege and prove prior possession.[75] But in unlawful detainer, the defendant unlawfully
withholds possession after the expiration or termination of his right to possess under any contract,
express or implied. In such a case, prior physical possession is not required.[76]
Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarras transient
right to possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of the
property because Guevarra had to seek Pajuyos permission to temporarily hold the property and
Guevarra had to follow the conditions set by Pajuyo in the Kasunduan. Control over the property still
rested with Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the disputed property. Possession in the
eyes of the law does not mean that a man has to have his feet on every square meter of the ground before
he is deemed in possession.[77] One may acquire possession not only by physical occupation, but also by
the fact that a thing is subject to the action of ones will.[78] Actual or physical occupation is not always
necessary.[79]
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to said
property.[80] We made this declaration because the person who had title or who had the right to legal
possession over the disputed property was a party in the ejectment suit and that party instituted the case
against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment case. This
case is between squatters. Had the government participated in this case, the courts could have evicted
the contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we
cannot evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of the
courts in settling the issue of physical possession. Stripping both the plaintiff and the defendant of
possession just because they are squatters would have the same dangerous implications as the
application of the principle of pari delicto. Squatters would then rather settle the issue of physical
possession among themselves than seek relief from the courts if the plaintiff and defendant in the
ejectment case would both stand to lose possession of the disputed property. This would subvert the
policy underlying actions for recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing
evidence and presenting arguments before the proper administrative agency to establish any right to
which they may be entitled under the law.[81]
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue of
physical possession does not affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership.[82] The owner can still go to court to recover lawfully
the property from the person who holds the property without legal title. Our ruling here does not diminish
the power of government agencies, including local governments, to condemn, abate, remove or demolish
illegal or unauthorized structures in accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo. Attorneys fees as
part of damages are awarded only in the instances enumerated in Article 2208 of the Civil Code.[83] Thus,
the award of attorneys fees is the exception rather than the rule.[84] Attorneys fees are not awarded every
time a party prevails in a suit because of the policy that no premium should be placed on the right to
litigate.[85] We therefore delete the attorneys fees awarded to Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did
not dispute this factual finding of the two courts. We find the amount reasonable compensation to Pajuyo.
The P300 monthly rental is counted from the last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14
December 2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision dated
11 November 1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943,
affirming the Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch
31 in Civil Case No. 12432, is REINSTATED with MODIFICATION. The award of attorneys fees is
deleted. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Ynares-Santiago, and Azcuna, JJ., concur.
[1] Under Rule 45 of the 1997 Rules of Court.

[2] Penned by Associate Justice Andres B. Reyes, Jr. with Associate Justices Quirino D. Abad Santos, Jr. and Romeo A.
Brawner, concurring.
[3] Penned by Judge Wenceslao I. Agnir.
[4] Docketed as Civil Case No. Q-96-26943.
[5] Penned by Judge Mariano M. Singzon, Jr.
[6] Docketed as Civil Case No. 12432.
[7] Rollo, p. 41.
[8] Ibid., p. 49.
[9] Ibid., p. 221.
[10] Ibid., p. 224.
11/9/2017 G.R. No. L-46240
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SUPREME COURT
Manila
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. la w p h i1 .n e t
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
11/9/2017 G.R. No. L-46240
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.
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.
Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.
11/9/2017 G.R. No. 155223

Supreme Court
Manila
THIRD DIVISION
BOBIE ROSE V. FRIAS, G.R. No. 155223

represented by her Attorney-in-
fact, MARIE F. FUJITA, Present:
Petitioner,
YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CALLEJO, SR.,
CHICO-NAZARIO, and
NACHURA, JJ.
FLORA SAN DIEGO-SISON, Promulgated:

Respondent. April 4, 2007
x------------------------------------------------x
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias represented
[1]
by her Attorney-in-fact, Marie Regine F. Fujita (petitioner) seeking to annul the Decision dated
[2]
June 18, 2002 and the Resolution dated September 11, 2002 of the Court of Appeals (CA) in
CA-G.R. CV No. 52839.
Petitioner is the owner of a house and lot located at No. 589 Batangas East, Ayala Alabang,
Muntinlupa, Metro Manila, which she acquired from Island Masters Realty and Development
http://sc.judiciary.gov.ph/jurisprudence/2007/april2007/155223%20.htm 1/13
11/9/2017 G.R. No. 155223
[3]
Corporation (IMRDC) by virtue of a Deed of Sale dated Nov. 16, 1990. The property is
[4]
covered by TCT No. 168173 of the Register of Deeds of Makati in the name of IMRDC.
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San Diego-Sison
[5]
(respondent), as the SECOND PARTY, entered into a Memorandum of Agreement over the
property with the following terms:
NOW, THEREFORE, for and in consideration of the sum of THREE MILLION PESOS
(P3,000,000.00) receipt of which is hereby acknowledged by the FIRST PARTY from the SECOND
PARTY, the parties have agreed as follows:
1. That the SECOND PARTY has a period of Six (6) months from the date of the execution of
this contract within which to notify the FIRST PARTY of her intention to purchase the aforementioned
parcel of land together within (sic) the improvements thereon at the price of SIX MILLION FOUR
HUNDRED THOUSAND PESOS (P6,400,000.00). Upon notice to the FIRST PARTY of the
SECOND PARTYs intention to purchase the same, the latter has a period of another six months within
which to pay the remaining balance of P3.4 million.
2. That prior to the six months period given to the SECOND PARTY within which to decide
whether or not to purchase the above-mentioned property, the FIRST PARTY may still offer the said
property to other persons who may be interested to buy the same provided that the amount of
P3,000,000.00 given to the FIRST PARTY BY THE SECOND PARTY shall be paid to the latter
including interest based on prevailing compounded bank interest plus the amount of the sale in excess of
P7,000,000.00 should the property be sold at a price more than P7 million.
3. That in case the FIRST PARTY has no other buyer within the first six months from the
execution of this contract, no interest shall be charged by the SECOND PARTY on the P3 million
however, in the event that on the sixth month the SECOND PARTY would decide not to purchase the
aforementioned property, the FIRST PARTY has a period of another six months within which to pay the
sum of P3 million pesos provided that the said amount shall earn compounded bank interest for the last six
months only. Under this circumstance, the amount of P3 million given by the SECOND PARTY shall be
treated as [a] loan and the property shall be considered as the security for the mortgage which can be
enforced in accordance with law.
[6]
x x x x.
Petitioner received from respondent two million pesos in cash and one million pesos in a
[7]
post-dated check dated February 28, 1990, instead of 1991, which rendered said check stale.
Petitioner then gave respondent TCT No. 168173 in the name of IMRDC and the Deed of Absolute
Sale over the property between petitioner and IMRDC.
11/9/2017 G.R. No. 155223
[8]
Respondent decided not to purchase the property and notified petitioner through a letter dated
[9]
March 20, 1991, which petitioner received only on June 11, 1991, reminding petitioner of their
agreement that the amount of two million pesos which petitioner received from respondent should
be considered as a loan payable within six months. Petitioner subsequently failed to pay respondent
the amount of two million pesos.
[10]
On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila, a complaint
for sum of money with preliminary attachment against petitioner. The case was docketed as Civil
Case No. 93-65367 and raffled to Branch 30. Respondent alleged the foregoing facts and in
addition thereto averred that petitioner tried to deprive her of the security for the loan by making a
[11]
false report of the loss of her owners copy of TCT No. 168173 to the Tagig Police Station on
[12]
June 3, 1991, executing an affidavit of loss and by filing a petition for the issuance of a new
owners duplicate copy of said title with the RTC of Makati, Branch 142; that the petition was
[13]
granted in an Order dated August 31, 1991; that said Order was subsequently set aside in an
[14]
Order dated April 10, 1992 where the RTC Makati granted respondents petition for relief from
judgment due to the fact that respondent is in possession of the owners duplicate copy of TCT
No. 168173, and ordered the provincial public prosecutor to conduct an investigation of petitioner
for perjury and false testimony. Respondent prayed for the ex-parte issuance of a writ of
preliminary attachment and payment of two million pesos with interest at 36% per annum from
December 7, 1991, P100,000.00 moral, corrective and exemplary damages and P200,000.00 for
attorneys fees.
In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued a writ of
[15]
preliminary attachment upon the filing of a bond in the amount of two million pesos.
[16]
Petitioner filed an Amended Answer alleging that the Memorandum of Agreement was
conceived and arranged by her lawyer, Atty. Carmelita Lozada, who is also respondents lawyer;
that she was asked to sign the agreement without being given the chance to read the same; that the
title to the property and the Deed of Sale between her and the IMRDC were entrusted to Atty.
Lozada for safekeeping and were never turned over to respondent as there was no consummated
sale yet; that out of the two million pesos cash paid, Atty. Lozada took the one million pesos which
11/9/2017 G.R. No. 155223
has not been returned, thus petitioner had filed a civil case against her; that she was never informed
of respondents decision not to purchase the property within the six month period fixed in the
agreement; that when she demanded the return of TCT No. 168173 and the Deed of Sale between
her and the IMRDC from Atty. Lozada, the latter gave her these documents in a brown envelope on
May 5, 1991 which her secretary placed in her attache case; that the envelope together with her
other personal things were lost when her car was forcibly opened the following day; that she sought
the help of Atty. Lozada who advised her to secure a police report, to execute an affidavit of loss
and to get the services of another lawyer to file a petition for the issuance of an owners duplicate
copy; that the petition for the issuance of a new owners duplicate copy was filed on her behalf
without her knowledge and neither did she sign the petition nor testify in court as falsely claimed for
she was abroad; that she was a victim of the manipulations of Atty. Lozada and respondent as
shown by the filing of criminal charges for perjury and false testimony against her; that no interest
could be due as there was no valid mortgage over the property as the principal obligation is vitiated
with fraud and deception. She prayed for the dismissal of the complaint, counter-claim for damages
and attorneys fees.
[17]
Trial on the merits ensued. On January 31, 1996, the RTC issued a decision, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby RENDERED:
1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon at the rate of
thirty two (32%) per cent per annum beginning December 7, 1991 until fully paid.
2) Ordering defendant to pay plaintiff the sum of P70,000.00 representing premiums paid by
plaintiff on the attachment bond with legal interest thereon counted from the date of this decision until fully
paid.
3) Ordering defendant to pay plaintiff the sum of P100,000.00 by way of moral, corrective and
exemplary damages.
[18]
4) Ordering defendant to pay plaintiff attorneys fees of P100,000.00 plus cost of litigation.
The RTC found that petitioner was under obligation to pay respondent the amount of two
million pesos with compounded interest pursuant to their Memorandum of Agreement; that the
fraudulent scheme employed by petitioner to deprive respondent of her only security to her loaned
money when petitioner executed an affidavit of loss and instituted a petition for the issuance of an
owners duplicate title knowing the same was in respondents possession, entitled respondent to
11/9/2017 G.R. No. 155223
moral damages; and that petitioners bare denial cannot be accorded credence because her
testimony and that of her witness did not appear to be credible.
The RTC further found that petitioner admitted that she received from respondent the two
million pesos in cash but the fact that petitioner gave the one million pesos to Atty. Lozada was
without respondents knowledge thus it is not binding on respondent; that respondent had also
proven that in 1993, she initially paid the sum of P30,000.00 as premium for the issuance of the
attachment bond, P20,000.00 for its renewal in 1994, and P20,000.00 for the renewal in 1995, thus
plaintiff should be reimbursed considering that she was compelled to go to court and ask for a writ
of preliminary attachment to protect her rights under the agreement.
Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the CA affirmed the
RTC decision with modification, the dispositive portion of which reads:
WHEREFORE, premises considered, the decision appealed from is MODIFIED in the sense that the rate
[19]
of interest is reduced from 32% to 25% per annum, effective June 7, 1991 until fully paid.
The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as her commission
and partly as a loan; respondent did not replace the mistakenly dated check of one million pesos
because she had decided not to buy the property and petitioner knew of her decision as early as
April 1991; the award of moral damages was warranted since even granting petitioner had no hand
in the filing of the petition for the issuance of an owners copy, she executed an affidavit of loss of
TCT No. 168173 when she knew all along that said title was in respondents possession; petitioners
claim that she thought the title was lost when the brown envelope given to her by Atty. Lozada was
stolen from her car was hollow; that such deceitful conduct caused respondent serious anxiety and
emotional distress.
The CA concluded that there was no basis for petitioner to say that the interest should be charged
for six months only and no more; that a loan always bears interest otherwise it is not a loan; that
[20]
interest should commence on June 7, 1991 with compounded bank interest prevailing at the
time the two million was considered as a loan which was in June 1991; that the bank interest rate for
loans secured by a real estate mortgage in 1991 ranged from 25% to 32% per annum as certified to
[21]
by Prudential Bank, that in fairness to petitioner, the rate to be charged should be 25% only.
Petitioners motion for reconsideration was denied by the CA in a Resolution dated

September 11, 2002.
11/9/2017 G.R. No. 155223
Hence the instant Petition for Review on Certiorari filed by petitioner raising the following
issues:
(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE LIMITED TO

SIX (6) MONTHS AS CONTAINED IN THE MEMORANDUM OF AGREEMENT.
(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.
(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES IS PROPER EVEN IF NOT MENTIONED IN THE TEXT OF THE
[22]
DECISION.
Petitioner contends that the interest, whether at 32% per annum awarded by the trial court or
at 25% per annum as modified by the CA which should run from June 7, 1991 until fully paid, is
contrary to the parties Memorandum of Agreement; that the agreement provides that if respondent
would decide not to purchase the property, petitioner has the period of another six months to pay
the loan with compounded bank interest for the last six months only; that the CAs ruling that a loan
always bears interest otherwise it is not a loan is contrary to Art. 1956 of the New Civil Code which
provides that no interest shall be due unless it has been expressly stipulated in writing.
While the CAs conclusion, that a loan always bears interest otherwise it is not a loan, is
[23]
flawed since a simple loan may be gratuitous or with a stipulation to pay interest, we find no
error committed by the CA in awarding a 25% interest per annum on the two-million peso loan even
beyond the second six months stipulated period.
The Memorandum of Agreement executed between the petitioner and respondent on

December 7, 1990 is the law between the parties. In resolving an issue based upon a contract, we
must first examine the contract itself, especially the provisions thereof which are relevant to the
[24]
controversy. The general rule is that if the terms of an agreement are clear and leave no doubt
[25]
as to the intention of the contracting parties, the literal meaning of its stipulations shall prevail. It
is further required that the various stipulations of a contract shall be interpreted together, attributing
[26]
to the doubtful ones that sense which may result from all of them taken jointly.
11/9/2017 G.R. No. 155223
In this case, the phrase for the last six months only should be taken in the context of the
entire agreement. We agree with and adopt the CAs interpretation of the phrase in this wise:
Their agreement speaks of two (2) periods of six months each. The first six-month period
was given to plaintiff-appellee (respondent) to make up her mind whether or not to purchase
defendant-appellants (petitioner's) property. The second six-month period was given to defendant-
appellant to pay the P2 million loan in the event that plaintiff-appellee decided not to buy the
subject property in which case interest will be charged for the last six months only, referring to the
second six-month period. This means that no interest will be charged for the first six-month period
while appellee was making up her mind whether to buy the property, but only for the second period
of six months after appellee had decided not to buy the property. This is the meaning of the phrase
for the last six months only. Certainly, there is nothing in their agreement that suggests that interest
will be charged for six months only even if it takes defendant-appellant an eternity to pay the loan.
[27]
The agreement that the amount given shall bear compounded bank interest for the last six
months only, i.e., referring to the second six-month period, does not mean that interest will no
longer be charged after the second six-month period since such stipulation was made on the logical
and reasonable expectation that such amount would be paid within the date stipulated. Considering
that petitioner failed to pay the amount given which under the Memorandum of Agreement shall be
considered as a loan, the monetary interest for the last six months continued to accrue until actual
payment of the loaned amount.
The payment of regular interest constitutes the price or cost of the use of money and thus,
until the principal sum due is returned to the creditor, regular interest continues to accrue since the
[28]
debtor continues to use such principal amount. It has been held that for a debtor to continue in
possession of the principal of the loan and to continue to use the same after maturity of the loan
without payment of the monetary interest, would constitute unjust enrichment on the part of the
[29]
debtor at the expense of the creditor.
Petitioner and respondent stipulated that the loaned amount shall earn compounded bank
interests, and per the certification issued by Prudential Bank, the interest rate for loans in 1991
ranged from 25% to 32% per annum. The CA reduced the interest rate to 25% instead of the 32%
awarded by the trial court which petitioner no longer assailed.
11/9/2017 G.R. No. 155223
[30]
In Bautista v. Pilar Development Corp., we upheld the validity of a 21% per annum
[31]
interest on a P142,326.43 loan. In Garcia v. Court of Appeals, we sustained the agreement of
the parties to a 24% per annum interest on an P8,649,250.00 loan. Thus, the interest rate of 25%
per annum awarded by the CA to a P2 million loan is fair and reasonable.
Petitioner next claims that moral damages were awarded on the erroneous finding that she
used a fraudulent scheme to deprive respondent of her security for the loan; that such finding is
baseless since petitioner was acquitted in the case for perjury and false testimony filed by
respondent against her.
Article 31 of the Civil Code provides that when the civil action is based on an obligation not
arising from the act or omission complained of as a felony, such civil action may proceed
[32]
independently of the criminal proceedings and regardless of the result of the latter.
While petitioner was acquitted in the false testimony and perjury cases filed by respondent
against her, those actions are entirely distinct from the collection of sum of money with damages
filed by respondent against petitioner.
We agree with the findings of the trial court and the CA that petitioners act of trying to
deprive respondent of the security of her loan by executing an affidavit of loss of the title and
instituting a petition for the issuance of a new owners duplicate copy of TCT No. 168173 entitles
respondent to moral damages. Moral damages may be awarded in culpa contractual or breach of
contract cases when the defendant acted fraudulently or in bad faith. Bad faith does not simply
connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and
[33]
conscious doing of wrong. It partakes of the nature of fraud.
The Memorandum of Agreement provides that in the event that respondent opts not to buy
the property, the money given by respondent to petitioner shall be treated as a loan and the
property shall be considered as the security for the mortgage. It was testified to by respondent that
after they executed the agreement on December 7, 1990, petitioner gave her the owners copy of the
title to the property, the Deed of Sale between petitioner and IMRDC, the certificate of occupancy,
[34]
and the certificate of the Secretary of the IMRDC who signed the Deed of Sale. However,
11/9/2017 G.R. No. 155223
notwithstanding that all those documents were in respondents possession, petitioner executed an
affidavit of loss that the owners copy of the title and the Deed of Sale were lost.
Although petitioner testified that her execution of the affidavit of loss was due to the fact that
she was of the belief that since she had demanded from Atty. Lozada the return of the title, she
thought that the brown envelope with markings which Atty. Lozada gave her on May 5, 1991
already contained the title and the Deed of Sale as those documents were in the same brown
[35]
envelope which she gave to Atty. Lozada prior to the transaction with respondent. Such
statement remained a bare statement. It was not proven at all since Atty. Lozada had not taken the
stand to corroborate her claim. In fact, even petitioners own witness, Benilda Ynfante (Ynfante),
was not able to establish petitioner's claim that the title was returned by Atty. Lozada in view of
Ynfante's testimony that after the brown envelope was given to petitioner, the latter passed it on to
[36] [37]
her and she placed it in petitioners attach case and did not bother to look at the envelope.
It is clear therefrom that petitioners execution of the affidavit of loss became the basis of the
filing of the petition with the RTC for the issuance of new owners duplicate copy of TCT No.
168173. Petitioners actuation would have deprived respondent of the security for her loan were it
not for respondents timely filing of a petition for relief whereby the RTC set aside its previous
order granting the issuance of new title. Thus, the award of moral damages is in order.
The entitlement to moral damages having been established, the award of exemplary damages
[38]
is proper. Exemplary damages may be imposed upon petitioner by way of example or
[39]
correction for the public good. The RTC awarded the amount of P100,000.00 as moral and
exemplary damages. While the award of moral and exemplary damages in an aggregate amount may
[40]
not be the usual way of awarding said damages, no error has been committed by CA. There is
no question that respondent is entitled to moral and exemplary damages.
Petitioner argues that the CA erred in awarding attorneys fees because the trial courts
decision did not explain the findings of facts and law to justify the award of attorneys fees as the
same was mentioned only in the dispositive portion of the RTC decision.
We agree.
11/9/2017 G.R. No. 155223
[41]
Article 2208 of the New Civil Code enumerates the instances where such may be
awarded and, in all cases, it must be reasonable, just and equitable if the same were to be granted.
[42]
Attorney's fees as part of damages are not meant to enrich the winning party at the expense of
the losing litigant. They are not awarded every time a party prevails in a suit because of the policy
[43]
that no premium should be placed on the right to litigate. The award of attorney's fees is the
exception rather than the general rule. As such, it is necessary for the trial court to make findings of
facts and law that would bring the case within the exception and justify the grant of such award.
The matter of attorney's fees cannot be mentioned only in the dispositive portion of the decision.
[44]
They must be clearly explained and justified by the trial court in the body of its decision. On
appeal, the CA is precluded from supplementing the bases for awarding attorneys fees when the
trial court failed to discuss in its Decision the reasons for awarding the same. Consequently, the
award of attorney's fees should be deleted.
WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002 and the
Resolution dated September 11, 2002 of the Court of Appeals in CA-G.R. CV No. 52839 are
AFFIRMED with MODIFICATION that the award of attorneys fees is DELETED.
No pronouncement as to costs.
SO ORDERED.
MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice
WE CONCUR:
CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson
11/9/2017 Ligutan vs CA : 138677 : February 12, 2002 : J. Vitug : Third Division
THIRD DIVISION
[G.R. No. 138677. February 12, 2002]
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON.

COURT OF APPEALS & SECURITY BANK & TRUST COMPANY,
respondents.
DECISION
VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594, entitled "Security Bank and
Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the amount
of P120,000.00 from respondent Security Bank and Trust Company. Petitioners executed a promissory
note binding themselves, jointly and severally, to pay the sum borrowed with an interest of 15.189% per
annum upon maturity and to pay a penalty of 5% every month on the outstanding principal and interest in
case of default. In addition, petitioners agreed to pay 10% of the total amount due by way of attorneys
fees if the matter were indorsed to a lawyer for collection or if a suit were instituted to enforce payment.
The obligation matured on 8 September 1981; the bank, however, granted an extension but only up until
29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20 May
1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand letter to
petitioners informing them that they had five days within which to make full payment. Since petitioners still
defaulted on their obligation, the bank filed on 3 November 1982, with the Regional Trial Court of Makati,
Branch 143, a complaint for recovery of the due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence and, on 27
March 1985, rested its case. Petitioners, instead of introducing their own evidence, had the hearing of the
case reset on two consecutive occasions. In view of the absence of petitioners and their counsel on 28
August 1985, the third hearing date, the bank moved, and the trial court resolved, to consider the case
submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the order of
the trial court declaring them as having waived their right to present evidence and prayed that they be
allowed to prove their case. The court a quo denied the motion in an order, dated 5 September 1988, and
[1]
on 20 October 1989, it rendered its decision, the dispositive portion of which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the latter to
pay, jointly and severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum, 2% service charge
and 5% per month penalty charge, commencing on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total amount of indebtedness for and as attorneys
fees; and
[2]
"3. To pay the costs of the suit.
Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court
of their motion to present evidence and assailing the imposition of the 2% service charge, the 5% per
[3]
month penalty charge and 10% attorney's fees. In its decision of 7 March 1996, the appellate court
affirmed the judgment of the trial court except on the matter of the 2% service charge which was deleted
pursuant to Central Bank Circular No. 783. Not fully satisfied with the decision of the appellate court, both
[4]
parties filed their respective motions for reconsideration. Petitioners prayed for the reduction of the 5%
stipulated penalty for being unconscionable. The bank, on the other hand, asked that the payment of
interest and penalty be commenced not from the date of filing of complaint but from the time of default as
so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest thereon must commence not
on the date of filing of the complaint as we have previously held in our decision but on the date when the obligation
became due.
Default generally begins from the moment the creditor demands the performance of the obligation. However, demand is
not necessary to render the obligor in default when the obligation or the law so provides.
In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the obligation on its
maturity date 'without necessity of demand.' They also agreed to pay the interest in case of non-payment from the date of
default.
xxxxxxxxx
While we maintain that defendants-appellants must be bound by the contract which they acknowledged and signed, we
take cognizance of their plea for the application of the provisions of Article 1229 x x x.
Considering that defendants-appellants partially complied with their obligation under the promissory note by the
reduction of the original amount of P120,000.00 to P114,416.00 and in order that they will finally settle their obligation,
it is our view and we so hold that in the interest of justice and public policy, a penalty of 3% per month or 36% per
annum would suffice.
xxxxxxxxx
WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendants-appellants Tolomeo
Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee Security Bank and Trust Company the
following:
1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3% per
month penalty charge commencing May 20, 1982 until fully paid;
[5]
2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys fees.
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly
[6]
discovered evidence, alleging that while the case was pending before the trial court, petitioner Tolomeo
Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18 January 1984 to secure
the existing indebtedness of petitioners Ligutan and dela Llana with the bank. Petitioners contended that
the execution of the real estate mortgage had the effect of novating the contract between them and the
bank. Petitioners further averred that the mortgage was extrajudicially foreclosed on 26 August 1986, that
they were not informed about it, and the bank did not credit them with the proceeds of the sale. The
appellate court denied the omnibus motion for reconsideration and to admit newly discovered evidence,
ratiocinating that such a second motion for reconsideration cannot be entertained under Section 2, Rule
52, of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the newly-discovered
evidence being invoked by petitioners had actually been known to them when the case was brought on
[7]
appeal and when the first motion for reconsideration was filed.
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to
this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court,
submitting thusly -
I. The respondent Court of Appeals seriously erred in not holding that the 15.189% interest and the
penalty of three (3%) percent per month or thirty-six (36%) percent per annum imposed by
private respondent bank on petitioners loan obligation are still manifestly exorbitant, iniquitous
and unconscionable.
II. The respondent Court of Appeals gravely erred in not reducing to a reasonable level the ten (10%)
percent award of attorneys fees which is highly and grossly excessive, unreasonable and
unconscionable.
III. The respondent Court of Appeals gravely erred in not admitting petitioners newly discovered
evidence which could not have been timely produced during the trial of this case.
IV. The respondent Court of Appeals seriously erred in not holding that there was a novation of the
cause of action of private respondents complaint in the instant case due to the subsequent
execution of the real estate mortgage during the pendency of this case and the subsequent
[8]
foreclosure of the mortgage.
Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to be
deleted by petitioners was even insufficient to fully cover and compensate for the cost of money brought
about by the radical devaluation and decrease in the purchasing power of the peso, particularly vis-a-vis
the U.S. dollar, taking into account the time frame of its occurrence. The Bank would stress that only the
[9]
amount of P5,584.00 had been remitted out of the entire loan of P120,000.00.
[10]
A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater
liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive
[11]
force of the obligation and to provide, in effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of
[12]
proof on the existence and on the measure of damages caused by the breach. Although a court may
not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public order or public policy, a stipulated penalty,
nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal
[13]
obligation has been partly or irregularly complied with.
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors as, but not necessarily confined to, the type, extent
and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of the parties, and the like, the application of which, by
and large, is addressed to the sound discretion of the court. In Rizal Commercial Banking Corp. vs.
[14]
Court of Appeals, just an example, the Court has tempered the penalty charges after taking into
account the debtors pitiful situation and its offer to settle the entire obligation with the creditor bank. The
stipulated penalty might likewise be reduced when a partial or irregular performance is made by the
[15]
debtor. The stipulated penalty might even be deleted such as when there has been substantial
[16]
performance in good faith by the obligor, when the penalty clause itself suffers from fatal infirmity, or
[17]
when exceptional circumstances so exist as to warrant it.
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty
interest from 5% a month to 3% a month which petitioner still disputes. Given the circumstances, not to
mention the repeated acts of breach by petitioners of their contractual obligation, the Court sees no
cogent ground to modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that has not
been raised and ventilated before the courts below. In any event, the interest stipulation, on its face, does
not appear as being that excessive. The essence or rationale for the payment of interest, quite often
referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being
[18]
distinct concepts which may separately be demanded. What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part of the banking business and the core of
[19]
a bank's existence.
Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's fees
for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of
services rendered by counsel for the bank and the nature of the case. Bearing in mind that the rate of
attorneys fees has been agreed to by the parties and intended to answer not only for litigation expenses
but also for collection efforts as well, the Court, like the appellate court, deems the award of 10%
attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to
admit newly discovered evidence. As the appellate court so held in its resolution of 14 May 1999 -
Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a judgment or
final resolution by the same party shall be entertained. Considering that the instant motion is already a second motion for
reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this court that the newly-discovered evidence being invoked
by defendants-appellants have actually been existent when the case was brought on appeal to this court as well as when
the first motion for reconsideration was filed. Hence, it is quite surprising why defendants-appellants raised the alleged
newly-discovered evidence only at this stage when they could have done so in the earlier pleadings filed before this
court.
The propriety or acceptability of such a second motion for reconsideration is not contingent upon the averment of 'new'
grounds to assail the judgment, i.e., grounds other than those theretofore presented and rejected. Otherwise, attainment
of finality of a judgment might be stayed off indefinitely, depending on the partys ingenuousness or cleverness in
conceiving and formulating 'additional flaws' or 'newly discovered errors' therein, or thinking up some injury or prejudice
[20]
to the rights of the movant for reconsideration.
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would
not have resulted in the extinguishment of the original contract of loan because of novation. Petitioners
acknowledge that the real estate mortgage contract does not contain any express stipulation by the
[21]
parties intending it to supersede the existing loan agreement between the petitioners and the bank.
Respondent bank has correctly postulated that the mortgage is but an accessory contract to secure the
loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties
[22]
to the new contract; third, the extinguishment of the obligation; and fourth, the validity of the new one. In
order that an obligation may be extinguished by another which substitutes the same, it is imperative that it
be so declared in unequivocal terms, or that the old and the new obligation be on every point incompatible
[23]
with each other. An obligation to pay a sum of money is not extinctively novated by a new instrument
which merely changes the terms of payment or adding compatible covenants or where the old contract is
[24]
merely supplemented by the new one. When not expressed, incompatibility is required so as to ensure
that the parties have indeed intended such novation despite their failure to express it in categorical terms.
The incompatibility, to be sure, should take place in any of the essential elements of the obligation, i.e., (1)
the juridical relation or tie, such as from a mere commodatum to lease of things, or from negotiorum
[25] [26]
gestio to agency, or from a mortgage to antichresis, or from a sale to one of loan; (2) the object or
principal conditions, such as a change of the nature of the prestation; or (3) the subjects, such as the
[27]
substitution of a debtor or the subrogation of the creditor. Extinctive novation does not necessarily
imply that the new agreement should be complete by itself; certain terms and conditions may be carried,
expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Melo, (Chairman), Panganiban, Sandoval-Gutierrez, and Carpio, JJ., concur.
[1]
Rollo, p. 114.
[2]
Rollo, pp. 117-118.
[3]
Rollo, p. 39.
[4]
Rollo, pp. 55, 58.
[5]
Rollo, pp. 48-49.
[6]
Rollo, p. 67.
[7]
Rollo, p. 52.
[8]
Rollo, pp. 17-18.
[9]
Memorandum for Respondent.
[10]
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if
the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a)
[11]
SSS vs. Moonwalk Development and Housing Corporation, 221 SCRA 119.
[12]
Article 1228, Civil Code; Manila Racing Club vs. Manila Jockey Club, 69 Phil. 55.
[13]
Article 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable.
11/9/2017 G.R. No. L-52478
Custom Search

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-52478 October 30, 1986
THE GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner-appellant,

vs.
HONORABLE COURT OF APPEALS, NEMENCIO R. MEDINA and JOSEFINA G. MEDINA, respondents-
appellants.
Coronel Law Office for private respondents.
Alberto C. Lerma collaborating counsel for private respondents
PARAS, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals in CA-G.R. No. 62541-R
(Nemencio R. Medina and Josefina G. Medina, Plaintiffs-Appellants vs. The Government Service Insurance
System, Defendant-Appellant) affirming the January 21, 1977 Decision of the trial court, and at the same time
ordering the GSIS to reimburse the amount of P9,580.00 as over-payment and to pay the spouses Nemencio R.
Medina and Josefina G. Medina P3,000.00 and P1,000.00 as attorney's fees and litigation expenses.
In 1961, herein private respondents spouses Nemencio R. Medina and Josefina G. Medina (Medinas for short)
applied with the herein petitioner Government Service Insurance System (GSIS for short) for a loan of
P600,000.00. The GSIS Board of Trustees, in its Resolution of December 20, 1961, approved under Resolution
No. 5041 only the amount of P350,000.00, subject to the following conditions: that the rate of interest shall be 9%
per annum compounded monthly; repayable in ten (10) years at a monthly amortization of P4,433.65 including
principal and interest, and that any installment or amortization that remains due and unpaid shall bear interest at
the rate of 9%/12% per month. The Office of the Economic Coordinator, in a 2nd Indorsement dated March 26,
1962, further reduced the approved amount to P295,000.00. On April 4, 1962, the Medinas accepting the reduced
amount, executed a promissory note and a real estate mortgage in favor of GSIS. On May 29, 1962, the GSIS, and
on June 6, 1962, the Office of the Economic Coordinator, upon request of the Medinas, both approved the
restoration of the amount of P350,000.00 (P295,000.00 + P55,000.00) originally approved by the GSIS. This
P350,000.00 loan was denominated by the GSIS as Account No. 31055.
On July 6, 1962, the Medinas executed in favor of the GSIS an Amendment of Real Estate Mortgage, the pertinent
portion of which reads:
WHEREAS, on the 4th day of April, 1962, the Mortgagor executed signed and delivered a real estate
mortgage to and in favor of the Mortgagee on real estate properties located in the City of Manila, ... to
secure payment to the mortgages of a loan of Two Hundred Ninety Five Thousand Pesos
(P295,000.00) Philippine Currency, granted by the mortgagee to the Mortgagors, ...;
WHEREAS, the parties herein have agreed as they hereby agree to increase the aforementioned
loan from Two Hundred Ninety Five Thousand Pesos (P295,000.00) to Three Hundred Fifty
Thousand Pesos (P350,000.00), Philippine Currency;
NOW, THEREFORE, for and in consideration of the foregoing premises, the aforementioned parties
have amended and by these presents do hereby amend the said mortgage dated April 4, 1962,
mentioned in the second paragraph hereof by increasing the loan from Two Hundred Ninety Five
Thousand Pesos (P295,000.00) to Three Hundred Fifty Thousand Pesos (P350,000.00) subject to
this additional condition.
(1) That the mortgagor shall pay to the system P4,433.65 monthly including principal and interest.
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It is hereby expressly understood that with the foregoing amendment, all other terms and conditions of
the said real estate mortgage dated April 4, 1962 insofar as they are not inconsistent herewith, are
hereby confirmed, ratified and continued in full force and effect and that the parties thereto agree that
this amendment be an integral part of said real estate mortgage. (Rollo, p. 153-154).
Upon application by the Medinas, the GSIS Board of Trustees adopted Resolution No. 121 on January 18, 1963,
as amended by Resolution No. 348 dated February 25, 1963, approving an additional loan of P230,000.00 in
favor of the Medinas on the security of the same mortgaged properties and the additional properties covered by
TCT Nos. 49234, 49235 and 49236, to bear interest at 9% per annum compounded monthly and repayable in ten
years. This additional loan of P230,000.00 was denominated by the GSIS as Account No. 31442.
On March 18, 1963, the Economic Coordinator thru the Auditor General interposed no objection thereto, subject
to the conditions of Resolution No. 121 as amended by Resolution No. 348 of the GSIS.
Beginning 1965, the Medinas having defaulted in the payment of the monthly amortization on their loan, the GSIS
imposed 9%/12% interest on an installments due and unpaid. In 1967, the Medinas began defaulting in the
payment of fire insurance premiums.
On May 3, 1974, the GSIS notified the Medinas that they had arrearages in the aggregate amount of P575,652.42
as of April 18, 1974 (Exhibit 9, p. 149, Joint Record on Appeal, Rollo, p. 79), and demanded payment within seven
(7) days from notice thereof, otherwise, it would foreclose the mortgage.
On April 21, 1975, the GSIS filed an Application for Foreclosure of Mortgage with the Sheriff of the City of Manila
(Exhibit "22," pp. 63 and 149; Rollo, p. 79). On June 30, 1975, the Medinas filed with the Court of First Instance of
Manila a complaint, praying, among other things, that a restraining order or writ of preliminary injunction be issued
to prevent the GSIS and the Sheriff of the City of Manila from proceeding with the extra-judicial foreclosure of their
mortgaged properties (CFI Decision, p. 121; Rollo, p. 79). However, in view of Section 2 of Presidential Decree No.
385, no restraining order or writ of preliminary injunction was issued by the trial court (CFI Decision, p. 212; Rollo,
p. 79). On April 25, 1975, the Medinas made a last partial payment in the amount of P209,662.80.
Under a Notice of Sale on Extra-Judicial Foreclosure dated June 18, 1975, the real properties of the Medinas
covered by Transfer Certificates of Title Nos. 32231, 43527, 51394, 58626, 60534, 63304, 67550, 67551 and
67552 of the Registry of Property of the City of Manila were sold at public auction to the GSIS as the highest
bidder for the total amount of P440,080.00 on January 12, 1976, and the corresponding Certificate of Sale was
executed by the Sheriff of Manila on January 27, 1976 (CFI Decision, pp. 212-213; Rollo, p. 79).
On January 30, 1976, the Medinas filed an Amended Complaint with the trial court, praying for (a) the declaration
of nullity of their two real estate mortgage contracts with the GSIS as well as of the extra-judicial foreclosure
proceedings; and (b) the refund of excess payments, plus damages and attorney's fees (CFI Decision, p. 213;
Rollo, p. 79).
On March 19, 1976, the GSIS filed its Amended Answer (Joint Record on Appeal, pp. 99-105; Rollo, p. 79). After
trial, the trial court rendered a Decision dated January 21, 1977 (Joint Record on Appeal, pp. 210-232), the
pertinent dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered declaring the extra-judicial foreclosure conducted by the
Sheriff of Manila of real estate mortgage contracts executed by plaintiffs on April 4, 1962, as
amended on July 6, 1962, and February 17, 1963, null and void and the Sheriff's Certificate of Sale
dated January 27, 1976, in favor of the GSIS of no legal force and effect; and directing plaintiffs to
pay the GSIS the sum of P1,611.12 in full payment of their obligation to the latter with interest of 9%
per annum from December 11, 1975, until fully paid.
Dissatisfied with the said judgment, both parties appealed with the Court of Appeals.
The Court of Appeals, in a Decision promulgated on January 18, 1980 (Record, pp. 72-77), ruled in favor of the
Medinas —
WHEREFORE, the defendant GSIS is ordered to reimburse the amount of P9,580.00 as overpayment
and to pay plaintiffs P3,000.00 and Pl,000.00 as attorney's fees and litigation expenses, respectively.
With these modifications, the judgment appealed from is AFFIRMED in all other respects, with costs
against defendant GSIS."
Hence this petition.
The Second Division of this Court, in a Resolution dated April 25, 1980 (Rollo, p.. 88), resolved to deny the
petition for lack of merit.
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Petitioner filed on June 26, 1980 a Motion for Reconsideration dated June 17, 1980 (Rollo, pp. 95-103), of the
above-stated Resolution and respondents in a Resolution dated July 9, 1980 (Rollo, p. 105), were required to
comment thereon which comment they filed on August 6, 1980. (Rollo, pp. 106-116).
The petition was given due course in the Resolution dated July 6, 1981 (Rollo, p. 128). Petitioner filed its brief on
November 26, 1981 (Rollo, pp. 147-177); while private respondents filed their brief on January 27, 1982 (Rollo,
pp. 181-224), and the case was considered submitted for decision in the Resolution of July 19, 1982 (Rollo, p.
229).
The issues in this case are:
1. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT THE AMENDMENT OF
REAL ESTATE MORTGAGE DATED JULY 6, 1962 SUPERSEDED THE MORTGAGE CONTRACT
DATED APRIL 4, 1962, PARTICULARLY WITH RESPECT TO COMPOUNDING OF INTEREST;
2. WHETHER OR NOT THE COURT OF APPEALS ERRED IN SUSTAINING THE RESPONDENT-

APPELLEE SPOUSES MEDINA'S CLAIM OR OVERPAYMENT, BY CREDITING THE FIRE INSURANCE
PROCEEDS IN THE SUM OF P11,152.02 TO THE TOTAL PAYMENT MADE BY SAID SPOUSES AS
OF DECEMBER 11, 1975;
3. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THAT THE INTEREST RATES
ON THE LOAN ACCOUNTS OF RESPONDENT-APPELLEE SPOUSES ARE USURIOUS;
4. WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE ANNULMENT OF THE
SUBJECT EXTRAJUDICIAL FORECLOSURE AND SHERIFF'S CERTIFICATE OF SALE; AND
5. WHETHER OR NOT THE COURT OF APPEALS ERRED IN HOLDING THE GSIS LIABLE FOR
ATTORNEY'S FEES, EXPENSES OF LITIGATION AND COSTS.
The petition is impressed with merit.
There is no dispute as to the facts of the case. By agreement of the parties the issues in this case are limited to
the loan of P350,000.00 denominated as Account No. 31055 (Rollo, p. 79; Joint Record on Appeal, p. 129) subject
of the Amendment of Real Mortgage dated July 6, 1962, the interpretation of which is the major issue in this case.
GSIS claims that the amendment of the real estate mortgage did not supersede the original mortgage contract
dated April 4, 1962 which was being amended only with respect to the amount secured thereby, and the amount of
monthly amortizations. All other provisions of aforesaid mortgage contract including that on compounding of
interest were deemed rewritten and thus binding on and enforceable against the respondent spouses. (Rollo, pp.
162-166).
Accordingly, payments made by the Medinas in the total amount of P991,845.53 was applied as follows: the
amount of P600,495.51 to Account No. 31055, P466,965.31 of which to interest and P133,530.20 to principal and
P390,845.66 to Account No. 31442, P230,774.29 to interest and P159,971.37 to principal. (Joint Record on
Appeal, p. 216; Rollo, p. 79).
On the other hand the Medinas maintain that there is no express stipulation on compounded interest in the
amendment of mortgage contract of July 6, 1962 so that the compounded interest stipulation in the original
mortgage contract of April 4, 1962 which has been superseded cannot be enforced in the later mortgage. (Rollo,
p. 185).
Hence the Medinas claim an overpayment in Account No. 31055. The application of their total payment in the
amount of P991,845.53 as computed by the trial court and by the Court of Appeals is as follows:
... It appearing and so the parties admit in their own exhibits that as of December 11, 1975, plaintiffs
had paid a total of P991,241.17 excluding fire insurance, P532,038.00 of said amount should have
been applied to the full payment of Acct. No. 31055 and the balance of P459,203.17 applied to the
payment of Acct. No. 31442.
According to the computation of the GSIS (Exhibit C, also Exhibit 38) the total amounts, collected on
Acct. No. 31442 as of December 11, 1975 total P390,745.66 thus leaving an unpaid balance of
P70,028.63. The total amount plaintiffs should pay on said account should therefore be P460,774.29.
Deduct this amount from P459,163.17 which has been shown to be the difference between the total
payments made by plaintiffs to the G.S.I.S. as of December 11, 1975 and the amount said plaintiffs
should pay under their Acct. No. 31055, there remains an outstanding balance of P1,611.12. This
amount represents the balance of the obligation of the plaintiffs to the G.S.I.S. on Acct. No. 31442 as
of December 11, 1975." (Decision, Civil Case No. 98390; Joint Record on Appeal, pp. 227-228; Rollo,
p. 79).
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To recapitulate, the difference in the computation lies in the inclusion of the compounded interest as demanded by
the GSIS on the one hand and the exclusion thereof, as insisted by the Medinas on the other.
It is a basic and fundamental rule in the interpretation of contract that if the terms thereof are clear and leave no
doubt as to the intention of the contracting parties, the literal meaning of the stipulations shall control but when the
words appear contrary to the evident intention of the parties, the latter shall prevail over, the former. In order to
judge the intention of the parties, their contemporaneous and subsequent acts shall be principally considered. (Sy
v. Court of Appeals, 131 SCRA 116; July 31, 1984).
There appears no ambiguity whatsoever in the terms and conditions of the amendment of the mortgage contract
herein quoted earlier. On the contrary, an opposite conclusion cannot be otherwise but absurd.
As correctly stated by the GSIS in its brief (Rollo, pp. 162166), a careful perusal of the title, preamble and body of
the Amendment of Real Estate Mortgage dated July 6, 1962, taking into account the prior, contemporaneous, and
subsequent acts of the parties, ineluctably shows that said Amendment was never intended to completely
supersede the mortgage contract dated April 4, 1962.
First, the title "Amendment of Real Estate Mortgage" recognizes the existence and effectivity of the previous
mortgage contract. Second, nowhere in the aforesaid Amendment did the parties manifest their intention to
supersede the original contract. On the contrary in the WHEREAS clauses, the existence of the previous mortgage
contract was fully recognized and the fact that the same was just being amended as to amount and amortization is
fully established as to obviate any doubt. Third, the Amendment of Real Estate Mortgage dated July 6, 1962 does
not embody the act of conveyancing the subject properties by way of mortgage. In fact the intention of the parties
to be bound by the unaffected provisions of the mortgage contract of April 4, 1962 expressed in unmistakable
language is clearly evident in the last provision of the Amendment of Real Estate Mortgage dated July 6, 1962
which reads:
It is hereby expressly understood that with the foregoing amendment, all other terms and conditions of
the said real estate mortgage dated April 4, 1962, insofar as they are not inconsistent herewith, are
hereby confirmed, ratified and continued to be in full force and effect, and that the parties hereto
agree that the amendment be an integral part of said real estate mortgage. (Emphasis supplied).
A review of prior, contemporaneous, and subsequent acts supports the conclusion that both contracts are fully
subsisting insofar as the latter is not inconsistent with the former. The fact is the GSIS, as a matter of policy,
imposes uniform terms and conditions for all its real estate loans, particularly with respect to compounding of
interest. As shown in the case at bar, the original mortgage contract embodies the same terms and conditions as
in the additional loan denominated as Account No. 31442 while the amendment carries the provision that it shall
be subject to the same terms and conditions as the real estate mortgage of April 4, 1962 except as to amount and
amortization.
Furthermore, it would be contrary to human experience and to ordinary practice for the mortgagee to impose less
onerous conditions on an increased loan by the deletion of compound interest exacted on a lesser loan.
II
There is an obvious error in the ruling of the Court of Appeals in its Decision dated January 18, 1980, which reads:
... We agree that plaintiff should be credited with P11,152.02 of the fire insurance proceeds as the
same is admitted in paragraph (4) of its Answer and should be added to their payments. (par. 13).
Contrary thereto, paragraph 4 of the Answer of the GSIS states:
That they (GSIS) specifically deny the allegations in Paragraph 11, the truth being that plaintiffs are
not entitled to a credit of P19,381.07 as fire insurance proceeds since they were only entitled to, and
were credited with, the amount of P11,152.02 as proceeds of their fire insurance policy. (par. 4,
Amended Answer).
As can be gleaned from the foregoing, petitioner-appellant GSIS had already credited the amount of P11,152.02.
Thus, when the Court of Appeals made the aforequoted ruling, it was actually doubly crediting the amount of
P11,152.02 which had been previously credited by petitioner-appellant GSIS (Rollo, pp. 170-171).
III.
As to whether or not the interest rates on the loan accounts of the Medinas are usurious, it has already been
settled that the Usury Law applies only to interest by way of compensation for the use or forbearance of money
(Lopez v. Hernaez, 32 Phil. 631; Bachrach Motor Co. v. Espiritu, 52 Phil. 346; Equitable Banking Corporation v.
Liwanag, 32 SCRA 293, March 30, 1970). Interest by way of damages is governed by Article 2209 of the Civil
Code of the Philippines which provides:
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Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon,...
In the Bachrach case (supra) the Supreme Court ruled that the Civil Code permits the agreement upon a penalty
apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as
such the two are different and distinct things which may be demanded separately. Reiterating the same principle in
the later case of Equitable Banking Corp. (supra), where this Court held that the stipulation about payment of such
additional rate partakes of the nature of a penalty clause, which is sanctioned by law.
IV.
Based on the finding that the GSIS had the legal right to impose an interest 9% per annum, compounded monthly,
on the loans of the Medinas and an interest of 9%/12% per annum on all due and unpaid amortizations or
installments, there is no question that the Medinas failed to settle their accounts with the GSIS which as computed
by the latter reached an outstanding balance of P630,130.55 as of April 12, 1975 and that the GSIS had a perfect
right to foreclose the mortgage.
In the same manner, there is obvious error in invalidating the extra-judicial foreclosure on the basis of a
typographical error in the Sheriff's Certificate of Sale which stated that the mortgage was foreclosed on May 17,
1963 instead of February 17, 1963.
There is merit in GSIS' contention that the Sheriff's Certificate of Sale is merely provisional in character and is not
intended to operate as an absolute transfer of the subject property, but merely to Identify the property, to show the
price paid and the date when the right of redemption expires (Section 27, Rule 39, Rules of Court, Francisco, The
Revised Rules of Court, 1972 Vol., IV-B, Part I, p. 681). Hence the date of the foreclosed mortgage is not even a
material content of the said Certificate. (Rollo, p. 174).
V.
PREMISES CONSIDERED, the decision of the Court of Appeals, in CA-G.R. No. 62541-R Medina, et al. v.
Government Service Insurance System et al., is hereby REVERSED and SET ASIDE, and a new one is hereby
RENDERED, affirming the validity of the extra-judicial foreclosure of the real estate mortgages of the respondent-
appellee spouses Medina dated April 4, 1962, as amended on July 6, 1962, and February 17, 1963.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Gutierrez, Jr., JJ., concur.
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Custom Search

SUPREME COURT
Manila
EN BANC
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,

vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.
VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of
goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the customs
broker; (b) whether the payment of legal interest on an award for loss or damage is to be computed from the time
the complaint is filed or from the date the decision appealed from is rendered; and (c) whether the applicable rate
of interest, referred to above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that
have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who
paid the consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery
vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No. 81/01177
for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which
damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant
Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey."
Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the shipment
to the consignee's warehouse. The latter excepted to one drum which contained spillages, while the
rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).
Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered
losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented
against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95
under the aforestated marine insurance policy, so that it became subrogated to all the rights of action
of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking check,
Exhs. M, N, and O). (pp. 85-86, Rollo.)
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There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
Defendants filed their respective answers, traversing the material allegations of the complaint
contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in
good order from the vessel unto the custody of Metro Port Service so that any damage/losses
incurred after the shipment was incurred after the shipment was turned over to the latter, is no longer
its liability (p. 17, Record); Metroport averred that although subject shipment was discharged unto its
custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage alleged that
plaintiff has no cause of action against it, not having negligent or at fault for the shipment was already
in damage and bad order condition when received by it, but nonetheless, it still exercised extra
ordinary care and diligence in the handling/delivery of the cargo to consignee in the same condition
shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of

defendants (in whose respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the losses/damages (see
plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's
Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained losses/damages.
The two drums were shipped in good order and condition, as clearly shown by the Bill of
Lading and Commercial Invoice which do not indicate any damages drum that was
shipped (Exhs. B and C). But when on December 12, 1981 the shipment was delivered to
defendant Metro Port Service, Inc., it excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the losses/damages were

sustained while in the respective and/or successive custody and possession of
defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh. G), with
its "Additional Survey Notes", are considered. In the latter notes, it is stated that when the
shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on
December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged
condition, covered by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report
further states that when defendant Allied Brokerage withdrew the shipment from
defendant arrastre operator's custody on January 7, 1982, one drum was found opened
without seal, cello bag partly torn but contents intact. Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one
drum was found with adulterated/faked contents. It is obvious, therefore, that these
losses/damages occurred before the shipment reached the consignee while under the
successive custodies of defendants. Under Art. 1737 of the New Civil Code, the common
carrier's duty to observe extraordinary diligence in the vigilance of goods remains in full
force and effect even if the goods are temporarily unloaded and stored in transit in the
warehouse of the carrier at the place of destination, until the consignee has been
advised and has had reasonable opportunity to remove or dispose of the goods (Art.
1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad
Order Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was
found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until fully paid (the liability of
defendant Eastern Shipping, Inc. shall not exceed US$500 per case or the CIF value of
the loss, whichever is lesser, while the liability of defendant Metro Port Service, Inc. shall
be to the extent of the actual invoice value of each package, crate box or container in no
case to exceed P5,000.00 each, pursuant to Section 6.01 of the Management Contract);
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2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant

Allied Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the shipment sustained damage while in the successive
possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount it
paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion on
the part of the appellate court when —
I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE ARRASTRE
OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE RESPONDENT AS GRANTED
IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT SHOULD
COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE OF TWELVE
PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF THE TRIAL COURT
AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE RESPONDENT'S CLAIM BEING
INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel.
Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the
articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for
transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person entitled
to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs. Dollar
Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition, a
presumption arises against the carrier of its failure to observe that diligence, and there need not be an express
finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139
SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases, enumerated in Article 17341 of the Civil Code, are
exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the
goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port
Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable in solidum,
thus:
The legal relationship between the consignee and the arrastre operator is akin to that of a depositor
and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between
the consignee and the common carrier is similar to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the
ARRASTRE to take good care of the goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in good
condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker are
themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in a
given case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which,
being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held liable in
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this particular case. A factual finding of both the court a quo and the appellate court, we take note, is that "there is
sufficient evidence that the shipment sustained damage while in the successive possession of appellants" (the
herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole
petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing remark.
Let us first see a chronological recitation of the major rulings of this Court:
The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and
pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its
complaint that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This
demand, however, was neither established in its totality nor definitely ascertained. In the stipulation of facts later
entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court rendered
judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to pay appellee
Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28
December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of legal interest. In
sustaining the appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal
rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial
court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with reasonable
certainty." And as was held by this Court in Rivera vs. Perez,4 L-6998, February 29, 1956, if the suit
were for damages, "unliquidated and not known until definitely ascertained, assessed and determined
by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447; Lichauco v.
Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to
Person and Loss of Property." After trial, the lower court decreed:
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:
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 III 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. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained the
trial court in adjudging legal interest from the filing of the complaint until fully paid. When the appellate
court's decision became final, the case was remanded to the lower court for execution, and this was when
the trial court issued its assailed resolution which applied the 6% interest per annum prescribed in Article
2209 of the Civil Code. In their petition for review on certiorari, the petitioners contended that Central Bank
Circular
No. 416, providing thus —
By virtue of the authority granted to it under Section 1 of Act 2655, as amended, 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%) percent per annum. This Circular
shall take effect immediately. (Emphasis found in the text) —
should have, instead, been applied. This Court6 ruled:
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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.
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 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 rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,7 promulgated on 28 July 1986. The
case was for damages occasioned by an injury to person and loss of property. The trial court awarded private
respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest
thereon from the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this Court8
modified the interest award from 12% to 6% interest per annum but sustained the time computation thereof, i.e.,
from the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages arising from the
collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the
date of the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by the
lower court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review, the
case, on 03 October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing, as
We do hereby impose, upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to
cover all damages (with the exception to attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this
decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant
and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)
A motion for reconsideration was filed by United Construction, contending that "the interest of twelve (12%)
per cent per annum imposed on the total amount of the monetary award was in contravention of law." The
Court10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases and, in its
resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular No.
416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or credit;
and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance
of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA 160-161 [1986];
Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case, there is neither a
loan or a forbearance, but then no interest is actually imposed provided the sums referred to in the
judgment are paid upon the finality of the judgment. It is delay in the payment of such final judgment,
that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum,
from the filing of the complaint until paid; in other words, as part of the judgment for damages. Clearly,
they are not applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court11 was a petition for
review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate Court reducing
the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and P100,000.00,
respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded by the trial court,
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i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest thereon at 12% per
annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while recognizing
the right of the private respondent to recover damages, held the award, however, for moral damages by the trial
court, later sustained by the IAC, to be inconceivably large. The Court12 thus set aside the decision of the
appellate court and rendered a new one, "ordering the petitioner to pay private respondent the sum of One
Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13 which arose from a breach of
employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court moral and
exemplary damages without, however, providing any legal interest thereon. When the decision was appealed to
the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except
defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in the
dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory
damages, with interest at the legal rate from the date of the filing of the complaint until fully paid
(Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial court,
and an entry of judgment was made. The writ of execution issued by the trial court directed that only
compensatory damages should earn interest at 6% per annum from the date of the filing of the complaint.
Ascribing grave abuse of discretion on the part of the trial judge, a petition for certiorari assailed the said
order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate" from
the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not apply
to actions based on a breach of employment contract like the case at bar. (Emphasis supplied)
The Court reiterated that the 6% interest per annum on the damages should be computed from the time the
complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation vs. Angas,14
decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a hearing on the
complaints for eminent domain, the trial court ordered the petitioner to pay the private respondents certain sums
of money as just compensation for their lands so expropriated "with legal interest thereon . . . until fully paid."
Again, in applying the 6% legal interest per annum under the Civil Code, the Court15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but
expropriation of certain parcels of land for a public purpose, the payment of which is without
stipulation regarding interest, and the interest adjudged by the trial court is in the nature of indemnity
for damages. The legal interest required to be paid on the amount of just compensation for the
properties expropriated is manifestly in the form of indemnity for damages for the delay in the
payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower court
sought to be enforced in this case is interest by way of damages, and not by way of earnings from
loans, etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified into
two groups according to the similarity of the issues involved and the corresponding rulings rendered by the court.
The "first group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines v. Cruz
(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance Company v.
Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express International v.
Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12%
(under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been a
consistent holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans or
forbearance16 of money, goods or credits, as well as to judgments involving such loan or forbearance of money,
goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves the
payment of indemnities in the concept of damage arising from the breach or a delay in the performance of
obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6%
interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully
paid.
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The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per annum,17
depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one of indemnity
for damage, on the other hand. Unlike, however, the "first group" which remained consistent in holding that the
running of the legal interest should be from the time of the filing of the complaint until fully paid, the "second
group" varied on the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a quo,
explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained, assessed
and determined by the courts after proof,' then, interest 'should be from the date of the decision.'" American
Express International v. IAC, introduced a different time frame for reckoning the 6% interest by ordering it to be
"computed from the finality of (the) decision until paid." The Nakpil and Sons case ruled that 12% interest per
annum should be imposed from the finality of the decision until the judgment amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for different
applications, guided by the rule that the courts are vested with discretion, depending on the equities of each case,
on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to suggest
the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts18 is
breached, the contravenor can be held liable for damages.19 The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.20
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may have been stipulated in writing.21 Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded.22 In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 116923 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court24 at the rate of 6% per annum.25 No interest,
however, shall be adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty.26 Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the MODIFICATION that
the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%), shall be
imposed on such amount upon finality of this decision until the payment thereof.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason,
Puno and Kapunan, JJ., concur.
Mendoza, J., took no part.
#Footnotes
1 Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods,
unless the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
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(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.
2 28 SCRA 65.
3 Penned by Justice Conrado Sanchez, concurred in by Justices Jose B.L. Reyes, Arsenio Dizon,
Querube Makalintal, Calixto Zaldivar, Enrique Fernando, Francisco Capistrano, Claudio Teehankee
and Antonio Barredo, Chief Justice Roberto Concepcion and Justice Fred Ruiz Castro were on official
leave.
4 The correct caption of the case is "Claro Rivera vs. Amadeo Matute, L-6998,
29 February 1956," 98 Phil. 516.
5 139 SCRA 260, 265.
6 Penned by Justice Serafin Cuevas, concurred in by Justices Hermogenes Concepcion, Jr., Vicente
Abad Santos, Ameurfina Melencio-Herrera, Venicio Escolin, Lorenzo Relova, Hugo Gutierrez, Jr.,
Buenaventura de la Fuente, Nestor Alampay and Lino Patajo. Justice Ramon Aquino concurred in the
result. Justice Efren Plana filed a concurring and dissenting opinion, concurred in by Justice Claudio
Teehankee while Chief Justice Felix Makasiar concurred with the separate opinion of Justice Plana.
7 143 SCRA 158.
8 Penned by then Justice, now Chief Justice, Andres Narvasa, concurred in by Justices Pedro Yap,
Ameurfina Melencio-Herrera, Isagani A. Cruz and Edgardo Paras.
9 160 SCRA 334.
10 Penned by Justice Edgardo Paras, with the concurrence of Justices Marcelo Fernan, Teodoro
Padilla, Abdulwahid Bidin, and Irene Cortes. Justice Hugo Gutierrez, Jr., took no part because he was
the ponente in the Court of Appeals.
11 167 SCRA 209.
12 Rendered per curiam with the concurrence of then Chief Justice Marcelo Fernan, Justices Andres
Narvasa, Isagani A. Cruz, Emilio Gancayco, Teodoro Padilla, Abdulwahid Bidin, Abraham Sarmiento,
Irene Cortes, Carolina Griño-Aquino, Leo Medialdea and Florenz Regalado. Justices Ameurfina
Melencio-Herrera and Hugo Gutierrez, Jr., took no part because they did not participate in the
deliberations. Justices Edgardo Paras and Florentino Feliciano also took no part.
13 170 SCRA 461.
14 208 SCRA 542.
15 Penned by Justice Edgardo Paras with the concurrence of Justices Ameurfina Melencio-Herrera,
Teodoro Padilla, Florenz Regalado and Rodolfo Nocon.
16 Black's Law Dictionary (1990 ed., 644) citing the case of Hafer v. Spaeth,
22 Wash. 2d 378, 156 P.2d 408, 411 defines the word forbearance, within the context of usury law, as
a contractual obligation of lender or creditor to refrain, during given period of time, from requiring
borrower or debtor to repay loan or debt then due and payable.
17 In the case of Malayan Insurance, the application of the 6% and 12% interest per annum has no
bearing considering that this case was decided upon before the issuance of Circular No. 416 by the
Central Bank.
18 Art. 1157. Obligations arise from.
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
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(4) Acts or omissions punished by law; and
(5) Qausi-delicts."
19 Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages.
20 Art. 2195. The provisions of this Title (on Damages) shall be respectively applicable to all
obligations mentioned in article 1157.
21 Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
22 Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent upon this point.
23 Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
"However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
"In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. From the moment one of
the parties fulfills his obligation, delay by the other begins."
24 Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for
breach of contract.
Art. 2211. In crimes and quasi-delicts, interest as a part of the damages may, in a proper case, be
adjudicated in the discretion of the court.
25 Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum.
26 Art. 2213. Interest cannot be recovered upon unliquidated claims or damages, except when the
demand can be established with reasonable certainty.
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THIRD DIVISION
SEBASTIAN SIGA-AN, G.R. No. 173227

Petitioner,
Present:
YNARES-SANTIAGO,
Chairperson,
AUSTRIA-MARTINEZ,
-versus CHICO-NAZARIO,
NACHURA, and
LEONARDO-DE CASTRO,* JJ.
Promulgated:
ALICIA VILLANUEVA,
Respondent. January 20, 2009
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CHICO-NAZARIO, J.:
[1]
Before Us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
[2] [3]
seeking to set aside the Decision, dated 16 December 2005, and Resolution, dated 19 June
[4]
2006 of the Court of Appeals in CA-G.R. CV No. 71814, which affirmed in toto the Decision,
dated 26 January 2001, of the Las Pinas City Regional Trial Court, Branch 255, in Civil Case No.
LP-98-0068.
The facts gathered from the records are as follows:
[5]
On 30 March 1998, respondent Alicia Villanueva filed a complaint for sum of money
against petitioner Sebastian Siga-an before the Las Pinas City Regional Trial Court (RTC), Branch
http://sc.judiciary.gov.ph/jurisprudence/2009/jan2009/173227.htm 1/13
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255, docketed as Civil Case No. LP-98-0068. Respondent alleged that she was a businesswoman
engaged in supplying office materials and equipments to the Philippine Navy Office (PNO) located at
Fort Bonifacio, Taguig City, while petitioner was a military officer and comptroller of the PNO from
1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the PNO and
offered to loan her the amount of P540,000.00. Since she needed capital for her business
transactions with the PNO, she accepted petitioners proposal. The loan agreement was not reduced
[6]
in writing. Also, there was no stipulation as to the payment of interest for the loan.
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as partial

payment of the loan. On 31 October 1993, she issued another check in the amount of P200,000.00
to petitioner as payment of the remaining balance of the loan. Petitioner told her that since she paid a
total amount of P700,000.00 for the P540,000.00 worth of loan, the excess amount of P160,000.00
would be applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner
pestered her to pay additional interest. Petitioner threatened to block or disapprove her transactions
with the PNO if she would not comply with his demand. As all her transactions with the PNO were
subject to the approval of petitioner as comptroller of the PNO, and fearing that petitioner might
block or unduly influence the payment of her vouchers in the PNO, she conceded. Thus, she paid
additional amounts in cash and checks as interests for the loan. She asked petitioner for receipt for
the payments but petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid to petitioner for
[7]
the loan and interest accumulated to P1,200,000.00.
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest on the
loan despite absence of agreement to that effect. Her lawyer told her that petitioner could not validly
collect interest on the loan because there was no agreement between her and petitioner regarding
payment of interest. Since she paid petitioner a total amount of P1,200,000.00 for the P540,000.00
worth of loan, and upon being advised by her lawyer that she made overpayment to petitioner, she
sent a demand letter to petitioner asking for the return of the excess amount of P660,000.00.
[8]
Petitioner, despite receipt of the demand letter, ignored her claim for reimbursement.
Respondent prayed that the RTC render judgment ordering petitioner to pay respondent (1)
P660,000.00 plus legal interest from the time of demand; (2) P300,000.00 as moral damages; (3)
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P50,000.00 as exemplary damages; and (4) an amount equivalent to 25% of P660,000.00 as

[9]
attorneys fees.
[10]
In his answer to the complaint, petitioner denied that he offered a loan to respondent. He
averred that in 1992, respondent approached and asked him if he could grant her a loan, as she
needed money to finance her business venture with the PNO. At first, he was reluctant to deal with
respondent, because the latter had a spotty record as a supplier of the PNO. However, since
respondent was an acquaintance of his officemate, he agreed to grant her a loan. Respondent paid
[11]
the loan in full.
Subsequently, respondent again asked him to give her a loan. As respondent had been able to
pay the previous loan in full, he agreed to grant her another loan. Later, respondent requested him to
restructure the payment of the loan because she could not give full payment on the due date. He
acceded to her request. Thereafter, respondent pleaded for another restructuring of the payment of
the loan. This time he rejected her plea. Thus, respondent proposed to execute a promissory note
wherein she would acknowledge her obligation to him, inclusive of interest, and that she would issue
several postdated checks to guarantee the payment of her obligation. Upon his approval of
respondents request for restructuring of the loan, respondent executed a promissory note dated 12
September 1994 wherein she admitted having borrowed an amount of P1,240,000.00, inclusive of
interest, from petitioner and that she would pay said amount in March 1995. Respondent also issued
to him six postdated checks amounting to P1,240,000.00 as guarantee of compliance with her
obligation. Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to do so. Hence, he
filed criminal cases for Violation of the Bouncing Checks Law (Batas Pambansa Blg. 22) against
respondent. The cases were assigned to the Metropolitan Trial Court of Makati City, Branch 65
[12]
(MeTC).
Petitioner insisted that there was no overpayment because respondent admitted in the latters
promissory note that her monetary obligation as of 12 September 1994 amounted to P1,240,000.00
inclusive of interests. He argued that respondent was already estopped from complaining that she
should not have paid any interest, because she was given several times to settle her obligation but
failed to do so. He maintained that to rule in favor of respondent is tantamount to concluding that the
loan was given interest-free. Based on the foregoing averments, he asked the RTC to dismiss
respondents complaint.
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After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent made an
overpayment of her loan obligation to petitioner and that the latter should refund the excess amount
to the former. It ratiocinated that respondents obligation was only to pay the loaned amount of
P540,000.00, and that the alleged interests due should not be included in the computation of
respondents total monetary debt because there was no agreement between them regarding payment
of interest. It concluded that since respondent made an excess payment to petitioner in the amount
of P660,000.00 through mistake, petitioner should return the said amount to respondent pursuant to
[13]
the principle of solutio indebiti.
The RTC also ruled that petitioner should pay moral damages for the sleepless nights and
wounded feelings experienced by respondent. Further, petitioner should pay exemplary damages by
way of example or correction for the public good, plus attorneys fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions of law and
jurisprudence on the matter, judgment is hereby rendered in favor of the plaintiff and against the defendant as
follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal interest of 12% per
annum computed from 3 March 1998 until the amount is paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of P660,000.00 as attorneys
fees; and
[14]
(5) Ordering defendant to pay the costs of suit.
Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate court
promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED and the assailed
[15]
decision [is] AFFIRMED in toto.
11/9/2017 G.R. No. 173227
Petitioner filed a motion for reconsideration of the appellate courts decision but this was
[16]
denied. Hence, petitioner lodged the instant petition before us assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO INTEREST WAS DUE
TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF SOLUTIO
[17]
INDEBITI.
Interest is a compensation fixed by the parties for the use or forbearance of money. This is
referred to as monetary interest. Interest may also be imposed by law or by courts as penalty or
[18]
indemnity for damages. This is called compensatory interest. The right to interest arises only by
virtue of a contract or by virtue of damages for delay or failure to pay the principal loan on which
[19]
interest is demanded.
[20]
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates
that no interest shall be due unless it has been expressly stipulated in writing. As can be gleaned from
the foregoing provision, payment of monetary interest is allowed only if: (1) there was an express
stipulation for the payment of interest; and (2) the agreement for the payment of interest was reduced
in writing. The concurrence of the two conditions is required for the payment of monetary interest.
Thus, we have held that collection of interest without any stipulation therefor in writing is prohibited
[21]
by law.
It appears that petitioner and respondent did not agree on the payment of interest for the loan.
Neither was there convincing proof of written agreement between the two regarding the payment of
interest. Respondent testified that although she accepted petitioners offer of loan amounting to
P540,000.00, there was, nonetheless, no verbal or written agreement for her to pay interest on the
[22]
loan.
11/9/2017 G.R. No. 173227
[23]
Petitioner presented a handwritten promissory note dated 12 September 1994 wherein
respondent purportedly admitted owing petitioner capital and interest. Respondent, however,
explained that it was petitioner who made a promissory note and she was told to copy it in her own
handwriting; that all her transactions with the PNO were subject to the approval of petitioner as
comptroller of the PNO; that petitioner threatened to disapprove her transactions with the PNO if she
would not pay interest; that being unaware of the law on interest and fearing that petitioner would
make good of his threats if she would not obey his instruction to copy the promissory note, she
copied the promissory note in her own handwriting; and that such was the same promissory note
[24]
presented by petitioner as alleged proof of their written agreement on interest. Petitioner did not
rebut the foregoing testimony. It is evident that respondent did not really consent to the payment of
interest for the loan and that she was merely tricked and coerced by petitioner to pay interest. Hence,
it cannot be gainfully said that such promissory note pertains to an express stipulation of interest or
written agreement of interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that he and
respondent agreed on the payment of 7% rate of interest on the loan; that the agreed 7% rate of
interest was duly admitted by respondent in her testimony in the Batas Pambansa Blg. 22 cases he
filed against respondent; that despite such judicial admission by respondent, the RTC and the Court
of Appeals, citing Article 1956 of the Civil Code, still held that no interest was due him since the
agreement on interest was not reduced in writing; that the application of Article 1956 of the Civil
Code should not be absolute, and an exception to the application of such provision should be made
when the borrower admits that a specific rate of interest was agreed upon as in the present case; and
that it would be unfair to allow respondent to pay only the loan when the latter very well knew and
even admitted in the Batas Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on
[25]
the loan.
We have carefully examined the RTC Decision and found that the RTC did not make a ruling
therein that petitioner and respondent agreed on the payment of interest at the rate of 7% for the loan.
The RTC clearly stated that although petitioner and respondent entered into a valid oral contract of
loan amounting to P540,000.00, they, nonetheless, never intended the payment of interest thereon.
[26]
While the Court of Appeals mentioned in its Decision that it concurred in the RTCs ruling that
petitioner and respondent agreed on a certain rate of interest as regards the loan, we consider this as
merely an inadvertence because, as earlier elucidated, both the RTC and the Court of Appeals ruled
that petitioner is not entitled to the payment of interest on the loan. The rule is that factual findings of
11/9/2017 G.R. No. 173227
[27]
the trial court deserve great weight and respect especially when affirmed by the appellate court.
We found no compelling reason to disturb the ruling of both courts.
Petitioners reliance on respondents alleged admission in the Batas Pambansa Blg. 22 cases
that they had agreed on the payment of interest at the rate of 7% deserves scant consideration. In the
said case, respondent merely testified that after paying the total amount of loan, petitioner ordered
[28]
her to pay interest. Respondent did not categorically declare in the same case that she and
respondent made an express stipulation in writing as regards payment of interest at the rate of 7%.
As earlier discussed, monetary interest is due only if there was an express stipulation in writing for
the payment of interest.
There are instances in which an interest may be imposed even in the absence of express
stipulation, verbal or written, regarding payment of interest. Article 2209 of the Civil Code states that
if the obligation consists in the payment of a sum of money, and the debtor incurs delay, a legal
interest of 12% per annum may be imposed as indemnity for damages if no stipulation on the
payment of interest was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest
due shall earn legal interest from the time it is judicially demanded, although the obligation may be
silent on this point.
All the same, the interest under these two instances may be imposed only as a penalty or
damages for breach of contractual obligations. It cannot be charged as a compensation for the use
or forbearance of money. In other words, the two instances apply only to compensatory interest and
[29]
not to monetary interest. The case at bar involves petitioners claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it was not
duly proven that respondent defaulted in paying the loan. Also, as earlier found, no interest was due
on the loan because there was no written agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio indebiti does
not apply to the instant case. Thus, he cannot be compelled to return the alleged excess amount paid
[30]
by respondent as interest.
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has
been no stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be
11/9/2017 G.R. No. 173227
applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision
provides that if something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor
relationship is created under a quasi-contract whereby the payor becomes the creditor who then has
the right to demand the return of payment made by mistake, and the person who has no right to
receive such payment becomes obligated to return the same. The quasi-contract of solutio indebiti
harks back to the ancient principle that no one shall enrich himself unjustly at the expense of another.
[31]
The principle of solutio indebiti applies where (1) a payment is made when there exists no
binding relation between the payor, who has no duty to pay, and the person who received the
payment; and (2) the payment is made through mistake, and not through liberality or some other
[32]
cause. We have held that the principle of solutio indebiti applies in case of erroneous payment
[33]
of undue interest.
It was duly established that respondent paid interest to petitioner. Respondent was under no
duty to make such payment because there was no express stipulation in writing to that effect. There
was no binding relation between petitioner and respondent as regards the payment of interest. The
payment was clearly a mistake. Since petitioner received something when there was no right to
demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed by the
RTC and the Court of Appeals.
[34]
Records show that respondent received a loan amounting to P540,000.00 from petitioner.
Respondent issued two checks with a total worth of P700,000.00 in favor of petitioner as payment
[35] [36]
of the loan. These checks were subsequently encashed by petitioner. Obviously, there was
an excess of P160,000.00 in the payment for the loan. Petitioner claims that the excess of
P160,000.00 serves as interest on the loan to which he was entitled. Aside from issuing the said two
[37]
checks, respondent also paid cash in the total amount of P175,000.00 to petitioner as interest.
Although no receipts reflecting the same were presented because petitioner refused to issue such to
[38]
respondent, petitioner, nonetheless, admitted in his Reply-Affidavit in the Batas Pambansa Blg.
22 cases that respondent paid him a total amount of P175,000.00 cash in addition to the two checks.
Section 26 Rule 130 of the Rules of Evidence provides that the declaration of a party as to a relevant
11/9/2017 G.R. No. 173227
fact may be given in evidence against him. Aside from the amounts of P160,000.00 and P175,000.00
paid as interest, no other proof of additional payment as interest was presented by respondent. Since
we have previously found that petitioner is not entitled to payment of interest and that the principle of
solutio indebiti applies to the instant case, petitioner should return to respondent the excess amount
of P160,000.00 and P175,000.00 or the total amount of P335,000.00. Accordingly, the reimbursable
amount to respondent fixed by the RTC and the Court of Appeals should be reduced from
P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas Pambansa Blg.
22 against respondent. In the said cases, the MeTC found respondent guilty of violating Batas
Pambansa Blg. 22 for issuing five dishonored checks to petitioner. Nonetheless, respondents
conviction therein does not affect our ruling in the instant case. The two checks, subject matter of
this case, totaling P700,000.00 which respondent claimed as payment of the P540,000.00 worth of
loan, were not among the five checks found to be dishonored or bounced in the five criminal cases.
Further, the MeTC found that respondent made an overpayment of the loan by reason of the interest
[39]
which the latter paid to petitioner.
Article 2217 of the Civil Code provides that moral damages may be recovered if the party
underwent physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injury. Respondent testified that she
experienced sleepless nights and wounded feelings when petitioner refused to return the amount paid
as interest despite her repeated demands. Hence, the award of moral damages is justified. However,
its corresponding amount of P300,000.00, as fixed by the RTC and the Court of Appeals, is
exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs that assessment
of damages is left to the discretion of the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded should not be palpably excessive as to
[40]
indicate that it was the result of prejudice or corruption on the part of the trial court. To our
mind, the amount of P150,000.00 as moral damages is fair, reasonable, and proportionate to the
injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio indebiti,
exemplary damages may be imposed if the defendant acted in an oppressive manner. Petitioner acted
oppressively when he pestered respondent to pay interest and threatened to block her transactions
with the PNO if she would not pay interest. This forced respondent to pay interest despite lack of
agreement thereto. Thus, the award of exemplary damages is appropriate. The amount of P50,000.00
11/9/2017 G.R. No. 173227
imposed as exemplary damages by the RTC and the Court is fitting so as to deter petitioner and
[41]
other lenders from committing similar and other serious wrongdoings.
Jurisprudence instructs that in awarding attorneys fees, the trial court must state the factual,
[42]
legal or equitable justification for awarding the same. In the case under consideration, the RTC
stated in its Decision that the award of attorneys fees equivalent to 25% of the amount paid as
interest by respondent to petitioner is reasonable and moderate considering the extent of work
rendered by respondents lawyer in the instant case and the fact that it dragged on for several years.
[43]
Further, respondent testified that she agreed to compensate her lawyer handling the instant case
[44]
such amount. The award, therefore, of attorneys fees and its amount equivalent to 25% of the
amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the amount
refundable to respondent computed from 3 March 1998 until its full payment. This is erroneous.
[45]
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, that when an obligation, not
constituting a loan or forbearance of money is breached, an interest on the amount of damages
awarded may be imposed at the rate of 6% per annum. We further declared that when the judgment
of the court awarding a sum of money becomes final and executory, the rate of legal interest, whether
it is a loan/forbearance of money or not, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed equivalent to a forbearance of credit.
In the present case, petitioners obligation arose from a quasi-contract of solutio indebiti and
not from a loan or forbearance of money. Thus, an interest of 6% per annum should be imposed on
the amount to be refunded as well as on the damages awarded and on the attorneys fees, to be
[46]
computed from the time of the extra-judicial demand on 3 March 1998, up to the finality of this
Decision. In addition, the interest shall become 12% per annum from the finality of this Decision up
to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated 16
December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the amount of
P660,000.00 as refundable amount of interest is reduced to THREE HUNDRED THIRTY FIVE
THOUSAND PESOS (P335,000.00); (2) the amount of P300,000.00 imposed as moral damages is
11/9/2017 G.R. No. 173227
reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an interest of 6% per
annum is imposed on the P335,000.00, on the damages awarded and on the attorneys fees to be
computed from the time of the extra-judicial demand on 3 March 1998 up to the finality of this
Decision; and (4) an interest of 12% per annum is also imposed from the finality of this Decision up
to its satisfaction. Costs against petitioner.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice
WE CONCUR:
Associate Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice
TERESITA J. LEONARDO-DE CASTRO

Associate Justice
ATTESTATION
11/9/2017 Carpo vs Chua : 150773 : September 30, 2005 : J. Tinga : Second Division : Decision

SECOND DIVISION
SPOUSES DAVID B. CARPO G.R. Nos. 150773 &
and RECHILDA S. CARPO, 153599
Petitioners,
Present:

- versus - PUNO, J.,
Chairman,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
ELEANOR CHUA and TINGA, and
ELMA DY NG, CHICO-NAZARIO, JJ.
Respondents.
Promulgated:
September 30, 2005

x-------------------------------------------------------------------x

DECISION

TINGA, J.:

Before this Court are two consolidated petitions for review. The first, docketed
[1]
as G.R. No. 150773, assails the Decision of the Regional Trial Court (RTC),
Branch 26 of Naga City dated 26 October 2001 in Civil Case No. 99-4376. RTC
[2]
Judge Filemon B. Montenegro dismissed the complaint for annulment of real
estate mortgage and consequent foreclosure proceedings filed by the spouses David
B. Carpo and Rechilda S. Carpo (petitioners).

The second, docketed as G.R. No. 153599, seeks to annul the Court of Appeals
[3]
Decision dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of Appeals
Third Division annulled and set aside the orders of Judge Corazon A. Tordilla to
suspend the sheriffs enforcement of the writ of possession.

http://sc.judiciary.gov.ph/jurisprudence/2005/sep2005/150773.htm 1/15
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they
borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount of One
Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6)
months with an interest rate of six percent (6% ) per month. To secure the payment
of the loan, petitioners mortgaged their residential house and lot situated at San
Francisco, Magarao, Camarines Sur, which lot is covered by Transfer Certificate of
Title (TCT) No. 23180. Petitioners failed to pay the loan upon demand.
Consequently, the real estate mortgage was extrajudicially foreclosed and the
mortgaged property sold at a public auction on 8 July 1996. The house and lot was
awarded to respondents, who were the only bidders, for the amount of Three
Hundred Sixty-Seven Thousand Four Hundred Fifty-Seven Pesos and Eighty
Centavos (P367,457.80).

Upon failure of petitioners to exercise their right of redemption, a certificate of
sale was issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180
was cancelled and in its stead, TCT No. 29338 was issued in the name of
respondents.

Despite the issuance of the TCT, petitioners continued to occupy the said
house and lot, prompting respondents to file a petition for writ of possession with
the RTC docketed as Special Proceedings (SP) No. 98-1665. On 23 March 1999,
[4]
RTC Judge Ernesto A. Miguel issued an Order for the issuance of a writ of
possession.

On 23 July 1999, petitioners filed a complaint for annulment of real estate
mortgage and the consequent foreclosure proceedings, docketed as Civil Case No.
99-4376 of the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven
Thousand One Hundred Ninety-Seven Pesos and Twenty-Six Centavos
(P257,197.26) with the RTC.

Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon
motion on 3 August 1999, enjoining the enforcement of the writ of possession. In
[5]
an Order dated 6 January 2000, the RTC suspended the enforcement of the writ
of possession pending the final disposition of Civil Case No. 99-4376. Against this
Order, respondents filed a petition for certiorari and mandamus before the Court of
Appeals, docketed as CA-G.R. SP No. 57297.

During the pendency of the case before the Court of Appeals, RTC Judge
Filemon B. Montenegro dismissed the complaint in Civil Case No. 99-4376 on the
ground that it was filed out of time and barred by laches. The RTC proceeded from
the premise that the complaint was one for annulment of a voidable contract and
thus barred by the four-year prescriptive period. Hence, the first petition for review
now under consideration was filed with this Court, assailing the dismissal of the
complaint.

The second petition for review was filed with the Court after the Court of
Appeals on 30 April 2002 annulled and set aside the RTC orders in SP No. 98-1665
on the ground that it was the ministerial duty of the lower court to issue the writ of
possession when title over the mortgaged property had been consolidated in the
mortgagee.

This Court ordered the consolidation of the two cases, on motion of petitioners.

In G.R. No. 150773, petitioners claim that following the Courts ruling in Medel v.
[6]
Court of Appeals the rate of interest stipulated in the principal loan agreement is
clearly null and void. Consequently, they also argue that the nullity of the agreed
interest rate affects the validity of the real estate mortgage. Notably, while
petitioners were silent in their petition on the issues of prescription and laches on
which the RTC grounded the dismissal of the complaint, they belatedly raised the
matters in their Memorandum. Nonetheless, these points warrant brief comment.

On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not
commit any grave abuse of discretion when it issued the orders dated 3 August
1999 and 6 January 2000, and that these orders could not have been the proper
subjects of a petition for certiorari and mandamus. More accurately, the justiciable
issues before us are whether the Court of Appeals could properly entertain the
petition for certiorari from the timeliness aspect, and whether the appellate court
correctly concluded that the writ of possession could no longer be stayed.

We first resolve the petition in G.R. No. 150773.

Petitioners contend that the agreed rate of interest of 6% per month or 72%
per annum is so excessive, iniquitous, unconscionable and exorbitant that it
should have been declared null and void. Instead of dismissing their complaint,
they aver that the lower court should have declared them liable to respondents for
the original amount of the loan plus 12% interest per annum and 1% monthly
[7]
penalty charge as liquidated damages, in view of the ruling in Medel v. Court of
[8]
Appeals.

In Medel, the Court found that the interest stipulated at 5.5% per month or
66% per annum was so iniquitous or unconscionable as to render the stipulation
void.

Nevertheless, we find the interest at 5.5% per month, or 66% per annum,
stipulated upon by the parties in the promissory note iniquitous or unconscionable,
and, hence, contrary to morals (contra bonos mores), if not against the law. The
stipulation is void. The Court shall reduce equitably liquidated damages, whether
[9]
intended as an indemnity or a penalty if they are iniquitous or unconscionable.

In a long line of cases, this Court has invalidated similar stipulations on
interest rates for being excessive, iniquitous, unconscionable and exorbitant. In
[10]
Solangon v. Salazar, we annulled the stipulation of 6% per month or 72% per
[11]
annum interest on a P60,000.00 loan. In Imperial v. Jaucian, we reduced the
interest rate from 16% to 1.167% per month or 14% per annum. In Ruiz v. Court of
[12]
Appeals, we equitably reduced the agreed 3% per month or 36% per annum
interest to 1% per month or 12% per annum interest. The 10% and 8% interest
rates per month on a P1,000,000.00 loan were reduced to 12% per annum in
[13] [14]
Cuaton v. Salud. Recently, this Court, in Arrofo v. Quino, reduced the 7%
interest per month on a P15,000.00 loan amounting to 84% interest per annum to
18% per annum.

There is no need to unsettle the principle affirmed in Medel and like cases. From
that perspective, it is apparent that the stipulated interest in the subject loan is
excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of
contract principle embodied in Article 1306 of the Civil Code, contracting parties
may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy. In the ordinary course, the codal provision may be invoked
to annul the excessive stipulated interest.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per
annum. By the standards set in the above-cited cases, this stipulation is similarly
invalid. However, the RTC refused to apply the principle cited and employed in
Medel on the ground that Medel did not pertain to the annulment of a real estate
[15]
mortgage, as it was a case for annulment of the loan contract itself. The
question thus sensibly arises whether the invalidity of the stipulation on interest
carries with it the invalidity of the principal obligation.

The question is crucial to the present petition even if the subject thereof is not
the annulment of the loan contract but that of the mortgage contract. The
consideration of the mortgage contract is the same as that of the principal contract
from which it receives life, and without which it cannot exist as an independent
contract. Being a mere accessory contract, the validity of the mortgage contract
[16]
would depend on the validity of the loan secured by it.

Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to
the more reasonable rate of 12% per annum. The same remedial approach to the
wrongful interest rates involved was employed or affirmed by the Court in
Solangon, Imperial, Ruiz, Cuaton, and Arrofo.

The Courts ultimate affirmation in the cases cited of the validity of the principal
loan obligation side by side with the invalidation of the interest rates thereupon is
congruent with the rule that a usurious loan transaction is not a complete nullity
but defective only with respect to the agreed interest.

We are aware that the Court of Appeals, on certain occasions, had ruled that a
usurious loan is wholly null and void both as to the loan and as to the usurious
[17]
interest. However, this Court adopted the contrary rule,

[18]
as comprehensively discussed in Briones v. Cammayo:

In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that,
in any event, the debtor in a usurious contract of loan should pay the creditor the amount
which he justly owes him, citing in support of this ruling its previous decisions in Go
Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44
Phil. 739.

....

Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249, We also held that the
standing jurisprudence of this Court on the question under consideration was clearly to
the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his right
to recover from the borrower the money actually loaned to and enjoyed by the latter. This
Court went further to say that the Usury Law did not provide for the forfeiture of the
capital in favor of the debtor in usurious contracts, and that while the forfeiture might
appear to be convenient as a drastic measure to eradicate the evil of usury, the legal
question involved should not be resolved on the basis of convenience.

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and
Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We
expressly held that when a contract is found to be tainted with usury "the only right of the
respondent (creditor) . . . was merely to collect the amount of the loan, plus interest due
thereon."

The view has been expressed, however, that the ruling thus consistently adhered to
should now be abandoned because Article 1957 of the new Civil Code a subsequent law
provides that contracts and stipulations, under any cloak or device whatever, intended to
circumvent the laws against usury, shall be void, and that in such cases "the borrower may
recover in accordance with the laws on usury." From this the conclusion is drawn that the
whole contract is void and that, therefore, the creditor has no right to recover not even his
capital.

The meaning and scope of our ruling in the cases mentioned heretofore is clearly
stated, and the view referred to in the preceding paragraph is adequately answered, in
Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the question of
whether a creditor in a usurious contract may or may not recover the principal of the loan,
and, in the affirmative, whether or not he may also recover interest thereon at the legal
rate, We said the following:

....

Appealing directly to Us, defendants raise two questions of law: (1) In a
loan with usurious interest, may the creditor recover the principal of the loan?
(2) Should attorney's fees be awarded in plaintiff's favor?"

Great reliance is made by appellants on Art. 1411 of the New Civil Code .
...

Since, according to the appellants, a usurious loan is void due to illegality of
cause or object, the rule of pari delicto expressed in Article 1411, supra,
applies, so that neither party can bring action against each other. Said rule,
however, appellants add, is modified as to the borrower, by express provision of
the law (Art. 1413, New Civil Code), allowing the borrower to recover interest
paid in excess of the interest allowed by the Usury Law. As to the lender, no
exception is made to the rule; hence, he cannot recover on the contract. So
they continue the New Civil Code provisions must be upheld as against the
Usury Law, under which a loan with usurious interest is not totally void,
because of Article 1961 of the New Civil Code, that: "Usurious contracts shall
be governed by the Usury Law and other special laws, so far as they are not
inconsistent with this Code."

We do not agree with such reasoning. Article 1411 of the New Civil Code
is not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said
provision is no warrant for departing from previous interpretation that, as
provided in the Usury Law (Act No. 2655, as amended), a loan with usurious
interest is not totally void only as to the interest.

. . . [a]ppellants fail to consider that a contract of loan with usurious
interest consists of principal and accessory stipulations; the principal one
is to pay the debt; the accessory stipulation is to pay interest thereon.

And said two stipulations are divisible in the sense that the former
can still stand without the latter. Article 1273, Civil Code, attests to this:
"The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force."

The question therefore to resolve is whether the illegal terms as to
payment of interest likewise renders a nullity the legal terms as to
payments of the principal debt. Article 1420 of the New Civil Code provides
in this regard: "In case of a divisible contract, if the illegal terms can be
separated from the legal ones, the latter may be enforced."

In simple loan with stipulation of usurious interest, the prestation of
the debtor to pay the principal debt, which is the cause of the contract
(Article 1350, Civil Code), is not illegal. The illegality lies only as to the
prestation to pay the stipulated interest; hence, being separable, the latter
only should be deemed void, since it is the only one that is illegal.

....

The principal debt remaining without stipulation for payment of interest
can thus be recovered by judicial action. And in case of such demand, and the
debtor incurs in delay, the debt earns interest from the date of the demand (in
this case from the filing of the complaint). Such interest is not due to
stipulation, for there was none, the same being void. Rather, it is due to the
general provision of law that in obligations to pay money, where the debtor
incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil
Code). The court a quo therefore, did not err in ordering defendants to pay the
principal debt with interest thereon at the legal rate, from the date of filing of
[19]
the complaint."

The Courts wholehearted affirmation of the rule that the principal obligation
subsists despite the nullity of the stipulated interest is evinced by its subsequent
rulings, cited above, in all of which the main obligation was upheld and the
offending interest rate merely corrected. Hence, it is clear and settled that the
principal loan obligation still stands and remains valid. By the same token, since
the mortgage contract derives its vitality from the validity of the principal
obligation, the invalid stipulation on interest rate is similarly insufficient to render
void the ancillary mortgage contract.

It should be noted that had the Court declared the loan and mortgage agreements
[20]
void for being contrary to public policy, no prescriptive period could have run.
Such benefit is obviously not available to petitioners.

Yet the RTC pronounced that the complaint was barred by the four-year
prescriptive period provided in Article 1391 of the Civil Code, which governs
voidable contracts. This conclusion was derived from the allegation in the
complaint that the consent of petitioners was vitiated through undue influence.
While the RTC correctly acknowledged the rule of prescription for voidable
contracts, it erred in applying the rule in this case. We are hard put to conclude in
this case that there was any undue influence in the first place.

There is ultimately no showing that petitioners consent to the loan and
mortgage agreements was vitiated by undue influence. The financial condition of
petitioners may have motivated them to contract with respondents, but undue
influence cannot be attributed to respondents simply because they had lent
money. Article 1391, in relation to Article 1390 of the Civil Code, grants the
aggrieved party the right to obtain the annulment of contract on account of factors
which vitiate consent. Article 1337 defines the concept of undue influence, as
follows:

There is undue influence when a person takes improper advantage of his power
over the will of another, depriving the latter of a reasonable freedom of choice. The
following circumstances shall be considered: the confidential, family, spiritual and other
relations between the parties or the fact that the person alleged to have been unduly
influenced was suffering from mental weakness, or was ignorant or in financial distress.

While petitioners were allegedly financially distressed, it must be proven that there
is deprivation of their free agency. In other words, for undue influence to be
present, the influence exerted must have so overpowered or subjugated the mind of
a contracting party as to destroy his free agency, making him express the will of
[21]
another rather than his own. The alleged lingering financial woes of petitioners
per se cannot be equated with the presence of undue influence.

The RTC had likewise concluded that petitioners were barred by laches from
assailing the validity of the real estate mortgage. We wholeheartedly agree. If indeed
petitioners unwillingly gave their consent to the agreement, they should have raised
this issue as early as in the foreclosure proceedings. It was only when the writ of
possession was issued did petitioners challenge the stipulations in the loan
contract in their action for annulment of mortgage. Evidently, petitioners slept on
their rights. The Court of Appeals succinctly made the following observations:

In all these proceedings starting from the foreclosure, followed by the issuance of
a provisional certificate of sale; then the definite certificate of sale; then the issuance of
TCT No. 29338 in favor of the defendants and finally the petition for the issuance of the
writ of possession in favor of the defendants, there is no showing that plaintiffs
questioned the validity of these proceedings. It was only after the issuance of the writ of
possession in favor of the defendants, that plaintiffs allegedly tendered to the
defendants the amount of P260,000.00 which the defendants refused. In all these
[22]
proceedings, why did plaintiffs sleep on their rights?
Clearly then, with the absence of undue influence, petitioners have no cause of
action. Even assuming undue influence vitiated their consent to the loan contract,
their action would already be barred by prescription when they filed it. Moreover,
petitioners had clearly slept on their rights as they failed to timely assail the validity
of the mortgage agreement. The denial of the petition in G.R. No. 150773 is
warranted.

We now resolve the petition in G.R. No. 153599.
Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January
2000 could no longer be questioned in a special civil action for certiorari and
mandamus as the reglementary period for such action had already elapsed.

It must be noted that the Order dated 3 August 1999 suspending the enforcement
of the writ of possession had a period of effectivity of only twenty (20) days from 3
August 1999, or until 23 August 1999. Thus, upon the expiration of the twenty
(20)-day period, the said Order became functus officio. Thus, there is really no
sense in assailing the validity of this Order, mooted as it was. For the same reason,
the validity of the order need not have been assailed by respondents in their special
civil action before the Court of Appeals.

On the other hand, the Order dated 6 January 2000 is in the nature of a writ of
injunction whose period of efficacy is indefinite. It may be properly assailed by way
of the special civil action for certiorari, as it is interlocutory in nature.
As a rule, the special civil action for certiorari under Rule 65 must be filed not later
[23]
than sixty (60) days from notice of the judgment or order. Petitioners argue that
the 3 August 1999 Order could no longer be assailed by respondents in a special
civil action for certiorari before the Court of Appeals, as the petition was filed
beyond sixty (60) days following respondents receipt of the Order. Considering that
the 3 August 1999 Order had become functus officio in the first place, this
argument deserves scant consideration.

Petitioners further claim that the 6 January 2000 Order could not have likewise
been the subject of a special civil action for certiorari, as it is according to them a
final order, as opposed to an interlocutory order. That the 6 January 2000 Order is
interlocutory in nature should be beyond doubt. An order is interlocutory if its
effects would only be provisional in character and would still leave substantial
proceedings to be further had by the issuing court in order to put the controversy to
[24]
rest. The injunctive relief granted by the order is definitely final, but merely
provisional, its effectivity hinging on the ultimate outcome of the then pending
action for annulment of real estate mortgage. Indeed, an interlocutory order hardly
puts to a close, or disposes of, a case or a disputed issue leaving nothing else to be
done by the court in respect thereto, as is characteristic of a final order.

Since the 6 January 2000 Order is not a final order, but rather interlocutory in
nature, we cannot agree with petitioners who insist that it may be assailed only
through an appeal perfected within fifteen (15) days from receipt thereof by
respondents. It is axiomatic that an interlocutory order cannot be challenged by an
appeal,

[25]
but is susceptible to review only through the special civil action of certiorari.
The sixty (60)-day reglementary period for special civil actions under Rule 65
applies, and respondents petition was filed with the Court of Appeals well within
the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the
petition for certiorari and mandamus. As pointed out by respondents, the remedy of
mandamus lies to compel the performance of a ministerial duty. The issuance of a
writ of possession to a purchaser in an extrajudicial foreclosure is merely a
[26]
ministerial function.

Thus, we also affirm the Court of Appeals ruling to set aside the RTC orders
[27]
enjoining the enforcement of the writ of possession. The purchaser in a
foreclosure sale is entitled as a matter of right to a writ of possession, regardless of
whether or not there is a pending suit for annulment of the mortgage or the
foreclosure proceedings. An injunction to prohibit the issuance or enforcement of
[28]
the writ is entirely out of place.

One final note. The issue on the validity of the stipulated interest rates,
regrettably for petitioners, was not raised at the earliest possible opportunity. It
should be pointed out though that since an excessive stipulated interest rate may
be void for being contrary to public policy, an action to annul said interest rate
does not prescribe. Such indeed is the remedy; it is not the action for annulment of
the ancillary real estate mortgage. Despite the nullity of the stipulated interest rate,
the principal loan obligation subsists, and along with it the mortgage that serves as
collateral security for it.

WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against
petitioners.

SO ORDERED.

DANTE O. TINGA Associate Justice

WE CONCUR:

11/9/2017 G.R. No. 175490

SUPREME COURT
Manila
THIRD DIVISION
ILEANA DR. MACALINAO, G.R. No. 175490

Petitioner,
Present:
- versus - YNARES-SANTIAGO, J.,

Chairperson,
CHICO-NAZARIO,
BANK OF THE PHILIPPINE VELASCO, JR.,
ISLANDS, NACHURA, and
Respondent. PERALTA, JJ.
. Promulgated:
September 17, 2009
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking
[1]
to reverse and set aside the June 30, 2006 Decision of the Court of Appeals (CA) and its
[2]
November 21, 2006 Resolution denying petitioners motion for reconsideration.
The Facts
Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit
[3]
card facilities of respondent Bank of the Philippine Islands (BPI). Petitioner Macalinao made
http://sc.judiciary.gov.ph/jurisprudence/2009/september2009/175490.htm 1/12
11/9/2017 G.R. No. 175490
some purchases through the use of the said credit card and defaulted in paying for said purchases.
She subsequently received a letter dated January 5, 2004 from respondent BPI, demanding payment
of the amount of one hundred forty-one thousand five hundred eighteen pesos and thirty-four
centavos (PhP 141,518.34), as follows:
Statement Previous Purchases Penalty Interest Finance Balance Due

Date Balance (Payments) Charges
10/27/2002 94,843.70 559.72 3,061.99 98,456.41
11/27/2002 98,465.41 (15,000) 0 2,885.61 86,351.02
12/31/2002 86,351.02 30,308.80 259.05 2,806.41 119,752.28
1/27/2003 119,752.28 618.23 3,891.07 124,234.58
2/27/2003 124,234.58 990.93 4,037.62 129,263.13
3/27/2003 129,263.13 (18,000.00) 298.72 3,616.05 115,177.90
4/27/2003 115,177.90 644.26 3,743.28 119,565.44
5/27/2003 119,565.44 (10,000.00) 402.95 3,571.71 113,540.10
6/29/2003 113,540.10 8,362.50 323.57 3,607.32 118,833.49
(7,000.00)
7/27/2003 118,833.49 608.07 3,862.09 123,375.65
8/27/2003 123,375.65 1,050.20 4,009.71 128,435.56
9/28/2003 128,435.56 1,435.51 4,174.16 134,045.23
10/28/2003
11/28/2003
12/28/2003
1/27/2004 141,518.34 8,491.10 4,599.34 154,608.78
Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI
Mastercard, the charges or balance thereof remaining unpaid after the payment due date indicated
on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an
additional penalty fee equivalent to another 3% per month. Particularly:
8. PAYMENT OF CHARGES BCC shall furnish the Cardholder a monthly Statement of Account
(SOA) and the Cardholder agrees that all charges made through the use of the CARD shall be paid by the
Cardholder as stated in the SOA on or before the last day for payment, which is twenty (20) days from the
date of the said SOA, and such payment due date may be changed to an earlier date if the Cardholders
account is considered overdue and/or with balances in excess of the approved credit limit, or to such other
date as may be deemed proper by the CARD issuer with notice to the Cardholder on the same monthly
SOA. If the last day fall on a Saturday, Sunday or a holiday, the last day for the payment automatically
becomes the last working day prior to said payment date. However, notwithstanding the absence or lack of
proof of service of the SOA of the Cardholder, the latter shall pay any and all charges made through the
use of the CARD within thirty (30) days from date or dates thereof. Failure of the Cardholder to pay the
charges made through the CARD within the payment period as stated in the SOA or within thirty (30) days
from actual date or dates of purchase whichever occur earlier, shall render him in default without the
11/9/2017 G.R. No. 175490
necessity of demand from BCC, which the Cardholder expressly waives. The charges or balance
thereof remaining unpaid after the payment due date indicated on the monthly Statement of
Accounts shall bear interest at the rate of 3% per month for BPI Express Credit, BPI Gold
Mastercard and an additional penalty fee equivalent to another 3% of the amount due for every
month or a fraction of a months delay. PROVIDED that if there occurs any change on the prevailing
market rates, BCC shall have the option to adjust the rate of interest and/or penalty fee due on the
outstanding obligation with prior notice to the cardholder. The Cardholder hereby authorizes BCC to
correspondingly increase the rate of such interest [in] the event of changes in the prevailing market rates,
and to charge additional service fees as may be deemed necessary in order to maintain its service to the
Cardholder. A CARD with outstanding balance unpaid after thirty (30) days from original billing statement
date shall automatically be suspended, and those with accounts unpaid after ninety (90) days from said
original billing/statement date shall automatically be cancel (sic), without prejudice to BCCs right to suspend
or cancel any card anytime and for whatever reason. In case of default in his obligation as provided herein,
Cardholder shall surrender his/her card to BCC and in addition to the interest and penalty charges
aforementioned , pay the following liquidated damages and/or fees (a) a collection fee of 25% of the
amount due if the account is referred to a collection agency or attorney; (b) service fee for every
dishonored check issued by the cardholder in payment of his account without prejudice, however, to BCCs
right of considering Cardholders account, and (c) a final fee equivalent to 25% of the unpaid balance,
exclusive of litigation expenses and judicial cost, if the payment of the account is enforced though court
action. Venue of all civil suits to enforce this Agreement or any other suit directly or indirectly arising from
the relationship between the parties as established herein, whether arising from crimes, negligence or breach
[4]
thereof, shall be in the process of courts of the City of Makati or in other courts at the option of BCC.
(Emphasis supplied.)
For failure of petitioner Macalinao to settle her obligations, respondent BPI filed with the
Metropolitan Trial Court (MeTC) of Makati City a complaint for a sum of money against her and
her husband, Danilo SJ. Macalinao. This was raffled to Branch 66 of the MeTC and was docketed
as Civil Case No. 84462 entitled Bank of the Philippine Islands vs. Spouses Ileana Dr. Macalinao
[5]
and Danilo SJ. Macalinao.
In said complaint, respondent BPI prayed for the payment of the amount of one hundred
fifty-four thousand six hundred eight pesos and seventy-eight centavos (PhP 154,608.78) plus
3.25% finance charges and late payment charges equivalent to 6% of the amount due from
February 29, 2004 and an amount equivalent to 25% of the total amount due as attorneys fees, and
[6]
of the cost of suit.
After the summons and a copy of the complaint were served upon petitioner Macalinao and
[7]
her husband, they failed to file their Answer. Thus, respondent BPI moved that judgment be
11/9/2017 G.R. No. 175490
[8]
rendered in accordance with Section 6 of the Rule on Summary Procedure. This was granted in
[9]
an Order dated June 16, 2004. Thereafter, respondent BPI submitted its documentary evidence.
[10]
In its Decision dated August 2, 2004, the MeTC ruled in favor of respondent BPI and
ordered petitioner Macalinao and her husband to pay the amount of PhP 141,518.34 plus interest
and penalty charges of 2% per month, to wit:
WHEREFORE, finding merit in the allegations of the complaint supported by documentary

evidence, judgment is hereby rendered in favor of the plaintiff, Bank of the Philippine Islands and against
defendant-spouses Ileana DR Macalinao and Danilo SJ Macalinao by ordering the latter to pay the
former jointly and severally the following:
1. The amount of PESOS: ONE HUNDRED FORTY ONE THOUSAND FIVE

HUNDRED EIGHTEEN AND 34/100 (P141,518.34) plus interest and penalty charges of 2%
per month from January 05, 2004 until fully paid;
2. P10,000.00 as and by way of attorneys fees; and
3. Cost of suit.
[11]
SO ORDERED.
Only petitioner Macalinao and her husband appealed to the Regional Trial Court (RTC) of
Makati City, their recourse docketed as Civil Case No. 04-1153. In its Decision dated October 14,
2004, the RTC affirmed in toto the decision of the MeTC and held:
In any event, the sum of P141,518.34 adjudged by the trial court appeared to be the result of a
recomputation at the reduced rate of 2% per month. Note that the total amount sought by the plaintiff-
appellee was P154,608.75 exclusive of finance charge of 3.25% per month and late payment charge of 6%
per month.
WHEREFORE, the appealed decision is hereby affirmed in toto.
[12]
SO ORDERED.
11/9/2017 G.R. No. 175490
Unconvinced, petitioner Macalinao filed a petition for review with the CA, which was
docketed as CA-G.R. SP No. 92031. The CA affirmed with modification the Decision of the RTC:
WHEREFORE, the appealed decision is AFFIRMED but MODIFIED with respect to the
total amount due and interest rate. Accordingly, petitioners are jointly and severally ordered to pay
respondent Bank of the Philippine Islands the following:
1. The amount of One Hundred Twenty Six Thousand Seven Hundred Six Pesos
and Seventy Centavos plus interest and penalty charges of 3% per month from
January 5, 2004 until fully paid;
2. P10,000.00 as and by way of attorneys fees; and
3. Cost of Suit.
[13]
SO ORDERED.
Although sued jointly with her husband, petitioner Macalinao was the only one who filed the
[14]
petition before the CA since her husband already passed away on October 18, 2005.
In its assailed decision, the CA held that the amount of PhP 141,518.34 (the amount sought
to be satisfied in the demand letter of respondent BPI) is clearly not the result of the re-computation
at the reduced interest rate as previous higher interest rates were already incorporated in the said
amount. Thus, the said amount should not be made as basis in computing the total obligation of
petitioner Macalinao. Further, the CA also emphasized that respondent BPI should not compound
the interest in the instant case absent a stipulation to that effect. The CA also held, however, that the
MeTC erred in modifying the amount of interest rate from 3% monthly to only 2% considering that
petitioner Macalinao freely availed herself of the credit card facility offered by respondent BPI to
the general public. It explained that contracts of adhesion are not invalid per se and are not entirely
prohibited.
Petitioner Macalinaos motion for reconsideration was denied by the CA in its Resolution
dated November 21, 2006. Hence, petitioner Macalinao is now before this Court with the following
assigned errors:
I.
THE REDUCTION OF INTEREST RATE, FROM 9.25% TO 2%, SHOULD BE UPHELD SINCE
THE STIPULATED RATE OF INTEREST WAS UNCONSCIONABLE AND INIQUITOUS, AND
THUS ILLEGAL.
11/9/2017 G.R. No. 175490
II.
THE COURT OF APPEALS ARBITRARILY MODIFIED THE REDUCED RATE OF INTEREST

FROM 2% TO 3%, CONTRARY TO THE TENOR OF ITS OWN DECISION.
III.
THE COURT A QUO, INSTEAD OF PROCEEDING WITH A RECOMPUTATION, SHOULD

HAVE DISMISSED THE CASE FOR FAILURE OF RESPONDENT BPI TO PROVE THE
CORRECT AMOUNT OF PETITIONERS OBLIGATION, OR IN THE ALTERNATIVE,
REMANDED THE CASE TO THE LOWER COURT FOR RESPONDENT BPI TO PRESENT
PROOF OF THE CORRECT AMOUNT THEREOF.
Our Ruling
The petition is partly meritorious.
The Interest Rate and Penalty Charge of 3% Per Month or 36% Per Annum Should Be
Reduced to 2% Per Month or 24% Per Annum
In its Complaint, respondent BPI originally imposed the interest and penalty charges at the
rate of 9.25% per month or 111% per annum. This was declared as unconscionable by the lower
courts for being clearly excessive, and was thus reduced to 2% per month or 24% per annum. On
appeal, the CA modified the rate of interest and penalty charge and increased them to 3% per
month or 36% per annum based on the Terms and Conditions Governing the Issuance and Use of
the BPI Credit Card, which governs the transaction between petitioner Macalinao and respondent
BPI.
In the instant petition, Macalinao claims that the interest rate and penalty charge of 3% per
month imposed by the CA is iniquitous as the same translates to 36% per annum or thrice the legal
[15]
rate of interest. On the other hand, respondent BPI asserts that said interest rate and penalty
charge are reasonable as the same are based on the Terms and Conditions Governing the Issuance
[16]
and Use of the BPI Credit Card.
11/9/2017 G.R. No. 175490
We find for petitioner. We are of the opinion that the interest rate and penalty charge of 3%
per month should be equitably reduced to 2% per month or 24% per annum.
Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit
Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not
the first time that this Court has considered the interest rate of 36% per annum as excessive and
[17]
unconscionable. We held in Chua vs. Timan:
The stipulated interest rates of 7% and 5% per month imposed on respondents loans must be
equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had
affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are
excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being
contrary to morals, if not against the law. While C.B. Circular No. 905-82, which took effect on
January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans,
regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche
authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a
hemorrhaging of their assets. (Emphasis supplied.)
Since the stipulation on the interest rate is void, it is as if there was no express contract
[18]
thereon. Hence, courts may reduce the interest rate as reason and equity demand.
The same is true with respect to the penalty charge. Notably, under the Terms and
Conditions Governing the Issuance and Use of the BPI Credit Card, it was also stated therein that
respondent BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article
1229 of the Civil Code states:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable.
In exercising this power to determine what is iniquitous and unconscionable, courts must
consider the circumstances of each case since what may be iniquitous and unconscionable in one
[19]
may be totally just and equitable in another.
In the instant case, the records would reveal that petitioner Macalinao made partial payments
[20]
to respondent BPI, as indicated in her Billing Statements. Further, the stipulated penalty charge
11/9/2017 G.R. No. 175490
of 3% per month or 36% per annum, in addition to regular interests, is indeed iniquitous and
unconscionable.
Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged
by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to
1% monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence
and in accordance with Art. 1229 of the Civil Code.
There Is No Basis for the Dismissal of the Case,

Much Less a Remand of the Same for Further Reception of Evidence
Petitioner Macalinao claims that the basis of the re-computation of the CA, that is, the
amount of PhP 94,843.70 stated on the October 27, 2002 Statement of Account, was not the
amount of the principal obligation. Thus, this allegedly necessitates a re-examination of the evidence
presented by the parties. For this reason, petitioner Macalinao further contends that the dismissal of
the case or its remand to the lower court would be a more appropriate disposition of the case.
Such contention is untenable. Based on the records, the summons and a copy of the
complaint were served upon petitioner Macalinao and her husband on May 4, 2004. Nevertheless,
they failed to file their Answer despite such service. Thus, respondent BPI moved that judgment be
[21]
rendered accordingly. Consequently, a decision was rendered by the MeTC on the basis of the
evidence submitted by respondent BPI. This is in consonance with Sec. 6 of the Revised Rule on
Summary Procedure, which states:
Sec. 6. Effect of failure to answer. Should the defendant fail to answer the complaint
within the period above provided, the court, motu proprio, or on motion of the plaintiff, shall
render judgment as may be warranted by the facts alleged in the complaint and limited to what is
prayed for therein: Provided, however, that the court may in its discretion reduce the amount of damages
and attorneys fees claimed for being excessive or otherwise unconscionable. This is without prejudice to the
applicability of Section 3(c), Rule 10 of the Rules of Court, if there are two or more defendants. (As
amended by the 1997 Rules of Civil Procedure; emphasis supplied.)
Considering the foregoing rule, respondent BPI should not be made to suffer for petitioner
Macalinaos failure to file an answer and concomitantly, to allow the latter to submit additional
evidence by dismissing or remanding the case for further reception of evidence. Significantly,
11/9/2017 G.R. No. 175490
petitioner Macalinao herself admitted the existence of her obligation to respondent BPI, albeit with
reservation as to the principal amount. Thus, a dismissal of the case would cause great injustice to
respondent BPI. Similarly, a remand of the case for further reception of evidence would unduly
prolong the proceedings of the instant case and render inutile the proceedings conducted before the
lower courts.
Significantly, the CA correctly used the beginning balance of PhP 94,843.70 as basis for the
re-computation of the interest considering that this was the first amount which appeared on the
Statement of Account of petitioner Macalinao. There is no other amount on which the re-
computation could be based, as can be gathered from the evidence on record. Furthermore, barring
a showing that the factual findings complained of are totally devoid of support in the record or that
they are so glaringly erroneous as to constitute serious abuse of discretion, such findings must
stand, for this Court is not expected or required to examine or contrast the evidence submitted by
[22]
the parties.
In view of the ruling that only 1% monthly interest and 1% penalty charge can be applied to
the beginning balance of PhP 94,843.70, this Court finds the following computation more
appropriate:
Statement Previous Purchases Balance Interest Penalty Total

Date Balance (Payments) (1%) Charge Amount
(1%) Due for the
Month
10/27/2002 94,843.70 94,843.70 948.44 948.44 96,740.58
11/27/2002 94,843.70 (15,000) 79,843.70 798.44 798.44 81,440.58
12/31/2002 79,843.70 30,308.80 110,152.50 1,101.53 1,101.53 112,355.56
1/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56
2/27/2003 110,152.50 110,152.50 1,101.53 1,101.53 112,355.56
3/27/2003 110,152.50 (18,000.00) 92,152.50 921.53 921.53 93,995.56
4/27/2003 92,152.50 92,152.50 921.53 921.53 93,995.56
5/27/2003 92,152.50 (10,000.00) 82,152.50 821.53 821.53 83,795.56
6/29/2003 82,152.50 8,362.50 83,515.00 835.15 835.15 85,185.30
(7,000.00)
7/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
8/27/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
9/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
10/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
11/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
12/28/2003 83,515.00 83,515.00 835.15 835.15 85,185.30
1/27/2004 83,515.00 83,515.00 835.15 835.15 85,185.30
11/9/2017 G.R. No. 175490
TOTAL 83,515.00 14,397.26 14,397.26 112,309.52
WHEREFORE, the petition is PARTLY GRANTED. The CA Decision dated June 30,
2006 in CA-G.R. SP No. 92031 is hereby MODIFIED with respect to the total amount due,
interest rate, and penalty charge. Accordingly, petitioner Macalinao is ordered to pay respondent
BPI the following:
(1) The amount of one hundred twelve thousand three hundred nine pesos and fifty-
two centavos (PhP 112,309.52) plus interest and penalty charges of 2% per month from January
5, 2004 until fully paid;
(2) PhP 10,000 as and by way of attorneys fees; and
(3) Cost of suit.
SO ORDERED.
PRESBITERO J. VELASCO, JR.

Associate Justice
Sl i PREME C ()L; RT
Manila
THIRD DIVISION
ARTHUR F. lVIENCHAVEZ, G .R. No. 185368

Petitioner,
Present:
- versus - VELASCO, JR.,./., Chairperson,

PERALTA,
Al3AD,
MARLYN lVI. BERMUDEZ, PEREZ,' and
Respondent. MENDOZA,././
Prumu !gated: -}.iY"/

1 ,;J1.
11 October 2012 ~\~
X------------------------------------------~----------===--~---------------(v~-- · X
DEC IS I 0 N
VELASCO, JR.,./.:
This is a Petition for Review on Ccrtiurari u;H.lcr Ruk 4), qtte~~li\lllillg

1
the Decision ul" the Court of Appeqls (C>\l dated May 30, :2008 i11 C:\-CI !~..
SP No. 99143, and the CA Resolution datcd November 7, :2008, detiying

petitioner's Motion for Reconsideration of the Decision.
The facts or the case are as follows:
Petiti~mer Arthur F. Mer:chavez and respondent rYiarlyn M. lkttiiudcz

entered on November 17, 199_1 mto a loan at_~reemenl, covering the <tJJHlLJIII
2
of PhP 5ll0,00U, with inkreSL : ixed at s::i jlCI ll1llll(h. Respondent ..:xe....:utcd
a promissory Jiute. which JCdG.~ d~ folkl\vs:
Addilicl>~~d
mun'l..:: ,·.:r :)pcc;:d \)Jder 1\,cl. i 2 1;') (\,."·-; \l"''"'l Jt\. 2(1 i 2.
Penned hy /\~S,JCnll' .llc,l!Ct' R· 'mar: r· C:JLII~·''II•' 'l:·,,_j c.ldCIIJT;·,.:d
I ill llv ,\;.~d--J:Ji•• lliSill·l·~
Portia Alifiu-llurmacl:uclos a.:d Pa:Jii;i. p, .'\harinll''·
2
Rollo, p. 112. .
I
Decision 2 G.R. No. 185368
17 November 1993
P500000. –
For value received I promise to pay ARTHUR F. MENCHAVEZ

or order the sum of pesos five hundred thousand on or before Dec. 17,
1993 with interest of 5% per month.
I acknowledge receipt of BPI Check 60965.
MARLYN M. BERMUDEZ3
She then issued Prudential Bank Check No. 031994, to mature on

December 17, 1993, in favor of petitioner, but with a request that petitioner
not present the check for payment on its maturity date.4 Respondent
replaced Check No. 031994 with five postdated Prudential Bank checks
totaling PhP 565,000, as follows: (1) Check No. 039198 dated April 17,
1994 for PhP 125,000; (2) Check No. 039199 dated May 17, 1994 for PhP
120,000; (3) Check No. 039200 dated June 17, 1994 for PhP 115,000; (4)
Check No. 039201 dated July 17, 1994 for PhP 110,000; and (5) Check No.
039202 dated August 17, 1994 for PhP 105,000.5 Four of the checks were
cleared and fully encashed when presented for payment, covering the sum of
PhP 465,000. The July 17, 1994 check, while dishonored, was partially paid
by respondent with a replacement check for PhP 110,000 issued on June 12,
1995.6
Petitioner alleged entering into a verbal compromise agreement with

respondent regarding the delay in payment and the accumulated interest.
Under the agreement, respondent would deliver 11 postdated Prudential
Bank checks as payment. When presented for payment, eight (8) of these
checks were dishonored for the reason, “Drawn against Insufficient Funds.”7
Nine criminal informations were filed against respondent Marlyn M.

Bermudez before the Metropolitan Trial Court (MeTC) in Makati City, each
charging her with violations of Batas Pambansa Blg. 22, or the Bouncing
3
Id. at 121.
4
Id.
5
Id. at 62-63.
6
Id. at 63.
7
Id.
Checks Law, raffled off to the MeTC, Branch 64 as Criminal Case Nos.
306361 to 306369.8 Eight counts covered the dishonored checks issued
pursuant to the compromise agreement, while the ninth covered the adverted
check issued on July 17, 1994. The checks involved in the charges were:
(a) Check No. 0000029595 dated March 31, 1997 for PhP 20,000;
(b) Check No. 0000029594 dated March 4, 1997 for PhP 20,000;
(c) Check No. 0000029592 dated December 17, 1996 for PhP 50,000;
(d) Check No. 0000029598 dated June 30, 1997 for PhP 20,000;
(e) Check No. 0000029597 dated June 3, 1997 for PhP 20,000.00;
(f) Check No. 0000029596 dated April 30, 1997 for PhP 20,000.00;
(g) Check No. 0000029602 dated November 4, 1997 for PhP 20,000;
(h) Check No. 0000029601 dated September 30, 1997 for PhP 20,000;
and
(i) Check No. 039201 dated July 17, 1994 for PhP 110,000;
which were issued and drawn by respondent against the account of FLB
Construction Corporation at Prudential Bank, Makati Branch, payable to
petitioner, covering the total sum of PhP 300,000. These checks were
dishonored by the drawee bank upon presentment for payment on their
respective maturity dates for the reason, “Drawn Against Insufficient
Funds.”9
The Ruling of the MeTC
Respondent raised the defense of payment, and proved paying

petitioner the sum of PhP 925,000, or PhP 425,000 over the PhP 500,000
loan. The amount of PhP 925,000.00 was acknowledged by petitioner in the
statement of account which he prepared, wherein PhP 624,344 was credited
to payment of interest, and PhP 300,656 was credited to payment of the
principal.10
The MeTC acquitted respondent of the charges against her, the

dispositive portion of the decision reading as follows:
8
Id. at 61.
9
Id. at 50.
10
Id. at 130.
WHEREFORE, in view of the foregoing premises, for failure to

prove the guilt of the accused beyond reasonable doubt, MARILYN
BERMUDEZ y MELY is hereby ACQUITTED in all nine (9) counts on
charge of Violation of Batas Pambansa Blg. 22.
No costs.
SO ORDERED.11
Petitioner then brought the matter on appeal to the Regional Trial

Court (RTC), Branch 143 in Makati City, appealing the civil aspect of the
cases. The cases were docketed as Crim. Case Nos. 06-966 to 06-974.
The Ruling of the RTC
In a Decision dated November 5, 2006, the RTC held that the PhP
425,000 excess payment had not fully settled the respondent’s obligations to
the petitioner. It found that no evidence was presented as to the payment on
the eight checks covering the amount of PhP 190,000 in the compromise
agreement, less partial payment of PhP 25,000. In fine, a total of PhP
165,000 remains unpaid.12 However, the 5% monthly interest stipulated in
the loan agreement could not be applied, as, according to the RTC, there was
no written agreement; thus, the rate of 12% per annum would be used.13
The dispositive portion of the RTC Decision reads as follows:
WHEREFORE PREMISES CONSIDERED, the Appeal filed by

complainant-appellant is partially granted. The Decision appealed from is
modified, ordering accused-appellee Marilyn M. Bermudez to pay
complainant-appellant the amount of P165,000.00 as civil liability with
legal interest at the rate of 12% per annum to be reckoned from October 6,
2000.
SO ORDERED.14
11
Id. at 64. Penned by Judge Dina Pestaño Teves.
12
Id. at 54.
13
Id. at 55.
14
Id. Penned by Judge Zenaida T. Galapate-Laguilles (now a member of the CA).
The Ruling of the CA
Respondent then raised the matter to the CA, on the issue of whether
petitioner Menchavez could still demand payment on the original loan of
PhP 500,000 despite the payment by respondent of the total amount of
PhP 925,000.
The CA found that petitioner had expressly admitted in a Statement of

Account, prepared under his supervision, that respondent’s payments had
already covered the principal loan of PhP 500,000, and that he had also
received excess payment in the amount of PhP 425,000, before the criminal
charges were filed.15
The CA did not agree with the RTC that the issuance of the subject
checks resulted from the compromise agreement, and not from the loan
transaction between petitioner and respondent. It held that the compromise
agreement could not be detached from and taken independently of the
principal loan. It further held that the compromise agreement bound
respondent to pay an exorbitant and unconscionable amount in interest and
charges, and that further, the principal loan had already been paid, with the
sum of PhP 425,000 added by way of interest at the rate of 5% per month or
60% per annum, and that courts could reduce liquidated damages, if these
are iniquitous or unconscionable, and thus contrary to morals.16
The fallo of the CA Decision reads:
WHEREFORE, premises considered, the Petition for Review is

GRANTED, and accordingly, the assailed November 5, 2006 Decision
and April 7, 2007 Order of the RTC are hereby REVERSED and SET
ASIDE.
SO ORDERED.17
15
Id. at 66.
16
Id. at 68.
17
Id. at 69.
Thus, petitioner brought the matter to this Court.
Grounds in Support of Petition
RESPONDENT’S OBLIGATION BASED ON THE COMPROMISE

AGREEMENT IS SEPARATE AND INDEPENDENT FROM HER
ORIGINAL LOAN OBLIGATION.
II
THE CA’S RULINGS WERE BASED ON MISAPPREHENSION OF

FACTS – ALTHOUGH PAYMENT WAS MADE, RESPONDENT WAS
FAR FROM COMPLETELY SATISFYING HER OBLIGATION TO
PETITIONER.
III
RESPONDENT VOLUNTARILY SIGNED A PROMISSORY NOTE

AND VOLUNTARILY AGREED TO PAY 5% INTEREST PER
MONTH.18
The Ruling of this Court
The petition is without merit.
Petitioner argues that the compromise agreement created an obligation

separate and distinct from the original loan, for which respondent is now
liable. It is undeniable that the compromise agreement is wholly intertwined
with the original loan agreement, to the extent that this compromise
agreement was entered into to fulfill respondent’s payment on the original
obligation, without which the compromise agreement would not have
existed.
By stating that the compromise agreement and the original loan

transaction are separate and distinct, petitioner would now attempt to exact
payment on both. This goes against the very purpose of the parties entering
into a compromise agreement, which was to extinguish the obligation under
the loan. Petitioner may not seek the enforcement of both the compromise
18
Id. at 24-25.
agreement and payment of the loan, even in the event that the compromise
agreement remains unfulfilled. It is beyond cavil that if a party fails or
refuses to abide by a compromise agreement, the other party may either
enforce the compromise or regard it as rescinded and insist upon his original
demand.19 It cannot, thus, be argued that there are two separate validly
subsisting obligations to be fulfilled by respondent under both the
compromise agreement and the original loan transaction.
To allow petitioner to recover under the terms of the compromise

agreement and to further seek enforcement of the original loan transaction
would constitute unjust enrichment. The compromise agreement was entered
into precisely to extinguish the obligation under the loan transaction, not to
create two sources of obligation for respondent. There is unjust enrichment
under Article 22 of the Civil Code when (1) a person is unjustly benefited;
and (2) such benefit is derived at the expense of or with damages to
another.20 Since respondent only entered into the compromise agreement to
commit to payment of the original loan, petitioner cannot separate the two
and seek payment of both, especially as he has already recovered the amount
of the original loan.
The second and third issues raised by petitioner are interrelated and
shall be discussed jointly.
Petitioner’s claim that the payment made by respondent did not

extinguish the obligation is based on his assessment that it is the rate of 5%
per month which should be the basis of computation. Furthermore, petitioner
argues that respondent voluntarily agreed to the interest rate of 5% per
month.
These arguments fail to convince this Court.
19
Diamond Builders Conglomeration v. Country Bankers Insurance Corporation, G.R. No.
171820, December 13, 2007, 540 SCRA 194, 207.
20
H.L. Carlos Construction, Inc. v. Marina Properties Corporation, G.R. No. 147614, January 29,
2004, 421 SCRA 428, 437.
Petitioner seeks to benefit from a 60% per annum rate of interest. This
cannot be countenanced.
Castro v. Tan21 is instructive. Petitioners in that case also argued that

lender and borrower could validly agree on any interest rate for loans, and
that the parties had voluntarily agreed upon the stipulated rate of interest.
The Court held in Castro:
While we agree with petitioners that parties to a loan agreement

have wide latitude to stipulate on any interest rate in view of the Central
Bank Circular No. 905 s. 1982 which suspended the Usury Law ceiling on
interest effective January 1, 1983, it is also worth stressing that interest
rates whenever unconscionable may still be declared illegal. There is
certainly nothing in said circular which grants lenders carte blanche
authority to raise interest rates to levels which either enslave their
borrowers or lead to a hemorrhaging of their assets.22
The Court, in said case, tagged the 5% monthly interest rate agreed
upon as “excessive, iniquitous, unconscionable and exorbitant, contrary to
morals, and the law.”23 And instead of allowing recovery at the stipulated
rate, the Court, in Castro, imposed the legal interest of 12% per annum. We
need not unsettle the principle we had affirmed in a plethora of cases that
stipulated interest rates of 3% per month and higher are excessive, iniquitous,
unconscionable, and exorbitant.24
In the present case, the CA scrutinized the Statement of Account25

prepared by petitioner, wherein it showed that respondent had already paid
PhP 925,000, or PhP 425,000 over the PhP 500,000 loan, and treated it as an
admission by petitioner. The original obligation of PhP 500,000 had already
been satisfied, and the PhP 425,000 would be treated as interest paid, even at
the iniquitous rate of 60% per annum.
We agree with the CA that petitioner has been fully paid.
21
G.R. No. 168940, November 24, 2009, 605 SCRA 231.
22
Id. at 237-238.
23
Id. at 238.
24
Macalinao v. Bank of the Philippine Islands, G.R. No. 175490, September 17, 2009, 600 SCRA
67, 77.
25
Rollo, pp. 128-130.
In the Statement of Account prepared by petitioner, which he said
covered the period from November 17, 1993 to January 17, 2001,
respondent made the following payments:
(a) PhP 25,000 on February 1, 1994;

(b) PhP 25,000 on February 23, 1994;
(c) PhP 25,000 on March 28, 1994;
(d) PhP 125,000 on April 17, 1994;
(e) PhP 120,000 on June 3, 1994;
(f) PhP 115,000 on August 1, 1994;
(g) PhP 105,000 on October 23, 1994;
(h) PhP 110,000 on June 15, 1995;
(i) PhP 25,000 on March 5, 1997;
(j) PhP 20,000 on May 5, 1997;
(k) PhP 20,000 on August 2, 1997;
(l) PhP 20,000 on October 22, 1997;
(m) PhP 20,000 on December 19, 1997;
(n) PhP 50,000 on January 31, 2000;
(o) PhP 30,000 on March 29, 2000;
(p) PhP 30,000 on May 3, 2000;
(q) PhP 30,000 on July 5, 2000;
(r) PhP 30,000 on July 31, 2000.26
Totaling the amounts in the Statement of Account results in the sum of

PhP 925,000, which petitioner admits that respondent has already paid. But
for him, it is still a contentious matter as he seeks to enforce the 5% per
month interest rate, and would, thus, claim that he has not been fully paid.
As it has been ruled that the 5% per month interest rate is null and void,
petitioner cannot recover the grossly inflated amounts listed in the Statement
of Account he prepared. Petitioner does not contest the amounts in the
Statement of Account he prepared, only the import, as in his Statement of
Account he computes for interest based on the 5% per month interest rate.
The Statement of Account is evidence that he has already been paid the PhP
500,000 subject of the original loan agreement, and has benefited further in
the amount of PhP 425,000, and, thus, must not be allowed to recover further.
26
Id.
Decision Ill C.R. No. lo53(lo
Parties may ne tr~c to contract and ~;tipulate as !hey ~ec fit, hut th<ll is
not an absolute freedom. i\rt. 130t) of the Civil Code pmvidL':), ""The
contracting parties may establish such stipulations, clauses, terms and

conditions as they may deem convenient, provided they are not contrary ttl
law, morals, good customs, public order, or public policy." While petitioner
harps on the voluntariness with which the parties agreed upon the y;,;, per
month interest rate, voluntariness dc1es nut make the ~tipulat;l'lll un interest
valid. The 5(}(; per month, or 60% pe1 ;innum, rate of interest 1~;, imkcll,
iniquitous, and must be struck down. Petitioner has been sulliciently
compensated for the loan and the iucresl earned, and cannot be <dlowcd to
further recover on an intere:)t rate which is unconscionable. Since the
stipulation l;n the interest rate I"> void, it i-.; t~s if there was IW express COillract
on said interest rate. Hence, cuurts may I\.'ducc the intcrc~;t 1 all? as IL<t30ll and
0 -,7
eqUJty demand.-
WHEREFORE, the pstition is DENIED. The CA's Decisiutl dntcd

May 30, 2008 and Resolution dated November 7, 2008 in CA-G.R SP No.
99143 are hereby AFFIRMED.
I
Costs against pditioner.
SO ORDERED.
'
{.VELASCO,,) ll.
11/9/2017 G.R. No. 189871
Custom Search

SUPREME COURT
Manila
EN BANC
G.R. No. 189871 August 13, 2013
DARIO NACAR, PETITIONER,

vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR., RESPONDENTS.
DECISIO N
PERALTA, J.:
This is a petition for review on certiorari assailing the Decision1 dated September 23, 2008 of the Court of Appeals
(CA) in CA-G.R. SP No. 98591, and the Resolution2 dated October 9, 2009 denying petitioner’s motion for
reconsideration.
The factual antecedents are undisputed.
Petitioner Dario Nacar filed a complaint for constructive dismissal before the Arbitration Branch of the National
Labor Relations Commission (NLRC) against respondents Gallery Frames (GF) and/or Felipe Bordey, Jr.,
docketed as NLRC NCR Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision3 in favor of petitioner and found that he was
dismissed from employment without a valid or just cause. Thus, petitioner was awarded backwages and separation
pay in lieu of reinstatement in the amount of ₱158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge the burden of showing that
complainant was dismissed from employment for a just or valid cause. All the more, it is clear from the records that
complainant was never afforded due process before he was terminated. As such, we are perforce constrained to
grant complainant’s prayer for the payments of separation pay in lieu of reinstatement to his former position,
considering the strained relationship between the parties, and his apparent reluctance to be reinstated, computed
only up to promulgation of this decision as follows:
SEPARATION PAY
Date Hired = August 1990

Rate = ₱198/day
Date of Decision = Aug. 18, 1998

Length of Service = 8 yrs. & 1 month
₱198.00 x 26 days x 8 months = ₱41,184.00

BACKWAGES
Date Dismissed = January 24, 1997

Rate per day = ₱196.00
Date of Decisions = Aug. 18, 1998

a) 1/24/97 to 2/5/98 = 12.36 mos.
₱196.00/day x 12.36 mos. = ₱62,986.56
http://www.lawphil.net/judjuris/juri2013/aug2013/gr_189871_2013.html 1/9
11/9/2017 G.R. No. 189871
b) 2/6/98 to 8/18/98 = 6.4 months
Prevailing Rate per day = ₱62,986.00
₱198.00 x 26 days x 6.4 mos. = ₱32,947.20

TOTAL = ₱95.933.76
xxxx
WHEREFORE, premises considered, judgment is hereby rendered finding respondents guilty of constructive
dismissal and are therefore, ordered:
To pay jointly and severally the complainant the amount of sixty-two thousand nine hundred eighty-six pesos and
56/100 (₱62,986.56) Pesos representing his separation pay;
To pay jointly and severally the complainant the amount of nine (sic) five thousand nine hundred thirty-three and
36/100 (₱95,933.36) representing his backwages; and
All other claims are hereby dismissed for lack of merit.
SO ORDERED.4
Respondents appealed to the NLRC, but it was dismissed for lack of merit in the Resolution5 dated February 29,
2000. Accordingly, the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for
reconsideration, but it was denied.6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On August 24, 2000, the CA
issued a Resolution dismissing the petition. Respondents filed a Motion for Reconsideration, but it was likewise
denied in a Resolution dated May 8, 2001.7
Respondents then sought relief before the Supreme Court, docketed as G.R. No. 151332. Finding no reversible
error on the part of the CA, this Court denied the petition in the Resolution dated April 17, 2002.8
An Entry of Judgment was later issued certifying that the resolution became final and executory on May 27, 2002.9
The case was, thereafter, referred back to the Labor Arbiter. A pre-execution conference was consequently
scheduled, but respondents failed to appear.10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that his backwages be computed
from the date of his dismissal on January 24, 1997 up to the finality of the Resolution of the Supreme Court on
May 27, 2002.11 Upon recomputation, the Computation and Examination Unit of the NLRC arrived at an updated
amount in the sum of ₱471,320.31.12
On December 2, 2002, a Writ of Execution13 was issued by the Labor Arbiter ordering the Sheriff to collect from
respondents the total amount of ₱471,320.31. Respondents filed a Motion to Quash Writ of Execution, arguing,
among other things, that since the Labor Arbiter awarded separation pay of ₱62,986.56 and limited backwages of
₱95,933.36, no more recomputation is required to be made of the said awards. They claimed that after the
decision becomes final and executory, the same cannot be altered or amended anymore.14 On January 13, 2003,
the Labor Arbiter issued an Order15 denying the motion. Thus, an Alias Writ of Execution16 was issued on January
14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a Resolution17 granting the
appeal in favor of the respondents and ordered the recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the NLRC to be final and
executory. Consequently, another pre-execution conference was held, but respondents failed to appear on time.
Meanwhile, petitioner moved that an Alias Writ of Execution be issued to enforce the earlier recomputed judgment
award in the sum of ₱471,320.31.18
The records of the case were again forwarded to the Computation and Examination Unit for recomputation, where
the judgment award of petitioner was reassessed to be in the total amount of only ₱147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay him the original amount as
determined by the Labor Arbiter in his Decision dated October 15, 1998, pending the final computation of his
backwages and separation pay.
11/9/2017 G.R. No. 189871
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the judgment award that was
due to petitioner in the amount of ₱147,560.19, which petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the monetary award to include
the appropriate interests.19
On May 10, 2005, the Labor Arbiter issued an Order20 granting the motion, but only up to the amount of
₱11,459.73. The Labor Arbiter reasoned that it is the October 15, 1998 Decision that should be enforced
considering that it was the one that became final and executory. However, the Labor Arbiter reasoned that since
the decision states that the separation pay and backwages are computed only up to the promulgation of the said
decision, it is the amount of ₱158,919.92 that should be executed. Thus, since petitioner already received
₱147,560.19, he is only entitled to the balance of ₱11,459.73.
Petitioner then appealed before the NLRC,21 which appeal was denied by the NLRC in its Resolution22 dated
September 27, 2006. Petitioner filed a Motion for Reconsideration, but it was likewise denied in the Resolution23
dated January 31, 2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP No. 98591.
On September 23, 2008, the CA rendered a Decision24 denying the petition. The CA opined that since petitioner
no longer appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and
executory, a belated correction thereof is no longer allowed. The CA stated that there is nothing left to be done
except to enforce the said judgment. Consequently, it can no longer be modified in any respect, except to correct
clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the Resolution25 dated October 9, 2009.
Hence, the petition assigning the lone error:
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED, COMMITTED
GRAVE ABUSE OF DISCRETION AND DECIDED CONTRARY TO LAW IN UPHOLDING THE
QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN, SUSTAINED THE MAY 10, 2005
ORDER OF LABOR ARBITER MAGAT MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15,
1998 DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN OPINION EXPRESSED IN THE
BODY OF THE SAME DECISION.26
Petitioner argues that notwithstanding the fact that there was a computation of backwages in the Labor Arbiter’s
decision, the same is not final until reinstatement is made or until finality of the decision, in case of an award of
separation pay. Petitioner maintains that considering that the October 15, 1998 decision of the Labor Arbiter did
not become final and executory until the April 17, 2002 Resolution of the Supreme Court in G.R. No. 151332 was
entered in the Book of Entries on May 27, 2002, the reckoning point for the computation of the backwages and
separation pay should be on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on
October 15, 1998. Further, petitioner posits that he is also entitled to the payment of interest from the finality of
the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited backwages were awarded to petitioner
by the October 15, 1998 decision of the Labor Arbiter, no more recomputation is required to be made of said
awards. Respondents insist that since the decision clearly stated that the separation pay and backwages are
"computed only up to [the] promulgation of this decision," and considering that petitioner no longer appealed the
decision, petitioner is only entitled to the award as computed by the Labor Arbiter in the total amount of
₱158,919.92. Respondents added that it was only during the execution proceedings that the petitioner questioned
the award, long after the decision had become final and executory. Respondents contend that to allow the further
recomputation of the backwages to be awarded to petitioner at this point of the proceedings would substantially
vary the decision of the Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods v. Court of Appeals (Sixth
Division),27 wherein the issue submitted to the Court for resolution was the propriety of the computation of the
awards made, and whether this violated the principle of immutability of judgment. Like in the present case, it was a
distinct feature of the judgment of the Labor Arbiter in the above-cited case that the decision already provided for
the computation of the payable separation pay and backwages due and did not further order the computation of
11/9/2017 G.R. No. 189871
the monetary awards up to the time of the finality of the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of execution of the labor arbiter's
original computation of the awards made, pegged as of the time the decision was rendered and confirmed with
modification by a final CA decision, is legally proper. The question is posed, given that the petitioner did not
immediately pay the awards stated in the original labor arbiter's decision; it delayed payment because it continued
with the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case proceeds from the way the original
labor arbiter framed his decision. The decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it has been confirmed with finality. This is
the finding of the illegality of the dismissal and the awards of separation pay in lieu of reinstatement, backwages,
attorney's fees, and legal interests.
The second part is the computation of the awards made. On its face, the computation the labor arbiter made
shows that it was time-bound as can be seen from the figures used in the computation. This part, being merely a
computation of what the first part of the decision established and declared, can, by its nature, be re-computed.
This is the part, too, that the petitioner now posits should no longer be re-computed because the computation is
already in the labor arbiter's decision that the CA had affirmed. The public and private respondents, on the other
hand, posit that a re-computation is necessary because the relief in an illegal dismissal decision goes all the way
up to reinstatement if reinstatement is to be made, or up to the finality of the decision, if separation pay is to be
given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal dismissal had taken place, also made
a computation of the award, is understandable in light of Section 3, Rule VIII of the then NLRC Rules of Procedure
which requires that a computation be made. This Section in part states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all events, as far as practicable, shall
embody in any such decision or order the detailed and full amount awarded.
Clearly implied from this original computation is its currency up to the finality of the labor arbiter's decision. As we
noted above, this implication is apparent from the terms of the computation itself, and no question would have
arisen had the parties terminated the case and implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on the finding of illegality as
well as on all the consequent awards made. Hence, the petitioner appealed the case to the NLRC which, in turn,
affirmed the labor arbiter's decision. By law, the NLRC decision is final, reviewable only by the CA on jurisdictional
grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional grounds through a timely filed
Rule 65 petition for certiorari. The CA decision, finding that NLRC exceeded its authority in affirming the payment
of 13th month pay and indemnity, lapsed to finality and was subsequently returned to the labor arbiter of origin for
execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal portion of the original labor
arbiter's decision, the implementing labor arbiter ordered the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had the case been terminated and implemented at the
labor arbiter's level. Thus, the labor arbiter re-computed the award to include the separation pay and the
backwages due up to the finality of the CA decision that fully terminated the case on the merits. Unfortunately, the
labor arbiter's approved computation went beyond the finality of the CA decision (July 29, 2003) and included as
well the payment for awards the final CA decision had deleted - specifically, the proportionate 13th month pay and
the indemnity awards. Hence, the CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it essentially considered the
labor arbiter's original decision in accordance with its basic component parts as we discussed above. To reiterate,
the first part contains the finding of illegality and its monetary consequences; the second part is the computation of
the awards or monetary consequences of the illegal dismissal, computed as of the time of the labor arbiter's
original decision.28
Consequently, from the above disquisitions, under the terms of the decision which is sought to be executed by the
petitioner, no essential change is made by a recomputation as this step is a necessary consequence that flows
from the nature of the illegality of dismissal declared by the Labor Arbiter in that decision.29 A recomputation (or
an original computation, if no previous computation has been made) is a part of the law – specifically, Article 279
of the Labor Code and the established jurisprudence on this provision – that is read into the decision. By the
nature of an illegal dismissal case, the reliefs continue to add up until full satisfaction, as expressed under Article
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279 of the Labor Code. The recomputation of the consequences of illegal dismissal upon execution of the decision
does not constitute an alteration or amendment of the final decision being implemented. The illegal dismissal ruling
stands; only the computation of monetary consequences of this dismissal is affected, and this is not a violation of
the principle of immutability of final judgments.30
That the amount respondents shall now pay has greatly increased is a consequence that it cannot avoid as it is
the risk that it ran when it continued to seek recourses against the Labor Arbiter's decision. Article 279 provides
for the consequences of illegal dismissal in no uncertain terms, qualified only by jurisprudence in its interpretation
of when separation pay in lieu of reinstatement is allowed. When that happens, the finality of the illegal dismissal
decision becomes the reckoning point instead of the reinstatement that the law decrees. In allowing separation
pay, the final decision effectively declares that the employment relationship ended so that separation pay and
backwages are to be computed up to that point.31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping Lines, Inc. v. Court of
Appeals,32 the Court laid down the guidelines regarding the manner of computing legal interest, to wit:
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made,
the interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally adjudged.
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated
May 16, 2013, approved the amendment of Section 234 of Circular No. 905, Series of 1982 and, accordingly,
issued Circular No. 799,35 Series of 2013, effective July 1, 2013, the pertinent portion of which reads:
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions governing the
rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of Circular No. 905,
Series of 1982:
Section 1. 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 an express contract as to such rate of interest, shall be
six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.136 of the Manual of Regulations for Banks and
Sections 4305Q.1,37 4305S.338 and 4303P.139 of the Manual of Regulations for Non-Bank Financial
Institutions are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that would govern the
parties, the rate of legal interest for loans or forbearance of any money, goods or credits and the rate allowed in
judgments shall no longer be twelve percent (12%) per annum - as reflected in the case of Eastern Shipping
Lines40 and Subsection X305.1 of the Manual of Regulations for Banks and Sections 4305Q.1, 4305S.3 and
4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions, before its amendment by BSP-MB
Circular No. 799 - but will now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not retroactively. Consequently, the twelve
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percent (12%) per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of six
percent (6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B. Olaguer v. Bangko Sentral
Monetary Board,41 this Court affirmed the authority of the BSP-MB to set interest rates and to issue and enforce
Circulars when it ruled that "the BSP-MB may prescribe the maximum rate or rates of interest for all loans or
renewals thereof or the forbearance of any money, goods or credits, including those for loans of low priority such
as consumer loans, as well as such loans made by pawnshops, finance companies and similar credit institutions. It
even authorizes the BSP-MB to prescribe different maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory prior to July 1, 2013, said
judgments shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein. 1 a w p + + i1
To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines42 are
accordingly modified to embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages. 1 â w p h i1
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages, except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but
when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the Court of Appeals in CA-G.R.
SP No. 98591, and the Resolution dated October 9, 2009 are REVERSED and SET ASIDE. Respondents are
Ordered to Pay petitioner:
(1) backwages computed from the time petitioner was illegally dismissed on January 24, 1997 up to May 27,
2002, when the Resolution of this Court in G.R. No. 151332 became final and executory;
(2) separation pay computed from August 1990 up to May 27, 2002 at the rate of one month pay per year of
service; and
(3) interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002
to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.
The Labor Arbiter is hereby ORDERED to make another recomputation of the total monetary benefits awarded
and due to petitioner in accordance with this Decision.
SO ORDERED.
DIOSDADO M. PERALTA
Associate Justice
11/9/2017 G.R. No. L-66826
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SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-66826 August 19, 1988
BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.
Pacis & Reyes Law Office for petitioner.
Ernesto T. Zshornack, Jr. for private respondent.
CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank and Trust Company of the Philippines [hereafter referred to as
"COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter referred to as BPI absorbed COMTRUST through a corporate merger, and was
substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of First Instance of Rizal —
Caloocan City a complaint against COMTRUST alleging four causes of action. Except for the third cause of action,
the CFI ruled in favor of Zshornack. The bank appealed to the Intermediate Appellate Court which modified the CFI
decision absolving the bank from liability on the fourth cause of action. The pertinent portions of the judgment, as
modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings account of plaintiff (No. 25-
4109) the amount of U.S $1,000.00 as of October 27, 1975 to earn interest together with the
remaining balance of the said account at the rate fixed by the bank for dollar deposits under Central
Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S. $3,000.00 immediately
upon the finality of this decision, without interest for the reason that the said amount was merely held
in custody for safekeeping, but was not actually deposited with the defendant COMTRUST because
being cash currency, it cannot by law be deposited with plaintiffs dollar account and defendant's only
obligation is to return the same to plaintiff upon demand;
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5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as damages in the
concept of litigation expenses and attorney's fees suffered by plaintiff as a result of the failure of the
defendant bank to restore to his (plaintiffs) account the amount of U.S. $1,000.00 and to return to him
(plaintiff) the U.S. $3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any liability to Zshornack. The
latter not having appealed the Court of Appeals decision, the issues facing this Court are limited to the bank's
liability with regard to the first and second causes of action and its liability for damages.
1. We first consider the first cause of action, On the dates material to this case, Rizaldy Zshornack and his wife,
Shirley Gorospe, maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso current
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11/9/2017 G.R. No. L-66826
account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V. Garcia, Assistant Branch
Manager of COMTRUST Quezon City, payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the
application, Garcia indicated that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings
account of the Zshornacks; the charges for commission, documentary stamp tax and others totalling P17.46 were
to be charged to Current Acct. No. 210465-29, again, the current account of the Zshornacks. There was no
indication of the name of the purchaser of the dollar draft.
On the same date, October 27,1975, COMTRUST, under the signature of Virgilio V. Garcia, issued a check
payable to the order of Leovigilda D. Dizon in the sum of US $1,000 drawn on the Chase Manhattan Bank, New
York, with an indication that it was to be charged to Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he demanded an explanation from the
bank. In answer, COMTRUST claimed that the peso value of the withdrawal was given to Atty. Ernesto Zshornack,
Jr., brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a cashier's check for
P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling of both the trial court and
the Appellate Court on the first cause of action. Petitioner must be held liable for the unauthorized withdrawal of
US$1,000.00 from private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings account, the bank has adopted
inconsistent theories. First, it still maintains that the peso value of the amount withdrawn was given to Atty. Ernesto
Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the same time, the bank claims that
the withdrawal was made pursuant to an agreement where Zshornack allegedly authorized the bank to withdraw
from his dollar savings account such amount which, when converted to pesos, would be needed to fund his peso
current account. If indeed the peso equivalent of the amount withdrawn from the dollar account was credited to the
peso current account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation, petitioner bank has not shown
how the transaction involving the cashier's check is related to the transaction involving the dollar draft in favor of
Dizon financed by the withdrawal from Rizaldy's dollar account. The two transactions appear entirely independent
of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality distinct and separate from Rizaldy
Zshornack. Payment made to Ernesto cannot be considered payment to Rizaldy.
As to the second explanation, even if we assume that there was such an agreement, the evidence do not show
that the withdrawal was made pursuant to it. Instead, the record reveals that the amount withdrawn was used to
finance a dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There
is no proof whatsoever that peso Current Account No. 210-465-29 was ever credited with the peso equivalent of
the US$1,000.00 withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court alleged that on December 8, 1975,
Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00 cash (popularly known as greenbacks) for
safekeeping, and that the agreement was embodied in a document, a copy of which was attached to and made
part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US DOLLARS:
THREE THOUSAND ONLY (US$3,000.00) for safekeeping.
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Received by:
(Sgd.) VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso current account at
prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the authenticity and due execution of
the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US $3,000 for
safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST explained that the sum
was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting
to P14,920.00 were deposited to Zshornack's current account per deposit slip accomplished by Garcia; the
remaining US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to P8,350.00 were
deposited to his current account per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current account at prevailing
conversion rates, BPI now posits another ground to defeat private respondent's claim. It now argues that the
contract embodied in the document is the contract of depositum (as defined in Article 1962, New Civil Code), which
banks do not enter into. The bank alleges that Garcia exceeded his powers when he entered into the transaction.
Hence, it is claimed, the bank cannot be liable under the contract, and the obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point which arises on the pleadings, must
be considered.
The second cause of action is based on a document purporting to be signed by COMTRUST, a copy of which
document was attached to the complaint. In short, the second cause of action was based on an actionable
document. It was therefore incumbent upon the bank to specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the authority of Garcia to bind the
corporation; and (2) to deny its capacity to enter into such contract. [See, E.B. Merchant v. International Banking
Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to enter into the contract, was
ever filed. Hence, the bank is deemed to have admitted not only Garcia's authority, but also the bank's power, to
enter into the contract in question.
In the past, this Court had occasion to explain the reason behind this procedural requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated.
In dealing with corporations the public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the external indicia of authority, any
person, not having notice of want of authority, may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that authority and thereby held him out
as a person competent to bind the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will be bound, notwithstanding the
actual authority may never have been granted
... Whether a particular officer actually possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not readily accessible to the stranger who
deals with the corporation on the faith of the ostensible authority exercised by some of the corporate
officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in
its name, that the corporation should be required, if it denies his authority, to state such defense in its
answer. By this means the plaintiff is apprised of the fact that the agent's authority is contested; and
he is given an opportunity to adduce evidence showing either that the authority existed or that the
contract was ratified and approved. [Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645- 646
(1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of absolving a corporation
from liability every time an officer enters into a contract which is beyond corporate powers, even without the proper
allegation or proof that the corporation has not authorized nor ratified the officer's act, is to cast corporations in so
perfect a mold that transgressions and wrongs by such artificial beings become impossible [Bissell v. Michigan
Southern and N.I.R. Cos 22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized acts is
only to put forth a very plain truism but to say that such bodies have no power or capacity to err is to impute to
them an excellence which does not belong to any created existence with which we are acquainted. The distinction
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between power and right is no more to be lost sight of in respect to artificial than in respect to natural persons."
[Ibid.]
Having determined that Garcia's act of entering into the contract binds the corporation, we now determine the
correct nature of the contract, and its legal consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00 was received by the bank for
safekeeping. The subsequent acts of the parties also show that the intent of the parties was really for the bank to
safely keep the dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded the return of the
money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit but some other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign exchange. Hence, the
transaction was covered by Central Bank Circular No. 20, Restrictions on Gold and Foreign Exchange
Transactions, promulgated on December 9, 1949, which was in force at the time the parties entered into the
transaction involved in this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in them of whatever nature, including,
where applicable their exportation and importation, shall NOT be effected, except with respect to
deposit accounts included in sub-paragraphs (b) and (c) of this paragraph, when such deposit
accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with banks or banking
institutions located in the Philippines, including money, checks, drafts, bullions bank
drafts, deposit accounts (demand, time and savings), all debts, indebtedness or
obligations, financial brokers and investment houses, notes, debentures, stocks, bonds,
coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of
security, expressed in foreign currencies, or if payable abroad, irrespective of the
currency in which they are expressed, and belonging to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or
corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in subparagraph (a) above,
whether or not held through, in, or with banks or banking institutions, and existent within
the Philippines, which belong to any person, firm, partnership, association, branch office,
agency, company or other unincorporated body or corporation not residing or located
within the Philippines;
(c) Any and all assets existent within the Philippines including money, checks, drafts,
bullions, bank drafts, all debts, indebtedness or obligations, financial securities
commonly dealt in by bankers, brokers and investment houses, notes, debentures,
stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in
the nature of security expressed in foreign currencies, or if payable abroad, irrespective
of the currency in which they are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or other unincorporated body
or corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by those authorized to
deal in foreign exchange. All receipts of foreign exchange by any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or corporation shall be
sold to the authorized agents of the Central Bank by the recipients within one business day following
the receipt of such foreign exchange. Any person, firm, partnership, association, branch office,
agency, company or other unincorporated body or corporation, residing or located within the
Philippines, who acquires on and after the date of this Circular foreign exchange shall not, unless
licensed by the Central Bank, dispose of such foreign exchange in whole or in part, nor receive less
than its full value, nor delay taking ownership thereof except as such delay is customary; Provided,
further, That within one day upon taking ownership, or receiving payment, of foreign exchange the
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aforementioned persons and entities shall sell such foreign exchange to designated agents of the
Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person, firm or corporation,
foreign or domestic, who being bound to the observance thereof, or of such other rules, regulations
or directives as may hereafter be issued in implementation of this Circular, shall fail or refuse to
comply with, or abide by, or shall violate the same, shall be subject to the penal sanctions provided in
the Central Bank Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281, Regulations on Foreign
Exchange, promulgated on November 26, 1969 by limiting its coverage to Philippine residents only. Section 6
provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company or corporation shall
be sold to authorized agents of the Central Bank by the recipients within one business day following
the receipt of such foreign exchange. Any resident person, firm, company or corporation residing or
located within the Philippines, who acquires foreign exchange shall not, unless authorized by the
Central Bank, dispose of such foreign exchange in whole or in part, nor receive less than its full value,
nor delay taking ownership thereof except as such delay is customary; Provided, That, within one
business day upon taking ownership or receiving payment of foreign exchange the aforementioned
persons and entities shall sell such foreign exchange to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they intended the bank to
safekeep the foreign exchange, and return it later to Zshornack, who alleged in his complaint that he is a
Philippine resident. The parties did not intended to sell the US dollars to the Central Bank within one business day
from receipt. Otherwise, the contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank within one business day
from receipt, is a transaction which is not authorized by CB Circular No. 20, it must be considered as one which
falls under the general class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void,
having been executed against the provisions of a mandatory/prohibitory law. More importantly, it affords neither of
the parties a cause of action against the other. "When the nullity proceeds from the illegality of the cause or object
of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no
cause of action against each other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the State
to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the concept of litigation expenses and
attorney's fees to be reasonable. The award is sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered to restore to the dollar
savings account of private respondent the amount of US$1,000.00 as of October 27, 1975 to earn interest at the
rate fixed by the bank for dollar savings deposits. Petitioner is further ordered to pay private respondent the
amount of P8,000.00 as damages. The other causes of action of private respondent are ordered dismissed.
SO ORDERED.
Gutierrez, Jr. and Bidin, JJ., concur.
Fernan, C.J., took no part
Feliciano, J., concur in the result.
11/9/2017 G.R. No. L-6913
Custom Search

SUPREME COURT
Manila
EN BANC
G.R. No. L-6913 November 21, 1913
THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,

vs.
GREGORIO DE LA PEÑA, administrator of the estate of Father Agustin de la Peña, defendant-appellant.
J. Lopez Vito, for appellant.

Arroyo and Horrilleno, for appellee.
MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of First Instance of Iloilo, awarding to the plaintiff
the sum of P6,641, with interest at the legal rate from the beginning of the action.
It is established in this case that the plaintiff is the trustee of a charitable bequest made for the construction of a
leper hospital and that father Agustin de la Peña was the duly authorized representative of the plaintiff to receive
the legacy. The defendant is the administrator of the estate of Father De la Peña.
In the year 1898 the books Father De la Peña, as trustee, showed that he had on hand as such trustee the sum of
P6,641, collected by him for the charitable purposes aforesaid. In the same year he deposited in his personal
account P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the war of the
revolution, Father De la Peña was arrested by the military authorities as a political prisoner, and while thus
detained made an order on said bank in favor of the United States Army officer under whose charge he then was
for the sum thus deposited in said bank. The arrest of Father De la Peña and the confiscation of the funds in the
bank were the result of the claim of the military authorities that he was an insurgent and that the funds thus
deposited had been collected by him for revolutionary purposes. The money was taken from the bank by the
military authorities by virtue of such order, was confiscated and turned over to the Government.
While there is considerable dispute in the case over the question whether the P6,641 of trust funds was included
in the P19,000 deposited as aforesaid, nevertheless, a careful examination of the case leads us to the conclusion
that said trust funds were a part of the funds deposited and which were removed and confiscated by the military
authorities of the United States.
That branch of the law known in England and America as the law of trusts had no exact counterpart in the Roman
law and has none under the Spanish law. In this jurisdiction, therefore, Father De la Peña's liability is determined
by those portions of the Civil Code which relate to obligations. (Book 4, Title 1.)
Although the Civil Code states that "a person obliged to give something is also bound to preserve it with the
diligence pertaining to a good father of a family" (art. 1094), it also provides, following the principle of the Roman
law, major casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for events which could
not be foreseen, or which having been foreseen were inevitable, with the exception of the cases expressly
mentioned in the law or those in which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la Peña did not thereby assume an
obligation different from that under which he would have lain if such deposit had not been made, nor did he
thereby make himself liable to repay the money at all hazards. If the had been forcibly taken from his pocket or
from his house by the military forces of one of the combatants during a state of war, it is clear that under the
provisions of the Civil Code he would have been exempt from responsibility. The fact that he placed the trust fund
in the bank in his personal account does not add to his responsibility. Such deposit did not make him a debtor who
must respond at all hazards.
11/9/2017 G.R. No. L-6913
We do not enter into a discussion for the purpose of determining whether he acted more or less negligently by
depositing the money in the bank than he would if he had left it in his home; or whether he was more or less
negligent by depositing the money in his personal account than he would have been if he had deposited it in a
separate account as trustee. We regard such discussion as substantially fruitless, inasmuch as the precise
question is not one of negligence. There was no law prohibiting him from depositing it as he did and there was no
law which changed his responsibility be reason of the deposit. While it may be true that one who is under
obligation to do or give a thing is in duty bound, when he sees events approaching the results of which will be
dangerous to his trust, to take all reasonable means and measures to escape or, if unavoidable, to temper the
effects of those events, we do not feel constrained to hold that, in choosing between two means equally legal, he
is culpably negligent in selecting one whereas he would not have been if he had selected the other.
The court, therefore, finds and declares that the money which is the subject matter of this action was deposited by
Father De la Peña in the Hongkong and Shanghai Banking Corporation of Iloilo; that said money was forcibly
taken from the bank by the armed forces of the United States during the war of the insurrection; and that said
Father De la Peña was not responsible for its loss.
The judgment is therefore reversed, and it is decreed that the plaintiff shall take nothing by his complaint.
Arellano, C.J., Torres and Carson, JJ., concur.
Separate Opinions
TRENT, J., dissenting:
I dissent. Technically speaking, whether Father De la Peña was a trustee or an agent of the plaintiff his books
showed that in 1898 he had in his possession as trustee or agent the sum of P6,641 belonging to the plaintiff as
the head of the church. This money was then clothed with all the immunities and protection with which the law
seeks to invest trust funds. But when De la Peña mixed this trust fund with his own and deposited the whole in the
bank to his personal account or credit, he by this act stamped on the said fund his own private marks and
unclothed it of all the protection it had. If this money had been deposited in the name of De la Peña as trustee or
agent of the plaintiff, I think that it may be presumed that the military authorities would not have confiscated it for
the reason that they were looking for insurgent funds only. Again, the plaintiff had no reason to suppose that De la
Peña would attempt to strip the fund of its identity, nor had he said or done anything which tended to relieve De la
Peña from the legal reponsibility which pertains to the care and custody of trust funds.
The Supreme Court of the United States in the United State vs. Thomas (82 U. S., 337), at page 343, said:
"Trustees are only bound to exercise the same care and solicitude with regard to the trust property which they
would exercise with regard to their own. Equity will not exact more of them. They are not liable for a loss by theft
without their fault. But this exemption ceases when they mix the trust-money with their own, whereby it loses its
identity, and they become mere debtors."
If this proposition is sound and is applicable to cases arising in this jurisdiction, and I entertain no doubt on this
point, the liability of the estate of De la Peña cannot be doubted. But this court in the majority opinion says: "The
fact that he (Agustin de la Peña) placed the trust fund in the bank in his personal account does not add to his
responsibility. Such deposit did not make him a debtor who must respond at all hazards. . . . There was no law
prohibiting him from depositing it as he did, and there was no law which changed his responsibility, by reason of
the deposit."
I assume that the court in using the language which appears in the latter part of the above quotation meant to say
that there was no statutory law regulating the question. Questions of this character are not usually governed by
statutory law. The law is to be found in the very nature of the trust itself, and, as a general rule, the courts say
what facts are necessary to hold the trustee as a debtor.
If De la Peña, after depositing the trust fund in his personal account, had used this money for speculative
purposes, such as the buying and selling of sugar or other products of the country, thereby becoming a debtor,
there would have been no doubt as to the liability of his estate. Whether he used this money for that purpose the
record is silent, but it will be noted that a considerable length of time intervened from the time of the deposit until
the funds were confiscated by the military authorities. In fact the record shows that De la Peña deposited on June
27, 1898, P5,259, on June 28 of that year P3,280, and on August 5 of the same year P6,000. The record also
shows that these funds were withdrawn and again deposited all together on the 29th of May, 1900, this last deposit
amounting to P18,970. These facts strongly indicate that De la Peña had as a matter of fact been using the money
in violation of the trust imposed in him. la w p h !1 .n e t
11/9/2017 G.R. No. L-6913
If the doctrine announced in the majority opinion be followed in cases hereafter arising in this jurisdiction trust
funds will be placed in precarious condition. The position of the trustee will cease to be one of trust.
[G.R. No. 160544. February 21, 2005]
TRIPLE-V vs. FILIPINO MERCHANTS
THIRD DIVISION
Gentlemen:
Quoted hereunder, for your information, is a resolution of this Court dated FEB 21 2005.
G.R. No. 160544 (Triple-V Food Services, Inc. vs. Filipino Merchants Insurance Company, Inc.)
Assailed in this petition for review on certiorari is the decision[1] dated October 21, 2003 of the Court of
cralaw
Appeals in CA-G.R. CV No. 71223, affirming an earlier decision of the Regional Trial Court at Makati City,
Branch 148, in its Civil Case No. 98-838, an action for damages thereat filed by respondent Filipino
Merchants Insurance, Company, Inc., against the herein petitioner, Triple-V Food Services, Inc.
On March 2, 1997, at around 2:15 o'clock in the afternoon, a certain Mary Jo-Anne De Asis (De Asis) dined
at petitioner's Kamayan Restaurant at 15 West Avenue, Quezon City. De Asis was using a Mitsubishi Galant
Super Saloon Model 1995 with plate number UBU 955, assigned to her by her employer Crispa Textile Inc.
(Crispa). On said date, De Asis availed of the valet parking service of petitioner and entrusted her car key to
petitioner's valet counter. A corresponding parking ticket was issued as receipt for the car. The car was then
parked by petitioner's valet attendant, a certain Madridano, at the designated parking area. Few minutes
later, Madridano noticed that the car was not in its parking slot and its key no longer in the box where valet
attendants usually keep the keys of cars entrusted to them. The car was never recovered. Thereafter, Crispa
filed a claim against its insurer, herein respondent Filipino Merchants Insurance Company, Inc. (FMICI).
Having indemnified Crispa in the amount of P669.500 for the loss of the subject vehicle, FMICI, as subrogee
to Crispa's rights, filed with the RTC at Makati City an action for damages against petitioner Triple-V Food
Services, Inc., thereat docketed as Civil Case No. 98-838 which was raffled to Branch 148.
In its answer, petitioner argued that the complaint failed to aver facts to support the allegations of
recklessness and negligence committed in the safekeeping and custody of the subject vehicle, claiming that
it and its employees wasted no time in ascertaining the loss of the car and in informing De Asis of the
discovery of the loss. Petitioner further argued that in accepting the complimentary valet parking service, De
Asis received a parking ticket whereunder it is so provided that "[Management and staff will not be
responsible for any loss of or damage incurred on the vehicle nor of valuables contained therein", a provision
which, to petitioner's mind, is an explicit waiver of any right to claim indemnity for the loss of the car; and
that De Asis knowingly assumed the risk of loss when she allowed petitioner to park her vehicle, adding that
its valet parking service did not include extending a contract of insurance or warranty for the loss of the
vehicle.
During trial, petitioner challenged FMICI's subrogation to Crispa's right to file a claim for the loss of the car,
arguing that theft is not a risk insured against under FMICI's Insurance Policy No. PC-5975 for the subject
vehicle.
In a decision dated June 22, 2001, the trial court rendered judgment for respondent FMICI, thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff (FMICI) and against
the defendant Triple V (herein petitioner) and the latter is hereby ordered to pay plaintiff the following:
1. The amount of P669,500.00, representing actual damages plus compounded (sic);
2. The amount of P30,000.00 as acceptance fee plus the amount equal to 25% of the total amount due as
attorney's fees;
3. The amount of P50,000.00 as exemplary damages;

4. Plus, cost of suit.
Defendant Triple V is not therefore precluded from taking appropriate action against defendant Armando
Madridano.
SO ORDERED.
Obviously displeased, petitioner appealed to the Court of Appeals reiterating its argument that it was not a
depositary of the subject car and that it exercised due diligence and prudence in the safe keeping of the
vehicle, in handling the car-napping incident and in the supervision of its employees. It further argued that
there was no valid subrogation of rights between Crispa and respondent FMICI.
In a decision dated October 21, 2003,[2] the Court of Appeals dismissed petitioner's appeal and affirmed the
cralaw
appealed decision of the trial court, thus:
WHEREFORE, based on the foregoing premises, the instant appeal is hereby DISMISSED. Accordingly, the
assailed June 22, 2001 Decision of the RTC of Makati City - Branch 148 in Civil Case No. 98-838 is
AFFIRMED.
SO ORDERED.
In so dismissing the appeal and affirming the appealed decision, the appellate court agreed with the findings
and conclusions of the trial court that: (a) petitioner was a depositary of the subject vehicle; (b) petitioner
was negligent in its duties as a depositary thereof and as an employer of the valet attendant; and (c) there
was a valid subrogation of rights between Crispa and respondent FMICI.
Hence, petitioner's present recourse.
We agree with the two (2) courts below.
When De Asis entrusted the car in question to petitioners valet attendant while eating at
petitioner's Kamayan Restaurant, the former expected the car's safe return at the end of her meal. Thus,
petitioner was constituted as a depositary of the same car. Petitioner cannot evade liability by arguing that
neither a contract of deposit nor that of insurance, guaranty or surety for the loss of the car was constituted
when De Asis availed of its free valet parking service.
In a contract of deposit, a person receives an object belonging to another with the obligation of safely
keeping it and returning the same.[3] A deposit may be constituted even without any consideration. It is not
cralaw
necessary that the depositary receives a fee before it becomes obligated to keep the item entrusted for
safekeeping and to return it later to the depositor.
Specious is petitioner's insistence that the valet parking claim stub it issued to De Asis contains a clear
exclusion of its liability and operates as an explicit waiver by the customer of any right to claim indemnity
for any loss of or damage to the vehicle.
The parking claim stub embodying the terms and conditions of the parking, including that of relieving
petitioner from any loss or damage to the car, is essentially a contract of adhesion, drafted and prepared as
it is by the petitioner alone with no participation whatsoever on the part of the customers, like De Asis, who
merely adheres to the printed stipulations therein appearing. While contracts of adhesion are not void in
themselves, yet this Court will not hesitate to rule out blind adherence thereto if they prove to be one-sided
under the attendant facts and circumstances.[4] cralaw
Hence, and as aptly pointed out by the Court of Appeals, petitioner must not be allowed to use its parking
claim stub's exclusionary stipulation as a shield from any responsibility for any loss or damage to vehicles or
to the valuables contained therein. Here, it is evident that De Asis deposited the car in question with the
petitioner as part of the latter's enticement for customers by providing them a safe parking space within the
vicinity of its restaurant. In a very real sense, a safe parking space is an added attraction to petitioner's
restaurant business because customers are thereby somehow assured that their vehicle are safely kept,
rather than parking them elsewhere at their own risk. Having entrusted the subject car to petitioner's valet
attendant, customer De Asis, like all of petitioner's customers, fully expects the security of her car while at
petitioner's premises/designated parking areas and its safe return at the end of her visit at petitioner's
restaurant.
Petitioner's argument that there was no valid subrogation of rights between Crispa and FMICI because theft
was not a risk insured against under FMICI's Insurance Policy No. PC-5975 holds no water.
Insurance Policy No. PC-5975 which respondent FMICI issued to Crispa contains, among others things, the
following item: "Insured's Estimate of Value of Scheduled Vehicle- P800.000".[5] On the basis of such item,
cralaw
the trial court concluded that the coverage includes a full comprehensive insurance of the vehicle in case of
damage or loss. Besides, Crispa paid a premium of P10,304 to cover theft. This is clearly shown in the
breakdown of premiums in the same policy.[6] Thus, having indemnified CRISPA for the stolen car, FMICI, as
cralaw
correctly ruled by the trial court and the Court of Appeals, was properly subrogated to Crispa's rights against
petitioner, pursuant to Article 2207 of the New Civil Code[7].
Anent the trial court's findings of negligence on the part of the petitioner, which findings were affirmed by
the appellate court, we have consistently ruled that findings of facts of trial courts, more so when affirmed,
as here, by the Court of Appeals, are conclusive on this Court unless the trial court itself ignored, overlooked
or misconstrued facts and circumstances which, if considered, warrant a reversal of the outcome of the
case.[8] This is not so in the case at bar. For, we have ourselves reviewed the records and find no
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justification to deviate from the trial court's findings.
WHEREFORE, petition is hereby DENIED DUE COURSE.
SO ORDERED.
11/9/2017 G.R. No. 90027
Custom Search

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,

vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and another party in a contract of rent of a safety deposit
box with respect to its contents placed by the latter one of bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao
entered into an agreement whereby the former purchased from the latter two (2) parcels of land for a
consideration of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was
covered by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a
Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be transferred to
the petitioner upon full payment of the purchase price and that the owner's copies of the certificates of titles
thereto, Transfer Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of
any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner and
the Pugaos upon full payment of the purchase price. Petitioner, through Sergio Aguirre, and the Pugaos then
rented Safety Deposit Box No. 1448 of private respondent Security Bank and Trust Company, a domestic banking
corporation hereinafter referred to as the respondent Bank. For this purpose, both signed a contract of lease
(Exhibit "2") which contains, inter alia, the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith.1
After the execution of the contract, two (2) renter's keys were given to the renters — one to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key remained in the possession of the respondent Bank. The
safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can be
opened only with the use of both keys. Petitioner claims that the certificates of title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a price of P225.00
per square meter which, as petitioner alleged in its complaint, translates to a profit of P100.00 per square meter or
a total of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre, accompanied by the Pugaos,
then proceeded to the respondent Bank on 4 October 1979 to open the safety deposit box and get the certificates
of title. However, when opened in the presence of the Bank's representative, the box yielded no such certificates.
Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the lots;
as a consequence thereof, the petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the
http://www.lawphil.net/judjuris/juri1993/mar1993/gr_90027_1993.html 1/6
11/9/2017 G.R. No. 90027
2
latter filed on 1 September 1980 a complaint for damages against the respondent Bank with the Court of First
Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No. 38382.
In its Answer with Counterclaim,3 respondent Bank alleged that the petitioner has no cause of action because of
paragraphs 13 and 14 of the contract of lease (Exhibit "2"); corollarily, loss of any of the items or articles contained
in the box could not give rise to an action against it. It then interposed a counterclaim for exemplary damages as
well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to the counterclaim.4
In due course, the trial court, now designated as Branch 161 of the Regional Trial Court (RTC) of Pasig, Metro
Manila, rendered a decision5 adverse to the petitioner on 8 December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay defendant the
amount of FIVE THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff.6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs 13 and 14 of the contract of
lease, the Bank has no liability for the loss of the certificates of title. The court declared that the said provisions
are binding on the parties.
Its motion for reconsideration7 having been denied, petitioner appealed from the adverse decision to the
respondent Court of Appeals which docketed the appeal as CA-G.R. CV No. 15150. Petitioner urged the
respondent Court to reverse the challenged decision because the trial court erred in (a) absolving the respondent
Bank from liability from the loss, (b) not declaring as null and void, for being contrary to law, public order and
public policy, the provisions in the contract for lease of the safety deposit box absolving the Bank from any liability
for loss, (c) not concluding that in this jurisdiction, as well as under American jurisprudence, the liability of the Bank
is settled and (d) awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and
exemplary damages and attorney's fees.8
In its Decision promulgated on 4 July 1989,9 respondent Court affirmed the appealed decision principally on the
theory that the contract (Exhibit "2") executed by the petitioner and respondent Bank is in the nature of a contract
of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit box and its
contents while the Bank retained no right to open the said box because it had neither the possession nor control
over it and its contents. As such, the contract is governed by Article 1643 of the Civil Code 10 which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or
use of a thing for a price certain, and for a period which may be definite or indefinite. However, no
lease for more than ninety-nine years shall be valid.
It invoked Tolentino vs. Gonzales 11 — which held that the owner of the property loses his control over the
property leased during the period of the contract — and Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments which earn interest
shall be bound to collect the latter when it becomes due, and to take such steps as may be necessary
in order that the securities may preserve their value and the rights corresponding to them according
to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to maintain the contents of
the box. The stipulation absolving the defendant-appellee from liability is in accordance with the nature of
the contract of lease and cannot be regarded as contrary to law, public order and public policy." 12 The
appellate court was quick to add, however, that under the contract of lease of the safety deposit box,
respondent Bank is not completely free from liability as it may still be made answerable in case unauthorized
persons enter into the vault area or when the rented box is forced open. Thus, as expressly provided for in
stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe
and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's Resolution of 28 August 1989, 15
petitioner took this recourse under Rule 45 of the Rules of Court and urges Us to review and set aside the
respondent Court's ruling. Petitioner avers that both the respondent Court and the trial court (a) did not properly
and legally apply the correct law in this case, (b) acted with grave abuse of discretion or in excess of jurisdiction
amounting to lack thereof and (c) set a precedent that is contrary to, or is a departure from precedents adhered to
11/9/2017 G.R. No. 90027
and affirmed by decisions of this Court and precepts in American jurisprudence adopted in the Philippines. It
reiterates the arguments it had raised in its motion to reconsider the trial court's decision, the brief submitted to
the respondent Court and the motion to reconsider the latter's decision. In a nutshell, petitioner maintains that
regardless of nomenclature, the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of
deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss of the certificates of title
pursuant to Article 1972 of the said Code which provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when required, to the
depositor, or to his heirs and successors, or to the person who may have been designated in the
contract. His responsibility, with regard to the safekeeping and the loss of the thing, shall be governed
by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the degree of care that
the depositary must observe.
17
Petitioner then quotes a passage from American Jurisprudence which is supposed to expound on the
prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit company leases a safe-deposit box or
safe and the lessee takes possession of the box or safe and places therein his securities or other
valuables, the relation of bailee and bail or is created between the parties to the transaction as to
such securities or other valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall know, the character or
description of the property which is deposited in such safe-deposit box or safe does not change that
relation. That access to the contents of the safe-deposit box can be had only by the use of a key
retained by the lessee ( whether it is the sole key or one to be used in connection with one retained
by the lessor) does not operate to alter the foregoing rule. The argument that there is not, in such a
case, a delivery of exclusive possession and control to the deposit company, and that therefore the
situation is entirely different from that of ordinary bailment, has been generally rejected by the courts,
usually on the ground that as possession must be either in the depositor or in the company, it should
reasonably be considered as in the latter rather than in the former, since the company is, by the
nature of the contract, given absolute control of access to the property, and the depositor cannot gain
access thereto without the consent and active participation of the company. . . . (citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the rental of a bank safety
deposit box in consideration of a fixed amount at stated periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are contrary to law and public policy
and should be declared null and void. In support thereof, it cites Article 1306 of the Civil Code which provides that
parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition and required the parties to
simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil Code. However, We do not fully subscribe to its view that
the same is a contract of deposit that is to be strictly governed by the provisions in the Civil Code on deposit; 19
the contract in the case at bar is a special kind of deposit. It cannot be characterized as an ordinary contract of
lease under Article 1643 because the full and absolute possession and control of the safety deposit box was not
given to the joint renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent
Bank; without this key, neither of the renters could open the box. On the other hand, the respondent Bank could
not likewise open the box without the renter's key. In this case, the said key had a duplicate which was made so
that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply. Neither could Article 1975, also
relied upon by the respondent Court, be invoked as an argument against the deposit theory. Obviously, the first
paragraph of such provision cannot apply to a depositary of certificates, bonds, securities or instruments which
earn interest if such documents are kept in a rented safety deposit box. It is clear that the depositary cannot open
the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find unanimous support even in American
jurisprudence. We agree with the petitioner that under the latter, the prevailing rule is that the relation between a
11/9/2017 G.R. No. 90027
bank renting out safe-deposit boxes and its customer with respect to the contents of the box is that of a bail or and
bailee, the bailment being for hire and mutual benefit. 21 This is just the prevailing view because:
There is, however, some support for the view that the relationship in question might be more properly
characterized as that of landlord and tenant, or lessor and lessee. It has also been suggested that it
should be characterized as that of licensor and licensee. The relation between a bank, safe-deposit
company, or storage company, and the renter of a safe-deposit box therein, is often described as
contractual, express or implied, oral or written, in whole or in part. But there is apparently no
jurisdiction in which any rule other than that applicable to bailments governs questions of the liability
and rights of the parties in respect of loss of the contents of safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has been adopted. Section 72 of the General Banking Act 23
pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this Act, banking institutions
other than building and loan associations may perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety deposit
boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this section as
depositories or as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit
boxes is not independent from, but related to or in conjunction with, this principal function. A contract of deposit
may be entered into orally or in writing 25 and, pursuant to Article 1306 of the Civil Code, the parties thereto may
establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order or public policy. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is governed by Title I, Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of fraud, negligence,
delay or contravention of the tenor of the agreement. 26 In the absence of any stipulation prescribing the degree of
diligence required, that of a good father of a family is to be observed. 27 Hence, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay
would be void for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13
and 14 of the questioned contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it
assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition
for indeed, said provisions are inconsistent with the respondent Bank's responsibility as a depositary under
Section 72(a) of the General Banking Act. Both exempt the latter from any liability except as contemplated in
condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who shall be
admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe
and beyond this, the Bank will not be responsible for the contents of any safe rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is
not correct to assert that the Bank has neither the possession nor control of the contents of the box since in
fact, the safety deposit box itself is located in its premises and is under its absolute control; moreover, the
respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their
respective boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the
extent above stated, the foregoing conditions in the contract in question are void and ineffective. It has been
said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company,

the parties, since the relation is a contractual one, may by special contract define their respective
duties or provide for increasing or limiting the liability of the deposit company, provided such contract
is not in violation of law or public policy. It must clearly appear that there actually was such a special
11/9/2017 G.R. No. 90027
contract, however, in order to vary the ordinary obligations implied by law from the relationship of the
parties; liability of the deposit company will not be enlarged or restricted by words of doubtful
meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or
negligence or that of its agents or servants, and if a provision of the contract may be construed as an
attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of
a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence,
the view has been taken that such a lessor may limits its liability to some extent by agreement or
stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be based on or proceed
from a characterization of the impugned contract as a contract of lease, but rather on the fact that no competent
proof was presented to show that respondent Bank was aware of the agreement between the petitioner and the
Pugaos to the effect that the certificates of title were withdrawable from the safety deposit box only upon both
parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was
due to the fraud or negligence of the respondent Bank. This in turn flows from this Court's determination that the
contract involved was one of deposit. Since both the petitioner and the Pugaos agreed that each should have one
(1) renter's key, it was obvious that either of them could ask the Bank for access to the safety deposit box and,
with the use of such key and the Bank's own guard key, could open the said box, without the other renter being
present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no bad faith on its part had
been established, the trial court erred in condemning the petitioner to pay the respondent Bank attorney's fees. To
this extent, the Decision (dispositive portion) of public respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for attorney's fees from the 4
July 1989 Decision of the respondent Court of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the
pronouncement We made above on the nature of the relationship between the parties in a contract of lease of
safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED and the instant Petition for
Review is otherwise DENIED for lack of merit.
SO ORDERED.
Feliciano, Bidin, Romero and Melo, JJ., concur.
Gutierrez, Jr., J., is on leave.
# Footnotes
1 Rollo, 102.
2 Annex "A" of Petition; Rollo, 28-32.
3 Annex "B", Id.; Id., 33-35.
4 Annex "C", Id.; Id., 36.
5 Annex "D" of Petition; Rollo, 38-54. Per Judge Cicero C. Jurado.
6 Id., 54.
7 Annex "E", Id.; Id., 55-68.
8 Rollo, 100-101.
9 Per Associate Justice Felipe B. Kalalo, concurred in by Associate Justices Bienvenido C. Ejercito
and Luis L. Victor. Annex "I" of Petition; Id., 89-105.
10 Citing PARAS, E.L., Civil Code of the Philippines, vol. 5, 1982 ed., 717.
11 50 Phil. 558 [1927].
11/9/2017 YHT Realty Corp vs CA : 126780 : February 17, 2005 : J. Tinga : Second Division : Decision
SECOND DIVISION
[G.R. No. 126780. February 17, 2005]
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM, petitioners,

vs. THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.
DECISION
TINGA, J.:
The primary question of interest before this Court is the only legal issue in the case: It is whether a
hotel may evade liability for the loss of items left with it for safekeeping by its guests, by having these
guests execute written waivers holding the establishment or its employees free from blame for such loss
in light of Article 2003 of the Civil Code which voids such waivers.
[1]
Before this Court is a Rule 45 petition for review of the Decision dated 19 October 1995 of the
[2]
Court of Appeals which affirmed the Decision dated 16 December 1991 of the Regional Trial Court
(RTC), Branch 13, of Manila, finding YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez
(Lainez) and Anicia Payam (Payam) jointly and solidarily liable for damages in an action filed by Maurice
McLoughlin (McLoughlin) for the loss of his American and Australian dollars deposited in the safety
deposit box of Tropicana Copacabana Apartment Hotel, owned and operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used to stay at Sheraton
Hotel during his trips to the Philippines prior to 1984 when he met Tan. Tan befriended McLoughlin by
showing him around, introducing him to important people, accompanying him in visiting impoverished
street children and assisting him in buying gifts for the children and in distributing the same to charitable
institutions for poor children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana
where Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of the hotel while
Lainez and Payam had custody of the keys for the safety deposit boxes of Tropicana. Tan took care of
McLoughlins booking at the Tropicana where he started staying during his trips to the Philippines from
[3]
December 1984 to September 1987.
On 30 October 1987, McLoughlin arrived from Australia and registered with Tropicana. He rented a
safety deposit box as it was his practice to rent a safety deposit box every time he registered at
Tropicana in previous trips. As a tourist, McLoughlin was aware of the procedure observed by Tropicana
relative to its safety deposit boxes. The safety deposit box could only be opened through the use of two
keys, one of which is given to the registered guest, and the other remaining in the possession of the
management of the hotel. When a registered guest wished to open his safety deposit box, he alone could
personally request the management who then would assign one of its employees to accompany the guest
[4]
and assist him in opening the safety deposit box with the two keys.
McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand US Dollars
(US$15,000.00) which he placed in two envelopes, one envelope containing Ten Thousand US Dollars
(US$10,000.00) and the other envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand
Australian Dollars (AUS$10,000.00) which he also placed in another envelope; two (2) other envelopes
containing letters and credit cards; two (2) bankbooks; and a checkbook, arranged side by side inside
[5]
the safety deposit box.
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin opened his safety
deposit box with his key and with the key of the management and took therefrom the envelope containing
Five Thousand US Dollars (US$5,000.00), the envelope containing Ten Thousand Australian Dollars
[6]
(AUS$10,000.00), his passports and his credit cards. McLoughlin left the other items in the box as he
did not check out of his room at the Tropicana during his short visit to Hongkong. When he arrived in
Hongkong, he opened the envelope which contained Five Thousand US Dollars (US$5,000.00) and
[7]
discovered upon counting that only Three Thousand US Dollars (US$3,000.00) were enclosed therein.
Since he had no idea whether somebody else had tampered with his safety deposit box, he thought that it
[8]
was just a result of bad accounting since he did not spend anything from that envelope.
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left for Australia.
When he arrived in Australia, he discovered that the envelope with Ten Thousand US Dollars
(US$10,000.00) was short of Five Thousand US Dollars (US$5,000). He also noticed that the jewelry
which he bought in Hongkong and stored in the safety deposit box upon his return to Tropicana was
[9]
likewise missing, except for a diamond bracelet.
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if some money
and/or jewelry which he had lost were found and returned to her or to the management. However, Lainez
told him that no one in the hotel found such things and none were turned over to the management. He
again registered at Tropicana and rented a safety deposit box. He placed therein one (1) envelope
containing Fifteen Thousand US Dollars (US$15,000.00), another envelope containing Ten Thousand
Australian Dollars (AUS$10,000.00) and other envelopes containing his traveling papers/documents. On
16 April 1988, McLoughlin requested Lainez and Payam to open his safety deposit box. He noticed that
in the envelope containing Fifteen Thousand US Dollars (US$15,000.00), Two Thousand US Dollars
(US$2,000.00) were missing and in the envelope previously containing Ten Thousand Australian Dollars
[10]
(AUS$10,000.00), Four Thousand Five Hundred Australian Dollars (AUS$4,500.00) were missing.
When McLoughlin discovered the loss, he immediately confronted Lainez and Payam who admitted
[11]
that Tan opened the safety deposit box with the key assigned to him. McLoughlin went up to his room
where Tan was staying and confronted her. Tan admitted that she had stolen McLoughlins key and was
[12]
able to open the safety deposit box with the assistance of Lopez, Payam and Lainez. Lopez also told
[13]
McLoughlin that Tan stole the key assigned to McLoughlin while the latter was asleep.
McLoughlin requested the management for an investigation of the incident. Lopez got in touch with
Tan and arranged for a meeting with the police and McLoughlin. When the police did not arrive, Lopez
and Tan went to the room of McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a
promissory note dated 21 April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and US$2,000.00 or its equivalent in
[14]
Philippine currency on or before May 5, 1988.
Lopez requested Tan to sign the promissory note which the latter did and Lopez also signed as a
witness. Despite the execution of promissory note by Tan, McLoughlin insisted that it must be the hotel
who must assume responsibility for the loss he suffered. However, Lopez refused to accept the
responsibility relying on the conditions for renting the safety deposit box entitled Undertaking For the Use
[15]
Of Safety Deposit Box, specifically paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL from any liability arising
from any loss in the contents and/or use of the said deposit box for any cause whatsoever, including but not
limited to the presentation or use thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA APARTMENT HOTEL upon
[16]
giving up the use of the box.
On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as to the validity of
the abovementioned stipulations. They opined that the stipulations are void for being violative of universal
hotel practices and customs. His lawyers prepared a letter dated 30 May 1988 which was signed by
[17]
McLoughlin and sent to President Corazon Aquino. The Office of the President referred the letter to the
[18]
Department of Justice (DOJ) which forwarded the same to the Western Police District (WPD).
After receiving a copy of the indorsement in Australia, McLoughlin came to the Philippines and
registered again as a hotel guest of Tropicana. McLoughlin went to Malacaňang to follow up on his letter
but he was instructed to go to the DOJ. The DOJ directed him to proceed to the WPD for documentation.
But McLoughlin went back to Australia as he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and came back to the
[19]
Philippines to follow up on his letter to the President but he failed to obtain any concrete assistance.
McLoughlin left again for Australia and upon his return to the Philippines on 25 August 1989 to pursue
his claims against petitioners, the WPD conducted an investigation which resulted in the preparation of
an affidavit which was forwarded to the Manila City Fiscals Office. Said affidavit became the basis of
preliminary investigation. However, McLoughlin left again for Australia without receiving the notice of the
hearing on 24 November 1989. Thus, the case at the Fiscals Office was dismissed for failure to
prosecute. Mcloughlin requested the reinstatement of the criminal charge for theft. In the meantime,
McLoughlin and his lawyers wrote letters of demand to those having responsibility to pay the damage.
Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate, Manila.
Meetings were held between McLoughlin and his lawyer which resulted to the filing of a complaint for
damages on 3 December 1990 against YHT Realty Corporation, Lopez, Lainez, Payam and Tan
(defendants) for the loss of McLoughlins money which was discovered on 16 April 1988. After filing the
complaint, McLoughlin left again for Australia to attend to an urgent business matter. Tan and Lopez,
however, were not served with summons, and trial proceeded with only Lainez, Payam and YHT Realty
Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had previously allowed and assisted
[20]
Tan to open the safety deposit box, McLoughlin filed an Amended/Supplemental Complaint dated 10
June 1991 which included another incident of loss of money and jewelry in the safety deposit box rented
[21]
by McLoughlin in the same hotel which took place prior to 16 April 1988. The trial court admitted the
Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of the country to attend to urgent
business in Australia, and while staying in the Philippines to attend the hearing, he incurred expenses for
hotel bills, airfare and other transportation expenses, long distance calls to Australia, Meralco power
[22]
expenses, and expenses for food and maintenance, among others.
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the dispositive portion of
which reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this Court in favor of plaintiff and against
the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of US$11,400.00 or its equivalent in
Philippine Currency of P342,000.00, more or less, and the sum of AUS$4,500.00 or its equivalent
in Philippine Currency of P99,000.00, or a total of P441,000.00, more or less, with 12% interest
from April 16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of P3,674,238.00 as actual and
consequential damages arising from the loss of his Australian and American dollars and jewelries
complained against and in prosecuting his claim and rights administratively and judicially (Items II,
III, IV, V, VI, VII, VIII, and IX, Exh. CC);
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of P500,000.00 as moral damages
(Item X, Exh. CC);
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of P350,000.00 as exemplary
damages (Item XI, Exh. CC);
5. And ordering defendants, jointly and severally, to pay litigation expenses in the sum of P200,000.00
(Item XII, Exh. CC);
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of P200,000.00 as attorneys fees,
and a fee of P3,000.00 for every appearance; and
7. Plus costs of suit.
[23]
SO ORDERED.
The trial court found that McLoughlins allegations as to the fact of loss and as to the amount of money
he lost were sufficiently shown by his direct and straightforward manner of testifying in court and found him
to be credible and worthy of belief as it was established that McLoughlins money, kept in Tropicanas
safety deposit box, was taken by Tan without McLoughlins consent. The taking was effected through the
use of the master key which was in the possession of the management. Payam and Lainez allowed Tan to
use the master key without authority from McLoughlin. The trial court added that if McLoughlin had not lost
his dollars, he would not have gone through the trouble and personal inconvenience of seeking aid and
assistance from the Office of the President, DOJ, police authorities and the City Fiscals Office in his
[24]
desire to recover his losses from the hotel management and Tan.
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth approximately
One Thousand Two Hundred US Dollars (US$1,200.00) which allegedly occurred during his stay at
Tropicana previous to 4 April 1988, no claim was made by McLoughlin for such losses in his complaint
dated 21 November 1990 because he was not sure how they were lost and who the responsible persons
were. But considering the admission of the defendants in their pre-trial brief that on three previous
occasions they allowed Tan to open the box, the trial court opined that it was logical and reasonable to
presume that his personal assets consisting of Seven Thousand US Dollars (US$7,000.00) and jewelry
were taken by Tan from the safety deposit box without McLoughlins consent through the cooperation of
[25]
Payam and Lainez.
The trial court also found that defendants acted with gross negligence in the performance and
exercise of their duties and obligations as innkeepers and were therefore liable to answer for the losses
[26]
incurred by McLoughlin.
Moreover, the trial court ruled that paragraphs (2) and (4) of the Undertaking For The Use Of Safety
Deposit Box are not valid for being contrary to the express mandate of Article 2003 of the New Civil Code
[27]
and against public policy. Thus, there being fraud or wanton conduct on the part of defendants, they
should be responsible for all damages which may be attributed to the non-performance of their contractual
[28]
obligations.
The Court of Appeals affirmed the disquisitions made by the lower court except as to the amount of
damages awarded. The decretal text of the appellate courts decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to Manila and back for a total
of eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Apartment Hotel;
4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the residence to Sidney [sic]
Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food and maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorneys fees.
With costs.
[29]
SO ORDERED.
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this appeal by
certiorari.
Petitioners submit for resolution by this Court the following issues: (a) whether the appellate courts
conclusion on the alleged prior existence and subsequent loss of the subject money and jewelry is
supported by the evidence on record; (b) whether the finding of gross negligence on the part of petitioners
in the performance of their duties as innkeepers is supported by the evidence on record; (c) whether the
Undertaking For The Use of Safety Deposit Box admittedly executed by private respondent is null and
void; and (d) whether the damages awarded to private respondent, as well as the amounts thereof, are
[30]
proper under the circumstances.
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law and any
peripheral factual question addressed to this Court is beyond the bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior existence of
the dollars and the jewelry which had been lost while deposited in the safety deposit boxes of Tropicana,
the basis of the trial court and the appellate court being the sole testimony of McLoughlin as to the
contents thereof. Likewise, petitioners dispute the finding of gross negligence on their part as not
supported by the evidence on record.
We are not persuaded. We adhere to the findings of the trial court as affirmed by the appellate court
that the fact of loss was established by the credible testimony in open court by McLoughlin. Such findings
are factual and therefore beyond the ambit of the present petition.
The trial court had the occasion to observe the demeanor of McLoughlin while testifying which
reflected the veracity of the facts testified to by him. On this score, we give full credence to the
appreciation of testimonial evidence by the trial court especially if what is at issue is the credibility of the
witness. The oft-repeated principle is that where the credibility of a witness is an issue, the established
[31]
rule is that great respect is accorded to the evaluation of the credibility of witnesses by the trial court.
The trial court is in the best position to assess the credibility of witnesses and their testimonies because
of its unique opportunity to observe the witnesses firsthand and note their demeanor, conduct and attitude
[32]
under grilling examination.
We are also not impressed by petitioners argument that the finding of gross negligence by the lower
court as affirmed by the appellate court is not supported by evidence. The evidence reveals that two keys
are required to open the safety deposit boxes of Tropicana. One key is assigned to the guest while the
other remains in the possession of the management. If the guest desires to open his safety deposit box,
he must request the management for the other key to open the same. In other words, the guest alone
cannot open the safety deposit box without the assistance of the management or its employees. With
more reason that access to the safety deposit box should be denied if the one requesting for the opening
of the safety deposit box is a stranger. Thus, in case of loss of any item deposited in the safety deposit
box, it is inevitable to conclude that the management had at least a hand in the consummation of the
taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had custody of the
master key of the management when the loss took place. In fact, they even admitted that they assisted
[33]
Tan on three separate occasions in opening McLoughlins safety deposit box. This only proves that
Tropicana had prior knowledge that a person aside from the registered guest had access to the safety
deposit box. Yet the management failed to notify McLoughlin of the incident and waited for him to discover
the taking before it disclosed the matter to him. Therefore, Tropicana should be held responsible for the
damage suffered by McLoughlin by reason of the negligence of its employees.
The management should have guarded against the occurrence of this incident considering that
Payam admitted in open court that she assisted Tan three times in opening the safety deposit box of
[34]
McLoughlin at around 6:30 A.M. to 7:30 A.M. while the latter was still asleep. In light of the
circumstances surrounding this case, it is undeniable that without the acquiescence of the employees of
Tropicana to the opening of the safety deposit box, the loss of McLoughlins money could and should have
been avoided.
The management contends, however, that McLoughlin, by his act, made its employees believe that
Tan was his spouse for she was always with him most of the time. The evidence on record, however, is
bereft of any showing that McLoughlin introduced Tan to the management as his wife. Such an inference
from the act of McLoughlin will not exculpate the petitioners from liability in the absence of any showing
that he made the management believe that Tan was his wife or was duly authorized to have access to the
safety deposit box. Mere close companionship and intimacy are not enough to warrant such conclusion
considering that what is involved in the instant case is the very safety of McLoughlins deposit. If only
petitioners exercised due diligence in taking care of McLoughlins safety deposit box, they should have
confronted him as to his relationship with Tan considering that the latter had been observed opening
McLoughlins safety deposit box a number of times at the early hours of the morning. Tans acts should
have prompted the management to investigate her relationship with McLoughlin. Then, petitioners would
have exercised due diligence required of them. Failure to do so warrants the conclusion that the
management had been remiss in complying with the obligations imposed upon hotel-keepers under the
law.
Under Article 1170 of the New Civil Code, those who, in the performance of their obligations, are
guilty of negligence, are liable for damages. As to who shall bear the burden of paying damages, Article
2180, paragraph (4) of the same Code provides that the owners and managers of an establishment or
enterprise are likewise responsible for damages caused by their employees in the service of the
branches in which the latter are employed or on the occasion of their functions. Also, this Court has ruled
that if an employee is found negligent, it is presumed that the employer was negligent in selecting and/or
[35]
supervising him for it is hard for the victim to prove the negligence of such employer. Thus, given the
fact that the loss of McLoughlins money was consummated through the negligence of Tropicanas
employees in allowing Tan to open the safety deposit box without the guests consent, both the assisting
employees and YHT Realty Corporation itself, as owner and operator of Tropicana, should be held
[36]
solidarily liable pursuant to Article 2193.
The issue of whether the Undertaking For The Use of Safety Deposit Box executed by McLoughlin is
tainted with nullity presents a legal question appropriate for resolution in this petition. Notably, both the trial
court and the appellate court found the same to be null and void. We find no reason to reverse their
common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable
for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility
[37]
of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to
apply to situations such as that presented in this case. The hotel business like the common carriers
business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only
lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the
essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by
any contrary stipulation in so-called undertakings that ordinarily appear in prepared forms imposed by
hotel keepers on guests for their signature.
[38]
In an early case, the Court of Appeals through its then Presiding Justice (later Associate Justice of
the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or innkeeper liable for the effects of their
guests, it is not necessary that they be actually delivered to the innkeepers or their employees. It is
[39]
enough that such effects are within the hotel or inn. With greater reason should the liability of the
hotelkeeper be enforced when the missing items are taken without the guests knowledge and consent
from a safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the undertaking manifestly contravene Article 2003 of the New Civil Code
for they allow Tropicana to be released from liability arising from any loss in the contents and/or use of the
[40]
safety deposit box for any cause whatsoever. Evidently, the undertaking was intended to bar any claim
against Tropicana for any loss of the contents of the safety deposit box whether or not negligence was
incurred by Tropicana or its employees. The New Civil Code is explicit that the responsibility of the hotel-
keeper shall extend to loss of, or injury to, the personal property of the guests even if caused by servants
or employees of the keepers of hotels or inns as well as by strangers, except as it may proceed from any
[41]
force majeure. It is the loss through force majeure that may spare the hotel-keeper from liability. In the
case at bar, there is no showing that the act of the thief or robber was done with the use of arms or
[42]
through an irresistible force to qualify the same as force majeure.
[43]
Petitioners likewise anchor their defense on Article 2002 which exempts the hotel-keeper from
liability if the loss is due to the acts of his guest, his family, or visitors. Even a cursory reading of the
provision would lead us to reject petitioners contention. The justification they raise would render nugatory
the public interest sought to be protected by the provision. What if the negligence of the employer or its
employees facilitated the consummation of a crime committed by the registered guests relatives or
visitor? Should the law exculpate the hotel from liability since the loss was due to the act of the visitor of
the registered guest of the hotel? Hence, this provision presupposes that the hotel-keeper is not guilty of
concurrent negligence or has not contributed in any degree to the occurrence of the loss. A depositary is
[44]
not responsible for the loss of goods by theft, unless his actionable negligence contributes to the loss.
In the case at bar, the responsibility of securing the safety deposit box was shared not only by the
guest himself but also by the management since two keys are necessary to open the safety deposit box.
Without the assistance of hotel employees, the loss would not have occurred. Thus, Tropicana was guilty
of concurrent negligence in allowing Tan, who was not the registered guest, to open the safety deposit box
of McLoughlin, even assuming that the latter was also guilty of negligence in allowing another person to
use his key. To rule otherwise would result in undermining the safety of the safety deposit boxes in hotels
for the management will be given imprimatur to allow any person, under the pretense of being a family
member or a visitor of the guest, to have access to the safety deposit box without fear of any liability that
will attach thereafter in case such person turns out to be a complete stranger. This will allow the hotel to
evade responsibility for any liability incurred by its employees in conspiracy with the guests relatives and
visitors.
Petitioners contend that McLoughlins case was mounted on the theory of contract, but the trial court
[45]
and the appellate court upheld the grant of the claims of the latter on the basis of tort. There is nothing
anomalous in how the lower courts decided the controversy for this Court has pronounced a
jurisprudential rule that tort liability can exist even if there are already contractual relations. The act that
[46]
breaks the contract may also be tort.
As to damages awarded to McLoughlin, we see no reason to modify the amounts awarded by the
appellate court for the same were based on facts and law. It is within the province of lower courts to settle
factual issues such as the proper amount of damages awarded and such finding is binding upon this
Court especially if sufficiently proven by evidence and not unconscionable or excessive. Thus, the
appellate court correctly awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four
Thousand Five Hundred Australian dollars (AUS$4,500.00) or their peso equivalent at the time of
[47] [48]
payment, being the amounts duly proven by evidence. The alleged loss that took place prior to 16
April 1988 was not considered since the amounts alleged to have been taken were not sufficiently
established by evidence. The appellate court also correctly awarded the sum of P308,880.80,
representing the peso value for the air fares from Sydney to Manila and back for a total of eleven (11)
[49] [50]
trips; one-half of P336,207.05 or P168,103.52 representing payment to Tropicana; one-half of
[51]
P152,683.57 or P76,341.785 representing payment to Echelon Tower; one-half of P179,863.20 or
P89,931.60 for the taxi or transportation expenses from McLoughlins residence to Sydney Airport and
[52]
from MIA to the hotel here in Manila, for the eleven (11) trips; one-half of P7,801.94 or P3,900.97
[53]
representing Meralco power expenses; one-half of P356,400.00 or P178,000.00 representing
[54]
expenses for food and maintenance.
The amount of P50,000.00 for moral damages is reasonable. Although trial courts are given
discretion to determine the amount of moral damages, the appellate court may modify or change the
amount awarded when it is palpably and scandalously excessive. Moral damages are not intended to
enrich a complainant at the expense of a defendant. They are awarded only to enable the injured party to
obtain means, diversion or amusements that will serve to alleviate the moral suffering he has undergone,
[55]
by reason of defendants culpable action.
The awards of P10,000.00 as exemplary damages and P200,000.00 representing attorneys fees are
likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals dated 19
October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and severally, to pay private
respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment;
(2) P308,880.80, representing the peso value for the air fares from Sydney to Manila and back for a total of
eleven (11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana Copacabana Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense from McLoughlins residence
to Sydney Airport and from MIA to the hotel here in Manila, for the eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and maintenance;
(8) P50,000.00 for moral damages;
(9) P10,000.00 as exemplary damages; and
(10) P200,000 representing attorneys fees.
With costs.
SO ORDERED.
Puno, (Chairman), Callejo, Sr., and Chico-Nazario, JJ., concur.
Austria-Martinez, J., no part.
[1]
Rollo, p. 38. Decision penned by Justice Bernardo LL. Salas and concurred in by Justices Pedro A. Ramirez and Ma.
Alicia Austria-Martinez.
[2]
Id. at 118. Decision penned by Judge Gerardo M.S. Pepito.
[3]
Id. at 119.
[4]
Id. at 120.
[5]
Ibid.
[6]
Ibid.
[7]
Ibid.
11/9/2017 E Zobel Inc vs CA : 113931 : May 6, 1998 : J. Martinez : Second Division
SECOND DIVISION
[G.R. No. 113931. May 6, 1998]
E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS, CONSOLIDATED

BANK AND TRUST CORPORATION, and SPOUSES RAUL and ELEA R.
CLAVERIA, respondents.
DECISION
MARTINEZ, J.:
This petition for review on certiorari seeks the reversal of the decision[1] of the Court of Appeals dated
July 13, 1993 which affirmed the Order of the Regional Trial Court of Manila, Branch 51, denying
petitioner's Motion to Dismiss the complaint, as well as the Resolution[2] dated February 15, 1994
denying the motion for reconsideration thereto.
The facts are as follows:
Respondent spouses Raul and Elea Claveria, doing business under the name "Agro Brokers,"
applied for a loan with respondent Consolidated Bank and Trust Corporation (now SOLIDBANK) in the
amount of Two Million Eight Hundred Seventy Five Thousand Pesos (P2, 875,000.00) to finance the
purchase of two (2) maritime barges and one tugboat[3] which would be used in their molasses business.
The loan was granted subject to the condition that respondent spouses execute a chattel mortgage over
the three (3) vessels to be acquired and that a continuing guarantee be executed by Ayala International
Philippines, Inc., now herein petitioner E. Zobel, Inc. in favor of SOLIDBANK. The respondent spouses
agreed to the arrangement. Consequently, a chattel mortgage and a Continuing Guaranty[4] were
executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity. Hence, on
January 31,1991, SOLIDBANK filed a complaint for sum of money with a prayer for a writ of preliminary
attachment, against respondents spouses and petitioner. The case was docketed as Civil Case No. 91-
55909 in the Regional Trial Court of Manila.
Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of the loan was
extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It argued that it has lost its right
to be subrogated to the first chattel mortgage in view of SOLIDBANK's failure to register the chattel
mortgage with the appropriate government agency.
SOLIDBANK opposed the motion contending that Article 2080 is not applicable because petitioner
is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:
"After a careful consideration of the matter on hand, the Court finds the ground of the motion to dismiss
without merit. The document referred to as 'Continuing Guaranty' dated August 21,1985 (Exh. 7) states as
follows:
'For and in consideration of any existing indebtedness to you of Agro Brokers, a single proprietorship
owned by Mr. Raul Claveria for the payment of which the undersigned is now obligated to you as surety
http://sc.judiciary.gov.ph/jurisprudence/1998/may1998/113931.htm 1/5
and in order to induce you, in your discretion, at any other manner, to, or at the request or for the account
of the borrower, x x x '
"The provisions of the document are clear, plain and explicit.
"Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the document is
'Continuing Guaranty', the Court's interpretation is not limited to the title alone but to the contents and
intention of the parties more specifically if the language is clear and positive. The obligation of the
defendant Zobel being that of a surety, Art. 2080 New Civil Code will not apply as it is only for those acting
as guarantor. In fact, in the letter of January 31, 1986 of the defendants (spouses and Zobel) to the plaintiff
it is requesting that the chattel mortgage on the vessels and tugboat be waived and/or rescinded by the
bank inasmuch as the said loan is covered by the Continuing Guaranty by Zobel in favor of the plaintiff
thus thwarting the claim of the defendant now that the chattel mortgage is an essential condition of the
guaranty. In its letter, it said that because of the Continuing Guaranty in favor of the plaintiff the chattel
mortgage is rendered unnecessary and redundant.
"With regard to the claim that the failure of the plaintiff to register the chattel mortgage with the proper
government agency, i.e. with the Office of the Collector of Customs or with the Register of Deeds makes
the obligation a guaranty, the same merits a scant consideration and could not be taken by this Court as
the basis of the extinguishment of the obligation of the defendant corporation to the plaintiff as surety. The
chattel mortgage is an additional security and should not be considered as payment of the debt in case of
failure of payment. The same is true with the failure to register, extinction of the liability would not lie.
"WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is ordered to file its
answer to the complaint within ten (10) days from receipt of a copy of this Order."[5]
Petitioner moved for reconsideration but was denied on April 26,1993.[6]

Thereafter, petitioner questioned said Orders before the respondent Court of Appeals, through a
petition for certiorari, alleging that the trial court committed grave abuse of discretion in denying the
motion to dismiss.
On July 13,1993, the Court of Appeals rendered the assailed decision the dispositive portion of
which reads:
"WHEREFORE, finding that respondent Judge has not committed any grave abuse of discretion in
issuing the herein assailed orders, We hereby DISMISS the petition."
A motion for reconsideration filed by petitioner was denied for lack of merit on February 15,1994.
Petitioner now comes to us via this petition arguing that the respondent Court of Appeals erred in its
finding: (1) that Article 2080 of the New Civil Code which provides: "The guarantors, even though they be
solidary, are released from their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages, and preferences of the latter," is not applicable to petitioner; (2) that
petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is that of a surety; and (3)
that the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish petitioner's
liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing Guaranty" obligated
itself to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person binds himself for another already
bound, and agrees with the creditor to satisfy the obligation if the debtor does not.[7] A contract of
guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case the latter does
not pay the debt.[8]
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to
both. However, under our civil law, they may be distinguished thus: A surety is usually bound with his
principal by the same instrument, executed at the same time, and on the same consideration. He is an
original promissor and debtor from the beginning, and is held, ordinarily, to know every default of his
principal. Usually, he will not be discharged, either by the mere indulgence of the creditor to the principal,
or by want of notice of the default of the principal, no matter how much he may be injured thereby. On the
other hand, the contract of guaranty is the guarantor's own separate undertaking, in which the principal
does not join. It is usually entered into before or after that of the principal, and is often supported on a
separate consideration from that supporting the contract of the principal. The original contract of his
principal is not his contract, and he is not bound to take notice of its non-performance. He is often
discharged by the mere indulgence of the creditor to the principal, and is usually not liable unless notified
of the default of the principal.[9]
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency
of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer of
the debt, and he obligates himself to pay if the principal does not pay.[10]
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor
of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to
respondent spouses. This can be seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business address x x x
(hereinafter called the Borrower), for the payment of which the undersigned is now obligated to you
as surety and in order to induce you, in your discretion, at any time or from time to time hereafter, to
make loans or advances or to extend credit in any other manner to, or at the request or for the account of
the Borrower, either with or without purchase or discount, or to make any loans or advances evidenced or
secured by any notes, bills receivable, drafts, acceptances, checks or other instruments or evidences of
indebtedness x x upon which the Borrower is or may become liable as maker, endorser, acceptor, or
otherwise, the undersigned agrees to guarantee, and does hereby guarantee, the punctual
payment, at maturity or upon demand, to you of any and all such instruments, loans, advances,
credits and/or other obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter become due or owing to you by the
Borrower, together with any and all expenses which may be incurred by you in collecting all or any such
instruments or other indebtedness or obligations hereinbefore referred to, and or in enforcing any rights
hereunder, and also to make or cause any and all such payments to be made strictly in accordance with
the terms and provisions of any agreement (g), express or implied, which has (have) been or may
hereafter be made or entered into by the Borrower in reference thereto, regardless of any law, regulation
or decree, now or hereafter in effect which might in any manner affect any of the terms or provisions of any
such agreements(s) or your right with respect thereto as against the Borrower, or cause or permit to be
invoked any alteration in the time, amount or manner of payment by the Borrower of any such instruments,
obligations or indebtedness; x x x " (Italics Ours)
One need not look too deeply at the contract to determine the nature of the undertaking and the
intention of the parties. The contract clearly disclose that petitioner assumed liability to SOLIDBANK, as a
regular party to the undertaking and obligated itself as an original promissor. It bound itself jointly and
severally to the obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all other
legal remedies or exhaust respondent spouses' properties before it can hold petitioner liable for the
obligation. This can be gleaned from a reading of the stipulations in the contract, to wit:
'x x x If default be made in the payment of any of the instruments, indebtedness or other
obligation hereby guaranteed by the undersigned, or if the Borrower, or the undersigned should
die, dissolve, fail in business, or become insolvent, x x x , or if any funds or other property of the
Borrower, or of the undersigned which may be or come into your possession or control or that
of any third party acting in your behalf as aforesaid should be attached of distrained, or should
be or become subject to any mandatory order of court or other legal process, then, or any time
after the happening of any such event any or all of the instruments of indebtedness or other
obligations hereby guaranteed shall, at your option become (for the purpose of this guaranty)
due and payable by the undersigned forthwith without demand of notice, and full power and
authority are hereby given you, in your discretion, to sell, assign and deliver all or any part of the property
upon which you may then have a lien hereunder at any broker's board, or at public or private sale at your
option, either for cash or for credit or for future delivery without assumption by you of credit risk, and
without either the demand, advertisement or notice of any kind, all of which are hereby expressly waived.
At any sale hereunder, you may, at your option, purchase the whole or any part of the property so sold, free
from any right of redemption on the part of the undersigned, all such rights being also hereby waived and
released. In case of any sale and other disposition of any of the property aforesaid, after
deducting all costs and expenses of every kind for care, safekeeping, collection, sale, delivery
or otherwise, you may apply the residue of the proceeds of the sale and other disposition
thereof, to the payment or reduction, either in whole or in part, of any one or more of the
obligations or liabilities hereunder of the undersigned whether or not except for disagreement
such liabilities or obligations would then be due, making proper allowance or interest on the
obligations and liabilities not otherwise then due, and returning the overplus, if any, to the
undersigned; all without prejudice to your rights as against the undersigned with respect to
any and all amounts which may be or remain unpaid on any of the obligations or liabilities
aforesaid at any time (s)"
xxx xxx xxx
'Should the Borrower at this or at any future time furnish, or should be heretofore have
furnished, another surety or sureties to guarantee the payment of his obligations to you, the
undersigned hereby expressly waives all benefits to which the undersigned might be entitled
under the provisions of Article 1837 of the Civil Code (beneficio division), the liability of the
undersigned under any and all circumstances being joint and several;" (Italics Ours)
The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty.
Authorities recognize that the word "guarantee" is frequently employed in business transactions to
describe not the security of the debt but an intention to be bound by a primary or independent obligation.
[11] As aptly observed by the trial court, the interpretation of a contract is not limited to the title alone but to
the contents and intention of the parties.

Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by
petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association vs. Guinhawa,
[12] we have ruled that Article 2080 of the New Civil Code does not apply where the liability is as a surety,
not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the chattel
mortgage did not release petitioner from the obligation. In the Continuing Guaranty executed in favor of
SOLIDBANK, petitioner bound itself to the contract irrespective of the existence of any collateral. It even
released SOLIDBANK from any fault or negligence that may impair the contract. The pertinent portions of
the contract so provides:
"x x x the undersigned (petitioner) who hereby agrees to be and remain bound upon this guaranty,
irrespective of the existence, value or condition of any collateral, and notwithstanding any such
change, exchange, settlement, compromise, surrender, release, sale, application, renewal or extension,
and notwithstanding also that all obligations of the Borrower to you outstanding and unpaid at any time (s)
may exceed the aggregate principal sum herein above prescribed.
'This is a Continuing Guaranty and shall remain in full force and effect until written notice shall have been
received by you that it has been revoked by the undersigned, but any such notice shall not be released the
undersigned from any liability as to any instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you may have any interest, at the time of the receipt of
such notice. No act or omission of any kind on your part in the premises shall in any event affect
or impair this guaranty, nor shall same be affected by any change which may arise by reason of the
death of the undersigned, of any partner (s) of the undersigned, or of the Borrower, or of the accession to
any such partnership of any one or more new partners." (Italics supplied)
In fine, we find the petition to be without merit as no reversible error was committed by respondent
Court of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby AFFIRMED. Costs
against the petitioner.
SO ORDERED.
Regalado, Melo, and Puno, JJ., concur.
Mendoza, J., no part, having concurred in the decision of the Court of Appeals when he was a
member of the Court.
[1] Annex "I," p. 80, Rollo; The decision was penned by Justice Ma. Alicia Austria-Martinez and concurred in by Justice
Vicente V. Mendoza and Justice Alfredo L. Benipayo.
[2] Annex "J," p. 91, Ibid.
[3] Annex "A," p. 39, Rollo.
[4] Annex "B," pp. 41-42.
[5]
Annex "G," pp. 70-75, Rollo.
[6] Annex H, p. 77, Ibid.
[7] Bouvier's Law Dictionary, Vol. I, Eighth Edition, p. 1386; Hope vs. Board, 43 La. Ann. 738, 9 South. 754
[8] Ibid.; Shaw, C. J. Dole vs. Young, 24 Pick. (Mass.), 252.
[9] Brandt, Surety and Guaranty; cited in Bouvier's Law Dictionary, supra., p. 1386.
[10] Machetti vs. Hospicio, 43 Phil. 297.
[11] 24 Am. Jur. 876 cited in De Leon, Credit Transactions, 1984 Ed.. p. 187.
[12] 188 SCRA 647.
11/9/2017 Int'l Finance Corp vs Imperial Textile Mills Inc : 160324 : November 15, 2005 : J. Panganiban : Third Division : Decision

THIRD DIVISION

INTERNATIONAL FINANCE G.R. No. 160324
CORPORATION,
Petitioner, Present:
Panganiban, J.,
Chairman,
- versus - Sandoval-Gutierrez,*
Corona,
Carpio Morales, and
Garcia, JJ
IMPERIAL TEXTILE MILLS, Promulgated:
INC.,**
Respondent. November 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

T
he terms of a contract govern the rights and obligations of the contracting parties.
When the obligor undertakes to be jointly and severally liable, it means that the
obligation is solidary.
If solidary liability was instituted to guarantee a principal obligation, the law deems the contract
to be one of suretyship.

The creditor in the present Petition was able to show convincingly that, although denominated
as a Guarantee Agreement, the Contract was actually a surety. Notwithstanding the use of the
words guarantee and guarantor, the subject Contract was indeed a surety, because its terms were
clear and left no doubt as to the intention of the parties.
http://sc.judiciary.gov.ph/jurisprudence/2005/nov2005/160324.htm 1/14

The Case

[1]
Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the
[2] [3]
February 28, 2002 Decision and September 30, 2003 Resolution of the Court of Appeals
(CA) in CA-GR CV No. 58471. The challenged Decision disposed as follows:
WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the trial court is
MODIFIED to read as follows:
1. Philippine Polyamide Industrial Corporation is ORDERED to pay [Petitioner]

International Finance Corporation, the following amounts:
(a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement;
(b) Interest of 12% per annum on accrued interest, which shall be counted from
the date of filing of the instant action up to the actual payment;
(c) P73,340.00 as attorneys fees;
(d) Costs of suit.
2. The guarantor Imperial Textile Mills, Inc. together with Grandtex is HELD secondarily
[4]
liable to pay the amount herein adjudged to [Petitioner] International Finance Corporation.

The assailed Resolution denied both parties respective Motions for Reconsideration.

The Facts

The facts are narrated by the appellate court as follows:
On December 17, 1974, [Petitioner] International Finance Corporation (IFC) and

[Respondent] Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement
wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in sixteen (16) semi-annual
installments of US$437,500.00 each, beginning June 1, 1977 to December 1, 1984, with interest
at the rate of 10% per annum on the principal amount of the loan advanced and outstanding
from time to time. The interest shall be paid in US dollars semi-annually on June 1 and
December 1 in each year and interest for any period less than a year shall accrue and be pro-
rated on the basis of a 360-day year of twelve 30-day months.
On December 17, 1974, a Guarantee Agreement was executed with x x x Imperial Textile
Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties
thereto. ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement.
PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978.
The payments due on December 1, 1978, June 1, 1979 and December 1, 1979 were
rescheduled as requested by PPIC. Despite the rescheduling of the installment payments,
however, PPIC defaulted. Hence, on April 1, 1985, IFC served a written notice of default to
PPIC demanding the latter to pay the outstanding principal loan and all its accrued interests.
Despite such notice, PPIC failed to pay the loan and its interests.
By virtue of PPICs failure to pay, IFC, together with DBP, applied for the extrajudicial
foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all
improvements owned by PPIC, located at Calamba, Laguna, with the regional sheriff of
Calamba, Laguna. On July 30, 1985, the deputy sheriff of Calamba, Laguna issued a notice of
extrajudicial sale. IFC and DBP were the only bidders during the auction sale. IFCs bid was for
P99,269,100.00 which was equivalent to US$5,250,000.00 (at the prevailing exchange rate of
P18.9084 = US$1.00). The outstanding loan, however, amounted to US$8,083,967.00 thus
leaving a balance of US$2,833,967.00. PPIC failed to pay the remaining balance.
Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the
outstanding balance. However, despite the demand made by IFC, the outstanding balance
remained unpaid.
Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of Manila against PPIC
and ITM for the payment of the outstanding balance plus interests and attorneys fees.
The trial court held PPIC liable for the payment of the outstanding loan plus interests. It
also ordered PPIC to pay IFC its claimed attorneys fees. However, the trial court relieved ITM of
its obligation as guarantor. Hence, the trial court dismissed IFCs complaint against ITM.
xxxxxxxxx
Thus, apropos the decision dismissing the complaint against ITM, IFC appealed [to the
[5]
CA].
Ruling of the Court of Appeals

The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM from any
obligation to IFC. According to the appellate court, ITM bound itself under the Guarantee
[6]
Agreement to pay PPICs obligation upon default. ITM was not discharged from its obligation as
[7]
guarantor when PPIC mortgaged the latters properties to IFC. The CA, however, held that ITMs
liability as a guarantor would arise only if and when PPIC could not pay. Since PPICs inability to
comply with its obligation was not sufficiently established, ITM could not immediately be made to
[8]
assume the liability.

[9]
The September 30, 2003 Resolution of the CA denied reconsideration. Hence, this Petition.
[10]
The Issues

Petitioner states the issues in this wise:
[11]
I. Whether or not ITM and Grandtex are sureties and therefore, jointly and severally liable
with PPIC, for the payment of the loan.
II. Whether or not the Petition raises a question of law.
[12]
III. Whether or not the Petition raises a theory not raised in the lower court.
The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the
payment of the loan.

The Courts Ruling

The Petition is meritorious.

Main Issue:
Liability of Respondent Under

the Guarantee Agreement

The present controversy arose from the following Contracts: (1) the Loan Agreement
[13]
dated December 17, 1974, between IFC and PPIC; and (2) the Guarantee Agreement dated
[14]
December 17, 1974, between ITM and Grandtex, on the one hand, and IFC on the other.

IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPICs
[15]
obligations proceeding from the Loan Agreement. For its part, ITM asserts that, by the
[16]
terms of the Guarantee Agreement, it was merely a guarantor and not a surety. Moreover,
[17]
any ambiguity in the Agreement should be construed against IFC -- the party that drafted it.

Language of the
Contract

The premise of the Guarantee Agreement is found in its preambular clause, which reads:
Whereas,
(A) By an Agreement of even date herewith between IFC and PHILIPPINE POLYAMIDE
INDUSTRIAL CORPORATION (herein called the Company), which agreement is herein
called the Loan Agreement, IFC agrees to extend to the Company a loan (herein called
the Loan) of seven million dollars ($7,000,000) on the terms therein set forth, including a
provision that all or part of the Loan may be disbursed in a currency other than dollars,
but only on condition that the Guarantors agree to guarantee the obligations of the
Company in respect of the Loan as hereinafter provided.
(B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and in
consideration of IFC entering into said Agreement, have agreed so to guarantee such
[18]
obligations of the Company.


The obligations of the guarantors are meticulously expressed in the following provision:

Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and
unconditionally guarantee, as primary obligors and not as sureties merely, the due and
punctual payment of the principal of, and interest and commitment charge on, the Loan, and the
principal of, and interest on, the Notes, whether at stated maturity or upon prematuring, all as
[19]
set forth in the Loan Agreement and in the Notes.
The Agreement uses guarantee and guarantors, prompting ITM to base its argument on
[20]
those words. This Court is not convinced that the use of the two words limits the Contract
to a mere guaranty. The specific stipulations in the Contract show otherwise.

Solidary Liability
Agreed to by ITM

While referring to ITM as a guarantor, the Agreement specifically stated that the
corporation was jointly and severally liable. To put emphasis on the nature of that liability, the
Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations
meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety.

[21]
Indubitably therefore, ITM bound itself to be solidarily liable with PPIC for the latters
obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC
and could not be deemed merely secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs liability
commenced only when it guaranteed PPICs obligation. It became a surety when it bound itself
solidarily with the principal obligor. Thus, the applicable law is as follows:
Article 2047. By guaranty, a person, called the guarantor binds himself to the creditor to
fulfill the obligation of the principal in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract shall be called
[22]
suretyship.
The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on Joint
and Solidary Obligations. Relevant to this case is Article 1216, which states:
The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which
may subsequently be directed against the others, so long as the debt has not been fully
collected.
Pursuant to this provision, petitioner (as creditor) was justified in taking action directly
against respondent.
No Ambiguity in the
Undertaking

The Court does not find any ambiguity in the provisions of the Guarantee Agreement.
When qualified by the term jointly and severally, the use of the word guarantor to refer to a
[23]
surety does not violate the law. As Article 2047 provides, a suretyship is created when a
guarantor binds itself solidarily with the principal obligor. Likewise, the phrase in the Agreement
-- as primary obligor and not merely as surety -- stresses that ITM is being placed on the same
level as PPIC. Those words emphasize the nature of their liability, which the law characterizes
as a suretyship.
[24]
The use of the word guarantee does not ipso facto make the contract one of guaranty. This
Court has recognized that the word is frequently employed in business transactions to describe
[25]
the intention to be bound by a primary or an independent obligation. The very terms of a
contract govern the obligations of the parties or the extent of the obligors liability. Thus, this
Court has ruled in favor of suretyship, even though contracts were denominated as a
[26] [27]
Guarantors Undertaking or a Continuing Guaranty.

[28]
Contracts have the force of law between the parties, who are free to stipulate any
[29]
matter not contrary to law, morals, good customs, public order or public policy. None of
these circumstances are present, much less alleged by respondent. Hence, this Court cannot give
a different meaning to the plain language of the Guarantee Agreement.

Indeed, the finding of solidary liability is in line with the premise provided in the Whereas
clause of the Guarantee Agreement. The execution of the Agreement was a condition precedent
for the approval of PPICs loan from IFC. Consistent with the position of IFC as creditor was its
requirement of a higher degree of liability from ITM in case PPIC committed a breach. ITM
agreed with the stipulation in Section 2.01 and is now estopped from feigning ignorance of its
solidary liability. The literal meaning of the stipulations control when the terms of the contract
[30]
are clear and there is no doubt as to the intention of the parties.

We note that the CA denied solidary liability, on the theory that the parties would not
have executed a Guarantee Agreement if they had intended to name ITM as a primary obligor.
[31]
The appellate court opined that ITMs undertaking was collateral to and distinct from the
Loan Agreement. On this point, the Court stresses that a suretyship is merely an accessory or a
[32]
collateral to a principal obligation. Although a surety contract is secondary to the principal
obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a
[33]
regular party to the undertaking. A surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest in the obligations
[34]
constituted by the latter.

ITMs Liability as Surety

With the present finding that ITM is a surety, it is clear that the CA erred in declaring the
[35]
former secondarily liable. A surety is considered in law to be on the same footing as the
[36]
principal debtor in relation to whatever is adjudged against the latter. Evidently, the
dispositive portion of the assailed Decision should be modified to require ITM to pay the
amount adjudged in favor of IFC.

Peripheral Issues

In addition to the main issue, ITM raised procedural infirmities allegedly justifying the
denial of the present Petition. Before the trial court and the CA, IFC had allegedly instituted
different arguments that effectively changed the corporations theory on appeal, in violation of
[37]
this Courts previous pronouncements. ITM further
claims that the main issue in the present case is a question of fact that is not cognizable by this
[38]
Court.

These contentions deserve little consideration.

Alleged Change of
Theory on Appeal

Petitioners arguments before the trial court (that ITM was a primary obligor) and before
the CA (that ITM was a surety) were related and intertwined in the action to enforce the solidary
liability of ITM under the Guarantee Agreement. We emphasize that the terms primary obligor
and surety were premised on the same stipulations in Section 2.01 of the Agreement. Besides,
both terms had the same legal consequences. There was therefore effectively no change of
theory on appeal. At any rate, ITM failed to show to this Court a disparity between IFCs
allegations in the trial court and those in the CA. Bare allegations without proof deserve no
credence.

Review of Factual
Findings Necessary

[39]
As to the issue that only questions of law may be raised in a Petition for Review, the
[40]
Court has recognized exceptions, one of which applies to the present case. The assailed
[41]
Decision was based on a misapprehension of facts, which particularly related to certain
stipulations in the Guarantee Agreement -- stipulations that had not been disputed by the
parties. This circumstance compelled the Court to review the Contract firsthand and to make its
own findings and conclusions accordingly.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and
Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is declared a surety to
Philippine Polyamide Industrial Corporation. ITM is ORDERED to pay International Finance
Corporation the same amounts adjudged against PPIC in the assailed Decision. No costs.

SO ORDERED.

ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division

WECONCUR:

(On official leave)
NGELINA SANDOVAL-GUTIERREZ RENATO C. CORONA

CONCHITA CARPIO MORALES CANCIO C. GARCIA

ATTESTATION

11/9/2017 Phil Blooming Mills Inc vs CA : 142381 : October 15, 2003 : J. Carpio : First Division : Decision
FIRST DIVISION
[G.R. No. 142381. October 15, 2003]
PHILIPPINE BLOOMING MILLS, INC., and ALFREDO CHING, petitioners, vs.

COURT OF APPEALS and TRADERS ROYAL BANK, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari[1] to annul the Decision[2] dated 16 July 1999 of the Court of
Appeals in CA-G.R. CV No. 39690, as well as its Resolution dated 17 February 2000 denying the motion
for reconsideration. The Court of Appeals affirmed with modification the Decision[3] dated 31 August
1992 rendered by Branch 113 of the Regional Trial Court of Pasay City (trial court). The trial courts
Decision declared petitioner Alfredo Ching (Ching) liable to respondent Traders Royal Bank (TRB) for the
payment of the credit accommodations extended to Philippine Blooming Mills, Inc. (PBM).
Antecedent Facts
This case stems from an action to compel Ching to pay TRB the following amounts:
1. P959,611.96 under Letter of Credit No. 479 AD covered by Trust Receipt No. 106;[4]
2. P1,191,137.13 under Letter of Credit No. 563 AD covered by Trust Receipt No. 113;[5] and
3. P3,500,000 under the trust loan covered by a notarized Promissory Note.[6]
Ching was the Senior Vice President of PBM. In his personal capacity and not as a corporate officer,
Ching signed a Deed of Suretyship dated 21 July 1977 binding himself as follows:
xxx as primary obligor(s) and not as mere guarantor(s), hereby warrant to the TRADERS ROYAL BANK, its
successors and assigns, the due and punctual payment by the following individuals and/or companies/firms, hereinafter
called the DEBTOR(S), of such amounts whether due or not, as indicated opposite their respective names, to wit:
NAME OF DEBTOR(S) AMOUNT OF OBLIGATION
PHIL. BLOOMING MILLS CORP. TEN MILLION PESOS

(P 10,000,000.00)
owing to said TRADERS ROYAL BANK, hereafter called the CREDITOR, as evidenced by all notes, drafts,
overdrafts and other credit obligations of every kind and nature contracted/incurred by said DEBTOR(S) in favor of said
CREDITOR.
http://sc.judiciary.gov.ph/jurisprudence/2003/oct2003/142381.htm 1/15
In case of default by any and/or all of the DEBTOR(S) to pay the whole or part of said indebtedness herein secured at
maturity, I/We, jointly and severally, agree and engage to the CREDITOR, its successors and assigns, the prompt
payment, without demand or notice from said CREDITOR, of such notes, drafts, overdrafts and other credit obligations
on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR, together
with all interests, penalty and other bank charges as may accrue thereon and all expenses which may be incurred by the
latter in collecting any or all such instruments.
I/WE further warrant the due and faithful performance by the DEBTOR(S) of all the obligations to be performed under
any contracts, evidencing indebtedness/obligations and any supplements, amendments, charges or modifications made
thereto, including but not limited to, the due and punctual payment by the said DEBTOR(S).
I/WE hereby expressly waive notice of acceptance of this suretyship, and also presentment, demand, protest and notice
of dishonor of any and all such instruments, loans, advances, credits, or other indebtedness or obligations hereinbefore
referred to.
MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent upon the
pursuit by the CREDITOR, its successors or assigns, of whatever remedies it or they may have against the DEBTOR(S)
or the securities or liens it or they may possess; and I/WE hereby agree to be and remain bound upon this suretyship,
irrespective of the existence, value or condition of any collateral, and notwithstanding also that all obligations of the
DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate principal sum herein above stated.
In the event of judicial proceedings, I/WE hereby expressly agree to pay the creditor for and as attorneys fees a sum
equivalent to TEN PER CENTUM (10%) of the total indebtedness (principal and interest) then unpaid, exclusive of all
costs or expenses for collection allowed by law.[7] (Emphasis supplied)
On 24 March and 6 August 1980, TRB granted PBM letters of credit on application of Ching in his
capacity as Senior Vice President of PBM. Ching later accomplished and delivered to TRB trust receipts,
which acknowledged receipt in trust for TRB of the merchandise subject of the letters of credit. Under the
trust receipts, PBM had the right to sell the merchandise for cash with the obligation to turn over the entire
proceeds of the sale to TRB as payment of PBMs indebtedness. Letter of Credit No. 479 AD, covered by
Trust Receipt No. 106, has a face value of US$591,043, while Letter of Credit No. 563 AD, covered by
Trust Receipt No. 113, has a face value of US$155,460.34.
Ching further executed an Undertaking for each trust receipt, which uniformly provided that:
xxx
6. All obligations of the undersigned under the agreement of trusts shall bear interest at the rate of __
per centum ( __%) per annum from the date due until paid.
7. [I]n consideration of the Trust Receipt, the undersigned hereby jointly and severally undertake
and agree to pay on demand on the said BANK, all sums and amounts of money which said
BANK may call upon them to pay arising out of, pertaining to, and/or in any manner connected with
this receipt. In case it is necessary to collect the draft covered by the Trust Receipt by or through an
attorney-at-law, the undersigned hereby further agree(s) to pay an additional of 10% of the total
amount due on the draft as attorneys fees, exclusive of all costs, fees and other expenses of
collection but shall in no case be less than P200.00[8] (Emphasis supplied)
On 27 April 1981, PBM obtained a P3,500,000 trust loan from TRB. Ching signed as co-maker in the
notarized Promissory Note evidencing this trust loan. The Promissory Note reads:
FOR VALUE RECEIVED THIRTY (30) DAYS after date, I/We, jointly and severally, promise to pay the TRADERS
ROYAL BANK or order, at its Office in 4th Floor, Kanlaon Towers Bldg., Roxas Blvd., Pasay City, the sum of Pesos:
THREE MILLION FIVE HUNDRED THOUSAND ONLY (P3,500,000.00), Philippine Currency, with the interest
rate of Eighteen Percent (18%) per annum until fully paid.
In case of non-payment of this note at maturity, I/We, jointly and severally, agree to pay an additional
amount equivalent to two per cent (2%) of the principal sum per annum, as penalty and collection charges in
the form of liquidated damages until fully paid, and the further sum of ten percent (10%) thereof in full, without any
deduction, as and for attorneys fees whether actually incurred or not, exclusive of costs and other judicial/extrajudicial
expenses; moreover, I/We jointly and severally, further empower and authorize the TRADERS ROYAL BANK at its
option, and without notice to set off or to apply to the payment of this note any and all funds, which may be in its hands
on deposit or otherwise belonging to anyone or all of us, and to hold as security therefor any real or personal property
which may be in its possession or control by virtue of any other contract.[9] (Emphasis supplied)
PBM defaulted in its payment of Trust Receipt No. 106 (Letter of Credit No. 479 AD) for
P959,611.96, and of Trust Receipt No. 113 (Letter of Credit No. 563 AD) for P1,191,137.13. PBM also
defaulted on its P3,500,000 trust loan.
On 1 April 1982, PBM and Ching filed a petition for suspension of payments with the Securities and
Exchange Commission (SEC), docketed as SEC Case No. 2250.[10] The petition sought to suspend
payment of PBMs obligations and prayed that the SEC allow PBM to continue its normal business
operations free from the interference of its creditors. One of the listed creditors of PBM was TRB.[11]
On 9 July 1982, the SEC placed all of PBMs assets, liabilities, and obligations under the
rehabilitation receivership of Kalaw, Escaler and Associates.[12]
On 13 May 1983, ten months after the SEC placed PBM under rehabilitation receivership, TRB filed
with the trial court a complaint for collection against PBM and Ching. TRB asked the trial court to order
defendants to pay solidarily the following amounts:
(1) P6,612,132.74 exclusive of interests, penalties, and bank charges [representing its indebtedness
arising from the letters of credit issued to its various suppliers];
(2) P4,831,361.11, exclusive of interests, penalties, and other bank charges [due and owing from the
trust loan of 27 April 1981 evidenced by a promissory note];
(3) P783,300.00 exclusive of interests, penalties, and other bank charges [due and owing from the
money market loan of 1 April 1981 evidenced by a promissory note];
(4) To order defendant Ching to pay P10,000,000.00 under the Deed of Suretyship in the event plaintiff
can not recover the full amount of PBMs indebtedness from the latter;
(5) The sum equivalent to 10% of the total sum due as and for attorneys fees;
(6) Such other amounts that may be proven by the plaintiff during the trial, by way of damages and
expenses for litigation.[13]
On 25 May 1983, TRB moved to withdraw the complaint against PBM on the ground that the SEC
had already placed PBM under receivership.[14] The trial court thus dismissed the complaint against PBM.
[15]
On 23 June 1983, PBM and Ching also moved to dismiss the complaint on the ground that the trial
court had no jurisdiction over the subject matter of the case. PBM and Ching invoked the assumption of
jurisdiction by the SEC over all of PBMs assets and liabilities.[16]
TRB filed an opposition to the Motion to Dismiss. TRB argued that (1) Ching is being sued in his
personal capacity as a surety for PBM; (2) the SEC decision declaring PBM in suspension of payments
is not binding on TRB; and (3) Presidential Decree No. 1758 (PD No. 1758),[17] which Ching relied on to
support his assertion that all claims against PBM are suspended, does not apply to Ching as the decree
regulates corporate activities only.[18]
In its order dated 15 August 1983,[19] the trial court denied the motion to dismiss with respect to Ching
and affirmed its dismissal of the case with respect to PBM. The trial court stressed that TRB was holding
Ching liable under the Deed of Suretyship. As Chings obligation was solidary, the trial court ruled that
TRB could proceed against Ching as surety upon default of the principal debtor PBM. The trial court also
held that PD No. 1758 applied only to corporations, partnerships and associations and not to individuals.
Upon the trial courts denial of his Motion for Reconsideration, Ching filed a Petition for Certiorari and
Prohibition[20] before the Court of Appeals. The appellate court granted Chings petition and ordered the
dismissal of the case. The appellate court ruled that the SEC assumed jurisdiction over Ching and PBM
to the exclusion of courts or tribunals of coordinate rank.
TRB assailed the Court of Appeals Decision[21] before this Court. In Traders Royal Bank v. Court
of Appeals,[22] this Court upheld TRB and ruled that Ching was merely a nominal party in SEC Case No.
2250. Creditors may sue individual sureties of debtor corporations, like Ching, in a separate proceeding
before regular courts despite the pendency of a case before the SEC involving the debtor corporation.
In his Answer dated 6 November 1989, Ching denied liability as surety and accommodation co-
maker of PBM. He claimed that the SEC had already issued a decision[23] approving a revised
rehabilitation plan for PBMs creditors, and that PBM obtained the credit accommodations for corporate
purposes that did not redound to his personal benefit. He further claimed that even as a surety, he has the
right to the defenses personal to PBM. Thus, his liability as surety would attach only if, after the
implementation of payments scheduled under the rehabilitation plan, there would remain a balance of
PBMs debt to TRB.[24] Although Ching admitted PBMs availment of the credit accommodations, he did
not show any proof of payment by PBM or by him.
TRB admitted certain partial payments on the PBM account made by PBM itself and by the SEC-
appointed receiver.[25] Thus, the trial court had to resolve the following remaining issues:
1. How much exactly is the corporate defendants outstanding obligation to the plaintiff?
2. Is defendant Alfredo Ching personally answerable, and for exactly how much?[26]
TRB presented Mr. Lauro Francisco, loan officer of the Remedial Management Department of TRB,
and Ms. Carla Pecson, manager of the International Department of TRB, as witnesses. Both witnesses
testified to the following:
1. The existence of a Deed of Suretyship dated 21 July 1977 executed by Ching for PBMs liabilities to
TRB up to P10,000,000;[27]
2. The application of PBM and grant by TRB on 13 March 1980 of Letter of Credit No. 479 AD for
US$591,043, and the actual availment by PBM of the full proceeds of the credit accommodation;
[28]
3. The application of PBM and grant by TRB on 6 August 1980 of Letter of Credit No. 563 AD for
US$156,000, and the actual availment by PBM of the full proceeds of the credit accommodation;
[29] and
4. The existence of a trust loan of P3,500,000 evidenced by a notarized Promissory Note dated 27
April 1981 wherein Ching bound himself solidarily with PBM;[30] and
5. Per TRBs computation, Ching is liable for P19,333,558.16 as of 31 October 1991.[31]
Ching presented Atty. Vicente Aranda, corporate secretary and First Vice President of the Human
Resources Department of TRB, as witness. Ching sought to establish that TRBs Board of Directors
adopted a resolution fixing the PBM account at an amount lower than what TRB wanted to collect from
Ching. The trial court allowed Atty. Aranda to testify over TRBs manifestation that the Answer failed to
plead the subject matter of his testimony. Atty. Aranda produced TRB Board Resolution No. 5935, series
of 1990, which contained the minutes of the special meeting of TRBs Board of Directors held on 8 June
1990.[32] In the resolution, the Board of Directors advised TRBs Management not to release Alfredo Ching
from his JSS liability to the bank.[33] The resolution also stated the following:
a) Accept the P1.373 million deposits remitted over a period of 17 years or until 2006 which shall be
applied directly to the account (as remitted per hereto attached schedule). The amount of P1.373
million shall be considered as full payment of PBMs account. (The receiver is amenable to this
alternative)
The initial deposit/remittance which amounts to P150,000.00 shall be remitted upon approval of the
above and conforme to PISCOR and PBM. Subsequent deposits shall start on the 3rd year and
annually thereafter (every June 30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and demandable.
b) Write-off immediately P4.278 million. The balance [of] P1.373 million to remain outstanding in the
books of the Bank. Said balance will equal the deposits to be remitted to the Bank for a period of 17
years.[34]
However, Atty. Aranda himself testified that both items (a) and (b) quoted above were never complied with
or implemented. Not only was there no initial deposit of P150,000 as required in the resolution, TRB also
disapproved the document prepared by the receiver, which would have released Ching from his
suretyship.[35]
The Ruling of the Trial Court
The trial court found Ching liable to TRB for P19,333,558.16 under the Deed of Suretyship. The trial
court explained:
[T]he liability of Ching as a surety attaches independently from his capacity as a stockholder of the Philippine Blooming
Mills. Indisputably, under the Deed of Suretyship defendant Ching unconditionally agreed to assume PBMs liability to the
plaintiff in the event PBM defaulted in the payment of the said obligation in addition to whatever penalties, expenses and
bank charges that may occur by reason of default. Clear enough, under the Deed of Suretyship (Exh. J), defendant
Ching bound himself jointly and severally with PBM in the payment of the latters obligation to the plaintiff. The obligation
being solidary, the plaintiff Bank can hold Ching liable upon default of the principal debtor. This is explicitly provided in
Article 1216 of the New Civil Code already quoted above.[36]
The dispositive portion of the trial courts Decision reads:
WHEREFORE, judgment is hereby rendered declaring defendant Alfredo Ching liable to plaintiff bank in the amount of
P19,333,558.16 (NINETEEN MILLION THREE HUNDRED THIRTY THREE THOUSAND FIVE HUNDRED
FIFTY EIGHT & 16/100) as of October 31, 1991, and to pay the legal interest thereon from such date until it is fully
paid. To pay plaintiff 5% of the entire amount by way of attorneys fees.
SO ORDERED.[37]
On appeal, Ching stated that as surety and solidary debtor, he should benefit from the changed nature
of the obligation as provided in Article 1222 of the Civil Code, which reads:
Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from
the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those
which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the
latter are responsible.
Ching claimed that his liability should likewise be reduced since the equitable apportionment of
PBMs remaining assets among its creditors under the rehabilitation proceedings would have the effect of
reducing PBMs liability. He also claimed that the amount for which he was being held liable was
excessive. He contended that the outstanding principal balance, as stated in TRB Board Resolution No.
5893-1990, was only P5,650,749.09.[38] Ching also contended that he was not liable for interest, as the
loan documents did not stipulate the interest rate, pursuant to Article 1956 of the Civil Code.[39] Finally,
Ching asserted that the Deed of Suretyship executed on 21 July 1977 could not guarantee obligations
incurred after its execution.[40]
TRB did not file its appellees brief. Thus, the Court of Appeals resolved to submit the case for
decision.[41]
The Court of Appeals considered the following issues for its determination:
1. Whether the Answer of Ching amounted to an admission of liability.
2. Whether Ching can still be sued as a surety after the SEC placed PBM under rehabilitation
receivership, and if in the affirmative, for how much.[42]
The Court of Appeals resolved the first two questions in favor of TRB. The appellate court stated:
Ching did not deny under oath the genuineness and due execution of the L/Cs, Trust Receipts, Undertaking, Deed of
Surety, and the 3.5 Million Peso Promissory Note upon which TRBs action rested. He is, therefore, presumed to be
liable unless he presents evidence showing payment, partially or in full, of these obligations (Investment and Underwriting
Corporation of the Philippines v. Comptronics Philippines, Inc. and Gene v. Tamesis, 192 SCRA 725 [1990]).
As surety of a corporation placed under rehabilitation receivership, Ching can answer separately for the obligations of
debtor PBM (Rizal Banking Corporation v. Court of Appeals, Philippine Blooming Mills, Inc., and Alfredo Ching, 178
SCRA 738 [1990], and Traders Royal Bank v. Philippine Blooming Mills and Alfredo Ching, 177 SCRA 788 [1989]).
Even a[n] SEC injunctive order cannot suspend payment of the suretys obligation since the rehabilitation receivers are
limited to the existing assets of the corporation.[43]
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, the judgment of the lower court is hereby AFFIRMED but modified with respect to the amount of
liability of defendant Alfredo Ching which is lowered from P19,333,558.16 to P15,773,708.78 with legal interest of
12% per annum until it is fully paid.
SO ORDERED.[44]
The Court of Appeals denied Chings Motion for Reconsideration for lack of merit.
Hence, this petition.
Issues
Ching assigns the following as errors of the Court of Appeals:

1. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT PETITIONER

ALFREDO CHING WAS LIABLE FOR OBLIGATIONS CONTRACTED BY PBM LONG AFTER THE
EXECUTION OF THE DEED OF SURETYSHIP.
2. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT RULED THAT THE PETITIONERS
WERE LIABLE FOR THE TRUST RECEIPTS DESPITE THE FACT THAT PRIVATE
RESPONDENT HAD PREVENTED THEIR FULFILLMENT.
3. THE COURT OF APPEALS COMMITTED AN ERROR WHEN IT FOUND PETITIONER ALFREDO
CHING LIABLE FOR P15,773,708.78 WITH LEGAL INTEREST AT 12% PER ANNUM UNTIL FULLY
PAID DESPITE THE FACT THAT UNDER THE REHABILITATION PLAN OF PETITIONER PBM,
WHICH WAS APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, PRIVATE
RESPONDENT IS ONLY ENTITLED TO P1,373,415.00.[45]
Ching asserted that the Deed of Suretyship dated 21 July 1977 could not answer for obligations not
yet in existence at the time of its execution. Specifically, Ching maintained that the Deed of Suretyship
could not answer for debts contracted by PBM in 1980 and 1981. Ching contended that no accessory
contract of suretyship could arise without an existing principal contract of loan. Ching likewise argued that
TRB could no longer claim on the trust receipts because TRB had already taken the properties subject of
the trust receipts. Ching likewise maintained that his obligation as surety could not exceed the
P1,373,415 apportioned to PBM under the SEC-approved rehabilitation plan.
In its Comment, TRB asserted that the first two assigned errors raised factual issues not brought
before the trial court. Furthermore, TRB pointed out that Ching never presented PBMs rehabilitation plan
before the trial court. TRB also stated that the Supreme Court ruling in Traders Royal Bank v. Court of
Appeals[46] constitutes res judicata between the parties. Therefore, TRB could proceed against Ching
separately from PBM to enforce in full Chings liability as surety.[47]
The petition has no merit.

The case before us is an offshoot of the trial courts denial of Chings motion to have the case
dismissed against him. The petition is a thinly veiled attempt to make this Court reconsider its decision in
the prior case of Traders Royal Bank v. Court of Appeals.[48] This Court has already resolved the issue
of Chings separate liability as a surety despite the rehabilitation proceedings before the SEC. We held in
Traders Royal Bank that:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could not assume
jurisdiction over his person and properties. The Securities and Exchange Commission was empowered, as rehabilitation
receiver, to take custody and control of the assets and properties of PBM only, for the SEC has jurisdiction over
corporations only [and] not over private individuals, except stockholders in an intra-corporate dispute (Sec. 5, P.D.
902-A and Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No. 2250, Chings properties were not included in
the rehabilitation receivership that the SEC constituted to take custody of PBMs assets. Therefore, the petitioner bank
was not barred from filing a suit against Ching, as a surety for PBM. An anomalous situation would arise if
individual sureties for debtor corporations may escape liability by simply co-filing with the corporation a petition for
suspension of payments in the SEC whose jurisdiction is limited only to corporations and their corporate assets.
xxx
Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by Article 1216
of the New Civil Code.
xxx
It is elementary that a corporation has a personality distinct and separate from its individual stockholders and members.
Being an officer or stockholder of a corporation does not make ones property the property also of the corporation, for
they are separate entities (Adelio Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Chings act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC jurisdiction over his
person or property, for jurisdiction does not depend on the consent or acts of the parties but upon express provision of
law (Tolentino vs. Social Security System, 138 SCRA 428; Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145
SCRA 408). (Emphasis supplied)
Traders Royal Bank has fully resolved the issue regarding Chings liability as a surety of the credit
accommodations TRB extended to PBM. The decision amounts to res judicata[49] which bars Ching from
raising the same issue again. Hence, the only question that remains is the amount of Chings liability.
Nevertheless, we shall resolve the issues Ching has raised in his attempt to escape liability under his
surety.
Whether Ching is liable for obligations PBM contracted after execution of the Deed of Suretyship
Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of
the 21 July 1977 Deed of Suretyship. This is evident from the tenor of the deed itself, referring to amounts
PBM may now be indebted or may hereafter become indebted to TRB.
The law expressly allows a suretyship for future debts. Article 2053 of the Civil Code provides:
A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim
against the guarantor until the debt is liquidated. A conditional obligation may also be secured. (Emphasis supplied)
Furthermore, this Court has ruled in Dio v. Court of Appeals[50] that:
Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at
the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. A
continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing,
covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is
generally intended to provide security with respect to future transactions within certain limits, and contemplates a
succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty
is one which covers all transactions, including those arising in the future, which are within the description or contemplation
of the contract of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when
by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to
time either indefinitely or until a certain period; especially if the right to recall the guaranty is expressly reserved. Hence,
where the contract states that the guaranty is to secure advances to be made from time to time, it will be construed to be
a continuing one.
In other jurisdictions, it has been held that the use of particular words and expressions such as payment of any debt, any
indebtedness, or any sum, or the guaranty of any transaction, or money to be furnished the principal debtor at any time,
or on such time that the principal debtor may require, have been construed to indicate a continuing guaranty.
Whether Chings liability is limited

to the amount stated in PBMs rehabilitation plan
Ching would like this Court to rule that his liability is limited, at most, to the amount stated in PBMs
rehabilitation plan. In claiming this reduced liability, Ching invokes Article 1222 of the Civil Code which
reads:
Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the
nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which
personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are
responsible.
In granting the loan to PBM, TRB required Chings surety precisely to insure full recovery of the loan in
case PBM becomes insolvent or fails to pay in full. This was the very purpose of the surety. Thus, Ching
cannot use PBMs failure to pay in full as justification for his own reduced liability to TRB. As surety, Ching
agreed to pay in full PBMs loan in case PBM fails to pay in full for any reason, including its insolvency.
TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of
PBMs loan. This is clear from Article 1216 of the Civil Code:
ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may subsequently be directed against the
others, so long as the debt has not been fully collected. (Emphasis supplied)
Ching further claims a reduced liability under TRB Board Resolution No. 5935. This resolution states
that PBMs outstanding loans may be reduced to P1.373 million subject to certain conditions like the
payment of P150,000 initial payment.[51] The resolution also states that TRB should not release Chings
solidary liability under his surety. The resolution even directs TRBs management to study Chings criminal
liability under the trust documents.[52]
Chings own witness testified that Resolution No. 5935 was never implemented. For one, PBM or its
receiver never paid the P150,000 initial payment to TRB. TRB also rejected the document that PBMs
receiver presented which would have released Ching from his suretyship. Clearly, Ching cannot rely on
Resolution No. 5935 to escape liability under his suretyship.
Chings attempts to have this Court review the factual issues of the case are improper. It is not a
function of the Supreme Court to assess and evaluate again the evidence, testimonial and evidentiary,
adduced by the parties particularly where the findings of both the trial court and the appellate court
coincide on the matter.[53]
Whether Ching is liable for the trust receipts
Ching is still liable for the amounts stated in the letters of credit covered by the trust receipts. Other
than his bare allegations, Ching has not shown proof of payment or settlement with TRB. Atty. Vicente
Aranda, TRBs corporate secretary and First Vice President of its Human Resource Management
Department, testified that the conditions in the TRB board resolution presented by Ching were not met or
implemented, thus:
ATTY. AZURA
Q Going into the resolution itself. A certain stipulation ha[s] been outlined, and may I refer you to
condition or step No. 1, which reads: a) Accept the P1.373 million deposits remitted over a period
of 17 years or until 2006 which shall be applied directly to the account (as remitted per hereto
attached schedule). The amount of P1.373 million shall be considered as full payment of PBMs
account. (The receiver is amenable to this alternative.) The initial deposit/remittance which
amounts to P150,000.00 shall be remitted upon approval of the above and conforme of PISCOR
[xxx] and PBM. Subsequent deposits shall start on the 3rd year and annually thereafter (every June
30th of the year) until June 30, 2006.
Failure to pay one annual installment shall make the whole obligation due and demandable. Now
Mr. Witness, would you be in a position to inform [the court] if these conditions listed in item (a) in
Resolution No. 5935, series of 1990, were implemented or met?
A Yes. I know for a fact that the conditions, more particularly the initial deposit/remittance in the amount
of P150,000.00 which have to be done with approval was not remitted or met.
Q Will you clarify your answer. Would you be in a position to inform the court if those conditions were
met? Because your initial answer was yes.
A Yes sir, I am in a position to state that these conditions were not met.
Q Let me refer you to the condition listed as item (b) of the same resolution which I read and quote:
Write off immediately P4.278 million. The balance of P1.373 million to remain outstanding in the
books of the bank. Said balance will be remitted to the Bank for a period of 17 years. Mr. Witness,
would you be in a position to inform the court if the bank implemented that particular condition?
A In the implementation of this settlement the receiver prepared a document for approval and
conformity of the bank. The said document would in effect release the suretyship of Alfredo Ching
and for that reason the bank refused or denied fixing its conformity and approval with the court.
xxx
ATTY. ATIENZA ON REDIRECT EXAMINATION
Q Mr. Witness you stated that the reason why the plaintiff bank did not implement these conditionalities
[sic] was because the former defendant corporation requested that the suretyship of Alfredo Ching
be released, is that correct?
A I did not say that. I said that in effect the document prepared by the lawyer of the receiver xxx the
bank would release the suretyship of Alfredo Ching, that is why the bank is not amenable to such a
document.
Q Despite this approved resolution the bank, because of said requirement or conformity did not seek to
implement these conditionalities [sic]?
A Yes sir because the conditions imposed by the board is not being followed in that document because
it was the condition of the board that the suretyship should not be released but the document being
presented to the bank for signature and conformity in effect if signed would release the suretyship.
So it would be a violation with the approval of the board so the bank did not sign the conformity.[54]
Ching also claims that TRB prevented PBM from fulfilling its obligations under the trust receipts when
TRB, together with other creditor banks, took hold of PBMs inventories, including the goods covered by
the trust receipts. Ching asserts that this act of TRB released him from liability under the suretyship. Ching
forgets that he executed, on behalf of PBM, separate Undertakings for each trust receipt expressly
granting to TRB the right to take possession of the goods at any time to protect TRBs interests. TRB may
exercise such right without waiving its right to collect the full amount of the loan to PBM. The Undertakings
also provide that any suspension of payment or any assignment by PBM for the benefit of creditors
renders the loan due and demandable. Thus, the separate Undertakings uniformly provide:
2. That the said BANK may at any time cancel the foregoing trust and take possession of said
merchandise with the right to sell and dispose of the same under such terms and conditions
it may deem best, or of the proceeds of such of the same as may then have been sold,
wherever the said merchandise or proceeds may then be found and all the provisions of the Trust
Receipt shall apply to and be deemed to include said above-mentioned merchandise if the same
shall have been made up or used in the manufacture of any other goods, or merchandise, and the
said BANK shall have the same rights and remedies against the said merchandise in its
manufactured state, or the product of said manufacture as it would have had in the event that such
merchandise had remained [in] its original state and irrespective of the fact that other and different
merchandise is used in completing such manufacture. In the event of any suspension, or failure
or assignment for the benefit of creditors on the part of the undersigned or of the non-
fulfillment of any obligation, or of the non-payment at maturity of any acceptance made
under said credit, or any other credit issued by the said BANK on account of the undersigned or of
the non-payment of any indebtedness on the part of the undersigned to the said BANK, all
obligations, acceptances, indebtedness and liabilities whatsoever shall thereupon without
notice mature and become due and payable and the BANK may avail of the remedies
provided herein.[55] (Emphasis supplied)
Presidential Decree No. 115 (PD No. 115), otherwise known as the Trust Receipts Law, expressly
allows TRB to take possession of the goods covered by the trust receipts. Thus, Section of 7 of PD No.
115 states:
SECTION 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the
entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale,
and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the
provisions of this Decree.
The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the
trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with
any of the terms and conditions of the trust receipt or any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to
the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the
goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser.
The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustees indebtedness to the entruster. The entrustee shall receive
any surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given
if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustees last known
business address. (Emphasis supplied)
Thus, even though TRB took possession of the goods covered by the trust receipts, PBM and Ching
remained liable for the entire amount of the loans covered by the trust receipts.
Absent proof of payment or settlement of PBM and Chings credit obligations with TRB, Chings
liability is what the Deed of Suretyship stipulates, plus the applicable interest and penalties. The trust
receipts, as well as the Letter of Undertaking dated 16 April 1980[56] executed by PBM, stipulate in writing
the payment of interest without specifying the rate. In such a case, the applicable interest rate shall be the
legal rate, which is now 12% per annum.[57] This is in accordance with Central Bank Circular No. 416,
which states:
By virtue of the authority granted to it under Section 1 of Act No. 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 per cent (12%) per annum. (Emphasis supplied)
On the other hand, the Promissory Note evidencing the P3,500,000 trust loan provides for 18%
interest per annum plus 2% penalty interest per annum in case of default. This stipulated interest should
continue to run until full payment of the P3,500,000 trust loan. In addition, the accrued interest on all the
credit accommodations should earn legal interest from the date of filing of the complaint pursuant to
Article 2212 of the Civil Code.
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be
silent upon this point.
The trial court found and the appellate court affirmed that the outstanding principal amounts as of the
filing of the complaint with the trial court on 13 May 1983 were P959,611.96 under Trust Receipt No. 106,
P1,191,137.13 under Trust Receipt No. 113, and P3,500,000 for the trust loan. As extracted from TRBs
Statement of Account as of 31 October 1991,[58] the accrued interest on the trust receipts and the trust
loan as of the filing of the complaint on 13 May 1983 were P311,387.51[59] under Trust Receipt No. 106,
P338,739.81[60] under Trust Receipt No. 113, and P1,287,616.44[61] under the trust loan. The penalty
interest on the trust loan amounted to P137,315.07.[62] Ching did not rebut this Statement of Account
which TRB presented during trial.
Thus, the following is the summary of Chings liability under the suretyship as of 13 May 1983, the date
of filing of TRBs complaint with the trial court:
1. On Trust Receipt No. 106 (Letter of Credit No. 479 AD)

Outstanding Principal P 959,611.96
Accrued Interest (12% per annum) 311,387.51
2. On Trust Receipt No. 113 (Letter of Credit No. 563 AD)

Outstanding Principal P 1,191,137.13
Accrued Interest (12% per annum) 338,739.82
3. On the Trust Loan (Promissory Note)

Outstanding Principal P 3,500,000.00
Accrued Interest (18% per annum) 1,287,616.44
Accrued Penalty Interest (2% per annum) 137,315.07
WHEREFORE, we AFFIRM the decision of the Court of Appeals with MODIFICATION. Petitioner
Alfredo Ching shall pay respondent Traders Royal Bank the following (1) on the credit accommodations
under the trust receipts, the total principal amount of P2,150,749.09 with legal interest at 12% per annum
from 14 May 1983 until full payment; (2) on the trust loan evidenced by the Promissory Note, the principal
sum of P3,500,000 with 20% interest per annum from 14 May 1983 until full payment; (3) on the total
accrued interest as of 13 May 1983, P2,075,058.84 with 12% interest per annum from 14 May 1983 until
full payment. Petitioner Alfredo Ching shall also pay attorneys fees to respondent Traders Royal Bank
equivalent to 5% of the total principal and interest.
SO ORDERED.
Davide, Jr., C.J. (Chairman), Vitug and Azcuna, JJ., concur.
Ynares-Santiago, J., on leave.
[1] Under Rule 45 of the Rules of Court.

[2] Penned by Associate Justice Conchita Carpio-Morales, with Associate Justices Artemon D. Luna and Bernardo P.
Abesamis, concurring.
[3] Penned by Judge Baltazar Relativo Dizon.
[4] Annex A, Records, p. 11; Exh. O, Records, p. 382.
[5] Annex D, Records, p. 23; Exh. O, Records, p. 382.
[6] Annex H, Records, p. 44.
[7] Annex J, Records, p. 46.
11/9/2017 G. R. No. 151953
SECOND DIVISION
SALVADOR P. ESCAO G. R. No. 151953

and MARIO M. SILOS,
Petitioners,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
RAFAEL ORTIGAS, JR., VELASCO, JR., JJ.
Respondent.
Promulgated:
June 29, 2007
x---------------------------------------------------------------------------------x
DECIS ION
TINGA, J.:
The main contention raised in this petition is that petitioners are not under obligation to reimburse
respondent, a claim that can be easily debunked. The more perplexing question is whether this obligation
to repay is solidary, as contended by respondent and the lower courts, or merely joint as argued by
petitioners.
[1]
On 28 April 1980, Private Development Corporation of the Philippines (PDCP) entered into a
loan agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to
Falcon the amount of US$320,000.00, for specific purposes and subject to certain terms and conditions.
[2]
On the same day, three stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr.
(Ortigas), George A. Scholey and George T. Scholey executed an Assumption of Solidary Liability
whereby they agreed to assume in [their] individual capacity, solidary liability with [Falcon] for the due
http://sc.judiciary.gov.ph/jurisprudence/2007/june2007/151953.htm 1/18
11/9/2017 G. R. No. 151953
[3]
and punctual payment of the loan contracted by Falcon with PDCP. In the meantime, two separate
guaranties were executed to guarantee the payment of the same loan by other stockholders and officers of
[4]
Falcon, acting in their personal and individual capacities. One Guaranty was executed by petitioner
[5]
Salvador Escao (Escao), while the other by petitioner Mario M. Silos (Silos), Ricardo C. Silverio
(Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J. Rodriguez (Rodriguez).
Two years later, an agreement developed to cede control of Falcon to Escao, Silos and Joseph M. Matti
(Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of
then already deceased George T. Scholey assigned their shares of stock in Falcon to Escao, Silos and
[6]
Matti. Part of the consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve
themselves of all liability arising from their previous joint and several undertakings with Falcon, including
those related to the loan with PDCP. Thus, an Undertaking dated 11 June 1982 was executed by the
[7]
concerned parties, namely: with Escao, Silos and Matti identified in the document as SURETIES, on
one hand, and Ortigas, Inductivo and the Scholeys as OBLIGORS, on the other. The Undertaking reads
in part:
3. That whether or not SURETIES are able to immediately cause PDCP and PAIC to release OBLIGORS from
their said guarantees [sic], SURETIES hereby irrevocably agree and undertake to assume all of
OBLIGORs said guarantees [sic] to PDCP and PAIC under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any demand from PDCP and/or PAIC for the
payment of FALCONs obligations with it, any of [the] OBLIGORS shall immediately inform
SURETIES thereof so that the latter can timely take appropriate measures;
b. Should suit be impleaded by PDCP and/or PAIC against any and/or all of OBLIGORS for
collection of said loans and/or credit facilities, SURETIES agree to defend OBLIGORS at their
own expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES therein
for contribution, indemnity, subrogation or other relief in respect to any of the claims of PDCP
and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any reason made to pay any amount to
PDCP and/or PAIC, SURETIES shall reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment;
4. OBLIGORS hereby waive in favor of SURETIES any and all fees which may be due from FALCON
[8]
arising out of, or in connection with, their said guarantees[sic].
11/9/2017 G. R. No. 151953
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended by PDCP. It would
also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan. However,
Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there
[9]
remained a subsisting deficiency of P5,031,004.07, which Falcon did not satisfy despite demand.
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for sum of money
with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas, Escao, Silos, Silverio and
Inductivo. The case was docketed as Civil Case No. 89-5128. For his part, Ortigas filed together with his
answer a cross-claim against his co-defendants Falcon, Escao and Silos, and also manifested his intent to
[10]
file a third-party complaint against the Scholeys and Matti. The cross-claim lodged against Escao and
Silos was predicated on the 1982 Undertaking, wherein they agreed to assume the liabilities of Ortigas
with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to come to terms
with PDCP was Escao, who in December of 1993, entered into a compromise agreement whereby he
agreed to pay the bank P1,000,000.00. In exchange, PDCP waived or assigned in favor of Escao one-
[11]
third (1/3) of its entire claim in the complaint against all of the other defendants in the case. The
[12]
compromise agreement was approved by the RTC in a Judgment dated 6 January 1994.
[13]
Then on 24 February 1994, Ortigas entered into his own compromise agreement with PDCP,
allegedly without the knowledge of Escao, Matti and Silos. Thereby, Ortigas agreed to pay PDCP
[14]
P1,300,000.00 as full satisfaction of the PDCPs claim against Ortigas, in exchange for PDCPs release
of Ortigas from any liability or claim arising from the Falcon loan agreement, and a renunciation of its
claims against Ortigas.
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to pay
[15]
P500,000.00 in exchange for PDCPs waiver of its claims against him.
In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escao, Silos
and Matti, on the basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and
[16]
Silos, while he maintained his cross-claim against Escao. In 1995, Ortigas filed a motion for Summary
Judgment in his favor against Escao, Silos and Matti. On 5 October 1995, the RTC issued the Summary
11/9/2017 G. R. No. 151953
Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly and severally, the amount of
[17]
P1,300,000.00, as well as P20,000.00 in attorneys fees. The trial court ratiocinated that none of the
third-party defendants disputed the 1982 Undertaking, and that the mere denials of defendants with
respect to non-compliance of Ortigas of the terms and conditions of the Undertaking, unaccompanied by
any substantial fact which would be admissible in evidence at a hearing, are not sufficient to raise genuine
issues of fact necessary to defeat a motion for summary judgment, even if such facts were raised in the
[18]
pleadings. In an Order dated 7 March 1996, the trial court denied the motion for reconsideration of
the Summary Judgment and awarded Ortigas legal interest of 12% per annum to be computed from 28
[19]
February 1994.
From the Summary Judgment, recourse was had by way of appeal to the Court of Appeals. Escao
[20]
and Silos appealed jointly while Matti appealed by his lonesome. In a Decision dated 23 January 2002,
the Court of Appeals dismissed the appeals and affirmed the Summary Judgment. The appellate court
found that the RTC did not err in rendering the summary judgment since the three appellants did not
effectively deny their execution of the 1982 Undertaking. The special defenses that were raised, payment
and excussion, were characterized by the Court of Appeals as appear[ing] to be merely sham in the light
[21]
of the pleadings and supporting documents and affidavits. Thus, it was concluded that there was no
genuine issue that would still require the rigors of trial, and that the appealed judgment was decided on the
bases of the undisputed and established facts of the case.
[22]
Hence, the present petition for review filed by Escao and Silos. Two main issues are raised.
First, petitioners dispute that they are liable to Ortigas on the basis of the 1982 Undertaking, a document
which they do not disavow and have in fact annexed to their petition. Second, on the assumption that they
are liable to Ortigas under the 1982 Undertaking, petitioners argue that they are jointly liable only, and not
solidarily. Further assuming that they are liable, petitioners also submit that they are not liable for interest
and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their memorandum before the
Court, the appropriateness of the summary judgment as a relief favorable to Ortigas. Under Section 3,
Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may avail if the pleadings, supporting
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affidavits, depositions and admissions on file show that, except as to the amount of damages, there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.
Petitioner have not attempted to demonstrate before us that there existed a genuine issue as to any material
fact that would preclude summary judgment. Thus, we affirm with ease the common rulings of the lower
courts that summary judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held liable to Ortigas
on the basis of the 1982 Undertaking in this Summary Judgment. An examination of the document reveals
several clauses that make it clear that the agreement was brought forth by the desire of Ortigas, Inductivo
and the Scholeys to be released from their liability under the loan agreement which release was, in turn,
part of the consideration for the assignment of their shares in Falcon to petitioners and Matti. The whereas
clauses manifest that Ortigas had bound himself with Falcon for the payment of the loan with PDCP, and
that amongst the consideration for OBLIGORS and/or their principals aforesaid selling is SURETIES
relieving OBLIGORS of any and all liability arising from their said joint and several undertakings with
[23]
FALCON. Most crucial is the clause in Paragraph 3 of the Undertaking wherein petitioners
irrevocably agree and undertake to assume all of OBLIGORs said guarantees [sic] to PDCP x x x under
[24]
the following terms and conditions.
At the same time, it is clear that the assumption by petitioners of Ortigass guarantees [sic] to PDCP
is governed by stipulated terms and conditions as set forth in sub-paragraphs (a) to (c) of Paragraph 3.
First, upon receipt by any of OBLIGORS of any demand from PDCP for the payment of Falcons
obligations with it, any of OBLIGORS was to immediately inform SURETIES thereof so that the latter
can timely take appropriate measures. Second, should any and/or all of OBLIGORS be impleaded by
PDCP in a suit for collection of its loan, SURETIES agree[d] to defend OBLIGORS at their own
expense, without prejudice to any and/or all of OBLIGORS impleading SURETIES therein for
[25]
contribution, indemnity, subrogation or other relief in respect to any of the claims of PDCP. Third, if
any of the OBLIGORS is for any reason made to pay any amount to [PDCP], SURETIES [were to]
[26]
reimburse OBLIGORS for said amount/s within seven (7) calendar days from such payment.
Petitioners claim that, contrary to paragraph 3(c) of the Undertaking, Ortigas was not made to pay
PDCP the amount now sought to be reimbursed, as Ortigas voluntarily paid PDCP the amount of P1.3
Million as an amicable settlement of the claims posed by the bank against him. However, the subject
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clause in paragraph 3(c) actually reads [i]n the event that any of OBLIGORS is for any reason made to
[27]
pay any amount to PDCP x x x As pointed out by Ortigas, the phrase for any reason reasonably
includes any extra-judicial settlement of obligation such as what Ortigas had undertaken to pay to PDCP,
as it is indeed obvious that the phrase was incorporated in the clause to render the eventual payment
adverted to therein unlimited and unqualified.
The interpretation posed by petitioners would have held water had the Undertaking made clear that
the right of Ortigas to seek reimbursement accrued only after he had delivered payment to PDCP as a
consequence of a final and executory judgment. On the contrary, the clear intent of the Undertaking was
for petitioners and Matti to relieve the burden on Ortigas and his fellow OBLIGORS as soon as possible,
and not only after Ortigas had been subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to exert all efforts to cause PDCP x x x to within
[28]
a reasonable time release all the OBLIGORS x x x from their guarantees [sic] to PDCP x x x In the
event that Ortigas and his fellow OBLIGORS could not be released from their guaranties, paragraph 2
commits petitioners and Matti to cause the Board of Directors of Falcon to make a call on its
stockholders for the payment of their unpaid subscriptions and to pledge or assign such payments to
Ortigas, et al., as security for whatever amounts the latter may be held liable under their guaranties. In
addition, paragraph 1 also makes clear that nothing in the Undertaking shall prevent OBLIGORS, or any
one of them, from themselves negotiating with PDCP x x x for the release of their said guarantees [sic].
[29]
There is no argument to support petitioners position on the import of the phrase made to pay in the
Undertaking, other than an unduly literalist reading that is clearly inconsistent with the thrust of the
document. Under the Civil Code, the various stipulations of a contract shall be interpreted together,
[30]
attributing to the doubtful ones that sense which may result from all of them taken jointly. Likewise
applicable is the provision that if some stipulation of any contract should admit of several meanings, it
shall be understood as bearing
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[31]
that import which is most adequate to render it effectual. As a means to effect the general intent of the
document to relieve Ortigas from liability to PDCP, it is his interpretation, not that of petitioners, that
holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions set in
paragraph 3, as they claim. Following the general assertion in the petition that Ortigas violated the terms of
the Undertaking, petitioners add that Ortigas paid PDCP BANK the amount of P1.3 million without
[32]
petitioners ESCANO and SILOSs knowledge and consent. Paragraph 3(a) of the Undertaking does
impose a requirement that any of the OBLIGORS shall immediately inform SURETIES if they received
any demand for payment of FALCONs obligations to PDCP, but that requirement is reasoned so that the
[33]
[SURETIES] can timely take appropriate measures presumably to settle the obligation without having
to burden the OBLIGORS. This notice requirement in paragraph 3(a) is markedly way off from the
suggestion of petitioners that Ortigas, after already having been impleaded as a defendant in the collection
suit, was obliged under the 1982 Undertaking to notify them before settling with PDCP.
The other arguments petitioners have offered to escape liability to Ortigas are similarly weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place. They note that Ortigas
had, in his answer, denied any liability to PDCP and had alleged that he signed the Assumption of
Solidary Liability not in his personal capacity, but as an officer of Falcon. However, such position,
according to petitioners, could not be justified since Ortigas later voluntarily paid PDCP the amount of
P1.3 Million. Such circumstances, according to petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The Partial
Compromise Agreement between PDCP and Ortigas expressly stipulated that Ortigass offer to pay PDCP
was conditioned without [Ortigass] admitting liability to plaintiff PDCP Banks complaint, and to terminate
[34]
and dismiss the said case as against Ortigas solely. Petitioners profess it is unthinkable for Ortigas to
[35]
have voluntarily paid PDCP without admitting his liability, yet such contention based on assumption
cannot supersede the literal terms of the Partial Compromise Agreement.
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Petitioners further observe that Ortigas made the payment to PDCP after he had already assigned
his obligation to petitioners through the 1982 Undertaking. Yet the fact is PDCP did pursue a judicial
claim against Ortigas notwithstanding the Undertaking he executed with petitioners. Not being a party to
such Undertaking, PDCP was not precluded by a contract from pursuing its claim against Ortigas based
on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his distress through a
settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking expressly states that nothing
herein shall prevent OBLIGORS, or any one of them, from themselves negotiating with PDCP x x x for
[36]
the release of their said guarantees [sic]. Simply put, the Undertaking did not bar Ortigas from
pursuing his own settlement with PDCP. Neither did the Undertaking bar Ortigas from recovering from
petitioners whatever amount he may have paid PDCP through his own settlement. The stipulation that if
Ortigas was for any reason made to pay any amount to PDCP[,] x x x SURETIES shall reimburse
[37]
OBLIGORS for said amount/s within seven (7) calendar days from such payment makes it clear that
petitioners remain liable to reimburse Ortigas for the sums he paid PDCP.
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on the
assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas, claiming that
the Undertaking did not provide for express solidarity. They cite Article 1207 of the New Civil Code,
which states in part that [t]here is a solidary liability only when the obligation expressly so states, or when
the law or the nature of the obligation requires solidarity.
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable for the
[38]
Undertaking, as the language used in the agreement clearly shows that it is a surety agreement between
the obligors (Ortigas group) and the sureties (Escao group). Ortigas points out that the Undertaking uses
the word SURETIES although the document, in describing the parties. It is further contended that the
principal objective of the parties in executing the Undertaking cannot be attained unless petitioners are
solidarily liable because the total loan obligation can not be paid or settled to free or release the
[39]
OBLIGORS if one or any of the SURETIES default from their obligation in the Undertaking.
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In case, there is a concurrence of two or more creditors or of two or more debtors in one and the same
obligation, Article 1207 of the Civil Code states that among them, [t]here is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.
Article 1210 supplies further caution against the broad interpretation of solidarity by providing: The
indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply
indivisibility.
These Civil Code provisions establish that in case of concurrence of two or more creditors or of two or
more debtors in one and the same obligation, and in the absence of express and indubitable terms
characterizing the obligation as solidary, the presumption is that the obligation is only joint. It thus
becomes incumbent upon the party alleging that the obligation is indeed solidary in character to prove
such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the petitioners agreed to bind
themselves jointly and severally in their obligations to the Ortigas group, or any such terms to that effect.
Hence, such obligation established in the Undertaking is presumed only to be joint. Ortigas, as the party
alleging that the obligation is in fact solidary, bears the burden to overcome the presumption of jointness
of obligations. We rule and so hold that he failed to discharge such burden.
Ortigas places primary reliance on the fact that the petitioners and Matti identified themselves in the
Undertaking as SURETIES, a term repeated no less than thirteen (13) times in the document. Ortigas
claims that such manner of identification sufficiently establishes that the obligation of petitioners to him
was joint and solidary in nature.
The term surety has a specific meaning under our Civil Code. Article 2047 provides the statutory
definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
[40]
of this Book shall be observed. In such case the contract is called a suretyship. [Emphasis supplied]
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As provided in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with
the principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the existence of a
principal contract. It appears that Ortigass argument rests solely on the solidary nature of the obligation of
the surety under Article 2047. In tandem with the nomenclature SURETIES accorded to petitioners and
Matti in the Undertaking, however, this argument can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined under Article 2047 in the first place. That
clearly is not the case here, notwithstanding the use of the nomenclature SURETIES in the Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom the surety is
solidarily bound by way of an ancillary obligation of segregate identity from the obligation between the
principal debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the
latter is vested with the right to proceed against the former to collect the credit in lieu of proceeding
[41]
against the principal debtor for the same obligation. At the same time, there is also a legal tie created
between the surety and the principal debtor to which the creditor is not privy or party to. The moment the
surety fully answers to the creditor for the obligation created by the principal debtor, such obligation is
[42]
extinguished. At the same time, the surety may seek reimbursement from the principal debtor for the
amount paid, for the surety does in fact become subrogated to all the rights and remedies of the creditor.
[43]
Note that Article 2047 itself specifically calls for the application of the provisions on joint and
[44]
solidary obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in
[45]
favor of the one who paid (i.e., the surety). However, a significant distinction still lies between a joint
and several debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can
compel any one of the joint and several debtors or the surety alone to answer for the entirety of the
principal debt. The difference lies in the respective faculties of the joint and several debtor and the surety
to seek reimbursement for the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
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A guarantor who binds himself in solidum with the principal debtor under the provisions of the second paragraph
does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-
debtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than
those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to the contract of suretyship. The civil law
suretyship is, accordingly, nearly synonymous with the common law guaranty; and the civil law relationship existing
[46]
between the co-debtors liable in solidum is similar to the common law suretyship.
In the case of joint and several debtors, Article 1217 makes plain that the solidary debtor who
effected the payment to the creditor may claim from his co-debtors only the share which corresponds
to each, with the interest for the payment already made. Such solidary debtor will not be able to recover
from the co-debtors the full amount already paid to the creditor, because the right to recovery extends
only to the proportional share of the other co-debtors, and not as to the particular proportional share of
the solidary debtor who already paid. In contrast, even as the surety is solidarily bound with the principal
debtor to the creditor, the surety who does pay the creditor has the right to recover the full amount paid,
and not just any proportional share, from the principal debtor or debtors. Such right to full reimbursement
falls within the other rights, actions and benefits which pertain to the surety by reason of the subsidiary
obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety? We find the right under Article
2066 of the Civil Code, which assures that [t]he guarantor who pays for a debtor must be indemnified by
[47]
the latter, such indemnity comprising of, among others, the total amount of the debt. Further, Article
2067 of the Civil Code likewise establishes that [t]he guarantor who pays is subrogated by virtue thereof
[48]
to all the rights which the creditor had against the debtor.
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the provisions should not
extend to sureties, especially in light of the qualifier in Article 2047 that the provisions on joint and several
obligations should apply to sureties. We reject that argument, and instead adopt Dr. Tolentinos
observation that [t]he reference in the second paragraph of [Article 2047] to the provisions of Section 4,
Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean that suretyship is
[49]
withdrawn from the applicable provisions governing guaranty. For if that were not the implication,
there would be no material difference between the surety as defined under Article 2047 and the joint and
several debtors, for both classes of obligors would be governed by exactly the same rules and limitations.
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Accordingly, the rights to indemnification and subrogation as established and granted to the
guarantor by Articles 2066 and 2067 extend as well to sureties as defined under Article 2047. These rights
granted to the surety who pays materially differ from those granted under Article 1217 to the solidary
debtor who pays, since the indemnification that pertains to the latter extends only [to] the share which
corresponds to each [co-debtor]. It is for this reason that the Court cannot accord the conclusion that
because petitioners are identified in the Undertaking as SURETIES, they are consequently joint and
severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general presumption
favoring joint liability, the Court would have to be satisfied that among the petitioners and Matti, there is
one or some of them who stand as the principal debtor to Ortigas and another as surety who has the right
to full reimbursement from the principal debtor or debtors. No suggestion is made by the parties that such
is the case, and certainly the Undertaking is not revelatory of such intention. If the Court were to give full
fruition to the use of the term SURETIES as conclusive indication of the existence of a surety agreement
that in turn gives rise to a solidary obligation to pay Ortigas, the necessary implication would be to lay
down a corresponding set of rights and obligations as between the SURETIES which petitioners and
Matti did not clearly intend.
It is not impossible that as between Escao, Silos and Matti, there was an agreement whereby in the
event that Ortigas were to seek reimbursement from them per the terms of the Undertaking, one of them
was to act as surety and to pay Ortigas in full, subject to his right to full reimbursement from the other
two obligors. In such case, there would have been, in fact, a surety agreement which evinces a solidary
obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not appear on the
record. More consequentially, no such intention is reflected in the Undertaking itself, the very document
that creates the conditional obligation that petitioners and Matti reimburse Ortigas should he be made to
pay PDCP. The mere utilization of the term SURETIES could not work to such effect, especially as it
does not appear who exactly is the principal debtor whose obligation is assured or guaranteed by the
surety.
Ortigas further argues that the nature of the Undertaking requires solidary obligation of the Sureties,
since the Undertaking expressly seeks to reliev[e] obligors of any and all liability arising from their said
joint and several undertaking with [F]alcon, and for the sureties to irrevocably agree and undertake to
[50]
assume all of obligors said guarantees to PDCP. We do not doubt that a finding of solidary liability
among the petitioners works to the benefit of Ortigas in the facilitation of these goals, yet the Undertaking
itself contains no stipulation or clause that establishes petitioners obligation to Ortigas as solidary.
Moreover, the aims adverted to by Ortigas do not by themselves establish that the nature of the obligation
requires solidarity. Even if the liability of petitioners and Matti were adjudged as merely joint, the full relief
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and reimbursement of Ortigas arising from his payment to PDCP would still be accomplished through the
complete execution of such a judgment.
Petitioners further claim that they are not liable for attorneys fees since the Undertaking contained
no such stipulation for attorneys fees, and that the situation did not fall under the instances under Article
2208 of the Civil Code where attorneys fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his being
impleaded in the suit filed by PDCP. The Undertaking was precisely executed as a means to obtain the
release of Ortigas and the Scholeys from their previous obligations as sureties of Falcon, especially
considering that they were already divesting their shares in the corporation. Specific provisions in the
Undertaking obligate petitioners to work for the release of Ortigas from his surety agreements with
Falcon. Specific provisions likewise mandate the immediate repayment of Ortigas should he still be made
to pay PDCP by reason of the guaranty agreements from which he was ostensibly to be released through
the efforts of petitioners. None of these provisions were complied with by petitioners, and Article 2208(2)
precisely allows for the recovery of attorneys fees [w]hen the defendants act or omission has compelled
the plaintiff to litigate with third persons or to incur expenses to protect his interest.
Finally, petitioners claim that they should not be liable for interest since the Undertaking does not
contain any stipulation for interest, and assuming that they are liable, that the rate of interest should not be
12% per annum, as adjudged by the RTC.
[51]
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals set forth the rules with
respect to the manner of computing legal interest:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages of the
Civil Code govern in determining the measure of recoverable damages.
forbearance of money, the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
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2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which time quantification
of damages may be deemed to have been reasonably ascertained). The actual base for the
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate
of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction, this interim period being deemed to be by then
[52]
an equivalent to a forbearance of credit.
Since what was the constituted in the Undertaking consisted of a payment in a sum of money, the
rate of interest thereon shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand. The interest rate imposed by the RTC is thus proper. However, the computation
should be reckoned from judicial or extrajudicial demand. Per records, there is no indication that Ortigas
made any extrajudicial demand to petitioners and Matti after he paid PDCP, but on 14 March 1994,
Ortigas made a judicial demand when he filed a Third-Party Complaint praying that petitioners and Matti
be made to reimburse him for the payments made to PDCP. It is the filing of this Third Party Complaint
on 14 March 1994 that should be considered as the date of judicial demand from which the computation
[53]
of interest should be reckoned. Since the RTC held that interest should be computed from 28
February 1994, the appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial Court dated 5
October 1995 is MODIFIED by declaring that petitioners and Joseph M. Matti are only jointly liable, not
jointly and severally, to respondent Rafael Ortigas, Jr. in the amount of P1,300,000.00. The Order of the
Regional Trial Court dated 7 March 1996 is MODIFIED in that the legal interest of 12% per annum on the
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amount of P1,300,000.00 is to be computed from 14 March 1994, the date of judicial demand, and not
from 28 February 1994 as directed in the Order of the lower court. The assailed rulings are affirmed in all
other respects. Costs against petitioners.
SO ORDERED.
DANTE O. TINGA Associate Justice
WE CONCUR:
(On Official Leave)

LEONARDO A. QUISUMBING
Associate Justice
Chairperson
ANTONIO T. CARPIO CONCHITA CARPIO MORALES

PRESBITERO J. VELASCO, JR.

Associate Justice
11/9/2017 Tupaz IV vs CA : 145578 : November 18, 2005 : J. Carpio : First Division : Decision
FIRST DIVISION
JOSE C. TUPAZ IV and G.R. No. 145578

PETRONILA C. TUPAZ,
Petitioners,
Present:
Davide, Jr., C.J.,
Chairman,
- versus - Quisumbing,
Ynares-Santiago,
Carpio, and
Azcuna, JJ.
THE COURT OF APPEALS and

BANK OF THE PHILIPPINE Promulgated:
ISLANDS,
Respondents. November 18, 2005
x-------------------------------------------------x
DECISION
CARPIO, J.:
The Case
[1] [2]
This is a petition for review of the Decision of the Court of Appeals dated 7 September
2000 and its Resolution dated 18 October 2000. The 7 September 2000 Decision affirmed the
ruling of the Regional Trial Court, Makati, Branch 144 in a case for estafa under Section 13,
Presidential Decree No. 115. The Court of Appeals Resolution of 18 October 2000 denied
petitioners motion for reconsideration.
The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz (petitioners) were Vice-President for
Operations and Vice-President/Treasurer, respectively, of El Oro Engraver Corporation (El Oro
Corporation). El Oro Corporation had a contract with the Philippine Army to supply the latter
with survival bolos.
To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El
Oro Corporation, applied with respondent Bank of the Philippine Islands (respondent bank) for
two commercial letters of credit. The letters of credit were in favor of El Oro Corporations
[3]
suppliers, Tanchaoco Manufacturing Incorporated (Tanchaoco Incorporated) and Maresco
[4]
Rubber and Retreading Corporation (Maresco Corporation). Respondent bank granted
petitioners application and issued Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco
Incorporated and Letter of Credit No. 2-00914-5 for P294,000 to Maresco Corporation.
Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts in
favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV (petitioner Jose
Tupaz) signed, in his personal capacity, a trust receipt corresponding to Letter of Credit No. 2-
00896-3 (for P564,871.05). Petitioner Jose Tupaz bound himself to sell the goods covered by the
letter of credit and to remit the proceeds to respondent bank, if sold, or to return the goods, if
not sold, on or before 29 December 1981.
On 9 October 1981, petitioners signed, in their capacities as officers of El Oro

Corporation, a trust receipt corresponding to Letter of Credit No. 2-00914-5 (for P294,000).
Petitioners bound themselves to sell the goods covered by that letter of credit and to remit the
proceeds to respondent bank, if sold, or to return the goods, if not sold, on or before 8
December 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro
Corporation, respondent bank paid the former P564,871.05 and P294,000, respectively.
Petitioners did not comply with their undertaking under the trust receipts. Respondent bank made
several demands for payments but El Oro Corporation made partial payments only. On 27 June
[5] [6]
1983 and 28 June 1983, respondent banks counsel and its representative respectively sent
final demand letters to El Oro Corporation. El Oro Corporation replied that it could not fully pay
its debt because the Armed Forces of the Philippines had delayed paying for the survival bolos.
Respondent bank charged petitioners with estafa under Section 13, Presidential Decree No. 115
[7]
(Section 13) or Trust Receipts Law (PD 115). After preliminary investigation, the then Makati
Fiscals Office found probable cause to indict petitioners. The Makati Fiscals Office filed the
corresponding Informations (docketed as Criminal Case Nos. 8848 and 8849) with the Regional
Trial Court, Makati, on 17 January 1984 and the cases were raffled to Branch 144 (trial court) on
20 January 1984. Petitioners pleaded not guilty to the charges and trial ensued. During the trial,
respondent bank presented evidence on the civil aspect of the cases.
The Ruling of the Trial Court
On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on reasonable
doubt. However, the trial court found petitioners solidarily liable with El Oro Corporation for the
balance of El Oro Corporations principal debt under the trust receipts. The dispositive portion of
the trial courts Decision provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both accused Jose C. Tupaz, IV
and Petronila Tupaz based upon reasonable doubt.
However, El Oro Engraver Corporation, Jose C. Tupaz, IV and Petronila Tupaz, are hereby ordered,
jointly and solidarily, to pay the Bank of the Philippine Islands the outstanding principal obligation of
P624,129.19 (as of January 23, 1992) with the stipulated interest at the rate of 18% per annum; plus
10% of the total amount due as attorneys fees; P5,000.00 as expenses of litigation; and costs of the suit.
[8]
In holding petitioners civilly liable with El Oro Corporation, the trial court held:
[S]ince the civil action for the recovery of the civil liability is deemed impliedly instituted with the
criminal action, as in fact the prosecution thereof was actively handled by the private prosecutor, the
Court believes that the El Oro Engraver Corporation and both accused Jose C. Tupaz and Petronila
Tupaz, jointly and solidarily should be held civilly liable to the Bank of the Philippine Islands. The mere
fact that they were unable to collect in full from the AFP and/or the Department of National Defense the
proceeds of the sale of the delivered survival bolos manufactured from the raw materials covered by the
trust receipt agreements is no valid defense to the civil claim of the said complainant and surely could not
[9]
wipe out their civil obligation. After all, they are free to institute an action to collect the same.
Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their acquittal
operates to extinguish [their] civil liability and (2) at any rate, they are not personally liable for El
Oro Corporations debts.
In its Decision of 7 September 2000, the Court of Appeals affirmed the trial courts ruling. The
appellate court held:
It is clear from [Section 13, PD 115] that civil liability arising from the violation of the trust receipt
agreement is distinct from the criminal liability imposed therein. In the case of Vintola vs. Insular Bank
of Asia and America, our Supreme Court held that acquittal in the estafa case (P.D. 115) is no bar to
the institution of a civil action for collection. This is because in such cases, the civil liability of the accused
does not arise ex delicto but rather based ex contractu and as such is distinct and independent from
any criminal proceedings and may proceed regardless of the result of the latter. Thus, an independent
civil action to enforce the civil liability may be filed against the corporation aside from the criminal action
against the responsible officers or employees.
xxx
[W]e hereby hold that the acquittal of the accused-appellants from the criminal charge of estafa
did not operate to extinguish their civil liability under the letter of credit-trust receipt arrangement with
plaintiff-appellee, with which they dealt both in their personal capacity and as officers of El Oro Engraver
Corporation, the letter of credit applicant and principal debtor.
Appellants argued that they cannot be held solidarily liable with their corporation, El Oro Engraver
Corporation, alleging that they executed the subject documents including the trust receipt agreements
only in their capacity as such corporate officers. They said that these instruments are mere pro-forma
and that they executed these instruments on the strength of a board resolution of said corporation
authorizing them to apply for the opening of a letter of credit in favor of their suppliers as well as to
execute the other documents necessary to accomplish the same.
Such contention, however, is contradicted by the evidence on record. The trust receipt agreement
indicated in clear and unmistakable terms that the accused signed the same as surety for the corporation
and that they bound themselves directly and immediately liable in the event of default with respect to the
obligation under the letters of credit which were made part of the said agreement, without need of
demand. Even in the application for the letter of credit, it is likewise clear that the undertaking of the
accused is that of a surety as indicated [in] the following words: In consideration of your establishing the
commercial letter of credit herein applied for substantially in accordance with the foregoing, the
undersigned Applicant and Surety hereby agree, jointly and severally, to each and all stipulations,
provisions and conditions on the reverse side hereof.
xxx
Having contractually agreed to hold themselves solidarily liable with El Oro Engraver Corporation under
the subject trust receipt agreements with appellee Bank of the Philippine Islands, herein accused-
appellants may not, therefore, invoke the separate legal personality of the said corporation to evade their
civil liability under the letter of credit-trust receipt arrangement with said appellee, notwithstanding their
acquittal in the criminal cases filed against them. The trial court thus did not err in holding the appellants
solidarily liable with El Oro Engraver Corporation for the outstanding principal obligation of
P624,129.19 (as of January 23, 1992) with the stipulated interest at the rate of 18% per annum, plus
[10]
10% of the total amount due as attorneys fees, P5,000.00 as expenses of litigation and costs of suit.
Hence, this petition. Petitioners contend that:
1. A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH THE CIVIL LIABILITY

OF PETITIONERS[;]
2. GRANTING WITHOUT ADMITTING THAT THE QUESTIONED OBLIGATION WAS

INCURRED BY THE CORPORATION, THE SAME IS NOT YET DUE AND PAYABLE;
3. GRANTING THAT THE QUESTIONED OBLIGATION WAS ALREADY DUE AND

PAYABLE, xxx PETITIONERS ARE NOT PERSONALLY LIABLE TO xxx RESPONDENT
BANK, SINCE THEY SIGNED THE LETTER[S] OF CREDIT AS SURETY AS OFFICERS
OF EL ORO, AND THEREFORE, AN EXCLUSIVE LIABILITY OF EL ORO; [AND]
4. IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS ARE SIMULATED AND

[11]
VOID.
The Issues
The petition raises these issues:
(1) Whether petitioners bound themselves personally liable for El Oro Corporations debts
under the trust receipts;
(2) If so
(a) whether petitioners liability is solidary with El Oro Corporation; and
(b) whether petitioners acquittal of estafa under Section 13, PD 115 extinguished their
civil liability.
The petition is partly meritorious. We affirm the Court of Appeals ruling with the modification
that petitioner Jose Tupaz is liable as guarantor of El Oro Corporations debt under the trust
receipt dated 30 September 1981.
On Petitioners Undertaking Under

the Trust Receipts
A corporation, being a juridical entity, may act only through its directors, officers, and
employees. Debts incurred by these individuals, acting as such corporate agents, are not theirs
[12]
but the direct liability of the corporation they represent. As an exception, directors or officers
[13]
are personally liable for the corporations debts only if they so contractually agree or stipulate.
Here, the dorsal side of the trust receipts contains the following stipulation:
To the Bank of the Philippine Islands
In consideration of your releasing to under the terms of this Trust Receipt the goods described herein,
I/We, jointly and severally, agree and promise to pay to you, on demand, whatever sum or sums of
money which you may call upon me/us to pay to you, arising out of, pertaining to, and/or in any way
connected with, this Trust Receipt, in the event of default and/or non-fulfillment in any respect of this
undertaking on the part of the said . I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps or exhaust
[14]
any legal remedies that you may have against the said . before making demand upon me/us.
(Capitalization in the original)
In the trust receipt dated 9 October 1981, petitioners signed below this clause as officers of El
Oro Corporation. Thus, under petitioner Petronila Tupazs signature are the words Vice-
PresTreasurer and under petitioner Jose Tupazs signature are the words Vice-PresOperations. By
so signing that trust receipt, petitioners did not bind themselves personally liable for El Oro
[15]
Corporations obligation. In Ong v. Court of Appeals, a corporate representative signed a
solidary guarantee clause in two trust receipts in his capacity as corporate representative. There,
the Court held that the corporate representative did not undertake to guarantee personally the
payment of the corporations debts, thus:
[P]etitioner did not sign in his personal capacity the solidary guarantee clause found on the dorsal
portion of the trust receipts. Petitioner placed his signature after the typewritten words ARMCO
INDUSTRIAL CORPORATION found at the end of the solidary guarantee clause. Evidently, petitioner
did not undertake to guaranty personally the payment of the principal and interest of ARMAGRIs debt
under the two trust receipts.
Hence, for the trust receipt dated 9 October 1981, we sustain petitioners claim that they are not
personally liable for El Oro Corporations obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose
Tupaz signed alone, we find that he did so in his personal capacity. Petitioner Jose Tupaz did not
indicate that he was signing as El Oro Corporations Vice-President for Operations. Hence,
petitioner Jose Tupaz bound himself personally liable for El Oro Corporations debts. Not being a
party to the trust receipt dated 30 September 1981, petitioner Petronila Tupaz is not liable under
such trust receipt.
The Nature of Petitioner Jose Tupazs Liability

Under the Trust Receipt Dated 30 September 1981
As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:
To the Bank of the Philippine Islands
In consideration of your releasing to under the terms of this Trust Receipt the goods described herein,
I/We, jointly and severally, agree and promise to pay to you, on demand, whatever sum or sums of
money which you may call upon me/us to pay to you, arising out of, pertaining to, and/or in any way
connected with, this Trust Receipt, in the event of default and/or non-fulfillment in any respect of this
undertaking on the part of the said . I/we further agree that my/our liability in this guarantee shall be
DIRECT AND IMMEDIATE, without any need whatsoever on your part to take any steps or exhaust
any legal remedies that you may have against the said . Before making demand upon me/us. (Underlining
supplied; capitalization in the original)
The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself solidarily
liable with El Oro Corporation for the latters debt under that trust receipt.
This is error.
[16]
In Prudential Bank v. Intermediate Appellate Court, the Court interpreted a
[17]
substantially identical clause in a trust receipt signed by a corporate officer who bound
himself personally liable for the corporations obligation. The petitioner in that case contended
that the stipulation we jointly and severally agree and undertake rendered the corporate officer
solidarily liable with the corporation. We dismissed this claim and held the corporate officer liable
as guarantor only. The Court further ruled that had there been more than one signatories to the
trust receipt, the solidary liability would exist between the guarantors. We held:
Petitioner [Prudential Bank] insists that by virtue of the clear wording of the xxx clause x x x we
jointly and severally agree and undertake x x x, and the concluding sentence on exhaustion, [respondent]
Chis liability therein is solidary.
xxx
Our xxx reading of the questioned solidary guaranty clause yields no other conclusion than that
the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein
for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil
Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable
for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause,
thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary
between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause we
jointly and severally agree and undertake refers to the undertaking of the two (2) parties who are to sign
it or to the liability existing between themselves. It does not refer to the undertaking between either one
or both of them on the one hand and the petitioner on the other with respect to the liability described
under the trust receipt. xxx
Furthermore, any doubt as to the import or true intent of the solidary guaranty clause should be
resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is
on a form drafted and prepared solely by the petitioner; Chis participation therein is limited to the affixing
of his signature thereon. It is, therefore, a contract of adhesion; as such, it must be strictly construed
[18]
against the party responsible for its preparation. (Underlining supplied; italicization in the original)
However, respondent banks suit against petitioner Jose Tupaz stands despite the Courts
finding that he is liable as guarantor only. First, excussion is not a pre-requisite to secure
judgment against a guarantor. The guarantor can still demand deferment of the execution of the
[19]
judgment against him until after the assets of the principal debtor shall have been exhausted.
[20]
Second, the benefit of excussion may be waived. Under the trust receipt dated 30 September
1981, petitioner Jose Tupaz waived excussion when he agreed that his liability in [the] guaranty
shall be DIRECT AND IMMEDIATE, without any need whatsoever on xxx [the] part [of
respondent bank] to take any steps or exhaust any legal remedies xxx. The clear import of this
stipulation is that petitioner Jose Tupaz waived the benefit of excussion under his guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporations principal debt and
other accessory liabilities (as stipulated in the trust receipt and as provided by law) under the trust
receipt dated 30 September 1981. That trust receipt (and the trust receipt dated 9 October 1981)
provided for payment of attorneys fees equivalent to 10% of the total amount due and an interest
at the rate of 7% per annum, or at such other rate as the bank may fix, from the date due until
[21]
paid xxx. In the applications for the letters of credit, the parties stipulated that drafts drawn
[22]
under the letters of credit are subject to interest at the rate of 18% per annum.
The lower courts correctly applied the 18% interest rate per annum considering that the
face value of each of the trust receipts is based on the drafts drawn under the letters of credit.
Based on the guidelines laid down in
[23]
Eastern Shipping Lines, Inc. v. Court of Appeals, the accrued stipulated interest earns
12% interest per annum from the time of the filing of the Informations in the Makati Regional
Trial Court on 17 January 1984. Further, the total amount due as of the date of the finality of this
Decision will earn interest at 18% per annum until fully paid since this was the stipulated rate in
[24]
the applications for the letters of credit.
The accounting of El Oro Corporations debts as of 23 January 1992, which the trial court
used, is no longer useful as it does not specify the amounts owing under each of the trust
receipts. Hence, in the execution of this Decision, the trial court shall compute El Oro
Corporations total liability under each of the trust receipts dated 30 September 1981 and 9
[25]
October 1981 based on the following formula:
TOTAL AMOUNT DUE = [principal + interest + interest on interest] partial payments

[26]
made
[27]
Interest = principal x 18 % per annum x no. of years from due date until finality of judgment
Interest on interest = interest computed as of the filing of the complaint (17 January 1984) x
12% x no. of years until finality of judgment
Attorneys fees is 10% of the total amount computed as of finality of judgment
Total amount due as of the date of finality of judgment will earn an interest of 18% per annum
until fully paid.
In so delegating this task, we reiterate what we said in Rizal Commercial Banking Corporation
[28]
v. Alfa RTW Manufacturing Corporation where we also ordered the trial court to
compute the amount of obligation due based on a formula substantially similar to that indicated
above:
The total amount due xxx [under] the xxx contract[] xxx may be easily determined by the trial
court through a simple mathematical computation based on the formula specified above. Mathematics is
an exact science, the application of which needs no further proof from the parties.
Petitioner Jose Tupazs Acquittal did not

Extinguish his Civil Liability
The rule is that where the civil action is impliedly instituted with the criminal action, the civil
liability is not extinguished by acquittal
[w]here the acquittal is based on reasonable doubt xxx as only preponderance of evidence is required in
civil cases; where the court expressly declares that the liability of the accused is not criminal but only civil
in nature xxx as, for instance, in the felonies of estafa, theft, and malicious mischief committed by certain
relatives who thereby incur only civil liability (See Art. 332, Revised Penal Code); and, where the civil
liability does not arise from or is not based upon the criminal act of which the accused was acquitted xxx.
[29]
(Emphasis supplied)
[30]
Here, respondent bank chose not to file a separate civil action to recover payment
under the trust receipts. Instead, respondent bank sought to recover payment in Criminal Case
Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose Tupaz, his acquittal did not
extinguish his civil liability. As the Court of Appeals correctly held, his liability arose not from the
criminal act of which he was acquitted (ex delito) but from the trust receipt contract (ex
contractu) of 30 September 1981. Petitioner Jose Tupaz signed the trust receipt of 30 September
1981 in his personal capacity.
On the other Matters Petitioners Raise
Petitioners raise for the first time in this appeal the contention that El Oro Corporations debts
under the trust receipts are not yet due and demandable. Alternatively, petitioners assail the trust
receipts as simulated. These assertions have no merit. Under the terms of the trust receipts dated
30 September 1981 and 9 October 1981, El Oro Corporations debts fell due on 29 December
1981 and 8 December 1981, respectively.
Neither is there merit to petitioners claim that the trust receipts were simulated. During the trial,
petitioners did not deny applying for the letters of credit and subsequently executing the trust
receipts to secure payment of the drafts drawn under the letters of credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court of
Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with the following
MODIFICATIONS:
1) El Oro Engraver Corporation is principally liable for the total amount due under the
trust receipts dated 30 September 1981 and 9 October 1981, as computed by the
Regional Trial Court, Makati, Branch 144, upon finality of this Decision, based on the
formula provided above;
2) Petitioner Jose C. Tupaz IV is liable for El Oro Engraver Corporations total debt under
the trust receipt dated 30 September 1981 as thus computed by the Regional Trial
Court, Makati, Branch 144; and
3) Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not liable under the trust
receipt dated 9 October 1981.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
HILARIO G. DAVIDE, JR.

Chief Justice
Chairman
11/9/2017 DBP vs CA : 118342 : January 5, 1998 : J. Davide, Jr. : First Division
FIRST DIVISION
[G.R. No. 118342. January 5, 1998]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF

APPEALS and LYDIA CUBA, respondents.
[G.R. No. 118367. January 5, 1998]
LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF

THE PHILIPPINES and AGRIPINA P. CAPERAL, respondents.
DECISION
DAVIDE, JR., J.:
These two consolidated cases stemmed from a complaint[1] filed against the Development Bank of
the Philippines (hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May
1985 with the Regional Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the
declaration of nullity of DBPs appropriation of CUBAs rights, title, and interests over a 44-hectare
fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the
annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the annulment of DBPs sale
of the subject fishpond to Caperal; (4) the restoration of her rights, title, and interests over the fishpond;
and (5) the recovery of damages, attorneys fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective pleadings, the trial court
conducted a pre-trial where CUBA and DBP agreed on the following facts, which were embodied in the
pre-trial order:[2]
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated May 13,
1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in the amounts
of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in the Promissory Notes
dated September 6, 1974; August 11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the terms of the
Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP appropriated the
Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond
in question, defendant DBP, in turn, executed a Deed of Conditional Sale of the Leasehold Rights
in favor of plaintiff Lydia Cuba over the same fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the Manager DBP,
Dagupan City dated November 6, 1979 and December 20, 1979. DBP thereafter accepted the
offer to repurchase in a letter addressed to plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new Fishpond
Lease Agreement No. 2083-A dated March 24, 1980 was issued by the Ministry of Agriculture and
Food in favor of plaintiff Lydia Cuba only, excluding her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional Sale, she
entered with the DBP a temporary arrangement whereby in consideration for the deferment of the
Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba promised to make certain
payments as stated in temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13, 1984, and
which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of the
fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over the fishpond in question,
DBP advertised in the SUNDAY PUNCH the public bidding dated June 24, 1984, to dispose of the
property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant Agripina Caperal
on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on December
28, 1984 by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial order. [3]
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to itself CUBAs leasehold
rights over the fishpond in question without foreclosure proceedings was contrary to Article 2088 of the
Civil Code and, therefore, invalid. CUBA insisted on an affirmative resolution. DBP stressed that it merely
exercised its contractual right under the Assignments of Leasehold Rights, which was not a contract of
mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBPs taking possession and
ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil Code which
provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
It disagreed with DBPs stand that the Assignments of Leasehold Rights were not contracts of mortgage
because (1) they were given as security for loans, (2) although the fishpond land in question is still a public
land, CUBAs leasehold rights and interest thereon are alienable rights which can be the proper subject of
a mortgage; and (3) the intention of the contracting parties to treat the Assignment of Leasehold Rights as
a mortgage was obvious and unmistakable; hence, upon CUBAs default, DBPs only right was to
foreclose the Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being
a clear case of pactum commissorium expressly prohibited and declared null and void by Article 2088 of
the Civil Code. It then concluded that since DBP never acquired lawful ownership of CUBAs leasehold
rights, all acts of ownership and possession by the said bank were void. Accordingly, the Deed of
Conditional Sale in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale
in favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed by Caperal in
favor of DBP, were also void and ineffective.
As to damages, the trial court found ample evidence on record that in 1984 the representatives of
DBP ejected CUBA and her caretakers not only from the fishpond area but also from the adjoining big
house; and that when CUBAs son and caretaker went there on 15 September 1985, they found the said
house unoccupied and destroyed and CUBAs personal belongings, machineries, equipment, tools, and
other articles used in fishpond operation which were kept in the house were missing. The missing items
were valued at about P550,000. It further found that when CUBA and her men were ejected by DBP for
the first time in 1979, CUBA had stocked the fishpond with 250,000 pieces of bangus fish (milkfish), all of
which died because the DBP representatives prevented CUBAs men from feeding the fish. At the
conservative price of P3.00 per fish, the gross value would have been P690,000, and after deducting
25% of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It
then set the aggregate of the actual damages sustained by CUBA at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely representing to the Bureau
of Fisheries that it had foreclosed its mortgage on CUBAs leasehold rights. Such representation induced
the said Bureau to terminate CUBAs leasehold rights and to approve the Deed of Conditional Sale in
favor of CUBA. And considering that by reason of her unlawful ejectment by DBP, CUBA suffered moral
shock, degradation, social humiliation, and serious anxieties for which she became sick and had to be
hospitalized the trial court found her entitled to moral and exemplary damages. The trial court also held
that CUBA was entitled to P100,000 attorneys fees in view of the considerable expenses she incurred for
lawyers fees and in view of the finding that she was entitled to exemplary damages.
In its decision of 31 January 1990, [4] the trial court disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of defendant Development Bank of
the Philippines in appropriating for its own interest, without any judicial or extra-judicial
foreclosure, plaintiffs leasehold rights and interest over the fishpond land in question under her
Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the
defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the acts of
notarial rescission of the Development Bank of the Philippines relative to said sale (Exhs. 16 and
26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the
Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh. 21), the
Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendant Agripina
Caperal (Exh. 23) and the Assignment of Leasehold Rights dated February 12, 1985 executed by
defendant Agripina Caperal in favor of the defendant Development Bank of the Philippines (Exh.
24) as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal,
jointly and severally, to restore to plaintiff the latters leasehold rights and interests and right of
possession over the fishpond land in question, without prejudice to the right of defendant
Development Bank of the Philippines to foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following
amounts:
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED PESOS

(P1,067,500.00), as and for actual damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral damages;
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary damages;
d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and for attorneys
fees;
6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to
defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO
THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS (P1,532,610.75)
representing the amounts paid by defendant Agripina Caperal to defendant Development Bank
of the Philippines under their Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former
sought an increase in the amount of damages, while the latter questioned the findings of fact and law of
the lower court.
In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in declaring
that the deed of assignment was null and void and that defendant Caperal could not validly acquire the
leasehold rights from DBP; (2) contrary to the claim of DBP, the assignment was not a cession under
Article 1255 of the Civil Code because DBP appeared to be the sole creditor to CUBA - cession
presupposes plurality of debts and creditors; (3) the deeds of assignment represented the voluntary act of
CUBA in assigning her property rights in payment of her debts, which amounted to a novation of the
promissory notes executed by CUBA in favor of DBP; (4) CUBA was estopped from questioning the
assignment of the leasehold rights, since she agreed to repurchase the said rights under a deed of
conditional sale; and (5) condition no. 12 of the deed of assignment was an express authority from CUBA
for DBP to sell whatever right she had over the fishpond. It also ruled that CUBA was not entitled to loss of
profits for lack of evidence, but agreed with the trial court as to the actual damages of P1,067,500. It,
however, deleted the amount of exemplary damages and reduced the award of moral damages from
P100,000 to P50,000 and attorneys fees, from P100,000 to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating Cubas
leasehold rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of assignment
executed by Cuba in favor of DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the
deed of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal,
and the assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered DBP to turn
over possession of the property to Caperal as lawful holder of the leasehold rights and to pay CUBA the
following amounts: (a) P1,067,500 as actual damages; P50,000 as moral damages; and P50,000 as
attorneys fees.
Since their motions for reconsideration were denied,[6] DBP and CUBA filed separate petitions for
review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and attorneys
fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of Appeals
erred (1) in not holding that the questioned deed of assignment was a pactum commissorium contrary to
Article 2088 of the Civil Code; (b) in holding that the deed of assignment effected a novation of the
promissory notes; (c) in holding that CUBA was estopped from questioning the validity of the deed of
assignment when she agreed to repurchase her leasehold rights under a deed of conditional sale; and (d)
in reducing the amounts of moral damages and attorneys fees, in deleting the award of exemplary
damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each of
which was covered by a promissory note. In all of these notes, there was a provision that: In the event of
foreclosure of the mortgage securing this notes, I/We further bind myself/ourselves, jointly and severally, to
pay the deficiency, if any. [7]
Simultaneous with the execution of the notes was the execution of Assignments of Leasehold Rights
[8]where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the
improvements thereon. As pointed out by CUBA, the deeds of assignment constantly referred to the
assignor (CUBA) as borrower; the assigned rights, as mortgaged properties; and the instrument itself, as
mortgage contract. Moreover, under condition no. 22 of the deed, it was provided that failure to comply
with the terms and condition of any of the loans shall cause all other loans to become due and
demandable and all mortgages shall be foreclosed. And, condition no. 33 provided that if foreclosure is
actually accomplished, the usual 10% attorneys fees and 10% liquidated damages of the total obligation
shall be imposed. There is, therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by way of security
for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights.
In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that an assignment to
guarantee an obligation is in effect a mortgage.
We find no merit in DBPs contention that the assignment novated the promissory notes in that the
obligation to pay a sum of money the loans (under the promissory notes) was substituted by the
assignment of the rights over the fishpond (under the deed of assignment). As correctly pointed out by
CUBA, the said assignment merely complemented or supplemented the notes; both could stand together.
The former was only an accessory to the latter. Contrary to DBPs submission, the obligation to pay a sum
of money remained, and the assignment merely served as security for the loans covered by the
promissory notes. Significantly, both the deeds of assignment and the promissory notes were executed
on the same dates the loans were granted. Also, the last paragraph of the assignment stated: The
assignor further reiterates and states all terms, covenants, and conditions stipulated in the promissory
note or notes covering the proceeds of this loan, making said promissory note or notes, to all intent and
purposes, an integral part hereof.
Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for
the plain and simple reason that there was only one creditor, the DBP. Article 1255 contemplates the
existence of two or more creditors and involves the assignment of all the debtors property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which
reads: Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law on sales. It bears stressing that the assignment, being in its essence a
mortgage, was but a security and not a satisfaction of indebtedness.[10]
We do not, however, buy CUBAs argument that condition no. 12 of the deed of assignment
constituted pactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the Assignor hereby appoints the
Assignee his Attorney-in-fact with full power and authority to take actual possession of the property
above-described, together with all improvements thereon, subject to the approval of the Secretary of
Agriculture and Natural Resources, to lease the same or any portion thereof and collect rentals, to make
repairs or improvements thereon and pay the same, to sell or otherwise dispose of whatever rights the
Assignor has or might have over said property and/or its improvements and perform any other act which
the Assignee may deem convenient to protect its interest. All expenses advanced by the Assignee in
connection with purpose above indicated which shall bear the same rate of interest aforementioned are
also guaranteed by this Assignment. Any amount received from rents, administration, sale or disposal of
said property may be supplied by the Assignee to the payment of repairs, improvements, taxes,
assessments and other incidental expenses and obligations and the balance, if any, to the payment of
interest and then on the capital of the indebtedness secured hereby. If after disposal or sale of said
property and upon application of total amounts received there shall remain a deficiency, said Assignor
hereby binds himself to pay the same to the Assignee upon demand, together with all interest thereon until
fully paid. The power herein granted shall not be revoked as long as the Assignor is indebted to the
Assignee and all acts that may be executed by the Assignee by virtue of said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by
way of security for the payment of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.[11]
Condition no. 12 did not provide that the ownership over the leasehold rights would automatically
pass to DBP upon CUBAs failure to pay the loan on time. It merely provided for the appointment of DBP
as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in
case of default by CUBA, and to apply the proceeds to the payment of the loan. This provision is a
standard condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which
authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged property for the payment
of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As
admitted by it during the pre-trial, it had [w]ithout foreclosure proceedings, whether judicial or extrajudicial,
appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question. Its contention
that it limited itself to mere administration by posting caretakers is further belied by the deed of
conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the herein
vendees [Cuba spouses] the former acquired all the rights and interest of the latter over the above-
described property;
The title to the real estate property [sic] and all improvements thereon shall remain in the name of the
Vendor until after the purchase price, advances and interest shall have been fully paid. (Emphasis
supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of
CUBAs leasehold rights merely on the strength of the deed of assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of
appropriating the leasehold rights. As stated earlier, condition no. 12 did not provide that CUBAs default
would operate to vest in DBP ownership of the said rights. Besides, an assignment to guarantee an
obligation, as in the present case, is virtually a mortgage and not an absolute conveyance of title which
confers ownership on the assignee.[12]
At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of Article 2088 of the
Civil Code, which forbids a creditor from appropriating, or disposing of, the thing given as security for the
payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop
her from questioning DBPs act of appropriation. Estoppel is unavailing in this case. As held by this Court
in some cases,[13] estoppel cannot give validity to an act that is prohibited by law or against public policy.
Hence, the appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code and to
public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have
foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of assignment. But, as
admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26 October 1979, addressed to
the Minister of Agriculture and Natural Resources and coursed through the Director of the Bureau of
Fisheries and Aquatic Resources, DBP declared that it had foreclosed the mortgage and enforced the
assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba spouces] to pay their
loan amortizations.[14] This only goes to show that DBP was aware of the necessity of foreclosure
proceedings.
In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of
Fisheries cancelled CUBAs original lease permit, approved the deed of conditional sale, and issued a
new permit in favor of CUBA. Said acts which were predicated on such false representation, as well as
the subsequent acts emanating from DBPs appropriation of the leasehold rights, should therefore be set
aside. To validate these acts would open the floodgates to circumvention of Article 2088 of the Civil
Code.
Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the
consequent auction sale for failure to comply with the requirements laid down by law, such as Act No.
3135, as amended.[15] With more reason that the sale of property given as security for the payment of a
debt be set aside if there was no prior foreclosure proceeding.
Hence, DBP should render an accounting of the income derived from the operation of the fishpond in
question and apply the said income in accordance with condition no. 12 of the deed of assignment which
provided: Any amount received from rents, administration, may be applied to the payment of repairs,
improvements, taxes, assessment, and other incidental expenses and obligations and the balance, if any,
to the payment of interest and then on the capital of the indebtedness.
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or
compensatory damages.
Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree
of certainty.[16] A court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of
damages, but must depend upon competent proof that they have been suffered by the injured party and
on the best obtainable evidence of the actual amount thereof.[17] It must point out specific facts which
could afford a basis for measuring whatever compensatory or actual damages are borne.[18]
In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages
consisting of P550,000 which represented the value of the alleged lost articles of CUBA and P517,500
which represented the value of the 230,000 pieces of bangus allegedly stocked in 1979 when DBP first
ejected CUBA from the fishpond and the adjoining house. This award was affirmed by the Court of
Appeals.
We find that the alleged loss of personal belongings and equipment was not proved by clear
evidence. Other than the testimony of CUBA and her caretaker, there was no proof as to the existence of
those items before DBP took over the fishpond in question. As pointed out by DBP, there was not
inventory of the alleged lost items before the loss which is normal in a project which sometimes, if not
most often, is left to the care of other persons. Neither was a single receipt or record of acquisition
presented.
Curiously, in her complaint dated 17 May 1985, CUBA included losses of property as among the
damages resulting from DBPs take-over of the fishpond. Yet, it was only in September 1985 when her son
and a caretaker went to the fishpond and the adjoining house that she came to know of the alleged loss of
several articles. Such claim for losses of property, having been made before knowledge of the alleged
actual loss, was therefore speculative. The alleged loss could have been a mere afterthought or
subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of
bangus which died when DBP took possession of the fishpond in March 1979, the same was not called
for. Such loss was not duly proved; besides, the claim therefor was delayed unreasonably. From 1979
until after the filing of her complaint in court in May 1985, CUBA did not bring to the attention of DBP the
alleged loss. In fact, in her letter dated 24 October 1979,[19] she declared:
1. That from February to May 1978, I was then seriously ill in Manila and within the same period I
neglected the management and supervision of the cultivation and harvest of the produce of the aforesaid
fishpond thereby resulting to the irreparable loss in the produce of the same in the amount of about
P500,000.00 to my great damage and prejudice due to fraudulent acts of some of my fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took possession of the
fishpond, did CUBA intimate that upon DBPs take-over there was a total of 230,000 pieces of bangus,
but all of which died because of DBPs representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient basis.
In view, however, of DBPs act of appropriating CUBAs leasehold rights which was contrary to law and
public policy, as well as its false representation to the then Ministry of Agriculture and Natural Resources
that it had foreclosed the mortgage, an award of moral damages in the amount of P50,000 is in order
conformably with Article 2219(10), in relation to Article 21, of the Civil Code. Exemplary or corrective
damages in the amount of P25,000 should likewise be awarded by way of example or correction for the
public good.[20] There being an award of exemplary damages, attorneys fees are also recoverable.[21]
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is
hereby REVERSED, except as to the award of P50,000 as moral damages, which is hereby sustained.
The 31 January 1990 Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-
1574 is MODIFIED setting aside the finding that condition no. 12 of the deed of assignment constituted
pactum commissorium and the award of actual damages; and by reducing the amounts of moral
damages from P100,000 to P50,000; the exemplary damages, from P50,000 to P25,000; and the
attorneys fees, from P100,000 to P20,000. The Development Bank of the Philippines is hereby ordered
to render an accounting of the income derived from the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income statement of DBP, as
well as the statement of the account of Lydia P. Cuba, and for the determination of each partys financial
obligation to one another.
SO ORDERED.
Bellosillo, Vitug, and Kapunan, JJ., concur.
[1]
Original Record (OR), 1-7.
11/9/2017 Bustamante vs Rosel : 126800 : November 29, 1999 : J. Pardo : First Division
FIRST DIVISION
[G. R. No. 126800. November 29, 1999]
NATALIA P. BUSTAMANTE, petitioner vs. SPOUSES RODITO F. ROSEL and

NORMA A. ROSEL, respondents.
RESOLUTION
PARDO, J. :
The case before the Court is a petition for review on certiorari[1] to annul the decision of the Court of Appeals,[2]
reversing and setting aside the decision of the Regional Trial Court,[3], dated November 10, 1992, Judge Teodoro P. Regino. 3
Quezon City, Branch 84, in an action for specific performance with consignation.
On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with petitioner Natalia Bustamante
and her late husband Ismael C. Bustamante, under the following terms and conditions:
1. That the borrowers are the registered owners of a parcel of land, evidenced by TRANSFER CERTIFICATE OF
TITLE No. 80667, containing an area of FOUR HUNDRED TWENTY THREE (423) SQUARE Meters, more or
less, situated along Congressional Avenue.
2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS
from the LENDER, for a period of two (2) years, counted from March 1, 1987, with an interest of EIGHTEEN (18%)
PERCENT per annum, and to guaranty the payment thereof, they are putting as a collateral SEVENTY (70) SQUARE
METERS portion, inclusive of the apartment therein, of the aforestated parcel of land, however, in the event the
borrowers fail to pay, the lender has the option to buy or purchase the collateral for a total consideration of TWO
HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed amount and interest therein;
3. That the lender do hereby manifest her agreement and conformity to the preceding paragraph, while the borrowers do
hereby confess receipt of the borrowed amount.[4]
When the loan was about to mature on March 1, 1989, respondents proposed to buy at the pre-set price of
P200,000.00, the seventy (70) square meters parcel of land covered by TCT No. 80667, given as collateral to
guarantee payment of the loan. Petitioner, however, refused to sell and requested for extension of time to pay the loan
and offered to sell to respondents another residential lot located at Road 20, Project 8, Quezon City, with the principal
loan plus interest to be used as down payment. Respondents refused to extend the payment of the loan and to accept the
lot in Road 20 as it was occupied by squatters and petitioner and her husband were not the owners thereof but were
mere land developers entitled to subdivision shares or commission if and when they developed at least one half of the
subdivision area.[5]
Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which the latter refused to
accept, insisting on petitioners signing a prepared deed of absolute sale of the collateral.
On February 28, 1990, respondents filed with the Regional Trial Court, Quezon City, Branch 84, a complaint for
specific performance with consignation against petitioner and her spouse.[6]
Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell the collateral pursuant to
the option to buy embodied in the loan agreement.
On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City a petition for
consignation, and deposited the amount of P153,000.00 with the City Treasurer of Quezon City on August 10, 1990.[7]
When petitioner refused to sell the collateral and barangay conciliation failed, respondents consigned the amount of
P47,500.00 with the trial court.[8] In arriving at the amount deposited, respondents considered the principal loan of
P100,000.00 and 18% interest per annum thereon, which amounted to P52,500.00.[9] The principal loan and the
interest taken together amounted to P152,500.00, leaving a balance of P 47,500.00.[10]
After due trial, on November 10, 1992, the trial court rendered decision holding:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Denying the plaintiffs prayer for the defendants execution of the Deed of Sale to Convey the collateral in plaintiffs
favor;
2. Ordering the defendants to pay the loan of P100,000.00 with interest thereon at 18% per annum commencing on
March 2, 1989, up to and until August 10, 1990, when defendants deposited the amount with the Office of the City
Treasurer under Official Receipt No. 0116548 (Exhibit 2); and
3. To pay Attorneys Fees in the amount of P 5,000.00, plus costs of suit.
SO ORDERED.
Quezon City, Philippines, November 10, 1992.
TEODORO P. REGINO
Judge[11]
On November 16, 1992, respondents appealed from the decision to the Court of Appeals.[12] On July 8, 1996, the
Court of Appeals rendered decision reversing the ruling of the Regional Trial Court. The dispositive portion of the Court
of Appeals decision reads:
IN VIEW OF THE FOREGOING, the judgment appeal (sic) from is REVERSED and SET ASIDE and a new one
entered in favor of the plaintiffs ordering the defendants to accept the amount of P 47,000.00 deposited with the Clerk
of Court of Regional Trial Court of Quezon City under Official Receipt No. 0719847, and for defendants to execute the
necessary Deed of Sale in favor of the plaintiffs over the 70 SQUARE METER portion and the apartment standing
thereon being occupied by the plaintiffs and covered by TCT No. 80667 within fifteen (15) days from finality hereof.
Defendants, in turn, are allowed to withdraw the amount of P153,000.00 deposited by them under Official Receipt No.
0116548 of the City Treasurers Office of Quezon City. All other claims and counterclaims are DISMISSED, for lack of
sufficient basis. No costs.
SO ORDERED.[13]
Hence, this petition.[14]

On January 20, 1997, we required respondents to comment on the petition within ten (10) days from notice.[15] On
February 27, 1997, respondents filed their comment.[16]
On February 9, 1998, we resolved to deny the petition on the ground that there was no reversible error on the part
of respondent court in ordering the execution of the necessary deed of sale in conformity the with the parties stipulated
agreement. The contract is the law between the parties thereof (Syjuco v. Court of Appeals, 172 SCRA 111, 118,
citing Phil. American General Insurance v. Mutuc, 61 SCRA 22; Herrera v. Petrophil Corporation, 146 SCRA
360).[17]
On March 17, 1998, petitioner filed with this Court a motion for reconsideration of the denial alleging that the real
intention of the parties to the loan was to put up the collateral as guarantee similar to an equitable mortgage according to
Article 1602 of the Civil Code.[18]
On April 21, 1998, respondents filed an opposition to petitioners motion for reconsideration. They contend that the
agreement between the parties was not a sale with right of re-purchase, but a loan with interest at 18% per annum for a
period of two years and if petitioner fails to pay, the respondent was given the right to purchase the property or
apartment for P200,000.00, which is not contrary to law, morals, good customs, public order or public policy. [19]
Upon due consideration of petitioners motion, we now resolve to grant the motion for reconsideration.
The questions presented are whether petitioner failed to pay the loan at its maturity date and whether the stipulation
in the loan contract was valid and enforceable.
We rule that petitioner did not fail to pay the loan.
The loan was due for payment on March 1, 1989. On said date, petitioner tendered payment to settle the loan
which respondents refused to accept, insisting that petitioner sell to them the collateral of the loan.
When respondents refused to accept payment, petitioner consigned the amount with the trial court.
We note the eagerness of respondents to acquire the property given as collateral to guarantee the loan. The sale of
the collateral is an obligation with a suspensive condition.[20] It is dependent upon the happening of an event, without
which the obligation to sell does not arise. Since the event did not occur, respondents do not have the right to demand
fulfillment of petitioners obligation, especially where the same would not only be disadvantageous to petitioner but would
also unjustly enrich respondents considering the inadequate consideration (P200,000.00) for a 70 square meter property
situated at Congressional Avenue, Quezon City.
Respondents argue that contracts have the force of law between the contracting parties and must be complied with
in good faith.[21] There are, however, certain exceptions to the rule, specifically Article 1306 of the Civil Code, which
provides:
Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given as
security for the loan. This is embraced in the concept of pactum commissorium, which is proscribed by law.[22]
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.[23]
In Nakpil vs. Intermediate Appellate Court,[24] we said:
The arrangement entered into between the parties, whereby Pulong Maulap was to be considered sold to him
(respondent) xxx in case petitioner fails to reimburse Valdes, must then be construed as tantamount to pactum
commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic
appropriation of the property by Valdes in the event of failure of petitioner to pay the value of the advances. Thus,
contrary to respondents manifestation, all the elements of a pactum commissorium were present: there was a creditor-
debtor relationship between the parties; the property was used as security for the loan; and there was automatic
appropriation by respondent of Pulong Maulap in case of default of petitioner.
A significant task in contract interpretation is the ascertainment of the intention of the parties and looking into the
words used by the parties to project that intention. In this case, the intent to appropriate the property given as collateral
in favor of the creditor appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amount as the loan. In effect, the creditor acquires the collateral in the
event of non payment of the loan. This is within the concept of pactum commissorium. Such stipulation is void.[25]
All persons in need of money are liable to enter into contractual relationships whatever the condition if only to
alleviate their financial burden albeit temporarily. Hence, courts are duty bound to exercise caution in the interpretation
and resolution of contracts lest the lenders devour the borrowers like vultures do with their prey.
WHEREFORE, we GRANT petitioners motion for reconsideration and SET ASIDE the Courts resolution of
February 9, 1998. We REVERSE the decision of the Court of Appeals in CA-G. R. CV No. 40193. In lieu thereof, we
hereby DISMISS the complaint in Civil Case No. Q-90-4813.
No costs.
SO ORDERED.
Davide, Jr., C.J., Puno, Kapunan, and Ynares-Santiago, JJ., concur.
[1] Under Rule 45, 1964 Revised Rules of Court.
[2] In CA-G.R. CV No. 40193, promulgated on July 8, 1996.
[3] In Civil Case No. Q-90-481
[4] Exhibit A, RTC Record, p. 142.
[5] Regional Trial Court Decision, Rollo, p. 31.
[6] Civil Case No. Q-90-4813
[7] Exhibit 2, RTC Record, p. 182.
[8] Under Official Receipt No. 0719847 dated February 28, 1990, issued by the City Treasurer, Quezon City, with the Clerk of Court,
Regional Trial Court, National Capitol Judicial Region, Quezon City, as payee, RTC Record, p. 162.
[9] (P100,000.00 x 18%) 2 years and 11 months (March 8, 1987 up to February 9, 1990) P18,000 x 2 years and 11 months = P 52,500.
[10] Comment, Rollo, pp. 41-45.
[11] Decision, Regional Trial Court, Quezon City, Rollo, pp. 30-39.
[12] Docketed as CA-G.R. CV No. 40193
[13] Court of Appeals Decision, Rollo, pp. 19-26.
[14] Petition, filed on November 29, 1996. Rollo, pp. 7-17. On November 27, 1996, the Court granted petitioner an extension of thirty days
from the expiration of the reglementary period within which to file a petition for review on certiorari (Rollo, p. 14).
[15] Rollo, p. 40.
[16] Rollo, pp. 41-45.
11/9/2017 G.R. No. 172592
SECOND DIVISION
SPOUSES WILFREDO N. ONG G.R. No. 172592

and EDNA SHEILA PAGUIO-
ONG, Present:
Petitioners,
QUISUMBING, J., Chairperson,
CARPIO MORALES,
- versus - TINGA,
BRION, and
AUSTRIA-MARTINEZ,* JJ.
ROBAN LENDING
CORPORATION, Promulgated:
Respondent. July 9, 2008
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CARPIO MORALES, J.:

On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo N.
Ong and Edna Sheila Paguio-Ong obtained several loans from Roban Lending Corporation
(respondent) in the total amount of P4,000,000.00. These loans were secured by a real estate
mortgage on petitioners parcels of land located in Binauganan, Tarlac City and covered by TCT
[1]
No. 297840.
On February 12, 2001, petitioners and respondent executed an Amendment to Amended

[2]
Real Estate Mortgage consolidating their loans inclusive of charges thereon which totaled
[3]
P5,916,117.50. On even date, the parties executed a Dacion in Payment Agreement wherein
http://sc.judiciary.gov.ph/jurisprudence/2008/july2008/172592.htm 1/11
11/9/2017 G.R. No. 172592
petitioners assigned the properties covered by TCT No. 297840 to respondent in settlement of
[4]
their total obligation, and a Memorandum of Agreement reading:
That the FIRST PARTY [Roban Lending Corporation] and the SECOND PARTY [the
petitioners] agreed to consolidate and restructure all aforementioned loans, which have been all past
due and delinquent since April 19, 2000, and outstanding obligations totaling P5,916,117.50. The
SECOND PARTY hereby sign [sic] another promissory note in the amount of P5,916,117.50 (a
copy of which is hereto attached and forms xxx an integral part of this document), with a promise to
pay the FIRST PARTY in full within one year from the date of the consolidation and restructuring,
otherwise the SECOND PARTY agree to have their DACION IN PAYMENT agreement, which
[5]
they have executed and signed today in favor of the FIRST PARTY be enforced[.]
[6]
In April 2002 (the day is illegible), petitioners filed a Complaint, docketed as Civil Case
No. 9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage
contract as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting, and
damages, alleging that the Memorandum of Agreement and the Dacion in Payment executed are
[7]
void for being pactum commissorium.
Petitioners alleged that the loans extended to them from July 14, 1999 to March 20, 2000
were founded on several uniform promissory notes, which provided for 3.5% monthly interest
rates, 5% penalty per month on the total amount due and demandable, and a further sum of 25%
[8]
attorneys fees thereon, and in addition, respondent exacted certain sums denominated as
[9]
EVAT/AR. Petitioners decried these additional charges as illegal, iniquitous, unconscionable,
and revolting to the conscience as they hardly allow any borrower any chance of survival in case
[10]
of default.
Petitioners further alleged that they had previously made payments on their loan accounts,
but because of the illegal exactions thereon, the total balance appears not to have moved at all,
[11]
hence, accounting was in order.
Petitioners thus prayed for judgment:
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a) Declaring the Real Estate Mortgage Contract and its amendments x x x as null and
void and without legal force and effect for having been renounced, abandoned, and given up;
b) Declaring the Memorandum of Agreement xxx and Dacion in Payment x x x as null

and void for being pactum commissorium;
c) Declaring the interests, penalties, Evat [sic] and attorneys fees assessed and loaded
into the loan accounts of the plaintiffs with defendant as unjust, iniquitous, unconscionable and illegal
and therefore, stricken out or set aside;
d) Ordering an accounting on plaintiffs loan accounts to determine the true and correct
balances on their obligation against legal charges only; and
e) Ordering defendant to [pay] to the plaintiffs: --
e.1 Moral damages in an amount not less than P100,000.00 and exemplary damages
of P50,000.00;
e.2 Attorneys fees in the amount of P50,000.00 plus P1,000.00 appearance fee per
hearing; and
[12]
e.3 The cost of suit.
as well as other just and equitable reliefs.

[13]
In its Answer with Counterclaim, respondent maintained the legality of its transactions with
petitioners, alleging that:
xxxx
If the voluntary execution of the Memorandum of Agreement and Dacion in Payment

Agreement novated the Real Estate Mortgage then the allegation of Pactum Commissorium has no
more legal leg to stand on;
The Dacion in Payment Agreement is lawful and valid as it is recognized x x x under Art.
1245 of the Civil Code as a special form of payment whereby the debtor-Plaintiffs alienates their
property to the creditor-Defendant in satisfaction of their monetary obligation;
The accumulated interest and other charges which were computed for more than two (2)
years would stand reasonable and valid taking into consideration [that] the principal loan is
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P4,000,000 and if indeed it became beyond the Plaintiffs capacity to pay then the fault is attributed to
[14]
them and not the Defendant[.]
After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was reset
[15]
several times due to, among other things, the parties efforts to settle the case amicably.
During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:
Considering that the plaintiff Wilfredo Ong is not around on the ground that he is in Manila
and he is attending to a very sick relative, without objection on the part of the defendants counsel, the
initial hearing of this case is reset to June 18, 2003 at 10:00 oclock in the morning.
Just in case [plaintiffs counsel] Atty. Concepcion cannot present his witness in the person of
Mr. Wilfredo Ong in the next scheduled hearing, the counsel manifested that he will submit the case
[16]
for summary judgment. (Underscoring supplied)
It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004
[17]
at which both counsels were present and the RTC issued the following order:
The counsel[s] agreed to reset this case on April 14, 2004, at 10:00 oclock in the morning.
However, the counsels are directed to be ready with their memorand[a] together with all the exhibits
or evidence needed to support their respective positions which should be the basis for the judgment
on the pleadings if the parties fail to settle the case in the next scheduled setting.
[18]
xxxx (Underscoring supplied)
At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of
[19]
respondent filed a memorandum.
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of
[20]
the pleadings that there was no pactum commissorium, dismissed the complaint.
[21] [22]
On appeal, the Court of Appeals noted that
x x x [W]hile the trial court in its decision stated that it was rendering judgment on the
pleadings, x x x what it actually rendered was a summary judgment. A judgment on the pleadings is
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proper when the answer fails to tender an issue, or otherwise admits the material allegations of the
adverse partys pleading. However, a judgment on the pleadings would not have been proper in this
case as the answer tendered an issue, i.e. the validity of the MOA and DPA. On the other hand, a
summary judgment may be rendered by the court if the pleadings, supporting affidavits, and other
documents show that, except as to the amount of damages, there is no genuine issue as to any
[23]
material fact.
Nevertheless, finding the error in nomenclature to be mere semantics with no bearing on

[24]
the merits of the case, the Court of Appeals upheld the RTC decision that there was no
[25]
pactum commissorium.
[26] [27]
Their Motion for Reconsideration having been denied, petitioners filed the instant
[28]
Petition for Review on Certiorari, faulting the Court of Appeals for having committed a clear
and reversible error
I. . . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL REQUISITES

WHICH WOULD WARRANT THE SETTING ASIDE OF THE SUMMARY
JUDGMENT IN VIOLATION OF APPELLANTS RIGHT TO DUE PROCESS;
II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS NECESSARY

BECAUSE THE FACTS ARE VERY MUCH IN DISPUTE;
III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE MEMORANDUM OF

AGREEMENT (MOA) AND THE DACION EN PAGO AGREEMENT (DPA) WERE
DESIGNED TO CIRCUMVENT THE LAW AGAINST PACTUM COMMISSORIUM;
and
IV. . . . WHEN IT FAILED TO CONSIDER THAT THE MEMORANDUM OF

AGREEMENT (MOA) AND THE DACION EN PAGO (DPA) ARE NULL AND VOID
[29]
FOR BEING CONTRARY TO LAW AND PUBLIC POLICY.
The petition is meritorious.
Both parties admit the execution and contents of the Memorandum of Agreement and
Dacion in Payment. They differ, however, on whether both contracts constitute pactum
commissorium or dacion en pago.
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This Court finds that the Memorandum of Agreement and Dacion in Payment constitute
pactum commissorium, which is prohibited under Article 2088 of the Civil Code which provides:
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void.
The elements of pactum commissorium, which enables the mortgagee to acquire

[30]
ownership of the mortgaged property without the need of any foreclosure proceedings, are:
(1) there should be a property mortgaged by way of security for the payment of the principal
obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of non-payment of the principal obligation within the stipulated period.
[31]
In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no
provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement,
the failure by the petitioners to pay their debt within the one-year period gives respondent the
right to enforce the Dacion in Payment transferring to it ownership of the properties covered by
TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties
upon petitioners failure to pay their debt within the stipulated period.
Respondent argues that the law recognizes dacion en pago as a special form of payment
[32]
whereby the debtor alienates property to the creditor in satisfaction of a monetary obligation.
This does not persuade. In a true dacion en pago, the assignment of the property extinguishes
[33]
the monetary debt. In the case at bar, the alienation of the properties was by way of security,
[34]
and not by way of satisfying the debt. The Dacion in Payment did not extinguish petitioners
obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the
same day as the Dacion in Payment, petitioners had to execute a promissory note for
[35]
P5,916,117.50 which they were to pay within one year.
11/9/2017 G.R. No. 172592
[36]
Respondent cites Solid Homes, Inc. v. Court of Appeals where this Court upheld a
[37]
Memorandum of Agreement/Dacion en Pago. That case did not involve the issue of pactum
[38]
commissorium.
That the questioned contracts were freely and voluntarily executed by petitioners and
[39]
respondent is of no moment, pactum commissorium being void for being prohibited by law.
Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and
[40]
attorneys fees if they are iniquitous or unconscionable.
[41]
This Court, based on existing jurisprudence, finds the monthly interest rate of 3.5%, or
42% per annum unconscionable and thus reduces it to 12% per annum. This Court finds too the
penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and demandable
principal plus interest, with interest not paid when due added to and becoming part of the
[42]
principal and likewise bearing interest at the same rate, compounded monthly unconscionable
and reduces it to a yearly rate of 12% of the amount due, to be computed from the time of
[43]
demand. This Court finds the attorneys fees of 25% of the principal, interests and interests
thereon, and the penalty fees unconscionable, and thus reduces the attorneys fees to 25% of the
[44]
principal amount only.
The prayer for accounting in petitioners complaint requires presentation of evidence, they
[45]
claiming to have made partial payments on their loans, vis a vis respondents denial thereof. A
remand of the case is thus in order.
Prescinding from the above disquisition, the trial court and the Court of Appeals erred in
holding that a summary judgment is proper. A summary judgment is permitted only if there is no
genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of
[46]
law. A summary judgment is proper if, while the pleadings on their face appear to raise
issues, the affidavits, depositions, and admissions presented by the moving party show that such
11/9/2017 G.R. No. 172592
[47]
issues are not genuine. A genuine issue, as opposed to a fictitious or contrived one, is an
[48]
issue of fact that requires the presentation of evidence. As mentioned above, petitioners
prayer for accounting requires the presentation of evidence on the issue of partial payment.
But neither is a judgment on the pleadings proper. A judgment on the pleadings may be
rendered only when an answer fails to tender an issue or otherwise admits the material allegations
[49]
of the adverse partys pleadings. In the case at bar, respondents Answer with Counterclaim
disputed petitioners claims that the Memorandum of Agreement and Dation in Payment are illegal
[50]
and that the extra charges on the loans are unconscionable. Respondent disputed too
[51]
petitioners allegation of bad faith.
WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET

ASIDE. The Memorandum of Agreement and the Dacion in Payment executed by petitioner-
spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent Roban Lending
Corporation on February 12, 2001 are declared NULL AND VOID for being pactum
commissorium.
In line with the foregoing findings, the following terms of the loan contracts between the
parties are MODIFIED as follows:
1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per
annum;
2. The monthly penalty fee of 5% of the total amount due and demandable is reduced
to 12% per annum, to be computed from the time of demand; and
3. The attorneys fees are reduced to 25% of the principal amount only.
Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of
receiving evidence on petitioners prayer for accounting.
SO ORDERED.
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Custom Search

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-53955 January 13, 1989
THE MANILA BANKING CORPORATION, plaintiff-appellee,

vs.
ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.
Formoso & Quimbo Law Office for plaintiff-appellee.
Serafin P. Rivera for defendants-appellants.
BIDIN, J.:
This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII in Civil Case No. 78178
for collection of sum of money based on promissory notes executed by the defendants-appellants in favor of
plaintiff-appellee bank. The dispositive portion of the appealed decision (Record on Appeal, p. 33) reads as
follows:
WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio Teodoro, Jr. and
Grace Anna Teodoro jointly and severally, to pay plaintiff the sum of P15,037.11 plus 12% interest per
annum from September 30, 1969 until fully paid, in payment of Promissory Notes No. 11487, plus the
sum of P1,000.00 as attorney's fees; and (b) sentencing defendant Anastacio Teodoro, Jr. to pay
plaintiff the sum of P8,934.74, plus interest at 12% per annum from September 30, 1969 until fully
paid, in payment of Promissory Notes Nos. 11515 and 11699, plus the sum of P500.00 an attorney's
fees.
With Costs against defendants.
The facts of the case as found by the trial court are as follows:
On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in
favor of plaintiff a Promissory Note (No. 11487) for the sum of P10,420.00 payable in 120 days, or on
August 25, 1966, at 12% interest per annum. Defendants failed to pay the said amount inspire of
repeated demands and the obligation as of September 30, 1969 stood at P 15,137.11 including
accrued interest and service charge.
On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio
Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699) for
P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest per annum. Father and
Son made a partial payment on the May 3, 1966 promissory Note but none on the June 20, 1966
Promissory Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969 including
accrued interest and service charge.
The three Promissory Notes stipulated that any interest due if not paid at the end of every month shall
be added to the total amount then due, the whole amount to bear interest at the rate of 12% per
annum until fully paid; and in case of collection through an attorney-at-law, the makers shall, jointly
and severally, pay 10% of the amount over-due as attorney's fees, which in no case shall be leas
than P200.00.
It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment of
Receivables from the Emergency Employment Administration in the sum of P44,635.00. The Deed of
Assignment provided that it was for and in consideration of certain credits, loans, overdrafts and other
credit accommodations extended to defendants as security for the payment of said sum and the
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interest thereon, and that defendants do hereby remise, release and quitclaim all its rights, title, and
interest in and to the accounts receivables. Further.
(1) The title and right of possession to said accounts receivable is to remain in the
assignee, and it shall have the right to collect the same from the debtor, and whatsoever
the Assignor does in connection with the collection of said accounts, it agrees to do as
agent and representative of the Assignee and in trust for said Assignee ;
xxx xxx xxx
(6) The Assignor guarantees the existence and legality of said accounts receivable, and
the due and punctual payment thereof unto the assignee, ... on demand, ... and further,
that Assignor warrants the solvency and credit worthiness of each and every account.
(7) The Assignor does hereby guarantee the payment when due on all sums payable
under the contracts giving rise to the accounts receivable ... including reasonable
attorney's fees in enforcing any rights against the debtors of the assigned accounts
receivable and will pay upon demand, the entire unpaid balance of said contract in the
event of non-payment by the said debtors of any monthly sum at its due date or of any
other default by said debtors;
xxx xxx xxx
(9) ... This Assignment shall also stand as a continuing guarantee for any and all
whatsoever there is or in the future there will be justly owing from the Assignor to the
Assignee ...
In their stipulations of Fact, it is admitted by the parties that plaintiff extended loans to defendants on
the basis and by reason of certain contracts entered into by the defunct Emergency Employment
Administration (EEA) with defendants for the fabrication of fishing boats, and that the Philippine
Fisheries Commission succeeded the EEA after its abolition; that non-payment of the notes was due
to the failure of the Commission to pay defendants after the latter had complied with their contractual
obligations; and that the President of plaintiff Bank took steps to collect from the Commission, but no
collection was effected.
For failure of defendants to pay the sums due on the Promissory Note, this action was instituted on
November 13, 1969, originally against the Father, Son, and the latter's wife. Because the Father died,
however, during the pendency of the suit, the case as against him was dismiss under the provisions
of Section 21, Rule 3 of the Rules of Court. The action, then is against defendants Son and his wife
for the collection of the sum of P 15,037.11 on Promissory Note No. 14487; and against defendant
Son for the recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and 11699, plus interest on both
amounts at 12% per annum from September 30, 1969 until fully paid, and 10% of the amounts due as
attorney's fees.
Neither of the parties presented any testimonial evidence and submitted the case for decision based
on their Stipulations of Fact and on then, documentary evidence.
The issues, as defined by the parties are: (1) whether or not plaintiff claim is already considered paid
by the Deed of Assign. judgment of Receivables by the Son; and (2) whether or not it is plaintiff who
should directly sue the Philippine Fisheries Commission for collection.' (Record on Appeal, p. 29- 32).
On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972, defendants filed
a motion for reconsideration (Record on Appeal, p. 33) which was denied by the trial court in its order of June 14,
1972 (Record on Appeal, p. 37). On June 23, 1972, defendants filed with the lower court their notice of appeal
together with the appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court of
Appeals on August 22, 1972 (Record on Appeal, p. 42).
In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of error, that is —
THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE CONTRACT

BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION.
As the appeal involves a pure question of law, the Court of Appeals, in its resolution promulgated on March 6,
1980, certified the case to this Court (Rollo, p. 24). The record on Appeal was forwarded to this Court on March
31, 1980 (Rollo, p. 1).
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In the resolution of May 30, 1980, the First Division of this Court ordered that the case be docketed and declared
submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that the case has been pending with the Court and to determine
whether supervening events may have rendered the case moot and academic, the Court resolved (1) to require
the parties to MOVE IN THE PREMISES within thirty days from notice, and in case they fail to make the proper
manifestation within the required period, (2) to consider the case terminated and closed with the entry of judgment
accordingly made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of the appeal review interposed by defendants-appellants
(Rollo, p. 41).
The major issues raised in this case are as follows: (1) whether or not the assignment of receivables has the effect
of payment of all the loans contracted by appellants from appellee bank; and (2) whether or not appellee bank
must first exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against
appellants for collections of loan under the promissory notes which are plaintiffs bases in the action for collection
in Civil Case No. 78178.
Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal
cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of the debtor,
transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce
it to the same extent as the assignor could have enforced it against the debtor. ... It may be in the form of a sale,
but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his
debt, assigns to his creditor a credit he has against a third person, or it may constitute a donation as when it is by
gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure
his own debt in favor of the assignee, without transmitting ownership. The character that it may assume
determines its requisites and effects. its regulation, and the capacity of the parties to execute it; and in every case,
the obligations between assignor and assignee will depend upon the judicial relation which is the basis of the
assignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-
166).
There is no question as to the validity of the assignment of receivables executed by appellants in favor of appellee
bank.
The issue is with regard to its legal effects.
It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not transfer the
ownership of the receivables to appellee bank and release appellants from their loans with the bank incurred
under promissory notes Nos. 11487,11515 and 11699.
The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts, and
their credit accommodations in the sum of P10,000.00 extended to appellants by appellee bank, and as security
for the payment of said sum and the interest thereon; that appellants as assignors, remise, release, and quitclaim
to assignee bank all their rights, title and interest in and to the accounts receivable assigned (lst paragraph). It
was further stipulated that the assignment will also stand as a continuing guaranty for future loans of appellants to
appellee bank and correspondingly the assignment shall also extend to all the accounts receivable; appellants
shall also obtain in the future, until the consideration on the loans secured by appellants from appellee bank shall
have been fully paid by them (No. 9).
The position of appellants, however, is that the deed of assignment is a quitclaim in consideration of their
indebtedness to appellee bank, not mere guaranty, in view of the following provisions of the deed of assignment:
... the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, title and
interest in the accounts receivable described hereunder. (Emphasis supplied by appellants, first par.,
Deed of Assignment).
... that the title and right of possession to said account receivable is to remain in said assignee and it
shall have the right to collect directly from the debtor, and whatever the Assignor does in connection
with the collection of said accounts, it agrees to do so as agent and representative of the Assignee
and it trust for said Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record on Appeal, p. 27)
The character of the transactions between the parties is not, however, determined by the language used in the
document but by their intention. Thus, the Court, quoting from the American Jurisprudence (68 2d, Secured
Transaction, Section 50) said:
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The characters of the transaction between the parties is to be determined by their intention,
regardless of what language was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a pledge. However, even though a transfer, if
regarded by itself, appellate to have been absolute, its object and character might still be qualified
and explained by a contemporaneous writing declaring it to have been a deposit of the property as
collateral security. It has been Id that a transfer of property by the debtor to a creditor, even if
sufficient on its farm to make an absolute conveyance, should be treated as a pledge if the debt
continues in existence and is not discharged by the transfer, and that accordingly, the use of the
terms ordinarily exporting conveyance, of absolute ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and ambiguous
language or other circumstances excluding an intent to pledge. (Lopez v. Court of Appeals, 114 SCRA
671 [1982]).
Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to have been
constituted by virtue of a dation in payment for appellants' loans with the bank evidenced by promissory note Nos.
11487, 11515 and 11699 which are the subject of the suit for collection in Civil Case No. 78178. At the time the
deed of assignment was executed, said loans were non-existent yet. The deed of assignment was executed on
January 24, 1964 (Exh. "G"), while promissory note No. 11487 is dated April 25, 1966 (Exh. 'A), promissory note
11515, dated May 3, 1966 (Exh. 'B'), promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it was a dation
in payment for P10,000.00, the amount of credit from appellee bank indicated in the deed of assignment. At the
time the assignment was executed, there was no obligation to be extinguished except the amount of P10,000.00.
Moreover, in order that an obligation may be extinguished by another which substitutes the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other (Article 1292, New Civil Code).
Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants, as a
continuing guaranty for whatever sums would be owing by defendants to plaintiff, as stated in stipulation No. 9 of
the deed.
In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of
pledge, the latter being the lesser transmission of rights and interests (Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title and interest of the defendant in the contracts of lease of two buildings
as well as her rights, title and interest in the land on which the buildings were constructed to secure an overdraft
from a bank amounting to P110,000.00 which was increased to P150,000.00, then to P165,000.00 was considered
by the Court to be documents of mortgage contracts inasmuch as they were executed to guarantee the principal
obligations of the defendant consisting of the overdrafts or the indebtedness resulting therefrom. The Court ruled
that an assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title
which confers ownership on the assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).
II
As to whether or not appellee bank must have to exhaust all legal remedies against the Philippine Fisheries
Commission before it can proceed against appellants for collection of loans under their promissory notes, must
also be answered in the negative.
The obligation of appellants under the promissory notes not having been released by the assignment of
receivables, appellants remain as the principal debtors of appellee bank rather than mere guarantors. The deed
of assignment merely guarantees said obligations. That the guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against
the debtor, under Article 2058 of the New Civil Code does not therefore apply to them. It is of course of the
essence of a contract of pledge or mortgage that when the principal obligation becomes due, the things in which
the pledge or mortgage consists may be alienated for the payment to the creditor (Article 2087, New Civil Code). In
the instant case, appellants are both the principal debtors and the pledgors or mortgagors. Resort to one is,
therefore, resort to the other.
Appellee bank did try to collect on the pledged receivables. As the Emergency Employment Agency (EEA) which
issued the receivables had been abolished, the collection had to be coursed through the Office of the President
which disapproved the same (Record on Appeal, p. 16). The receivable became virtually worthless leaving
appellants' loans from appellee bank unsecured. It is but proper that after their repeated demands made on
appellants for the settlement of their obligations, appellee bank should proceed against appellants. It would be an
exercise in futility to proceed against a defunct office for the collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trial court is affirmed in
toto.
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SO ORDERED.
Fernan, C.J., Gutierrez, Jr. and Cortes, JJ., concur.
Separate Opinions
FELICIANO, J., concurring:
I quite agree with the general reasoning of and the results reached by my distinguished brother Bidin in respect of
both of the principal issues he addressed in his opinion.
I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the character of the
transactions between the parties is not, however, determined by the language used in the document but by their
intention.' This statement is basically not exceptionable, so far as it goes. It might, however, be borne in mind that
the intent of the parties to the transaction is to be determined in the first instance, by the very language which they
use. The deed of assignment contains language which suggest that the parties intended to effect a complete
alienation of title to and rights over the receivables which are the subject of the assignment. This language is
comprised of works like "remise," "release and quitclaim" and clauses like "the title and right of possession to said
accounts receivable is to remain in said assignee" who "shall have the right to collect directly from the debtor." The
same intent is also suggested by the use of the words "agent and representative of the assignee" in reffering to
the assignor.
The point that appears to me to be worth making is that although in its form, the deed of assignment of receivables
partakes of the nature of a complete alienation of the receivables assigned, such form should be taken in
conjunction with, and indeed must be qualified and controlled by, other language showing an intent of the parties
that title to the receivables shall pass to the assignee for the limited purpose of securing another, principal;
obligation owed by the assignor to the assignee. Title moves from assignor to asignee but that title is defeasible
being designed to collateralize the principal obligation. Operationally, what this means is that the assignee is
burdened with an obligation of taking the proceeds of the receivables assigned and applying such proceeds to the
satisfaction of the principal obligation and returning any balance remaining thereafter to the assignor.
The parties gave the deed of assignment the form of an absolute conveyance of title over the receivables
assigned, essentially for the convenience of the assignee. Without such formally unlimited conveyance of title, the
assignee would have to treat the deed of assignment as no more than a deed of pledge or of chattel mortgage. In
other words, in such hypothetical case, should the assignee seek to realize upon the security given to him through
the deed of assignment (which would then have to comply with the documentation and registration requirements of
a pledge or chattel mortgage), the assignee would have to foreclose upon the securities or credits assigned and
place them on public sale and there acquire the same. It should be recalled that under the principle which forbids
a pactum commisorium Article 2088, Civil Code), a mortgagee or pledgee is prohibited from simply taking and
appropriating the personal property turned over to him as security for the payment of a principal obligation. A
deed of assignment by way of security avoids the necessity of a public sale impose by the rule on pactum
commisorium, by in effect placing the sale of the collateral up front. (Emphasis supplied)
The foregoing is applicable where, as in the present instance, the deed of assignment of receivables combines
elements of both a complete or absolute alienation of the credits being assigned and a security arrangement to
assure payment of a principal obligation. Where the second element is absent, that is, where there is nothing to
indicate that the parties intended the deed of assignment to function as a security device, it would of course follow
that the simple absolute conveyance embodied in the deed of assignment would be operative; the assignment
would constitute essentially a mode of payment or dacion en pago. Put a little differently, in order that a deed of
assignment of receivables which is in form an absolute conveyance of title to the credits being assigned, may be
qualified and treated as a security arrangement, language to such effect must be found in the document itself and
that language, precisely, is embodied in the deed of assignment in the instant case. Finally, it might be noted that
that deed simply follows a form in standard use in commercial banking.
11/9/2017 G.R. No. L-53955
Separate Opinions
FELICIANO, J., concurring:
I quite agree with the general reasoning of and the results reached by my distinguished brother Bidin in respect of
both of the principal issues he addressed in his opinion.
I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the character of the
transactions between the parties is not, however, determined by the language used in the document but by their
intention.' This statement is basically not exceptionable, so far as it goes. It might, however, be borne in mind that
the intent of the parties to the transaction is to be determined in the first instance, by the very language which they
use. The deed of assignment contains language which suggest that the parties intended to effect a complete
alienation of title to and rights over the receivables which are the subject of the assignment. This language is
comprised of works like "remise," "release and quitclaim" and clauses like "the title and right of possession to said
accounts receivable is to remain in said assignee" who "shall have the right to collect directly from the debtor." The
same intent is also suggested by the use of the words "agent and representative of the assignee" in reffering to
the assignor.
The point that appears to me to be worth making is that although in its form, the deed of assignment of receivables
partakes of the nature of a complete alienation of the receivables assigned, such form should be taken in
conjunction with, and indeed must be qualified and controlled by, other language showing an intent of the parties
that title to the receivables shall pass to the assignee for the limited purpose of securing another, principal;
obligation owed by the assignor to the assignee. Title moves from assignor to asignee but that title is defeasible
being designed to collateralize the principal obligation. Operationally, what this means is that the assignee is
burdened with an obligation of taking the proceeds of the receivables assigned and applying such proceeds to the
satisfaction of the principal obligation and returning any balance remaining thereafter to the assignor.
The parties gave the deed of assignment the form of an absolute conveyance of title over the receivables
assigned, essentially for the convenience of the assignee. Without such formally unlimited conveyance of title, the
assignee would have to treat the deed of assignment as no more than a deed of pledge or of chattel mortgage. In
other words, in such hypothetical case, should the assignee seek to realize upon the security given to him through
the deed of assignment (which would then have to comply with the documentation and registration requirements of
a pledge or chattel mortgage), the assignee would have to foreclose upon the securities or credits assigned and
place them on public sale and there acquire the same. It should be recalled that under the principle which forbids
a pactum commisorium Article 2088, Civil Code), a mortgagee or pledgee is prohibited from simply taking and
appropriating the personal property turned over to him as security for the payment of a principal obligation. A
deed of assignment by way of security avoids the necessity of a public sale impose by the rule on pactum
commisorium, by in effect placing the sale of the collateral up front. (Emphasis supplied)
The foregoing is applicable where, as in the present instance, the deed of assignment of receivables combines
elements of both a complete or absolute alienation of the credits being assigned and a security arrangement to
assure payment of a principal obligation. Where the second element is absent, that is, where there is nothing to
indicate that the parties intended the deed of assignment to function as a security device, it would of course follow
that the simple absolute conveyance embodied in the deed of assignment would be operative; the assignment
would constitute essentially a mode of payment or dacion en pago. Put a little differently, in order that a deed of
assignment of receivables which is in form an absolute conveyance of title to the credits being assigned, may be
qualified and treated as a security arrangement, language to such effect must be found in the document itself and
that language, precisely, is embodied in the deed of assignment in the instant case. Finally, it might be noted that
that deed simply follows a form in standard use in commercial banking.
Footnotes
* Penned by then Judge of the Court of First Instance of Manila, Ameurfina Melencio-Herrera, now
Associate Justice of the Court.
11/9/2017 G.R. No. 98334
Custom Search

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 98334 May 8, 1992
MANUEL D. MEDIDA, Deputy Sheriff of the Province of Cebu, CITY SAVINGS BANK (formerly Cebu City
Savings and Loan Association, Inc.) and TEOTIMO ABELLANA, petitioners,
vs.
COURT OF APPEALS and SPS. ANDRES DOLINO and PASCUALA DOLINO, respondents.
Gines N. Abellana for petitioners.
Dionisio U. Flores for private respondents.
REGALADO, J.:
The core issue in this case is whether or not a mortgagor, whose property has been extrajudicially foreclosed and
sold at the corresponding foreclosure sale, may validly execute a mortgage contract over the same property in
favor of a third party during the period of redemption.
The present appeal by certiorari assails the decision 1 of respondent Court of Appeals in CA-G.R. CV No. 12678
where it answered the question posed by the foregoing issue in the negative and modified the decision 2 of the
then Court of First Instance of Cebu in Civil Case No. R-18616 wherein the validity of said subsequent mortgage
was assumed and the case was otherwise disposed of on other grounds.
The facts which gave rise to the institution of the aforesaid civil case in the trial court, as found by respondent
Court of Appeals, are as follows:
On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption over lot 4731 of the
Cebu City Cadastre and embraced under TCT No. 14272 from Mr. Juan Gandioncho, purchaser of
the aforesaid lot at the foreclosure sale of the previous mortgage in favor of Cebu City Development
Bank, went to Teotimo Abellana, president of defendant Association, to obtain a loan of P30,000.00.
Prior thereto or on October 3, 1974, their son Teofredo Dolino filed a similar loan application for
Twenty-Five Thousand (P25,000.00) Pesos with lot No. 4731 offered as security for the Thirty
Thousand (P30,000.00) Pesos loan from defendant association. Subsequently, they executed a
promissory note in favor of defendant association. Both documents indicated that the principal
obligation is for Thirty Thousand (P30,000.00) Pesos payable in one year with interest at twelve
(12%) percent per annum.
When the loan became due and demandable without plaintiff paying the same, defendant association
caused the extrajudicial foreclosure of the mortgage on March 16, 1976. After the posting and
publication requirements were complied with, the land was sold at public auction on April 19, 1976 to
defendant association being the highest bidder. The certificate of sale was issued on April 20, 1976
and registered on May 10, 1976 with the Register of Deeds of Cebu.
On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff, TCT No. 14272 was
cancelled and in lieu thereof TCT No. 68041 was issued in the name of defendant association.3
xxx xxx xxx
On October 18, 1979, private respondents filed the aforestated Civil Case No. R-18616 in the court a quo for the
annulment of the sale at public auction conducted on April 19, 1976, as well as the corresponding certificate of
sale issued pursuant thereto.
http://www.lawphil.net/judjuris/juri1992/may1992/gr_98334_1992.html 1/5
11/9/2017 G.R. No. 98334
In their complaint, private respondents, as plaintiffs therein, assailed the validity of the extrajudicial foreclosure
sale of their property, claiming that the same was held in violation of Act No. 3135, as amended, and prayed, inter
alia, for the cancellation of Transfer Certificate of Title No. 68041 issued in favor of therein defendant City Savings
and Loan Association, Inc., now known as City Savings Bank and one of the petitioners herein.
In its answer, the defendant association therein denied the material allegations of the complaint and averred,
among others, that the present private respondent spouses may still avail of their right of redemption over the land
in question.
On January 12, 1983, after trial on the merits, the court below rendered judgment upholding the validity of the loan
and the real estate mortgage, but annulling the extrajudicial foreclosure sale inasmuch as the same failed to
comply with the notice requirements in Act No. 3135, as amended, under the following dispositive part:
WHEREFORE, the foregoing premises considered and upon the view taken by the Court of this case,
judgment is hereby rendered, as follows:
1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot No. 4731 of the
Cadastral Survey of Cebu;
2. Ordering the cancellation of Transfer Certificate of Title No. 68041 of the Registry of Deeds of the
City of Cebu in the name of defendant Cebu City Savings and Loan Association, Inc. the
corresponding issuance of a new transfer certificate to contain all the annotations made in TCT No.
14272 of the plaintiffs Pascuala Sabellano, married to Andres Dolino;
3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City Savings and Loan Association,
Inc. the unpaid balance of the loan, plus interest; and reimbursing said defendant the value of any
necessary and useful expenditures on the property after deducting any income derived by said
defendant from the property.
For this purpose, defendant Association is given 15 days from receipt hereof within which to submit its
statement of the amount due it from the plaintiffs Dolino, with notice to them. The payment to be made
by the plaintiffs shall be within ninety (90) days from their receipt of the order approving the amount
due the defendant Cebu City Savings and Loan Association, Inc.
No award of damages or costs to either party.
SO ORDERED. 4
Not satisfied therewith, herein private respondents interposed a partial appeal to respondent court with respect to
the second and third paragraphs of the aforequoted decretal portion, contending that the lower court erred in (1)
declaring that the mortgage executed by the therein plaintiff spouses Dolino is valid; (2) permitting therein Cebu
City Savings and Loan Association, Inc. to collect interest after the same foreclosure proceedings and auction sale
which are null and void from the beginning; (3) not ordering the forfeiture of the capital or balance of the loan with
usurious interest; and (4) not sentencing therein defendant to pay damages and attorney's fees to plaintiffs. 5
On September 28, 1990, respondent Court of Appeals promulgated its decision modifying the decision of the lower
court, with this adjudication:
WHEREFORE, PREMISES CONSIDERED, the decision appealed from is hereby MODIFIED declaring
as void and ineffective the real estate mortgage executed by plaintiffs in favor of defendant
association. With this modification, the decision is AFFIRMED in other respects. 6
Herein petitioners then filed a motion for reconsideration which was denied by respondent court in its resolution
dated March 5, 1991, hence the present petition which, in synthesis, postulates that respondent court erred in
declaring the real estate mortgage void, and also impugns the judgment of the trial court declaring ineffective the
extrajudicial foreclosure of said mortgage and ordering the cancellation of Transfer Certificate of Title No. 68041
issued in favor of the predecessor of petitioner bank. 7
The first submission assailing the judgment of respondent Court of Appeals is meritorious.
Said respondent court declared the real estate mortgage in question null and void for the reason that the
mortgagor spouses, at the time when the said mortgage was executed, were no longer the owners of the lot,
having supposedly lost the same when the lot was sold to a purchaser in the foreclosure sale under the prior
mortgage. This holding cannot be sustained.
Preliminarily, the issue of ownership of the mortgaged property was never alleged in the complaint nor was the
same raised during the trial, hence that issue should not have been taken cognizance of by the Court of Appeals.
11/9/2017 G.R. No. 98334
An issue which was neither averred in the complaint nor ventilated during the trial in the court below cannot be
raised for the first time on appeal as it would be offensive to the basic rule of fair play, justice and due process. 8
Nonetheless, since respondent Court took cognizance thereof and, in fact, anchored its modificatory judgment on its ratiocination of that issue, we are
inclined to liberalize the rule so that we can in turn pass upon the correctness of its conclusion. We may consider such procedure as analogous to the rule
that an unassigned error closely related to an error properly assigned, or upon which the determination of the question properly assigned is dependent,
may be considered by an appellate court. 9 We adopt this approach since, after all, both lower courts agreed upon the invalidity of the extrajudicial
foreclosure but differed only on the matter of the validity of the real estate mortgage upon which the extrajudicial foreclosure was based.
In arriving at its conclusion, respondent court placed full reliance on what obviously is an obiter dictum laid down in
the course of the disquisition in Dizon vs. Gaborro, et al. which we shall analyze. 10 For, as explicitly stated therein
by the Court, "(t)he basic issue to be resolved in this case is whether the 'Deed of Sale with Assumption of
Mortgage' and the 'Option to Purchase Real Estate,' two instruments executed by and between petitioner Jose P.
Dizon and Alfredo G. Gaborro (defendant below) on the same day, October 6, 1959, constitute in truth and in fact
an absolute sale of the three parcels of land therein described or merely an equitable mortgage or conveyance
thereof by way of security for reimbursement or repayment by petitioner Jose P. Dizon of any and all sums which
may have been paid to the Development Bank of the Philippines and the Philippine National Bank by Alfredo G.
Gaborro . . . ." Said documents were executed by the parties and the payments were made by Gaborro for the
debt of Dizon to said banks after the Development Bank of the Philippines had foreclosed the mortgage executed
by Dizon and during the period of redemption after the foreclosure sale of the mortgaged property to said creditor
bank.
The trial court held that the true agreement between the parties therein was that Gaborro would assume and pay
the indebtedness of Dizon to the banks and, in consideration thereof, Gaborro was given the possession and
enjoyment of the properties in question until Dizon shall have reimbursed him for the amount paid to the creditor
banks. Accordingly, the trial court ordered the reformation of the documents to the extent indicated and such
particular relief was affirmed by the Court of Appeals. This Court held that the agreement between the parties is
one of those innominate contracts under Article 1307 of the Civil Code whereby the parties agreed "to give and to
do" certain rights and obligations, but partaking of the nature of antichresis.
Hence, on appeal to this Court, the judgment of the Court of Appeals in that case was affirmed but with the
following pronouncements:
The two instruments sought to be reformed in this case appear to stipulate rights and obligations
between the parties thereto pertaining to and involving parcels of land that had already been
foreclosed and sold extrajudicially, and purchased by the mortgage creditor, a third party. It becomes,
therefore, necessary, to determine the legality of said rights and obligations arising from the
foreclosure and sale proceedings not only between the two contracting parties to the instruments
executed between them but also in so far as the agreement affects the rights of the third party, the
purchaser Bank.
xxx xxx xxx
Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor remains in possession of
the property foreclosed and sold, during the period of redemption. If the judgment debtor is in
possession of the property sold, he is entitled to retain it, and receive the fruits, the purchaser not
being entitled to such possession. (Riosa vs. Verzosa, 26 Phil. 86; Velasco vs. Rosenberg's, Inc., 32
Phil. 72; Pabico vs. Pauco, 43 Phil. 572; Power vs. PNB, 54 Phil. 54; Gorospe vs. Gochangco, L-
12735, Oct. 30, 1959).
xxx xxx xxx
Upon foreclosure and sale, the purchaser is entitled to a certificate of sale executed by the sheriff.
(Section 27, Revised Rules of Court). After the termination of the period of redemption and no
redemption having been made, the purchaser is entitled to a deed of conveyance and to the
possession of the properties. (Section 35, Revised Rules of Court). The weight of authority is to the
effect that the purchaser of land sold at public auction under a writ of execution has only an inchoate
right to the property, subject to be defeated and terminated within the period of 12 months from the
date of sale, by a redemption on the part of the owner. Therefore, the judgment debtor in possession
of the property is entitled to remain therein during the period for redemption. (Riosa vs. Verzosa, 26
Phil. 86, 89; Gonzales vs. Calimbas, 51 Phil. 355).
In the case before Us, after the extrajudicial foreclosure and sale of his properties, petitioner Dizon
retained the right to redeem the lands, the possession, use and enjoyment of the same during the
period of redemption. And these are the only rights that Dizon could legally transfer, cede and convey
unto respondent Gaborro under the instrument captioned Deed of Sale with Assumption of Mortgage
(Exh. A-Stipulation), likewise the same rights that said respondent could acquire in consideration of
the latter's promise to pay and assume the loan of petitioner Dizon with DBP and PNB.
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Such an instrument cannot be legally considered a real and unconditional sale of the parcels of land,
firstly, because there was absolutely no money consideration therefor, as admittedly stipulated, the
sum of P131,831.91 mentioned in the document as the consideration "receipt of which was
acknowledged" was not actually paid; and, secondly, because the properties had already been
previously sold by the sheriff at the foreclosure sale, thereby divesting the petitioner of his full right as
owner thereof to dispose and sell the lands. (Emphasis ours.)
It was apparently the second reason stated by the Court in said case which was relied upon by respondent court in
the present case on which to premise its conclusion. Yet, as demonstrated by the relevant excerpts above quoted,
not only was that obiter therein unnecessary since evidently no sale was concluded, but even inaccurate, if not
inconsistent, when considered in the context of the discussion in its entirety. If, as admitted, the purchaser at the
foreclosure sale merely acquired an inchoate right to the property which could ripen into ownership only upon the
lapse of the redemption period without his credit having been discharged, it is illogical to hold that during that
same period of twelve months the mortgagor was "divested" of his ownership, since the absurd result would be
that the land will consequently be without an owner although it remains registered in the name of the mortgagor.
That is why the discussion in said case carefully and felicitously states that what is divested from the mortgagor is
only his "full right as owner thereof to dispose (of) and sell the lands," in effect, merely clarifying that the
mortgagor does not have the unconditional power to absolutely sell the land since the same is encumbered by a
lien of a third person which, if unsatisfied, could result in a consolidation of ownership in the lienholder but only
after the lapse of the period of redemption. Even on that score, it may plausibly be argued that what is delimited is
not the mortgagor's jus dispodendi, as an attribute of ownership, but merely the rights conferred by such act of
disposal which may correspondingly be restricted.
At any rate, even the foregoing considerations and arguments would have no application in the case at bar and
need not here be resolved since what is presently involved is a mortgage, not a sale, to petitioner bank. Such
mortgage does not involve a transfer, cession or conveyance of the property but only constitutes a lien thereon.
There is no obstacle to the legal creation of such a lien even after the auction sale of the property but during the
redemption period, since no distinction is made between a mortgage constituted over the property before or after
the auction sale thereof.
Thus, a redemptioner is defined as a creditor having a lien by attachment, judgment or mortgage on the property
sold, or on some part thereof, subsequent to the judgment under which the property was sold. 11 Of course, while
in extrajudicial foreclosure the sale contemplated is not under a judgment but the proceeding pursuant to which
the mortgaged property was sold, a subsequent mortgage could nevertheless be legally constituted thereafter with
the subsequent mortgagee becoming and acquiring the rights of a redemptioner, aside from his right against the
mortgagor.
In either case, what bears attention is that since the mortgagor remains as the absolute owner of the property
during the redemption period and has the free disposal of his property, there would be compliance with the
requisites of Article 2085 of the Civil Code for the constitution of another mortgage on the property. To hold
otherwise would create the inequitable situation wherein the mortgagor would be deprived of the opportunity, which
may be his last recourse, to raise funds wherewith to timely redeem his property through another mortgage
thereon.
Coming back to the present controversy, it is undisputed that the real estate mortgage in favor of petitioner bank
was executed by respondent spouses during the period of redemption. We reiterate that during said period it
cannot be said that the mortgagor is no longer the owner of the foreclosed property since the rule up to now is
that the right of a purchaser at a foreclosure sale is merely inchoate until after the period of redemption has
expired without the right being exercised. 12 The title to land sold under mortgage foreclosure remains in the
mortgagor or his grantee until the expiration of the redemption period and conveyance by the master's deed. 13 To
repeat, the rule has always been that it is only upon the expiration of the redemption period, without the judgment
debtor having made use of his right of redemption, that the ownership of the land sold becomes consolidated in
the purchaser. 14
Parenthetically, therefore, what actually is effected where redemption is seasonably exercised by the judgment or
mortgage debtor is not the recovery of ownership of his land, which ownership he never lost, but the elimination
from his title thereto of the lien created by the levy on attachment or judgment or the registration of a mortgage
thereon. The American rule is similarly to the effect that the redemption of property sold under a foreclosure sale
defeats the inchoate right of the purchaser and restores the property to the same condition as if no sale had been
attempted. Further, it does not give to the mortgagor a new title, but merely restores to him the title freed of the
encumbrance of the lien foreclosed. 15
We cannot rule on the plaint of petitioners that the trial court erred in declaring ineffective the extrajudicial
foreclosure and the sale of the property to petitioner bank. The court below spelled out at length in its decision the
facts which it considered as violative of the provisions of Act No. 3135, as amended, by reason of which it nullified
11/9/2017 G.R. No. 98334
the extrajudicial foreclosure proceeding and its effects. Such findings and ruling of the trial court are already final
and binding on petitioners and can no longer be modified, petitioners having failed to appeal therefrom.
An appellee who has not himself appealed cannot obtain from the appellate court any affirmative relief other than
the ones granted in the decision of the court below. 16 He cannot impugn the correctness of a judgment not
appealed from by him. He cannot assign such errors as are designed to have the judgment modified. All that said
appellee can do is to make a counter-assignment of errors or to argue on issues raised at the trial only for the
purpose of sustaining the judgment in his favor, even on grounds not included in the decision of the court a quo
nor raised in the appellant's assignment of errors or arguments.17
WHEREFORE, the decision of respondent Court of Appeals, insofar as it modifies the judgment of the trial court, is
REVERSED and SET ASIDE. The judgment of said trial court in Civil Case No. R-18616, dated January 12, 1983,
is hereby REINSTATED.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Nocon, JJ., concur.
Footnotes
1 Justice Manuel C. Herrera, ponente; Justices Eduardo R. Bengson and Jainal D. Rasul, concurring.
2 Per Judge Valeriano P. Tomol, Jr., presiding over Branch I.
3 Rollo, 61.
4 Ibid., 57-58.
5 Ibid., 63.
6 Ibid., 65.
7 Ibid., 4-6.
8 Vencilao, et al. vs. Vano, et al., 182 SCRA 491 (1990); Gevero, et al., vs. Intermediate Appellate
Court, et al., 189 SCRA 201 (1990).
9 Philippine Commercial and Industrial Bank vs. Court of Appeals, et al., 159 SCRA 24 (1988); Roman
Catholic Archbishop of Manila, et al. vs. Court of Appeals, et al., 198 SCRA 300 (1991).
10 83 SCRA 688 (1978).
11 Sec. 29 (b), Rule 39, Rules of Court.
12 De Castro vs. Intermediate Appellate Court, et al., 165 SCRA 654 (1988).
13 Kling vs. Ghilarducci, 3 I11. 2d 454, 121 NE2d 752, 46 ALR 2d 1189.
14 Mateo vs. Court of Appeals, et al., 99 Phil. 1042 (1956).
15 55 Am. Jur. 2d, Mortgages 781.
16 Alba vs. Santander, et al., 160 SCRA 8 (1988).
17 Aparri vs. Court of Appeals, et al., 13 SCRA 611 (1965); Carbonel vs. Court of Appeals, et al., 147
SCRA 565 (1987); Dizon, Jr. vs. National Labor Relations Commission, et al., 181 SCRA 472 (1990).
11/9/2017 Huerta Alba Resort Inc vs CA : 128567 : September 1, 2000 : J. Purisima : Third Division
THIRD DIVISION
[G.R. No. 128567. September 1, 2000]
HUERTA ALBA RESORT, INC., petitioner, vs. COURT OF APPEALS and

SYNDICATED MANAGEMENT GROUP, INC., respondents.
DECISION
PURISIMA, J.:
Litigation must at some time be terminated, even at the risk of occasional errors. Public policy
dictates that once a judgment becomes final, executory and unappealable, the prevailing party should not
be denied the fruits of his victory by some subterfuge devised by the losing party. Unjustified delay in the
enforcement of a judgment sets at naught the role of courts in disposing justiciable controversies with
finality.
T h e C a se
At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated March
11, 1997, of the Court of Appeals in CA-G.R. No. 38747, which set aside the Order, dated July 21, 1995,
and Order, dated September 4, 1997, of the Regional Trial Court of Makati City, in Civil Case No. 89-
5424. The aforesaid orders of the trial court held that petitioner had the right to redeem subject pieces of
property within the one-year period prescribed by Section 78 of Republic Act No. 337 otherwise known
as the General Banking Act.
Section 78 of R.A. No. 337 provides that in case of a foreclosure of a mortgage in favor of a bank,
banking or credit institution, whether judicially or extrajudicially, the mortgagor shall have the right, within
one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to
redeem the property.
TheFacts
The facts that matter are undisputed:

In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on October 19,
1989, docketed as Civil Case No. 89-5424 before the Regional Trial Court of Makati City, the herein
private respondent sought the foreclosure of four (4) parcels of land mortgaged by petitioner to Intercon
Fund Resource, Inc. (Intercon).
Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan amounting to
P8.5 million obtained by petitioner from Intercon, in whose favor petitioner mortgaged the aforesaid
parcels of land as security for the said loan.
In its answer below, petitioner questioned the assignment by Intercon of its mortgage right thereover
to the private respondent, on the ground that the same was ultra vires. Petitioner also questioned during
http://sc.judiciary.gov.ph/jurisprudence/2000/sept2000/128567.htm 1/12
the trial the correctness of the charges and interest on the mortgage debt in question.
On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice Buenaventura
J. Guerrero, came out with its decision granting herein private respondent SMGIs complaint for judicial
foreclosure of mortgage, disposing as follows:
WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the following:
(1) P8,500,000.00 representing the principal of the amount due;
(2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid;
(3) 22% per annum interest on the above principal from September 6, 1998, until fully paid;
(4) 5% of the sum total of the above amounts, as reasonable attorneys fees; and,
(5) Costs.
All the above must be paid within a period of not less than 150 days from receipt hereof by the defendant. In default of
such payment, the four parcels of land subject matter of the suit including its improvements shall be sold to realize the
mortgage debt and costs, in the manner and under the regulations that govern sales of real estate under execution.[1]
Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal docketed as
CA-G.R. CV No. 39243 before the Sixth Division of the appellate court, which dismissed the case on
June 29, 1993 on the ground of late payment of docket fees.
Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a petition for
certiorari, docketed as G.R. No. 112044, which this court resolved to dismiss on December 13, 1993, on
the finding that the Court of Appeals erred not in dismissing the appeal of petitioner.
Petitioners motion for reconsideration of the dismissal of its petition in G.R. No. 112044 was denied
with finality in this Courts Resolution promulgated on February 16, 1994. On March 10, 1994, leave to
present a second motion for reconsideration in G.R. No. 112044 or to submit the case for hearing by the
Court en banc was filed, but to no avail. The Court resolved to deny the same on May 11, 1994.
On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became final and
executory and was entered in the Book of Entries of Judgment.
On July 4, 1994, private respondent filed with the trial court of origin a motion for execution of the
Decision promulgated on April 30, 1992 in Civil Case No. 89-5424. The said motion was granted on July
13, 1994.
Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of Levy and
Execution was issued by the Sheriff concerned, who issued on August 1, 1994 a Notice of Sheriffs Sale
for the auction of subject properties on September 6, 1994.
On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash and Set
Aside Writ of Execution ascribing to it grave abuse of discretion in issuing the questioned Writ of
Execution. To support its motion, petitioner invited attention and argued that the records of the case were
still with the Court of Appeals and therefore, issuance of the writ of execution was premature since the
150-day period for petitioner to pay the judgment obligation had not yet lapsed and petitioner had not yet
defaulted in the payment thereof since no demand for its payment was made by the private respondent. In
petitioners own words, the dispute between the parties was principally on the issue as to when the 150-
day period within which Huerta Alba may exercise its equity of redemption should be counted.
In its Order of September 2, 1994, the lower court denied petitioners urgent motion to quash the writ
of execution in Civil Case No. 89-5424, opining that subject judgment had become final and executory
and consequently, execution thereof was a matter of right and the issuance of the corresponding writ of
execution became its ministerial duty.
Challenging the said order granting execution, petitioner filed once more with the Court of Appeals
another petition for certiorari and prohibition with preliminary injunction, docketed as C.A.-G.R. SP No.
35086, predicated on the same grounds invoked for its Motion to Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale of subject pieces of properties proceeded and
the private respondent was declared the highest bidder. Thus, private respondent was awarded subject
bidded pieces of property. The covering Certificate of Sale issued in its favor was registered with the
Registry of Deeds on October 21, 1994.
On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the trial court
to clarify whether or not the twelve (12) month period of redemption for ordinary execution applied in the
case.
On September 26, 1994, the trial court ruled that the period of redemption of subject property should
be governed by the rule on the sale of judicially foreclosed property under Rule 68 of the Rules of Court.
Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and Motion to
Set Aside Said Order, contending that the said Order materially altered the Decision dated April 30,
1992 which declared that the satisfaction of the judgment shall be in the manner and under the regulation
that govern sale of real estate under execution.
Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the issues raised
by the petitioner in C.A.-G.R. SP No. 35086, holding that the one hundred-fifty day period within which
petitioner may redeem subject properties should be computed from the date petitioner was notified of the
Entry of Judgment in G.R. No. 112044; and that the 150-day period within which petitioner may exercise
its equity of redemption expired on September 11, 1994. Thus:
Petitioner must have received the resolution of the Supreme Court dated February 16, 1994 denying with finality its
motion for reconsideration in G.R. No. 112044 before March 14, 1994, otherwise the Supreme Court would not have
made an entry of judgment on March 14, 1994. While, computing the 150-day period, petitioner may have until
September 11, 1994, within which to pay the amounts covered by the judgment, such period has already expired by this
time, and therefore, this Court has no more reason to pass upon the parties opposing contentions, the same having
become moot and academic.[2](Underscoring supplied).
Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-G.R. SP No.
35086. In its Motion for Reconsideration dated October 18, 1994, petitioner theorized that the period of
one hundred fifty (150) days should not be reckoned with from Entry of Judgment but from receipt on or
before July 29, 1994 by the trial court of the records of Civil Case No. 89-5424 from the Court of Appeals.
So also, petitioner maintained that it may not be considered in default, even after the expiration of 150
days from July 29, 1994, because prior demand to pay was never made on it by the private respondent.
According to petitioner, it was therefore, premature for the trial court to issue a writ of execution to enforce
the judgment.
The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in view of the
pendency of petitioners Motion for Reconsideration in CA-G.R. SP No. 35086.
On December 23, 1994, the Court of Appeals denied petitioners motion for reconsideration in CA-
G.R. SP No. 35086. Absent any further action with respect to the denial of the subject motion for
reconsideration, private respondent presented a Second Motion for Confirmation of Certificate of Sale
before the trial court.
As regards the Decision rendered on September 30, 1994 by the Court of Appeals in CA G.R. SP
No. 35086 it became final and executory on January 25, 1995.
On February 10, 1995, the lower court confirmed the sale of subject properties to the private
respondent. The pertinent Order declared that all pending incidents relating to the Order dated
September 26, 1994 had become moot and academic. Conformably, the Transfer Certificates of Title to
subject pieces of property were then issued to the private respondent.
On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification seeking
clarification of the date of commencement of the one (1) year period for the redemption of the properties
in question.
In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for
Clarification since its Decision promulgated on September 30, 1994 had already become final and
executory; ratiocinating thus:
We view the motion for clarification filed by petitioner, purportedly signed by its proprietor, but which we believe was
prepared by a lawyer who wishes to hide under the cloak of anonymity, as a veiled attempt to buy time and to delay
further the disposition of this case.
Our decision of September 30, 1994 never dealt on the right and period of redemption of petitioner, but was merely
circumscribed to the question of whether respondent judge could issue a writ of execution in its Civil Case No. 89-5424
xxx.
We further ruled that the one-hundred fifty day period within which petitioner may exercise its equity of redemption
should be counted, not from the receipt of respondent court of the records of Civil Case No. 89-5424 but from the date
petitioner was notified of the entry of judgment made by the appellate court.
But we never made any pronouncement on the one- year right of redemption of petitioner because, in the first place, the
foreclosure in this case is judicial, and as such, the mortgagor has only the equity, not the right of redemption xxx. While
it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the General Banking Act, a
mortgagor of a bank, banking or credit institution, whether the foreclosure was done judicially or extrajudicially, has a
period of one year from the auction sale within which to redeem the foreclosed property, the question of whether the
Syndicated Management Group, Inc., is a bank or credit institution was never brought before us squarely, and it is
indeed odd and strange that petitioner would now sarcastically ask a rhetorical question in its motion for clarification.[3]
(Underscoring supplied).
Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of Appeals in
CA-G.R. No. 35086 its pretended right under Section 78 of R.A. No. 337 but it never did so.
At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure, petitioner
should have averred in its pleading that it was entitled to the beneficial provisions of Section 78 of R.A.
No. 337; but again, petitioner did not make any such allegation in its answer.
From the said Resolution, petitioner took no further step such that on March 31, 1995, the private
respondent filed a Motion for Issuance of Writ of Possession with the trial court.
During the hearing called on April 21, 1995, the counsel of record of petitioner entered appearance
and asked for time to interpose opposition to the Motion for Issuance of /Writ of Possession.
On May 2, 1995, in opposition to private respondents Motion for Issuance of /writ of Possession,
petitioner filed a Motion to Compel Private Respondent to Accept Redemption. It was the first time
petitioner ever asserted the right to redeem subject properties under Section 78 of R.A. No. 337, the
General Banking Act; theorizing that the original mortgagee, being a credit institution, its assignment of
the mortgage credit to petitioner did not remove petitioner from the coverage of Section 78 of R.A. No.
337. Therefore, it should have the right to redeem subject properties within one year from registration of
the auction sale, theorized the petitioner which concluded that in view of its right of redemption, the
issuance of the titles over subject parcels of land to the private respondent was irregular and premature.
In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan, denied private
respondents motion for a writ of possession, opining that Section 78 of the General Banking Act was
applicable and therefore, the petitioner had until October 21, 1995 to redeem the said parcels of land,
said Order ruled as follows:
It is undisputed that Intercon is a credit institution from which defendant obtained a loan secured with a real estate
mortgage over four (4) parcels of land. Assuming that the mortgage debt had not been assigned to plaintiff, there is then
no question that defendant would have a right of redemption in case of foreclosure, judicially or extrajudicially, pursuant
to the above quoted Section 78 of RA 337, as amended.
However, the pivotal issue here is whether or not the defendant lost its right of redemption by virtue of the assignment of
its mortgage debt by Intercon to plaintiff, which is not a bank or credit institution. The issue is resolved in the negative.
The right of redemption in this case is vested by law and is therefore an absolute privilege which defendant may not lose
even though plaintiff-assignee is not a bank or credit institution (Tolentino versus Court of Appeals, 106 SCRA 513).
Indeed, a contrary ruling will lead to a possible circumvention of Section 78 because all that may be needed to deprive a
defaulting mortgagor of his right of redemption is to assign his mortgage debt from a bank or credit institution to one
which is not. Protection of defaulting mortgagors, which is the avowed policy behind the provision, would not be
achieved if the ruling were otherwise. Consequently, defendant still possesses its right of redemption which it may
exercise up to October 21, 1995 only, which is one year from the date of registration of the certificate of sale of subject
properties (GSIS versus Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA 87).
Since the period to exercise defendants right of redemption has not yet expired, the cancellation of defendants transfer
certificates of title and the issuance of new ones in lieu thereof in favor of plaintiff are therefore illegal for being premature,
thereby necessitating reconveyance (see Sec. 63 (a) PD 1529, as amended).
WHEREFORE, the Court hereby rules as follows:
(1) The Motion for Issuance of Writ of Possession is hereby denied;
(2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in an amount computed according to
the terms stated in the Writ of Execution dated July 15, 1994 plus all other related costs and expenses mentioned under
Section 78, RA 337, as amended; and
(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the defendant the following titles of the
four (4) parcels of land, namely TCT Nos. V-38878, V-38879, V-38880, and V-38881, now in the name of plaintiff,
and (b) to register the certificate of sale dated October 7, 1994 and the Order confirming the sale dated February 10,
1995 by a brief memorandum thereof upon the transfer certificates of title to be issued in the name of defendant,
pursuant to Sec. 63 (a) PD 1529, as amended.
The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is now deemed resolved.
SO ORDERED.[4]
Private respondent interposed a Motion for Reconsideration seeking the reversal of the Order but to
no avail. In its Order dated September 4, 1995, the trial court denied the same.
To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of September 4,
1995 of the trial court, the private respondent filed with this court a Petition for Certiorari, Prohibition and
Mandamus, docketed as G.R. No. 121893, but absent any special and cogent reason shown for
entertaining the same, the Court referred the petition to the Court of Appeals, for proper determination.
Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due course to the
petition and set aside the trial courts Order dated July 21, 1995 and Order dated September 4, 1995.
In its Resolution of March 11, 1997, the Court of Appeals denied petitioners Motion for
Reconsideration of the Decision promulgated on November 14, 1996 in CA-G.R. No. 38747.
Undaunted, petitioner has come to this Court via the present petition, placing reliance on the
assignment of errors, that:
I
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE COURT OF
APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD RESOLVED WITH FINALITY THAT
PETITIONER HUERTA ALBA HAD NO RIGHT OF REDEMPTION BUT ONLY THE EQUITY OF
REDEMPTION.
II
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT PETITIONER

HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF REDEMPTION UNDER SECTION 78, R.A.
NO. 337 (THE GENERAL BANKING ACT).
III
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT PRIVATE

RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED TO THE ISSUANCE OF A
WRIT OF POSSESSION OVER THE SUBJECT PROPERTY.[5]
In its comment on the petition, private respondent countered that:
A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED WITH

FINALITY IN C.A.-G.R. SP NO. 35086 THAT PETITIONER ONLY HAD THE RIGHT OF REDEMPTION
IN RESPECT OF THE SUBJECT PROPERTIES.
B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE THE FINALITY OF

VARIOUS DECISIONS, RESOLUTIONS AND ORDERS WHICH HELD THAT PETITIONER ONLY
POSSESSES THE EQUITY OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.
C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE OF ITS

ALLEGED RIGHT OF REDEMPTION.
D. IN HOLDING THAT THE PETITIONER HAD THE RIGHT OF REDEMPTION OVER THE SUBJECT
PROPERTIES, THE TRIAL COURT MADE A MOCKERY OF THE LAW OF THE CASE. [6]
And by way of Reply, petitioner argued, that:

I.
THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY RESOLVED
THEREIN - WHETHER WITH FINALITY OR OTHERWISE - THE ISSUE OF PETITIONER HUERTA
ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337.
II.
THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT OF

REDEMPTION UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER
CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND WITHIN ONE (1) YEAR
FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE.
III.
THE PRINCIPLE OF THE LAW OF THE CASE HAS ABSOLUTELY NO BEARING HERE:
(1)
THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT PREDICATED UPON
THE FINALITY AND CORRECTNESS OF THE DECISION IN CIVIL CASE NO. 89-5424.
(2)
THUS, THE RTCS ORDER RECOGNIZING PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 37 DOES NOT IN ANY WAY HAVE THE EFFECT OF AMENDING,
MODIFYING, OR SETTING ASIDE THE DECISION IN CIVIL CASE NO. 89-5424.
The above arguments and counter-arguments advanced relate to the pivotal issue of whether or not
the petitioner has the one-year right of redemption of subject properties under Section 78 of Republic Act
No. 337 otherwise known as the General Banking Act.
The petition is not visited by merit.
Petitioners assertion of right of redemption under Section 78 of Republic Act No. 337 is premised on
the submission that the Court of Appeals did not resolve such issue in CA-G.R. SP No. 35086;
contending thus:
(1)
BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 BE
INTERPRETED TO MEAN THE COURT OF APPEALS HAD RESOLVED WITH FINALITY THE ISSUE
OF WHETHER PETITIONER HUERTA ALBA HAD THE RIGHT OF REDEMPTION WHEN ALL THAT
THE RESOLUTION DID WAS TO MERELY NOTE THE MOTION FOR CLARIFICATION.
(2)
THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL JUDGMENT, ORDER
OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO BEGIN WITH. IT ORDERS NOTHING;
IT ADJUDICATES NOTHING.
(3)
PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 37 WAS NOT
AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE POSSIBLY BEEN AN ISSUE NOR IN
ISSUE, IN CA G.R. SP NO. 35086.
(4)
THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY BECOME FINAL
EVEN BEFORE THE FILING OF THE MOTION FOR CLARIFICATION, THE COURT OF APPEALS NO
LONGER HAD ANY JURISDICTION TO ACT OF THE MOTION OR ANY OTHER MATTER IN CA
G.R. SP NO. 35086, EXCEPT TO MERELY NOTE THE MOTION.
II.
IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION

UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND JOINED BY THE PARTIES, AND
THE SAME DULY RESOLVED BY THE TRIAL COURT.
III.
THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS MANDATORY AND
AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-BOUND TO RECOGNIZE SUCH
RIGHT.
IV.
EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER HUERTA ALBA, NOT

THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF THE LAW TO AID RATHER THAN
DEFEAT THE RIGHT OF REDEMPTION.
V.
THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL COURT ARE
VALID AND PROPER IN ACCORDANCE WITH THE MANDATE OF THE LAW.
From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has
been adjudged to have was only the equity of redemption over subject properties. On the distinction
between the equity of redemption and right of redemption, the case of Gregorio Y. Limpin vs.
Intermediate Appellate Court,[7] comes to the fore. Held the Court in the said case:
The equity of redemption is, to be sure, different from and should not be confused with the right of redemption.
The right of redemption in relation to a mortgage - understood in the sense of a prerogative to re-acquire mortgaged
property after registration of the foreclosure sale - exists only in the case of the extrajudicial foreclosure of the
mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine
National Bank or a bank or banking institution.
Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one
(1) year from the registration of the sheriffs certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a
judicial foreclosure sale, when confirmed by an order of the court, x x shall operate to divest the rights of all the parties
to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.
Such rights exceptionally allowed by law (i.e., even after confirmation by an order of the court) are those granted by the
charter of the Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A. 337). These
laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem
the property sold on foreclosure - after confirmation by the court of the foreclosure sale - which right may be
exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of
Property.
But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the
PNB or a bank or banking institution. In such a case, the foreclosure sale, when confirmed by an order of the court. x x
shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser. There then exists
only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the
mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment
becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation.
Section 2, Rule 68 provides that -
x x If upon the trial x x the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due
to the plaintiff upon the mortgage debt or obligation, including interest and costs, and shall render judgment for the sum
so found due and order the same to be paid into court within a period of not less than ninety (90) days from the date
of the service of such order, and that in default of such payment the property be sold to realize the mortgage debt and
costs.
This is the mortgagors equity (not right) of redemption which, as above stated, may be exercised by him even beyond
the 90-day period from the date of service of the order, and even after the foreclosure sale itself, provided it be before
the order of confirmation of the sale. After such order of confirmation, no redemption can be effected any longer.[8]
(Underscoring supplied)
Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.
Petitioner avers in its petition that the Intercom, predecessor in interest of the private respondent, is a
credit institution, such that Section 78 of Republic Act No. 337 should apply in this case. Stated differently,
it is the submission of petitioner that it should be allowed to redeem subject properties within one year
from the date of sale as a result of the foreclosure of the mortgage constituted thereon.
The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted right
under Section 78 of R.A. No. 337 to redeem subject properties.
Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation by the court
of the foreclosure sale, and within one (1) year from the date of registration of the certificate of sale.
Indeed, the facts show that it was only on May 2, 1995 when, in opposition to the Motion for Issuance of
Writ of Possession, did petitioner file a Motion to Compel Private Respondent to Accept Redemption,
invoking for the very first time its alleged right to redeem subject properties under to Section 78 of R.A.
No. 337.
In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to redeem
under Section 78 of R.A. No. 337. Petitioner failed to assert a right to redeem in several crucial stages of
the Proceedings.
For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for
Clarification, petitioner failed to allege and prove that private respondent's predecessor in interest was a
credit institution and therefore, Section 78 of R.A. No. 337 was applicable. Petitioner merely asked the
trial court to clarify whether the sale of subject properties was execution sale or judicial foreclosure sale.
So also, when it presented before the trial court an Exception to the Order and Motion to Set Aside
Said Order dated October 13, 1994, petitioner again was silent on its alleged right under Section 78 of
R.A. No. 337, even as it failed to show that private respondent's predecessor in interest is a credit
institution. Petitioner just argued that the aforementioned Order materially altered the trial court's Decision
of April 30, 1992.
Then, too, nothing was heard from petitioner on its alleged right under Section 78 of R.A. No. 337 and
of the predecessor in interest of private respondent as a credit institution, when the trial court came out
with an order on February 10, 1995, confirming the sale of subject properties in favor of private
respondent and declaring that all pending incidents with respect to the Order dated September 26, 1994
had become moot and academic.
Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the Court of
Appeals, seeking "clarification" of the date of commencement of the one (1) year redemption period for
the subject properties, petitioner never intimated any alleged right under Section 78 of R.A. No. 337 nor
did it invite attention to its present stance that private respondent's predecessor-in-interest was a credit
institution. Consequently, in its Resolution dated March 20, 1995, the Court of Appeals ruled on the said
motion thus:
But we never made any pronouncement on the one-year right of redemption of petitioner because, in the first place, the
foreclosure in this case is judicial, and as such, the mortgagor has only the equity, not the right of redemption xxx. While
it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the General Banking Act, a
mortgagor of a bank, banking or credit institution, whether the foreclosure was done judicially or extrajudicially, has a
period of one year from the auction sale within which to redeem the foreclosed property, the question of whether the
Syndicated Management Group, Inc., is bank or credit institution was never brought before us squarely, and it is indeed
odd and strange that petitioner would now sarcastically ask a rhetorical question in its motion for clarification.[9]
(Underscoring supplied).
If petitioner were really acting in good faith, it would have ventilated before the Court of Appeals in
CA-G.R. No. 35086 its alleged right under Section 78 of R.A. No. 337; but petitioner never did do so.
Indeed, at the earliest opportunity, when it submitted its answer to the complaint for judicial
foreclosure, petitioner should have alleged that it was entitled to the beneficial provisions of Section 78 of
R.A. No. 337 but again, it did not make any allegation in its answer regarding any right thereunder. It
bears stressing that the applicability of Section 78 of R.A. No. 337 hinges on the factual question of
whether or not private respondents predecessor in interest was a credit institution. As was held in Limpin,
a judicial foreclosure sale, when confirmed by an order of the court, xx shall operate to divest the rights of
all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption
as may be allowed by law,[10] which confer on the mortgagor, his successors in interest or any judgment
creditor of the mortgagor, the right to redeem the property sold on foreclosure after confirmation by the
court of the judicial foreclosure sale. Thus, the claim that petitioner is entitled to the beneficial provisions
of Section 78 of R.A. No. 337 - since private respondents predecessor-in-interest is a credit institution - is
in the nature of a compulsory counterclaim which should have been averred in petitioners answer to the
compliant for judicial foreclosure.
xxx A counterclaim is, most broadly, a cause of action existing in favor of the defendant against the plaintiff. More
narrowly, it is a claim which, if established, will defeat or in some way qualify a judgment or relief to which plaintiff is
otherwise entitled. It is sometimes defined as any cause of action arising in contract available against any action also
arising in contract and existing at the time of the commencement of such an action. It is frequently defined by the codes
as a cause of action arising out of the contract or transaction set forth in the complaint as the foundation of the plaintiffs
claim, or connected with the subject of the action.[11] (underscoring supplied)
The counterclaim is in itself a distinct and independent cause of action, so that when properly stated as such, the
defendant becomes, in respect to the matters stated by him, an actor, and there are two simultaneous actions pending
between the same parties, wherein each is at the same time both a plaintiff and a defendant. Counterclaim is an offensive
as well as a defensive plea and is not necessarily confined to the justice of the plaintiffs claim. It represents the right of the
defendant to have the claims of the parties counterbalanced in whole or in part, and judgment to be entered in excess, if
any. A counterclaim stands on the same footing, and is to be tested by the same rules, as if it were an independent action.
[12]
(underscoring supplied)
The very purpose of a counterclaim would have been served had petitioner alleged in its answer its
purported right under Section 78 of R.A. No. 337:
xxx The rules of counterclaim are designed to enable the disposition of a whole controversy of interested parties
conflicting claims, at one time and in one action, provided all parties be brought before the court and the matter decided
without prejudicing the rights of any party.[13]
The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337
precludes it from so doing at this late stage of the case. Estoppel may be successfully invoked if the party
fails to raise the question in the early stages of the proceedings.[14] Thus, a party to a case who failed to
invoked his claim in the main case, while having the opportunity to do so, will be precluded, subsequently,
from invoking his claim, even if it were true, after the decision has become final, otherwise the judgment
may be reduced to a mockery and the administration of justice may be placed in disrepute.[15]
All things viewed in proper perspective, it is decisively clear that the trial court erred in still allowing
petitioner to introduce evidence that private respondents predecessor-in-interest was a credit institution,
and to thereafter rule that the petitioner was entitled to avail of the provisions of Section 78 of R.A. No.
337. In effect, the trial court permitted the petitioner to accomplish what the latter failed to do before the
Court of Appeals, that is, to invoke its alleged right under Section 78 of R.A. No. 337 although the Court of
Appeals in CA-G.R. no. 35086 already found that the question of whether the Syndicated Management
Council Group, Inc. is a bank or credit institution was never brought before (the Court of Appeals)
squarely. The said pronouncement by the Court of Appeals unerringly signified that petitioner did not
make a timely assertion of any right under Section 78 of R.A. No. 337 in all the stages of the proceedings
below.
Verily, the petitioner has only itself to blame for not alleging at the outset that the predecessor-in-
interest of the private respondent is a credit institution. Thus, when the trial court, and the Court of Appeals
repeatedly passed upon the issue of whether or not petitioner had the right of redemption or equity of
redemption over subject properties in the decisions, resolutions and orders, particularly in Civil Case no.
89-5424, CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. SP No. 38747, it was
unmistakable that the petitioner was adjudged to just have the equity of redemption without any
qualification whatsoever, that is, without any right of redemption allowed by law.
The law of case holds that petitioner has the equity of redemption without any qualification.
There is, therefore, merit in private respondents contention that to allow petitioner to belatedly invoke
its right under Section 78 of R.A. No. 337 will disturb the law of the case. However, private respondents
statement of what constitutes the law of the case is not entirely accurate. The law of the case is not simply
that the defendant possesses an equity of redemption. As the Court has stated, the law of the case holds
that petitioner has the equity of the redemption without any qualification whatsoever, that is, without the
right of redemption afforded by Section 78 of R.A. No. 337. Whether or not the law of the case is
erroneous is immaterial, it still remains the law of the case. A contrary rule will contradict both the letter
and spirit of the rulings of the Court of Appeals in CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and
CA-G.R. 38747, which clearly saw through the repeated attempts of petitioner to forestall so simple a
matter as making the security given for a just debt to answer for its payment.
Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as confirmed by the
Order dated February 10, 1995 of the trial court in Civil Case No. 89-5424 operated to divest the rights of
all the parties to the action and to vest their rights in private respondent. There then existed only what is
known as the equity of redemption, which is simply the right of the petitioner to extinguish the mortgage
and retain ownership of the property by paying the secured debt within the 90-day period after the
judgment became final. There being an explicit finding on the part of the Court of Appeals in its Decision
of September 30, 1994 in CA-G.R. No. 35086 - that the herein petitioner failed to exercise its equity of
redemption within the prescribed period, redemption can no longer be effected. The confirmation of the
sale and the issuance of the transfer certificates of title covering the subject properties to private
respondent was then, in order. The trial court therefore, has the ministerial duty to place private
respondent in the possession of subject properties.
WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals, declaring
null and void the Order dated 21 July 1995 and Order dated 4 September 1997 of the Regional Trial
Court of Makati City in Civil Case No. 89-5424, AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.
[1]
Rollo, pp. 87-88.
[2]
Decision, p. 5; Rollo, p. 93.
[3]
Resolution, pp. 1-2; Rollo, pp. 366-367.
[4]
Rollo, pp. 14-15.
[5]
Rollo, p. 4.
[6]
Rollo, p. 390.
[7]
166 SCRA 87.
[8]
Ibid., pp. 93-95.
[9]
Rollo, pp. 366-367.
[10]
Limpin vs. Intermediate Appellate Court, supra, p. 94.
[11]
The Revised Rules of Court in the Philippines, Volume I, Francisco, Vicente J., p. 462 citing: 47 Am. Jur. 709-710.
[12]
Ibid., p. 464 citing: 47 Am. Jur., 717.
[13]
Ibid., p. 463 citing: Kuenzel vs. Universal Carloading and Distributing Co., (1939) 29 F. Supp. 407.
[14]
Corona vs. Court of Appeals, 214 SCRA 378, 392.
[15]
Applications of Estoppel in Litigation, 216 SCRA 826, 834 citing: Tuazon vs. Arca, 23 SCRA 1308, 1312.
11/9/2017 G.R. No. 170215
THIRD DIVISION
SPS. ESMERALDO and G.R. No. 170215

ELIZABETH SUICO,
Petitioners, Present:
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
PHILIPPINE NATIONAL BANK
and HON. COURT OF Promulgated:
APPEALS,
Respondents. August 28, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CHICO-NAZARIO, J.:
Herein petitioners, Spouses Esmeraldo and Elizabeth Suico, obtained a loan from the Philippine
[1]
National Bank (PNB) secured by a real estate mortgage on real properties in the name of the
former. The petitioners were unable to pay their obligation prompting the PNB to extrajudicially
foreclose the mortgage over the subject properties before the City Sheriff of Mandaue City under
EJF Case No. 92-5-15.
The petitioners thereafter filed a Complaint against the PNB before the Regional Trial Court (RTC)
of Mandaue City, Branch 55, docketed as Civil Case No. MAN-2793 for Declaration of Nullity of
[2]
Extrajudicial Foreclosure of Mortgage.
http://sc.judiciary.gov.ph/jurisprudence/2007/august2007/170215.htm 1/14
11/9/2017 G.R. No. 170215
The Complaint alleged that on 6 May 1992, PNB filed with the Office of the Mandaue City Sheriff a
petition for the extrajudicial foreclosure of mortgage constituted on the petitioners properties (subject
properties) for an outstanding loan obligation amounting to P1,991,770.38 as of 10 March 1992. The
foreclosure case before the Office of the Mandaue City Sheriff, which was docketed as EJF Case
No. 92-5-15, covered the following properties:
TCT NO. 13196
A parcel of land (Lot 701, plan 11-5121 Amd-2) situated at Mandaue City, bounded on the NE., and SE.,
by lot no. 700; on the SW. by lots nos. 688 and 702; on the NW. by lot no. 714, containing an area of
2,078 sq. m. more or less.
TAX DECL. NO. 00553
A parcel of land situated at Tabok, Mandaue City, Cad. Lot No. 700-C-1; bounded on the North by Lot
No. 701 & 700-B; on the South by Lot No. 700-C-3; on the East by lot no. 700-C-3 and on the West by
Lot no. 688, containing an area of 200 square meters, more or less.
TAX DECL. NO. 00721
Two (2) parcels of land situated at Tabok, Mandaue City, Cad. lot nos. 700-C-3 and 700-C-2; bounded on
the North by Lot Nos. 700-C-1 and 700-B; on the South by Lot No. 700-D; on the East by Lot Nos. 695
and 694; and on the West by Lot Nos. 688 and 700-C-1, containing an aggregate area of 1,683 sq. m.
more or less.
TAX DECL. NO. 0237
A parcel of land situated at Tabok, Mandaue City, Cad. Lot no. 700-B. Bounded on the NE. by (Lot 699)
109, (Lot No. 69) 110, on the SE (Lot 700-C) 115, on the NW. (Lot 700-A) 112 and on the SW. (Lot
701) 113; containing an area of .1785 HA more or less.
TAX DECL. NO. 9267
A parcel of land situated at Tabok, Mandaue City, Cad. Lot no. 700-A. Bounded on the NE. by (Lot 699)
109, on the South West by (Lot 701) 113, on the SE. by (Lot 700-B) 111, and on the NW. by (lot 714)
[3]
040039; containing an area of .1785 HA more or less.
Petitioners claimed that during the foreclosure sale of the subject properties held on 30 October
1992, PNB, as the lone bidder, offered a bid in the amount of P8,511,000.00. By virtue of the said
bid, a Certificate of Sale of the subject properties was issued by the Mandaue City Sheriff in favor of
PNB. PNB did not pay to the Sheriff who conducted the auction sale the amount of its bid which
was P8,511,000.00 or give an accounting of how said amount was applied against petitioners
11/9/2017 G.R. No. 170215
outstanding loan, which, as of 10 March 1992, amounted only to P1,991,770.38. Since the amount
of the bid grossly exceeded the amount of petitioners outstanding obligation as stated in the
extrajudicial foreclosure of mortgage, it was the legal duty of the winning bidder, PNB, to deliver to
the Mandaue City Sheriff the bid price or what was left thereof after deducting the amount of
petitioners outstanding obligation. PNB failed to deliver the amount of their bid to the Mandaue City
Sheriff or, at the very least, the amount of such bid in excess of petitioners outstanding obligation.
One year after the issuance of the Certificate of Sale, PNB secured a Certificate of Final Sale from
the Mandaue City Sheriff and, as a result, PNB transferred registration of all the subject properties to
its name.
Owing to the failure of PNB as the winning bidder to deliver to the petitioners the amount of its bid
or even just the amount in excess of petitioners obligation, the latter averred that the extrajudicial
foreclosure conducted over the subject properties by the Mandaue City Sheriff, as well as the
Certificate of Sale and the Certificate of Finality of Sale of the subject properties issued by the
Mandaue City Sheriff, in favor of PNB, were all null and void.
Petitioners, in their Complaint in Civil Case No. MAN-2793, prayed for:
a) Declaring the Nullity of Extra-judicial Foreclosure of Mortgage under EJF Case No. 92-5-15 including
the certificate of sale and the final deed of sale of the properties affected;
b) Order[ing] the cancellation of the certificates of titles and tax declaration already in the name of [herein
respondent] PNB and revert the same back to herein [petitioners] name;
c) Ordering the [PNB] to pay [petitioners] moral damages amounting to more than P1,000,000,00;
Exemplary damages of P500,000.00; Litigation expenses of P100,000.00 and attorneys fees of
[4]
P300,000.00.
[5]
PNB filed a Motion to Dismiss Civil Case No. MAN-2793 citing the pendency of another action
between the same parties, specifically Civil Case No. CEB-15236 before the RTC of Cebu City
entitled, PNB v. Sps. Esmeraldo and Elizabeth Suico where PNB was seeking the payment of the
balance of petitioners obligation not covered by the proceeds of the auction sale held on 30 October
1992. PNB argued that these two cases involve the same parties. Petitioners opposed the Motion to
[6]
Dismiss filed by PNB. Subsequently, the Motion to Dismiss Civil Case No. MAN-2793 was
11/9/2017 G.R. No. 170215
[7]
denied in the Order of the RTC dated 15 July 1997; thus, PNB was constrained to file its Answer.
[8]
PNB disputed petitioners factual narration. PNB asserted that petitioners had other loans which had
likewise become due. Petitioners outstanding obligation of P1,991,770.38 as of 10 March 1992 was
exclusive of attorneys fees, and other export related obligations which it did not consider due and
demandable as of said date. PNB maintained that the outstanding obligation of the petitioners under
their regular and export- related loans was already more than the bid price of P8,511,000.00,
contradicting the claim of surplus proceeds due the petitioners. Petitioners were well aware that their
total principal outstanding obligation on the date of the auction sale was P5,503,293.21.
PNB admitted the non-delivery of the bid price to the sheriff and the execution of the final deed of
sale, but claimed that it had not transferred in its name all the foreclosed properties because the
petition to register in its name Transfer Certificates of Title (TCT) No. 37029 and No. 13196 were
still pending.
[9]
On 2 February 1999, the RTC rendered its Decision in Civil Case No. MAN-2793 for the
declaration of nullity of the extrajudicial foreclosure of mortgage, the dispositive portion of which
states:
WHEREFORE, based on the foregoing, judgment is rendered in favor of [herein petitioners] Sps. Esmeraldo
& Elizabeth Suico and against [herein respondent], Philippine National Bank (PNB), declaring the nullity of
Extrajudicial Foreclosure of Mortgage under EJF Case No. 92-5-15, including the certificate of sale and the
final deed of sale of the subject properties; ordering the cancellation of the certificates of titles and tax
declaration already in the name of [respondent] PNB, if any, and revert the same back to the [petitioners]
name; ordering [respondent] PNB to cause a new foreclosure proceeding, either judicially or extra-judicially.
[10]
Furnish parties thru counsels copy of this order.
In granting the nullification of the extrajudicial foreclosure of mortgage, the RTC reasoned that given
that petitioners had other loan obligations which had not yet matured on 10 March 1992 but became
due by the date of the auction sale on 30 October 1992, it does not justify the shortcut taken by PNB
and will not excuse it from paying to the Sheriff who conducted the auction sale the excess bid in the
foreclosure sale. To allow PNB to do so would constitute fraud, for not only is the filing fee in the
said foreclosure inadequate but, worse, the same constitutes a misrepresentation regarding the
amount of the indebtedness to be paid in the foreclosure sale as posted and published in the notice
11/9/2017 G.R. No. 170215
[11]
of sale. Such misrepresentation is fatal because in an extrajudicial foreclosure of mortgage,
[12]
notice of sale is jurisdictional. Any error in the notice of sale is fatal and invalidates the notice.
[13]
When the PNB appealed its case to the Court of Appeals, the appellate court rendered a
[14]
Decision dated 12 April 2005, the fallo of which provides:
WHEREFORE, premises considered, the instant appeal is GRANTED. The questioned decision of the
Regional Trial Court of Mandaue City, Branch 55 dated February 2, 1999 is hereby REVERSED and SET
ASIDE. Accordingly, the extra judicial foreclosure of mortgage under EJF 92-5-15 including the certificate
[15]
of sale and final deed of sale executed appurtenant thereto are hereby declared to be valid and binding.
In justifying reversal, the Court of Appeals held:
A careful scrutiny of the evidence extant on record would show that in a letter dated January 12, 1994,
[petitioners] expressly admitted that their outstanding principal obligation amounted to P5.4 Million and in
fact offered to redeem the properties at P6.5 Million. They eventually increased their offer at P7.5 Million as
evidenced by that letter dated February 4, 1994. And finally on May 16, 1994, they offered to redeem the
foreclosed properties by paying the whole amount of the obligation by installment in a period of six years. All
those offers made by the [petitioners] not only contradicted their very assertion that their obligation is merely
that amount appearing on the petition for foreclosure but are also indicative of the fact that they have
admitted the validity of the extra judicial foreclosure proceedings and in effect have cured the impugned
defect. Thus, for the [petitioners] to insist that their obligation is only over a million is unworthy of belief.
Oddly enough, it is evident from their acts that they themselves likewise believe otherwise.
Even assuming that indeed there was a surplus and the [PNB] is retaining more than the proceeds of the sale
than it is entitled, this fact alone will not affect the validity of the sale but simply gives the [petitioners] a cause
of action to recover such surplus. In fine, the failure of the [PNB] to remit the surplus, if any, is not
tantamount to a non-compliance of statutory requisites that could constitute a jurisdictional defect invalidating
the sale. This situation only gives rise to a cause of action on the part of the [petitioners] to recover the
alleged surplus from the [PNB]. This ruling is in harmony with the decisional rule that in suing for the return of
the surplus proceeds, the mortgagor is deemed to have affirmed the validity of the sale since nothing is due if
[16]
no valid sale has been made.
[17]
Petitioners filed a Motion for Reconsideration of the foregoing Decision, but the Court of
Appeals was not persuaded. It maintained the validity of the foreclosure sale and, in its Amended
Decision dated 28 September 2005, it merely directed PNB to pay the deficiency in the filing fees,
holding thus:
11/9/2017 G.R. No. 170215
WHEREFORE, Our decision dated April 12, 2005 is hereby AMENDED. [Herein respondent PNB] is
hereby required to pay the deficiency in the filing fees due on the petition for extra judicial foreclosure sale to
be based on the actual amount of mortgage debts at the time of filing thereof. In all other respects, Our
[18]
decision subject of herein petitioners] motion for reconsideration is hereby AFFIRMED.
Unflinching, petitioners elevated the case before this Court via the present Petition for Review
essentially seeking the nullification of the extrajudicial foreclosure of the mortgage constituted on the
subject properties. Petitioners forward two reasons for declaring null and void the said extrajudicial
foreclosure: (1) the alleged defect or misrepresentation in the notice of sheriffs sale; and/or (2) failure
of PNB to pay and tender the price of its bid or the surplus thereof to the sheriff.
Petitioners argue that since the Notice of Sheriffs Sale stated that their obligation was only
P1,991,770.38 and PNB bidded P8,511,000.00, the said Notice as well as the consequent sale of the
subject properties were null and void.
It is true that statutory provisions governing publication of notice of mortgage foreclosure sales must
be strictly complied with, and that even slight deviations therefrom will invalidate the notice and
[19]
render the sale at least voidable. Nonetheless, we must not also lose sight of the fact that the
purpose of the publication of the Notice of Sheriffs Sale is to inform all interested parties of the
date, time and place of the foreclosure sale of the real property subject thereof. Logically, this not
only requires that the correct date, time and place of the foreclosure sale appear in the notice, but
also that any and all interested parties be able to determine that what is about to be sold at the
[20]
foreclosure sale is the real property in which they have an interest.
Considering the purpose behind the Notice of Sheriffs Sale, we disagree with the finding of the RTC
that the discrepancy between the amount of petitioners obligation as reflected in the Notice of Sale
and the amount actually due and collected from the petitioners at the time of the auction sale
constitute fraud which renders the extrajudicial foreclosure sale null and void.
Notices are given for the purpose of securing bidders and to prevent a sacrifice of the property. If
these objects are attained, immaterial errors and mistakes will not affect the sufficiency of the notice;
but if mistakes or omissions occur in the notices of sale, which are calculated to deter or mislead
bidders, to depreciate the value of the property, or to prevent it from bringing a fair price, such
11/9/2017 G.R. No. 170215
mistakes or omissions will be fatal to the validity of the notice, and also to the sale made pursuant
[21]
thereto.
All these considered, we are of the view that the Notice of Sale in this case is valid. Petitioners failed
to convince this Court that the difference between the amount stated in the Notice of Sale and the
amount of PNBs bid resulted in discouraging or misleading bidders, depreciated the value of the
property or prevented it from commanding a fair price.
[22]
The cases cited by the RTC in its Decision do not apply herein. San Jose v. Court of Appeals
refers to a Notice of Sheriffs Sale which did not state the correct number of the transfer certificates
of title of the property to be sold. This Court considered the oversight as a substantial and fatal error
which resulted in invalidating the entire notice. The case of Community Savings and Loan
[23]
Association, Inc. v. Court of Appeals is also inapplicable, because the said case refers to an
extrajudicial foreclosure tainted with fraud committed by therein petitioners, which denied therein
respondents the right to redeem the property. It actually has no reference to a Notice of Sale.
We now proceed to the effect of the non-delivery by PNB of the bid price or the surplus to the
petitioners.
The following antecedents are not disputed:

For failure to pay their loan obligation secured by a real estate mortgage on the subject properties,
PNB foreclosed the said mortgage. In its petition for foreclosure sale under ACT No. 3135 filed
before the Mandaue City Sheriff, PNB stated therein that petitioners total outstanding obligation
[24]
amounted to P1,991,770.38. PNB bidded the amount of P8,511,000.00. Admittedly, PNB did
not pay its bid in cash or deliver the excess either to the City Sheriff who conducted the bid or to the
petitioners after deducting the difference between the amount of its bid and the amount of petitioners
obligation in the Notice of Sale. The petitioners then sought to declare the nullity of the foreclosure,
alleging that their loan obligation amounted only to P1,991,770.38 in the Notice of Sale, and that
PNB did not pay its bid in cash or deliver to petitioner the surplus, which is required under the law.
[25]
On the other hand, PNB claims that petitioners loan obligation reflected in the Notice of Sale dated
10 March 1992 did not include their other obligations, which became due at the date of the auction
11/9/2017 G.R. No. 170215
sale on 10 October 1992; as well as interests, penalties, other charges, and attorneys fees due on the
[26]
said obligation.
Pertinent provisions under Rule 39 of the Rules of Court on extrajudicial foreclosure sale provide:
SEC. 21. Judgment obligee as purchaser. When the purchaser is the judgment obligee, and no third-party
claim has been filed, he need not pay the amount of the bid if it does not exceed the amount of his
judgment. If it does, he shall pay only the excess. (Emphasis supplied.)
SEC. 39. Obligor may pay execution against obligee. After a writ of execution against property has been
issued, a person indebted to the judgment obligor may pay to the sheriff holding the writ of execution the
amount of his debt or so much thereof as may be necessary to satisfy the judgment, in the manner prescribed
in section 9 of this Rule, and the sheriffs receipt shall be a sufficient discharge for the amount so paid or
directed to be credited by the judgment obligee on the execution.
Conspicously emphasized under Section 21 of Rule 39 is that if the amount of the loan is equal to
the amount of the bid, there is no need to pay the amount in cash. Same provision mandates that in
the absence of a third-party claim, the purchaser in an execution sale need not pay his bid if it does
[27]
not exceed the amount of the judgment; otherwise, he shall pay only the excess.
The raison de etre is that it would obviously be senseless for the Sheriff or the Notary Public
conducting the foreclosure sale to go through the idle ceremony of receiving the money and paying it
back to the creditor, under the truism that the lawmaking body did not contemplate such a pointless
application of the law in requiring that the creditor must bid under the same conditions as any other
bidder. It bears stressing that the rule holds true only where the amount of the bid represents the total
[28]
amount of the mortgage debt.
The question that needs to be addressed in this case is: considering the amount of PNBs bid of
P8,511,000.00 as against the amount of the petitioners obligation of P1,991,770.38 in the Notice of
Sale, is the PNB obliged to deliver the excess?
Petitioners insist that the PNB should deliver the excess. On the other hand PNB counters that on the
date of the auction sale on 30 October 1992, petitioners other loan obligation already exceeded the
amount of P1,991,770.38 in the Notice of Sale.
Rule 68, Section 4 of the Rules of Court provides:

11/9/2017 G.R. No. 170215
SEC. 4. Disposition of proceeds of sale.- The amount realized from the foreclosure sale of the mortgaged
property shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when
there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid to junior
encumbrancers in the order of their priority, to be ascertained by the court, or if there be no such
encumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly
authorized agent, or to the person entitled to it.
Under the above rule, the disposition of the proceeds of the sale in foreclosure shall be as follows:
(a) first, pay the costs
(b) secondly, pay off the mortgage debt
(c) thirdly, pay the junior encumbrancers, if any in the order of priority
[29]
(d) fourthly, give the balance to the mortgagor, his agent or the person entitled to it.
Based on the foregoing, after payment of the costs of suit and satisfaction of the claim of the first
mortgagee/senior mortgagee, the claim of the second mortgagee/junior mortgagee may be satisfied
from the surplus proceeds. The application of the proceeds from the sale of the mortgaged property
to the mortgagors obligation is an act of payment, not payment by dacion; hence, it is the
mortgagees duty to return any surplus in the selling price to the mortgagor. Perforce, a mortgagee
who exercises the power of sale contained in a mortgage is considered a custodian of the fund and,
being bound to apply it properly, is liable to the persons entitled thereto if he fails to do so. And
even though the mortgagee is not strictly considered a trustee in a purely equitable sense, but as far
as concerns the unconsumed balance, the mortgagee is deemed a trustee for the mortgagor or owner
[30]
of the equity of redemption.
Thus it has been held that if the mortgagee is retaining more of the proceeds of the sale than he is
entitled to, this fact alone will not affect the validity of the sale but simply give the mortgagor a cause
[31]
of action to recover such surplus.
In the case before us, PNB claims that petitioners loan obligations on the date of the auction sale
were already more than the amount of P1,991,770.38 in the Notice of Sale. In fact, PNB claims that
on the date of the auction sale, petitioners principal obligation, plus penalties, interests, attorneys fees
and other charges were already beyond the amount of its bid of P8,511,000.00.
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After a careful review of the evidence on record, we find that the same is insufficient to support
PNBs claim. Instead, what is available on record is petitioners Statement of Account as prepared by
[32] [33]
PNB and attached as Annex A to its Answer with counterclaim. In this Statement of
Account, petitioners principal obligation with interest/penalty and attorneys fees as of 30 October
1992 already amounted to P6,409,814.92.
Although petitioners denied the amounts reflected in the Statement of Account from PNB, they did
not interpose any defense to refute the computations therein. Petitioners mere denials, far from being
compelling, had nothing to offer by way of evidence. This then enfeebles the foundation of
petitioners protestation and will not suffice to overcome the computation of their loan obligations as
[34]
presented in the Statement of Account submitted by PNB.
Noticeably, this Statement of Account is the only piece of evidence available before us from which
we can determine the outstanding obligations of petitioners to PNB as of the date of the auction sale
on 10 October 1992.
It did not escape the attention of this Court that petitioners wrote a number of letters to PNB almost
[35]
two years after the auction sale, in which they offered to redeem the property. In their last letter,
petitioners offered to redeem their foreclosed properties for P9,500,000.00. However, these letters
by themselves cannot be used as bases to support PNBs claim that petitioners obligation is more
than its bid of P8,500,000.00, without any other evidence. There was no computation presented to
show how petitioners obligation already reached P9,500,000.00. Petitioners could very well have
offered such an amount on the basis of the value of the foreclosed properties rather than their total
obligation to PNB. We cannot take petitioners offer to redeem their properties in the amount of
P9,500,000.00 on its face as an admission of the amount of their obligation to PNB without any
supporting evidence.
Given that the Statement of Account from PNB, being the only existing documentary evidence to
support its claim, shows that petitioners loan obligations to PNB as of 30 October 1992 amounted to
P6,409,814.92, and considering that the amount of PNBs bid is P8,511,000.00, there is clearly an
excess in the bid price which PNB must return, together with the interest computed in accordance
[36]
with the guidelines laid down by the court in Eastern Shipping Lines v. Court of Appeals,
regarding the manner of computing legal interest, viz:
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forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual base for the
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
[37]
In Philippine National Bank v. Court of Appeals, it was held that:
The rate of 12% interest referred to in Cir. 416 applies only to:
Loan or forbearance of money, or to cases where money is transferred from one person to another and the
obligation to return the same or a portion thereof is adjudged. Any other monetary judgment which does not
involve or which has nothing to do with loans or forbearance of any, money, goods or credit does not fall
within its coverage for such imposition is not within the ambit of the authority granted to the Central Bank.
When an obligation not constituting a loan or forbearance of money is breached then an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum in
accordance with Art. 2209 of the Civil Code. Indeed, the monetary judgment in favor of private respondent
does not involve a loan or forbearance of money, hence the proper imposable rate of interest is six (6%) per
cent.
Using the above rule as yardstick, since the responsibility of PNB arises not from a loan or
forbearance of money which bears an interest rate of 12%, the proper rate of interest for the amount
which PNB must return to the petitioners is only 6%. This interest according to Eastern Shipping
shall be computed from the time of the filing of the complaint. However, once the judgment becomes
final and executory, the "interim period from the finality of judgment awarding a monetary claim and
until payment thereof, is deemed to be equivalent to a forbearance of credit. Thus, in accordance
11/9/2017 G.R. No. 170215
with the pronouncement in Eastern Shipping, the rate of 12% per annum should be imposed, to be
computed from the time the judgment becomes final and executory until fully satisfied.
It must be emphasized, however, that our holding in this case does not preclude PNB from proving
and recovering in a proper proceeding any deficiency in the amount of petitioners loan obligation that
may have accrued after the date of the auction sale.
WHEREFORE, premises considered, the Decision of the Court of Appeals dated 12 April 2005 is
MODIFIED in that the PNB is directed to return to the petitioners the amount of P2,101,185.08
with interest computed at 6% per annum from the time of the filing of the complaint until its full
payment before finality of judgment. Thereafter, if the amount adjudged remains unpaid, the interest
rate shall be 12% per annum computed from the time the judgment became final and executory until
fully satisfied. Costs against private respondent.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice
WE CONCUR:
Associate Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA

11/9/2017 Acme Shoe, Rubber & Plastic Corporation vs CA : 103576 : August 22, 1996 : J Vitug : First Division
FIRST DIVISION
[G.R. No. 103576. August 22, 1996]
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs. HON. COURT OF APPEALS, PRODUCERS BANK OF THE PHILIPPINES
and REGIONAL SHERIFF OF CALOOCAN CITY, respondents.
DECISION
VITUG, J.:
Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend
its coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant
petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber &
Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in
favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for
petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage
agreement was to this effect -
"(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or
obligations above-stated according to the terms thereof, then this mortgage shall be null and void. x x x.
"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as
security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing
a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any
and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the constitution of this mortgage."[1]
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations totalling P2,700,000.00.[2] These
borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one
million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial
constraints, the loan was not settled at maturity.[3] Respondent bank thereupon applied for an extrajudicial
foreclosure of the chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City, prompting
petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of
preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081).
Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held
petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage.
http://sc.judiciary.gov.ph/jurisprudence/1996/aug1996/103576.htm 1/5
Petitioner corporation appealed to the Court of Appeals[4] which, on 14 August 1991, affirmed, "in all
respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January
1992.
The instant petition interposed by petitioner corporation was initially denied on 04 March 1992 by this
Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the
petition while petitioner corporation filed a compliance and an opposition to private respondent's motion
to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for
reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon.[5]
Except in criminal cases where the penalty of reclusion perpetua or death is imposed[6] which the
Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right
but of sound judicial discretion. The circulars of the Court prescribing technical and other procedural
requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and
needlessly consume the time of the Court. These technical and procedural rules, however, are intended to
help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus
be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the
existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give
way to and uphold the paramount and overriding interest of justice.
Contracts of security are either personal or real. In contracts of personal security, such as a guaranty
or a suretyship, the faithful performance of the obligation by the principal debtor is secured by the
personal commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a
mortgage or an antichresis, that fulfillment is secured by an encumbrance of property - in pledge, the
placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution
of a public instrument encumbering the real property covered thereby; and in antichresis, by a written
instrument granting to the creditor the right to receive the fruits of an immovable property with the
obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his
credit - upon the essential condition that if the principal obligation becomes due and the debtor defaults,
then the property encumbered can be alienated for the payment of the obligation,[7] but that should the
obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory
character[8] of the agreement. As the law so puts it, once the obligation is complied with, then the contract
of security becomes, ipso facto, null and void.[9]
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described,[10] a chattel mortgage, however, can
only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a
chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be
compelled upon, the security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage
Law.[11] Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred
obligation can constitute an act of default on the part of the borrower of the financing agreement whereon
the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time
of constitution and during the life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed
by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good
faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel
mortgage would still be valid between the parties (not against third persons acting in good faith[12]), the
fact, however, that the statute has provided that the parties to the contract must execute an oath that -
"x x x (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no
other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud."[13]
makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely
contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage
contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of
the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void
or terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al.,[14] the Court said
-
"x x x A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date
the same are made and not from the date of the mortgage."[15]
The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had
ceased to exist coincidentally with the full payment of the P3,000,000.00 loan,[16] there no longer was any
chattel mortgage that could cover the new loans that were concluded thereafter.
We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial
court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action
taken by respondent bank against it."[17] This prayer is not reflected in its complaint which has merely
asked for the amount of P3,000,000.00 by way of moral damages.[18] In LBC Express, Inc. vs. Court of
Appeals,[19] we have said:
"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person
and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience
physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it
flows from real ills, sorrows, and griefs of life - all of which cannot be suffered by respondent bank as an artificial
person."[20]
While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so
named as a party in representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It
instead turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to
private respondent's comment on the petition his so-called "One Final Word;" viz:
"In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be
required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the
clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event
that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring
justices. This is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially
members of a superior court of appellate jurisdiction."[21] (Italics supplied.)
The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs.
Villamor;[22] thus:
"(L)awyers x x x should bear in mind their basic duty `to observe and maintain the respect due to the courts of justice
and judicial officers and x x x (to) insist on similar conduct by others.' This respectful attitude towards the court is to be
observed, `not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme
importance.' And it is `through a scrupulous preference for respectful language that a lawyer best demonstrates his
observance of the respect due to the courts and judicial officers x x x.'"[23]
The virtues of humility and of respect and concern for others must still live on even in an age of
materialism.
WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside
without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an
unsecured creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the
courts.
SO ORDERED.
Kapunan and Hermosisima, Jr., JJ., concur.
Padilla, J., took no part in view of lessor-lessee relationship with respondent bank.
Bellosillo, J., on leave.
[1] Rollo, p. 45.

[2] Ibid., p. 34.
[3] Ibid.
[4]
Associate Justice Consuelo Ynares Santiago, ponente, with Associate Justices Ricardo L. Pronove, Jr. and Nicolas P.
Lapea, Jr., concurring.
[5] In the Court's resolution, dated 27 May 1992, Rollo, p. 91.
[6] Sec. 5 (2) (d), Art. VIII, 1987 Constitution.
[7] See Arts. 2085, 2087, 2093, 2125, 2126, 2132, 2139 and 2140, Civil Code.
[8] See Manila Surety & Fidelity Co. vs. Velayo, 21 SCRA 515.
[9] See Sec. 3, Act 1508.
[10] See Mojica vs. Court of Appeals, 201 SCRA 517; Lim Julian vs. Lutero, 49 Phil. 703.
[11] Act No. 1508.
[12] See Philippine Refining Co. vs. Jarque, 61 Phil. 229.
[13] Civil Code, Vol. 3, 1990 Edition by Ramon C. Aquino and Carolina C. Grio-Aquino, pp. 610-611.
[14] 49 Phil. 647.
[15] At p. 655. This ruling was reiterated in Jaca vs. Davao Lumber Company, 113 SCRA 107.
[16] Being merely accessory in nature, it cannot exist independently of the principal obligation.
[17] Petitioner's Memorandum, p. 5; Rollo, p. 119.
[18] Complaint, p. 6; Record, p. 9.
[19] 236 SCRA 602.
[20] At p. 607.
[21] Rollo, p. 113.
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SUPREME COURT
Manila
EN BANC
G.R. No. L-17500 May 16, 1967
PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO. OF MANILA, plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION and CONNELL BROS. CO.
(PHIL.), defendants-appellants.
Angel S. Gamboa for defendants-appellants.

Laurel Law Offices for plaintiffs-appellants.
DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation licensed to do
business in the Philippines — hereinafter referred to as ATLANTIC — sold and assigned all its rights in the
Dahican Lumber concession to Dahican Lumber Company — hereinafter referred to as DALCO — for the total
sum of $500,000.00, of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession,
DALCO obtained various loans from the People's Bank & Trust Company — hereinafter referred to as the BANK
— amounting, as of July 13, 1950, to P200,000.00. In addition, DALCO obtained, through the BANK, a loan of
$250,000.00 from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00
each, maturing on different dates, executed by both DALCO and the Dahican America Lumber Corporation, a
foreign corporation and a stockholder of DALCO, — hereinafter referred to as DAMCO, all payable to the BANK or
its order.
As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in favor of the BANK
— the latter acting for itself and as trustee for the Export-Import Bank of Washington D.C. — a deed of mortgage
covering five parcels of land situated in the province of Camarines Norte together with all the buildings and other
improvements existing thereon and all the personal properties of the mortgagor located in its place of business in
the municipalities of Mambulao and Capalonga, Camarines Norte (Exhibit D). On the same date, DALCO executed
a second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid balance of the
sale price of the lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both deeds contained the
following provision extending the mortgage lien to properties to be subsequently acquired — referred to hereafter
as "after acquired properties" — by the mortgagor:
All property of every nature and description taken in exchange or replacement, and all buildings, machinery,
fixtures, tools equipment and other property which the Mortgagor may hereafter acquire, construct, install,
attach, or use in, to, upon, or in connection with the premises, shall immediately be and become subject to
the lien of this mortgage in the same manner and to the same extent as if now included therein, and the
Mortgagor shall from time to time during the existence of this mortgage furnish the Mortgagee with an
accurate inventory of such substituted and subsequently acquired property.
Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In addition thereto
DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to
secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the same to
the Export-Import Bank of Washington D.C., and the latter assigned to the former its credit and the first mortgage
securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue promissory
note.
After July 13, 1950 — the date of execution of the mortgages mentioned above — DALCO purchased various
machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already
owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted theretofore
regarding "after acquired properties," the BANK requested DALCO to submit complete lists of said properties but
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the latter failed to do so. In connection with these purchases, there appeared in the books of DALCO as due to
Connell Bros. Company (Philippines) — a domestic corporation who was acting as the general purchasing agent
of DALCO — thereinafter called CONNELL — the sum of P452,860.55 and to DAMCO, the sum of P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the purpose, passed a
resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO
to it. Thereafter, the corresponding agreements of rescission of sale were executed between DALCO and DAMCO,
on the one hand and between DALCO and CONNELL, on the other.
On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be
cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12, 1953; ATLANTIC and the
BANK, commenced foreclosure proceedings in the Court of First Instance of Camarines Norte against DALCO and
DAMCO. On the same date they filed an ex-parte application for the appointment of a Receiver and/or for the
issuance of a writ of preliminary injunction to restrain DALCO from removing its properties. The court granted both
remedies and appointed George H. Evans as Receiver. Upon defendants' motion, however, the court, in its order
of February 21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the material allegations of the complaint and alleging
several affirmative defenses and a counterclaim.
On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it was the owner and
possessor of some of the equipments, spare parts and supplies which DALCO had acquired subsequent to the
execution of the mortgages sought to be foreclosed and which plaintiffs claimed were covered by the lien. In its
order of March 18,1953 the Court granted the motion, as well as plaintiffs' motion to set aside the order
discharging the Receiver. Consequently, Evans was reinstated.
On April 1, 1953, CONNELL filed its answer denying the material averment of the complaint, and asserting
affirmative defenses and a counterclaim.
Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the venue of the action
to the Court of First Instance of Manila where it was docketed as Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment
and supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which was
deposited in court pending final determination of the action. By a similar agreement one-half (P87,500.00) of this
amount was considered as representing the proceeds obtained from the sale of the "undebated properties" (those
not claimed by DAMCO and CONNELL), and the other half as representing those obtained from the sale of the
"after acquired properties".
After due trial, the Court, on July 15, 1960, rendered judgment as follows:
IN VIEW WHEREFORE, the Court:
1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00 with 7% interest per
annum from July 13, 1950, Plus another sum of P100,000.00 with 5% interest per annum from July 13,
1950; plus 10% on both principal sums as attorney's fees;
2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00 with 4% interest per
annum from July 3, 1950, plus 10% on both principal as attorney's fees;
3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55, and to pay unto
Dahican American Lumber Co. the sum of P2,151,678.24 both with legal interest from the date of the filing
of the respective answers of those parties, 10% of the principals as attorney's fees;
4. Orders that of the sum realized from the sale of the properties of P175,000.00, after deducting the
recognized expenses, one-half thereof be adjudicated unto plaintiffs, the court no longer specifying the
share of each because of that announced intention under the stipulation of facts to "pool their resources";
as to the other one-half, the same should be adjudicated unto both plaintiffs, and defendant Dahican
American and Connell Bros. in the proportion already set forth on page 9, lines 21, 22 and 23 of the body of
this decision; but with the understanding that whatever plaintiffs and Dahican American and Connell Bros.
should receive from the P175,000.00 deposited in the Court shall be applied to the judgments particularly
rendered in favor of each;
5. No other pronouncement as to costs; but the costs of the receivership as to the debated properties shall
be borne by People's Bank, Atlantic Gulf, Connell Bros., and Dahican American Lumber Co., pro-rata.
On the following day, the Court issued the following supplementary decision:
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IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add the following
paragraph 6:
6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the Court orders the
sale at public auction of the lands object of the mortgages to satisfy the said mortgages and costs of
foreclosure.
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following: that the "after acquired properties" were subject to
the deeds of mortgage mentioned heretofore; that said properties were acquired from suppliers other than
DAMCO and CONNELL; that even granting that DAMCO and CONNELL were the real suppliers, the rescission of
the sales to DALCO could not prejudice the mortgage lien in favor of plaintiffs; that considering the foregoing, the
proceeds obtained from the sale of the "after acquired properties" as well as those obtained from the sale of the
"undebated properties" in the total sum of P175,000.00 should have been awarded exclusively to plaintiffs by
reason of the mortgage lien they had thereon; that damages should have been awarded to plaintiffs against
defendants, all of them being guilty of an attempt to defraud the former when they sought to rescind the sales
already mentioned for the purpose of defeating their mortgage lien, and finally, that defendants should have been
made to bear all the expenses of the receivership, costs and attorney's fees.
On the other hand, defendants-appellants contend that the trial court erred: firstly, in not holding that plaintiffs had
no cause of action against them because the promissory note sued upon was not yet due when the action to
foreclose the mortgages was commenced; secondly, in not holding that the mortgages aforesaid were null and
void as regards the "after acquired properties" of DALCO because they were not registered in accordance with the
Chattel Mortgage Law, the court erring, as a consequence, in holding that said properties were subject to the
mortgage lien in favor of plaintiffs; thirdly, in not holding that the provision of the fourth paragraph of each of said
mortgages did not automatically make subject to such mortgages the "after acquired properties", the only meaning
thereof being that the mortgagor was willing to constitute a lien over such properties; fourthly, in not ruling that
said stipulation was void as against DAMCO and CONNELL and in not awarding the proceeds obtained from the
sale of the "after acquired properties" to the latter exclusively; fifthly, in appointing a Receiver and in holding that
the damages suffered by DAMCO and CONNELL by reason of the depreciation or loss in value of the "after
acquired properties" placed under receivership was damnum absque injuria and, consequently, in not awarding, to
said parties the corresponding damages claimed in their counterclaim; lastly, in sentencing DALCO and DAMCO to
pay attorney's fees and in requiring DAMCO and CONNELL to pay the costs of the Receivership, instead of
sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also as appellants submit a
total of seventeen. However, the multifarious issues thus before Us may be resolved, directly or indirectly, by
deciding the following issues:
Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of mortgage subject of
foreclosure?; secondly, assuming that they are subject thereto, are the mortgages valid and binding on the
properties aforesaid inspite of the fact that they were not registered in accordance with the provisions of the
Chattel Mortgage Law?; thirdly, assuming again that the mortgages are valid and binding upon the "after acquired
properties", what is the effect thereon, if any, of the rescission of sales entered into, on the one hand, between
DAMCO and DALCO, and between DALCO and CONNELL, on the other?; and lastly, was the action to foreclose
the mortgages premature?
A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and
description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments,
and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection
with the premises — that is, its lumber concession — "shall immediately be and become subject to the lien" of both
mortgages in the same manner and to the same extent as if already included therein at the time of their execution.
As the language thus used leaves no room for doubt as to the intention of the parties, We see no useful purpose
in discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We might say
logical, in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or
were intended to be sold, or to be used — thus becoming subject to the inevitable wear and tear — but with the
understanding — express or implied — that they shall be replaced with others to be thereafter acquired by the
mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent
allowed by circumstances, the original value of the properties given as security. Indeed, if such properties were of
the nature already referred to, it would be poor judgment on the part of the creditor who does not see to it that a
similar provision is included in the contract.
B. But defendants contend that, granting without admitting, that the deeds of mortgage in question cover the "after
acquired properties" of DALCO, the same are void and ineffectual because they were not registered in
accordance with the Chattel Mortgage Law. In support of this and of the proposition that, even if said mortgages
were valid, they should not prejudice them, the defendants argue (1) that the deeds do not describe the
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mortgaged chattels specifically, nor were they registered in accordance with the Chattel Mortgage Law; (2) that the
stipulation contained in the fourth paragraph thereof constitutes "mere executory agreements to give a lien" over
the "after acquired properties" upon their acquisition; and (3) that any mortgage stipulation concerning "after
acquired properties" should not prejudice creditors and other third persons such as DAMCO and CONNELL.
The stipulation under consideration strongly belies defendants contention. As adverted to hereinbefore, it states
that all property of every nature, building, machinery etc. taken in exchange or replacement by the mortgagor
"shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent
as if now included therein". No clearer language could have been chosen.
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a chattel mortgage
must be registered and must describe the mortgaged chattels or personal properties sufficiently to enable the
parties and any other person to identify them, We say that such law does not apply to this case.
As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force, there can be no
doubt that the provisions of said code must govern their interpretation and the question of their validity. It happens
however, that Articles 334 and 1877 of the old Civil Code are substantially reproduced in Articles 415 and 2127,
respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we take the former or the latter
as guide in deciding the point under consideration.
Article 415 does not define real property but enumerates what are considered as such, among them being
machinery, receptacles, instruments or replacements intended by owner of the tenement for an industry or works
which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said
industry or works.
On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were
placed in the real properties mortgaged to plaintiffs, they came within the operation of Art. 415, paragraph 5 and
Art. 2127 of the New Civil Code".
We find the above ruling in agreement with our decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil Code (old)
gives the character of real property to machinery, liquid containers, instruments or replacements intended by the
owner of any building or land for use in connection with any industry or trade being carried on therein and which
are expressly adapted to meet the requirements of such trade or industry.
(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage constituted on a sugar
central includes not only the land on which it is built but also the buildings, machinery and accessories installed at
the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to the
mortgagor, installed after the constitution thereof .
It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in connection
with, and for use in the development of its lumber concession and that they were purchased in addition to, or in
replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be deemed to
have been immobilized, with the result that the real estate mortgages involved herein — which were registered as
such — did not have to be registered a second time as chattel mortgages in order to bind the "after acquired
properties" and affect third parties.
But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim that the "after
acquired properties" did not become immobilized because DALCO did not own the whole area of its lumber
concession all over which said properties were scattered.
The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the present. In the
former, the Davao Sawmill Company, Inc., had repeatedly treated the machinery therein involved as personal
property by executing chattel mortgages thereon in favor of third parties, while in the present case the parties had
treated the "after acquired properties" as real properties by expressly and unequivocally agreeing that they shall
automatically become subject to the lien of the real estate mortgages executed by them. In the Davao Sawmill
decision it was, in fact, stated that "the characterization of the property as chattels by the appellant is indicative of
intention and impresses upon the property the character determined by the parties" (61 Phil. 112, emphasis
supplied). In the present case, the characterization of the "after acquired properties" as real property was made
not only by one but by both interested parties. There is, therefore, more reason to hold that such consensus
impresses upon the properties the character determined by the parties who must now be held in estoppel to
question it.
Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia, Inc. (225 U.S. 58) where it
was held that while under the general law of Puerto Rico, machinery placed on property by a tenant does not
become immobilized, yet, when the tenant places it there pursuant to contract that it shall belong to the owner, it
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then becomes immobilized as to that tenant and even as against his assignees and creditors who had sufficient
notice of such stipulation. In the case at bar it is not disputed that DALCO purchased the "after acquired
properties" to be placed on, and be used in the development of its lumber concession, and agreed further that the
same shall become immediately subject to the lien constituted by the questioned mortgages. There is also
abundant evidence in the record that DAMCO and CONNELL had full notice of such stipulation and had never
thought of disputed validity until the present case was filed. Consequently all of them must be deemed barred from
denying that the properties in question had become immobilized.
What We have said heretofore sufficiently disposes all the arguments adduced by defendants in support their
contention that the mortgages under foreclosure are void, and, that, even if valid, are ineffectual as against
DAMCO and CONNELL.
Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired properties" superior
to the mortgage lien constituted thereon in favor of plaintiffs. It is defendants' contention that in relation to said
properties they are "unpaid sellers"; that as such they had not only a superior lien on the "after acquired
properties" but also the right to rescind the sales thereof to DALCO.
This contention — it is obvious — would have validity only if it were true that DAMCO and CONNELL were the
suppliers or vendors of the "after acquired properties". According to the record, plaintiffs did not know their exact
identity and description prior to the filing of the case bar because DALCO, in violation of its obligation under the
mortgages, had failed and refused theretofore to submit a complete list thereof. In the course of the proceedings,
however, when defendants moved to dissolve the order of receivership and the writ of preliminary injunction issued
by the lower court, they attached to their motion the lists marked as Exhibits 1, 2 and 3 describing the properties
aforesaid. Later on, the parties agreed to consider said lists as identifying and describing the "after acquire
properties," and engaged the services of auditors to examine the books of DALCO so as to bring out the details
thereof. The report of the auditors and its annexes (Exhibits V, V-1 — V4) show that neither DAMCO nor CONNELL
had supplied any of the goods of which they respective claimed to be the unpaid seller; that all items were
supplied by different parties, neither of whom appeared to be DAMCO or CONNELL that, in fact, CONNELL
collected a 5% service charge on the net value of all items it claims to have sold to DALCO and which, in truth, it
had purchased for DALCO as the latter's general agent; that CONNELL had to issue its own invoices in addition to
those o f the real suppliers in order to collect and justify such service charge.
Taking into account the above circumstances together with the fact that DAMCO was a stockholder and CONNELL
was not only a stockholder but the general agent of DALCO, their claim to be the suppliers of the "after acquired
required properties" would seem to be preposterous. The most that can be claimed on the basis of the evidence is
that DAMCO and CONNELL probably financed some of the purchases. But if DALCO still owes them any amount in
this connection, it is clear that, as financiers, they can not claim any right over the "after acquired properties"
superior to the lien constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the
execution of the rescission of sales mentioned heretofore appears to be but a desperate attempt to better or
improve DAMCO and CONNELL's position by enabling them to assume the role of "unpaid suppliers" and thus
claim a vendor's lien over the "after acquired properties". The attempt, of course, is utterly ineffectual, not only
because they are not the "unpaid sellers" they claim to be but also because there is abundant evidence in the
record showing that both DAMCO and CONNELL had known and admitted from the beginning that the "after
acquired properties" of DALCO were meant to be included in the first and second mortgages under foreclosure.
The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or otherwise, is of no
consequence and does not make the rescission valid and legally effective. It must be stated clearly, however, in
justice to Belden, that, as a member of the Board of Directors of DALCO, he opposed the resolution of December
15, 1952 passed by said Board and the subsequent rescission of the sales.
Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953 was premature
because the promissory note sued upon did not fall due until April 1 of the same year, concluding from this that,
when the action was commenced, the plaintiffs had no cause of action. Upon this question the lower court says the
following in the appealed judgment;
The other is the defense of prematurity of the causes of action in that plaintiffs, as a matter of grace,
conceded an extension of time to pay up to 1 April, 1953 while the action was filed on 12 February, 1953,
but, as to this, the Court taking it that there is absolutely no debate that Dahican Lumber Co., was insolvent
as of the date of the filing of the complaint, it should follow that the debtor thereby lost the benefit to the
period.
x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);
and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the aggregate,
P1,200,000 excluding interest while the aggregate price of the "after-acquired" chattels claimed by Connell
under the rescission contracts was P1,614,675.94, Exh. 1, Exh. V, report of auditors, and as a matter of fact,
almost all the properties were sold afterwards for only P175,000.00, page 47, Vol. IV, and the Court
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understanding that when the law permits the debtor to enjoy the benefits of the period notwithstanding that
he is insolvent by his giving a guaranty for the debt, that must mean a new and efficient guaranty, must
concede that the causes of action for collection of the notes were not premature.
Very little need be added to the above. Defendants, however, contend that the lower court had no basis for finding
that, when the action was commenced, DALCO was insolvent for purposes related to Article 1198, paragraph 1 of
the Civil Code. We find, however, that the finding of the trial court is sufficiently supported by the evidence
particularly the resolution marked as Exhibit K, which shows that on December 16, 1952 — in the words of the
Chairman of the Board — DALCO was "without funds, neither does it expect to have any funds in the foreseeable
future." (p. 64, record on appeal).
The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after acquired
properties" should have been awarded exclusively to the plaintiffs or to DAMCO and CONNELL, and if in law they
should be distributed among said parties, whether or not the distribution should be pro-rata or otherwise; whether
or not plaintiffs are entitled to damages; and, lastly, whether or not the expenses incidental to the Receivership
should be borne by all the parties on a pro-rata basis or exclusively by one or some of them are of a secondary
nature as they are already impliedly resolved by what has been said heretofore.
As regard the proceeds obtained from the sale of the of after acquired properties" and the "undebated
properties", it is clear, in view of our opinion sustaining the validity of the mortgages in relation thereto, that said
proceeds should be awarded exclusively to the plaintiffs in payment of the money obligations secured by the
mortgages under foreclosure.
On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313 and 1314 of the
New Civil Code) provides that creditors are protected in cases of contracts intended to defraud them; and that any
third person who induces another to violate his contract shall be liable for damages to the other contracting party.
Similar liability is demandable under Arts. 20 and 21 — which may be given retroactive effect (Arts. 225253) — or
under Arts. 1902 and 2176 of the Old Civil Code.
The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to pay the fifth
promissory note upon its maturity, conspired jointly with CONNELL to violate the provisions of the fourth paragraph
of the mortgages under foreclosure by attempting to defeat plaintiffs' mortgage lien on the "after acquired
properties". As a result, the plaintiffs had to go to court to protect their rights thus jeopardized. Defendants' liability
for damages is therefore clear.
However, the measure of the damages suffered by the plaintiffs is not what the latter claim, namely, the difference
between the alleged total obligation secured by the mortgages amounting to around P1,200,000.00, plus the
stipulated interest and attorney's fees, on the one hand, and the proceeds obtained from the sale of "after
acquired properties", and of those that were not claimed neither by DAMCO nor CONNELL, on the other.
Considering that the sale of the real properties subject to the mortgages under foreclosure has not been effected,
and considering further the lack of evidence showing that the true value of all the properties already sold was not
realized because their sale was under stress, We feel that We do not have before Us the true elements or factors
that should determine the amount of damages that plaintiffs are entitled recover from defendants. It is, however,
our considered opinion that, upon the facts established, all the expenses of the Receivership, which was deemed
necessary to safeguard the rights of the plaintiffs, should be borne by the defendants, jointly and severally, in the
same manner that all of them should pay to the plaintiffs, jointly a severally, attorney's fees awarded in the
appealed judgment.
In consonance with the portion of this decision concerning the damages that the plaintiffs are entitled to recover
from the defendants, the record of this case shall be remanded below for the corresponding proceedings.
Modified as above indicated, the appealed judgment is affirmed in all other respects. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
11/9/2017 G.R. No. L-58469
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SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-58469 May 16, 1983
MAKATI LEASING and FINANCE CORPORATION, petitioner,

vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS, respondents.
Loreto C. Baduan for petitioner.
Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.
Jose V. Mancella for respondent.
DE CASTRO, J.:
Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate Appellate Court)
promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later specified herein, of
Judge Ricardo J. Francisco, as Presiding Judge of the Court of First instance of Rizal Branch VI, issued in Civil
Case No. 36040, as wen as the resolution dated September 22, 1981 of the said appellate court, denying
petitioner's motion for reconsideration.
It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing and Finance
Corporation, the private respondent Wearever Textile Mills, Inc., discounted and assigned several receivables with
the former under a Receivable Purchase Agreement. To secure the collection of the receivables assigned, private
respondent executed a Chattel Mortgage over certain raw materials inventory as well as a machinery described as
an Artos Aero Dryer Stentering Range.
Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the properties mortgage
to it. However, the Deputy Sheriff assigned to implement the foreclosure failed to gain entry into private
respondent's premises and was not able to effect the seizure of the aforedescribed machinery. Petitioner
thereafter filed a complaint for judicial foreclosure with the Court of First Instance of Rizal, Branch VI, docketed as
Civil Case No. 36040, the case before the lower court.
Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the enforcement of which
was however subsequently restrained upon private respondent's filing of a motion for reconsideration. After
several incidents, the lower court finally issued on February 11, 1981, an order lifting the restraining order for the
enforcement of the writ of seizure and an order to break open the premises of private respondent to enforce said
writ. The lower court reaffirmed its stand upon private respondent's filing of a further motion for reconsideration.
On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private respondent and
removed the main drive motor of the subject machinery.
The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private respondent,
set aside the Orders of the lower court and ordered the return of the drive motor seized by the sheriff pursuant to
said Orders, after ruling that the machinery in suit cannot be the subject of replevin, much less of a chattel
mortgage, because it is a real property pursuant to Article 415 of the new Civil Code, the same being attached to
the ground by means of bolts and the only way to remove it from respondent's plant would be to drill out or destroy
the concrete floor, the reason why all that the sheriff could do to enfore the writ was to take the main drive motor of
said machinery. The appellate court rejected petitioner's argument that private respondent is estopped from
claiming that the machine is real property by constituting a chattel mortgage thereon.
A motion for reconsideration of this decision of the Court of Appeals having been denied, petitioner has brought
the case to this Court for review by writ of certiorari. It is contended by private respondent, however, that the
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11/9/2017 G.R. No. L-58469
instant petition was rendered moot and academic by petitioner's act of returning the subject motor drive of
respondent's machinery after the Court of Appeals' decision was promulgated.
The contention of private respondent is without merit. When petitioner returned the subject motor drive, it made
itself unequivocably clear that said action was without prejudice to a motion for reconsideration of the Court of
Appeals decision, as shown by the receipt duly signed by respondent's representative. 1 Considering that
petitioner has reserved its right to question the propriety of the Court of Appeals' decision, the contention of
private respondent that this petition has been mooted by such return may not be sustained.
The next and the more crucial question to be resolved in this Petition is whether the machinery in suit is real or
personal property from the point of view of the parties, with petitioner arguing that it is a personality, while the
respondent claiming the contrary, and was sustained by the appellate court, which accordingly held that the chattel
mortgage constituted thereon is null and void, as contended by said respondent.
A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court, speaking through
Justice J.B.L. Reyes, ruled:
Although there is no specific statement referring to the subject house as personal property, yet by
ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could only
have meant to convey the house as chattel, or at least, intended to treat the same as such, so that
they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the
subject house stood on a rented lot to which defendants-appellants merely had a temporary right as
lessee, and although this can not in itself alone determine the status of the property, it does so when
combined with other factors to sustain the interpretation that the parties, particularly the mortgagors,
intended to treat the house as personality. Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. &
Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery & Williamson, wherein third persons
assailed the validity of the chattel mortgage, it is the defendants-appellants themselves, as debtors-
mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of
estoppel therefore applies to the herein defendants-appellants, having treated the subject house as
personality.
Examining the records of the instant case, We find no logical justification to exclude the rule out, as the appellate
court did, the present case from the application of the abovequoted pronouncement. If a house of strong
materials, like what was involved in the above Tumalad case, may be considered as personal property for
purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent
third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature
and becomes immobilized only by destination or purpose, may not be likewise treated as such. This is really
because one who has so agreed is estopped from denying the existence of the chattel mortgage.
In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals lays stress on
the fact that the house involved therein was built on a land that did not belong to the owner of such house. But the
law makes no distinction with respect to the ownership of the land on which the house is built and We should not
lay down distinctions not contemplated by law.
It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is
indicative of intention and impresses upon the property the character determined by the parties. As stated in
Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature would be real property, as long as no interest of third
parties would be prejudiced thereby.
Private respondent contends that estoppel cannot apply against it because it had never represented nor agreed
that the machinery in suit be considered as personal property but was merely required and dictated on by herein
petitioner to sign a printed form of chattel mortgage which was in a blank form at the time of signing. This
contention lacks persuasiveness. As aptly pointed out by petitioner and not denied by the respondent, the status
of the subject machinery as movable or immovable was never placed in issue before the lower court and the Court
of Appeals except in a supplemental memorandum in support of the petition filed in the appellate court. Moreover,
even granting that the charge is true, such fact alone does not render a contract void ab initio, but can only be a
ground for rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a
proper action in court. There is nothing on record to show that the mortgage has been annulled. Neither is it
disclosed that steps were taken to nullify the same. On the other hand, as pointed out by petitioner and again not
refuted by respondent, the latter has indubitably benefited from said contract. Equity dictates that one should not
benefit at the expense of another. Private respondent could not now therefore, be allowed to impugn the efficacy
of the chattel mortgage after it has benefited therefrom,
From what has been said above, the error of the appellate court in ruling that the questioned machinery is real,
not personal property, becomes very apparent. Moreover, the case of Machinery and Engineering Supplies, Inc. v.
CA, 96 Phil. 70, heavily relied upon by said court is not applicable to the case at bar, the nature of the machinery
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and equipment involved therein as real properties never having been disputed nor in issue, and they were not the
subject of a Chattel Mortgage. Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant
case to be the more controlling jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed and set aside,
and the Orders of the lower court are hereby reinstated, with costs against the private respondent.
SO ORDERED.
Makasiar (Chairman), Aquino, Concepcion Jr., Guerrero and Escolin JJ., concur.
Abad Santos, J., concurs in the result.
Footnotes
1 p. 52, Rollo.
11/9/2017 G.R. No. 92989
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SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 92989 July 8, 1991
PERFECTO DY, JR. petitioner,

vs.
COURT OF APPEALS, GELAC TRADING INC., and ANTONIO V. GONZALES, respondents.
Zosa & Quijano Law Offices for petitioner.

Expedito P. Bugarin for respondent GELAC Trading, Inc.
GUTIERREZ, JR., J.:
This is a petition for review on certiorari seeking the reversal of the March 23, 1990 decision of the Court of
Appeals which ruled that the petitioner's purchase of a farm tractor was not validly consummated and ordered a
complaint for its recovery dismissed.
The facts as established by the records are as follows:
The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo Dy purchased a truck and a
farm tractor through financing extended by Libra Finance and Investment Corporation (Libra). Both truck and
tractor were mortgaged to Libra as security for the loan.
The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he wrote a letter to Libra
requesting that he be allowed to purchase from Wilfredo Dy the said tractor and assume the mortgage debt of the
latter.
In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the petitioner's request.
Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of the petitioner over the
tractor in question.
At this time, the subject tractor was in the possession of Libra Finance due to Wilfredo Dy's failure to pay the
amortizations.
Despite the offer of full payment by the petitioner to Libra for the tractor, the immediate release could not be
effected because Wilfredo Dy had obtained financing not only for said tractor but also for a truck and Libra
insisted on full payment for both.
The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so that full payment could be
made for both. On November 22, 1979, a PNB check was issued in the amount of P22,000.00 in favor of Libra,
thus settling in full the indebtedness of Wilfredo Dy with the financing firm. Payment having been effected through
an out-of-town check, Libra insisted that it be cleared first before Libra could release the chattels in question.
Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a collection case to recover the
sum of P12,269.80 was pending in another court in Cebu.
On the strength of an alias writ of execution issued on December 27, 1979, the provincial sheriff was able to seize
and levy on the tractor which was in the premises of Libra in Carmen, Cebu. The tractor was subsequently sold at
public auction where Gelac Trading was the lone bidder. Later, Gelac sold the tractor to one of its stockholders,
Antonio Gonzales.
It was only when the check was cleared on January 17, 1980 that the petitioner learned about GELAC having
already taken custody of the subject tractor. Consequently, the petitioner filed an action to recover the subject
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tractor against GELAC Trading with the Regional Trial Court of Cebu City.
On April 8, 1988, the RTC rendered judgment in favor of the petitioner. The dispositive portion of the decision
reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, pronouncing
that the plaintiff is the owner of the tractor, subject matter of this case, and directing the defendants Gelac
Trading Corporation and Antonio Gonzales to return the same to the plaintiff herein; directing the
defendants jointly and severally to pay to the plaintiff the amount of P1,541.00 as expenses for hiring a
tractor; P50,000 for moral damages; P50,000 for exemplary damages; and to pay the cost. (Rollo, pp. 35-
36)
On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the complaint with costs against
the petitioner. The Court of Appeals held that the tractor in question still belonged to Wilfredo Dy when it was
seized and levied by the sheriff by virtue of the alias writ of execution issued in Civil Case No. R-16646.
The petitioner now comes to the Court raising the following questions:
A.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND
ERRED IN NOT AFFIRMING THE TRIAL COURT'S FINDING THAT OWNERSHIP OF THE FARM TRACTOR
HAD ALREADY PASSED TO HEREIN PETITIONER WHEN SAID TRACTOR WAS LEVIED ON BY THE
SHERIFF PURSUANT TO AN ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN FAVOR OF
RESPONDENT GELAC TRADING INC.
B.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON MERE CONJECTURE AND
SURMISE IN HOLDING THAT THE SALE OF THE AFORESAID TRACTOR TO PETITIONER WAS DONE IN
FRAUD OF WILFREDO DY'S CREDITORS, THERE BEING NO EVIDENCE OF SUCH FRAUD AS FOUND BY
THE TRIAL COURT.
C.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND
ERRED IN NOT SUSTAINING THE FINDING OF THE TRIAL COURT THAT THE SALE OF THE TRACTOR BY
RESPONDENT GELAC TRADING TO ITS CO-RESPONDENT ANTONIO V. GONZALES ON AUGUST 2, 1980
AT WHICH TIME BOTH RESPONDENTS ALREADY KNEW OF THE FILING OF THE INSTANT CASE WAS
VIOLATIVE OF THE HUMAN RELATIONS PROVISIONS OF THE CIVIL CODE AND RENDERED THEM
LIABLE FOR THE MORAL AND EXEMPLARY DAMAGES SLAPPED AGAINST THEM BY THE TRIAL COURT.
(Rollo, p. 13)
The respondents claim that at the time of the execution of the deed of sale, no constructive delivery was effected
since the consummation of the sale depended upon the clearance and encashment of the check which was issued
in payment of the subject tractor.
In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA 80 [1989]), we stated that:
xxx xxx xxx
The rule is settled that the chattel mortgagor continues to be the owner of the property, and therefore, has
the power to alienate the same; however, he is obliged under pain of penal liability, to secure the written
consent of the mortgagee. (Francisco, Vicente, Jr., Revised Rules of Court in the Philippines, (1972),
Volume IV-B Part 1, p. 525). Thus, the instruments of mortgage are binding, while they subsist, not only
upon the parties executing them but also upon those who later, by purchase or otherwise, acquire the
properties referred to therein.
The absence of the written consent of the mortgagee to the sale of the mortgaged property in favor of a
third person, therefore, affects not the validity of the sale but only the penal liability of the mortgagor under
the Revised Penal Code and the binding effect of such sale on the mortgagee under the Deed of Chattel
Mortgage.
xxx xxx xxx
The mortgagor who gave the property as security under a chattel mortgage did not part with the ownership over
the same. He had the right to sell it although he was under the obligation to secure the written consent of the
mortgagee or he lays himself open to criminal prosecution under the provision of Article 319 par. 2 of the Revised
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Penal Code. And even if no consent was obtained from the mortgagee, the validity of the sale would still not be
affected.
Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject tractor. There is no
dispute that the consent of Libra Finance was obtained in the instant case. In a letter dated August 27, 1979, Libra
allowed the petitioner to purchase the tractor and assume the mortgage debt of his brother. The sale between the
brothers was therefore valid and binding as between them and to the mortgagee, as well.
Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the vendee from the
moment it is delivered to him in any of the ways specified in Articles 1497 to 1501 or in any other manner signing
an agreement that the possession is transferred from the vendor to the vendee. We agree with the petitioner that
Articles 1498 and 1499 are applicable in the case at bar.
Article 1498 states:
Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to
the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or
cannot clearly be inferred.
xxx xxx xxx
Article 1499 provides:
Article 1499. The delivery of movable property may likewise be made by the mere consent or agreement of
the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of
the sale, or if the latter already had it in his possession for any other reason. (1463a)
In the instant case, actual delivery of the subject tractor could not be made. However, there was constructive
delivery already upon the execution of the public instrument pursuant to Article 1498 and upon the consent or
agreement of the parties when the thing sold cannot be immediately transferred to the possession of the vendee.
(Art. 1499)
The respondent court avers that the vendor must first have control and possession of the thing before he could
transfer ownership by constructive delivery. Here, it was Libra Finance which was in possession of the subject
tractor due to Wilfredo's failure to pay the amortization as a preliminary step to foreclosure. As mortgagee, he has
the right of foreclosure upon default by the mortgagor in the performance of the conditions mentioned in the
contract of mortgage. The law implies that the mortgagee is entitled to possess the mortgaged property because
possession is necessary in order to enable him to have the property sold.
While it is true that Wilfredo Dy was not in actual possession and control of the subject tractor, his right of
ownership was not divested from him upon his default. Neither could it be said that Libra was the owner of the
subject tractor because the mortgagee can not become the owner of or convert and appropriate to himself the
property mortgaged. (Article 2088, Civil Code) Said property continues to belong to the mortgagor. The only
remedy given to the mortgagee is to have said property sold at public auction and the proceeds of the sale
applied to the payment of the obligation secured by the mortgagee. (See Martinez v. PNB, 93 Phil. 765, 767
[1953]) There is no showing that Libra Finance has already foreclosed the mortgage and that it was the new
owner of the subject tractor. Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner. It
was aware of the transfer of rights to the petitioner.
Where a third person purchases the mortgaged property, he automatically steps into the shoes of the original
mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA 521 [1989]). His right of ownership shall be subject
to the mortgage of the thing sold to him. In the case at bar, the petitioner was fully aware of the existing mortgage
of the subject tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered to
assume the remaining balance of the mortgage debt of Wilfredo Dy which Libra undeniably agreed to.
The payment of the check was actually intended to extinguish the mortgage obligation so that the tractor could be
released to the petitioner. It was never intended nor could it be considered as payment of the purchase price
because the relationship between Libra and the petitioner is not one of sale but still a mortgage. The clearing or
encashment of the check which produced the effect of payment determined the full payment of the money
obligation and the release of the chattel mortgage. It was not determinative of the consummation of the sale. The
transaction between the brothers is distinct and apart from the transaction between Libra and the petitioner. The
contention, therefore, that the consummation of the sale depended upon the encashment of the check is
untenable.
The sale of the subject tractor was consummated upon the execution of the public instrument on September 4,
1979. At this time constructive delivery was already effected. Hence, the subject tractor was no longer owned by
Wilfredo Dy when it was levied upon by the sheriff in December, 1979. Well settled is the rule that only properties
11/9/2017 G.R. No. 92989
unquestionably owned by the judgment debtor and which are not exempt by law from execution should be levied
upon or sought to be levied upon. For the power of the court in the execution of its judgment extends only over
properties belonging to the judgment debtor. (Consolidated Bank and Trust Corp. v. Court of Appeals, G.R. No.
78771, January 23, 1991).
The respondents further claim that at that time the sheriff levied on the tractor and took legal custody thereof no
one ever protested or filed a third party claim.
It is inconsequential whether a third party claim has been filed or not by the petitioner during the time the sheriff
levied on the subject tractor. A person other than the judgment debtor who claims ownership or right over levied
properties is not precluded, however, from taking other legal remedies to prosecute his claim. (Consolidated Bank
and Trust Corp. v. Court of Appeals, supra) This is precisely what the petitioner did when he filed the action for
replevin with the RTC.
Anent the second and third issues raised, the Court accords great respect and weight to the findings of fact of the
trial court. There is no sufficient evidence to show that the sale of the tractor was in fraud of Wilfredo and
1 â w p h i1
creditors. While it is true that Wilfredo and Perfecto are brothers, this fact alone does not give rise to the
presumption that the sale was fraudulent. Relationship is not a badge of fraud (Goquiolay v. Sycip, 9 SCRA 663
[1963]). Moreover, fraud can not be presumed; it must be established by clear convincing evidence.
We agree with the trial court's findings that the actuations of GELAC Trading were indeed violative of the
provisions on human relations. As found by the trial court, GELAC knew very well of the transfer of the property to
the petitioners on July 14, 1980 when it received summons based on the complaint for replevin filed with the RTC
by the petitioner. Notwithstanding said summons, it continued to sell the subject tractor to one of its stockholders
on August 2, 1980.
WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals promulgated on March 23,
1990 is SET ASIDE and the decision of the Regional Trial Court dated April 8, 1988 is REINSTATED.
SO ORDERED.
Fernan, C.J., Feliciano and Bidin, JJ., concur.

Davide, Jr., J., took no part.
11/9/2017 Servicewide Specialists Inc vs CA : 110048 : November 19, 1999 : J. Purisima : Third Division
THIRD DIVISION
[G.R. No. 110048. November 19, 1999]
SERVICEWIDE SPECIALISTS, INC. petitioner, vs. COURT OF APPEALS, HILDA

TEE, & ALBERTO M. VILLAFRANCA, respondents.
DECISION
PURISIMA, J.:
This is a petition for review on certiorari under Rule 45 of the Decision of the Court of Appeals[1] in CA-G.R. CV
No. 19571, affirming the judgment of the Regional Trial Court of Manila, Branch XX, dismissing Civil Case No. 84-
25763 for replevin and damages.
The litigation involves a motor vehicle, a Colt Galant, 4-door Sedan automobile, with Motor No. 2E-08927, Serial
No. A112A-5297, Model No. 1976.
The appellate court culled the facts that matter as follows:[2]
"On May 14, 1976, Leticia L. Laus of Quezon City purchased on credit a Colt Galant xxx from Fortune Motors (Phils.)
Corporation. On the same date, she executed a promissory note for the amount of P56,028.00, inclusive of interest at
12% per annum, payable within a period of 48 months starting August, 1976 at a monthly installment of P1,167.25 due
and demandable on the 17th day of each month (Exhibit A, pp. 144, Orig. Records,). It was agreed upon, among
others, that in case of default in the payment of any installment the total principal sum, together with the interest, shall
become immediately due and payable (Exhibit A; p. 144, Orig. Records). As a security for the promissory note, a
chattel mortgage was constituted over the said motor vehicle (Exhibit B, ibid.), with a deed of assignment incorporated
therein such that the credit and mortgage rights were assigned by Fortune Motors Corp. in favor of Filinvest Credit
Corporation with the consent of the mortgagor-debtor Leticia Laus (Exhibits B-1 and B-2; p. 147, ibid.). The vehicle
was then registered in the name of Leticia L. Laus with the chattel mortgage annotated on said certificate. (Exhibit "H"; p.
154, ibid.)
On September 25, 1978, Filinvest Credit Corporation in turn assigned the credit in favor of Servicewide Specialists, Inc.
(Servicewide, for brevity) transferring unto the latter all its rights under the promissory note and the chattel mortgage
(Exhibit B-3; p. 149, ibid.) with the corresponding notice of assignment sent to the registered car owner (Exhibit C; p.
150, Ibid.).
On April 18, 1977, Leticia Laus failed to pay the monthly installment for that month. The installments for the succeeding
17 months were not likewise fully paid, hence on September 25, 1978, pursuant to the provisions of the promissory
note, Servicewide demanded payment of the entire outstanding balance of P46,775.24 inclusive of interests (Exhibits D
and E; pp. 151-152, ibid.). Despite said formal demand, Leticia Laus failed to pay all the monthly installments due until
July 18, 1980.
On July 25, 1984, Servicewide sent a statement of account to Leticia Laus and demanded payment of the amount of
P86,613.32 representing the outstanding balance plus interests up to July 25, 1985, attorneys fees, liquidated damages,
estimated repossession expense, and bonding fee (Exhibit F; p. 153, ibid.)
As a result of the failure of Leticia Laus to settle her obligation, or at least to surrender possession of the motor vehicle
for the purpose of foreclosure, Servicewide instituted a complaint for replevin, impleading Hilda Tee and John Dee in
whose custody the vehicle was believed to be at the time of the filing of the suit.
In its complaint, plaintiff alleged that it had superior lien over the mortgaged vehicle; that it is lawfully entitled to the
possession of the same together with all its accessories and equipments; (sic) that Hilda Tee was wrongfully detaining the
motor vehicle for the purpose of defeating its mortgage lien; and that a sufficient bond had been filed in court. (Complaint
with Annexes, pp. 1-13, ibid.). On July 30, 1984, the court approved the replevin bond (p. 20, ibid.)
On August 1, 1984, Alberto Villafranca filed a third party claim contending that he is the absolute owner of the subject
motor vehicle duly evidenced by the Bureau of Land Transportations Certificate of Registration issued in his name on
June 22, 1984; that he acquired the said mother vehicle from a certain Remedios D. Yang under a Deed of Sale dated
May 16, 1984; that he acquired the same free from all lien and emcumbrances; and that on July 30, 1984, the said
automobile was taken from his residence by Deputy Sheriff Bernardo Bernabe pursuant to the seizure order issued by
the court a quo.
Upon motion of the plaintiff below, Alberto Villafranca was substituted as defendant. Summons was served upon him.
(pp. 55-56, ibid).
On March 20, 1985, Alberto Villafranca moved for the dismissal of the complaint on the ground that there is another
action pending between the same parties before the Regional Trial Court of Makati, Branch 140, docketed as Civil Case
No. 8310, involving the seizure of subject motor vehicle and the indemnity bond posted by Servicewide (Motion to
Dismiss with Annexes; pp. 57-110, ibid.) On March 28, 1985, the court granted the aforesaid motion (p. 122, ibid.),
but subsequently the order of dismissal was reconsidered and set aside (pp. 135-136, ibid.). For failure to file his
Answer as required by the court a quo, Alberto Villafranca was declared in default and plaintiffs evidence was received
ex parte.
On December 27, 1985, the lower court rendered a decision dismissing the complaint for insufficiency of evidence. Its
motion for reconsideration of said decision having been denied, xxx.
In its appeal to the Court of Appeals, petitioner theorized that a suit for replevin aimed at the foreclosure of a chattel
is an action quasi in rem, and does not require the inclusion of the principal obligor in the Complaint. However, the
appellate court affirmed the decision of the lower Court; ratiocinating, thus:
A cursory reading, however, of the Promissory Note dated May 14, 1976 in favor of Fortune Motors (Phils.) Corp. in
the sum of P56,028.00 (Annex A of Complaint, p. 7, Original Records) and the Chattel Mortgage of the same date
(Annex B of Complaint; pp. 8-9, ibid.) will disclose that the maker and mortgagor respectively are one and the same
person: Leticia Laus. In fact, plaintiff-appellant admits in paragraphs (sic) nos. 2 and 3 of its Complaint that the aforesaid
public documents (Annexes A and B thereof) were executed by Leticia Laus, who, for reasons not explained, was never
impleaded. In the case under consideration, plaintiff-appellants main case is for judicial foreclosure of the chattel
mortgage against Hilda Tee and John Doe who was later substituted by appellee Alberto Villafranca. But as there is no
privity of contract, not even a causal link, between plaintiff-appellant Servicewide Specialists, Inc. and defendant-
appellee Alberto Villafranca, the court a quo committed no reversible error when it dismissed the case for insufficiency of
evidence against Hilda Tee and Alberto Villafranca since the evidence adduced pointed to Leticia Laus as the party liable
for the obligation sued upon (p. 2, RTC Decision).[3]
Petitioner presented a Motion for Reconsideration but in its Resolution[4] of May 10, 1993, the Court of Appeals
denied the same, taking notice of another case pending between the same parties xxx relating to the very chattel
mortgage of the motor vehicle in litigation.
Hence, the present petition for review on certiorari under Rule 45. Essentially, the sole issue here is: Whether or
not a case for replevin may be pursued against the defendant, Alberto Villafranca, without impleading the absconding
debtor-mortgagor?
Rule 60 of the Revised Rules of Court requires that an applicant for replevin must show that he is the owner of the
property claimed, particularly describing it, or is entitled to the possession thereof.[5] Where the right of the plaintiff to the
possession of the specified property is so conceded or evident, the action need only be maintained against him who so
possesses the property. In rem action est per quam rem nostram quae ab alio possidetur petimus, et semper
adversus eum est qui rem possidet.[6]
Citing Northern Motors, Inc. vs. Herrera,[7] the Court said in the case of BA Finance (which is of similar
import with the present case):
There can be no question that persons having a special right of property in the goods the recovery of which is sought,
such as a chattel mortgagee, may maintain an action for replevin therefor. Where the mortgage authorizes the mortgagee
to take possession of the property on default, he may maintain an action to recover possession of the mortgaged chattels
from the mortgagor or from any person in whose hands he may find them.[8]
Thus, in default of the mortgagor, the mortgagee is thereby constituted as attorney-in-fact of the mortgagor, enabling
such mortgagee to act for and in behalf of the owner. That the defendant is not privy to the chattel mortgage should be
inconsequential. By the fact that the object of replevin is traced to his possession, one properly can be a defendant in an
action for replevin. It is here assumed that the plaintiffs right to possess the thing is not or cannot be disputed.[9]
(Italics supplied)
However, in case the right of possession on the part of the plaintiff, or his authority to claim such possession or that
of his principal, is put to great doubt (a contending party may contest the legal bases for plaintiffs cause of action or an
adverse and independent claim of ownership or right of possession may be raised by that party), it could become
essential to have other persons involved and impleaded for a complete determination and resolution of the controversy.
[10] In the case under scrutiny, it is not disputed that there is an adverse and independent claim of ownership by the
respondent as evinced by the existence of a pending case before the Court of Appeals involving subject motor vehicle
between the same parties herein.[11] Its resolution is a factual matter, the province of which properly lies in the lower
Court and not in the Supreme Court, in the guise of a petition for review on certiorari. For it is basic that under Rule 45,
this Court only entertains questions of law, and rare are the exceptions and the present case does not appear to be one
of them.
In a suit for replevin, a clear right of possession must be established. (Italics supplied) A foreclosure under a
chattel mortgage may properly be commenced only once there is default on the part of the mortgagor of his obligation
secured by the mortgage. The replevin in this case has been resorted to in order to pave the way for the foreclosure of
what is covered by the chattel mortgage. The conditions essential for such foreclosure would be to show, firstly, the
existence of the chattel mortgage and, secondly, the default of the mortgagor. These requirements must be shown
because the validity of the plaintiffs exercise of the right of foreclosure is inevitably dependent thereon.[12]
Since the mortgagees right of possession is conditioned upon the actual fact of default which itself may be
controverted, the inclusion of other parties, like the debtor or the mortgagor himself, may be required in order to allow a
full and conclusive determination of the case. When the mortgagee seeks a replevin in order to effect the eventual
foreclosure of the mortgage, it is not only the existence of, but also the mortgagors default on, the chattel mortgage that,
among other things, can properly uphold the right to replevy the property. The burden to establish a valid justification for
such action lies with the plaintiff. An adverse possessor, who is not the mortgagor, cannot just be deprived of his
possession, let alone be bound by the terms of the chattel mortgage contract, simply because the mortgagee brings up an
action for replevin.[13]
Leticia Laus, being an indispensable party, should have been impleaded in the complaint for replevin and damages.
An indispensable party is one whose interest will be affected by the courts action in the litigation, and without whom no
final determination of the case can be had. The partys interest in the subject matter of the suit and in the relief sought are
so inextricably intertwined with the other parties that his legal presence as a party to the proceeding is an absolute
necessity. In his absence, there cannot be a resolution of the dispute of the parties before the Court which is effective,
complete, or equitable.
Conversely, a party is not indispensable to the suit if his interest in the controversy or subject matter is distinct and
divisible from the interest of the other parties and will not necessarily be prejudiced by a judgment which does complete
justice to the parties in Court. He is not indispensable if his presence would merely complete relief between him and
those already parties to the action or will simply avoid multiple litigation.[14] Without the presence of indispensable
parties to a suit or proceeding, a judgment of a Court cannot attain real finality.[15]
That petitioner could not locate the mortgagor, Leticia Laus, is no excuse for resorting to a procedural short-cut. It
could have properly availed of substituted service of summons under the Revised Rules of Court.[16] If it deemed such a
mode to be unavailing, it could have proceeded in accordance with Section 14 of the same Rule.[17] Indeed, petitioner
had other proper remedies, it could have resorted to but failed to avail of. For instance, it could have properly impleaded
the mortgagor. Such failure is fatal to petitioners cause.
With the foregoing disquisition and conclusion, the other issues raised by petitioner need not be passed upon.
WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals in CA-G.R. CV No. 19571
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.
[1] Penned by Justice Fermin A. Martin, Jr., and concurred in by Justices Seragin E. Camilon and Alfredo L. Benipayo.
[2] Rollo, Annex A, pp. 31-33.
[3] Ibid, p. 3.
[4] Rollo, Annex B, p. 39.
[5] Section 2 (a).
[6] Ba Finance Corp. vs. CA, 258 SCRA 102,111 (1996).
[7] 49 SCRA 392, 396.
[8] Infra, pp. 111-112.
[9] Ibid.
[10] Ibid. p. 112.
[11] Docketed as C.A.-G.R. CV No. 36141.
[12] Servicewide Specialists, Inc. vs. CA, 251 SCRA 70, p. 75 (1995).
[13] BA Finance vs. CA, infra, pp. 113-114.
[14] Servicewide Specialists, Inc. vs. CA, infra, pp. 75-76; quoting Imson vs. CA, 239 SCRA 58, 65.
[15] Ibid., p. 76, citing Uy vs. CA, 232 SCRA 579; see also Galarosa vs. Valencia, 227 SCRA 728.
11/9/2017 Pameca Wood Treatment Plant Inc vs CA : 106435 : July 14, 1999 : J. Gonzaga-Reyes : Third Division
SYLLABI/SYNOPSIS
THIRD DIVISION
[G.R. No. 106435. July 14, 1999]
PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA

V. TEVES and HIRAM DIDAY R. PULIDO, petitioners, vs. HON. COURT OF
APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES, respondents.
DECISION
GONZAGA-REYES, J.:
Before Us for review on certiorari is the decision of the respondent Court of Appeals in CA G.R. CV No. 27861,
promulgated on April 23, 1992,[1] affirming in toto the decision of the Regional Trial Court of Makati[2] to award
respondent banks deficiency claim, arising from a loan secured by chattel mortgage.
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of
US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner
PAMECA, through its President, petitioner Herminio C. Teves, executed a promissory note for the said amount,
promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also executed over
PAMECAs properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole value of
the loan.
On January 18, 1984, and upon petitioner PAMECAs failure to pay, respondent bank extrajudicially foreclosed the
chattel mortgage, and, as sole bidder in the public auction, purchased the foreclosed properties for a sum of
P322,350.00. On June 29, 1984, respondent bank filed a complaint for the collection of the balance of
P4,366,332.46[3] with Branch 132 of the Regional Trial Court of Makati City against petitioner PAMECA and private
petitioners herein, as solidary debtors with PAMECA under the promissory note.
On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive portion of which we
reproduce as follows:
WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly and severally plaintiff the (1) sum of
P4,366,332.46 representing the deficiency claim of the latter as of March 31, 1984, plus 21% interest per annum and
other charges from April 1, 1984 until the whole amount is fully paid and (2) the costs of the suit. SO ORDERED.[4]
The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:
1. Respondent appellate court gravely erred in not reversing the decision of the trial court, and in not holding that the
public auction sale of petitioner PAMECAs chattels were tainted with fraud, as the chattels of the said petitioner were
bought by private respondent as sole bidder in only 1/6 of the market value of the property, hence unconscionable and
inequitable, and therefore null and void.
http://sc.judiciary.gov.ph/jurisprudence/1999/jul99/106435.htm 1/6
2. Respondent appellate court gravely erred in not applying by analogy Article 1484 and Article 2115 of the Civil Code
by reading the spirit of the law, and taking into consideration the fact that the contract of loan was a contract of adhesion.
3. The appellate court gravely erred in holding the petitioners Herminio Teves, Victoria Teves and Hiram Diday R. Pulido
solidarily liable with PAMECA Wood Treatment Plant, Inc. when the intention of the parties was that the loan is only for
the corporations benefit.
Relative to the first ground, petitioners contend that the amount of P322,350.00 at which respondent bank bid for
and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time of the public
sale, the mortgaged properties had a total value of more than P2,000,000.00. According to petitioners, this is evident
from an inventory dated March 31, 1980[5], which valued the properties at P2,518,621.00, in accordance with the
terms of the chattel mortgage contract[6] between the parties that required that the inventories be maintained at a level no
less than P2 million. Petitioners argue that respondent banks act of bidding and purchasing the mortgaged properties for
P322,350.00 or only about 1/6 of their actual value in a public sale in which it was the sole bidder was fraudulent,
unconscionable and inequitable, and constitutes sufficient ground for the annulment of the auction sale.
To this, respondent bank contends that the above-cited inventory and chattel mortgage contract were not in fact
submitted as evidence before the RTC of Makati, and that these documents were first produced by petitioners only
when the case was brought to the Court of Appeals.[7] The Court of Appeals, in turn, disregarded these documents for
petitioners failure to present them in evidence, or to even allude to them in their testimonies before the lower court.[8]
Instead, respondent court declared that it is not at all unlikely for the chattels to have sufficiently deteriorated as to have
fetched such a low price at the time of the auction sale.[9] Neither did respondent court find anything irregular or
fraudulent in the circumstance that respondent bank was the sole bidder in the sale, as all the legal procedures for the
conduct of a foreclosure sale have been complied with, thus giving rise to the presumption of regularity in the
performance of public duties.[10]
Petitioners also question the ruling of respondent court, affirming the RTC, to hold private petitioners, officers and
stockholders of petitioner PAMECA, liable with PAMECA for the obligation under the loan obtained from respondent
bank, contrary to the doctrine of separate and distinct corporate personality.[11] Private petitioners contend that they
became signatories to the promissory note only as a matter of practice by the respondent bank, that the promissory note
was in the nature of a contract of adhesion, and that the loan was for the benefit of the corporation, PAMECA, alone.[12]
Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that Articles 1484[13] and 2115[14]
of the Civil Code be applied in analogy to the instant case to preclude the recovery of a deficiency claim.[15]
Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel mortgage.
In the leading case of Ablaza vs. Ignacio[16], the lower court dismissed the complaint for collection of deficiency
judgment in view of Article 2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge shall
also apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage Law. It was the lower courts
opinion that, by virtue of Article 2141, the provisions of Article 2115 which deny the creditor-pledgee the right to
recover deficiency in case the proceeds of the foreclosure sale are less than the amount of the principal obligation, will
apply.
This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law
regarding the effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article 2115 in
relation to Article 2141, may not be applied to the case.
Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:
xxx
The officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in
the office of the Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record the same.
The fees of the officer for selling the property shall be the same as the case of sale on execution as provided in Act
Numbered One Hundred and Ninety, and the amendments thereto, and the fees of the Register of Deeds for registering
the officers return shall be taxed as a part of the costs of sale, which the officer shall pay to the Register of Deeds. The
return shall particularly describe the articles sold, and state the amount received for each article, and shall operate as a
discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be applied to the payment,
first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured
by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the
balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand.
(Emphasis supplied)
It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent
with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire
principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the
principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the
proceeds, upon satisfaction of the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is
a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at
public auction. As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co.[17], cited in Ablaza vs.
Ignacio, supra:
While it is true that section 3 of Act No. 1508 provides that a chattel mortgage is a conditional sale, it further provides
that it is a conditional sale of personal property as security for the payment of a debt, or for the performance of some
other obligation specified therein. The lower court overlooked the fact that the chattels included in the chattel mortgage
are only given as security and not as a payment of the debt, in case of a failure of payment.
The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as
security, should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full
amount for which it might be sold, even though that amount was greatly in excess of the indebtedness. Such a result
certainly was not contemplated by the legislature when it adopted Act No. 1508. There seems to be no reason
supporting that theory under the provision of the law. The value of the chattels changes greatly from time to time, and
sometimes very rapidly. If, for example, the chattels should greatly increase in value and a sale under that condition
should result in largely overpaying the indebtedness, and if the creditor is not permitted to retain the excess, then the
same token would require the debtor to pay the deficiency in case of a reduction in the price of the chattels between the
date of the contract and a breach of the condition.
Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question of chattel mortgages,
have said, that in case of a sale under a foreclosure of a chattel mortgage, there is no question that the mortgagee or
creditor may maintain an action for the deficiency, if any should occur. And the fact that Act No. 1508 permits a private
sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent than the value of the property at the time of
the sale. The amount received at the time of the sale, of course, always requiring good faith and honesty in the sale, is
only a payment, pro tanto, and an action may be maintained for a deficiency in the debt.
We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating it[18]
Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As
correctly pointed out by the trial court, the said article applies clearly and solely to the sale of personal property the price
of which is payable in installments. Although Article 1484, paragraph (3) expressly bars any further action against the
purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose the chattel mortgage on the
thing sold, should the vendees failure to pay cover two or more installments, this provision is specifically applicable to a
sale on installments.
To accommodate petitioners prayer even on the basis of equity would be to expand the application of the provisions
of Article 1484 to situations beyond its specific purview, and ignore the language and intent of the Chattel Mortgage
Law. Equity, which has been aptly described as justice outside legality, is applied only in the absence of, and never
against, statutory law or judicial rules of procedure.[19]
We are also unable to find merit in petitioners submission that the public auction sale is void on grounds of fraud and
inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did
they attempt to prove inadequacy of price through the documents, i.e., the Open-End Mortgage on Inventory and
inventory dated March 31, 1980, likewise attached to their Petition before this Court. Basic is the rule that parties may
not bring on appeal issues that were not raised on trial.
Having nonetheless examined the inventory and chattel mortgage document as part of the records, We are not
convinced that they effectively prove that the mortgaged properties had a market value of at least P2,000,000.00 on
January 18, 1984, the date of the foreclosure sale. At best, the chattel mortgage contract only indicates the obligation of
the mortgagor to maintain the inventory at a value of at least P2,000,000.00, but does not evidence compliance
therewith. The inventory, in turn, was as of March 31, 1980, or even prior to April 17, 1980, the date when the parties
entered into the contracts of loan and chattel mortgage, and is far from being an accurate estimate of the market value of
the properties at the time of the foreclosure sale four years thereafter. Thus, even assuming that the inventory and chattel
mortgage contract were duly submitted as evidence before the trial court, it is clear that they cannot suffice to
substantiate petitioners allegation of inadequacy of price.
Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged properties in the public sale
does not warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires
full and convincing evidence,[20] and may not be inferred from the lone circumstance that it was only respondent bank
that bid in the sale of the foreclosed properties. The sparseness of petitioners evidence in this regard leaves Us no
discretion but to uphold the presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners joint and several liability with petitioner corporation in the loan. As found by
the trial court and the Court of Appeals, the terms of the promissory note unmistakably set forth the solidary nature of
private petitioners commitment. Thus:
On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT PLANT, INC., a corporation
organized and existing under the laws of the Philippines, with principal office at 304 El Hogar Filipina Building, San Juan,
Manila, promise to pay to the order of DEVELOPMENT BANK OF THE PHILIPPINES at its office located at
corner Buendia and Makati Avenues, Makati, Metro Manila, the principal sum of TWO HUNDRED SIXTY SEVEN
THOUSAND EIGHT HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$ 267,881.67) with interest at
the rate of three per cent (3%) per annum over DBPs borrowing rate for these funds. Before the date of maturity, we
hereby bind ourselves, jointly and severally, to make partial payments as follows:
xxx
In case of default in the payment of any installment above, we bind ourselves to pay DBP for advances xxx
xxx
We further bind ourselves to pay additional interest and penalty charges on loan amortizations or portion thereof in
arrears as follows:
xxx
"In addition to the above, we also bind ourselves to pay for bank advances for insurance premiums, taxes xxx
xxx
"We further bind ourselves to reimburse DBP on a pro-rata basis for all costs incurred by DBP on the foreign
currency borrowings from where the loan shall be drawn xxx
xxx
In case of non-payment of the amount of this note or any portion of it on demand, when due, or any other amount or
amounts due on account of this note, the entire obligation shall become due and demandable, and if, for the enforcement
of the payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is constrained to entrust the case to its
attorneys, we jointly and severally bind ourselves to pay for attorneys fees as provided for in the mortgage contract,
in addition to the legal fees and other incidental expenses. In the event of foreclosure of the mortgage securing this
note, we further bind ourselves jointly and severally to pay the deficiency, if any. (Emphasis supplied)[21]
The promissory note was signed by private petitioners in the following manner:
PAMECA WOOD TREATMENT PLANT, INC.
By:
(Sgd) HERMINIO G. TEVES
(For himself & as President of above-named corporation)
(Sgd) HIRAM DIDAY PULIDO
(Sgd) VICTORIA V. TEVES[22]
From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with petitioner
PAMECA in the loan. As correctly submitted by respondent bank, private petitioners are not made to answer for the
corporate act of petitioner PAMECA, but are made liable because they made themselves co-makers with PAMECA
under the promissory note.
IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of Appeals dated
April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against petitioners.
SO ORDERED.
Romero (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.
[1] Penned by Justice Lorna S. Lombos-dela Fuente, with the concurrence of Justices Salome A. Montoya and Quirino D. Abad-Santos,
Jr.
[2] Civil Case No. 7734, Branch 132, presided over by Judge Herminio I. Benito.
[3] Representing the deficiency claim of respondent bank, inclusive of interest charges, as of March 31, 1984.
[4] Rollo, 47; Decision of the RTC, 4.
11/9/2017 SECOND DIVISION
RIZAL COMMERCIAL G.R. No. 179756

BANKING CORPORATION,
Petitioner, Present:
YNARES-SANTIAGO, *
- versus - CARPIO MORALES,**

Acting Chairperson,
PERALTA,***
ROYAL CARGO DEL CASTILLO, and
CORPORATION, ABAD, JJ.
Respondent.
Promulgated:
October 2, 2009
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CARPIO MORALES, J.:

[1]
Terrymanila, Inc. (Terrymanila) filed a petition for voluntary insolvency with the
[2]
Regional Trial Court (RTC) of Bataan on February 13, 1991. One of its creditors was Rizal
Commercial Banking Corporation (petitioner) with which it had an obligation of P3 Million that
was secured by a chattel mortgage executed on February 16, 1989. The chattel mortgage was
duly recorded in the notarial register of Amado Castano, a notary public for and in the Province
[3]
of Bataan.
Royal Cargo Corporation (respondent), another creditor of Terrymanila, filed an action
before the RTC of Manila for collection of sum of money and preliminarily attached some of
Terrymanilas personal properties on March 5, 1991 to secure the satisfaction of a judgment
[4]
award of P296,662.16, exclusive of interests and attorneys fees.
On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.
http://sc.judiciary.gov.ph/jurisprudence/2009/october2009/179756.htm 1/15
[5]
On June 11, 1991, the Manila RTC, by Decision of even date, rendered judgment in the
collection case in favor of respondent.
In the meantime, petitioner sought in the insolvency proceedings at the Bataan RTC
permission to extrajudicially foreclose the chattel mortgage which was granted by Order of
[6]
February 3, 1992. It appears that respondent, together with its employees union, moved to
[7]
have this Order reconsidered but the motion was denied by Order of March 20, 1992 Order.
The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public auction
sale of the mortgaged personal properties at the Municipal Building of Mariveles, Bataan. At the
auction sale, petitioner, the sole bidder of the properties, purchased them for P1.5 Million.
[8]
Eventually, petitioner sold the properties to Domingo Bondoc and Victoriano See.
Respondent later filed on July 30, 1992 a petition before the RTC of Manila, docketed as
Civil Case No. 92-62106, against the Provincial Sheriff of the RTC Bataan and petitioner, for
annulment of the auction sale (annulment of sale case). Apart from questioning the inclusion in
[9]
the auction sale of some of the properties which it had attached, respondent questioned the
failure to duly notify it of the sale at least 10 days before the sale, citing Section 14 of Act No.
1508 or the Chattel Mortgage Law which reads:
Sec. 14. The mortgagee, his executor, administrator or assign, may, after thirty days, from the
time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction
by a public officer at a public place in the municipality where the mortgagor resides, or where the
property is situated, provided at least ten days notice of the time, place, and purpose of such sale has
been posted at two or more public places in such municipality, and the mortgagee, his executor,
administrator or assignee shall notify the mortgagor or person holding under him and the
persons holding subsequent mortgages of the time and place of sale, either by notice in writing
directed to him or left at his abode, if within the municipality, or sent by mail if he does not
reside in such municipality, at least ten days previous to the date. (Emphasis and underscoring
supplied),
[10]
it claiming that its counsel received a notice only on the day of the sale.
Petitioner, alleging that the annulment of sale case filed by respondent stated no cause of
[11]
action, filed on December 3, 1992 a Motion to Dismiss which was, however, denied by
[12]
Branch 16 of the Manila RTC.
Petitioner appealed the denial of the Motion to Dismiss via certiorari to the Court of
Appeals, docketed as CA-G.R. SP No. 31125. The appellate court dismissed the petition, by
Decision of February 21, 1994, it holding that respondents petition for annulment prima facie
states a sufficient cause of action and that the [trial court] in denying [herein petitioner RCBCs]
[13]
motion to dismiss, had acted advisedly and well within its powers and authority.
[14]
Petitioner thereupon filed before the Manila RTC its Answer Ex Abundante Cautelam
in the annulment of sale case in which it lodged a Compulsory Counterclaim by seeking P1
Million for moral damages, P500,000 for exemplary damages, and P250,000 for attorneys fees. It
thereafter elevated the case to this Court via petition for review on certiorari, docketed as G.R.
[15]
115662. This Court by minute Resolution of November 7, 1994, denied the petition for
[16]
failure to show that a reversible error was committed by the appellate court.
[17]
Trial on the merits of the annulment of sale case thereupon ensued. By Decision of
October 15, 1997, Branch 16 of the Manila RTC rendered judgment in favor of respondent,
disposing as follows:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
1. ORDERING . . . RCBC to pay plaintiff [heein respondent Royal Cargo] the amount of
P296,662.16 and P8,000.00 as reasonable attorneys fees.
2. No pronouncement as to costs.
3. DISMISSING the petition as to respondents Provincial Sheriff of Balanga, Bataan RTC;
SO ORDERED.
[18]
Both parties appealed to the Court of Appeals which, by Decision of April 17, 2007,
denied herein petitioners appeal and partly granted herein respondents by increasing to P50,000
the attorneys fees awarded to it and additionally awarding it exemplary damages and imposing
interest on the principal amount payable to it. Thus it disposed:
WHEREFORE, the foregoing considered, the appeal instituted by appellant RCBC is hereby
DENIED for lack of merit while the appeal of appellant Royal Cargo is PARTLY GRANTED in that the
amount of attorneys fees awarded by the RTC is increased to P50,000.00.
In addition, RCBC is ordered to pay Royal Cargo the amount of P100,000.00 as

exemplary damages. The principal amount of P296,662.18 [sic] to be paid by RCBC to Royal Cargo
shall likewise earn 12% interest per annum from the time the petition was filed in the court a quo until
fully paid. The rest of the decision is AFFIRMED.
SO ORDERED. (Emphasis and underscoring supplied)
In partly granting respondents appeal from the Decision of Br. 16 of RTC Manila, the
appellate court ratiocinated that respondent had a right to be timely informed of the foreclosure
sale.
RCBCs citations [sic] of numerous rulings on the matter more than supports the fact that as
mortgagee, it had preferential right over the chattels subject of the foreclosure sale. This however is not
at issue in this case. What is being contested is the right of Royal Cargo to be timely informed of the
foreclosure sale as it too had interests over the mortgagee Terrymanila, Inc.s assets. We note that this
matter had already been passed upon by this Court on February 21, 1994 in CA-G.R. SP No. 31125
as well as by the Supreme Court on November 7, 1994 in G.R. No. [1]15662. RCBC, by arguing
about its preferential right as mortgagee in the instant appeal merely reiterates what had already been
considered and ruled upon in earlier proceedings.
xxxx
Moreover, Section 14 of the Chattel Mortgage Law pertaining to the procedure in the
foreclosure of chattel mortgages provides, to wit:
xxxx
The above-quoted provision clearly requires that the mortgagee should notify in writing the
mortgagor or person holding under him of the time and place of the sale by personal delivery of the
notice. Thus, RCBCs failure to comply with this requirement warranted a ruling against it by the RTC.
(Italics in the original; emphasis partly in the original; underscoring supplied)
[19]
Its motion for reconsideration having been denied by the appellate court, petitioner
lodged the present petition for review which raises the following issues:
WHETHER OR NOT RESPONDENT SHOULD HAVE BEEN GIVEN A TEN(10)-DAY PRIOR

NOTICE OF THE JUNE 16, 1992 FORECLOSURE SALE
II
WHETHER OR NOT THE TRIAL COURT AND THE COURT OF APPEALS GRAVELY ERRED
IN DECLARING PETITIONER GUILTY OF CONSTRUCTIVE FRAUD IN FAILING TO
PROVIDE RESPONDENT A TEN (10)-DAY PRIOR NOTICE OF THE FORECLOSURE SALE.
III
WHETHER OR NOT THE PETITIONER WAS CORRECTLY HELD LIABLE TO PAY

RESPONDENT P296,662.[16] PLUS INTEREST THEREON, EXEMPLARY DAMAGES AND
ATTORNEYS FEES.
IV
[20]
WHETHER OR NOT PETITIONER IS ENTITLED TO AN AWARD OF ATTORNEYS FEES.
(Underscoring supplied)
Petitioner faults the appellate court in applying res judicata by holding that respondents
entitlement to notice of the auction sale had already been settled in its Decision in CA G.R. SP
No. 31125 and in this Courts Decision in G.R. No. 115662. For, so it contends, the decisions in
these cases dealt on interlocutory issues, viz: the issue of whether respondents petition for
annulment of the sale stated a cause of action, and the issue of whether petitioners motion to
[21]
dismiss was properly denied.
Arguing against respondents position that it was entitled to notice of the auction sale,
petitioner cites the Chattel Mortgage Law which enumerates who are entitled to be notified
under Section 14 thereof. It posits that [h]ad the law intended to include in said Section an
attaching creditor or a judgment creditor [like herein respondent], it could have so specifically
stated therein, since in the preceding section, Section 13, it already mentioned that a subsequent
[22]
attaching creditor may redeem.
Petitioner goes on to fault the appellate court in echoing its ruling in CA-G.R. SP No.
[23]
31125 that Sections 13 and 14 of the Chattel Mortgage Law should be read in tandem since
the right given to the attaching creditor under Section 13 would not serve its purpose if we were
to exclude the subsequent attaching creditor from those who under Section 14 need to be
[24]
notified of the foreclosure sale ten days before it is held.
Petitioner likewise posits that Section 13 permits a subsequent attaching creditor to redeem
the mortgage only before the holding of the auction sale, drawing attention to Paray v.
[25]
Rodriguez which instructs that no right of redemption exists over personal property as the
[26]
Chattel Mortgage Law is silent thereon.
Even assuming arguendo, petitioner contends, that there exists an obligation to furnish
respondent a notice of the auction sale 10 days prior thereto, respondents judgment award of
P296,662.16 with interest thereon at the legal rate from the date of filing of the [c]omplaint and
P10,000.00 as reasonable attorneys fees is very much less than the P1.5 [m]illion bid of
[27]
petitioner
As for the issue of constructive fraud-basis of the award of damages to respondent,
petitioner maintains that both the trial and appellate courts erred in concluding that it (petitioner)
was the one which sent the notice of sheriffs sale to, which was received on the day of the sale
by, the counsel for respondent for, so it contends, it had absolutely no participation in the
[28]
preparation and sending of such notice.
[29]
In its Comment, respondent reiterates that the respective decisions of the appellate
court and this Court in CA G.R. SP No. 31125 and G.R. No. 115662 are conclusive between the
parties, hence, the right of [respondent] to a [ten-day] notice has a binding effect and must be
adopted in any other controversy between the same parties in which the very same question is
[30]
raised.
And respondent maintains that the obligation to notify the mortgagor or person holding
under him and the persons holding subsequent mortgages falls upon petitioner as the mortgagee.
The petition is MERITORIOUS.
The respective decisions of the appellate court in CA G.R. SP No. 31125 and this Court in
G.R. No. 115662 did not conclusively settle the issue on the need to give a 10-day notice to
respondent of the holding of the public auction sale of the chattels.
The elements of res judicata are: (1) the judgment sought to bar the new action must be
final; (2) the decision must have been rendered by a court having jurisdiction over the subject
matter and the parties; (3) the disposition of the case must be a judgment on the merits; and (4)
there must be as between the first and second action, identity of parties, subject matter, and
[31]
causes of action.
Res judicata has two concepts: (1) bar by prior judgment as enunciated in Rule 39,
Section 47 (b) of the Rules of Civil Procedure; and (2) conclusiveness of judgment in Rule 39,
[32]
Section 47 (c).
There is bar by prior judgment when, as between the first case where the judgment was
rendered, and the second case that is sought to be barred, there is identity of parties, subject
matter, and causes of action. Where there is identity of parties and subject matter in the first and
[33]
second cases, but no identity of causes of action, there is conclusiveness of judgment. The
first judgment is conclusive only as to those matters actually and directly controverted and
determined, not as to matters merely involved therein.
The Court of Appeals, in CA G.R. SP No. 31125, resolved only the interlocutory issue of
whether the trial courts Order of April 12, 1993 denying petitioners motion to dismiss
respondents petition for annulment was attended by grave abuse of discretion. The appellate
court did not rule on the merits of the petition as to establish a controlling legal rule which has to
be subsequently followed by the parties in the same case. It merely held that respondents petition
in the trial court stated a sufficient cause of action. Its determination of respondents entitlement to
notice of the public auction sale was at best prima facie. Thus, the appellate court held:
In view of the above, We are of the considered view that the private respondents petition in the
court a quo prima facie states a sufficient cause of action and that the public respondent in denying
the petitioners motion to dismiss, had acted advisedly and well within its powers and authority. We,
therefore, find no cause to annul the challenged order issued by the respondent court in Civil
[34]
Case No. 92-62106. (Underscoring in the original; emphasis and italics supplied)
An order denying a motion to dismiss is merely interlocutory and cannot give rise to res
[35]
judicata, hence, it is subject to amendments until the rendition of the final judgment.
On respondents contention that petitioner, as mortgagee, had the duty to notify it of the
public auction sale, the Court finds the same immaterial to the case.
Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to
redeem the mortgaged property only before its sale. Consider the following pronouncement in
[36]
Paray:
[T]here is no law in our statute books which vests the right of redemption over personal
property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for
any legislative intent to bestow a right of redemption over personal property, since that law governs the
extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point. And
Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the Court of Appeals,
starkly utters that the right of redemption applies to real properties, not personal properties, sold on
execution. (Emphasis, italics and underscoring supplied)
Unmistakably, the redemption cited in Section 13 partakes of an equity of redemption,

which is the right of the mortgagor to redeem the mortgaged property after his default in the
[37]
performance of the conditions of the mortgage but before the sale of the property to clear it
[38]
from the encumbrance of the mortgage. It is not the same as right of redemption which is the
right of the mortgagor to redeem the mortgaged property after registration of the foreclosure sale,
[39] [40]
and even after confirmation of the sale.
While respondent had attached some of Terrymanilas assets to secure the satisfaction of a
P296,662.16 judgment rendered in another case, what it effectively attached was Terrymanilas
equity of redemption. That respondents claim is much lower than the P1.5 million actual bid of
petitioner at the auction sale does not defeat respondents equity of redemption. Top Rate
[41]
International Services, Inc. v. IAC enlightens:
It is, therefore, error on the part of the petitioner to say that since private respondents
lien is only a total of P343,227.40, they cannot be entitled to the equity of redemption because
the exercise of such right would require the payment of an amount which cannot be less than
P40,000,000.00.
When herein private respondents prayed for the attachment of the properties to secure their
respective claims against Consolidated Mines, Inc., the properties had already been mortgaged to the
consortium of twelve banks to secure an obligation of US$62,062,720.66. Thus, like subsequent
mortgagees, the respondents liens on such properties became inferior to that of banks, which claims in
the event of foreclosure proceedings, must first be satisfied. The appellate court, therefore, was
correct in holding that in reality, what was attached by the respondents was merely
Consolidated Mines . . . equity of redemption. x x x x
xxxx
We, therefore, hold that the appellate court did not commit any error in ruling that there was no
over-levy on the disputed properties. What was actually attached by respondents was Consolidated
Mines right or equity of redemption, an incorporeal and intangible right, the value of which can neither
[42]
be quantified nor equated with the actual value of the properties upon which it may be exercised.
(Emphasis, italics and underscoring supplied)
Having thus attached Terrymanilas equity of redemption, respondent had to be informed

of the date of sale of the mortgaged assets for it to exercise such equity of redemption over some
of those foreclosed properties, as provided for in Section 13.
Recall, however, that respondent filed a motion to reconsider the February 3, 1992 Order
of the RTC Bataan-insolvency court which granted leave to petitioner to foreclose the chattel
mortgage, which motion was denied. Notably, respondent failed to allege this incident in his
annulment of sale case before the RTC of Manila.
Thus, even prior to receiving, through counsel, a mailed notice of the auction sale on the
date of the auction sale itself on June 16, 1992, respondent was already put on notice of the
impending foreclosure sale of the mortgaged chattels. It could thus have expediently exercised its
equity of redemption, at the earliest when it received the insolvency courts Order of March 20,
1992 denying its Motion for Reconsideration of the February 3, 1992 Order.
Despite its window of opportunity to exercise its equity of redemption, however,

respondent chose to be technically shrewd about its chances, preferring instead to seek
annulment of the auction sale, which was the result of the foreclosure of the mortgage,
permission to conduct which it had early on opposed before the insolvency court. Its negligence
or omission to exercise its equity of redemption within a reasonable time, or even on the day of
the auction sale, warrants a presumption that it had either abandoned it or opted not to assert it.
[43]
Equitable considerations thus sway against it.
It is also not lost on the Court that as early as April 12, 1991, Terrymanila had been
judicially declared insolvent. Respondents recourse was thus to demand the satisfaction of its
judgment award before the insolvency court as its judgment award is a preferred credit under
[44]
Article 2244 of the Civil Code. To now allow respondent have its way in annulling the auction
sale and at the same time let it proceed with its claims before the insolvency court would neither
rhyme with reason nor with justice.
Parenthetically, respondent has not shown that it was prejudiced by the auction sale since
the insolvency court already determined that even if the mortgaged properties were foreclosed,
there were still sufficient, unencumbered assets of Terrymanila to cover the obligations owing to
[45]
other creditors, including that of respondents.
In any event, even if respondent would have participated in the auction sale and matched
petitioners bid, the superiority of petitioners lien over the mortgaged assets would preclude
respondent from recovering the chattels.
It has long been settled by this Court that the right of those who acquire said properties
should not and can not be superior to that of the creditor who has in his favor an instrument of
mortgage executed with the formalities of the law, in good faith, and without the least
indication of fraud. x x x. In purchasing it, with full knowledge that such circumstances existed, it
should be presumed that he did so, very much willing to respect the lien existing thereon, since he should
not have expected that with the purchase, he would acquire a better right than that which the vendor then
[46]
had. (Emphasis and underscoring supplied)
It bears noting that the chattel mortgage in favor of petitioner was registered more than two
years before the issuance of a writ of attachment over some of Terrymanilas chattels in favor of
respondent. This is significant in determining who between petitioner and respondent should be
given preference over the subject properties. Since the registration of a chattel mortgage is an
effective and binding notice to other creditors of its existence and creates a real right or lien that
[47]
follows the property wherever it may be, the right of respondent, as an attaching creditor or
as purchaser, had it purchased the mortgaged chattel at the auction sale, is subordinate to the lien
[48]
of the mortgagee who has in his favor a valid chattel mortgage.
Contrary then to the appellate courts ruling, petitioner is not liable for constructive fraud
for proceeding with the auction sale. Nor for subsequently selling the chattel. For foreclosure
suits may be initiated even during insolvency proceedings, as long as leave must first be obtained
[49]
from the insolvency court as what petitioner did.
The appellate courts award of exemplary damages and attorneys fees for respondent,
given petitioners good faith, is thus not warranted.
As for petitioners prayer for attorneys fees in its Compulsory Counterclaim, the same is in
[50]
order, the dismissal of respondents Complaint nowithstanding. Perkin Elmer Singapore v.
[51] [52]
Dakila Trading, citing Pinga v. Heirs of German Santiago, enlightens:
It bears to emphasize that petitioners counterclaim against respondent is for damages and attorneys fees
arising from the unfounded suit. While respondents Complaint against petitioner is already dismissed,
petitioner may have very well incurred damages and litigation expenses such as attorneys fees since it
was forced to engage legal representation in the Philippines to protect its rights and to assert lack of
jurisdiction of the courts over its person by virtue of the improper service of summons upon it. Hence,
the cause of action of petitioners counterclaim is not eliminated by the mere dismissal of respondents
[53]
complaint. (Underscoring supplied)
To the Court, the amount of P250,000 prayed for by petitioner in its Counterclaim is just and
equitable, given the nature and extent of legal services employed in controverting respondents
unfounded claim.
WHEREFORE, the petition for review is GRANTED. The challenged Decision and
Resolution of the Court of Appeals are REVERSED and SET ASIDE. Civil Case No. 92-
62106 lodged before the Regional Trial Court of Manila, Branch 16, is DISMISSED for lack of
merit.
Respondent, Royal Cargo Corporation, is ORDERED to pay petitioner, Rizal

Commercial Banking Corporation, P250,000 as and for attorneys fees.
No costs.
SO ORDERED.
CONCHITA CARPIO MORALES
Associate Justice
WE CONCUR:
CONSUELO YNARES- DIOSDADO M. PERALTA

SANTIAGO Associate Justice
Associate Justice
MARIANO C. DEL CASTILLO ROBERTO A. ABAD

ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Courts Division.
CONCHITA CARPIO MORALES

Associate Justice
Acting Chairperson
11/9/2017 G.R. No. L-14938
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SUPREME COURT
Manila
EN BANC
G.R. No. L-14938 January 28, 1961
MAGDALENA C. DE BARRETO, ET AL., plaintiffs-appellants,

vs.
JOSE G. VILLANUEVA, ET AL., defendants-appellees.
Bausa, Ampil & Suarez for plaintiffs-appellants.

Esteban Ocampo for defendants-appellees.
GUTIERREZ DAVID, J.:
On May 10, 1948, Rosario Cruzado, for herself and as administratix of the intestate estate of her deceased
husband Pedro Cruzado in Special Proceedings No. 4959 of the Court of First Instance of Manila, obtained from
the defunct Rehabilitation Finance Corporation (hereinafter referred to as the RFC a loan in the amount of
P11,000.00. To secure payment thereof, she mortgaged the land then covered by Transfer Certificate of Title No.
61358 issued in her name and that of her deceased. husband. As she failed to pay certain installments on the
loan, the mortgage was foreclosed and the RFC acquired the property for P11,000.00, subject to her rights as
mortgagor to re-purchase the same. On July 26, 1951, upon her application, the land was sold back to her
conditionally for the amount of P14,269.03, payable in seven years.
About two years thereafter, or on February 13, 1953 Rosario Cruzado, as guardian of her minor children in
Special Proceedings No. 14198 of the Court of First Instance of Manila, was authorized by the court, to sell with
the previous consent of the RFC the land in question together with the improvements thereon for a sum not less
than P19,000. Pursuant to such authority and with the consent of the RFC, she sold to Pura L. Villanueva for
P19,000.00 "all their rights, interest,' title and dominion and over the herein described parcel of land together with
the existing improvements thereon, including one use and an annex thereon; free from all charges and
encumbrances, , with the exception of the sum of P11,009.52, is stipulated interest thereon, which the vendor, is
still presently obligated to the RFC and which the vendee herein now assumes to pay to the RFC under the same
terms and conditions specified in that deed of sale dated July 26, 1951." Having paid in advance the sum of
P500.00, Pura L. Villanueva, the vendee, in consideration of the aforesaid sale, executed in favor of the vendor
Rosario Cruzado a promissory note dated March 9, 1953, undertaking to pay the balance of P17,500.00 in
monthly installments. On April 22, 1953, she made an additional payment of P5,500.00 on the promissory note.
She was, subsequently, able to secure in her name Transfer Certificate of Title No. 32526 covering the house and
lot above referred to, and on July 10, 1953, she mortgaged the said property to Magdalena C. Barretto as security
for a loan the amount of P30,000.00.
As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid balance of P12,000.00 her
promissory note for the sale of the property in question, a complaint for the recovery of the same from her and her
husband was filed on September 21, 1963 by Rosario Cruzado in her own right and in her capacity as judicial
guardian of her minor children. Pending trial of the case, a lien was constituted upon the property in the nature of
a levy in attachment in favor of the Cruzados said lien being annotated at the back of Transfer Certificate of Title
No. 32526. After trial, decision was rendered ordering Pura Villanueva and her husband, jointly and severally, to
pay Rosario Cruzado the sum of P12,000.00, with legal interest thereon from the date of the filing of the complaint
until fully paid plus the sum of P1,500.00 as attorney's fees.
Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to Magdalena C. Barretto, the
latter, jointly with her husband, instituted against the Villanueva spouses an action for foreclosure of mortgage,
impleading Rosario Cruzado and her children as parties defendants. On November 11, 1956, decision was
rendered in the case absolving the Cruzados from the complaint and sentencing the Villanuevas to pay the
Barrettos, jointly and severally, the sum of P30,000.00, with interest thereon at the rate of 12% per annum from
January 11, 1954 plus the sum of P4,000.00 as attorney's fees. Upon the finality of this decision, the Barrettos
filed a motion for the issuance of a writ of execution which was granted by the lower court on July 31, 1958. On
August 14, 1958, the Cruzados filed their "Vendor's Lien" in the amount of P12,000.00, plus legal interest, over
http://www.lawphil.net/judjuris/juri1961/jan1961/gr_l-14938_1961.html 1/5
11/9/2017 G.R. No. L-14938
the real property subject of the foreclosure suit, the said amount representing the unpaid balance of the purchase
price of the said property. Giving due course to the line, the court on August 18, 1958 ordered the same
annotated in Transfer Certificate of Title No. 32526 of the Registry of Deeds of Manila, decreeing that should the
realty in question be sold at public auction in the foreclosure proceedings, the Cruzados shall be credited with
their pro-rata share in the proceeds thereof, "pursuant to the provision of articles 2248 and 2249 of the new Civil
Code in relation to Article 2242, paragraph 2 of the same Code." The Barrettos filed a motion for reconsideration
on September 12, 1958, but on that same date, the sheriff of Manila, acting in pursuance of the order of the court
granting the writ of execution, sold at public auction the property in question. As highest bidder, the Barrettos
themselves acquired the properties for the sum of P49,000.00.
On October 4, 1958, 'the Court of First Instance issued an order confirming the aforesaid sale and directing the
Register of Deeds of the City of Manila to issue to the Barrettos the corresponding certificate of title, subject,
however, to the order of August 18, 1958 concerning,. the vendor's lien. On the same date, the motion of the
Barettos seeking reconsideration of the order of the court giving due course to the said vendor's lien was denied.
From this last order, the Barretto spouses interposed the present appeal.
The appeal is devoid of merit.
In claiming that the decision of the Court, of First Instance of Manila in Civil Case No. 20075 . awarding the amount
of P12,000.00 in favor of Rosario Cruzado and her minor children . cannot constitute a basis for the vendor's lien
filed by the appellee Rosario Cruzado, appellants allege that the action in said civil case was merely to recover the
balance of a promissory note. But while, apparently, the action was to recover the remaining obligation of
promissor Pura Villanueva on the note, the fact remains that Rosario P. Cruzado as guardian of her minor children,
was an unpaid vendor., of the realty in question, and the promissory note, was, precisely, for the unpaid balance
of the price of the property bought by, said Pura Villanueva.
Article 2242 of the new Civil, Code enumerates the claims, mortgage and liens that constitute an encumbrance on
specific immovable property, and among them are: .
(2) For the unpaid price of real property sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro-rata after the payment of the taxes and assessment upon the
immovable property or real rights.
Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario
Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the
proceeds of the foreclosure sale.
The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was not registered, it
should not prejudice the said appellants' registered rights over the property. There is nothing to this argument.
Note must be taken of the fact that article 2242 of the new Civil Code enumerating the preferred claims, mortgages
and liens on immovables, specifically requires that . unlike the unpaid price of real property sold . mortgage
credits, in order to be given preference, should be recorded in the Registry of Property. If the legislative intent was
to impose the same requirement in the case of the vendor's lien, or the unpaid price of real property sold, the
lawmakers could have easily inserted the same qualification which now modifies the mortgage credits. The law,
however, does not make any distinction between registered and unregistered vendor's lien, which only goes to
show that any lien of that kind enjoys the preferred credit status.
Appellants also argue that to give the unrecorded vendor's lien the same standing as the registered mortgage
credit would be to nullify the principle in land registration system that prior unrecorded interests cannot prejudice
persons who subsequently acquire interests over the same property. The Land Registration Act itself, however,
respects without reserve or qualification the paramount rights of lien holders on real property. Thus, section 70 of
that Act provides that .
Registered land, and ownership therein shall in all respects be subject to the same burdens and incidents
attached by law to unregistered land. Nothing contained in this Act shall in any way be construed to relieve
registered land or the owners thereof from any rights incident to the relation of husband and wife, or from
liability to attachment on mesne process or levy, on execution, or from liability to any lien of any description
established by law on land and the buildings thereon, or the interest of the owners of such land or buildings,
or to change the laws of descent, or the rights of partition between co-owners, joint tenants and other co-
tenants or the right to take the same by eminent domain, or to relieve such land from liability to be
appropriated in any lawful manner for the payment of debts, or to change or affect in any other way any
other rights or liabilities created by law and applicable to unregistered land, except as otherwise expressly
provided in this Act or in the amendments thereof, (Emphasis supplied)
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As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable
only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret
this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships where
there are concurrence of credits would be left without any rules to govern them, and it would render purposeless
the special laws an insolvency.
Premises considered, the order appealed from is hereby affirmed. Costs against the appellants.
Bengzon, Padilla, Bautista Angelo, Labrador, Paredes and Dizon, JJ., concur.
Concepcion, Reyes, J.B.L. and Barrera, JJ., concur in the result.
RESOLUTION ON MOTION TO RECONSIDER
December 29, 1962
REYES, J.B.L., J.:
Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to be discussed in the course of
this resolution, that our decision of 28 January 1961 be reconsidered and set aside, and a new one entered
declaring that their right as mortgagees remain superior to the unrecorded claim of herein appellee for the
balance of the purchase price of her rights, title, and interests in the mortgaged property.
It will be recalled that, with Court authority, Rosario Cruzado sold all her right, title, and interest and that of her
children in the house and lot herein involved to Pura I. Villanueva for P19,000.00. The purchaser paid Pl,500 in
advance, and executed a promissory note for the balance of P17,506.00. However, the buyer could only pay
P5,500 On account of the note, for which reason the vendor obtained judgment for the unpaid balance. In the
meantime, the buyer Villanueva was able to secure a clean certificate of title (No. 32626), and mortgaged the
property to appellant Magdalena C. Barretto, married to Jose C. Barretto, to secure a loan of P30,000.03, said
mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her
favor, obtained judgment, and upon its becoming final asked for execution on 31 July 1958. On 14 August 1958,
Cruzado filed a motion for recognition for her "vendor's lien" in the amount of Pl2,000.00, plus legal interest,
invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the court below ordered the "lien"
annotated on the back of Certificate of Title No. 32526, with the proviso that in case of sale under the foreclosure
decree the vendor's lien and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds.
Our original decision affirmed this order of the Court of First Instance of Manila.
Appellants insist that:
(1) The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines, can only become
effective in the event of insolvency of the vendee, which has not been proved to exist in the instant case; and .
(2) That the appellee Cruzado is not a true vendor of the foreclosed property. We have given protracted and
mature consideration to the facts and law of this case, and have reached the conclusion that our original decision
must be reconsidered and set aside, for the following reasons:
A. The previous decision failed to take fully into account the radical changes introduced by the Civil Code of the
Philippines into the system of priorities among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property under
Article 1923 were to be resolved according to an order of priorities established by Article 1927, whereby one class
of creditors could exclude the creditors of lower order until the claims of the former were fully satisfied out of the
proceeds of the sale of the real property subject of the preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines however, only taxes enjoy a similar absolute preference. All
the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but
must be paid pro-rata i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides:
If there are two or more credits with respect to the same specific real property or real rights, they, shall be
satisfied pro-rata after the payment of the taxes and assessments upon the immovable property or real
rights."
But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article
2242 (or such of their, as have credits outstanding) must necessarily be convened, and the import of their claims
11/9/2017 G.R. No. L-14938
ascertained. It is thus apparent that the full, application (of Articles 2249 and 2242 demands that there must be
first some proceedings where the claims of all the preferred creditors may be bindingly adjudicated, such as
insolvency, the settlement of decedents estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that —
The claims or credits enumerated in the two preceding articles" shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal provisions governing insolvency . . .
(Emphasis supplied),
And the rule is further clarified in he Report of the Code Commission, as follows:
The question as to whether the Civil Code and the insolvency Law can be harmonized is settled by this
Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced
in accordance with the Insolvency Law." (Emphasis supplied) .
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in
the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under
Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims
is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro-rata dividend
corresponding to each, because the rights of the other creditors likewise" enjoying preference under Article 2242
can not be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from,
decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and appellee, is
incorrect, and must be reversed.
In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's estate), the
conflict between the parties now before us must be decided pursuant to the well established principle concerning
registered lands; that a purchaser in good faith and for value (as the appellant concededly is) takes registered
property free from liens and encumbrances other than statutory liens and those recorded in the certificate of title.
There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not require the character
and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain subordinate to
the latter.
We are understandably loathed (absent a clear precept of law so commanding) to adopt a rule that would
undermine the faith and credit to be accorded to registered Torrens titles and nullify the beneficient objectives
sought to be obtained by the Land Registration Act. No argument is needed to stress that if a person dealing with
registered land were to be held to take it in every instance subject to all the fourteen preferred claims enumerate
in Article 2242 of the new Civil Code, even if the existence and import thereof can not be ascertained from the
records, all confidence in Torrens titles would be destroyed, and credit transactions on the faith of such titles
would be hampered, if not prevented, with incalculable results. Loans on real estate security would become
aleatory and risky transactions, for no, prospective lender could accurately estimate the hidden liens on the
property offered as security, unless he indulged in complicated, tedious investigations, . The logical result might
well be a contraction of credit unforeseeable proportions that could lead to economic disaster.
Upon the other hand, it does not appear excessively burdensome to require the privileged creditors to cause their
claims to be recorded in the books of the Register of deeds should they desire to protect their rights even outside
of insolvency or liquidation proceedings.
B. The close study of the facts disclosed by the records lasts strong doubt on the proposition that appellees
Cruzados should be regarded as unpaid vendors of the property( land, buildings, and improvements ) involved in
the case at bar so as to be entitled to preference under Article 2242. The record on appeal, specially the final
decision of the Court of First Instance of Manila in the suit of the ,Cruzados against Villanueva, clearly establishes
that after her husband's death, and with due court authority, Rosario Cruzado, for herself and as administratrix of
her husband's state, mortgaged the property to the Rehabilitation Finance Corporation (RFC) to secure payment
of a loan of P11,000, installments, but that the debtor failed to pay some of the installments; wherefore the RFC,
on 24 August 1949, foreclosed the mortgage, and acquired the property, subject to the debtor's right to redeem or
repurchase the said property; and that on 25 September 1950, the RFC consolidated its ownership, and the
certificate of title of the Cruzados was cancelled and a new certificate issued in the name of the RFC.
While on 26 July 1951 the RFC did execute a deed selling back the property to the erstwhile mortgagors and
former owners Cruzados in installments, subject to the condition (among others) that the title to the property and
its improvements "shall remain in the name of Corporation (RFC) until after said purchase price, advances and
interests shall have been fully paid", as of 27 September 1952, Cruzado had only paid a total of P1,360, and had
defaulted on six monthly amortizations; for which reason the RFC rescinded the sale, and forfeited the payments
made, in accordance with the terms of the contract of 26 July 1951.
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It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights, title, interest and
dominion on and over" the property, lot, house, and improvements for P19,000.00, the buyer undertaking to
assume payment of the obligation to the RFC, and by resolution of 30 April 1953, the RFC approved "the transfer
of the rights and interest of Rosario P. Cruzado and her children in their property herein above-described in favor
of Pura L. Villanueva"; and on 7 May 1953 the RFC executed a deed of absolute sale of the property to said party,
who had fully paid the price of P14,269.03. Thereupon, the spouses Villanueva obtained a new Transfer
Certificate of Title No. 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the property to the spouses Barretto, appellants herein.
It is clear from the facts above-stated that ownership of the property had passed to the Rehabilitation Finance
Corporation since 1950, when it consolidated its purchase at the foreclosure sale and obtained a certificate of title
in its corporate name. The subsequent contract of resale in favor of the Cruzados did not revest ownership in
them, since they failed to comply with its terms and conditions, and the contract itself provided that the title should
remain in the name of the RFC until the price was fully paid.
Therefore, when after defaulting in their payments due under the resale contract with the RFC the appellants
Cruzados sold to Villanueva "their rights, title, interest and dominion" to the property, they merely assigned
whatever rights or claims they might still have thereto; the ownership of the property rested with the RFC. The sale
from Cruzado to Villanueva, therefore, was not so much a sale of the land and its improvements as it was a quit-
claim deed in favor of Villanueva. In law, the operative sale was that from the RFC to the latter, and it was the RFC
that should be regarded as the true vendor of the property. At the most, the Cruzados transferred to Villanueva an
option to acquire the property, but not the property itself, and their credit, therefore, can not legally constitute a
vendor's lien on the corpus of that property that should stand on an equal footing with the mortgaged credit held
by appellant Barretto.
In view of the foregoing, the previous decision of this Court, promulgated on 28 January 1961, is hereby
reconsidered and set aside, and a new one entered reversing the judgment appealed from and declaring the
appellants Barretto entitled to full satisfaction of their mortgaged credit out of the proceeds of the foreclosure sale
in the hands of the Sheriff of the City of Manila. No costs.
Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Regala and Makalintal, JJ., concur.
Bengzon, Labrador and Dizon, JJ., took no part.
11/9/2017 JL Bernardo Construction vs CA : 105827 : January 31, 2000 : J. Gonzaga-Reyes : Third Division
THIRD DIVISION
[G.R. No. 105827. January 31, 2000]
J.L. BERNARDO CONSTRUCTION, represented by attorneys-in-fact Santiago R. Sugay,

Edwin A. Sugay and Fernando S.A. Erana, SANTIAGO R. SUGAY, EDWIN A. SUGAY and
FERNANDO S. A. ERANA, petitioners, vs. COURT OF APPEALS and MAYOR JOSE L.
SALONGA, respondents.
DECISION
GONZAGA-REYES, J.:
This petition for certiorari under Rule 65 seeks to annul and set aside the following:
1. Decision dated February 6, 1992 issued by the Eleventh Division of the Court of Appeals in CA-G.R. No. 26336
which nullified the order of the Regional Trial Court of Cabanatuan City in Civil Case No. 1016-AF granting plaintiffs
(petitioners herein) a writ of attachment and a contractors lien upon the San Antonio Public Market; and
2. Resolution dated June 10, 1992 issued by the former Eleventh Division of the Court of Appeals in CA-G.R. No.
26336 denying the motions for reconsideration filed by both parties.
The factual antecedents of this case, as culled from the pleadings, are as follows:
Sometime in 1990, the municipal government of San Antonio, Nueva Ecija approved the construction of the San
Antonio Public Market. The construction of the market was to be funded by the Economic Support Fund Secretariat
(ESFS), a government agency working with the USAID. Under ESFS "grant-loan-equity" financing program, the funding
for the market would be composed of a (a) grant from ESFS, (b) loan extended by ESFS to the Municipality of San
Antonio, and (c) equity or counterpart funds from the Municipality.
It is claimed by petitioners Santiago R. Sugay, Edwin A. Sugay, Fernando S.A. Erana and J.L. Bernardo Construction, a
single proprietorship owned by Juanito L. Bernardo, that they entered into a business venture for the purpose of
participating in the bidding for the public market. It was agreed by petitioners that Santiago Sugay would take the lead
role and be responsible for the preparation and submission of the bid documents, financing the entire project, providing
and utilizing his own equipment, providing the necessary labor, supplies and materials and making the necessary
representations and doing the liaison work with the concerned government agencies.
On April 20, 1990, J.L. Bernardo Construction, thru petitioner Santiago Sugay, submitted its bid together with other
qualified bidders. After evaluating the bids, the municipal pre-qualification bids and awards committee, headed by
respondent Jose L. Salonga (then incumbent municipal mayor of San Antonio) as Chairman, awarded the contract to
petitioners. On June 8, 1990, a Construction Agreement was entered into by the Municipality of San Antonio thru
respondent Salonga and petitioner J.L. Bernardo Construction.
It is claimed by petitioners that under this Construction Agreement, the Municipality agreed to assume the expenses for
the demolition, clearing and site filling of the construction site in the amount of P1,150,000 and, in addition, to provide
cash equity of P767,305.99 to be remitted directly to petitioners.
http://sc.judiciary.gov.ph/jurisprudence/2000/jan2000/105827.html 1/8
Petitioners allege that, although the whole amount of the cash equity became due, the Municipality refused to pay the
same, despite repeated demands and notwithstanding that the public market was more than ninety-eight percent (98%)
complete as of July 20, 1991. Furthermore, petitioners maintain that Salonga induced them to advance the expenses for
the demolition, clearing and site filling work by making representations that the Municipality had the financial capability to
reimburse them later on. However, petitioners claim that they have not been reimbursed for their expenses.[1]
On July 31, 1991, J.L. Bernardo Construction, Santiago Sugay, Edwin Sugay and Fernando Erana, with the latter three
bringing the case in their own personal capacities and also in representation of J.L. Bernardo Construction, filed a
complaint for breach of contract, specific performance, and collection of a sum of money, with prayer for preliminary
attachment and enforcement of contractors lien against the Municipality of San Antonio, Nueva Ecija and Salonga, in his
personal and official capacity as municipal mayor. After defendants filed their answer, the Regional Trial Court held
hearings on the ancillary remedies prayed for by plaintiffs.[2]
On September 5, 1991, the Regional Trial Court issued the writ of preliminary attachment prayed for by plaintiffs. It also
granted J.L. Bernardo Construction the right to maintain possession of the public market and to operate the same. The
dispositive portion of the decision provides:
IN VIEW OF THE FOREGOING DISQUISITION, the Court finds the auxiliary reliefs of attachment
prayed for by the plaintiffs to be well-taken and the same is hereby GRANTED. Conformably thereto,
let a writ of preliminary attachment be issued upon the filing by the plaintiffs of a bond in the amount of
P2,653,576.84 to answer for costs and damages which the defendants may suffer should the Court
finally adjudged (sic) that the plaintiffs are not entitled to the said attachment, and thereafter, the Deputy
Sheriff of this court is hereby ordered to attach the properties of the defendants JOSE LAPUZ
SALONGA and the MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA which are not exempt
from execution.
CORROLARILY, the Court grants the plaintiffs J.L. BERNARDO CONSTRUCTION, represented by
SANTIAGO R. SUGAY, EDWIN A. SUGAY and FERNANDO S.A. ERANA, the authority to hold
on to the possession of the public market in question and to open and operate the same based on fair
and reasonable guidelines and other mechanics of operation to be submitted by plaintiffs within fifteen
(15) days from their receipt of this Order which shall be subject to Courts approval and to deposit the
income they may derive therefrom to the Provincial Treasurer of Nueva Ecija after deducting the
necessary expenses for the operation and management of said market, subject to further orders from this
Court.
SO ORDERED.
The trial court gave credence to plaintiffs claims that defendants were guilty of fraud in incurring their contractual
obligations as evidenced by the complaint and the affidavits of plaintiffs Santiago Sugay and Erana. The court ruled that
defendants acts of "obtaining property, credit or services by false representations as to material facts made by the
defendant to the plaintiff with intent to deceive constitutes fraud warranting attachment" and that " a debt is considered
fradulently contracted if at the time of contracting it, the debtor entertained an intention not to pay."
With regards to the contractors lien, the trial court held that since plaintiffs have not been reimbursed for the cash equity
and for the demolition, clearing and site filling expenses, they stand in the position of an unpaid contractor and as such
are entitled, pursuant to articles 2242 and 2243 of the Civil Code, to a lien in the amount of P2,653,576.84 (as of
August 1, 1991), excluding the other claimed damages, attorneys fees and litigation expenses, upon the public market
which they constructed. It was explained that, although the usual way of enforcing a lien is by a decree for the sale of the
property and the application of the proceeds to the payment of the debt secured by it, it is more practical and reasonable
to permit plaintiffs to operate the public market and to apply to their claims the income derived therefrom, in the form of
rentals and goodwill from the prospective stallholders of the market, as prayed for by plaintiffs.
The trial court made short shrift of defendants argument that the case was not instituted in the name of the real parties-in-
interest. It explained that the plaintiff in the cause of action for money claims for unpaid cash equity and demolition and
site filling expenses is J.L. Bernardo Construction, while the plaintiffs in the claim for damages for violation of their rights
under the Civil Code provisions on human relations are plaintiffs Santiago Sugay, Edwin Sugay and Erana.[3]
The defendants moved for reconsideration of the trial courts order, to which the plaintiffs filed an opposition. On
October 10, 1991 the motion was denied. The following day, the trial court approved the guidelines for the operation of
the San Antonio Public Market filed by plaintiffs.
Respondent Salonga filed a motion for the approval of his counterbond which was treated by the trial court in its
October 29, 1991 order as a motion to fix counterbond and for which it scheduled a hearing on November 19, 1991.
On October 21, 1991, during the pendency of his motion, respondent Salonga filed with the Court of Appeals a petition
for certiorari under Rule 65 with prayer for a writ of preliminary injunction and temporary restraining order which case
was docketed as CA-G.R. SP No. 26336.[4] Petitioners opposed the petition, claming that respondent had in fact a
plain, speedy and adequate remedy as evidenced by the filing of a motion to approve counter-bond with the trial court.
[5]
On February 6, 1992, the Court of Appeals reversed the trial courts decision and ruled in favor of Salonga. The
dispositive portion of its decision states
FOR ALL THE FOREGOING, the petition is hereby granted as follows:
1. The respondent judges ORDER dated September 5, 1991 for the issuance of a writ
of attachment and for the enforcement of a contractors lien, is hereby NULLIFIED and
SET ASIDE; the writ of attachment issued pursuant thereto and the proceedings
conducted by the Sheriffs assigned to implement the same are, as a consequence, also
hereby NULLIFIED and SET ASIDE;
2. The respondent judges ORDER dated October 11, 1991 further enforcing the
contractors lien and approving the guidelines for the operation of the San Antonio Public
Market is also NULLIFIED and SET ASIDE.
Petitioners prayers for the dismissal of Civil Case No. 1016 (now pending before
respondent judge) and for his deletion from said case as defendant in his private capacity
are, however, DENIED.
The respondent judge may now proceed to hearing of Civil Case No. 1016 on the
merits.
SO ORDERED.
The appellate court reasoned that since the Construction Agreement was only between Juanito Bernardo and the
Municipality of San Antonio, and since there is no sworn statement by Juanito Bernardo alleging that he had been
deceived or misled by Mayor Salonga or the Municipality of San Antonio, it is apparent that the applicant has not proven
that the defendants are guilty of inceptive fraud in contracting the debt or incurring the obligation, pursuant to Rule 57 of
the Rules of Court, and therefore, the writ of attachment should be struck down for having been improvidently and
irregularly issued.
The filing of a motion for the approval of counter-bond by defendants did not, according to the Court of Appeals, render
the petition for certiorari premature. The appellate court held that such motion could not cure the defect in the issuance
of the writ of attachment and that, moreover, the defendants motion was filed by them "without prejudice to the petition
for certiorari."
As to the contractors lien, the appellate court ruled that Articles 2242 of the Civil Code finds application only in the
context of insolvency proceedings, as expressly stated in Article 2243. Even if it is conceded that plaintiffs are entitled to
retain possession of the market under its contractors lien, the appellate court held that the same right cannot be expanded
to include the right to use the building. Therefore, the trial courts grant of authority to plaintiffs to operate the San Antonio
Public Market amounts to a grave abuse of discretion.
With regard to the allegations of defendants that plaintiffs are not the proper parties, the Court of Appeals ruled that such
issue should be assigned as an error by defendants later on should the outcome of the case be adverse to the latter.[6]
Petitioners are now before this Court assailing the appellate courts decision. In their petition, they make the following
assignment of errors:
1. THE DECISION IS CONTRARY TO LAW IN THAT THE COURT OF APPEALS OVERLOOKED AND/OR
DISREGARDED THE FUNDAMENTAL REQUIREMENT AND ESTABLISHED SUPREME COURT
DECISIONS IN ACTIONS FOR CERTIORARI CONSIDERING THAT THE FILING OF THE PETITION BY
RESPONDENT SALONGA WITH THE COURT OF APPEALS IS OBVIOUSLY PREMATURE AND
IMPROPER SINCE THERE ADMITTEDLY EXISTS A PLAIN, SPEEDY AND ADEQUATE REMEDY
AVAILABLE TO RESPONDENT SALONGA WHICH IS HIS UNRESOLVED "MOTION TO APPROVE
COUNTERBOND" PENDING WITH THE TRIAL COURT.
2. IN COMPLETE DISREGARD OF ESTABLISHED JURISPRUDENCE, THE COURT OF APPEALS HAS

SKIRTED AND/OR FAILED TO CONSIDER/DISREGARDED THE EQUALLY CRUCIAL ISSUE THAT THE
QUESTIONED ORDERS ARE CLEARLY AND ADMITTEDLY INTERLOCUTORY IN NATURE AND
THEREFORE THEY CANNOT BE THE PROPER SUBJECT OF AN ACTION FOR CERTIORARI; PROOF
THAT THE ORDERS ASSAILED BY RESPONDENT SALONGA ARE INTERLOCUTORY IN CHARACTER
IS THE DISPOSITIVE PORTION OF THE DECISION WHEN THE COURT OF APPEALS SAID "THE
RESPONDENT JUDGE MAY NOW PROCEED TO HEARING OF SAID CIVIL CASE NO. 1016 ON THE
MERITS"; PETITION FILED BY RESPONDENT SALONGA WITH THE COURT OF APPEALS SHOULD
HAVE BEEN DISMISSED OUTRIGHTLY AS SOUGHT BY HEREIN PETITIONERS IN THEIR VARIOUS
UNACTED PLEADINGS.
3. THE DECISION IS BASED ON FINDINGS OF FACTS AND CONCLUSIONS WHICH ARE NOT ONLY
GROSSLY ERRONEOUS BUT ARE SQUARELY CONTRADICTED BY THE EVIDENCE ON RECORD.
4. THE COURT OF APPEALS HAS CLEARLY MISAPPRECIATED, MISREAD AND DISREGARDED

HEREIN PETITIONERS CAUSES OF ACTION AGAINST RESPONDENT SALONGA AND HIS CO-
RESPONDENT MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA.
5. THE COURT OF APPEALS HAS MADE ERRONEOUS AND CONTRADICTORY CONCLUSIONS AND
FINDINGS ON THE ISSUE OF "REAL PARTY IN INTEREST" IN COMPLETE DISREGARD OF THE
POWERS AND AUTHORITY GRANTED BY JUANITO L. BERNARDO CONSTRUCTION TO HEREIN
PETITIONERS.
6. THE COURT OF APPEALS HAS SKIRTED THE IMPORTANT ISSUE OF "AGENCY COUPLED WITH AN
INTEREST."
7. THE COURT OF APPEALS WENT BEYOND THE ISSUES OF THE CERTIORARI CASE AND ITS
FINDINGS AND CONCLUSIONS ON ISSUES NOT RELATED TO THE CASE FOR CERTIORARI ARE
CONTRARY TO THE PLEADINGS AND DO NOT CONFORM TO THE EVIDENCE ON RECORD.
8. THE COURT OF APPEALS HAS LIKEWISE DISREGARDED THE PRECEPT THAT CONCLUSIONS AND
FINDINGS OF FACT OF THE TRIAL COURT ARE ENTITLED TO GREAT WEIGHT ON APPEAL AND
SHOULD NOT BE DISTURBED SINCE THERE IS NO STRONG AND COGENT REASON WHATSOVER TO
OVERCOME THE WELL-WRITTEN AND DETAILED AND ESTABLISHED FACTUAL FINDINGS OF THE
TRIAL COURT.
9. PETITIONERS HAVE STRONG REASONS TO BELIEVE THAT THE DECISION OF THE COURT OF
APPEALS WAS ISSUED WITH SERIOUS INJUSTICE AND AGAINST THE TENETS OF FAIR PLAY SINCE
THE DECISION HAD BEEN KNOWN TO AS IT WAS OPENLY AND PUBLICLY ANNOUNCED BY
RESPONDENT SALONGA LONG BEFORE IT WAS "PROMULGATED" BY THE COURT OF APPEALS.
The various issues raised by petitioners may be restated in a more summary manner as -
1. Whether or not the Court of Appeals correctly assumed jurisdiction over the petition for certiorari filed by
respondents herein assailing the trial courts interlocutory orders granting the writ of attachment and the contractors lien?
2. Whether or not the Court of Appeals committed reversible errors of law in its decision?
A petition for certiorari may be filed in case a tribunal, board or officer exercising judicial or quasi-judicial functions has
acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction,
and there is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of law.[7]
The office of a writ of certiorari is restricted to truly extraordinary cases wherein the act of the lower court or quasi-
judicial body is wholly void.[8] We held in a recent case that certiorari may be issued "only where it is clearly shown that
there is a patent and gross abuse of discretion as to amount to an evasion of positive duty or to virtual refusal to perform
a duty enjoined by law, or to act at all in contemplation of law, as where the power is exercised in an arbitrary and
despotic manner by reason of passion or personal hostility."[9]
As a general rule, an interlocutory order is not appealable until after the rendition of the judgment on the merits for a
contrary rule would delay the administration of justice and unduly burden the courts.[10] However, we have held that
certiorari is an appropriate remedy to assail an interlocutory order (1) when the tribunal issued such order without or in
excess of jurisdiction or with grave abuse of discretion and (2) when the assailed interlocutory order is patently
erroneous and the remedy of appeal would not afford adequate and expeditious relief.[11]
We hold that the petition for certiorari filed by Salonga and the Municipality with the Court of Appeals questioning the
writ of attachment issued by the trial court should not have been given due course for they still had recourse to a plain,
speedy and adequate remedy - the filing of a motion to fix the counter-bond, which they in fact filed with the trial court,
the grant of which would effectively prevent the issuance of the writ of attachment. Moreover, they could also have filed
a motion to discharge the attachment for having been improperly or irregularly issued or enforced, or that the bond is
insufficient, or that the attachment is excessive.[12] With such remedies still available to the Municipality and Salonga, the
filing of a petition for certiorari with the Court of Appeals insofar as it questions the order of attachment was clearly
premature.
However, with regards to the contractors lien, we uphold the appellate courts ruling reversing the trial courts grant of a
contractors lien in favor of petitioners.
Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with respect to specific
personal or real property of the debtor. Specifically, the contractors lien claimed by petitioners is granted under the third
paragraph of Article 2242 which provides that the claims of contractors engaged in the construction, reconstruction or
repair of buildings or other works shall be preferred with respect to the specific building or other immovable property
constructed.[13]
However, Article 2242 only finds application when there is a concurrence of credits, i.e. when the same specific
property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is
insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a
need to determine which of the creditors will be paid ahead of the others.[14] Fundamental tenets of due process will
dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims
of all the preferred creditors may be bindingly adjudicated, such as insolvency proceedings.[15]
This is made explicit by Article 2243 which states that the claims and liens enumerated in articles 2241 and 2242 shall be
considered as mortgages or pledges of real or personal property, or liens within the purview of legal provisions governing
insolvency.[16]
The action filed by petitioners in the trial court does not partake of the nature of an insolvency proceeding. It is basically
for specific performance and damages.[17] Thus, even if it is finally adjudicated that petitioners herein actually stand in the
position of unpaid contractors and are entitled to invoke the contractors lien granted under Article 2242, such lien cannot
be enforced in the present action for there is no way of determining whether or not there exist other preferred creditors
with claims over the San Antonio Public Market. The records do not contain any allegation that petitioners are the only
creditors with respect to such property. The fact that no third party claims have been filed in the trial court will not bar
other creditors from subsequently bringing actions and claiming that they also have preferred liens against the property
involved.[18]
Our decision herein is consistent with our ruling in Philippine Savings Bank v. Lantin,[19] wherein we also disallowed
the contractor from enforcing his lien pursuant to Article 2242 of the Civil Code in an action filed by him for the
collection of unpaid construction costs.
It not having been alleged in their pleadings that they have any rights as a mortgagee under the contracts, petitioners may
only obtain possession and use of the public market by means of a preliminary attachment upon such property, in the
event that they obtain a favorable judgment in the trial court. Under our rules of procedure, a writ of attachment over
registered real property is enforced by the sheriff by filing with the registry of deeds a copy of the order of attachment,
together with a description of the property attached, and a notice that it is attached, and by leaving a copy of such order,
description, and notice with the occupant of the property, if any.[20] If judgment be recovered by the attaching party and
execution issue thereon, the sheriff may cause the judgment to be satisfied by selling so much of the property as may be
necessary to satisfy the judgment.[21] Only in the event that petitioners are able to purchase the property will they then
acquire possession and use of the same.
Clearly, the trial courts order of September 5, 1991 granting possession and use of the public market to petitioners does
not adhere to the procedure for attachment laid out in the Rules of Court. In issuing such an order, the trial court gravely
abused its discretion and the appellate courts nullification of the same should be sustained.
At this stage of the case, there is no need to pass upon the question of whether or not petitioners herein are the real
parties-in-interest. In the event that judgment is rendered against Salonga and the Municipality, this issue may be assigned
as an error in their appeal from such judgment.
WHEREFORE, we UPHOLD the Court of Appeals Decision dated February 6, 1992 in CA-G.R. SP No. 26336
insofar as it nullifies the contractors lien granted by the trial court in favor of petitioners in its September 5, 1991 Order.
Consequently, we also UPHOLD the appellate courts nullification of the trial courts October 11, 1991 Order approving
the guidelines for the operation of the San Antonio Public Market. However, we REVERSE the appellate courts order
nullifying the writ of attachment granted by the trial court.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.
[1] Rollo, 16-19.

[2] Ibid., 63-96.
[3] Ibid., 106-126.
[4] Ibid., 128-146.
[5] Ibid., 55.
[6] Ibid., 52-62.
[7] Abad v. National Labor Relations Commission, 286 SCRA 355 (1998); Rules of Court, Rule 65, sec. 1.
[8] Fortich v. Corona, 289 SCRA 624 (1998).
[9] Lalican v. Vergara, 276 SCRA 518 (1997).
[10] Id.
[11] Pearson v. Intermediate Appellate Court, 295 SCRA 27 (1998); Casil v. Court of Appeals, 285 SCRA 264 (1998).
[12] Rules of Court, Rule 57, sec. 13.
[13]
Article 2242. With reference to specific immovable property and real rights of the debtor, the following claims, mortgages and liens
shall be preferred, and shall constitute an encumbrance on the immovable or real right;
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the immovables sold.
(3) Claims of laborers, masons, mechanics and other workmen, as well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or other works, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the construction, reconstruction, or repair of buildings, canals or other works, upon said
buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Property, upon the real estate mortgaged;
(6) Expenses for the preservation or improvement of real property when the law authorizes reimbursement, upon the immovables
preserved or improved;
(7) Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or execution, upon the property affected,
and only as to later credits;
(8) Claims of co-heirs for warranty in the partition of an immovable among them, upon the real property thus divided;
(9) Claims of donors of real property for pecuniary charges or other conditions imposed upon the donee, upon the immovable donated;
(10) Credits of insurers, upon the property insured, for the insurance premium for two years.
[14] Philippine Savings Bank v. Lantin, 124 SCRA 476 (1983).
[15] Id.
11/9/2017 Development Bank of the Phil vs CA : 126200 : August 16, 2001 : J. Kapunan : First Division
FIRST DIVISION
[G.R. No. 126200. August 16, 2001]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. HONORABLE

COURT OF APPEALS and REMINGTON INDUSTRIAL SALES
CORPORATION, respondents.
DECISION
KAPUNAN, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking a review of the
Decision of the Court of Appeals dated October 6, 1995 and the Resolution of the same court dated August 29, 1996.
The facts are as follows:
Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation engaged in the manufacture of pure
and refined nickel, nickel and cobalt in mixed sulfides, copper ore/concentrates, cement and pyrite conc., obtained from
the Philippine National Bank (PNB) various loan accommodations. To secure the loans, Marinduque Mining executed
on October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all
of Marinduque Minings real properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at Antipolo,
Rizal, including the improvements thereon. As of November 20, 1980, the loans extended by PNB amounted to P4
Billion, exclusive of interest and charges.[1]
On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of the Philippines
(DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque Mining mortgaged to PNB and DBP all its
real properties located at Surigao del Norte, Sipalay, Negros Occidental, and Antipolo, Rizal, including the
improvements thereon. The mortgage also covered all of Marinduque Minings chattels, as well as assets of whatever
kind, nature and description which Marinduque Mining may subsequently acquire in substitution or replenishment or in
addition to the properties covered by the previous Deed of Real and Chattel Mortgage dated October 7, 1978.
Apparently, Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive of interest and charges.
[2]
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to Mortgage Trust
Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB and DBP all other real and personal
properties and other real rights subsequently acquired by Marinduque Mining.[3]
For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted sometime on July and
August 1984 extrajudicial foreclosure proceedings over the mortgaged properties.
The events following the foreclosure are narrated by DBP in its petition, as follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP emerged and were declared the
highest bidders over the foreclosed real properties, buildings, mining claims, leasehold rights together with the
improvements thereon as well as machineries [sic] and equipments [sic] of MMIC located at Nonoc Nickel Refinery
Plant at Surigao del Norte for a bid price of P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located
at Nonoc Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders, bidded for P170,577,610.00 (Exhs. 5
to 5-A, 6, 7 to 7-AA- PNB/DBP). For the foreclosed real properties together with all the buildings, major machineries
& equipment and other improvements of MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold
to PNB and DBP as highest bidders in the sum of P1,107,167,950.00 (Exhs. 10 to 10-X- PNB/ DBP).
At the auction sale conducted on September 7, 1984[,] over the foreclosed real properties, buildings, &
machineries/equipment of MMIC located at Sipalay, Negros Occidental were sold to PNB and DBP, as highest bidders,
in the amount of P2,383,534,000.00 and P543,040,000.00 respectively (Exhs. 8 to 8-BB, 9 to 90-
GGGGGGPNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed personal properties of MMIC,
the same were sold to PNB and DBP as the highest bidder in the sum of P678,772,000.00 (Exhs. 11 and12-
QQQQQPNB).
PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in order to ensure the continued
operation of the Nickel refinery plant and to prevent the deterioration of the assets foreclosed, assigned and transferred
to Nonoc Mining and Industrial Corporation all their rights, interest and participation over the foreclosed properties of
MMIC located at Nonoc Island, Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. 13-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned and transferred in favor of
Maricalum Mining Corp. all its rights, interest and participation over the foreclosed properties of MMIC at Sipalay,
Negros Occidental for an initial consideration of P325,800,000.00 (Exh. 14PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended, again assigned, transferred and
conveyed to the National Government thru [sic] the Asset Privatization Trust (APT) all its existing rights and interest over
the assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation, Maricalum Mining Corporation and
Island Cement Corporation (Exh. 15 & 15-APNB/DBP).[4]
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and caused to be
delivered construction materials and other merchandise from Remington Industrial Sales Corporation (Remington) worth
P921,755.95. The purchases remained unpaid as of August 1, 1984 when Remington filed a complaint for a sum of
money and damages against Marinduque Mining for the value of the unpaid construction materials and other merchandise
purchased by Marinduque Mining, as well as interest, attorneys fees and the costs of suit.
On September 7, 1984, Remingtons original complaint was amended to include PNB and DBP as co-defendants in
view of the foreclosure by the latter of the real and chattel mortgages on the real and personal properties, chattels, mining
claims, machinery, equipment and other assets of Marinduque Mining.[5]
On September 13, 1984, Remington filed a second amended complaint to include as additional defendant, the
Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc Mining is the assignee of all real and personal
properties, chattels, machinery, equipment and all other assets of Marinduque Mining at its Nonoc Nickel Factory in
Surigao del Norte.[6]
On March 26, 1986, Remington filed a third amended complaint including the Maricalum Mining Corporation
(Maricalum Mining) and Island Cement Corporation (Island Cement) as co-defendants. Remington asserted that
Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one
and the same entity by disregarding the veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are newly created entities are practically owned wholly
by defendants PNB and DBP, and managed by their officers, aside from the fact that the aforesaid co-defendants
NMIC, Maricalum and Island Cement were organized in such a hurry and in such suspicious circumstances by co-
defendants PNB and DBP after the supposed extra-judicial foreclosure of MMICs assets as to make their supposed
projects assets, machineries and equipment which were originally owned by co-defendant MMIC beyond the reach of
creditors of the latter.
2. The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC, Maricalum and
Island Cement creations of co-defendants PNB and DBP were the personnel of co-defendant MMIC such that x x x
practically there has only been a change of name for all legal purpose and intents.
3. The places of business not to mention the mining claims and project premises of co-defendants NMIC, Maricalum
and Island Cement likewise used to be the places of business, mining claims and project premises of co-defendant
MMIC as to make the aforesaid co-defendants NMIC, Maricalum and Island Cement mere adjuncts and subsidiaries of
co-defendants PNB and DBP, and subject to their control and management.
On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement being all corporations created
by the government in the pursuit of business ventures should not be allowed to ignore, x x x or obliterate with impunity
nay illegally, the financial obligations of x x x MMIC whose operations co-defendants PNB and DBP had highly financed
before the alleged extrajudicial foreclosure of defendant MMICs assets, machineries and equipment to the extent that
major policies of co-defendant MMIC were being decided upon by co-defendants PNB and DBP as major financiers
who were represented in its board of directors forming part of the majority thereof which through the alleged
extrajudicial foreclosure culminated in a complete take-over by co-defendants PNB and DBP bringing about the
organization of their co-defendants NMIC, Maricalum and Island Cement to which were transferred all the assets,
machineries and pieces of equipment of co-defendant MMIC used in its nickel mining project in Surigao del Norte,
copper mining operation in Sipalay, Negros Occidental and cement factory in Antipolo, Rizal to the prejudice of
creditors of co-defendant MMIC such as plaintiff Remington Industrial Sales Corporation whose stockholders, officers
and rank-and-file workers in the legitimate pursuit of its business activities, invested considerable time, sweat and private
money to supply, among others, co-defendant MMIC with some of its vital needs for its operation, which co-defendant
MMIC during the time of the transactions material to this case became x x x co-defendants PNB and DBPs
instrumentality, business conduit, alter ego, agency (sic), subsidiary or auxiliary corporation, by virtue of which it
becomes doubly necessary to disregard the corporation fiction that co-defendants PNB, DBP, MMIC, NMIC,
Maricalum and Island Cement, six (6) distinct and separate entities, when in fact and in law, they should be treated as
one and the same at least as far as plaintiffs transactions with co-defendant MMIC are concerned, so as not to defeat
public convenience, justify wrong, subvert justice, protect fraud or confuse legitimate issues involving creditors such as
plaintiff, a fact which all defendants were as (sic) still are aware of during all the time material to the transactions subject
of this case.[7]
On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint impleading the Asset
Privatization Trust (APT) as co-defendant. Said fourth amended complaint was admitted by the lower court in its Order
dated April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendants Marinduque Mining &
Industrial Corporation, Philippine National Bank, Development Bank of the Philippines, Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation, Island Cement Corporation and Asset Privatization Trust to pay, jointly
and severally, the sum of P920,755.95, representing the principal obligation, including the stipulated interest as of June
22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until the amount is fully paid; the sum
equivalent to 10% of the amount due as and for attorneys fees; and to pay the costs.[8]
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the Court of Appeals, in
its Decision dated October 6, 1995, affirmed the decision of the RTC. Petitioner filed a Motion for Reconsideration,
which was denied in the Resolution dated August 29, 1996.

Hence, this petition, DBP maintaining that Remington has no cause of action against it or PNB, nor against their
transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the APT.
On the other hand, private respondent Remington submits that the transfer of the properties was made in fraud of
creditors. The presence of fraud, according to Remington, warrants the piercing of the corporate veil such that
Marinduque Mining and its transferees could be considered as one and the same corporation. The transferees, therefore,
are also liable for the value of Marinduque Minings purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,[9] cited by the Court of Appeals in its decision,[10] this Court
declared:
It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from
its stockholders and from other corporations to which it may be connected. However, when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as
an association of persons or in case of two corporations, merge them into one. (Koppel [Phils.], Inc., vs. Yatco, 71 Phil.
496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs. Milwaukee Refrigeration
Transit Co., 142 Fed., 247, 255 per Sanborn, J.) xxx
In accordance with the foregoing rule, this Court has disregarded the separate personality of the corporation where
the corporate entity was used to escape liability to third parties.[11] In this case, however, we do not find any fraud on
the part of Marinduque Mining and its transferees to warrant the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past due account had
incurred arrearages of more than 20% of the total outstanding obligation. Section 1 of Presidential Decree No. 385 (The
Law on Mandatory Foreclosure) provides:
It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the issuance of this
decree, to foreclose the collateral and/or securities for any loan, credit accommodation, and/or guarantees granted by
them whenever the arrearages on such account, including accrued interest and other charges, amount to at least twenty
percent (20%) of the total outstanding obligations, including interest and other charges, as appearing in the books of
account and/or related records of the financial institution concerned. This shall be without prejudice to the exercise by the
government financial institution of such rights and/or remedies available to them under their respective contracts with their
debtors, including the right to foreclose on loans, credits, accomodations and/or guarantees on which the arrearages are
less than twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon the subject
properties. The banks had no choice but to obey the statutory command.
The import of this mandate was lost on the Court of Appeals, which reasoned that under Article 19 of the Civil
Code, Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone
his due, and observe honesty and good faith. The appellate court, however, did not point to any fact evidencing bad faith
on the part of the Marinduque Mining and its transferees. Indeed, it skirted the issue entirely by holding that the question
of actual fraudulent intent on the part of the interlocking directors of DBP and Marinduque Mining was irrelevant
because:
As aptly stated by the appellee in its brief, x x x where the corporations have directors and officers in common, there
may be circumstances under which their interest as officers in one company may disqualify them in equity from
representing both corporations in transactions between the two. Thus, where one corporation was insolvent and
indebted to another, it has been held that the directors of the creditor corporation were disqualified, by reason of self-
interest, from acting as directors of the debtor corporation in the authorization of a mortgage or deed of trust to the
former to secure such indebtedness x x x (page 105 of the Appellees Brief). In the same manner that x x x when the
corporation is insolvent, its directors who are its creditors can not secure to themselves any advantage or preference
over other creditors. They can not thus take advantage of their fiduciary relation and deal directly with themselves, to the
injury of others in equal right. If they do, equity will set aside the transaction at the suit of creditors of the corporation or
their representatives, without reference to the question of any actual fraudulent intent on the part of the directors,
for the right of the creditors does not depend upon fraud in fact, but upon the violation of the fiduciary relation to the
directors. xxx. (page 106 of the Appellees Brief.)
We also concede that x x x directors of insolvent corporation, who are creditors of the company, can not secure to
themselves any preference or advantage over other creditors in the payment of their claims. It is not good morals or
good law. The governing body of officers thereof are charged with the duty of conducting its affairs strictly in the interest
of its existing creditors, and it would be a breach of such trust for them to undertake to give any one of its members any
advantage over any other creditors in securing the payment of his debts in preference to all others. When validity of these
mortgages, to secure debts upon which the directors were indorsers, was questioned by other creditors of the
corporation, they should have been classed as instruments rendered void by the legal principle which prevents directors
of an insolvent corporation from giving themselves a preference over outside creditors. x x x (page 106-107 of the
Appellees Brief.)[12]
The Court of Appeals made reference to two principles in corporation law. The first pertains to transactions
between corporations with interlocking directors resulting in the prejudice to one of the corporations. This rule does not
apply in this case, however, since the corporation allegedly prejudiced (Remington) is a third party, not one of the
corporations with interlocking directors (Marinduque Mining and DBP).
The second principle invoked by respondent court involves directors who are creditors which is also inapplicable
herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum and Island
Cement. As Remington itself concedes, DBP is not authorized by its charter to engage in the mining business.[13] The
creation of the three corporations was necessary to manage and operate the assets acquired in the foreclosure sale lest
they deteriorate from non-use and lose their value. In the absence of any entity willing to purchase these assets from the
bank, what else would it do with these properties in the meantime? Sound business practice required that they be utilized
for the purposes for which they were intended.
Remington also asserted in its third amended complaint that the use of Nonoc Mining, Maricalum and Island
Cement of the premises of Marinduque Mining and the hiring of the latters officers and personnel also constitute badges
of bad faith.
Assuming that the premises of Marinduque Mining were not among those acquired by DBP in the foreclosure sale,
convenience and practicality dictated that the corporations so created occupy the premises where these assets were
found instead of relocating them. No doubt, many of these assets are heavy equipment and it may have been impossible
to move them. The same reasons of convenience and practicality, not to mention efficiency, justified the hiring by Nonoc
Mining, Maricalum and Island Cement of Marinduque Minings personnel to manage and operate the properties and to
maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend crime.[14] To disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed.[15] In
this case, the Court finds that Remington failed to discharge its burden of proving bad faith on the part of Marinduque
Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the
corporate veil.
The Court of Appeals also held that there exists in Remingtons favor a lien on the unpaid purchases of Marinduque
Mining, and as transferee of these purchases, DBP should be held liable for the value thereof.
In the absence of liquidation proceedings, however, the claim of Remington cannot be enforced against DBP. Article
2241 of the Civil Code provides:
Article 2241. With reference to specific movable property of the debtor, the following claims or liens shall be preferred:
xxx
(3) Claims for the unpaid price of movables sold, on said movables, so long as they are in the possession of the debtor,
up to the value of the same; and if the movable has been resold by the debtor and the price is still unpaid, the lien may be
enforced on the price; this right is not lost by the immobilization of the thing by destination, provided it has not lost its
form, substance and identity, neither is the right lost by the sale of the thing together with other property for a lump sum,
when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of the creditor, or those guaranteed
by a chattel mortgage, upon the things pledged or mortgaged, up to the value thereof;
xxx
In Barretto vs. Villanueva,[16] the Court had occasion to construe Article 2242, governing claims or liens over
specific immovable property. The facts that gave rise to the case were summarized by this Court in its resolution as
follows:
x x x Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lot herein involved to
Pura L. Villanueva for P19,000.00. The purchaser paid P1,500 in advance, and executed a promissory note for the
balance of P17,500.00. However, the buyer could only pay P5,500 on account of the note, for which reason the vendor
obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean certificate of
title (No. 32626), and mortgaged the property to appellant Magdalena C. Barretto, married to Jose C. Baretto, to
secure a loan of P30,000.03, said mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming final asked for execution on 31 July 1958. On 14 August 1958, Cruzado filed
a motion for recognition for her "vendor's lien" in the amount of P12,000.00, plus legal interest, invoking Articles 2242,
2243, and 2249 of the new Civil Code. After hearing, the court below ordered the "lien" annotated on the back of
Certificate of Title No. 32526, with the proviso that in case of sale under the foreclousre decree the vendor's lien and the
mortgage credit of appellant Barretto should be paid pro rata from the proceeds. Our original decision affirmed this
order of the Court of First Instance of Manila.
In its decision upholding the order of the lower court, the Court ratiocinated thus:
Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that constitute an encumbrance on
specific immovable property, and among them are:
"(2) For the unpaid price of real property sold, upon the immovable sold"; and
"(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro-rata, after the payment of the taxes and assessments upon the
immovable property or real rights."
Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario Cruzado as
an unpaid vendor of the property in question has the right to share pro-rata with the appellants the proceeds of the
foreclosure sale.
xxx
As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable only to
the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to interpret this portion of
the Code as intended only for insolvency cases, then other creditor-debtor relationships where there are concurrence of
credits would be left without any rules to govern them, and it would render purposeless the special laws on insolvency.
[17]
Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L. Reyes, speaking for the
Court, explained the reasons for the reversal:
A. The previous decision failed to take fully into account the radical changes introduced by the Civil Code of the
Philippines into the system of priorities among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property under Article
1923 were to be resolved according to an order of priorities established by Article 1927, whereby one class of creditors
could exclude the creditors of lower order until the claims of the former were fully satisfied out of the proceeds of the
sale of the real property subject of the preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines, however, only taxes enjoy a similar absolute preference. All the
remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but must be
paid pro rata, i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides:
"If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro
rata, after the payment of the taxes and assessments upon the immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article 2242 (or
such of them as have credits outstanding) must necessarily be convened, and the import of their claims ascertained. It is
thus apparent that the full application of Articles 2249 and 2242 demands that there must be first some proceeding
where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of
decedent's estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that -
"The claims or credits enumerated in the two preceding articles shall be considered as mortgages or pledges of real or
personal property, or liens within the purview of legal provisions governing insolvency xxx (Italics supplied).
And the rule is further clarified in the Report of the Code Commission, as follows:
"The question as to whether the Civil Code and the Insolvency Law can be harmonized is settled by this Article (2243).
The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the
Insolvency Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as in the
case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242,
unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a
dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to each,
because the rights of the other creditors likewise enjoying preference under Article 2242 can not be ascertained.
Wherefore, the order of the Court of First Instance of Manila now appealed from, decreeing that the proceeds of the
foreclosure sale be apportioned only between appellant and appellee, is incorrect, and must be reversed. [Underscoring
supplied]
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et al.,[18] and in two cases
both entitled Development Bank of the Philippines vs. NLRC.[19]
Although Barretto involved specific immovable property, the ruling therein should apply equally in this case where
specific movable property is involved. As the extra-judicial foreclosure instituted by PNB and DBP is not the liquidation
proceeding contemplated by the Civil Code, Remington cannot claim its pro rata share from DBP.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 6, 1995 and its
Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE. The original complaint filed in the
Regional Trial Court in CV Case No. 84-25858 is hereby DISMISSED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.
[1] Rollo, pp. 61-62.

[2] Id., at 62.
[3] Id.
[4] Rollo, pp. 62-63. Underscoring in the original.
[5] Id., at 90.
[6] Id.
[7] Id., at 91-92.
[8] Id., at 89.
[9] 1 SCRA 160 (1961)
[10] Rollo, p. 102.
[11]Tan Bonn Bee & Co. vs. Jarencio, 163 SCRA 205 (1988); Claparols, et al. vs. Court of Industrial Relations. 65 SCRA 613 (1975); Villa
Rey Transit, Inc. vs. Eusebio E. Ferrer, 25 SCRA 849 (1968); National Marketing Corporation vs. Associated Financing Company, et al.,
19 SCRA 962 (1967); Palacio, et al. vs. Fely Transportation Company, 5 SCRA 1011 (1962); McConnel, et al. vs. Court of Appeals, et al., 1
SCRA 721 (1961).
[12] Rollo, p. 107. Italics in the original.
[13] Id., at 232.
[14] Union Bank of the Philippines vs. Court of Appeals, 290 SCRA 198 (1998).
[15] Complex Electronics Employees Association vs. NLRC, 310 SCRA 403 (1990); Luxuria Homes, Inc. vs. Court of Appeals, 302 SCRA
315 (1999); Matuguina Integrated Wood Products vs. Court of Appeals, 263 SCRA 490 (1996).
[16] 1 SCRA 288 (1961).
[17] Id., at 292-294.
[18] 209 SCRA 383 (1983).
11/9/2017 G.R. No. 146555
FIRST DIVISION
JOSE C. CORDOVA, G.R. No. 146555

Petitioner,
Present:
PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,*
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ. **
REYES DAWAY LIM BERNARDO

LINDO ROSALES LAW OFFICES,
ATTY. WENDELL CORONEL and
the SECURITIES AND EXCHANGE
COMMISSION,***
Respondents. Promulgated:
July 3, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
CORONA, J.:
[1] [2] [3]

This is a petition for review on certiorari of a decision and resolution of the Court of Appeals
(CA) dated July 31, 2000 and December 27, 2000, respectively, in CA-G.R. SP No. 55311.
Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from Philippine Underwriters
Finance Corporation (Philfinance) certificates of stock of Celebrity Sports Plaza Incorporated (CSPI)
[4]
and shares of stock of various other corporations. He was issued a confirmation of sale. The CSPI
[5]
shares were physically delivered by Philfinance to the former Filmanbank and Philtrust Bank, as
[6]
custodian banks, to hold these shares in behalf of and for the benefit of petitioner.
11/9/2017 G.R. No. 146555
On June 18, 1981, Philfinance was placed under receivership by public respondent Securities and
Exchange Commission (SEC). Thereafter, private respondents Reyes Daway Lim Bernardo Lindo
[7]
Rosales Law Offices and Atty. Wendell Coronel (private respondents) were appointed as liquidators.
Sometime in 1991, without the knowledge and consent of petitioner and without authority from the SEC,
[8]
private respondents withdrew the CSPI shares from the custodian banks. On May 27, 1996, they
sold the shares to Northeast Corporation and included the proceeds thereof in the funds of Philfinance.
[9]
Petitioner learned about the unauthorized sale of his shares only on September 10, 1996. He lodged a
[10]
complaint with private respondents but the latter ignored it prompting him to file, on May 6, 1997,
[11]
a formal complaint against private respondents in the receivership proceedings with the SEC, for
the return of the shares.
Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery for Philfinances
[12]
creditors and investors. On May 13, 1997, the liquidators began the process of settling the claims
[13]
against Philfinance, from its assets.
On April 14, 1998, the SEC rendered judgment dismissing the petition. However, it reconsidered
this decision in a resolution dated September 24, 1999 and granted the claims of petitioner. It held that
petitioner was the owner of the CSPI shares by virtue of a confirmation of sale (which was considered
as a deed of assignment) issued to him by Philfinance. But since the shares had already been sold and
the proceeds commingled with the other assets of Philfinance, petitioners status was converted into that
of an ordinary creditor for the value of such shares. Thus, it ordered private respondents to pay
petitioner the amount of P5,062,500 representing 15% of the monetary value of his CSPI shares plus
interest at the legal rate from the time of their unauthorized sale.
On October 27, 1999, the SEC issued an order clarifying its September 24, 1999 resolution.
While it reiterated its earlier order to pay petitioner the amount of P5,062,500, it deleted the award of
11/9/2017 G.R. No. 146555
legal interest. It clarified that it never meant to award interest since this would be unfair to the other
claimants.
On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the owner of the CSPI
shares but the recovery of such shares had become impossible. It also declared that the clarificatory
order merely harmonized the dispositive portion with the body of the resolution. Petitioners motion for
reconsideration was denied.
Hence this petition raising the following issues:

1) whether petitioner should be considered as a preferred (and secured) creditor of
Philfinance;
2) whether petitioner can recover the full value of his CSPI shares or merely 15% thereof like
all other ordinary creditors of Philfinance and
[14]
3) whether petitioner is entitled to legal interest.
To resolve these issues, we first have to determine if petitioner was indeed a creditor of
Philfinance.
There is no dispute that petitioner was the owner of the CSPI shares. However, private
respondents, as liquidators of Philfinance, illegally withdrew said certificates of stock without the
[15]
knowledge and consent of petitioner and authority of the SEC. After selling the CSPI shares, private
[16]
respondents added the proceeds of the sale to the assets of Philfinance. Under these circumstances,
did the petitioner become a creditor of Philfinance? We rule in the affirmative.
The SEC, after holding that petitioner was the owner of the shares, stated:
Petitioner is seeking the return of his CSPI shares which, for the present, is no longer possible, considering that
the same had already been sold by the respondents, the proceeds of which are ADMITTEDLY commingled with
the assets of PHILFINANCE.
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This being the case, [petitioner] is now but a claimant for the value of those shares. As a claimant, he shall be
[17]
treated as an ordinary creditor in so far as the value of those certificates is concerned.
The CA agreed with this and elaborated:
Much as we find both detestable and reprehensible the grossly abusive and illicit contrivance employed
by private respondents against petitioner, we, nevertheless, concur with public respondent that the return of
petitioners CSPI shares is well-nigh impossible, if not already an utter impossibility, inasmuch as the certificates of
stocks have already been alienated or transferred in favor of Northeast Corporation, as early as May 27, 1996,
in consequence whereof the proceeds of the sale have been transmuted into corporate assets of Philfinance,
under custodia legis, ready for distribution to its creditors and/or investors. Case law holds that the assets of an
institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver or
liquidator, and shall from the moment of such receivership or liquidation, be exempt from any order, garnishment,
levy, attachment, or execution.
Concomitantly, petitioners filing of his claim over the subject CSPI shares before the SEC in the
liquidation proceedings bound him to the terms and conditions thereof. He cannot demand any special treatment
[from] the liquidator, for this flies in the face of, and will contravene, the Supreme Court dictum that when a
corporation threatened by bankruptcy is taken over by a receiver, all the creditors shall stand on equal footing.
Not one of them should be given preference by paying one or some [of] them ahead of the others. This is
precisely the philosophy underlying the suspension of all pending claims against the corporation under
[18]
receivership. The rule of thumb is equality in equity.
We agree with both the SEC and the CA that petitioner had become an ordinary creditor of
Philfinance.
[19]
Certainly, petitioner had the right to demand the return of his CSPI shares. He in fact filed a
complaint in the liquidation proceedings in the SEC to get them back but was confronted by an
impossible situation as they had already been sold. Consequently, he sought instead to recover their
monetary value.
[20]
Petitioners CSPI shares were specific or determinate movable properties. But after they were
[21]
sold, the money raised from the sale became generic and were commingled with the cash and other
assets of Philfinance. Unlike shares of stock, money is a generic thing. It is designated merely by its
class or genus without any particular designation or physical segregation from all others of the same
11/9/2017 G.R. No. 146555
[22]
class. This means that once a certain amount is added to the cash balance, one can no longer
pinpoint the specific amount included which then becomes part of a whole mass of money.
It thus became impossible to identify the exact proceeds of the sale of the CSPI shares since they
could no longer be particularly designated nor distinctly segregated from the assets of Philfinance.
Petitioners only remedy was to file a claim on the whole mass of these assets, to which unfortunately all
of the other creditors and investors of Philfinance also had a claim.
Petitioners right of action against Philfinance was a claim properly to be litigated in the liquidation
[23] [24]
proceedings. In Finasia Investments and Finance Corporation v. CA, we discussed the
definition of claims in the context of liquidation proceedings:
[25]
We agree with the public respondent that the word claim as used in Sec. 6(c) of P.D. 902-A, as
amended, refers to debts or demands of a pecuniary nature. It means "the assertion of a right to have money
paid. It is used in special proceedings like those before [the administrative court] on insolvency."
The word "claim" is also defined as:

Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated,
fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
right to an equitable remedy for breach of performance if such breach gives rise to a right to payment,
whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured,
[26]
unmatured, disputed, undisputed, secured, unsecured.
Undoubtedly, petitioner had a right to the payment of the value of his shares. His demand was of
a pecuniary nature since he was claiming the monetary value of his shares. It was in this sense (i.e. as a
claimant) that he was a creditor of Philfinance.
The Civil Code provisions on concurrence and preference of credits are applicable to the
[27]
liquidation proceedings. The next question is, was petitioner a preferred or ordinary creditor under
these provisions?
Petitioner argues that he was a preferred creditor because private respondents illegally withdrew
his CSPI shares from the custodian banks and sold them without his knowledge and consent and
11/9/2017 G.R. No. 146555
without authority from the SEC. He quotes Article 2241 (2) of the Civil Code:
With reference to specific movable property of the debtor, the following claims or liens shall be preferred:
xxx xxx xxx
(2) Claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in the
performance of their duties, on the movables, money or securities obtained by them;
xxx xxx xxx

(Emphasis supplied)
He asserts that, as a preferred creditor, he was entitled to the entire monetary value of his shares.
Petitioners argument is incorrect. Article 2241 refers only to specific movable property. His claim
was for the payment of money, which, as already discussed, is generic property and not specific or
determinate.
Considering that petitioner did not fall under any of the provisions applicable to preferred
creditors, he was deemed an ordinary creditor under Article 2245:
Credits of any other kind or class, or by any other right or title not comprised in the four preceding articles, shall
enjoy no preference.
This being so, Article 2251 (2) states that:
Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.
Like all the other ordinary creditors or claimants against Philfinance, he was entitled to a rate of recovery
of only 15% of his money claim.
One final issue: was petitioner entitled to interest?
The SEC argues that awarding interest to petitioner would have given petitioner an unfair
[28]
advantage or preference over the other creditors. Petitioner counters that he was entitled to 12%
legal interest per annum under Article 2209 of the Civil Code from the time he was deprived of the
shares until fully paid.
11/9/2017 G.R. No. 146555
[29]
The guidelines for awarding interest were laid down in Eastern Shipping Lines, Inc. v. CA:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:
forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from the date of the
judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount
of finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
[30]
credit. (Emphasis supplied)
Under this ruling, petitioner was not entitled to legal interest of 12% per annum (from demand)
[31] [32]
because the amount owing to him was not a loan or forbearance of money.
[33]
Neither was he entitled to legal interest of 6% per annum under Article 2209 of the Civil Code
[34]
since this provision applies only when there is a delay in the payment of a sum of money. This was
not the case here. In fact, petitioner himself manifested before the CA that the SEC (as liquidator) had
[35]
already paid him P5,062,500 representing 15% of P33,750,000.
11/9/2017 G.R. No. 146555
Accordingly, petitioner was not entitled to interest under the law and current jurisprudence.
Considering that petitioner had already received the amount of P5,062,500, the obligation of the
[36]
SEC as liquidator of Philfinance was totally extinguished.
We note that there is an undisputed finding by the SEC and CA that private respondents sold the subject
shares without authority from the SEC. Petitioner evidently has a cause of action against private
[37]
respondents for their bad faith and unauthorized acts, and the resulting damage caused to him.
WHEREFORE, the petition is hereby DENIED.
SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
(On Leave)
GELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA
(No part)
CANCIO C. GARCIA
Associate Justice
CERTIFICATION
11/9/2017 Ruby Indus'l Corp vs CA : 124185-87 : January 20, 1998 : J. Puno : Second Division
SECOND DIVISION
[G.R. No. 124185-87. January 20, 1998]
RUBY INDUSTRIAL CORPORATION and BENHAR INTERNATIONAL, INC.

petitioners, vs. COURT OF APPEALS, MIGUEL LIM, ALLIED LEASING and
FINANCE CORPORATION, and THE MANAGEMENT COMMITTEE OF
RUBY INDUSTRIAL CORPORATION, respondents.
DECISION
PUNO, J.:
Petitioners seek the reversal of the Court of Appeals Decision, [1] setting aside the Orders of the
Securities and Exchange Commission (SEC), dated July 30, 1993 and October 15, 1993, which
approved the Revised Rehabilitation Plan of Ruby Industrial Corporation (RUBY) and appointed Benhar
International, Inc. (BENHAR) as member of RUBY's Management Committee.
The facts: Petitioner Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass
manufacturing, while petitioner Benhar International, Inc. (BENHAR) is a domestic corporation engaged in
importation and sale of vehicle spare parts. BENHAR is wholly-owned by the Yu family and headed by
Henry Yu who is also a director and majority stockholder of RUBY.
In 1983, RUBY suffered severe liquidity problems. Thus, on December 13, 1983, it filed a Petition for
Suspension of Payments with the Securities and Exchange Commission (SEC). [2]
On December 20, 1983, the SEC issued an Order[3] declaring RUBY under suspension of payments.
Pending hearing of its petition, the SEC enjoined RUBY from disposing its property, except insofar as
necessary in its ordinary operations. It also enjoined RUBY from making payments outside of the
necessary or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel[4] created a management committee[5] for RUBY to: (1)
undertake the management of RUBY; (2) take custody of and control over all existing assets and liabilities
of RUBY; (3) evaluate RUBY's existing assets and liabilities, earnings and operations; (4) determine the
best way to salvage and protect the interest of its investors and creditors; and (5) study, review and
evaluate the proposed rehabilitation plan for RUBY.[6]
Subsequently, at RUBY's special stockholders meeting, its majority stockholders led by Yu Kim
Giang presented the BENHAR/RUBY Rehabilitation Plan to be submitted to SEC. Under the plan,
BENHAR shall lend its P60 million credit line in China Bank to RUBY, payable within ten (10) years.
Moreover, BENHAR shall purchase the credits of RUBY's creditors and mortgage RUBY's properties to
obtain credit facilities for RUBY.[7] Upon approval of the rehabilitation plan, BENHAR shall control and
manage RUBY'S operations. For its service, BENHAR shall receive a management fee equivalent to
7.5% of RUBY's net sales.[8]
Some 40% of the stockholders opposed the BENHAR/RUBY Plan, including private respondent
MIGUEL LIM, a minority shareholder of RUBY. Private respondent Allied Leasing and Finance
Corporation, the biggest unsecured creditor of RUBY and chairman of the management committee, also
objected to the plan as it would transfer RUBY's assets beyond the reach and to the prejudice of its
http://sc.judiciary.gov.ph/jurisprudence/1998/jan1998/124185_87.htm 1/9
unsecured creditors. Despite the oppositions, the majority stockholders still submitted the
BENHAR/RUBY Plan to the SEC for approval.
Upon the other hand, RUBY's minority stockholders, represented by private respondent Lim,
submitted their own rehabilitation plan (the ALTERNATIVE PLAN) to the SEC where they proposed to: (1)
pay all RUBY'S creditors without securing any bank loan; (2) run and operate RUBY without charging
management fees; (3) buy-out the majority shares or sell their shares to the majority stockholders; (4)
rehabilitate RUBY's two plants; and (5) secure a loan at 25% interest, as against the 28% interest
charged in the loan under the BENHAR/RUBY Plan.[9]
Both plans were endorsed by the SEC to RUBY's management committee for evaluation.
On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan.[10] The minority
stockholders, thru private respondent Lim, appealed the approval to the SEC en banc. On November 15,
1988, the SEC en banc temporarily enjoined the implementation of the BENHAR/RUBY Plan. On
December 20, 1988, after the expiration of the TRO, the SEC en banc granted the writ of preliminary
injunction against the enforcement of the BENHAR/RUBY Plan.[11]
Thereafter, BENHAR and Henry Yu, later joined by RUBY and Yu Kim Giang, appealed to the Court of
Appeals (CA-G.R. SP No. 16798) questioning the issuance of the writ. Their appeal was denied.[12]
BENHAR and company elevated the matter to this Court. In a minute Resolution,[13] dated February
28, 1990, we denied the petition and upheld the injunction against the implementation of the
BENHAR/RUBY Plan.
However, it appears that before the SEC Hearing Panel approved the BENHAR/RUBY Plan on
October 28, 1988, BENHAR had already implemented part of the plan by paying off Far East Bank &
Trust Company (FEBTC), one of RUBY's secured creditors. Thus, by May 30, 1988, FEBTC had already
executed a deed of assignment of credit and mortgage rights in favor of BENHAR. Moreover, despite the
SEC en banc's TRO and injunction, BENHAR still paid RUBY's other secured creditors who, in turn,
assigned their credits in favor of BENHAR.
Hence, RUBY's biggest unsecured creditor, Allied Leasing and Finance Corporation, and private
respondent Lim moved to nullify the deeds of assignment executed in favor of BENHAR and cite the
parties thereto in contempt for willful violation of the December 20, 1983 SEC Order enjoining RUBY from
disposing its properties and making payments pending the hearing of its petition for suspension of
payments. Private respondents Lim and Allied Leasing charged that in paying off FEBTC's credits,
FEBTC was given undue preference over the other creditors of RUBY.
Acting on private respondents' motions, the SEC Hearing Panel nullified the deeds of assignment
executed by RUBY's creditors in favor of BENHAR and declared the parties thereto guilty of indirect
contempt.[14]
Petitioners appealed to the SEC en banc. Their appeal was denied.[15] It was ruled that, pending
approval of the BENHAR/RUBY plan, BENHAR had no authority to pay off FEBTC, one of RUBY's
creditors. In prematurely implementing the BENHAR/RUBY plan, BENHAR defied the SEC Order
declaring RUBY under suspension of payments and directing the management committee to preserve its
assets.
Petitioners RUBY and BENHAR, joined by Henry Yu and Yu Kim Giang, appealed to the Court of
Appeals (CA-G.R. SP No. 18310). On August 29, 1990, the Court of Appeals affirmed the SEC ruling
nullifying the deeds of assignment.[16] It also declared that its decision is final and executory as to RUBY
and Yu Kim Giang for their failure to file their pleadings within the reglementary period. This Court affirmed
the Court of Appeals' decision in G.R. No. 96675.[17]
Earlier, on May 29, 1990, after the SEC en banc enjoined the implementation of BENHAR/RUBY
Plan, RUBY filed with the SEC en banc an ex-parte petition to create a new management committee and
to approve its revised rehabilitation plan (Revised BENHAR/RUBY Plan). Under the revised plan,
BENHAR shall receive P34.068 Million of the P60.437 Million credit facility to be extended to RUBY, as
reimbursement for BENHAR's payment to some of RUBY's creditors.
The SEC en banc directed RUBY to submit the Revised BENHAR/RUBY Plan to its creditors for
comment and approval. The petition for the creation of a new management committee was remanded for
further proceedings to the SEC Hearing Panel. The Alternative Plan of RUBY's minority stockholders was
also forwarded to the hearing panel for evaluation.
On April 26, 1991, over ninety (90%) percent of RUBY's creditors objected to the Revised
BENHAR/RUBY Plan and the creation of a new management committee. Instead, they endorsed the
minority stockholders' Alternative Plan.
At the hearing of the petition for the creation of a new management committee, three (3) members of
the original management committee[18] opposed the Revised BENHAR/RUBY Plan on the following
grounds:
(1) the Revised BENHAR/RUBY Plan would legitimize the entry of BENHAR, a total stranger, to RUBY as
BENHAR would become the biggest creditor of RUBY;
(2) the revised plan would put RUBY's assets beyond the reach of the unsecured creditors and the
minority stockholders; and,
(3) the revised plan was not approved by RUBY's stockholders in a meeting called for the purpose.
However, on September 18, 1991, despite the objections of over 90% of RUBY's creditors and three
(3) members of the management committee, the SEC Hearing Panel approved the revised plan and
dissolved the existing management committee. It also created a new management committee and
appointed BENHAR as one of its members.[19] In addition to the powers originally conferred to the
management committee under P.D. No. 902-A, the new management committee was tasked to oversee
the implementation by the Board of Directors of the revised rehabilitation plan for RUBY.
Consequently, the original management committee, Lim, and the Allied Leasing Corporation
appealed to the SEC en banc. On July 30, 1993, the SEC En Banc affirmed the approval of the Revised
BENHAR/RUBY Plan and the creation of a new management committee.[20] To avoid any group from
controlling the management of RUBY, the SEC appointed SEC lawyers Ruben C. Ladia and Teresita R.
Siao as additional members of the new management committee. Further, it declared that BENHAR's
membership in the new management committee is subject to the condition that BENHAR will extend its
credit facilities to RUBY without using the latter's assets as security or collateral.
Private respondents Lim, Allied Leasing Corporation and the original management committee
moved for reconsideration. Petitioners, on the other hand, asked the SEC to reconsider the portion of its
Order prohibiting BENHAR from utilizing RUBY's assets as collateral.
On October 15, 1993, the SEC denied private respondents' motions for reconsideration. However, it
granted petitioners' motion and allowed BENHAR to use RUBY's assets as collateral for loans, subject to
the approval of the majority of all the members of the new management committee.[21]
On appeal by private respondents, the Court of Appeals set aside[22] SEC's approval of the Revised
BENHAR/RUBY plan and remanded the case to the SEC for further proceedings. It ruled that the revised
plan circumvented its earlier decision (CA-G.R. SP No. 18310) nullifying the deeds of assignment
executed by RUBY's creditors in favor of BENHAR. Under the revised plan, BENHAR was to receive
P34.068 Million of the P60.437 Million credit facility to be extended to RUBY, as settlement for its
advance payment to RUBY's seven (7) secured creditors. In effect, the payments made by BENHAR
under the void Deeds of Assignment were recognized as payable to BENHAR under the revised plan.
Petitioners' motion for reconsideration was denied.[23]
Hence, this petition where petitioners aver that:
"I. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR, GRAVELY ABUSED ITS
DISCRETION AND EXCEEDED ITS JURISDICTION WHEN IT WENT AGAINST THE FACTS AS
FOUND BY THE SEC AND, THEREAFTER, SUBSTITUTED ITS JUDGMENT FOR THAT OF THE
SEC.
"II. THE COURT OF APPEALS COMMITTED AN ERROR REVIEWABLE ON APPEAL AND ALSO
A PROPER SUBJECT OF CERTIORARI WHEN IT ALLOWED PRIVATE RESPONDENTS TO FILE
SEPARATE PETITIONS PREPARED BY LAWYERS REPRESENTING THEMSELVES AS
BELONGING TO DIFFERENT LAW FIRMS."
We find no merit in the petition.
Petitioners first contend that, in reversing the SEC's approval of the Revised BENHAR/RUBY Plan,
the Court of Appeals exceeded its jurisdiction and disregarded the SEC's expertise in resolving
corporate controversies.
The settled doctrine is that factual findings of an administrative agency are accorded respect and, at
times, finality for they have acquired the expertise inasmuch as their jurisdiction is confined to specific
matters.[24] Nonetheless, these doctrines do not apply when the board or official has gone beyond his
statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to his
duty or with grave abuse of discretion.[25] In Leongson vs. Court of Appeals,[26] we held: "once the
actuation of the administrative official or administrative board or agency is tainted by a failure to abide by
the command of the law, then it is incumbent on the courts of justice to set matters right, with this Tribunal
having the last say on the matter."
We hold that the SEC acted arbitrarily when it approved the Revised BENHAR/RUBY Plan. As found
by the Court of Appeals, the plan contained provisions which circumvented its final decision[27] in CA-G.R.
SP No. 18310, nullifying the deeds of assignment of credits and mortgages executed by RUBY's
creditors in favor of BENHAR, as well as this Court's resolution in G.R. No. 96675, affirming said Court of
Appeals' decision. Specifically, the Revised BENHAR/RUBY Plan considered as valid the advance
payments made by BENHAR in favor of some of RUBY'S creditors. The nullity of BENHAR's unauthorized
dealings with RUBY's creditors is settled. The deeds of assignment between BENHAR and RUBY's
creditors had been categorically declared void by the SEC Hearing Panel in two (2) orders issued on
January 12, 1989 and March 15, 1989.[28] The dispositive portion of the Order, dated January 12, 1989,
held:
"WHEREFORE, the motion for reconsideration of the Order dated October 7, 1988, insofar as it relates
to the motion of Allied Leasing and Finance Corporation to cite for contempt and to annul deed of
assignment is hereby GRANTED. ... The Deed of Assignment of Receivables and Mortgages, Rights,
Credits and Interest Without Recourse having been executed in violation of the Order dated December
20, 1988 is hereby declared NULL and VOID.
"SO ORDERED."
The dispositive portion of the Order dated March 15, 1989, similarly provided:
"WHEREFORE, Mr. Yu Kim Giang and others are hereby found guilty of indirect contempt and a penalty
of P500.00 each is hereby imposed on them. The Deed of Assignment of Receivables and Mortgages,
Rights, Credits and Interest Without Recourse, in favor of Benhar International, Inc., by Florence Danon,
Philippine Bank of Communication, Philippine Commercial International Bank, Philippine Trust Company
and PCI Leasing and Finance Incorporated, having been executed in violation of the Order dated
December 20, 1988 are hereby declared NULL and VOID.
These orders were upheld by the SEC en banc[29] and the Court of Appeals.[30] In CA-GR SP No.
18310, the Court of Appeals ruled as follows:
"xxx xxx xxx
"1) x x x when the Deed of Assignment was executed on May 30, 1988 by and between Ruby Industrial
Corp., Benhar International Inc., and FEBTC, the Rehabilitation Plan proposed by petitioner Ruby
Industrial Corp. for Benhar International Inc. to assume all petitioner's obligation has not been approved by
the SEC. The Rehabilitation Plan was not approved until October 28, 1988. There was a willful and blatant
violation of the SEC order dated December 20, 1983 on the part of petitioner Ruby Industrial Corp.,
represented by Yu Kim Giang, by Benhar International Inc., represented by Henry Yu and by FEBTC ... .
"2) The magnitude and coverage of the transactions involved were such that Yu Kim Giang and the other
signatories cannot feign ignorance or pretend lack of knowledge thereto in view of the fact that they were
all signatories to the transaction and privy to all the negotiations leading to the questioned transactions. In
executing the Deeds of Assignments, the petitioners totally disregarded the mandate contained in the
SEC order not to dispose the properties of Ruby Industrial Corp. in any manner whatsoever pending the
approval of the Rehabilitation Plan and rendered illusory the SEC efforts to rehabilitate the petitioner
corporation to the best interests of all the creditors.
"3) The assignments were made without prior approval of the Management Committee created by the
SEC in an Order dated August 10, 1984. Under Section 6, par. d, sub. par. (2) of P.D. 902-A as amended
by P.D. 1799, the Management Committee, rehabilitation receiver, board or body shall have the power to
take custody and control over all existing assets of such entities under management notwithstanding any
provision of law, articles of incorporation or by-law to the contrary. The SEC therefore has the power and
authority, through a Management Committee composed of petitioner's creditors or through itself directly,
to declare all assignment of assets of the petitioner Corporation declared under suspension of payments,
null and void, and to conserve the same in order to effect a fair, equitable and meaningful rehabilitation of
the insolvent corporation."
"4) x x x. The acts for which petitioners were held in indirect contempt by the SEC arose from the failure or
willful refusal by petitioners to obey the lawful order of the SEC not to dispose of any of its properties in
any manner whatsoever without authority or approval of the SEC. The execution of the Deeds of
Assignment tend to defeat or obstruct the administration of justice. Such acts are offenses against the
SEC because they are calculated to embarrass, hinder and obstruct the tribunal in the administration of
justice or lessen its authority.
"In view of the foregoing conclusion which has now been reached, it is not necessary to discuss at length
or to determine other questions which are presented on record. It is sufficient to say that the facts as
established by the evidence on records warrant a finding that petitioners are guilty of indirect contempt.
The Order of the SEC is hereby AFFIRMED. This petition is DISMISSED with costs against the
petitioners.
"SO ORDERED." (emphasis ours)
Petitioners insist that the Court of Appeals did not make a categorical statement in the dispositive
portion of its decision in CA-G.R. SP No. 18310 that it was nullifying the deeds of assignment in favor of
BENHAR. Allegedly, it merely stated that it is affirming the decision of the SEC. Petitioners cite Olac vs.
Court of Appeals[31] where we held that the dispositive portion or the fallo constitutes the court's resolution
in a given case, while the discussion in the body of the decision merely expresses the court's opinion.
The contention has no merit. The principle laid down in Olac applies only when there is a conflict
between the dispositive part (fallo) and the opinion of the court contained in the decision. Hence, in the
execution of the court's judgment, the fallo should be considered as the final disposition of the case
before it. Such conflict does not exist in the Court of Appeals' decision in CA-G.R. SP No. 18310. It is
crystal clear that what the Court of Appeals affirmed in CA-GR SP No. 18310 was the nullity of the deeds
of assignment in favor of BENHAR. In a minute resolution in G.R. No. 96675, we even sustained the Court
of Appeals' decision in CA-GR SP No. 18310.[32]
In any event, petitioners actively participated in the proceedings before the SEC and the Court of
Appeals when private respondents sought the nullification of the subject deeds. Petitioners are, therefore,
estopped from questioning anew the validity of the deeds of assignment executed by RUBY's creditors in
favor of BENHAR. Petitioners should know that it is not for a party to participate in the proceedings,
submit his case for decision, accept the judgment if it is favorable to him but attack it for any reason when
it is adverse.[33]
Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the Revised
BENHAR/RUBY Plan, has acknowledged the invalidity of the subject deeds of assignment. However, to
justify its approval of the plan and the appointment of BENHAR to the new management committee, it
gave the lame excuse that BENHAR became RUBY's creditor for having paid RUBY's debts. We quote
the relevant portion of the SEC's ruling, thus:
"Anent the contention that BENHAR should not take an active participation in the management of
petitioner corporation, the same deserves scant consideration.
"While the Deeds of Assignment executed by creditors of Ruby in favor of Benhar were all declared null
and void, the Revised Rehabilitation Plan, as herein approved by the Commission, shows that Benhar will
assign its credit lines/loan proceeds or will act as financier whereby it re-lends the contracted loan to
Ruby thereby converting Benhar as a creditor of the petitioner corporation once the Rehabilitation Plan is
implemented. In fact, as of March 31, 1990, it appears that Benhar had made some advance payments to
some creditors of Ruby further strengthening its status as a creditor. We cannot, therefore, see any
reason why Benhar should not sit in the management team to oversee the implementation of the Plan."
For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY Plan gave undue
preference to BENHAR. The records, indeed, show that BENHAR's offer to lend its credit facility in favor
of RUBY is conditioned upon the payment of the amount it advanced to RUBY's creditors, thus:
"FUND SOURCING
xxx
1.1. Deed of Assignment of Credit Facility (or Loan Proceeds) to be executed by Benhar in favor of Ruby,
under pre-arrangement with China Banking Corporation or by any other creditor-banks, and upon
payment by Ruby of such amount already advanced by Benhar."
In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit facility to be extended
to RUBY for the latter's rehabilitation.
Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency.[34] When a distressed
company is placed under rehabilitation, the appointment of a management committee follows to avoid
collusion between the previous management and creditors it might favor, to the prejudice of the other
creditors. All assets of a corporation under rehabilitation receivership are held in trust for the equal benefit
of all creditors to preclude one from obtaining an advantage or preference over another by the expediency
of attachment, execution or otherwise. As between the creditors, the key phrase is equality in equity. Once
the corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought to stand on
equal footing. Not any one of them should be paid ahead of the others. This is precisely the reason for
suspending all pending claims against the corporation under receivership.[35]
Parenthetically, BENHAR is a domestic corporation engaged in importing and selling vehicle spare
parts with an authorized capital stock of thirty million pesos. Yet, it offered to lend its credit facility in the
amount of sixty to eighty millions pesos to RUBY. It is to be noted that BENHAR is not a lending or
financing corporation and lending its credit facilities, worth more than double its authorized capitalization,
is not one of the powers granted to it under its Articles of Incorporation. Significantly, Henry Yu, a director
and a majority stockholder of RUBY is, at the same time, a stockholder of BENHAR, a corporation owned
and controlled by his family. These circumstances render the deals between BENHAR and RUBY highly
irregular.
To justify its appointment in the new management committee and to dispute that it will become a
creditor of RUBY only on account of the proposed assignment of its credit facility to RUBY, BENHAR
avers that as early as December 27, 1988, it already lent one million pesos (P1,000,000.00) to RUBY for
the latter's working capital.
The submission deserves scant consideration. To start with, this argument was raised by BENHAR
for the first time in its motion for reconsideration before the Court of Appeals. The settled rule is that
issues not raised in the court a quo cannot be raised for the first time on appeal -- in this case, in a motion
for reconsideration -- for being offensive to the basic rules of fair play, justice and due process.[36]
Moreover, when RUBY initiated its petition for suspension of payments with the SEC, BENHAR was
not listed as one of RUBY's creditors. BENHAR is a total stranger to RUBY. If at all, BENHAR only served
as a conduit of RUBY. As aptly stated in the challenged Court of Appeals decision:[37]
"Benhar's role in the Revised Benhar/Ruby Plan, as envisioned by the majority stockholders, is to contract
the loan for Ruby and, serving the role of a financier, relend the same to Ruby. Benhar is merely extending
its credit line facility with China Bank, under which the bank agrees to advance funds to the company
should the need arise. This is unlikely a loan in which the entire amount is made available to the borrower
so that it can be used and programmed for the benefit of the company's financial and operational needs.
Thus, it is actually China Bank which will be the source of the funds to be relent to Ruby. Benhar will not
shell out a single centavo of its own funds. It is the assets of Ruby which will be mortgaged in favor of
Benhar. Benhar's participation will only make the rehabilitation plan more costly and, because of the
mortgage of its (Ruby's) assets to a new creditor, will create a situation which is worse than the present. x
x x."
We need not say more.

On the second issue, petitioners charge that private respondents are guilty of forum-shopping. It
appears that the three (3) private respondents filed separate petitions before the Court of Appeals upon
receipt of the adverse ruling of the SEC en banc. Private respondent Miguel Lim commenced CA-G.R.
SP No. 32404, thru its counsel Romulo Mabanta Beunaventura Sayoc and De los Angeles. For their part,
private respondent Allied Leasing and the original management committee of RUBY, represented by
Attorney Walter T. Young, commenced CA-G.R. SP No. 32483 and CA-G.R. SP No. 32469, respectively.
In CA-G.R. SP No. 32483, Atty. Young signed for and in behalf of the law firm Ocampo Quiroz Pesayco
and Associates, while in CA-G.R. SP No. 32469, Atty. Young signed for the law firm Quiroz and Young. In
both petitions, he used the same business address-- Allied Bank Center, 6754 Ayala Avenue, Makati
City.
We hold that private respondents are not guilty of forum-shopping. In Ramos, Sr. vs. Court of Appeals,
[38] we ruled:
"The private respondents can be considered to have engaged in forum shopping if all of them, acting as
one group, filed identical special civil actions in the Court of Appeals and in this Court. There must be
identity of parties or interests represented, rights asserted and relief sought in different tribunals. In the
case at bar, two groups of private respondents appear to have acted independently of each other when
they sought relief from the appellate court. Both group sought relief from the same tribunal.
"It would not matter even if there are several divisions in the Court of Appeals. The adverse party can
always ask for the consolidation of the two cases. x x x"
In the case at bar, private respondents represent different groups with different interests-- the minority
stockholders' group, represented by private respondent Lim; the unsecured creditors group, Allied
Leasing & Finance Corporation; and the old management group. Each group has distinct rights to
protect. In line with our ruling in Ramos, the cases filed by private respondents should be consolidated. In
fact, BENHAR and RUBY did just that-- in their urgent motions filed on December 1, 1993 and December
6, 1993, respectively, they prayed for the consolidation of the cases before the Court of Appeals.
IN VIEW OF THE FOREGOING, the instant petition is DISMISSED for lack of merit. The Court of
Appeals' Decision, dated March 31, 1995, and its Resolution, dated March 12, 1996, in CA-G.R. SP
Nos. 32404, 42469 and 32483 are AFFIRMED. The case is remanded to the Securities and Exchange
Commission for further proceedings. Costs against petitioners.
SO ORDERED.
Regalado, (Chairman), and Mendoza, JJ., concur.
Martinez, J., no part.
[1]
Dated March 31, 1995; Penned by Associate Justice Consuelo Ynares-Santiago and concurred in by Associate Justice
Antonio M. Martinez (now a distinguished member of this Court) and Associate Justice Ruben T. Reyes; See Rollo, pp. 33-
56.
[2]
Docketed as SEC Case No. 2556.
[3]
Rollo, pp. 271-272.
[4]
Composed of Hearing Officers Alberto P. Atas, Juanito B. Almosa and Rolando C. Malabonga.
[5]
Composed of Allied Leasing & Finance Corp. as Chairman, with the following as members: Philippine Bank of Commerce,
China Banking Corporation, Filipinas Shell Petroleum and Ruby Industrial Corp.
[6]
Order of SEC Hearing Panel, dated October 28, 1988, Rollo, pp. 100-109.
[7]
Comment of private respondent Miguel Lim, Rollo, pp. 201-202.
[8]
See Order of SEC Hearing Panel, dated October 28, 1988, in SEC Case No. 2556, marked as Annex "E" of Petition, Rollo,
pp. 100-109.
[9]
Ibid., at p. 203.
[10]
Annex "E" of Petition, Rollo, pp. 100-109.
[11]
The Writ of Injunction was finally issued on January 6, 1989, Rollo, p. 278.
[12]
The Fourth Division of the Court of Appeals which decided the appeal in CA-G.R. SP No. 16798 was composed of
Associate Justices Cecilio L. Pe (ponente), Pedro A. Ramirez and now Supreme Court Associate Justice Vicente V.
Mendoza.
[13]
G.R. No. L-88311.
[14]
Orders, dated January 12, 1989 and March 15, 1989; Rollo, pp. 408-412, 416-419.
11/9/2017 RCBC vs Intermediate Appellate Court : 74851 : December 9, 1999 : J. Melo : En Banc
EN BANC
[G.R. No. 74851. December 9, 1999]
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. INTERMEDIATE

APPELLATE COURT AND BF HOMES, INC., respondents.
RESOLUTION
MELO, J.:
On September 14, 1992, the Court passed upon the case at bar and rendered its decision, dismissing the petition of
Rizal Commercial Banking Corporation (RCBC), thereby affirming the decision of the Court of Appeals which canceled
the transfer certificate of title issued in favor of RCBC, and reinstating that of respondent BF Homes.
This will now resolve petitioners motion for reconsideration which, although filed in 1992 was not deemed submitted
for resolution until in late 1998. The delay was occasioned by exchange of pleadings, the submission of supplemental
papers, withdrawal and change of lawyers, not to speak of the case having been passed from one departing to another
retiring justice. It was not until May 3, 1999, when the case was re-raffled to herein ponente, but the record was given
to him only sometime in the late October 1999.
By way of review, the pertinent facts as stated in our decision are reproduced herein, to wit:
On September 28, 1984, BF Homes filed a Petition for Rehabilitation and for Declaration of Suspension of Payments
(SEC Case No. 002693) with the Securities and Exchange Commission (SEC).
One of the creditors listed in its inventory of creditors and liabilities was RCBC.
On October 26, 1984, RCBC requested the Provincial Sheriff of Rizal to extra-judicially foreclose its real estate
mortgage on some properties of BF Homes. A notice of extra-judicial foreclosure sale was issued by the Sheriff on
October 29, 1984, scheduled on November 29, 1984, copies furnished both BF Homes (mortgagor) and RCBC
(mortgagee).
On motion of BF Homes, the SEC issued on November 28, 1984 in SEC Case No. 002693 a temporary restraining
order (TRO), effective for 20 days, enjoining RCBC and the sheriff from proceeding with the public auction sale. The
sale was rescheduled to January 29, 1985.
On January 25, 1985, the SEC ordered the issuance of a writ of preliminary injunction upon petitioners filing of a bond.
However, petitioner did not file a bond until January 29, 1985, the very day of the auction sale, so no writ of preliminary
injunction was issued by the SEC. Presumably, unaware of the filing of the bond, the sheriffs proceeded with the public
auction sale on January 29, 1985, in which RCBC was the highest bidder for the properties auctioned.
On February 5, 1985, BF Homes filed in the SEC a consolidated motion to annul the auction sale and to cite RCBC and
the sheriff for contempt. RCBC opposed the motion.
Because of the proceedings in the SEC, the sheriff withheld the delivery to RCBC of a certificate of sale covering the
auctioned properties.
http://sc.judiciary.gov.ph/jurisprudence/1999/dec99/74851.htm 1/7
On February 13, 1985, the SEC in Case No. 002693 belatedly issued a writ of preliminary injunction stopping the
auction sale which had been conducted by the sheriff two weeks earlier.
On March 13, 1985, despite SEC Case No. 002693, RCBC filed with the Regional Trial Court, Br. 140, Rizal (CC
10042) an action for mandamus against the provincial sheriff of Rizal and his deputy to compel them to execute in its
favor a certificate of sale of the auctioned properties.
In answer, the sheriffs alleged that they proceeded with the auction sale on January 29, 1985 because no writ of
preliminary injunction had been issued by SEC as of that date, but they informed the SEC that they would suspend the
issuance of a certificate of sale to RCBC.
On March 18, 1985, the SEC appointed a Management Committee for BF Homes.
On RCBCs motion in the mandamus case, the trial court issued on May 8, 1985 a judgment on the pleadings, the
dispositive portion of which states:
WHEREFORE, petitioners Motion for Judgment on the pleadings is granted and judgement is hereby rendered ordering
respondents to execute and deliver to petitioner the Certificate of the Auction Sale of January 29, 1985, involving the
properties sold therein, more particularly those described in Annex C of their Answer. (p. 87, Rollo.)
On June 4, 1985, B.F. Homes filed an original complaint with the IAC pursuant to Section 9 of B.P. 129 praying for the
annulment of the judgment, premised on the following:
x x x: (1) even before RCBC asked the sheriff to extra-judicially foreclose its mortgage on petitioners properties, the
SEC had already assumed exclusive jurisdiction over those assets, and (2) that there was extrinsic fraud in procuring the
judgment because the petitioner was not impleaded as a party in the mandamus case, respondent court did not acquire
jurisdiction over it, and it was deprived of its right to be heard. (CA Decision, p. 88, Rollo).
On April 8, 1986, the IAC rendered a decision, setting aside the decision of the trial court, dismissing the mandamus
case and suspending issuance to RCBC of new land titles, until the resolution of case by SEC in Case No. 002693,
disposing as follows:
WHEREFORE, the judgment dated May 8, 1985 in Civil Case No. 10042 is hereby annulled and set aside and the
case is hereby dismissed. In view of the admission of respondent Rizal Commercial Banking Corporation that the sheriffs
certificate of sale has been registered on BF Homes TCTs . . . (here the TCTs were enumerated) the Register of Deeds
for Pasay City is hereby ordered to suspend the issuance to the mortgagee-purchaser, Rizal Commercial Banking
Corporation, of the owners copies of the new land titles replacing them until the matter shall have been resolved by
the Securities and Exchange Commission in SEC Case No. 002693.
(p. 257-260, Rollo; also pp. 832-834, 213 SCRA 830[1992]; Emphasis in the original.)
On June 18, 1986, RCBC appealed the decision of the then Intermediate Appellate Court (now, back to its old
revered name, the Court of Appeals) to this Court, arguing that:
1. Petitioner did not commit extrinsic fraud in excluding private respondent as party defendant in Special Civil Case No.
10042 as private respondent was not indispensable party thereto, its participation not being necessary for the full
resolution of the issues raised in said case.
2. SEC Case No. 2693 cannot be invoked to suspend Special Civil Case No. 10042, and for that matter, the extra-
judicial foreclosure of the real estate mortgage in petitioners favor, as these do not constitute actions against private
respondent contemplated under Section 6(c) of Presidential Decree No. 902-A.
3. Even assuming arguendo that the extra-judicial sale constitute an action that may be suspended under Section 6(c) of
Presidential Decree No. 902-A, the basis for the suspension thereof did not exist so as to adversely affect the validity
and regularity thereof.
4. The Regional Trial court had jurisdiction to take cognizance of Special Civil Case No. 10042.
5. The Regional Trial court had jurisdiction over Special Civil Case No. 10042.
(p. 5, Rollo.)
On November 12, 1986, the Court gave due course to the petition. During the pendency of the case, RCBC
brought to the attention of the Court an order issued by the SEC on October 16, 1986 in Case No.002693, denying the
consolidated Motion to Annul the Auction Sale and to cite RCBC and the Sheriff for Contempt, and ruling as follows:
WHEREFORE, the petitioners Consolidated Motion to Cite Sheriff and Rizal Commercial Banking Corporation for
Contempt and to Annul Proceedings and Sale, dated February 5, 1985, should be as is, hereby DENIED.
While we cannot direct the Register of Deeds to allow the consolidation of the titles subject of the Omnibus Motion
dated September 18, 1986 filed by the Rizal Commercial banking Corporation, and therefore, denies said Motion,
neither can this Commission restrain the said bank and the Register of Deeds from effecting the said consolidation.
SO ORDERED.
(p. 143, Rollo.)
By virtue of the aforesaid order, the Register of Deeds of Pasay City effected the transfer of title over subject pieces
of property to petitioner RCBC, and the issuance of new titles in its name. Thereafter, RCBC presented a motion for the
dismissal of the petition, theorizing that the issuance of said new transfer certificates of title in its name rendered the
petition moot and academic.
In the decision sought to be reconsidered, a greatly divided Court (Justices Gutierrez, Nocon, and Melo concurred
with the ponente, Justice Medialdea; Chief Justice Narvasa, Justices Bidin, Regalado, and Bellosillo concurred only in
the result; while Justice Feliciano dissented and was joined by Justice Padilla, then Justice, now Chief Justice Davide,
and Justice Romero; Justices Grio-Aquino and Campos took no part) denied petitioners motion to dismiss, finding basis
for nullifying and setting aside the TCTs in the name of RCBC. Ruling on the merits, the Court upheld the decision of the
Intermediate Appellate Court which dismissed the mandamus case filed by RCBC and suspended the issuance of new
titles to RCBC. Setting aside RCBCs acquisition of title and nullifying the TCTs issued to it, the Court held that:
. . . whenever a distressed corporation asks the SEC for rehabilitation and suspension of payments, preferred creditors
may no longer assert such preference, but . . . stand on equal footing with other creditors. Foreclosure shall be
disallowed so as not to prejudice other creditors, or cause discrimination among them. If foreclosure is undertaken
despite the fact that a petition for rehabilitation has been filed, the certificate of sale shall not be delivered pending
rehabilitation. Likewise, if this has also been done, no transfer of title shall be effected also, within the period of
rehabilitation. The rationale behind PD 902-A, as amended, is to effect a feasible and viable rehabilitation. This cannot
be achieved if one creditor is preferred over the others.
In this connection, the prohibition against foreclosure attaches as soon as a petition for rehabilitation is filed. Were it
otherwise, what is to prevent the petitioner from delaying the creation of a Management Committee and in the meantime
dissipate all its assets. The sooner the SEC takes over and imposes a freeze on all the assets, the better for all
concerned.
(pp. 265-266, Rollo; also p. 838, 213 SCRA 830[1992].)
Then Justice Feliciano (joined by three other Justices), dissented and voted to grant the petition. He opined that the
SEC acted prematurely and without jurisdiction or legal authority in enjoining RCBC and the sheriff from proceeding
with the public auction sale. The dissent maintain that Section 6 (c) of Presidential Decree 902-A is clear and
unequivocal that, claims against the corporations, partnerships, or associations shall be suspended only upon the
appointment of a management committee, rehabilitation receiver, board or body. Thus, in the case under consideration,
only upon the appointment of the Management Committee for BF Homes on March 18, 1985, should the suspension of
actions for claims against BF Homes have taken effect and not earlier.
In support of its motion for reconsideration, RCBC contends:
The restraining order and the writ of preliminary injunction issued by the Securities and Exchange Commission enjoining
the foreclosure sale of the properties of respondent BF Homes were issued without or in excess of its jurisdiction
because it was violative of the clear provision of Presidential Decree No. 902-A, and are therefore null and void; and
Petitioner, being a mortgage creditor, is entitled to rely solely on its security and to refrain from joining the unsecured
creditors in SEC Case No. 002693, the petition for rehabilitation filed by private respondent.
We find the motion for reconsideration meritorious.

The issue of whether or not preferred creditors of distressed corporations stand on equal footing with all other
creditors gains relevance and materiality only upon the appointment of a management committee, rehabilitation receiver,
board, or body. Insofar as petitioner RCBC is concerned, the provisions of Presidential Decree No. 902-A are not yet
applicable and it may still be allowed to assert its preferred status because it foreclosed on the mortgage prior to the
appointment of the management committee on March 18, 1985. The Court, therefore, grants the motion for
reconsideration on this score.
The law on the matter, Paragraph (c), Section 6 of Presidential Decree 902-A, provides:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers:
c) To appoint one or more receivers of the property, real and personal, which is the subject of the action pending before
the Commission in accordance with the pertinent provisions of the Rules of Court in such other cases whenever
necessary to preserve the rights of the parties-litigants to and/or protect the interest of the investing public and creditors;
Provided, however, that the Commission may, in appropriate cases, appoint a rehabilitation receiver of corporations,
partnerships or other associations not supervised or regulated by other government agencies who shall have, in addition
to the powers of a regular receiver under the provisions of the Rules of Court, such functions and powers as are
provided for in the succeeding paragraph (d) hereof: Provided, finally, That upon appointment of a management
committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against
corporations, partnerships or associations under management or receivership pending before any court,
tribunal, board or body shall be suspended accordingly. (As amended by PDs No. 1673, 1758 and by PD No.
1799. Emphasis supplied.)
It is thus adequately clear that suspension of claims against a corporation under rehabilitation is counted or figured
up only upon the appointment of a management committee or a rehabilitation receiver. The holding that suspension of
actions for claims against a corporation under rehabilitation takes effect as soon as the application or a petition for
rehabilitation is filed with the SEC may, to some, be more logical and wise but unfortunately, such is incongruent with the
clear language of the law. To insist on such ruling, no matter how practical and noble, would be to encroach upon
legislative prerogative to define the wisdom of the law plainly judicial legislation.
It bears stressing that the first and fundamental duty of the Court is to apply the law. When the law is clear and free
from any doubt or ambiguity, there is no room for construction or interpretation. As has been our consistent ruling, where
the law speaks in clear and categorical language, there is no occasion for interpretation; there is only room for application
(Cebu Portland Cement Co. vs. Municipality of Naga, 24 SCRA 708 [1968]).
Where the law is clear and unambiguous, it must be taken to mean exactly what it says and the court has no choice but
to see to it that its mandate is obeyed (Chartered Bank Employees Association vs. Ople, 138 SCRA 273 [1985];
Luzon Surety Co., Inc. vs. De Garcia, 30 SCRA 111 [1969]; Quijano vs. Development Bank of the Philippines,
35 SCRA 270 [1970]).
Only when the law is ambiguous or of doubtful meaning may the court interpret or construe its true intent. Ambiguity
is a condition of admitting two or more meanings, of being understood in more than one way, or of referring to two or
more things at the same time. A statute is ambiguous if it is admissible of two or more possible meanings, in which case,
the Court is called upon to exercise one of its judicial functions, which is to interpret the law according to its true intent.
Furthermore, as relevantly pointed out in the dissenting opinion, a petition for rehabilitation does not always result in
the appointment of a receiver or the creation of a management committee. The SEC has to initially determine whether
such appointment is appropriate and necessary under the circumstances. Under Paragraph (d), Section 6 of Presidential
Decree No. 902-A, certain situations must be shown to exist before a management committee may be created or
appointed, such as;
1. when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties; or
2. when there is paralization of business operations of such corporations or entities which may be prejudicial to
the interest of minority stockholders, parties-litigants or to the general public.
On the other hand, receivers may be appointed whenever:
1. necessary in order to preserve the rights of the parties-litigants; and/or
2. protect the interest of the investing public and creditors. (Section 6 (c), P.D. 902-A.)
These situations are rather serious in nature, requiring the appointment of a management committee or a receiver to
preserve the existing assets and property of the corporation in order to protect the interests of its investors and creditors.
Thus, in such situations, suspension of actions for claims against a corporation as provided in Paragraph (c) of Section 6,
of Presidential Decree No. 902-A is necessary, and here we borrow the words of the late Justice Medialdea, so as not
to render the SEC management Committee irrelevant and inutile and to give it unhampered rescue efforts over the
distressed firm (Rollo, p. 265).
Otherwise, when such circumstances are not obtaining or when the SEC finds no such imminent danger of losing the
corporate assets, a management committee or rehabilitation receiver need not be appointed and suspension of actions
for claims may not be ordered by the SEC. When the SEC does not deem it necessary to appoint a receiver or to create
a management committee, it may be assumed, that there are sufficient assets to sustain the rehabilitation plan and, that the
creditors and investors are amply protected.
Petitioner additionally argues in its motion for reconsideration that, being a mortgage creditor, it is entitled to rely on
its security and that it need not join the unsecured creditors in filing their claims before the SEC-appointed receiver. To
support its position, petitioner cites the Courts ruling in the case of Philippine Commercial International Bank vs.
Court of Appeals, (172 SCRA 436 [1989]) that an order of suspension of payments as well as actions for claims
applies only to claims of unsecured creditors and cannot extend to creditors holding a mortgage, pledge, or any lien on
the property.
Ordinarily, the Court would refrain from discussing additional matters such as that presented in RCBCs second
ground, and would rather limit itself only to the relevant issues by which the controversy may be settled with finality.
In view, however, of the significance of such issue, and the conflicting decisions of this Court on the matter, coupled
with the fact that our decision of September 14, 1992, if not clarified, might mislead the Bench and the Bar, the Court
resolved to discuss further.
It may be recalled that in the herein en banc majority opinion (pp. 256-275, Rollo, also published as RCBC vs.
IAC, 213 SCRA 830 [1992]), we held that:
. . . whenever a distressed corporation asks the SEC for rehabilitation and suspension of payments, preferred creditors
may no longer assert such preference, but . . . stand on equal footing with other creditors. Foreclosure shall be
disallowed so as not to prejudice other creditors, or cause discrimination among them. If foreclosure is undertaken
despite the fact that a petition for rehabilitation has been filed, the certificate of sale shall not be delivered pending
rehabilitation. Likewise, if this has also been done, no transfer of title shall be effected also, within the period of
rehabilitation. The rationale behind PD 902-A, as amended, is to effect a feasible and viable rehabilitation. This cannot
be achieved if one creditor is preferred over the others.
In this connection, the prohibition against foreclosure attaches as soon as a petition for rehabilitation is filed.
Were it otherwise, what is to prevent the petitioner from delaying the creation of a Management Committee and in the
meantime dissipate all its assets. The sooner the SEC takes over and imposes a freeze on all the assets, the better for all
concerned.
(pp. 265-266, Rollo; also p. 838, 213 SCRA 830[1992]. Emphasis supplied.)
The foregoing majority opinion relied upon BF Homes, Inc. vs. Court of Appeals (190 SCRA 262 [1990] per
Cruz, J.: First Division) where it was held that when a corporation threatened by bankruptcy is taken over by a receiver,
all the creditors should stand on an equal footing. Not anyone of them should be given preference by paying one or some
of them ahead of the others. This is precisely the reason for the suspension of all pending claims against the corporation
under receivership. Instead of creditors vexing the courts with suits against the distressed firm, they are directed
to file their claims with the receiver who is a duly appointed officer of the SEC (pp. 269-270; emphasis in the
original). This ruling is a reiteration of Alemars Sibal & Sons, Inc. vs. Hon. Jesus M. Elbinias (pp. 99-100;186 SCRA
94 [1990] per Fernan, C.J.: Third Division).
Taking the lead from Alemars Sibal & Sons, the Court also applied this same ruling in Araneta vs. Court of
Appeals (211 SCRA 390 [1992] per Nocon, J.: Second Division).
All the foregoing cases departed from the ruling of the Court in the much earlier case of PCIB vs. Court of
Appeals (172 SCRA 436 [1989] per Medialdea, J.: First Division) where the Court categorically ruled that:
SECs order for suspension of payments of Philfinance as well as for all actions of claims against Philfinance could only be
applied to claims of unsecured creditors. Such order can not extend to creditors holding a mortgage, pledge or any lien
on the property unless they give up the property, security or lien in favor of all the creditors of Philfinance. . .
(p. 440. Emphasis supplied)
Thus, in BPI vs. Court of Appeals (229 SCRA 223 [1994] per Bellosillo, J.: First Division) the Court explicitly
stated that . . . the doctrine in the PCIB Case has since been abrogated. In Alemars Sibal & Sons v. Elbinias, BF
Homes, Inc. v. Court of Appeals, Araneta v. Court of Appeals and RCBC v. Court of Appeals, we already ruled
that whenever a distressed corporation asks SEC for rehabilitation and suspension of payments, preferred creditors may
no longer assert such preference, but shall stand on equal footing with other creditors. . . (pp. 227-228).
It may be stressed, however, that of all the cases cited by Justice Bellosillo in BPI, which abandoned the Courts
ruling in PCIB, only the present case satisfies the constitutional requirement that no doctrine or principle of law laid down
by the court in a decision rendered en banc or in division may be modified or reversed except by the court sitting en
banc (Sec 4, Article VIII, 1987 Constitution). The rest were division decisions.
It behooves the Court, therefore, to settle the issue in this present resolution once and for all, and for the guidance of
the Bench and the Bar, the following rules of thumb shall are laid down:
1. All claims against corporations, partnerships, or associations that are pending before any court, tribunal, or
board, without distinction as to whether or not a creditor is secured or unsecured, shall be suspended effective upon the
appointment of a management committee, rehabilitation receiver, board, or body in accordance with the provisions of
Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is equally
suspended upon the appointment of a management committee, rehabilitation receiver, board, or body. In the event that
the assets of the corporation, partnership, or association are finally liquidated, however, secured and preferred credits
under the applicable provisions of the Civil Code will definitely have preference over unsecured ones.
In other words, once a management committee, rehabilitation receiver, board or body is appointed pursuant to P.D.
902-A, all actions for claims against a distressed corporation pending before any court, tribunal, board or body shall be
suspended accordingly.
This suspension shall not prejudice or render ineffective the status of a secured creditor as compared to a totally
unsecured creditor. P.D. 902-A does not state anything to this effect. What it merely provides is that all actions for
claims against the corporation, partnership or association shall be suspended. This should give the receiver a chance to
rehabilitate the corporation if there should still be a possibility for doing so. (This will be in consonance with Alemars, BF
Homes, Araneta, and RCBC insofar as enforcing liens by preferred creditors are concerned.)
However, in the event that rehabilitation is no longer feasible and claims against the distressed corporation would
eventually have to be settled, the secured creditors shall enjoy preference over the unsecured creditors (still maintaining
PCIB ruling), subject only to the provisions of the Civil Code on Concurrence and Preferences of Credit (our ruling in
State Investment House, Inc. vs. Court of Appeals, 277 SCRA 209 [1997]).
The majority ruling in our 1992 decision that preferred creditors of distressed corporations shall, in a way, stand on
equal footing with all other creditors, must be read and understood in the light of the foregoing rulings. All claims of both
a secured or unsecured creditor, without distinction on this score, are suspended once a management committee is
appointed. Secured creditors, in the meantime, shall not be allowed to assert such preference before the Securities and
Exchange Commission. It may be stressed, however, that this shall only take effect upon the appointment of a
management committee, rehabilitation receiver, board, or body, as opined in the dissent.
In fine, the Court grants the motion for reconsideration for the cogent reason that suspension of actions for claims
commences only from the time a management committee or receiver is appointed by the SEC. Petitioner RCBC,
therefore, could have rightfully, as it did, move for the extrajudicial foreclosure of its mortgage on October 26, 1984
because a management committee was not appointed by the SEC until March 18, 1985.
WHEREFORE, petitioners motion for reconsideration is hereby GRANTED. The decision dated September 14,
1992 is vacated, the decision of Intermediate Appellate Court in AC-G.R. No. SP-06313 REVERSED and SET
ASIDE, and the judgment of the Regional Trial Court National Capital Judicial Region, Branch 140, in Civil Case No.
10042 REINSTATED.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Puno, Vitug, Kapunan, Mendoza, Quisumbing, Pardo, Buena, Gonzaga-Reyes,
Ynares-Santiago, and De Leon, Jr., JJ., concur.
Panganiban, J., see separate opinion.
Purisima, J., no part.

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11/9/2017 G.R. No.

Today is Thursday, November 09, 2017

Republic of the Philippines

G.R. No. L-19190 November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

Recaredo Ma. Calvo for appellant.

Morse, in his work, Banks and Banking, section 125, says:

Today is Thursday, November 09, 2017

Republic of the Philippines

G.R. No. L-17474 October 25, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

D. T. Reyes, Liaison and Associates for petitioner-appellant.

After hearing, on 30 July 1956 the trial court render judgment —

(2) If he keeps it longer than the period stipulated . . .

1 Article 1933 of the Civil Code.

The Lawphil Project - Arellano Law Foundation

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

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK),

(c) the amount of P40,000.00 for attorneys fees; and

(d) the costs of the suit.

THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONERS BANK

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

CAROLYN M. GARCIA, G.R. No. 154878

PUNO, C.J., Chairperson,

RICA MARIE S. THIO,

March 16, 2007

3. P100,000.00 as and for attorneys fees; and

For lack of merit, [respondents] counterclaim is perforce dismissed.

With costs against [respondent].

The petition is impressed with merit.

[G.R. No. 146364. June 3, 2004]

COLITO T. PAJUYO, petitioner, vs. COURT OF APPEALS and EDDIE

The Ruling of the MTC

The Ruling of the RTC

The Ruling of the Court of Appeals

Pajuyo raises the following issues for resolution:

1) in GRANTING, instead of denying, Private Respondents Motion for an Extension of thirty

The Ruling of the Court

The Principle of Pari Delicto is not Applicable to Ejectment Cases

Possession is the only Issue for Resolution in an Ejectment Case

Pajuyo is Entitled to Physical Possession of the Disputed Property

Ruling on Possession Does not Bind Title to the Land in Dispute

Attorneys Fees and Rentals

[1] Under Rule 45 of the 1997 Rules of Court.

Today is Thursday, November 09, 2017

Republic of the Philippines

G.R. No. L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,

Mauricio Carlos for appellants.

Avanceña, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

The Lawphil Project - Arellano Law Foundation

Republic of the Philippines

BOBIE ROSE V. FRIAS, G.R. No. 155223

FLORA SAN DIEGO-SISON, Promulgated:

Petitioners motion for reconsideration was denied by the CA in a Resolution dated

(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE LIMITED TO

(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL DAMAGES.

We are not persuaded.

The Memorandum of Agreement executed between the petitioner and respondent on

We are not persuaded.

MA. ALICIA AUSTRIA-MARTINEZ

[G.R. No. 138677. February 12, 2002]