HERMOJINA ESTORES v.

SPOUSES ARTURO and LAURA SUPANGAN

G.R. No. 175139, April 18, 2012, J. Del Castillo

FACTS:

On October 3, 1993, petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan
entered into a Conditional Deed of Sale. Petitioner offered to sell, and respondent-spouses offered to buy,
a parcel of land located at Naic, Cavite for the sum of ₱4.7 million subject to the following conditions1:

(1) Vendor will secure approved clearance from DAR requirements; (2) Vendee shall be
informed as to the status of DAR clearance within 10 days upon signing of the documents;
(3) Vendor shall move the house within the subject lot owned by spouses [Magbago],
outside the perimeter of the subject property before full payment by the vendee; (4) a
forfeiture fee of 25% or downpayment if the vendee fails to complete payment; (5) vendee
has the right to demand return of full amount of down payment if the vendor fails to secure
the DAR requirements; (6) Vendee shall be informed of the approval by the LRC of the
boundaries and partition of the lots.

Petitioner still failed to comply with her obligation after almost seven years from the time of the execution
of the contract and notwithstanding payment of ₱3.5 million by the respondent-spouses. On September
27, 2000, respondent-spouses demanded the return of the amount of ₱3.5 million. Petitioner
acknowledged receipt of the ₱3.5 million and promised to return the same within 120 days with an
interest of 12% compounded annually shall be imposed on the ₱3.5 million.

Petitioner still failed to return the amount. Respondent-spouses filed a Complaint for sum of money
before the Malabon-RTC against herein petitioner and Roberto U. Arias (Arias) who allegedly acted as
petitioner’s agent. Respondet-spouses prayed for: P8,558,591.65 (P3.5M + 12% annual interest from
October 1993) against Arias.

Petitioner and Arias averred that they are willing to return the principal amount of ₱3.5 million but
without any interest as the same was not agreed upon. They argued that since the Conditional Deed of
Sale provided only for the return of the downpayment in case of breach, they cannot be held liable to pay
legal interest as well.

RTC; Pre-Trial Order: The principal amount of 3.5 million pesos should be returned. Only issue now is
the legal interest.

RTC: Respondent-spouses entitled to interest but only at the rate of 6% per annum starting Oct. 1, 1993.

CA: Affirmed. However, the same shall start to run only from September 27, 2000 when respondent-
spouses formally demanded the return of their money and not from October 1993 when the contract was
executed.

1 Mostly comprises of the vendor’s (Estores) obligations.

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Petitioner’s Contention: She is not bound to pay interest because the Conditional Deed of Sale only
provided for the return of the downpayment in case of failure to comply with her obligations.

Respondents’ Contention: The interest should be imposed because petitioner failed to return the amount
upon demand and had been using the ₱3.5 million for her benefit. Moreover, it is undisputed that
petitioner failed to perform her obligations.

ISSUE: WON the payment of interest is applicable in this case.

HELD: Yes, it is subject to interest. Interest may be imposed even in the absence of stipulation in the
contract.

Article 2210 of the Civil Code expressly provides that "interest may, in the discretion of the court, be
allowed upon damages awarded for breach of contract." In this case, there is no question that petitioner is
legally obligated to return the ₱3.5 million because of her failure to fulfill the obligation under the
Conditional Deed of Sale, despite demand.

Rate of Interest Applicable2

The interest at the rate of 12% is applicable. The general rule is that the applicable rate of interest "shall be
computed in accordance with the stipulation of the parties." Absent any stipulation, the applicable rate of
interest shall be 12% per annum "when the obligation arises out of a loan or a forbearance of money,
goods or credits. In other cases, it shall be six percent (6%)."

Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the return of
the money be considered as a forbearance of money which required payment of interest at the rate of
12%? Yes.

In Crismina Garments, Inc. v. Court of Appeals:

Forbearance was defined as a "contractual obligation of lender or creditor to refrain during

a given period of time, from requiring the borrower or debtor to repay a loan or debt then
due and payable." A loan where a debtor is given a period within which to pay a loan or
debt.

In this case, petitioner’s unwarranted withholding of the money which rightfully pertains to respondent-
spouses amounts to forbearance of money which can be considered as an involuntary loan.

WHEREFORE, the Petition for Review is DENIED.

2Not applicable as of July 1, 2013 because of the effectivity of CB Circular no. 799 which provides for a uniform rate of
interest at 6% per annum. (Cf: Dario Nacar v. Gallery Frames )
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 ILEANA DR. MACALINAO v. BANK OF THE PHILIPPINE ISLANDS
G.R. No. 175490, September 17, 2009, J. Velasco, Jr.

FACTS:

Ilena Macalinao (Petitioner) was an approved cardholder of BPI Mastercard.

She made some purchases through the use of the said credit card and defaulted in paying for said
purchases. She subsequently received a demand letter from BPI asking for the payment of PHP
141,518.34.

Terms and Conditions:

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 canceled, 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 thereof, shall be in the process of courts of the City of Makati or in
other courts at the option of BCC.

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.

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MeTC Ruling: Ruled in favor of BPI and ordered petitioner to pay the amount of P141,518.34 plus interest
and penalty charges of 2% per month.

RTC Ruling: Affirmed in toto the decision of the MeTC.

CA Ruling: Affirmed with modification: 126,706.70 plus interest charger of 3% per month from January
5,2004 until fully paid.

The amount of P141,517.34 already incorporated the interest rates in the said amount. Thus, the said
amount should not be made as basis in computing the total obligation of petitioner. MeTC erred in
modifying the amount of interest rate from 3% monthly to only 2% considering that petitioner freely
availed herself of the credit card facility offered by respondent to the general public.

Issue: WON 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 rate of interest.

Held:

No.

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 Chua v. Timan:

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 Central Bank. 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.

Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence,
courts may reduce the interest rate as reason and equity demand.

The same is true with respect to the penalty charge. Art. 1229 of the NCC provides:

The judge shall equitable 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 the case at bar, petitioner had already made partial payments to respondent, as indicated in her Billing
Statements.

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.
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Accordingly, petitioner Macalinao is ordered to pay respondent BPI 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.

DARIO NACAR v. GALLERY FRAMES AND/OR FELIPE BORDEY, JR.

G.R. No. 189871, August 13, 2013, J. Peralta.

FACTS:

Petitioner Dario Nacar filed a complaint for constructive dismissal before the NLRC against respondents
Gallery Frames (GF) and/or Felipe Bordey, Jr.

October 15, 1998, the Labor Arbiter rendered a decision in favor of petitioner and found that he was
dismissed form employment without a valid or just cause. The petitioner was awarded backwages and
separation pay in lieu of reinstatement in the amount of P158,919.92 (62,986.66 – Separation pay; 95,933.36
– backwages)

Respondents appealed to the NLRC, but was dismissed for lack of merit in the resolution. Subsequently
The Court of Appeals and Supreme Court denied the petition. Thus, an entry of judgment was later
issued certifying that the resolution became final and executory on May 27, 2002. Hence the case was
thereafter referred back to the LA.

After the finality of the decision of SC, Nacar filed a motion for re-computation before the LA alleging
that his backwages should be computed from the time of his illegal dismissal (January 24, 1997) until the
finality of the decision of SC (May 27, 2002) with interest.

The respondents filed a Motion to Quash Writ of Execution saying that after the decision becomes final
and executory, the same cannot be altered or amended anymore. But the LA denied the said motion and
an Alias Writ of Execution was issued on January 14, 2003 (to pay P471,320.31 in favor of the petitioner).

Respondents again appealed before the NLRC, which granted the appeal in favor of the respondents and
ordered the re-computation of the judgment award.

The records were again forwarded for re-computation where the judgment award of petitioner was
reassessed to be P147,560.19. On January 14, 2003, the LA issued an Alias Writ of Execution to satisfy the
judgment award that was due to the petitioner in the amout of P147,560.19, which the petitioner
eventually received.

The petitioner filed a manifestation and motion praying for the re-computation of the monetary award to
include the appropriate interests. But the LA granted only up to the amount of P11,459.73 on the ground
that it is October 15, 1998 decision that should be the reckoning point because Nacar did not appeal hence
as to him, that decision became final and executory.

ISSUE: WON the contention of the LA is correct

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HELD: NO. 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 does not violate the principle of immutability of final judgments

For backwages, the SC held that the award of backwages shall be computed from the date of illegal
dismissal until the date of the LA. But if the employer appeals, then the end date shall be extended until
the day when the appellate court’s decision shall become final. In this case, the backwages shall be
computed from the time the petitioner was illegally dismissed on January 24, 1997 up to May 27, 2002,
when the resolution of the SC became final and executory.

With regard to the interest, when the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest 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,
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 (BSP Circ No 799).

Hence, interest of 12% perannum of the total monetary awards, computed from May 27, 2002 to June
30,2013 and 6% per annum from July 1, 2013 until their full satisfaction

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 ECE REALTY and DEVELOPMENT, INC. v. HAYDYN HERNANDEZ
G.R. No. 212689, August 6, 2014, J. Reyes.

FACTS:

This is a Petition for Review on Certiorari from the Decision dated November 4, 2013 of the Court of
Appeals (CA) in CA-G.R. SP No. 120738, which affirmed with modification the Decision dated January 10,
2011 of the Office of the President (OP) in O.P. Case Number 09-D-152, entitled, "The Housing and Land
Use Regulatory Board and Haydyn Hernandez v. ECE Realty and Development Corporation."

On September 7, 2006, Haydyn Hernandez (respondent) filed a Complaint for specific performance, with
damages, against Emir Realty and Development Corporation (EMIR) and ECE Realty and Development
Incorporated (ECE) before the Housing and Land Use Regulatory Board Expanded National Capital
Region Field Office (HLURB-Regional Office).

The respondent alleged that ECE and EMIR, engaged in condominium development and
marketing,respectively, sold to him a 30-square meter condominium unit in the "Harrison Mansion"
described as Unit 808, Building B, Phase 1 (Unit 808).

On July 22, 1997 the respondent paid the reservation fee of ₱35,000.00, and on August 2, 1997 he paid
₱104,063.65 to complete the downpayment.

In the parties’ Contract to Sell dated November 5, 1997, EMIR and ECE promised that Unit 808 would be
ready for occupancy by December 31, 1999.

EMIR and ECE failed to deliver Unit 808 to the respondent on December 31, 1999, by which date he had
already paid a total of ₱452,551.65. Moreover, they discovered that Unit 808 contained only 26 sq m, not
30 sq m as contracted, thus, he asked for a corresponding reduction in the price by ₱120,000.00, based on
the price per sq m of ₱30,000.00. Instead, EMIR and ECE demanded that he settle all his amortizations in
arrears with interest. Sometime in 2005, the respondent learned that EMIR and ECE had sold Unit 808 to a
third party.

**If Unit 808 is no longer available, the respondent asked that EMIR and ECE reimburse him the amountof
₱452,551.65 he paid, plus legal interest.**

In their Answer with Counterclaim, EMIR and ECE sought to dismiss the complaint for lack of cause of
action, and to drop EMIR as defendant because it has no contractual relations with the respondent. They
alleged that the respondent unjustifiably refused to accept the turn-over of Unit 808, that he was duly
given a Grace Period Notice that he was in arrears in his monthly amortizations, but the respondentlet the
said period lapse without settling his past-due amortizations. Thus, ECE was compelled to cancel his
contract to sell, invoking RepublicAct No. 6552 (An Act to provide protection to buyers of Real Estate on
Installment Payments). EMIR and ECE also sought exemplary damages, attorney’s fees, and litigation
expenses.

HLURB: On May 12, 2008, the HLURB-Regional Office ordered EMIR and ECE to reimburse the
respondent the amount of ₱452,551.65, plus legal interest, from the filing of the complaint, and to pay the
respondent ₱50,000.00 as moral damages, ₱50,000.00 as attorney’s fees, and ₱50,000.00 as exemplary
damages.
Page 7 of 28
EMIR and ECE appealed to the HLURB Board of Commissioners, WHICH upheld the HLURB-Regional
Office but dropped EMIR as defendant. ECE appealed to the OP, but the OP in its dismissed ECE’s
appeal. OP denied ECE’s motion for reconsideration.

**On petition for review to the CA, ECE argued that the OP erred in affirming the rescission of the parties’
contract to sell and the order to refund the respondent’s payments with legal interest from filing of the
complaint, along with the award of moral and exemplary damages and attorney’s fees to the
respondent.**

ECE pointed out that the respondent did not ask for rescission and refund on account of the delay in the
delivery of Unit 808, but only for a reduction in the price. It further argued that interest may be imposed
only from finality of judgment. Insisting that it was not in bad faith, ECE sought the deletion of the award
for damages and attorney’s fees, saying also that they are excessive.

CA RULING: In upholding the OP, the CA cited Section 23 of Presidential Decree (P.D.) No. 957
(Regulating the Sale of Subdivision Lots and Condominiums, Providing for Penalties for Violations
Thereof), which reads:

Sec. 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a

subdivision or condominium project for the lot or unit he contracted to buy shall be
forfeited in favor of the owner or developer when the buyer, after due notice to the owner
or developer, desists from further payment due to the failure of the owner or developer to
develop the subdivision or condominium project according to the approved plans and
within the time limit for complying with the same. Such buyer may, at his option, be
reimbursed the total amount paid including amortization interests but excluding
delinquency interests, with interest thereon at the legal rate.

The CA found that the respondent duly notified ECE that he was suspending his subsequent
amortizations because of the delayed delivery of Unit 808.

The CA then ruled that under P.D. No. 957, when the owner of the subdivision or condominium fails to
develop the same according to the plan within the period agreed, the buyer, after notifying the owner,
may desist from paying the balance, and may demand the reimbursement of all that he has paid. ECE
failed to deliver Unit 808 on or before December 31, 1999, even as the said unit measured only 26 sq m,
not 30 sqm as agreed. As also found by the CA, by ECE’s own evidence Unit 808 was ready for inspection
only on June 28, 2002, or two and a half years after the agreed date of delivery. But the CA deleted the
award of moral and exemplary damages, finding that ECE did not act in bad faith, while sustaining the
award of ₱50,000.00 as attorney’s fees pursuant to Article 2208 (2) of the Civil Code, since ECE’s act or
omission compelled the respondent to litigate.

Issue: Whether or not the contention of ECE and EMIR is valid?

Held: No.

We resolve to affirm the CA decision with modification, by reducing the interest imposable after finality
from twelve percent (12%) to six percent (6%).

Page 8 of 28
Article 2209 of the New Civil Code provides that "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." There is no doubt that ECE incurred in delay in delivering the
subject condominium unit, for which reason the trial court was justified inawarding interest to the
respondent from the filing of his complaint. There being no stipulation as to interest, under Article 2209
the imposable rate is six percent (6%) by way of damages, following the guidelines laid down in the
landmark case of Eastern Shipping Lines v. Court of Appeals:

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, notconstituting a loan or forbearance of money, is breached, an interest on

the amount of damages awarded may be imposed at the discretion of the courtat the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable certainty. Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially(Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from
the date the judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding
a sum of money becomes final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of credit.

The term "forbearance," within the context of usury law, has been described as a contractual obligation ofa
lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to
repay the loan or debt then due and payable.

Since July 1, 2013, the rate of twelve percent (12%) per annum from finality of the judgment until
satisfaction has been brought back to six percent (6%). Section 1 of Resolution No. 796 of the Monetary
Board of the Bangko Sentral ng Pilipinas dated May 16, 2013 provides: "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." Thus, the rate of interest
to be imposed from finality of judgments is now back at six percent (6%), the rate provided in Article 2209
of the Civil Code.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. SP No. 120738 is AFFIRMED with
MODIFICATION. Petitioner ECE Realty and Development, Inc. is hereby ordered to pay respondent
Haydyn Hernandez the amount of ₱452,551.65 representing the total amount he paid to petitioner ECE
Page 9 of 28
Realty and Development Incorporated, plus six percent (6%) interest per annum from September 7, 2006
until finality hereof by way of actual and compensatory damages. From finality until full satisfaction, the
total amount due now compounded with interest due from September 7, 2006 up to finality, shall likewise
earn interest at six percent (6%) per annum until fully paid.

PHILIPPINE NATIONAL BANK v. THE HON. COURT OF APPEALS and AMBROSIO PADILLA
G.R. No. 88880, April 30, 1991, J. Grino-Aquino

FACTS:

In July 1982, the private respondent was granted by petitioner PNB, a credit line of 321.8 million, secured
by a real estate mortgage, for a term of two (2) years, with 18% interest per annum. Private respondent
executed in favor of the PNB a Credit Agreement, two (2) promissory notes in the amount of P900,000.00
each, and a Real Estate Mortgage Contract.

The above agreements provided that: …the interest rate may be increased during the life of the contract
"to such increase within the rate allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe” or "within the limits allowed by law"

On June 20, 1984, PNB informed the private respondent that his credit line "will expire on July 4, 1984,"
and "if renewal of the line for another year is intended, please submit soonest possible your request.”
Private respondent complied and requested that "the increase of the interest rate of my mortgage loan be
from 18% to 21%,” among others.

Subsequent exchanges between the private respondent and PNB showed that latter, over the objection
and numerous request of the private respondent, and without authority from the Monetary Board, within
a period of only four (4) months, increased the 18% interest rate on the private respondent’s loan
obligation three (3) times:

(a) to 32% in July 1984;

(b) to 41% in October 1984; and

(c) to 48% in November 1984.

Thus, private respondent filed in the RTC of Manila a complaint against PNB praying that judgment be
rendered declaring that the unilateral increase of interest rates not valid nor binding on plaintiff, and that
an adjustment of his interest rate from 18% to 24% is reasonable, fair and just.

RTC: …rendered judgment on April 14, 1986, dismissing the complaint because the increases of interest
were properly made.

CA: …reversed the RTC, hence, PNB’s recourse to this Court by a petition for review under Rule 45 of the
Rules of Court.

ISSUE: Whether or not the bank, within the term of the loan which it granted to the private respondent,
may unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased.
Page 10 of 28
HELD: No, those increases were null and void.

Although Sec. 2, P.D. No. 116 of1973, authorizes the Monetary Board (MB) to prescribe the maximum rate
or rates of interest for loans or renewal thereof and to change such rate or rates whenever warranted by
prevailing economic and social conditions, it expressly provides that "such changes shall not be made
oftener than once every twelve months.” If the MB itself was not authorized to make such changes oftener
than once a year, even less so may a bank which is subordinate to the Board.

CB Circular No. 905, Series of 1982 removed the Usury law ceiling on interest rates — but it did not
authorize PNB, to unilaterally and successively increase the agreed interest rates from 18% to 48% within
four (4) months, in violation of P.D. 116 which limits such changes to "once every twelve months.”

While the private respondent-debtor did agree in the Deed of Real Estate Mortgage that the interest rate
may be increased during the life of the contract "to such increase within the rate allowed by law, as the
Board of Directors of the MORTGAGEE may prescribe” or "within the limits allowed by law", no law was
ever passed in July to November 1984 increasing the interest rates on loans or renewals thereof to 32%,
41% and 48%, and no documents were executed and delivered by the debtor to effectuate the increases.
The PNB relied on its own Board Resolution No. 681, PNB Circular No. 40-79-84 and 40-129-84, but those
resolution and circulars are neither laws nor resolutions of the Monetary Board.

In Banco Filipino Savings and Mortgage Bank v. Navarro (1987), this Court disauthorized the bank from
raising the interest rate despite an escalation clause in the loan agreement authorizing Banco Filipino "to
correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in
the event a law should be enacted increasing the lawful rates of interest that may be charged on this
particular kind of loan.” The bank relied on Sec. 3 of CB Circular No. 494 dated July 1, 1976 which
provided that "the maximum rate of interest, including commissions premiums, fees and other charges on
loans with a maturity of more than 730 days by banking institution . . . shall be 19%.” The Court
disallowed the increase for the simple reason that said "Circular No. 494, although it has the effect of law
is not a law." This Court held:

"It is now clear that from March 17, 1980, escalation clauses to be valid should provide:

(1) that there can be an increase in interest if increased by law or by the Monetary
Board; and

(2) in order for such stipulation to be valid, it must include a provision for reduction of
the stipulated interest ‘in the event that the applicable maximum rate of interest is reduced
by law or by the Monetary Board.’"

Besides violating P.D. 116, the unilateral action of the PNB in increasing the interest rate on the private
respondent’s loan, violated the mutuality of contracts ordained in Article 1308 of the civil Code: "ART.
1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will
of one of them.”

Page 11 of 28
PNB’s successive increases of the interest rate on the private respondent’s loan, over the latter’s protest,
were arbitrary as they violated an express provision of the Credit Agreement Section 9.01 that its terms
"may be amended only by an instrument in writing signed by the party to be bound as burdened by such
amendment." The increases imposed by PNB also contravene Art. 1956 of the Civil Code which provides
that "no interest shall be due unless it has been expressly stipulated in writing."

Page 12 of 28
SPOUSES MARIANO and GILDA FLORENDO v. COURT OF APPEALS and LAND BANK OF THE
PHILIPPINES
G.R. No. 101771, December 17, 1996, J. Panganiban

FACTS:

Florendo was an employee of Landbank of the Philippines (LBP) from May 17, 1976 until August 16, 1984
when she voluntarily resigned. Before her resignation, she applied for a housing loan payable in 25 years
from LBP’s Provident Fund. Both parties executed a Housing Loan Agreement and constituted a Real
Estate Mortgage and Promissory Note. After almost a year from her resignation, LBP increased the
interest rate on the loan from 9% per annum to 17% as per LBP’s ManCom Resolution No. 85-08 and in a
PF (Provident Fund) Memorandum Circular (No. 85-08, Series of 1985.) LBP informed Florendo and the
latter protested the increase. LBP kept on demanding Florendo to pay the increased interest or the new
monthly installments based on the increased interest rate. Florendo maintained that such increase is
unjustified and unlawful. Nevertheless, Florendo just disregarded the increased rate and continued to pay
the obligation under the original contract.

RTC: Ruled in favor of LBP, and held that the bank was vested with authority to increase the interest rate
(and the corresponding monthly amortizations) pursuant to said escalation provisions in the housing loan
agreement and the mortgage contract.

CA: Affirmed RTC’s ruling.

ISSUE: WON the LBP have a valid and legal basis to impose an increased interest rate on the housing
loan.

HELD: The increased rate imposed or charged is not valid.

In Banco Filipino, this Court, x x x, disallowed the bank from increasing the interest rate on the subject
loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to
“correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in
the event the law should be enacted increasing the lawful rates of interest that may be charged on this
particular kind of loan.”

In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29,
1973. In the light of the CB issuances in force at that time, respondent bank was fully aware that it could
have imposed an interest higher than 9% per annum rate for the housing loans of its employees, but it did
not. In the subject loan, the respondent bank knowingly agreed that the interest rate on the petitioner’s
loans shall remain at 9% unless a CB issuance is passed authorizing an increase (or decrease) in the rate on
such employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, as far as the
parties were concerned, all other onerous factors, such as employee resignations, which could have been
used to trigger the application of the escalation clause were considered barred or waived.

The unilateral determination and imposition of increased interest rates by the herein respondent bank is
obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code.

Page 13 of 28
The Court understands LBP’s position that the concessional interest rate was really intended as a means
to remunerate its employees and thus an escalation clause due to resignation would have been a valid
stipulation. But no such stipulation was in fact made, and thus escalation provision could not be legally
applied and enforced against herein petitioners.

Page 14 of 28
 SPOUSES IGNACIO F. JUICO and ALICE P. JUICO v. CHINA BANKING CORPORATION
G.R. No. 187678, April 10, 2013, J. Villarama, Jr.

FACTS:

Spouses Ignacio F. Juico and Alice P. Juico obtained a loan from China Banking Corporation as evidenced
by two Promissory Notes. The loan was secured by a Real Estate Mortgage over the spouses Juico’s
property located at White Plains, Quezon City. When Spouses Juico failed to pay the monthly
amortizations due, China Banking demanded the full payment of the outstanding balance with accrued
monthly interests, which totaled P19,201,776.63 representing the principal, interests, penalties and
attorney’s fees. Thereafter, the mortgaged property was sold at public auction, with respondent as highest
bidder. China Banking finally sent a demand letter to them for the payment of the amount of deficiency
after applying proceeds of the foreclosure sale to the mortgage debt but they remained unheeded,
prompting China Banking to file a collection suit in the trial court. When asked if there was any written
authority from the spouses to increase the interest rate unilaterally, China Banking answered that they
signed a promissory note indicating that they agreed to pay interest at the prevailing rate. The interest
rate was increased from 15% to as high as 24.50%.

Spouses Juico interposed that the complaint has no cause of action considering the principal of the loan
was already when the mortgaged property was extrajudicially foreclosed and sold and even assuming
there is a cause of action, such deficiency cannot be enforced because it consists only of the penalty
and/or compounded interest on the accrued interest which is generally not favored under the Civil Code.
Ultimately, Ignacio Juico avers that the interest that the interest rates imposed by China Banking are not
valid as they were not by virtue of any law or BSP regulation or any regulation that was passed by an
appropriate government entity, thereby insisting that the interest rates were unilaterally imposed by the
bank and thus violate the principle of mutuality of contracts. They argue that the escalation clause in the
promissory notes does not give the bank the unbridled authority to increase the interest rate unilaterally.
Any change must be mutually agreed upon.

RTC: ruled in favor of the bank.

CA: affirmed and held that having signed the promissory notes, Spouses Juico are bound by the
stipulations contained therein.

ISSUE: W/N the interest rates imposed by the bank are valid

HELD: No. The matter at hand involves escalation clauses which refer to stipulations allowing an increase
in the interest rate agreed upon by the contracting parties. It has long recognized that there is nothing
inherently wrong with escalation clauses which are valid stipulations in commercial contracts to maintain
fiscal stability and to retain the value of money in long term contracts. Hence, such stipulations are not
void per se. Nevertheless, like the one herein, escalation clause is considered void because it grants the
bank the power to impose an increased rate of interest without a written notice to Spouses Juico and their
written consent.

Page 15 of 28
It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes
an increase in the stipulated rate of interest without the express conformity of the debtor. Modifications in
the rate of interest for loans pursuant to an escalation clause must be the result of an agreement between
the parties. Unless such important change in the contract terms is mutually agreed upon, it has no binding
effect.

While a ceiling on interest rates under the Usury Law was already lifted under Central Bank Circular No.
905, nothing therein "grants lenders carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their assets." The bank’s monthly telephone
calls to them advising the prevailing interest rates would not suffice. A detailed billing statement based
on the new imposed interest with corresponding computation of the total debt should have been
provided to enable them to make an informed decision. An appropriate form must also be signed by
Spouses Juico to indicate their conformity to the new rates. For indeed, one-sided impositions do not have
the force of law between the parties, because such impositions are not based on the parties’ essential
equality. Any contract appearing to be heavily weighed in favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which
is left solely to the will of one of the parties, is likewise, invalid.

Based on jurisprudence, therefore, these points must be considered by creditors and debtors in the
drafting of valid escalation clauses:

Firstly, as a matter of equity and consistent with P.D. No. 1684, the escalation clause must be paired with
a de-escalation clause.

Secondly, so as not to violate the principle of mutuality, the escalation must be pegged to the prevailing
market rates, and not merely make a generalized reference to “any increase or decrease in the interest
rate%” in the event a law or a Central Bank regulation is passed.

Thirdly, consistent with the nature of contracts, the proposed modification must be the result of an
agreement between the parties. In this way, our credit system would be facilitated by firm loan provisions
that not only aid fiscal stability, but also avoid numerous disputes and litigations between creditors and
debtors.

In the absence of consent on the part of Spouses Juico to the modifications in the interest rates, the
adjusted rates cannot bind them. Hence, the Court considered as invalid the interest rates in excess of
15%, the rate charged for the first year. The Court ordered Spouses Juico to pay jointly and severally
China Banking P4,761,865.79 representing the amount of deficiency inclusive of interest, penalty charge
and attorney’s fees. Said amount shall bear interest at 12% per annum, reckoned from the time of the
filing of the complaint until its full satisfaction.

Page 16 of 28
 ART. 1962 - Concept

INTEGRATED REALTY CORPORATION and RAUL L. SANTOS v. PHILIPPINE NATIONAL

BANK, OVERSEAS BANK OF MANILA and THE HON. COURT OF APPEALS
G.R. No. L-60705, June 28, 1989, J. Regalado

OVERSEAS BANK OF MANILA v. COURT OF APPEALS, INTEGRATED REALTY CORPORATION,

and RAUL L. SANTOS
G.R. No. L-60907, June 28, 1989, J. Regalado

FACTS:

Raul L. Santos made two time deposits with defendant Overeas Bank of Manila (OBM) in the amount of
P500,000 and P200,000 at separate dates. Integrated Realty Corporation (IRC), thru its President—Raul L.
Santos, applied for a loan and/or credit line with plaintiff PNB. To secure the said loan, Santos executed a
Deed of Assignment of the two time deposits in favor of plaintiff PNB. Defendant OBM gave its
conformity to the assignment. On the same date, defendant IRC, thru its President Raul L. Santos, also
executed a Deed of Conformity to Loan Conditions. The defendant OBM, after the due dates of the time
deposit certificates, did not pay plaintiff PNB.

PNB demanded payment from IRC and Raul L. Santos and from OBM. IRC and Raul L. Santos replied
that the obligation (loan) of IRC was deemed paid with the irrevocable assignment of the time deposit
certificates. PNB filed a complaint to collect from IRC and Santos the loan with interest as well as
attorney’s fees. It impleaded OBM as a defendant to compel it to redeem and pay to it Santos’ time
deposit certificates with interest, plus exemplary and corrective damages, attorney’s fees, and costs.

IRC and Santos alleged that PNB has no cause of action against them because their obligation to PNB was
fully paid or extinguished upon the ‘irrevocable’ assignment of the time deposit certificates, and that they
are not answerable for the insolvency of OBM and that OBM acted fraudulently in refusing to pay the
time deposit certificates to PNB resulting in the filing of the suit against them by PNB, and that, therefore,
OBM should pay them whatever amount they may be ordered by the court to pay PNB with interest.

On the other hand, OBM acknowledges the Certificates of time deposit that it issued to Santos and
admitting its failure to pay the same due to its distressed financial situation. It alleged that by reason of its
state of insolvency its operations have been suspended by the Central Bank, the time deposits ceased to
earn interest from that date; that it may not give preference to any depositor or creditor; and that payment
of the plaintiffs claim is prohibited.

ISSUE: Whether or not OBM should be held liable for interests on the time deposits of IRC and Santos
from the time it ceased operations until it resumed its business

HELD: No. The obligation to pay interest on the deposit ceases during the moment that the bank was not
allowed by the Central Bank to operate.

Page 17 of 28
Distinction must be made between the interest which the deposits should earn from their existence until
the bank ceased to operate, and that which they may earn from the time the bank’s operations were
stopped until the date of payment of the deposits. As to the first-class, it should be paid because such
interest has been earned in the ordinary course of the bank’s business and before the latter has been
declared in a state of liquidation. Moreover, the bank being authorized by law to make use of the deposits
with the limitation stated, to invest the same in its business and other operations, it may be presumed that
it bound itself to pay interest to the depositors as in fact it paid interest prior to the dates of the said
claims. As to the interest which may be charged from the date the bank ceased to do business because it
was declared in a state of liquidation, said interest should not be paid.

What enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of
its operation it is able to generate funds to cover the payment of such interest. Unless a bank can lend
money, engage in international transactions, acquire foreclosed mortgaged properties or their proceeds
and generally engage in other banking and financing activities from which it can derive income, it is
inconceivable how it can carry on as a depository obligated to pay stipulated interest. Conventional
wisdom dictates this inexorable fair and just conclusion. And it can be said that all who deposit money in
banks are aware of such a simple economic proposition. Consequently, it should be deemed read into
every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment
the operation of the bank is completely suspended by the duly constituted authority, the Central Bank.

Page 18 of 28
 BANK OF THE PHILIPPINE ISLANDS v. THE INTERMEDIATE APPELLATE COURT and
ZSHORNACK
G.R. No. L-66826, August 19, 1988, J. Cortes

FACTS:

Rizaldy Zshornack filed four causes of action against COMTRUST (now absorbed by the BPI). CFI ruled
in his favour for the first 3 causes. On appeal, IAC dismissed the third cause of action.

In the first cause of action, Zshornack maintained a dollar savings and a peso current account with
Comtrust. An application for a dollar draft was accomplished by Assistant Branch Manager Garcia
payable to Dizon for $1000. There was no indication of the name of the purchaser in the dollar draft.
When Zshornack noticed the the withdrawal, he demanded an explanation. Comtrust stated that the
withdrawal was given to his brother, Ernesto. On appeal, Comtrust maintains :

1. per value was given to the brother which he encashed and

2. withdrawal was made pursuant to the authority given by Zhornack.

In the second cause of action, Zshornack entrusted to Comtrust $3000 cash for safekeeping. Despite
demands, Comtrust refused to return the money. Comtrust averred that the money was credited in the
peso current account at prevailing exchange rates.

ISSUE: Whether the contract between petitioner and respondent bank is a deposit.

HELD: YES. It is a contract of deposit.

Comtrust failed to show how the transaction involving the check is related to the transaction involving
the dollar draft in favour of Dizon financed by the account. They are two separate transactions. There is
no evidence that the withdrawal was made in pursuant to the agreement.

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. Parties did not intend to sell
the US dollars to the Central Bank within one day from receipt.

The above arrangement is that contract of deposit defined under NCC 1962 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.

However, the contract is covered by Central Bank Circular No. 20 on restrictions on gold and Foreign
exchange transactions. Safekeeping of foreign currency without selling them to the Central Bank is a
prohibited transaction. Pursuant to NCC 5, it is void. Hence, Zhornack, under the principal of in pari
delicto, cannot recover.
Page 19 of 28
SC modified the decision of the IAC, ordered BPI to restore the dollar savings account $1000, to earn
interest rate fixed by the bank from Oct 27, 1975 + pay damages P8k.

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.

Page 20 of 28
 ART. 1980 – Bank Deposits are Loans

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS v. THE CITY FISCAL
OF MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and
CLEMENT DAVID
G.R. No. L-60033, April 4, 1984, C.J. Makasiar, Actg.

FACTS:

David invested with the Nation Savings and Loan Association (NSLA) the sum of P1,145,546.20 on nine
deposits, he said he was induced into making the aforestated investments by Robert Marshall an
Australian national who was allegedly a close associate of petitioner Guingona Jr. (then NSLA President),
petitioner Martin (then NSLA Executive Vice-President of NSLA) and petitioner Santos (then NSLA
General Manager).

NSLA was placed under receivership on March 21, 1981. David filed claims therewith for his investments
and those of his sister. Petitioners Guingona and Martin, upon the request of David, assumed the
obligation of the bank to David by executing on June 17, 1981 a joint promissory note in favor of David
acknowledging an indebtedness. On July 17, 1981, petitioners Guingona and Martin agreed to divide the
said indebtedness, and petitioner Guingona executed another promissory note antedated to June 17, 1981
whereby he personally acknowledged said indebtedness.

On July 22, 1981 David received a report from the Central Bank that only P305,821.92 of those investments
were entered in the records of NSLA. David filed I.S. No. 81-31938 in the Office of the City Fiscal, which
case was assigned to Asst. City Fiscal Lota for preliminary investigation. David charged petitioners with
estafa and violation of Central Bank Circular No. 364 and related regulations on foreign exchange
transactions.

Petitioners moved to dismiss the charges against them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota denied the motion to
dismiss. But, after the presentation of David's principal witness, petitioners filed this petition for
prohibition and injunction because (a) the production of the Promisory Notes, Banker's Acceptance,
Certificates of Time Deposits and Savings Account allegedly showed that the transactions between David
and NSLA were simple loans, i.e., civil obligations on the part of NSLA which were novated when
Guingona, Jr. and Martin assumed them; and (b) David's principal witness allegedly testified that the
duplicate originals of the aforesaid instruments of indebtedness were all on file with NSLA, contrary to
David's claim that some of his investments were not record

A TRO was issued ordering the respondents to refrain from proceeding with the preliminary
investigation in I.S. No. 81-31938.

ISSUE: Whether public respondents acted without jurisdiction when they investigated the charges (estafa
and violation of CB Circular No. 364 and related regulations regarding foreign exchange transactions)
subject matter of I.S. No. 81-31938.?

Page 21 of 28
HELD: It must be pointed out that when David invested his money on nine deposits and savings deposits
with NSLA, the contract that was perfected was a contract of simple loan or mutuum and not a contract of
deposit. Thus, Article 1980 of the New Civil Code provides that:têñ.£îhqwâ£

Article 1980. Fixed, savings, and current deposits of-money in banks and similar institutions shall be
governed by the provisions concerning simple loan.

Hence, the relationship between the private respondent and the Nation Savings and Loan Association is
that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the
Bank upon the perfection of the contract and it can make use of the amount deposited for its banking
operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the
obligation to return the amount deposited, it has, however, no obligation to return or deliver the same
money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute
estafa through misappropriation punishable under Article 315, par. L(b) of the Revised Penal Code, but it
will only give rise to civil liability over which the public respondents have no- jurisdiction.

But even granting that the failure of the bank to pay the time and savings deposits of private respondent
David would constitute a violation of paragraph 1(b) of Article 315 of the Revised Penal Code,
nevertheless any incipient criminal liability was deemed avoided, because when the aforesaid bank was
placed under receivership by the Central Bank, petitioners Guingona and Martin assumed the obligation
of the bank to private respondent David, thereby resulting in the novation of the original contractual
obligation arising from deposit into a contract of loan and converting the original trust relation between
the bank and private respondent David into an ordinary debtor-creditor relation between the petitioners
and private respondent. Consequently, the failure of the bank or petitioners Guingona and Martin to pay
the deposits of private respondent would not constitute a breach of trust but would merely be a failure to
pay the obligation as a debtor.

Moreover, while it is true that novation does not extinguish criminal liability, it may however, prevent the
rise of criminal liability as long as it occurs prior to the filing of the criminal information in court

In the case at bar, there is no dispute that petitioners Guingona and Martin executed a promissory note on
June 17, 1981 assuming the obligation of the bank to private respondent David; while the criminal
complaint for estafa was filed on December 23, 1981 with the Office of the City Fiscal. Hence, it is clear
that novation occurred long before the filing of the criminal complaint with the Office of the City Fiscal.

Consequently, as aforestated, any incipient criminal liability would be avoided but there will still be a
civil liability on the part of petitioners Guingona and Martin to pay the assumed obligation.

Page 22 of 28
BANK OF THE PHILIPPINE ISLANDS and GRACE ROMERO v. COURT OF APPEALS and EDVIN
F. REYES
G.R. No. 116792, March 29, 1996, J. Puno

FACTS:

Private respondent Edvin F. Reyes opened Savings Account at petitioner Bank of the Philippine Islands
(BPI) Cubao, Shopping Center Branch. It is a joint "AND/OR" account with his wife, Sonia S. Reyes.

Private respondent also held a joint "AND/OR" Savings Account with his grandmother, Emeteria M.
Fernandez, opened on February 11, 1986 at the same BPI branch. He regularly deposited in this account
the U.S. Treasury Warrants payable to the order of Emeteria M. Fernandez as her monthly pension.

Emeteria M. Fernandez died on December 28, 1989 without the knowledge of the U.S. Treasury
Department. She was still sent U.S. Treasury Warrant No. 21667302 dated January 1, 1990 in the amount
of U.S. $377.00 or P10,556.00. On January 4, 1990, private respondent deposited the said U.S. treasury
check of Fernandez in his Savings Account with his wife. The U.S. Veterans Administration Office in
Manila conditionally cleared the check. The check was then sent to the United States for further clearing.

Two months after or on March 8, 1990, private respondent closed the Savings Account with his
grandmother and transferred its funds amounting to P13,112.91 to Savings Account No. 3 185-0172-56, the
joint account with his wife.

On January 16, 1991, U.S. Treasury Warrant No. 21667302 was dishonored as it was discovered that
Fernandez died three (3) days prior to its issuance. The U.S. Department of Treasury requested petitioner
bank for a refund. For the first time petitioner bank came to know of the death of Fernandez.

On February 19, 1991, private respondent received a PT & T urgent telegram from petitioner bank
requesting him to contact Manager Grace S. Romero or Assistant Manager Carmen Bernardo. When he
called up the bank, he was informed that the treasury check was the subject of a claim by Citibank NA,
correspondent of petitioner bank. He assured petitioners that he would drop by the bank to look into the
matter. He also verbally authorized them to debit from his other joint account the amount stated in the
dishonored U.S. Treasury Warrant. On the same day, petitioner bank debited the amount of P10,556.00
from private respondent’s Savings Account No. 3185-0172-56.

On February 21, 1991, private respondent with his lawyer Humphrey Tumaneng visited the petitioner
bank and the refund documents were shown to them. Surprisingly, private respondent demanded from
petitioner bank restitution of the debited amount. He claimed that because of the debit, he failed to
withdraw his money when he needed them. He then filed a suit for Damages against petitioners before
the Regional Trial Court of Quezon City, Branch 79.

Petitioners contested the complaint and counter-claimed for moral and exemplary damages. By way of
Special and Affirmative Defense, they averred that private respondent gave them his express verbal
authorization to debit the questioned amount. They claimed that private respondent later refused to
execute a written authority.

Page 23 of 28
ISSUE: Whether or legal compensation is applicable in the case at bar

HELD:

Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other. Article 1290 of the Civil Code provides that "when all the requisites mentioned in Article 1279 are
present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent
amount, even though the creditors and debtors are not aware of the compensation." Legal compensation
operates even against the will of the interested parties and even without the consent of them. Since this
compensation takes place ipso jure, its effects arise on the very day on which all its requisites concur.
When used as a defense, it retroacts to the date when its requisites are fulfilled.

Article 1279 states that in order that compensation may be proper, it is necessary:

"(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be
of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor."

The elements of legal compensation are all present in the case at bar. The obligors bound principally are at
the same time creditors of each other. Petitioner bank stands as a debtor of the private respondent, a
depositor. At the same time, said bank is the creditor of the private respondent with respect to the
dishonored U.S. Treasury Warrant which the latter illegally transferred to his joint account. The debts
involved consist of a sum of money. They are due, liquidated, and demandable. They are not claimed by a
third person.

Page 24 of 28
 CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS FINANCE CORPORATION,
doing business under the name and style of FNCB Finance v. MODESTA R. SABENIANO
G.R. No. 156132, October 16, 2006, J. Chico-Nazario

FACTS:

Modesta Sabeniano is a client of Citibank and FNCB Finance. On February 1978, Sabeniano obtained a
loan of Php 200,000 from Citibank. This loan was followed with several other loans – some were paid,
while some were not. Those that were not paid upon maturity were rolled over, reflecting a total unpaid
loan of Php 1,069,847.40 as of September 1979.

These loans were secured by Sabeniano’s money market placements with FNCB Finance through a Deed
of Assignment plus a Declaration of Pledge which states that all present and future fiduciary placements
held in her personal and/or joint name with Citibank Switzerland, will secure all claims that Citibank
may have or, in the future, acquire against her.

The Deeds of Assignment were duly notarized, while the Declaration of Pledge was not notarized and
Citibank’s copy was undated, while that of Sabeniano bore the date, September 24, 1979.

Since Sabeniano failed to pay her obligations to Citibank, the latter sent demand letters to request
payment. Her total unpaid loan initially amounted to Php 2,123,843.20 (inclusive of interests).

Still failing to pay, Citibank executed the Deeds of Assignment and used the proceeds of Sabeniano’s
money market placement from FNCB Finance which totaled Php 1,022,916.66 and her deposits with
Citibank which totaled Php 31,079.14 to set-off her loan. This reduced the unpaid balance to Php
1,069,847.40 as previously mentioned. Since the loan remains unpaid, Citibank proceeded to execute the
Declaration of Pledge and remitted a total of $149,632.99 from Sabeniano’s Citibank-Geneva accounts to
off-set the loan.

Sabeniano then filed a complaint against Citibank for damages and specific performance (for proper
accounting and return of the remitted proceeds from her personal accounts). She also contended that the
proceeds of 2 promissory notes (PN) from her money market placements with Citibank were rolled over
or reinvested into the petitioner bank, and these should also be returned to her.

Regarding the execution of the pledge, the RTC declared this illegal, null and void. Citibank was ordered
to return the $149,632.99 to Sabeniano’s Citibank-Geneva account with a legal interest of 12% per annum.
The RTC also ordered Sabeniano to pay her outstanding loan to Citibank without interests and penalty
charges.

Both parties appealed to the CA which affirmed the RTC’s decision, but further ruled entirely in favor of
Sabeniano – holding that Citibank failed to establish her indebtedness and that all the executed deeds
should be returned to her account. The case has now reached the Supreme Court.

ISSUE: Whether or not there exists a loan transaction from the bank transactions with Citibank

Page 25 of 28
HELD: YES.

After going through the testimonial and documentary evidence presented by both sides to this case, it is
this Court's assessment that respondent did indeed have outstanding loans with petitioner Citibank at the
time it effected the off-set or compensation on 25 July 1979 (using respondent's savings deposit with
petitioner Citibank), 5 September 1979 (using the proceeds of respondent's money market placements
with petitioner FNCB Finance) and 26 October 1979 (using respondent's dollar accounts remitted from
Citibank-Geneva). The totality of petitioners' evidence as to the existence of the said loans preponderates
over respondent's. Preponderant evidence means that, as a whole, the evidence adduced by one side
outweighs that of the adverse party.

This Court finds applicable herein the presumptions that private transactions have been fair and regular,
and that the ordinary course of business has been followed. There is no question that the loan transaction
between petitioner Citibank and the respondent is a private transaction. The transactions revolving
around the crossed MCs – from their issuance by petitioner Citibank to respondent as payment of the
proceeds of her loans; to its deposit in respondent's accounts with several different banks; to the clearing
of the MCs by an independent clearing house; and finally, to the payment of the MCs by petitioner
Citibank as the drawee bank of the said checks – are all private transactions which shall be presumed to
have been fair and regular to all the parties concerned. In addition, the banks involved in the foregoing
transactions are also presumed to have followed the ordinary course of business in the acceptance of the
crossed MCs for deposit in respondent's accounts, submitting them for clearing, and their eventual
payment and cancellation.

The afore-stated presumptions are disputable, meaning, they are satisfactory if uncontradicted, but may
be contradicted and overcome by other evidence. Respondent, however, was unable to present sufficient
and credible evidence to dispute these presumptions.

It should be recalled that out of the nine MCs presented by petitioner Citibank, respondent admitted to
receiving one as proceeds of a loan (MC No. 228270), denied receiving two (MCs No. 220701 and 226467),
and admitted to receiving all the rest, but not as proceeds of her loans, but as return on the principal
amounts and interests from her money market placements.

Respondent admitted receiving MC No. 228270 representing the proceeds of her loan covered by PN No.
34534. Although the principal amount of the loan is ₱150,000.00, respondent only received ₱146,312.50,
because the interest and handling fee on the loan transaction were already deducted therefrom. Stamps
and notations at the back of MC No. 228270 reveal that it was deposited at the Bank of the Philippine
Islands (BPI), Cubao Branch, in Account No. 0123-0572-28. The check also bore the signature of
respondent at the back. And, although respondent would later admit that she did sign PN No. 34534 and
received MC No. 228270 as proceeds of the loan extended to her by petitioner Citibank, she contradicted
herself when, in an earlier testimony, she claimed that PN No. 34534 was among the PNs she executed as
simulated loans with petitioner Citibank.

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Respondent denied ever receiving MCs No. 220701 and 226467. However, considering that the said checks
were crossed for payee's account only, and that they were actually deposited, cleared, and paid, then the
presumption would be that the said checks were properly deposited to the account of respondent, who
was clearly named the payee in the checks. Respondent's bare allegations that she did not receive the two
checks fail to convince this Court, for to sustain her, would be for this Court to conclude that an
irregularity had occurred somewhere from the time of the issuance of the said checks, to their deposit,
clearance, and payment, and which would have involved not only petitioner Citibank, but also BPI, which
accepted the checks for deposit, and the Central Bank of the Philippines, which cleared the checks. It falls
upon the respondent to overcome or dispute the presumption that the crossed checks were issued,
accepted for deposit, cleared, and paid for by the banks involved following the ordinary course of their
business.

Respondent's defense of simulated loans to escape liability for the second set of PNs is truly a novel
one.1âwphi1 It is regrettable, however, that she was unable to substantiate the same. Yet again,
respondent's version of events is totally based on her own uncorroborated testimony. The notations on
the second set of PNs, that they were non-negotiable simulated notes, were admittedly made by
respondent herself and were, thus, self-serving. Equally self-serving was respondent's letter, written on 7
October 1985, or more than six years after the execution of the second set of PNs, in which she demanded
return of the simulated or fictitious PNs, together with the letters relating thereto, which Mr. Tan
purportedly asked her to execute. Respondent further failed to present any proof of her alleged loan
application with the DBP, and of any circumstance or correspondence wherein the simulated or fictitious
PNs were indeed used for their supposed purpose.

In contrast, petitioner Citibank, as supported by the testimonies of its officers and available
documentation, consistently treated the said PNs as regular loans – accepted, approved, and paid in the
ordinary course of its business.

The PNs executed by the respondent in favor of petitioner Citibank to cover her loans were duly-filled out
and signed, including the disclosure statement found at the back of the said PNs, in adherence to the
Central Bank requirement to disclose the full finance charges to a loan granted to borrowers.

Ms. Cristina Dondoyano, who worked at petitioner Citibank as a loan processor, was responsible for
booking respondent's loans. Booking the loans means recording it in the General Ledger. She explained
the procedure for booking loans, as follows: The account officer, in the Marketing Department, deals
directly with the clients who wish to borrow money from petitioner Citibank. The Marketing Department
will forward a loan booking checklist, together with the borrowing client's PNs and other supporting
documents, to the loan pre-processor, who will check whether the details in the loan booking checklist are
the same as those in the PNs. The documents are then sent to Signature Control for verification of the
client's signature in the PNs, after which, they are returned to the loan pre-processor, to be forwarded
finally to the loan processor. The loan processor shall book the loan in the General Ledger, indicating
therein the client name, loan amount, interest rate, maturity date, and the corresponding PN number.
Since she booked respondent's loans personally, Ms. Dondoyano testified that she saw the original PNs.
In 1986, Atty. Fernandez of petitioner Citibank requested her to prepare an accounting of respondent's

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loans, which she did, and which was presented as Exhibit "120" for the petitioners. The figures from the
said exhibit were culled from the bookings in the General Ledger, a fact which respondent's counsel was
even willing to stipulate

In consideration of the foregoing discussion, this Court finds that the preponderance of evidence supports
the existence of the respondent's loans, in the principal sum of ₱1,920,000.00, as of 5 September 1979.

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