1
1985, the third hearing date, the bank moved, and the
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 Ll
ana 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
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 on 20 October 1989, it rendered its decision,
[1]
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
"3. To pay the costs of the suit.[2]
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 month
penalty charge and 10% attorney's fees. In its
decision[3] 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
parties filed their respective motions for
reconsideration.[4] 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 a
re 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;
2. The sum equivalent to 10% of the total
amount of the indebtedness as and for
attorneys fees.[5]
On 16 November 1998, petitioners filed an
omnibus motion for reconsideration and to admit
newly discovered evidence,[6] alleging that while the
case was pending before the trial court,
petitioner Tolomeo Ligutan and his
2
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 extrajudiciallyforeclosed 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 appeal and when the first motion
for reconsideration was filed.[7]
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 foreclosure of the
mortgage.[8]
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
amount of P5,584.00 had been remitted out of the
entire loan of P120,000.00.[9]
A penalty clause, expressly recognized by law,
[10]
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
force of the obligation[11] 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 proof
on the existence and on the measure of damages
caused by the breach.[12] 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
obligation has been partly or irregularly complied
with.[13]
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. Court
of Appeals,[14] 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
3
[15]
irregular performance is made by the debtor. The
stipulated penalty might even be deleted such as when
there has been substantial performance in good faith
by the obligor,[16] when the penalty clause itself suffers
from fatal infirmity, or when exceptional
circumstances so exist as to warrant it.[17]
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 distinct
concepts which may separately be demanded.[18] What
may justify a court in not allowing the creditor to
impose full surcharges and penalties, despite an
express stipulation therefor in a valid agreement, may
not equally justify the non-payment or reduction of
interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the
banking business and the core of a bank's existence.[19]
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 to the rights of the movant for
reconsideration.[20]
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 parties
intending it to supersede the existing loan agreement
between the petitioners and the bank.[21] 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 to the new contract; third, the extinguishment
of the obligation; and fourth, the validity of the new
one.[22] 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 with each other.[23] An obligation to pay a
sum of money is not extinctively novated by a new
instrument which merely changes the terms of
4
payment or adding compatible covenants or where the
old contract is merely supplemented by the new one.
[24]
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 gestio to agency, or from a mortgage
to antichresis,[25] or from a sale to one of loan;[26] (2)
the object or principal conditions, such as a change of
the nature of the prestation; or (3) the subjects, such as
the substitution of a debtor[27] 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.
THIRD DIVISION
[G.R. No. 157480. May 6, 2005]
PRYCE CORPORATION (formerly PRYCE
PROPERTIES
CORPORATION), petitioner,
vs.PHILIPPINE AMUSEMENT AND
GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a
contract is not equivalent to its rescission. When an
agreement is terminated, it is deemed valid at
inception. Prior to termination, the contract binds the
parties, who are thus obliged to observe its provisions.
However, when it is rescinded, it is deemed inexistent,
and the parties are returned to their status quo ante.
Hence, there is mutual restitution of benefits received.
The consequences of termination may be anticipated
and provided for by the contract. As long as the terms
of the contract are not contrary to law, morals, good
customs, public order or public policy, they shall be
respected by courts. The judiciary is not authorized to

make or modify contracts; neither may it rescue parties
from disadvantageous stipulations. Courts, however,
are empowered to reduce iniquitous or unconscionable
liquidated damages, indemnities and penalties agreed
upon by the parties.
The Case
Before us is a Petition for Review[1] under Rule 45
of the Rules of Court, assailing the May 22, 2002
Decision[2] of the Court of Appeals (CA) in CA-GR
CV No. 51629 and its March 4, 2003
Resolution[3] denying petitioners Motion for
Reconsideration. The assailed Decision disposed thus:
WHEREFORE, in view of the foregoing, judgment is
hereby rendered as follows: (1) In Civil Case No. 93-
68266, the appealed decision[,] is AFFIRMED with
MODIFICATION[,] ordering [Respondent] Philippine
Amusement and Gaming Corporation to pay
[Petitioner] Pryce Properties Corporation the total
amount of P687,289.50 as actual damages representing
the accrued rentals for the quarter September to
November 1993 with interest and penalty at the rate of
two percent (2%) per month from date of filing of the
complaint until the amount shall have been fully paid,
and the sum of P50,000.00 as attorneys fees; (2) In
Civil Case No. 93-68337, the appealed decision is
REVERSED and SET ASIDE and a new judgment is
rendered ordering [Petitioner] Pryce Properties
Corporation to reimburse [Respondent] Philippine
Amusement and Gaming Corporation the amount
of P687,289.50 representing the advanced rental
deposits, which amount may be compensated by
[Petitioner] Pryce Properties Corporation with its
award in Civil Case No. 93-68266 in the equal amount
of P687,289.50.[4]
The Facts
According to the CA, the facts are as follows:
Sometime in the first half of 1992, representatives
from Pryce Properties Corporation (PPC for brevity)
made representations with the Philippine Amusement
and Gaming Corporation (PAGCOR) on the possibility
of setting up a casino in Pryce Plaza Hotel in Cagayan
de Oro City. [A] series of negotiations followed.
PAGCOR representatives went to Cagayan de Oro
5
City to determine the pulse of the people whether the
presence of a casino would be welcomed by the
residents. Some local government officials showed
keen interest in the casino operation and expressed the
view that possible problems were surmountable. Their
negotiations culminated with PPCs counter-letter
proposal dated October 14, 1992.
On November 11, 1992, the parties executed a
Contract of Lease x x x involving the ballroom of the
Hotel for a period of three (3) years starting December
1, 1992 and until November 30, 1995. On November
13, 1992, they executed an addendum to the contract x
x x which included a lease of an additional 1000
square meters of the hotel grounds as living quarters
and playground of the casino personnel. PAGCOR
advertised the start of their casino operations on
December 18, 1992.
Way back in 1990, the Sangguniang Panlungsod of
Cagayan de Oro City passed Resolution No. 2295 x x
x dated November 19, 1990 declaring as a matter of
policy to prohibit and/or not to allow the establishment
of a gambling casino in Cagayan de Oro City.
Resolution No. 2673 x x x dated October 19, 1992 (or
a month before the contract of lease was executed) was
subsequently passed reiterating with vigor and
vehemence the policy of the City under Resolution No.
2295, series of 1990, banning casinos in Cagayan de
Oro City. On December 7, 1992, the Sangguniang
Panlungsod of Cagayan de Oro City enacted
Ordinance No. 3353 x x x prohibiting the issuance of
business permits and canceling existing business
permits to any establishment for using, or allowing to
be used, its premises or any portion thereof for the
operation of a casino.
In the afternoon of December 18, 1992 and just hours
before the actual formal opening of casino operations,
a public rally in front of the hotel was staged by some
local officials, residents and religious leaders.
Barricades were placed [which] prevented some casino
personnel and hotel guests from entering and exiting
from the Hotel. PAGCOR was constrained to suspend
casino operations because of the rally. An agreement
between PPC and PAGCOR, on one hand, and
representatives of the rallyists, on the other, eventually
ended the rally on the 20th of December, 1992.
On January 4, 1993, Ordinance No. 3375-93 x x x was
passed by the Sangguniang Panlungsod of Cagayan de
Oro City, prohibiting the operation of casinos and

providing for penalty for violation thereof. On January
7, 1993, PPC filed a Petition for Prohibition with
Preliminary Injunction x x x against then public
respondent Cagayan de Oro City and/or Mayor Pablo
P. Magtajas x x x before the Court of Appeals,
docketed as CA G.R. SP No. 29851 praying inter alia,
for the declaration of unconstitutionality of Ordinance
No. 3353. PAGCOR intervened in said petition and
further assailed Ordinance No. 4475-93 as being
violative of the non-impairment of contracts and equal
protection clauses. On March 31, 1993, the Court of
Appeals promulgated its decision x x x, the dispositive
portion of which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No.
3353 and Ordinance No. 3375-93 are hereby
DECLARED UNCONSTITUTIONAL and VOID and
the respondents and all other persons acting under their
authority and in their behalf are PERMANENTLY
ENJOINED from enforcing those ordinances.
SO ORDERED.
Aggrieved by the decision, then public respondents
Cagayan de Oro City, et al. elevated the case to the
Supreme Court in G.R. No. 111097, where, in an En
Banc Decision dated July 20, 1994 x x x, the Supreme
Court denied the petition and affirmed the decision of
the Court of Appeals.
In the meantime, PAGCOR resumed casino operations
on July 15, 1993, against which, however, another
public rally was held. Casino operations continued for
some time, but were later on indefinitely suspended
due to the incessant demonstrations. Per verbal advice
x x x from the Office of the President of the
Philippines, PAGCOR decided to stop its casino
operations in Cagayan de Oro City. PAGCOR stopped
its casino operations in the hotel prior to September,
1993. In two Statements of Account dated September
1, 1993 x x x, PPC apprised PAGCOR of its
outstanding account for the quarter September 1 to
November 30, 1993. PPC sent PAGCOR another
Letter dated September 3, 1993 x x x as a follow-up to
the parties earlier conference. PPC sent PAGCOR
another Letter dated September 15, 1993 x x x stating
its Board of Directors decision to collect the full
rentals in case of pre-termination of the lease.
PAGCOR sent PPC a letter dated September 20, 1993
x x x [stating] that it was not amenable to the payment
of the full rentals citing as reasons unforeseen legal
6
and other circumstances which prevented it from
complying with its obligations. PAGCOR further
stated that it had no other alternative but to pre-
terminate the lease agreement due to the relentless and
vehement opposition to their casino operations. In a
letter dated October 12, 1993 x x x, PAGCOR asked
PPC to refund the total of P1,437,582.25 representing
the reimbursable rental deposits and expenses for the
permanent improvement of the Hotels parking lot. In a
letter dated November 5, 1993 x x x, PAGCOR
formally demanded from PPC the payment of its claim
for reimbursement.
On November 15, 1993 x x x, PPC filed a case for sum
of money in the Regional Trial Court of Manila
docketed as Civil Case No. 93-68266. On November
19, 1993, PAGCOR also filed a case for sum of money
in the Regional Trial Court of Manila docketed as
Civil Case No. 93-68337.
In a letter dated November 25, 1993, PPC informed
PAGCOR that it was terminating the contract of lease
due to PAGCORs continuing breach of the contract
and further stated that it was exercising its rights under
the contract of lease pursuant to Article 20 (a) and (c)
thereof.
On February 2, 1994, PPC filed a supplemental
complaint x x x in Civil Case No. 93-68266, which the
trial court admitted in an Order dated February 11,
1994. In an Order dated April 27, 1994, Civil Case No.
93-68377 was ordered consolidated with Civil Case
No. 93-68266. These cases were jointly tried by the
court a quo. On August 17, 1995, the court a quo
promulgated its decision. Both parties appealed.[5]
In its appeal, PPC faulted the trial court for the
following reasons: 1) failure of the court to award
actual and moral damages; 2) the 50 percent reduction
of the amount PPC was claiming; and 3) the courts
ruling that the 2 percent penalty was to be imposed
from the date of the promulgation of the Decision, not
from the date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial
court for the latters failure to rule that the Contract of
Lease had already been terminated as early as
September 21, 1993, or at the latest, on October 14,
1993, when PPC received PAGCORs letter dated
October 12, 1993. The gaming corporation added that
the trial court erred in 1) failing to consider that PPC
was entitled to avail itself of the provisions of Article
XX only when PPC was the party terminating the
 7
Contract; 2) not finding that there were valid, had not presented official receipts to prove the latters
justifiable and good reasons for terminating the alleged expenses. The appellate court, however, upheld
Contract; and 3) dismissing the Complaint of the trial courts award to PPC of P50,000 attorneys
PAGCOR in Civil Case No. 93-68337 for lack of fees.
merit, and not finding PPC liable for the
Hence this Petition.[6]
reimbursement of PAGCORS cash deposits and of the
value of improvements.
Issues
Ruling of the Court of Appeals
In their Memorandum, petitioner raised the
following issues:
First, on the appeal of PAGCOR, the CA ruled
that the PAGCORS pretermination of the Contract of
MAIN ISSUE:
Lease was unjustified. The appellate court explained
that public demonstrations and rallies could not be
Did the Honorable Court of Appeals commit x x x
considered as fortuitous events that would exempt the
grave and reversible error by holding that Pryce was
gaming corporation from complying with the latters
not entitled to future rentals or lease payments for the
contractual obligations. Therefore, the Contract
unexpired period of the Contract of Lease between
continued to be effective until PPC elected to
Pryce and PAGCOR?
terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held Sub-Issues:
that under Article 1659 of the Civil Code, PPC had the
right to ask for (1) rescission of the Contract and 1. Were the provisions of Sections 20(a) and 20(c) of
indemnification for damages; or (2) only the Contract of Lease relative to the right of PRYCE to
indemnification plus the continuation of the Contract. terminate the Contract for cause and to moreover
These two remedies were alternative, not cumulative, collect rentals from PAGCOR corresponding to the
ruled the CA. remaining term of the lease valid and binding?
As PAGCOR had admitted its failure to pay the
2. Did not Article 1659 of the Civil Code supersede
rentals for September to November 1993, PPC
Sections 20(a) and 20(c) of the Contract, PRYCE
correctly exercised the option to terminate the lease
having rescinded the Contract of Lease?
agreement. Previously, the Contract remained
effective, and PPC could collect the accrued rentals.
3. Do the case of Rios, et al. vs. Jacinto Palma
However, from the time it terminated the Contract on
Enterprises, et al. and the other cases cited by
November 25, 1993, PPC could no longer demand
PAGCOR support its position that PRYCE was not
payment of the remaining rentals as part of actual
entitled to future rentals?
damages, the CA added.
Denying the claim for moral damages, the CA 4. Would the collection by PRYCE of future rentals
pointed out the failure of PPC to show that PAGCOR not give rise to unjust enrichment?
had acted in gross or evident bad faith in failing to pay
the rentals from September to November 1993. Such 5. Could we not have harmonized Article 1659 of the
failure was shown especially by the fact that PPC still Civil Code and Article 20 of the Contract of Lease?
had in hand three (3) months advance rental deposits
of PAGCOR. The former could have simply applied 6. Is it not a basic rule that the law, i.e. Article 1659, is
this deposit to the unpaid rentals, as provided in the deemed written in contracts, particularly in the
Contract. Neither did PPC adequately show that its PRYCE-PAGCOR Contract of Lease?[7]
reputation had been besmirched or the hotels goodwill
eroded by the establishment of the casino and the
public protests. The Courts Ruling
Finally, as to the claimed reimbursement for
parking lot improvement, the CA held that PAGCOR The Petition is partly meritorious.

Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon
the provisions of the Contract. Likewise, it argues
that termination, as defined under the Contract, is
different from the remedy of rescission prescribed
under Article 1659 of the Civil Code. On the other
hand, PAGCOR contends, as the CA ruled, that Article
1659 of the Civil Code governs; hence, PPC is
allegedly no longer entitled to future rentals, because it
chose to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that
obligations arising from contracts have the force of
law between the contracting parties and should be
complied with in good faith.[8] In deference to the
rights of the parties, the law[9] allows them to enter into
stipulations, clauses, terms and conditions they may
deem convenient; that is, as long as these are not
contrary to law, morals, good customs, public order or
public policy. Likewise, it is settled that if the terms of
the contract clearly express the intention of the
contracting parties, the literal meaning of the
stipulations would be controlling.[10]
In this case, Article XX of the parties Contract of
Lease provides in part as follows:
XX. BREACH OR DEFAULT
a) The LESSEE agrees that all the terms, conditions
and/or covenants herein contained shall be deemed
essential conditions of this contract, and in the event of
default or breach of any of such terms, conditions
and/or covenants, or should the LESSEE become
bankrupt, or insolvent, or compounds with his
creditors, the LESSOR shall have the right to
terminate and cancel this contract by giving them
fifteen (15 days) prior notice delivered at the leased
premises or posted on the main door thereof. Upon
such termination or cancellation, the LESSOR may
forthwith lock the premises and exclude the LESSEE
therefrom, forcefully or otherwise, without incurring
any civil or criminal liability. During the fifteen (15)
days notice, the LESSEE may prevent the termination
of lease by curing the events or causes of termination
or cancellation of the lease.
8
b) x x x x x x x x x
c) Moreover, the LESSEE shall be fully liable to the
LESSOR for the rentals corresponding to the
remaining term of the lease as well as for any and all
damages, actual or consequential resulting from such
default and termination of this contract.
d) x x x x x x x x x. (Italics supplied)
The above provisions leave no doubt that the
parties have covenanted 1) to give PPC the right to
terminate and cancel the Contract in the event of a
default or breach by the lessee; and 2) to make
PAGCOR fully liable for rentals for the remaining
term of the lease, despite the exercise of such right to
terminate. Plainly, the parties have voluntarily bound
themselves to require strict compliance with the
provisions of the Contract by stipulating that a default
or breach, among others, shall give the lessee the
termination option, coupled with the lessors liability
for rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not
contrary to law, morals, good customs, public order or
public policy. Neither is there anything objectionable
about the inclusion in the Contract of mandatory
provisions concerning the rights and obligations of the
parties.[11] Being the primary law between the parties,
it governs the adjudication of their rights and
obligations. A court has no alternative but to enforce
the contractual stipulations in the manner they have
been agreed upon and written.[12] It is well to recall that
courts, be they trial or appellate, have no power to
make or modify contracts.[13]Neither can they save
parties from disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the
right to ask for termination plus the full payment of
future rentals under the provisions of the Contract,
rather than just rescission under Article 1659 of the
Civil Code. This Court is not unmindful of the fact
that termination and rescission are terms that have
been used loosely and interchangeably in the past. But
distinctions ought to be made, especially in this
controversy, in which the terms mean differently and
lead to equally different consequences.
The term rescission is found in 1) Article
1191[14] of the Civil Code, the general provision on

rescission of reciprocal obligations; 2) Article 1659,
[15]
which authorizes rescission as an alternative
remedy, insofar as the rights and obligations of the
lessor and the lessee in contracts of lease are
concerned; and 3) Article 1380[16] with regard to the
rescission of contracts.
In his Concurring Opinion in Universal Food
Corporation v. CA,[17] Justice J. B. L. Reyes
differentiated rescission under Article 1191 from that
under Article 1381 et seq. as follows:
x x x. The rescission on account of breach of
stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith
by the defendant, that violates the reciprocity between
the parties. It is not a subsidiary action, and Article
1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to
anything other than the culpable breach of his
obligations to the defendant. This rescission is a
principal action retaliatory in character, it being unjust
that a party be held bound to fulfill his promises when
the other violates his. As expressed in the old Latin
aphorism: Non servanti fidem, non est fides
servanda. Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in rescission by reason of lesion or
economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because
it is the raison detre as well as the measure of the right
to rescind. x x x.[18]
Relevantly, it has been pointed out
that resolution was originally used in Article 1124 of
the old Civil Code, and that the term became the basis
for rescission under Article 1191 (and, conformably,
also Article 1659).[19]
Now, as to the distinction
between termination (or cancellation)
and rescission (more properly, resolution), Huibonhoa
v. CA[20] held that, where the action prayed for the
payment of rental arrearages, the aggrieved party
actually sought the partial enforcement of a lease
contract. Thus, the remedy was not rescission, but
termination or cancellation, of the contract. The Court
explained:
x x x. By the allegations of the complaint, the
Gojoccos aim was to cancel or terminate the contract
because they sought its partial enforcement in praying
9
for rental arrearages. There is a distinction in law
between cancellation of a contract and its
rescission. To rescind is to declare a contract void in
its inception and to put an end to it as though it never
were. It is not merely to terminate it and release
parties from further obligations to each other but to
abrogate it from the beginning and restore the parties
to relative positions which they would have occupied
had no contract ever been made.
x x x. The termination or cancellation of a contract
would necessarily entail enforcement of its terms prior
to the declaration of its cancellation in the same way
that before a lessee is ejected under a lease contract,
he has to fulfill his obligations thereunder that had
accrued prior to his ejectment. However, termination
of a contract need not undergo judicial intervention. x
x x.[21] (Italics supplied)
Rescission has likewise been defined as the
unmaking of a contract, or its undoing from the
beginning, and not merely its
termination. Rescission may be effected by both
parties by mutual agreement; or unilaterally by one of
them declaring a rescission of contract without the
consent of the other, if a legally sufficient ground
exists or if a decree of rescission is applied for before
the courts.[22] On the other hand, termination refers to
an end in time or existence; a close, cessation or
conclusion. With respect to a lease or contract, it
means an ending, usually before the end of the
anticipated term of such lease or contract, that may be
effected by mutual agreement or by one party
exercising one of its remedies as a consequence of the
default of the other.[23]
Thus, mutual restitution is required in a rescission
(or resolution), in order to bring back the parties to
their original situation prior to the inception of the
contract.[24] Applying this principle to this case, it
means that PPC would re-acquire possession of the
leased premises, and PAGCOR would get back the
rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are
not restored to their original situation; neither is the
contract treated as if it never existed. Prior to its
termination, the parties are obliged to comply with
their contractual obligations. Only afterthe contract
has been cancelled will they be released from their
obligations.
In this case, the actions and pleadings of petitioner
show that it never intended to rescind the Lease

Contract from the beginning. This fact was evident
when it first sought to collect the accrued rentals from
September to November 1993 because, as previously
stated, it actually demanded the enforcement of the
Lease Contract prior to termination. Any intent to
rescind was not shown, even when it abrogated the
Contract on November 25, 1993, because such
abrogation was not the rescission provided for under
Article 1659.
Future Rentals
As to the remaining sub-issue of future
rentals, Rios v. Jacinto[25] is inapplicable, because the
remedy resorted to by the lessors in that case was
rescission, not termination. The rights and obligations
of the parties in Rios were governed by Article 1659 of
the Civil Code; hence, the Court held that the damages
to which the lessor was entitled could not have
extended to the lessees liability for future rentals.
Upon the other hand, future rentals cannot be
claimed as compensation for the use or enjoyment of
anothers property after the termination of a contract.
We stress that by abrogating the Contract in the present
case, PPC released PAGCOR from the latters future
obligations, which included the payment of rentals. To
grant that right to the former is to unjustly enrich it at
the latters expense.
However, it appears that Section XX (c) was
intended to be a penalty clause. That fact is manifest
from a reading of the mandatory provision under
subparagraph (a) in conjunction with subparagraph (c)
of the Contract. A penal clause is an accessory
obligation which the parties attach to a principal
obligation for the purpose of insuring the performance
thereof by imposing on the debtor a special prestation
(generally consisting in the payment of a sum of
money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled.[26]
Quite common in lease contracts, this clause
functions to strengthen the coercive force of the
obligation and to provide, in effect, for what could be
the liquidated damages resulting from a breach.
[27]
There is nothing immoral or illegal in such
indemnity/penalty clause, absent any showing that it
was forced upon or fraudulently foisted on the obligor.
[28]
In obligations with a penal clause, the general rule
is that the penalty serves as a substitute for the
10
indemnity for damages and the payment of interests in
case of noncompliance; that is, if there is no
stipulation to the contrary,[29] in which case proof of
actual damages is not necessary for the penalty to be
demanded.[30] There are exceptions to the
aforementioned rule, however, as enumerated in
paragraph 1 of Article 1226 of the Civil Code: 1) when
there is a stipulation to the contrary, 2) when the
obligor is sued for refusal to pay the agreed penalty,
and 3) when the obligor is guilty of fraud. In these
cases, the purpose of the penalty is obviously to punish
the obligor for the breach. Hence, the obligee can
recover from the former not only the penalty, but also
other damages resulting from the nonfulfillment of the
principal obligation. [31]
In the present case, the first exception applies
because Article XX (c) provides that, aside from the
payment of the rentals corresponding to the remaining
term of the lease, the lessee shall also be liable for any
and all damages, actual or consequential, resulting
from such default and termination of this contract.
Having entered into the Contract voluntarily and with
full knowledge of its provisions, PAGCOR must be
held bound to its obligations. It cannot evade further
liability for liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may
nevertheless be equitably reduced by the courts.
[32]
This power is explicitly sanctioned by Articles 1229
and 2227 of the Civil Code, which we quote:
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.
Art. 2227. Liquidated damages, whether intended as
an indemnity or a penalty, shall be equitably reduced if
they are iniquitous or unconscionable.
The question of whether a penalty is reasonable or
iniquitous is addressed to the sound discretion of the
courts. To be considered in fixing the amount of
penalty are factors such as -- but not limited to -- the
type, extent and purpose of the penalty; the nature of
the obligation; the mode of the breach and its
 11
consequences; the supervening realities; the standing
and relationship of the parties; and the like.[33]
In this case, PAGCORs breach was occasioned by
THIRD DIVISION
events that, although not fortuitous in law, were in fact
real and pressing. From the CAs factual findings,
which are not contested by either party, we find that ERMINDA F. FLORENTINO, G.R. N
PAGCOR conducted a series of negotiations and Petitioner,
consultations before entering into the Contract. It did Presen
so not only with the PPC, but also with local YNARES
Chairper
government officials, who assured it that the problems
were surmountable. Likewise, PAGCOR took pains to AUSTR
- versus - CHICO
contest the ordinances[34] before the courts, which
consequently declared them unconstitutional. On top NACH
of these developments, the gaming corporation was REYES
advised by the Office of the President to stop the
games in Cagayan de Oro City, prompting the former SUPERVALUE, INC.,
to cease operations prior to September 1993. Respondent.
Promu
Also worth mentioning is the CAs finding that
PAGCORs casino operations had to be suspended for
days on end since their start in December 1992; and Septem
indefinitely from July 15, 1993, upon the advice of the x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Office of President, until the formal cessation of - - - - - - - - - - - - - -x
operations in September 1993. Needless to say, these
interruptions and stoppages meant that PAGCOR
suffered a tremendous loss of expected revenues, not
to mention the fact that it had fully operated under the D E C I S I O N
Contract only for a limited time.
While petitioners right to a stipulated penalty is
CHICO-NAZARIO, J.:
affirmed, we consider the claim for future rentals to
the tune of P7,037,835.40 to be highly iniquitous. The
amount should be equitably reduced. Under the
Before this Court is a Petition for Review
circumstances, the advanced rental deposits in the sum
on Certiorari under Rule 45 of the Revised Rules of
of P687,289.50 should be sufficient penalty for
Court, filed by petitioner Erminda F. Florentino,
respondents breach.
seeking to reverse and set aside the Decision,
WHEREFORE, the Petition is GRANTED in dated 10 October 2003 and the Resolution,
[1]

part. The assailed Decision and Resolution are dated 19 April 2006 of the Court of Appeals in CA-
[2]

hereby MODIFIED to include the payment of penalty.
Accordingly, respondent is ordered to pay petitioner
the additional amount of P687,289.50 as penalty,
which may be set off or applied against the formers
advanced rental deposits. Meanwhile, the CAs award
to petitioner of actual damages representing the
accrued rentals for September to November 1993 --
with interest and penalty at the rate of two percent
(2%) per month, from the date of filing of the
Complaint until the amount shall have been fully paid
-- as well as the P50,000 award for attorneys fees,
is AFFIRMED. No costs.
SO ORDERED.
G.R. CV No. 73853. The appellate court, in its assailed
Decision and Resolution, modified the Decision
dated 30 April 2001 of the Regional Trial Court (RTC)
of Makati, Branch 57, in Civil Case No. 00-1015,
finding the respondent Supervalue, Inc., liable for the
sum of P192,000.00, representing the security deposits
made by the petitioner upon the commencement of
their Contract of Lease. The dispositive portion of the
assailed appellate courts Decision thus reads:
WHEREFORE, premises
considered, the appeal is PARTLY
GRANTED. The April 30, 2001
Decision of the Regional Trial Court
of Makati, Branch 57 is therefore

MODIFIED to wit: (a) the portion
ordering the [herein respondent] to pay
the amount of P192,000.00 representing
the security deposits and P50,000.00 as
attorneys fees in favor of the [herein
petitioner] as well as giving
[respondent] the option to reimburse
[petitioner] of the value of the
improvements introduced by the
[petitioner] on the leased [premises]
should [respondent] choose to
appropriate itself or require the
[petitioner] to remove the
improvements, is hereby REVERSED
and SET ASIDE; and (b) the portion
ordering the return to [petitioner] the
properties seized by [respondent] after
the former settled her obligation with
the latter is however MAINTAINED. [3]
The factual and procedural antecedents of the
instant petition are as follows:
Petitioner is doing business under the business
name Empanada Royale, a sole proprietorship engaged
in the retail of empanada with outlets in different
malls and business establishments within Metro
Manila.[4]
Respondent, on the other hand, is a domestic
corporation engaged in the business of leasing stalls
and commercial store spaces located inside SM Malls
found all throughout the country. [5]
On 8 March 1999, petitioner and respondent executed
three Contracts of Lease containing similar terms and
conditions over the cart-type stalls at SM
North Edsa and SM Southmall and a store space at
SM Megamall. The term of each contract is for a
period of four months and may be renewed upon
agreement of the parties.
[6]
Upon the expiration of the original Contracts of Lease,
the parties agreed to renew the same by extending their
terms until 31 March 2000. [7]
Before the expiration of said Contracts of Lease, or
on 4 February 2000, petitioner received two letters
from the respondent, both dated 14 January 2000,
transmitted through facsimile transmissions. [8]
12
In the first letter, petitioner was charged with violating
Section 8 of the Contracts of Lease by not opening
on 16 December 1999 and 26 December 1999. [9]
Respondent also charged petitioner with selling
a new variety of empanada called mini-embutido and
of increasing the price of her merchandise from P20.00
to P22.00, without the prior approval of the
respondent. [10]
Respondent observed that petitioner was
frequently closing earlier than the usual mall hours,
either because of non-delivery or delay in the delivery
of stocks to her outlets, again in violation of the terms
of the contract. A stern warning was thus given to
petitioner to refrain from committing similar
infractions in the future in order to avoid the
termination of the lease contract. [11]
In the second letter, respondent informed the petitioner
that it will no longer renew the Contracts of Lease for
the three outlets, upon their expiration on 31 March
2000. [12]
In a letter-reply dated 11 February 2000, petitioner
explained that the mini-embutido is not a new variety
of empanada but had similar fillings, taste and
ingredients as those of pork empanada; only, its size
was reduced in order to make it more affordable to the
buyers. [13]
Such explanation notwithstanding, respondent still
refused to renew its Contracts of Lease with the
petitioner. To the contrary, respondent took possession
of the store space in SM Megamall and confiscated the
equipment and personal belongings of the petitioner
found therein after the expiration of the lease contract.
[14]
In a letter dated 8 May 2000, petitioner demanded that
the respondent release the equipment and personal
belongings it seized from the SM Megamall store
space and return the security deposits, in the sum
of P192,000.00, turned over by the petitioner upon
signing of the Contracts of Lease. On 15 June 2000,
petitioner sent respondent another letter reiterating her
previous demands, but the latter failed or refused to
comply therewith. [15]
On 17 August 2000, an action for Specific
Performance, Sum of Money and Damages was filed
by the petitioner against the respondent before the
RTC of Makati, Branch 57. [16]

In her Complaint docketed as Civil Case No.
00-1015, petitioner alleged that the respondent made
verbal representations that the Contracts of Lease will
be renewed from time to time and, through the said
representations, the petitioner was induced to
introduce improvements upon the store space at
SM Megamall in the sum of P200,000.00, only to find
out a year later that the respondent will no longer
renew her lease contracts for all three outlets.
[17]
In addition, petitioner alleged that the respondent,
without justifiable cause and without previous
demand, refused to return the security deposits in the
amount of P192,000.00. [18]
Further, petitioner claimed that the respondent seized
her equipment and personal belongings found inside
the store space in SM Megamall after the lease
contract for the said outlet expired and despite
repeated written demands from the petitioner,
respondent continuously refused to return the seized
items.[19]
Petitioner thus prayed for the award of actual damages
in the sum of P472,000.00, representing the sum of
security deposits, cost of improvements and the value
of the personal properties seized. Petitioner also asked
for the award of P300,000.00 as moral
damages; P50,000.00 as exemplary damages;
and P80,000.00 as attorneys fees and expenses of
litigation. [20]
For its part, respondent countered that petitioner
committed several violations of the terms of their
Contracts of Lease by not opening from 16 December
1999 to 26 December 1999, and by introducing a new
variety of empanadawithout the prior consent of the
respondent, as mandated by the provision of Section 2
of the Contract of Lease. Respondent also alleged that
petitioner infringed the lease contract by frequently
closing earlier than the agreed closing
hours. Respondent finally averred that petitioner is
liable for the amount P106,474.09, representing the
penalty for selling a new variety of empanada,
electricity and water bills, and rental adjustment,
among other charges incidental to the lease
agreements. Respondent claimed that the seizure of
petitioners personal belongings and equipment was in
the exercise of its retaining lien, considering that the
petitioner failed to settle the said obligations up to the
time the complaint was filed. [21]
13
Considering that petitioner already committed several
breaches of contract, the respondent thus opted not to
renew its Contracts of Lease with her anymore. The
security deposits were made in order to ensure faithful
compliance with the terms of their lease agreements;
and since petitioner committed several infractions
thereof, respondent was justified in forfeiting the
security deposits in the latters favor.
On 30 April 2001, the RTC rendered a Judgment in [22]
favor of the petitioner and found that the physical
takeover by the respondent of the leased premises and
the seizure of petitioners equipment and personal
belongings without prior notice were
illegal. The decretal part of the RTC Judgment reads:
WHEREFORE, premises duly
considered, judgment is hereby
rendered ordering the [herein
respondent] to pay [herein petitioner]
the amount of P192,000.00 representing
the security deposits made by
the [petitioner] and P50,000.00 as and
for attorneys fees.
The [respondent] is likewise
ordered to return to the [petitioner] the
various properties seized by the former
after settling her account with the
[respondent].
Lastly, the [respondent] may
choose either to reimburse the
[petitioner] one half (1/2) of the value
of the improvements introduced by the
plaintiff at SM Megamall should
[respondent] choose to appropriate the
improvements to itself or require the
[petitioner] to remove the
improvements, even though the
principal thing may suffer damage
thereby. [Petitioner] shall not, however,
cause anymore impairment upon the
said leased premises than is necessary.
The other damages claimed by
the plaintiff are denied for lack of merit.
Aggrieved, the respondent appealed the adverse RTC
Judgment to the Court of Appeals.

In a Decision dated 10 October 2003, the Court of
[23]
Appeals modified the RTC Judgment and found that
the respondent was justified in forfeiting the security
deposits and was not liable to reimburse the petitioner
for the value of the improvements introduced in the
leased premises and to pay for attorneys fees. In
modifying the findings of the lower court, the
appellate court declared that in view of the breaches of
contract committed by the petitioner, the respondent is
justified in forfeiting the security deposits. Moreover,
since the petitioner did not obtain the consent of the
respondent before she introduced improvements on the
SM Megamall store space, the respondent has
therefore no obligation to reimburse the petitioner for
the amount expended in connection with the said
improvements. The Court of Appeals, however,
[24]
maintained the order of the trial court for respondent to
return to petitioner her properties after she has settled
her obligations to the respondent. The appellate court
denied petitioners Motion for Reconsideration in a
Resolution dated 19 April 2006.
[25]
Hence, this instant Petition for Review
on Certiorari filed by the petitioner assailing the
[26]
Court of Appeals Decision. For the resolution of this
Court are the following issues:
I. Whether or not the respondent is liable to return the
security deposits to the petitions.
II. Whether or not the respondent is liable to reimburse
the petitioner for the sum of the improvements she
introduced in the leased premises.
III. Whether or not the respondent is liable for
attorneys fees. [27]
The appellate court, in finding that the respondent is
authorized to forfeit the security deposits, relied on the
provisions of Sections 5 and 18 of the Contract of
Lease, to wit:
Section 5. DEPOSIT. The LESSEE
shall make a cash deposit in the sum
of SIXTY THOUSAND PESOS
(P60,000.00) equivalent to three (3)
months rent as security for the full
and faithful performance to each and
every term, provision, covenant and
condition of this lease and not as a
pre-payment of rent. If at any time
during the term of this lease the rent
14
is increased[,] the LESSEE on demand
shall make an additional deposit equal
to the increase in rent. The LESSOR
shall not be required to keep the deposit
separate from its general funds and the
deposit shall not be entitled to
interest. The deposit shall remain intact
during the entire term and shall not be
applied as payment for any monetary
obligations of the LESSEE under this
contract. If the LESSEE shall faithfully
perform every provision of this lease[,]
the deposit shall be refunded to the
LESSEE upon the expiration of this
Lease and upon satisfaction of all
monetary obligation to the LESSOR.
xxxx
Section 18. TERMINATION. Any
breach, non-performance or non-
observance of the terms and
conditions herein provided shall
constitute default which shall be
sufficient ground to terminate this
lease, its extension or renewal.In
which event, the LESSOR shall
demand that LESSEE immediately
vacate the premises, and LESSOR
shall forfeit in its favor the deposit
tendered without prejudice to any
such other appropriate action as may
be legally authorized. [28]
Since it was already established by the trial
court that the petitioner was guilty of committing
several breaches of contract, the Court of Appeals
decreed that she cannot therefore rightfully demand
the return of the security deposits for the same are
deemed forfeited by reason of evident contractual
violations.
It is undisputed that the above-quoted provision found
in all Contracts of Lease is in the nature of a penal
clause to ensure petitioners faithful compliance with
the terms and conditions of the said contracts.
A penal clause is an accessory undertaking to assume
greater liability in case of breach. It is attached to an
obligation in order to insure performance and has a
double function: (1) to provide for liquidated damages,
and (2) to strengthen the coercive force of the
obligation by the threat of greater responsibility in the
event of breach. The obligor would then be bound to
[29]

pay the stipulated indemnity without the necessity of
proof of the existence and the measure of damages
caused by the breach. Article 1226 of the Civil Code
[30]
states:
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.
As a general rule, courts are not at liberty to ignore the
freedoms of the parties to agree on such terms and
conditions as they see fit as long as they are not
contrary to law, morals, good customs, public order or
public policy.Nevertheless, courts may equitably
reduce a stipulated penalty in the contracts in two
instances: (1) if the principal obligation has been partly
or irregularly complied with; and (2) even if there has
been no compliance if the penalty is iniquitous or
unconscionable in accordance with Article 1229 of the
Civil Code which clearly provides:
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. [31]
In ascertaining whether the penalty is unconscionable
or not, this court set out the following standard
in Ligutan v. Court of Appeals, to wit:
[32]
The question of whether a
penalty is reasonable or iniquitous can
be partly subjective and partly
objective. Its resolution would depend
on such factor as, but not necessarily
confined to, the type, extent and
purpose of the penalty, the nature of the
15
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. xxx.
In the instant case, the forfeiture of the entire
amount of the security deposits in the sum
of P192,000.00 was excessive and unconscionable
considering that the gravity of the breaches committed
by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but
equitable therefore to reduce the penalty of the
petitioner to 50% of the total amount of security
deposits.
It is in the exercise of its sound discretion that
this court tempered the penalty for the breaches
committed by the petitioner to 50% of the amount of
the security deposits. The forfeiture of the entire sum
of P192,000.00 is clearly a usurious and iniquitous
penalty for the transgressions committed by the
petitioner. The respondent is therefore under the
obligation to return the 50% of P192,000.00 to the
petitioner.
Turning now to the liability of the respondent to
reimburse the petitioner for one-half of the expenses
incurred for the improvements on the leased store
space at SM Megamall, the following provision in the
Contracts of Lease will enlighten us in resolving this
issue:
Section 11. ALTERATIONS,
ADDITIONS, IMPROVEMENTS,
ETC. The LESSEE shall not make any
alterations, additions, or improvements
without the prior written consent of
LESSOR; and all alterations, additions
or improvements made on the leased
premises, except movable or fixtures
put in at LESSEEs expense and which
are removable, without defacing the
buildings or damaging its floorings,
shall become LESSORs property
without compensation/reimbursement
but the LESSOR reserves the right to
require the removal of the said
alterations, additions or improvements
upon expiration of the lease.

The foregoing provision in the Contract of Lease
mandates that before the petitioner can introduce any
improvement on the leased premises, she should first
obtain respondents consent. In the case at bar, it was
not shown that petitioner previously secured the
consent of the respondent before she made the
improvements on the leased space in SM Megamall. It
was not even alleged by the petitioner that she
obtained such consent or she at least attempted to
secure the same. On the other hand, the petitioner
asserted that respondent allegedly misrepresented to
her that it would renew the terms of the contracts from
time to time after their expirations, and that the
petitioner was so induced thereby that she expended
the sum of P200,000.00 for the improvement of the
store space leased.
This argument was squarely addressed by this court
in Fernandez v. Court of Appeals, thus:
[33]
The Court ruled that the stipulation of
the parties in their lease contract to be
renewable at the option of both parties
stresses that the faculty to renew was
given not to the lessee alone nor to
the lessor by himself but to the two
simultaneously; hence, both must agree
to renew if a new contract is to come
about.
Petitioners contention that
respondents had verbally agreed to
extend the lease indefinitely is
inadmissible to qualify the terms of the
written contract under the parole
evidence rule, and unenforceable under
the statute of frauds.
[34]
Moreover, it is consonant with human experience that
lessees, before occupying the leased premises,
especially store spaces located inside malls and big
commercial establishments, would renovate the place
and introduce improvements thereon according to the
needs and nature of their business and in harmony with
their trademark designs as part of their marketing ploy
to attract customers. Certainly, no inducement or
misrepresentation from the lessor is necessary for this
purpose, for it is not only a matter of necessity that a
lessee should re-design its place of business but a
business strategy as well.
In ruling that the respondent is liable to reimburse
petitioner one half of the amount of improvements
16
made on the leased store space should it choose to
appropriate the same, the RTC relied on the provision
of Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes,
in good faith, useful improvements
which are suitable to the use for which
the lease is intended, without altering
the form or substance of the property
leased, the lessor upon the termination
of the lease shall pay the lessee one-half
of the value of the improvements at that
time. Should the lessor refuse to
reimburse said amount, the lessee may
remove the improvements, even though
the principal thing may suffer damage
thereby. He shall not,
however, cause any more impairment
upon the property leased than is
necessary.
While it is true that under the above-quoted provision
of the Civil Code, the lessor is under the obligation to
pay the lessee one-half of the value of the
improvements made should the lessor choose to
appropriate the improvements, Article 1678 however
should be read together with Article 448 and Article
546 of the same statute, which provide:
Art. 448. The owner of the land
on which anything has been built, sown
or planted in good faith, shall have the
right to appropriate as his own the
works, sowing or planting, after
payment of the indemnity provided for
in articles 546 and 548, or to oblige the
one who built or planted to pay the
price of the land, and the one who
sowed, the proper rent.However, the
builder or planter cannot be obliged to
buy the land if its value is considerably
more than that of the building or
trees. In such case, he shall pay
reasonable rent, if the owner of the land
does not choose to appropriate the
building or trees after proper
indemnity. The parties shall agree upon
the terms of the lease and in case of
disagreement, the court shall fix the
terms thereof.
xxxx
Art. 546. Necessary expenses shall be
refunded to every possessor; but only

possessor in good faith may retain the
thing until he has been
reimbursed therefor.
Useful expenses shall be refunded only
to the possessor in good faith with the
same right of retention, the person who
has defeated him in the possession
having the option of refunding the
amount of the expenses or of paying the
increase in value which the thing may
have acquired by reason thereof.
Thus, to be entitled to reimbursement for
improvements introduced on the property, the
petitioner must be considered a builder in good
faith. Further, Articles 448 and 546 of the Civil Code,
which allow full reimbursement of useful
improvements and retention of the premises until
reimbursement is made, apply only to a possessor in
good faith, i.e., one who builds on land with the belief
that he is the owner thereof. A builder in good faith is
one who is unaware of any flaw in his title to the land
at the time he builds on it. In this case, the petitioner
[35]
cannot claim that she was not aware of any flaw in her
title or was under the belief that she is the owner of the
subject premises for it is a settled fact that she is
merely a lessee thereof.
In Geminiano v. Court of Appeals, this Court
[36]
was emphatic in declaring that lessees are not
possessors or builders in good faith, thus:
Being mere lessees, the private
respondents knew that their
occupation of the premises would
continue only for the life of the
lease. Plainly, they cannot be
considered as possessors nor builders
in good faith.
In a plethora of cases, this Court
has held that Article 448 of the Civil
Code, in relation to Article 546 of the
same Code, which allows full
reimbursement of useful improvements
and retention of the premises until
reimbursement is made, applies only to
a possessor in good faith, i.e., one who
builds on land with the belief that he is
the owner thereof.It does not apply
where one's only interest is that of a
lessee under a rental contract;
otherwise, it would always be in the
17
power of the tenant to "improve" his
landlord out of his property.
Since petitioners interest in the store space is merely
that of the lessee under the lease contract, she cannot
therefore be considered a builder in good
faith. Consequently, respondent may appropriate the
improvements introduced on the leased premises
without any obligation to reimburse the petitioner for
the sum expended.
Anent the claim for attorneys fees, we resolve to
likewise deny the award of the same. Attorneys fees
may be awarded when a party is compelled to litigate
or to incur expenses to protect its interest by reason of
unjustified act of the other.
[37]
In the instant petition, it was not shown that the
respondent unjustifiably refused to grant the demands
of the petitioner so as to compel the latter to initiate
legal action to enforce her right. As we have found
herein, there is basis for respondents refusal to return
to petitioner the security deposits and to reimburse the
costs of the improvements in the leased premises. The
award of attorneys fees is therefore not proper in the
instant case.
WHEREFORE, premises considered, the instant
Petition is PARTLY GRANTED. The Court of
Appeals Decision dated 10 October 2003 in CA-G.R.
CV No. 73853 is hereby AFFIRMED with
the MODIFICATION that the respondent may forfeit
only 50% of the total amount of the security deposits
in the sum of P192,000.00, and must return the
remaining 50% to the petitioner. No costs.
SO ORDERED.
THIRD DIVISION
G.R. No
DIAMOND BUILDERS CONGLOMERATION,
ROGELIO S. ACIDRE, TERESITA P. ACIDRE,
Presen
GRACE C. OSIAS, VIOLETA S. FAIYAZ and
EMMA S. CUTILLAR,
YNAR
Petitioners,
Chairp
CHICO
VELA
- versus -
NACH
REYE
COUNTRY BANKERS INSURANCE
Promu
CORPORATION,

Respondent.
x---------------------------------------------------------------------
---------------x
DECISION
NACHURA, J.:
Before us is a petition for review on certiorari to annul
the Decision[1] of the Court of Appeals (CA) in CA-
G.R. C.V. No. 48603, which reversed the Decision of
the Regional Trial Court, Branch 7, Manila (RTC
Manila) in Civil Case No. 92-62029 and granted
respondent Country Bankers Insurance Corporations
(Country Bankers) prayer for a sum of money against
the petitioners.
The controversy originated from a civil case[3] pending
before the Regional Trial Court, Branch
125, Caloocan City(RTC Caloocan) filed
Marceliano Borja (Borja) against Rogelio S. Acidre
(Rogelio) for the latters breach of his obligation to
construct a residential and commercial building.
Rogelio is the sole proprietor of petitioner Diamond
Builders Conglomeration (DBC).
To put an end to the foregoing litigation, the
parties entered into a Compromise Agreement[4] which
provided, in part:
COMPROMISE AGREEMENT
1. x x x
a. In lieu of rescission, the parties have
mutually agreed, subject to the
provisions hereunder, to fully
implement the building contract dated
October 1, 1990 and supplemented on
October 2, 1990 with an additional
scope of work marked as Annex A of
the complaint and the Letter-Agreement
dated November 16, 1991 signed by the
[petitioner Rogelio] and plaintiffs son(,)
Ferdinand A. Borja, marked as Annex B
of the complaint, which required full
compliance of the structural design of
18
Engr. Ramos and explicit reminders in
December 13,
the2007 constructing of the
residential/commercial building and the
additional works therein specified for
the added consideration of P100,000.00
as alleged in paragraphs 2 and 3 of the
complaint, Annex C hereof.
b. [Petitioner Rogelio] admits full
payment of plaintiff to him the amount
of P1,530,000.00 leaving the balance
of P570,000.00 of the contractual price
of P2,100,000.00 for the construction of
the buildings aforementioned.
c. [Petitioner Rogelio] agrees to fully
[2]
complete the construction of the
residential/commercial building
mentioned in paragraph 1 hereof
provided plaintiff would pay to him,
subject to hereunder terms, the
aforesaid amount ofP570,000.00.
d. The plaintiff agrees to pay [petitioner
Rogelio] the amount of P570,000.00
by subject to the terms hereunder set forth
and subject strictly to the condition that
[petitioner Rogelio] will finish the
building above-described pursuant to
the agreements [Annex(es) A and B] set
forth in paragraph 1 hereof.
e. Plaintiff shall pay [petitioner
Rogelio] the amount of P570,000.00 as
follows:
i. P370,000.00 the
5th day from approval
of this compromise
agreement by this
Honorable Court and
to coincide (with) the
start of the 75 days for
[petitioner Rogelio] to
complete the
construction of the
building.
ii. P200,000.00 When
the aforedescribed
building is fully
constructed pursuant to

agreements stated in
paragraph 1 hereof.
iii. Said building must
be fully finished
pursuant to the
agreement stated in
paragraph 1 hereof
within 75 days
(excluding Sundays
and Holidays) counted
from receipt of
payment
of P370,000.00.The date
of receipt to be issued by
[petitioner Rogelio] will
control. The 75th day will
be 12:00 noon of the
75th day.
iv. From receipt of the
aforesaid amount
of P370,000.00,
[petitioner Rogelio]
shall submit in favor of
plaintiff a performance
or surety bond in the
equivalent amount
of P370,000.00 to
answer or indemnify
plaintiff in the event
the building is not
finished on the 75th day.
v. In the event the
building is finished
within 75 days as
heretofore stated and
pursuant to the
agreements set forth in
paragraph 1 hereof, in
addition to the amount
of P200,000.00, the
plaintiff shall also pay
[petitioner Rogelio] the
amount of P90,000.00
by way of
[bonus]. However, in
the event [petitioner
Rogelio] shall fail to
fully complete the
construction of the
building pursuant to
19
the agreements set
forth in paragraph 1
hereof within 75 days
as heretofore stated,
[petitioner Rogelio]
shall not be entitled to
any further payments
and the performance
or surety bond above-
mentioned shall be
fully implemented by
way of penalizing
[petitioner Rogelio]
and/or as award for
damages in favor of
plaintiff.
xxxx
f. x x x
g. That the construction herein
contemplated shall not extend beyond
75 days. Said period shall commence
five days from the date of the final
approval hereof by this Honorable
Court.
i. That any violation and/or
avoidance of the terms and
conditions of this Compromise
Agreement by either of the parties
herein shall forthwith entitle the
aggrieved party to an immediate
execution hereof and to the necessary
and corresponding reliefs and
remedies therefore. (Emphasis
supplied.)
The RTC Caloocan approved the Compromise
Agreement and rendered a Decision[5] in accordance
with the terms and conditions contained therein.
In compliance with the Compromise Agreement,
Rogelio obtained a Surety Bond[6] from Country
Bankers in favor of the spouses Borja.[7] In this regard,
Rogelio and his spouse, petitioner Teresita P. Acidre,
together with DBC employees Grace C. Osias, Violeta
S. Faiyaz and Emma S. Cutillar (the other petitioners
herein), signed an Indemnity Agreement[8] consenting
to their joint and several liability to Country Bankers
should the surety bond be executed upon.

On April 23, 1992, Country Bankers received a
Motion for Execution[9] of the surety bond filed by
Borja with the RTC Caloocan for Rogelios alleged
violation of the Compromise Agreement.
Consequently, Country Bankers, in a
letter[10] dated May 13, 1992, advised petitioners that in
the event it is constrained to pay under the surety bond
to Borja, it shall proceed against petitioners for
reimbursement.
In turn, petitioners wrote Country Bankers informing
the latter of the filing of an Opposition to Borjas
Motion for Execution.[11] In spite of the opposition,
however, the RTC Caloocan issued a Writ of
Execution[12] on May 25, 1992. Petitioners then filed a
motion for reconsideration.
On May 29, 1992, Sheriff Perceverando Pangan of
RTC Caloocan served Country Bankers a copy of the
writ. Posthaste, Country Bankers, in writing, requested
Sheriff Pangan for a 10-day grace period within which
to settle the claim.[13]
Subsequently, Rogelio filed an Urgent Omnibus
Motion[14] to suspend the Writ of Execution and to
resolve the Motion for Reconsideration dated June 3,
1992. Upon receipt of the Omnibus Motion, Country
Bankers forthwith wrote Sheriff Pangan and requested
that the implementation of the Writ of Execution be
held in abeyance so as not to render moot and
academic the RTC Caloocans resolution on the
Omnibus Motion.[15]
Nonetheless, on June 9, 1992, Country Bankers
was served a Notice of Levy/Sheriffs Sale[16] with a list
of its personal properties to be sold at the scheduled
public auction on June 15, 1992.
The next day, or on June 10, 1992, Country
Bankers verified with the RTC Caloocan the status of
petitioners Omnibus Motion. It was informed that the
motion had yet to be acted upon. On the same date,
Sheriff Pangan arrived at Country Bankers office, and
the latter was thus constrained to pay the amount of the
surety bond.[17]
Significantly, on June 22, 1992, twelve (12) days after
the satisfaction of judgment in Civil Case No. C-
14745, Rogelio filed a Petition for Certiorari and
Prohibition with Preliminary Injunction and
Restraining Order[18] with the CA, docketed as CA-
G.R. SP No. 28205. Although the appellate court
20
issued a Temporary Restraining Order (TRO), the
petition was eventually denied due course and
dismissed outright for being fait accompli, as what it
sought to enjoin or prohibit had already been fully
satisfied and executed.[19]
In the meantime, after Country Bankers was
compelled to pay the amount of the surety bond, it
demanded reimbursement from the petitioners under
the Indemnity Agreement.[20] However, petitioners
refused to reimburse Country Bankers.
In addition, upon the dismissal of their petition in CA-
G.R. SP No. 28205, petitioners wrote Country Bankers
and informed the latter that the voluntary payment of
the bond effectively prevented them from contesting
the validity of the issuance of the Writ of Execution.[21]
As a result, Country Bankers filed a complaint for sum
of money against the petitioners which, as previously
stated, the RTC Manila dismissed. It disposed of the
case, thus:
WHEREFORE, and considering the
foregoing, judgment is hereby rendered:
1. Dismissing the complaint for lack of
merit;
2. On the counterclaim, ordering
[Country Bankers] to pay [petitioners]
attorneys fees of P50,000.00, plus the
costs of suit.
SO ORDERED.
On appeal, the CA reversed and set aside the
decision of the RTC Manila, to wit:
WHEREFORE, premises considered,
the Appeal is GRANTED and the
Decision dated November 2, 1992 of
Branch 7 of the Regional Trial Court of
Manila is hereby REVERSED and a
new one entered, ordering [petitioners]
to pay [Country Bankers] the sum of
THREE HUNDRED SEVENTY
THOUSAND PESOS (P370,000.00), as
reimbursement or actual damages, plus
interest thereon at the rate of 12% per
annum computed from the date of

judicial demand, or from July 24, 1992,
the date of filing of the complaint until
the said amount has been fully paid.
SO ORDERED.
In reversing the trial court, the CA ruled that Country
Bankers, as surety of Rogelios loan obligation, did not
effect voluntary payment on the bond. The appellate
court found that what Country Bankers paid was an
obligation legally due and demandable. It declared that
Country Bankers acted upon compulsion of a writ of
execution, which appears to have been regularly, and
validly issued, and, by its very nature, is immediately
enforceable.
Hence, this appeal positing a sole issue for our
resolution, to wit:
Whether petitioners should indemnify
Country Bankers for the payment of the
surety bond.
In fine, petitioners contend that Country Bankers is not
entitled to reimbursement when it voluntarily paid the
surety bond considering it knew full well the remedies
availed of by petitioners to stay the execution of the
compromise judgment. Thus, Country Bankers must
bear the loss or damage arising from its voluntary act.
We deny the appeal and affirm the appellate courts
ruling. Country Bankers should be reimbursed for
the P370,000.00 it paid to Borja under the surety bond.
In impugning the CAs decision, petitioners invoke
their pending Omnibus Motion to stay the execution of
the compromise judgment. Petitioners theory is that,
although the RTC Caloocan had already issued a writ
of execution and Country Bankers had been served a
Notice of Levy/Sheriffs Sale of its properties at the
impending public auction, the payment made by
Country Bankers to Borja is a voluntary act.
Petitioners push their theory even further, and deign to
suggest that Country Bankers should have itself
intervened in the proceedings before the RTC
Caloocan to stay the writ of execution.
We reject this preposterous suggestion. Petitioners
ought to be reminded of the nature of a judgment on a
compromise and a writ of execution issued in
connection therewith.
21
A compromise judgment is a decision rendered by a
court sanctioning the agreement between the parties
concerning the determination of the controversy at
hand. Essentially, it is a contract, stamped with judicial
imprimatur, between two or more persons, who, for
preventing or putting an end to a lawsuit, adjust their
difficulties by mutual consent in the manner which
they agree on, and which each of them prefers in the
hope of gaining, balanced by the danger of losing.
[22]
Upon court approval of a compromise agreement, it
transcends its identity as a mere contract binding only
upon the parties thereto, as it becomes a judgment that
is subject to execution in accordance with Rule 39 of
the Rules of Court.[23]
Ordinarily, a judgment based on compromise is not
appealable. It should not be disturbed except upon a
showing of vitiated consent or forgery. The reason for
the rule is that when both parties enter into an
agreement to end a pending litigation and request that
a decision be rendered approving said agreement, it is
only natural to presume that such action constitutes an
implicit, as undeniable as an express, waiver of the
right to appeal against said decision. [24]Thus, a decision
on a compromise agreement is final and executory, and
is conclusive between the parties.[25]
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.[26] Following this
mandatory rule, the RTC Caloocan granted Borjas
motion, and subsequently issued an order to the sheriff
to execute the compromise judgment. Notwithstanding
the foregoing, petitioners still maintain that since they
had taken steps to stay the execution of the
compromise judgment, Country Bankers, with full
knowledge of their active opposition to the execution
thereof, should not have readily complied with the
RTC Caloocan Order.
Petitioners argument contemplates a brazen defiance
of a validly issued court order, which had not been
restrained by the appellate court or this Court. The
argument is unacceptable.
The Compromise Agreement between Borja and
Rogelio explicitly provided that the latters failure to
complete construction of the building within the
stipulated period[27] shall cause the full implementation
of the surety bond as a penalty for the default, and as
an award of damages to Borja. Furthermore, the

Compromise Agreement contained a default executory
clause in case of a violation or avoidance of the terms
and conditions thereof. Therefore, the payment made
by Country Bankers to Borja was proper, as failure to
pay would have amounted to contumacious
disobedience of a valid court order.
Clearly, even without the aforesaid default clause, the
compromise judgment remained executory as against
Rogelio, as the principal obligor (co-debtor), and
Country Bankers as surety of the obligation. Section 4,
Rule 39 of the Rules of Court provides:
SEC. 4. Judgments not stayed by
appeal. Judgments in actions for
injunction, receivership, accounting and
support, and such other judgments as
are now or may hereafter be declared to
be immediately executory, shall be
enforceable after their rendition and
shall not be stayed by an appeal taken
therefrom, unless otherwise ordered by
the trial court. On appeal therefrom, the
appellate court in its discretion may
make an order suspending, modifying,
restoring or granting the injunction,
receivership, accounting, or award of
support.
The stay of execution shall be upon
such terms as to bind or otherwise as
may be considered proper for the
security or protection of the rights of
the adverse party.
Other judgments in actions declared to be immediately
executory and not stayed by the filing of an appeal are
for: (1) compromise,[28] (2) forcible entry and unlawful
detainer,[29] (3) direct contempt,[30] and (4)
[31]
expropriation.
Likewise, Section 9, paragraph (a),[32] of the same Rule
outlines the procedure for execution of judgments for
money, thus:
SEC. 9 Execution of judgments for
money, how enforced.
(a) Immediate payment on demand. The
officer shall enforce an execution of a
judgment for money by demanding
from the judgment obligor the
22
immediate payment of the full amount
stated in the writ of execution and all
lawful fees. The judgment obligor shall
pay in case, certified bank check
payable to the judgment oblige, or any
other form of payment acceptable to the
latter, the amount of the judgment debt
under proper receipt directly to the
judgment oblige or his authorized
representative if present at the time of
payment. The lawful fees shall be
handed under proper receipt to the
executing sheriff who shall turn over
the said amount within the same day to
the clerk of court of the court that
issued the writ.
As Rogelios obligation under the compromise
agreement, and approved by the RTC Caloocan, had a
penal clause[33] which is monetary in nature,[34] the writ
of execution availed of by Borja, and paid by Country
Bankers, strictly complied with the rules on execution
of money judgments.
It is true that the petitioners did not directly question
the compromise judgment. What was pending before
the Caloocan RTC was petitioners Omnibus Motion
praying for a stay in the implementation of the writ of
execution.However, the bottom line issue raised in the
Omnibus Motion is, actually, a question on the
compromise judgment, since its resolution would
require an inquiry into the stipulations contained in the
Compromise Agreement, particularly the provision on
immediate execution.
Thus, when the RTC Manila ruled that the payment on
the bond made by Country Bankers was voluntary, the
lower court effectively disregarded the rule on the non-
appealable nature and the immediately executory
character of a judgment on a compromise.
Moreover, it has not escaped our attention that
petitioners belatedly filed a Petition for Certiorari and
Prohibition with prayer for a TRO with the CA,
ostensibly to stop the execution of the compromise
judgment. Not only was the filing thereof late, it was
done twelve (12) days after the satisfaction of the
compromise judgment. We are, therefore, perplexed
why, despite the urgency of the matter, petitioners
merely banked on a pending motion for
reconsideration to stay the enforcement of an already

issued writ of execution. Petitioners total reliance
thereon was certainly misplaced.
Admittedly, the general rule is that certiorari will not
lie unless a motion for reconsideration is first filed
before the respondent tribunal to allow it an
opportunity to correct the imputed errors.
[35]
Nonetheless, the rule admits of exceptions, thus:
(a) where the order is a patent
nullity, as where the court a quo has no
jurisdiction;
(b) where the questions raised
in the certiorari proceedings have been
duly raised and passed upon by the
lower court, or are the same as those
raised and passed upon in the lower
court;
(c) where there is an urgent
necessity for the resolution of the
question and any further delay would
prejudice the interests of the
Government or of the petitioner or the
subject matter of the action is
perishable;
(d) where, under the
circumstances, a motion for
reconsideration would be useless;
(e) where petitioner was
deprived of due process and there is
extreme urgency for relief;
(f) where, in a criminal case,
relief from an order of arrest is urgent
and the granting of such relief by the
trial court is improbable;
(g) where the proceedings in the
lower court are a nullity for lack of due
process;
(h) where the proceedings
was ex-parte or in which the petitioner
had no opportunity to object; and
(i) where the issue raised is one
purely of law or where public interest is
involved.[36]
23
Evidently, it would not have been premature for
petitioners to have filed a petition before the CA, upon
the issuance by the RTC Caloocan of a writ of
execution, because the RTC Caloocan already denied
their Opposition to Borjas Motion for Execution on the
surety bond. If, as petitioners insist, they had a
meritorious challenge to the satisfaction of the writ of
execution, they should have immediately filed a
Petition for Certiorari with the CA and therein alleged
the exceptional circumstance warranting the non-filing
of a motion for reconsideration. Petitioners should not
have persisted on waiting for the resolution of their
Omnibus Motion.
We have consistently ruled that an order for the
issuance of a writ of execution is ordinarily not
appealable.The reason for this is that the merits of the
case should not be delved into anew after a
determination has been made thereon with finality.
[37]
Otherwise, there would be practically no end to
litigation since the losing party would always try to
thwart execution by appealing from every order
granting the writ. In this case, this aphorism should
apply. Rogelio, after agreeing to an amicable
settlement with Borja to put an end to the case before
the RTC Caloocan, cannot flout compliance of the
court order of execution by refusing to reimburse
Country Bankers, the surety of his obligation in the
compromise agreement.
Still, petitioners stubbornly refuse to pay Country
Bankers, contending that the CA itself, in CA-G.R. SP
No. 28205, declared that the payment effected was
voluntary.
We are not persuaded.
Article 2047 of the Civil Code specifically calls for the
application of the provisions on solidary obligations to
suretyship contracts. In particular, Article 1217 of the
Civil Code recognizes the right of reimbursement from
a co-debtor (the principal co-debtor, in case of
suretyship) in favor of the one who paid (i.e., the
surety).[38] In contrast, Article 1218 of the Civil Code is
definitive on when reimbursement is unavailing, such
that only those payments made after the obligation
has prescribed or became illegal shall not entitle a
solidary debtor to reimbursement. Nowhere in the
invoked CA Decision does it declare that a surety who
pays, by virtue of a writ of execution, is not entitled to
reimbursement from the principal co-debtor. The CA
Decision was confined to the mootness of the issue

presented and petitioners preclusion from the relief it
prayed for, i.e., a stay of the writ of execution,
considering that the writ had already been satisfied.
More importantly, the Indemnity Agreement signed by
Rogelio and the other petitioners explicitly provided
for an incontestability clause on payments made by
Country Bankers. The said clause reads:
INCONTESTABILITY OF
PAYMENTS MADE BY THE
COMPANY: - Any payment or
disbursement made by [Country
Bankers] on account of the above-
mentioned Bond, its renewals,
extensions, alterations or substitutions
either in the belief that [Country
Bankers] was obligated to make such
payment or in the belief that said
payment was necessary or expedient in
order to avoid greater losses or
obligations for which [Country
Bankers] might be liable by virtue of
the terms of the above-mentioned Bond,
its renewals, extensions, alterations, or
substitutions, shall be final and shall not
be disputed by the undersigned, who
hereby jointly and severally bind
themselves to indemnify [Country
Bankers] of any and all such payments,
as stated in the preceding clauses.
In case [Country Bankers] shall have
paid, settled or compromised any
liability, loss, costs, damages, attorneys
fees, expenses, claims, demands, suits,
or judgments as above-stated, arising
out of or in connection with said bond,
an itemized statement thereof, signed
by an officer of [Country Bankers] and
other evidence to show said payment,
settlement or compromise, shall be
prima facie evidence of said payment,
settlement or compromise, as well as
the liability of [petitioners] in any and
all suits and claims against [petitioners]
arising out of said bond or this bond
application.
Ineluctably, petitioners are obligated to reimburse
Country Bankers the amount of P370,000.00.
24
Finally, petitioners desperately attempt to inveigle out
of this burden, which is of their own making, by
imputing a lack of initiative on Country Bankers part
to intervene in the execution proceedings before the
RTC.
This contention, as with the rest of petitioners
arguments, deserves scant consideration. Suffice it to
state that Country Bankers is a surety of the obligation
with a penal clause, constituted in the compromise
judgment; it is not a joint and solidary co-debtor of
Rogelio.
In the recent case of Escaňo v. Ortigas,[39] we
elucidated on the distinction between a surety as a co-
debtor under a suretyship agreement and a joint and
solidary co-debtor, thus:
(A)s 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 not 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 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
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.
WHEREFORE, the Petition is DENIED. The
Decision of the Court of Appeals in CA-G.R. C.V. No.
48603 is hereby AFFIRMED. Costs against the
petitioner.
SO ORDERED.

G.R. No. 182963 June 3, 2013
SPOUSES DEO AGNER and MARICON
AGNER, Petitioners,
vs.
BPI FAMILY SAVINGS BANK, INC., Respondent.
DECISION
PERALTA, J.:
This is a petition for review on certiorari assailing the
April 30, 2007 Decision1 and May 19, 2008
Resolution2of the Court of Appeals in CAG.R. CV No.
86021, which affirmed the August 11, 2005
Decision3 of the Regional Trial Court, Branch 33,
Manila City.
On February 15, 2001, petitioners spouses Deo Agner
and Maricon Agner executed a Promissory Note with
Chattel Mortgage in favor of Citimotors, Inc. The
contract provides, among others, that: for receiving the
amount of Php834, 768.00, petitioners shall pay Php
17,391.00 every 15th day of each succeeding month
until fully paid; the loan is secured by a 2001
Mitsubishi Adventure Super Sport; and an interest of
6% per month shall be imposed for failure to pay each
installment on or before the stated due date.4
On the same day, Citimotors, Inc. assigned all its
rights, title and interests in the Promissory Note with
Chattel Mortgage to ABN AMRO Savings Bank, Inc.
(ABN AMRO), which, on May 31, 2002, likewise
assigned the same to respondent BPI Family Savings
Bank, Inc.5
For failure to pay four successive installments from
May 15, 2002 to August 15, 2002, respondent, through
counsel, sent to petitioners a demand letter dated
August 29, 2002, declaring the entire obligation as due
and demandable and requiring to pay Php576,664.04,
or surrender the mortgaged vehicle immediately upon
receiving the letter.6 As the demand was left unheeded,
respondent filed on October 4, 2002 an action for
Replevin and Damages before the Manila Regional
Trial Court (RTC).
A writ of replevin was issued.7 Despite this, the subject
vehicle was not seized.8 Trial on the merits ensued. On
August 11, 2005, the Manila RTC Br. 33 ruled for the
respondent and ordered petitioners to jointly and
severally pay the amount of Php576,664.04 plus
25
interest at the rate of 72% per annum from August 20,
2002 until fully paid, and the costs of suit.
Petitioners appealed the decision to the Court of
Appeals (CA), but the CA affirmed the lower court’s
decision and, subsequently, denied the motion for
reconsideration; hence, this petition.
Before this Court, petitioners argue that: (1)
respondent has no cause of action, because the Deed of
Assignment executed in its favor did not specifically
mention ABN AMRO’s account receivable from
petitioners; (2) petitioners cannot be considered to
have defaulted in payment for lack of competent proof
that they received the demand letter; and (3)
respondent’s remedy of resorting to both actions of
replevin and collection of sum of money is contrary to
the provision of Article 14849 of the Civil Code and
the Elisco Tool Manufacturing Corporation v. Court of
Appeals10ruling.
The contentions are untenable.
With respect to the first issue, it would be sufficient to
state that the matter surrounding the Deed of
Assignment had already been considered by the trial
court and the CA. Likewise, it is an issue of fact that is
not a proper subject of a petition for review under Rule
45. An issue is factual when the doubt or difference
arises as to the truth or falsehood of alleged facts, or
when the query invites calibration of the whole
evidence, considering mainly the credibility of
witnesses, existence and relevancy of specific
surrounding circumstances, their relation to each other
and to the whole, and the probabilities of the
situation.11 Time and again, We stress that this Court is
not a trier of facts and generally does not weigh anew
evidence which lower courts have passed upon.
As to the second issue, records bear that both verbal
and written demands were in fact made by respondent
prior to the institution of the case against
petitioners.12 Even assuming, for argument’s sake, that
no demand letter was sent by respondent, there is
really no need for it because petitioners legally waived
the necessity of notice or demand in the Promissory
Note with Chattel Mortgage, which they voluntarily
and knowingly signed in favor of respondent’s
predecessor-in-interest. Said contract expressly
stipulates:

In case of my/our failure to pay when due and payable,
any sum which I/We are obliged to pay under this note
and/or any other obligation which I/We or any of us
may now or in the future owe to the holder of this note
or to any other party whether as principal or guarantor
x x x then the entire sum outstanding under this note
shall, without prior notice or demand, immediately
become due and payable. (Emphasis and underscoring
supplied)
A provision on waiver of notice or demand has been
recognized as legal and valid in Bank of the Philippine
Islands v. Court of Appeals,13 wherein We held:
The Civil Code in Article 1169 provides that one
incurs in delay or is in default from the time the
obligor demands the fulfillment of the obligation from
the obligee. However, the law expressly provides that
demand is not necessary under certain circumstances,
and one of these circumstances is when the parties
expressly waive demand. Hence, since the co-signors
expressly waived demand in the promissory notes,
demand was unnecessary for them to be in default.14
Further, the Court even ruled in Navarro v.
Escobido15 that prior demand is not a condition
precedent to an action for a writ of replevin, since
there is nothing in Section 2, Rule 60 of the Rules of
Court that requires the applicant to make a demand on
the possessor of the property before an action for a
writ of replevin could be filed.
Also, petitioners’ representation that they have not
received a demand letter is completely inconsequential
as the mere act of sending it would suffice. Again, We
look into the Promissory Note with Chattel Mortgage,
which provides:
All correspondence relative to this mortgage, including
demand letters, summonses, subpoenas, or
notifications of any judicial or extrajudicial action
shall be sent to the MORTGAGOR at the address
indicated on this promissory note with chattel
mortgage or at the address that may hereafter be given
in writing by the MORTGAGOR to the
MORTGAGEE or his/its assignee. The mere act of
sending any correspondence by mail or by personal
delivery to the said address shall be valid and effective
notice to the mortgagor for all legal purposes and the
fact that any communication is not actually received
by the MORTGAGOR or that it has been returned
unclaimed to the MORTGAGEE or that no person was
26
found at the address given, or that the address is
fictitious or cannot be located shall not excuse or
relieve the MORTGAGOR from the effects of such
notice.16 (Emphasis and underscoring supplied)
The Court cannot yield to petitioners’ denial in
receiving respondent’s demand letter. To note, their
postal address evidently remained unchanged from the
time they executed the Promissory Note with Chattel
Mortgage up to time the case was filed against them.
Thus, the presumption that "a letter duly directed and
mailed was received in the regular course of the
mail"17 stands in the absence of satisfactory proof to
the contrary.
Petitioners cannot find succour from Ting v. Court of
Appeals18 simply because it pertained to violation of
Batas Pambansa Blg. 22 or the Bouncing Checks Law.
As a higher quantum of proof – that is, proof beyond
reasonable doubt – is required in view of the criminal
nature of the case, We found insufficient the mere
presentation of a copy of the demand letter allegedly
sent through registered mail and its corresponding
registry receipt as proof of receiving the notice of
dishonor.
Perusing over the records, what is clear is that
petitioners did not take advantage of all the
opportunities to present their evidence in the
proceedings before the courts below. They miserably
failed to produce the original cash deposit slips
proving payment of the monthly amortizations in
question. Not even a photocopy of the alleged proof of
payment was appended to their Answer or shown
during the trial. Neither have they demonstrated any
written requests to respondent to furnish them with
official receipts or a statement of account. Worse,
petitioners were not able to make a formal offer of
evidence considering that they have not marked any
documentary evidence during the presentation of Deo
Agner’s testimony.19
Jurisprudence abounds that, in civil cases, one who
pleads payment has the burden of proving it; the
burden rests on the defendant to prove payment, rather
than on the plaintiff to prove non-payment.20 When the
creditor is in possession of the document of credit,
proof of non-payment is not needed for it is
presumed.21 Respondent's possession of the
Promissory Note with Chattel Mortgage strongly
buttresses its claim that the obligation has not been

extinguished. As held in Bank of the Philippine Islands
v. Spouses Royeca:22
x x x The creditor's possession of the evidence of debt
is proof that the debt has not been discharged by
payment. A promissory note in the hands of the
creditor is a proof of indebtedness rather than proof of
payment. In an action for replevin by a mortgagee, it is
prima facie evidence that the promissory note has not
been paid. Likewise, an uncanceled mortgage in the
possession of the mortgagee gives rise to the
presumption that the mortgage debt is unpaid.23
Indeed, when the existence of a debt is fully
established by the evidence contained in the record,
the burden of proving that it has been extinguished by
payment devolves upon the debtor who offers such
defense to the claim of the creditor. 24 The debtor has
the burden of showing with legal certainty that the
obligation has been discharged by payment.25
Lastly, there is no violation of Article 1484 of the Civil
Code and the Court’s decision in Elisco Tool
Manufacturing Corporation v. Court of Appeals.26
In Elisco, petitioner's complaint contained the
following prayer:
WHEREFORE, plaintiffs pray that judgment be
rendered as follows:
ON THE FIRST CAUSE OF ACTION
Ordering defendant Rolando Lantan to pay the
plaintiff the sum of ₱39,054.86 plus legal interest from
the date of demand until the whole obligation is fully
paid;
ON THE SECOND CAUSE OF ACTION
To forthwith issue a Writ of Replevin ordering the
seizure of the motor vehicle more particularly
described in paragraph 3 of the Complaint, from
defendant Rolando Lantan and/or defendants Rina
Lantan, John Doe, Susan Doe and other person or
persons in whose possession the said motor vehicle
may be found, complete with accessories and
equipment, and direct deliver thereof to plaintiff in
accordance with law, and after due hearing to confirm
said seizure and plaintiff's possession over the same;
PRAYER COMMON TO ALL CAUSES OF ACTION
27
1. Ordering the defendant Rolando Lantan to pay the
plaintiff an amount equivalent to twenty-five percent
(25%) of his outstanding obligation, for and as
attorney's fees;
2. Ordering defendants to pay the cost or expenses of
collection, repossession, bonding fees and other
incidental expenses to be proved during the trial; and
3. Ordering defendants to pay the costs of suit.
Plaintiff also prays for such further reliefs as this
Honorable Court may deem just and equitable under
the premises.27
The Court therein ruled:
The remedies provided for in Art. 1484 are alternative,
not cumulative. The exercise of one bars the exercise
of the others. This limitation applies to contracts
purporting to be leases of personal property with
option to buy by virtue of Art. 1485. The condition that
the lessor has deprived the lessee of possession or
enjoyment of the thing for the purpose of applying Art.
1485 was fulfilled in this case by the filing by
petitioner of the complaint for replevin to recover
possession of movable property. By virtue of the writ
of seizure issued by the trial court, the deputy sheriff
seized the vehicle on August 6, 1986 and thereby
deprived private respondents of its use. The car was
not returned to private respondent until April 16, 1989,
after two (2) years and eight (8) months, upon issuance
by the Court of Appeals of a writ of execution.
Petitioner prayed that private respondents be made to
pay the sum of ₱39,054.86, the amount that they were
supposed to pay as of May 1986, plus interest at the
legal rate. At the same time, it prayed for the issuance
of a writ of replevin or the delivery to it of the motor
vehicle "complete
with accessories and equipment." In the event the car
could not be delivered to petitioner, it was prayed that
private respondent Rolando Lantan be made to pay
petitioner the amount of ₱60,000.00, the "estimated
actual value" of the car, "plus accrued monthly rentals
thereof with interests at the rate of fourteen percent
(14%) per annum until fully paid." This prayer of
course cannot be granted, even assuming that private
respondents have defaulted in the payment of their
obligation. This led the trial court to say that petitioner
wanted to eat its cake and have it too.28

In contrast, respondent in this case prayed:
(a) Before trial, and upon filing and approval of the
bond, to forthwith issue a Writ of Replevin ordering
the seizure of the motor vehicle above-described,
complete with all its accessories and equipments,
together with the Registration Certificate thereof, and
direct the delivery thereof to plaintiff in accordance
with law and after due hearing, to confirm the said
seizure;
(b) Or, in the event that manual delivery of the said
motor vehicle cannot be effected to render judgment in
favor of plaintiff and against defendant(s) ordering
them to pay to plaintiff, jointly and severally, the sum
of ₱576,664.04 plus interest and/or late payment
charges thereon at the rate of 72% per annum from
August 20, 2002 until fully paid;
(c) In either case, to order defendant(s) to pay jointly
and severally:
(1) the sum of ₱297,857.54 as attorney’s fees,
liquidated damages, bonding fees and other expenses
incurred in the seizure of the said motor vehicle; and
(2) the costs of suit.
Plaintiff further prays for such other relief as this
Honorable Court may deem just and equitable in the
premises.29
Compared with Elisco, the vehicle subject matter of
this case was never recovered and delivered to
respondent despite the issuance of a writ of replevin.
As there was no seizure that transpired, it cannot be
said that petitioners were deprived of the use and
enjoyment of the mortgaged vehicle or that respondent
pursued, commenced or concluded its actual
foreclosure. The trial court, therefore, rightfully
granted the alternative prayer for sum of money, which
is equivalent to the remedy of "exacting fulfillment of
the obligation." Certainly, there is no double recovery
or unjust enrichment30 to speak of.1âwphi1
All the foregoing notwithstanding, We are of the
opinion that the interest of 6% per month should be
equitably reduced to one percent (1%) per month or
twelve percent (12%) per annum, to be reckoned from
May 16, 2002 until full payment and with the
remaining outstanding balance of their car loan as of
May 15, 2002 as the base amount.
28
Settled is the principle which this Court has affirmed
in a number of cases that stipulated interest rates of
three percent (3%) per month and higher are excessive,
iniquitous, unconscionable, and exorbitant.31 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.32 Since the stipulation on
the interest rate is void for being contrary to morals, if
not against the law, it is as if there was no express
contract on said interest rate; thus, the interest rate
may be reduced as reason and equity demand.33
WHEREFORE, the petition is DENIED and the Court
AFFIRMS WITH MODIFICATION the April 30,
2007 Decision and May 19, 2008 Resolution of the
Court of Appeals in CA-G.R. CV No. 86021.
Petitioners spouses Deo Agner and Maricon Agner are
ORDERED to pay, jointly and severally, respondent
BPI Family Savings Bank, Inc. ( 1) the remaining
outstanding balance of their auto loan obligation as of
May 15, 2002 with interest at one percent ( 1 o/o) per
month from May 16, 2002 until fully paid; and (2)
costs of suit.
SO ORDERED.
THIRD DIVISION
[ G.R. No. 175378, November
11, 2015 ]
MULTI-INTERNATIONAL BUSINESS DATA
SYSTEM, INC., PETITIONER, VS.
RUEL MARTINEZ, RESPONDENT.
D E C I S I O N
JARDELEZA, J.:
Before us is a petition for review
on certiorari[1] (petition) under Rule 45 filed by
Multi-International Business Data System, Inc.
(petitioner) to annul and set aside the

Decision[2] dated October 18, 2006 rendered by the
Appeals (CA) Sixteenth Division in CA G.R. CV No.
82686.
The Facts
Respondent Ruel Martinez (respondent) was the
Operations Manager[3] of petitioner from the last
quarter of 1990 to January 22, 1999.[4] Sometime in
June 4, 1994, respondent applied for and was granted a
car loan amounting to P648,288.00.[5] Both parties
agreed that the loan was payable through deductions
from respondent's bonuses or commissions, if any.
[6] Further, if respondent would be terminated for any
cause before the end of the term of the loan obligation,
the unpaid balance would be immediately due and
demandable without need of demand.[7] On
November 11, 1998, petitioner sent respondent a letter
informing him of the breakdown of his outstanding
obligation with petitioner amounting to P418,012.78,
detailing every bonus, loan or advance obtained and
deducted.[8] The subject vehicle remains with
respondent.[9]
In a letter dated November 24, 1998, respondent
requested for a breakdown of his benefits from
petitioner as director/operations manager in case he
will resign from his position. In said letter, respondent
stated that the computation "is only for the assumed
amount on my end to deduct whatever I owe the
Company."[10]
In a letter dated January 22, 1999 which respondent
received the next day, petitioner terminated respondent
for cause effective immediately and demanded that
respondent pay his outstanding loan of P418,012.78
and surrender the car to petitioner within three days
from receipt.[11] Despite this, respondent failed to pay
the outstanding balance.
In a letter dated June 23, 1999, petitioner demanded
respondent to pay his loan within three days from
receipt thereof at petitioner's office.[12] Again, despite
demand, respondent failed to pay his outstanding
obligation.
On July 12, 1999, petitioner filed a complaint[13] with
the Regional Trial Court of Makati City, Branch 148
(trial court) against respondent praying that respondent
be ordered to pay his outstanding obligation of
P418,012.78 plus interest, and that respondent be held
liable for exemplary damages, attorney's fees and costs
of the suit.[14]
29
In his answer[15] dated August 28, 1999, respondent
alleged that he already paid his loan through
deductions made from his compensation/salaries,
bonuses and commissions.[16] During trial,
respondent presented a certification dated September
10, 1996 issued by petitioner's president, Helen Dy
(Dy), stating that respondent already paid the amount
of P337,650.00 as of the said date.[17] Respondent
alleged that a simple accounting would show that the
he already paid the loan considering that it is payable
within four years from 1994.[18]
The Ruling of the Regional Trial Court
In its Decision[19] dated November 22, 2002, the trial
court ruled in favor of petitioner. It decreed, thus:
WHEREFORE, judgment i[s] hereby rendered in favor
of plaintiff as against the defendant[ ] as follows:
1. Ordering defendant to pay plaintiff the balance
of his car loan in the amount of Four Hundred
Eighteen Thousand Twelve and 78/100 Pesos
([P]418,012.78) plus interest at the rate of
twelve percent (12%) [per annum] from [June
23,] 1999 until full payment;
2. Ordering defendant Martinez to pay plaintiff
the amount of Ten Thousand Pesos
([P]10,000.00), by way of exemplary damages;
3. Ordering defendant to pay plaintiff the amount
of Twenty Thousand Pesos ([P]20,000.00) by
way of attorney's fees;
4. Dismissing the counterclaims interposed by
defendant;
5. Ordering defendant to pay the costs of the suit.
SO ORDERED.[20]
In arriving at the above pronouncement, the trial court
held that the respondent failed to present evidence to
prove payment. The trial court also held that the due
execution and authenticity of the certification dated
September 10, 1996 were not established. In
respondent's direct examination, he merely testified
that he knows Dy and her spouse but did not state that
the document was actually executed by Dy.[21]
On December 16, 2002, respondent filed a motion
seeking the reconsideration of the trial court's decision

dated November 22, 2002. The trial court denied this
motion in its Order[22] dated March 22, 2004.
The Ruling of the Court of Appeals
Respondent appealed the trial court's decision with the
CA. Docketed as CA G.R. CV No. 82686, the appeal
alleged that the parties agreed that the car loan would
be payable within four years from the time respondent
secured the loan in June 1994.[23]Respondent alleged
that he already completed his payment in June 1998
and that the payment was done through salary
deductions because if it were otherwise, petitioner
would be seeking full payment in the amount of
P648,288.00 and not only the balance of P418,012.78.
[24] Respondent also assailed the finding that the due
execution of the certification dated September 10,
1996 was not proven. Respondent alleged that by mere
comparison, one can safely say that the signatures
appearing in the certification and in Dy's affidavit
submitted before the National Labor Relations
Commission are signatures by one and the same
person, Dy. Respondent claims that he is very much
familiar with the signature of Dy, his former boss for
ten years and even petitioner's witness, who is also its
administrative manager, Aida Valle (Valle), also
identified the signature of Dy in the certification.[25]
The CA in its Decision[26] dated October 18, 2006
reversed the trial court and ruled in favor of
respondent in holding that the latter already fulfilled
his loan obligation with petitioner. The CA found
credence in the following pieces of evidence: (1)
certification dated September 10, 1996 signed by Dy;
(2) deduction of the monthly installments from
respondent's salary pursuant to the agreement between
him and petitioner; and (3) petitioner's admission of
respondent's installment payments made in the amount
of P230,275.22.[27] The CA held that Dy never denied
nor confirmed in open court the authenticity of her
signature in the certification dated September 10,
1996.[28] Citing Permanent Savings and Loan Bank v.
Velarde[29] and Consolidated Bank and Trust
Corporation (SOLIDBANK) v. Del Monte Motor
Works, Inc.,[30] the CA held that Dy must declare
under oath that she did not sign the document or that it
is otherwise false or fabricated.[31]
Thus, the CA reversed the trial court's ruling and held:
WHEREFORE, premises considered, the November
22, 2002 Decision of the Regional Trial Court of
Makati City, Branch 148, in Civil Case No. 99-1295, is
30
hereby REVERSED and SET ASIDE and a new one
is entered DISMISSINGthe complaint for lack of
merit.
SO ORDERED.[32] (Emphasis in the original)
Hence, this petition.
The Issues
The issues for resolution are:
1. Whether respondent has fulfilled his obligation
with petitioner; and
2. Whether the certification dated September 10,
1996 should be admitted as basis for
respondent's payment of his loan with
petitioner.[33]
Our Ruling
The petition is partly meritorious.
Verification/Certification on Non-Forum Shopping
Before going into the substantive merits of the case,
we shall first resolve the technical issue raised by
respondent in his Comment[34] dated February 8,
2007 and Memorandum[35] dated November 6, 2007.
Respondent alleged that the petition should be
dismissed for failing to comply with Section 4, Rule
45 of the Rules of Court in relation to Sections 4 and
5, Rule 7 of the Rules of Court.[36] Respondent
alleged that the signature of Dy in the
Verification/Certification in the petition differs from
her signature in the letter dated November 11, 1998,
thus, inferred that someone not authorized signed the
Verification/Certification.[37]
Upon a review of the records, however, we found Dy's
signature in the petition to be the same with Dy's
signature in the Ex-Parte Manifestation of
Compliance[38] dated February 22, 2005 which
petitioner filed with the CA. Respondent never
objected to Dy's signature in petitioner's Ex-Parte
Manifestation of Compliance. Further, Dy did not
refute that the signature in the petition is hers. Thus,
we find no reason to dismiss the petition outright
based on respondent's allegation.

Review of factual findings
Before going into the merits of the petition, we stress
the well-settled rule that only questions of law may be
raised in a petition for review on certiorari under Rule
45 of the Rules of Court, since "the Supreme Court is
not a trier of facts."[39] It is not our function to review,
examine and evaluate or weigh the probative value of
the evidence presented.
When supported by substantial evidence, the findings
of fact of the CA are conclusive and binding on the
parties and are not reviewable by this Court, unless the
case falls under any of the recognized exceptions in
jurisprudence.[40]
In the present case, the factual findings of the trial
court and the CA on whether respondent has fully paid
his car loan are conflicting. The trial court found that
no deductions were made from respondent's salary to
establish full payment of the car loan while the CA
found otherwise. The trial court held, thus:
Culled from the evidence adduced and the testimony
of the witnesses, it appears that the defendant himself
admitted on cross-examination that no deductions were
made in his monthly salary. Thus, it was a mere
presumption of fact on his part that he had been able to
fully pay off his car loan. The testimony of the
defendant creating merely an inference of payment
will not be regarded as conclusive on that issue. Thus,
payment cannot be presumed by a mere inference from
surrounding circumstances. At most, the agreement
that the payments for the car loan shall be deducted
from the defendant's salary and bonus is only
affirmative of the capacity or ability of the defendant
to fulfill his part of the bargain.
But whether or not there was actual payment through
deductions from the defendant's salary and bonus
remains to be proven by independent and credible
evidence. As the saying goes: "a proof that an act
could have been done is no proof that it was actually
done." Hence for failure to present evidence to prove
payment, defendant miserably failed in his defense and
in effect admitted the allegations of plaintiff.[41]
The CA, on the other hand, found that respondent
sufficiently established that deductions were made
from his salary:
31
x x x Moreover, it had been sufficiently established by
witness Aida Valle (VALLE), Administrative manager
of plaintiff-appellee MULTI-INTERNATIONAL, that
defendant-appellant MARTINEZ had been the only
employee granted by plaintiff-appellee MULTI-
INTERNATIONAL a car loan as such [sic]. With that,
it can fairly be inferred that plaintiff-appellee MULT1-
INTERNATlONAL's asseveration that the deductions
from the salary of defendant-appellant MARTINEZ
had not been reflected in his payslips is for naught,
since indeed, no such "item" in the payslip is provided,
considering that it is only defendant-appellant
MARTINEZ who had been granted such car loan x x
x.[42]
Thus, the conflicting factual findings of the trial court
and CA compel us to re-evaluate the facts of this case,
an exception to the rule that only questions of law may
be dealt with in a petition for certiorari under Rule 45.
Admissibility of the
certification dated
September 10, 1996
Respondent relies on the certification[43] dated
September 10, 1996 to bolster his defense that he
already fully paid his car loan to petitioner. We affirm
the findings of the CA that the certification is
admissible in evidence.
Section 22,[44] Rule 132 of the Rules of Court
explicitly authorizes the court to compare the
handwriting in issue with writings admitted or treated
as genuine by the party against whom the evidence is
offered or proved to be genuine to the satisfaction of
the judge. In Jimenez v. Commission on Ecumenical
Mission and Relations of the United Presbyterian
Church in the USA,[45] we held:
It is also hornbook doctrine that the opinions of
handwriting experts, even those from the NBI and the
PC, are not binding upon courts. This principle holds
true especially when the question involved is mere
handwriting similarity or dissimilarity, which can be
determined by a visual comparison of specimens of the
questioned signatures with those of the currently
existing ones.
Handwriting experts are usually helpful in the
examination of forged documents because of the
technical procedure involved in analyzing them. But
resort to these experts is not mandatory or

indispensable to the examination or the comparison of
handwriting. A finding of forgery does not depend
entirely on the testimonies of handwriting experts,
because the judge must conduct an independent
examination of the questioned signature in order to
arrive at a reasonable conclusion as to its authenticity,
x x x[46] (Citations omitted)
32
Q: If I show you Certification dated September 10,
1996 will you be able to confirm if this is a
Certification signed by the president?
A: It looked like the signature of the president but I
think she will be the one to testify because she was
the one who signed.[52] (Emphasis supplied)

The documents containing the signature of Dy which Aside from supporting our finding that the signature in
have been submitted by petitioner as authentic are the the certification is genuine, the foregoing testimonies
following: (1) letter dated November 11, 1998;[47] (2) of Dy and Valle substantially comply with the other
termination letter dated January 22, 1999;[48] (3) modes of authenticating a private document under
promissory note dated June 17, 1994;[49] and (4) Section 20,[53] Rule 132 of the Rules of Court.
chattel mortgage signed on June 27, 1994.
[50] Examining and analyzing the signatures in these Dy never testified that any forgery or fraud attended
documents with Dy's signature in the certification, we the certification.[54] In fact, she did not deny the
find no substantial reason to doubt the latter's authenticity of her signature but actually admitted that
authenticity. In fact, the testimonies of Dy herself and the signature therein looks like hers. Additionally,
Valle support our finding. Valle, who is familiar with the signature of Dy because
of the requirements of her job, also positively testified
Dy testified on cross-examination as follows: that the signature in the certification looks like that of
Dy's.[55]
Q: Now, ms witness [sic], sometime in December 10,
1996, do you recall having executed a certification to The defenses of Dy that she does not have a copy or
Mr. Martinez? record of the certification in her file and that the
A: No. letterhead shows an old address are weak and do not
prove that the certification was not duly executed.
Q: Just to refresh your memory, would you please
identify if this is the signature you signed given [sic] to For having established the due execution and
Mr. Martinez? authentication of the certification dated September 10,
A: Yeah. If looks like my signature, but... 1996, the certification should be admitted in evidence
to prove that respondent partially paid the car loan in
Q: Is that your signature? the amount ofP337,650.00.
A: But I said it looks like my signature. I want you
to notice something because everytime... Insufficient evidence to prove
full payment of loan
Q: Just answer the question please. Is that your
signature? It is established that the one who pleads payment has
A: I said it looks like my signature. the burden of proving it. Even where the creditor
alleges non-payment, the general rule is that the debtor
xxx has the burden to prove payment, rather than the
creditor. The debtor has the burden of showing with
legal certainty that the obligation has been discharged
Q: Just answer the question please. by payment. Where the debtor introduces some
A: I said it looks like my signature.[51] (Emphasis evidence of payment, the burden of going forward
supplied) with the evidence—as distinct from the general burden
of proof—shifts to the creditor, who is then under a
duty of producing some evidence to show non-
On the other hand, Valle, on cross-examination payment.[56]
testified as follows:
It must be emphasized that both parties have not

presented any written agreement or contract governing
respondent's obligation. Nevertheless, it has been
established that respondent obtained a car loan
amounting to P648,288.00 from petitioner. Thus, the
burden is now on respondent to prove that the
obligation has already been extinguished by payment.
Although not exclusive, a receipt of payment is the
best evidence of the fact of payment.[57] We held that
the fact of payment may be established not only by
documentary evidence but also by parol evidence.[58]
Except for respondent's bare allegations that he has
fully paid the P648,288.00 car loan, there is nothing in
the records which shows that full payment has indeed
been made. Respondent did not present any receipt
other than the certification dated September 10, 1996
which only proves that respondent has already paid
P337,650.00 of the car loan. A balance of P310,638.00
still remained.
Even respondent's testimony lacks credence. He
alleged that the amortization of the car loan was
deducted from his salaries, bonuses and commissions.
However, he could not even answer nor give an
estimate of how much bonuses and commissions he
receives from petitioner.[59]
Respondent also alleged that although deductions were
made from his salaries, bonuses and commissions, his
payslips do not reflect such deductions because "there
is no such car loan field" in the accounting program
for the payroll.[60] Respondent admitted in his
testimony that he only presumed that the deductions
were being made from his salaries, bonuses and
commissions, to wit:
Q: So my question was that, whether or not your
regular salary which was received twice a month, the
monthly amortization| s] are being deducted from that?
[sic]
A: There is no reflection in the payslip.
Q: But do you know it was ever deducted from your
monthly salary? [sic]
A: It must be deducted from my salary, [sic]
Q: You are assuming?
A: That is the agreement.
Q: That is the agreement but you don't know if it was
indeed deducted?
A: Yes.[61]
33
If indeed deductions were made on his salaries, bonuses and
commissions, respondent should have been confident in
answering the questions propounded on him during trial. Me
should have presented his payslips and shown that even if his
payslips did not reflect any deductions for his car loan,
deductions were indeed made, by comparing the amount of
compensation he could have gotten based on his employment
contract and the amount he actually received. Respondent
merely made calculations on what he presumed he already paid.
Further, respondent could have presented testimonies of persons
other than himself to prove payment of the loans. The letter
dated November 24, 1998 showed that respondent was aware
that he still had outstanding obligations with petitioner.
In Royal Cargo Corporation v. DFS Sports Unlimited, Inc., we
held that the defense of payment was not proven by the
respondent's failure to present any supporting evidence such as
official receipts or the testimony of the person who made
payment or who had direct knowledge of the payment, among
others.[62] Respondent's witness therein also assumed that
payment was made even in the absence of any receipt "once the
accounting department of respondent forwarded to her the
original invoice which was stamped PAID". We held in this case
that such testimony and the invoices which were stamped paid,
are all self-serving and do not, by themselves, prove
respondent's claim of payment.[63]
Nevertheless, even if the parties agreed to make deductions
from respondent's salary, bonuses and commissions, we agree
with the trial court that this is "only affirmative of the capacity or
ability of the [respondent] to fulfill his part of the bargain. But
whether or not there was actual payment through deductions
from [respondent]'s salary and bonus remains to be proven by
independent and credible evidence."[64]
Finally, we find it questionable why respondent would agree on a
setup where petitioner would not give him any written
acknowledgment receipt of his payments or accounting of his
loan.[65] Respondent should have insisted that receipts be
issued in his favor in the first place if it were true that the
program for issuing the payslips could not reflect the deductions
from his salaries, bonuses and commissions. Since he was the
only employee who was given a car loan, it would not have been
an inconvenience for the petitioner. His actions go against the
legal presumption that a person takes ordinary care of his
concerns.[66]
Statement of account is
self-serving
Similarly, we find that the statement of account, showing the
amount of P418,012.78 as respondent's outstanding loan
obligation to petitioner, is self-serving. Dy admitted that she
prepared the statement of account.[67] However, she neither
explained clearly, during her testimony, the breakdown nor
supported the amounts stated therein with documentary
evidence.[68]
Although petitioner refers to the amount of P418,012.78 in the
statement to represent only the car loan obligation, the
statement itself shows that the amount also includes the cash
advances of respondent from the company. The trial court has
already ruled that judgment cannot be rendered on the issue
regarding cash advances because this was not made subject of
petitioner's complaint and the same was not amended.[69]Such
issue was also not raised with us on appeal. Further, it was not
explained why Valle was not the one who prepared the statement
or was not asked to testify on the document when her duties
include supervising the accounting department and assisting in
the preparation of the employees' payroll.[70]
Thus, having only proven payment to the extent of P337,650.00,
respondent is obligated to pay petitioner the balance of
P310,638.00 with interest.
 34
secured by a real estate mortgage executed
WHEREFORE, the instant petition is PARTIALLY GRANTED.
The Court of Appeals' Decision dated October 18, 2006 in CA on December 15, 1987 over the spouses Go Cincos
G.R. CV No. 82686 is SET ASIDE. The respondent land and 4-storey building located in Maasin, Southern
is ORDERED to pay petitioner the balance of the car loan in the
amount of P310,638.00 plus interest at the rate of six percent
Leyte.
(6%) per annum computed from January 23, 199971 until the Under the terms of the promissory note,
date of finality of this judgment. The total amount shall the P700,000.00 loan was subject to a monthly interest
thereafter earn interest at the rate of six percent (6%) per
annum[72]until fully paid. The trial court's Decision dated rate of 3% or 36% per annum and was payable within
November 22, 2002 is AFFIRMED in all other respects. a term of 180 days or 6 months, renewable for another
SO ORDERED. 180 days. As of July 16, 1989, Manuels outstanding
obligation with MTLC amounted to P1,071,256.66,
MANUEL GO CINCO and ARACELI S. GO G.R. No. 151903which amount included the principal, interest, and
CINCO,
penalties.[5]
Petitioners, Present:
To be able to pay the loan in favor of MTLC, the
*
CORONA, spouses Go Cinco applied for a loan with the
**
CARPIO-MORALES,
Philippine National Bank, Maasin Branch (PNB or the
- versus - Acting Chairperson,
bank) and offered as collateral the same properties
***
NACHURA,they previously mortgaged to MTLC. The PNB
BRION, and approved the loan application for P1.3
ABAD, JJ. [6]
Million through a letter dated July 8, 1989; the
release of the amount, however, was conditioned on
COURT OF APPEALS, ESTER
the cancellation of the mortgage in favor of MTLC.
SERVACIO and MAASIN Promulgated:
TRADERS LENDING
On July 16, 1989, Manuel went to the house of
CORPORATION, October 9, 2009
respondent Ester Servacio (Ester), MTLCs President,
Respondents.
to inform her that there was money with the PNB for
x ------------------------------------------------------------------------------------------x
the payment of his loan with MTLC. Ester then
proceeded to the PNB to verify the information, but
DECISION she claimed that the banks officers informed her that
Manuel had no pending loan application with
them. When she told Manuel of the banks response,
Manuel assured her there was money with the PNB
BRION, J.: and promised to execute a document that would allow
her to collect the proceeds of the PNB loan.

On July 20, 1989, Manuel executed a Special

Before the Court is a petition for review
on certiorari[1] filed by petitioners, spouses Manuel
and Araceli Go Cinco (collectively, the spouses Go
Cinco), assailing the decision[2] dated June 22, 2001 of
the Court of Appeals (CA) in CA-G.R. CV No. 47578,
as well as the resolution[3] dated January 25, 2002
denying the spouses Go Cincos motion for
reconsideration.
THE FACTUAL ANTECEDENTS
Power of Attorney[7] (SPA) authorizing Ester to collect
the proceeds of his PNB loan. Ester again went to the
bank to inquire about the proceeds of the loan. This
time, the banks officers confirmed the existence of
the P1.3 Million loan, but they required Ester to first
sign a deed of release/cancellation of mortgage before
they could release the proceeds of the loan to
her. Outraged that the spouses Go Cinco used the same
properties mortgaged to MTLC as collateral for the
PNB loan, Ester refused to sign the deed and did not
collect the P1.3 Million loan proceeds.

In December 1987, petitioner Manuel Cinco (Manuel)
obtained a commercial loan in the amount
of P700,000.00 from respondent Maasin Traders
Lending Corporation (MTLC). The loan was evidenced
by a promissory note datedDecember 11, 1987,[4] and
As the MTLC loan was already due, Ester
instituted foreclosure proceedings against the spouses
Go Cinco on July 24, 1989.

To prevent the foreclosure of their properties,
the spouses Go Cinco filed an action for specific
performance, damages, and preliminary
[8]
injunction before the Regional Trial Court (RTC),
Branch 25, Maasin, Southern Leyte.The spouses Go
Cinco alleged that foreclosure of the mortgage was no
longer proper as there had already been settlement of
Manuels obligation in favor of MTLC. They claimed
that the assignment of the proceeds of the PNB loan
amounted to the payment of the MTLC loan. Esters
refusal to sign the deed of release/cancellation of
mortgage and to collect the proceeds of the PNB loan
were, to the spouses Go Cinco, completely unjustified
and entitled them to the payment of damages.
Ester countered these allegations by claiming
that she had not been previously informed of the
spouses Go Cincos plan to obtain a loan from the PNB
and to use the loan proceeds to settle Manuels loan
with MTLC. She claimed that she had no explicit
agreement with Manuel authorizing her to apply the
proceeds of the PNB loan to Manuels loan with
MTLC; the SPA merely authorized her to collect the
proceeds of the loan. She thus averred that it was
unfair for the spouses Go Cinco to require the release
of the mortgage to MTLC when no actual payment of
the loan had been made.
In a decision dated August 16, 1994,[9] the RTC
ruled in favor of the spouses Go Cinco. The trial court
found that the evidence sufficiently established the
existence of the PNB loan whose proceeds were
available to satisfy Manuels obligation with MTLC,
and that Ester unjustifiably refused to collect the
amount. Creditors, it ruled, cannot unreasonably
prevent payment or performance of obligation to the
damage and prejudice of debtors who may stand liable
for payment of higher interest rates.[10] After finding
MTLC and Ester liable for abuse of rights, the RTC
ordered the award of the following amounts to the
spouses Go Cinco:
(a) P1,044,475.15 plus 535.63 per
day hereafter, representing loss
of savings on interest, by way of
actual or compensatory
damages, if defendant
corporation insists on the
original 3% monthly interest
rate;
(b) P100,000.00 as unrealized
profit;
35
(c) P1,000,000.00 as moral
damages;
(d) P20,000.00 as exemplary
damages;
(e) P22,000.00 as litigation
expenses; and
(f) 10% of the total amount as
attorneys fees plus costs.[11]
Through an appeal with the CA, MTLC and
Ester successfully secured a reversal of the RTCs
decision. Unlike the trial court, the appellate court
found it significant that there was no explicit
agreement between Ester and the spouses Go Cinco
for the cancellation of the MTLC mortgage in favor of
PNB to facilitate the release and collection by Ester of
the proceeds of the PNB loan. The CA read the SPA as
merely authorizing Ester to withdrawthe proceeds of
the loan. As Manuels loan obligation with MTLC
remained unpaid, the CA ruled that no valid objection
could be made to the institution of the foreclosure
proceedings. Accordingly, it dismissed the spouses Go
Cinco complaint. From this dismissal, the spouses Go
Cinco filed the present appeal by certiorari.
THE PETITION
The spouses Go Cinco impute error on the part
of the CA for its failure to consider their acts as
equivalent to payment that extinguished the MTLC
loan; their act of applying for a loan with the PNB was
indicative of their good faith and honest intention to
settle the loan with MTLC. They contend that the
creditors have the correlative duty to accept the
payment.
The spouses Go Cinco charge MTLC and Ester
with bad faith and ill-motive for unjustly refusing to
collect the proceeds of the loan and to execute the
deed of release of mortgage. They assert that Esters
justifications for refusing the payment were flimsy
excuses so she could proceed with the foreclosure of
the mortgaged properties that were worth more than
the amount due to MTLC. Thus, they conclude that the
acts of MTLC and of Ester amount to abuse of rights
that warrants the award of damages in their (spouses
Go Cincos) favor.
In refuting the claims of the spouses Go Cinco,
MTLC and Ester raise the same arguments they raised
before the RTC and the CA. They claim that they were
not aware of the loan and the mortgage to PNB, and

that there was no agreement that the proceeds of the
PNB loan were to be used to settle Manuels obligation
with MTLC. Since the MTLC loan remained unpaid,
they insist that the institution of the foreclosure
proceedings was proper. Additionally, MTLC and
Ester contend that the present petition raised questions
of fact that cannot be addressed in a Rule 45 petition.
THE COURTS RULING
The Court finds the petition meritorious.
Preliminary Considerations
Our review of the records shows that there are no
factual questions involved in this case; the ultimate
facts necessary for the resolution of the case already
appear in the records. The RTC and the CA decisions
differed not so much on the findings of fact, but on the
conclusions derived from these factual findings. The
correctness of the conclusions derived from factual
findings raises legal questions when the conclusions
are so linked to, or are inextricably intertwined with,
the appreciation of the applicable law that the case
requires, as in the present case.[12] The petition raises
the issue of whether the loan due the MTLC had been
extinguished; this is a question of law that this Court
can fully address and settle in an appeal by certiorari.
Payment as Mode of
Extinguishing Obligations
Obligations are extinguished, among others, by
payment or performance,[13] the mode most relevant to
the factual situation in the present case. Under Article
1232 of the Civil Code, payment means not only the
delivery of money but also the performance, in any
other manner, of an obligation. Article 1233 of the
Civil Code states that a debt shall not be understood to
have been paid unless the thing or service in which the
obligation consists has been completely delivered or
rendered, as the case may be. In contracts of loan, the
debtor is expected to deliver the sum of money due the
creditor. These provisions must be read in relation with
the other rules on payment under the Civil Code,
[14]
which rules impliedly require acceptance by the
creditor of the payment in order to extinguish an
obligation.
In the present case, Manuel sought to pay Ester
by authorizing her, through an SPA, to collect the
proceeds of the PNB loan an act that would have led to
payment if Ester had collected the loan proceeds as
authorized. Admittedly, the delivery of the SPA was
36
not, strictly speaking, a delivery of the sum of money
due to MTLC, and Ester could not be compelled to
accept it as payment based on Article
1233. Nonetheless, the SPA stood as an authority to
collect the proceeds of the already-approved PNB loan
that, upon receipt by Ester, would have constituted as
payment of the MTLC loan.[15] Had Ester presented the
SPA to the bank and signed the deed of
release/cancellation of mortgage, the delivery of the
sum of money would have been effected and the
obligation extinguished.[16] As the records show, Ester
refused to collect and allow the cancellation of the
mortgage.
Under these facts, Manuel posits two
things: first, that Esters refusal was based on
completely unjustifiable grounds; and second, that the
refusal was equivalent to payment that led to the
extinguishment of the obligation.
a. Unjust Refusal to Accept Payment
After considering Esters arguments, we agree
with Manuel that Esters refusal of the payment was
without basis.
Ester refused to accept the payment because
the bank required her to first sign a deed of
release/cancellation of the mortgage before the
proceeds of the PNB loan could be released. As a prior
mortgagee, she claimed that the spouses Go Cinco
should have obtained her consent before offering the
properties already mortgaged to her as security for the
PNB loan. Moreover, Ester alleged that the SPA
merely authorized her to collect the proceeds of the
loan; there was no explicit agreement that the MTLC
loan would be paid out of the proceeds of the PNB
loan.
There is nothing legally objectionable in a
mortgagors act of taking a second or subsequent
mortgage on a property already mortgaged; a
subsequent mortgage is recognized as valid by law and
by commercial practice, subject to the prior rights of
previous mortgages. Section 4, Rule 68 of the 1997
Rules of Civil Procedure on the disposition of the
proceeds of sale after foreclosure actually requires the
payment of the proceeds to, among others, the junior
encumbrancers in the order of their priority.[17] Under
Article 2130 of the Civil Code, a stipulation forbidding
the owner from alienating the immovable mortgaged is
considered void. If the mortgagor-owner is allowed to
convey the entirety of his interests in the mortgaged

property, reason dictates that the lesser right to
encumber his property with other liens must also be
recognized. Ester, therefore, could not validly require
the spouses Go Cinco to first obtain her consent to the
PNB loan and mortgage. Besides, with the payment of
the MTLC loan using the proceeds of the PNB loan,
the mortgage in favor of the MTLC would have
naturally been cancelled.
We find it improbable for Ester to claim that
there was no agreement to apply the proceeds of the
PNB loan to the MTLC loan. Beginning July 16, 1989,
Manuel had already expressed intent to pay his loan
with MTLC and thus requested for an updated
statement of account. Given Manuels express intent of
fully settling the MTLC loan and of paying through
the PNB loan he would secure (and in fact secured),
we also cannot give credit to the claim that the SPA
only allowed Ester to collect the proceeds of the PNB
loan, without giving her the accompanying authority,
although verbal, to apply these proceeds to the MTLC
loan. Even Esters actions belie her claim as she in fact
even went to the PNB to collect the proceeds. In sum,
the surrounding circumstances of the case simply do
not support Esters position.
b. Unjust Refusal Cannot be Equated to
Payment
While Esters refusal was unjustified and
unreasonable, we cannot agree with Manuels position
that this refusal had the effect of payment that
extinguished his obligation to MTLC. Article 1256 is
clear and unequivocal on this point when it provides
that
ARTICLE 1256. If the creditor
to whom tender of payment has been
made refuses without just cause to
accept it, the debtor shall be released
from responsibility by the consignation
of the thing or sum due. [Emphasis
supplied.]
In short, a refusal without just cause is not equivalent
to payment; to have the effect of payment and the
consequent extinguishment of the obligation to pay,
the law requires the companion acts of tender of
payment and consignation.
Tender of payment, as defined in Far East
Bank and Trust Company v. Diaz Realty, Inc.,[18] is the
definitive act of offering the creditor what is due him
37
or her, together with the demand that the creditor
accept the same. When a creditor refuses the debtors
tender of payment, the law allows the consignation of
the thing or the sum due. Tender and consignation
have the effect of payment, as by consignation, the
thing due is deposited and placed at the disposal of the
judicial authorities for the creditor to collect.[19]
A sad twist in this case for Manuel was that he
could not avail of consignation to extinguish his
obligation to MTLC, as PNB would not release the
proceeds of the loan unless and until Ester had signed
the deed of release/cancellation of mortgage, which
she unjustly refused to do. Hence, to compel Ester to
accept the loan proceeds and to prevent their
mortgaged properties from being foreclosed, the
spouses Go Cinco found it necessary to institute the
present case for specific performance and damages.
c. Effects of Unjust Refusal
Under these circumstances, we hold that while
no completed tender of payment and consignation took
place sufficient to constitute payment, the spouses Go
Cinco duly established that they have legitimately
secured a means of paying off their loan with MTLC;
they were only prevented from doing so by the unjust
refusal of Ester to accept the proceeds of the PNB loan
through her refusal to execute the release of the
mortgage on the properties mortgaged to MTLC. In
other words, MTLC and Ester in fact prevented the
spouses Go Cinco from the exercise of their right to
secure payment of their loan. No reason exists under
this legal situation why we cannot compel MTLC and
Ester:(1) to release the mortgage to MTLC as a
condition to the release of the proceeds of the PNB
loan, upon PNBs acknowledgment that the proceeds of
the loan are ready and shall forthwith be released; and
(2) to accept the proceeds, sufficient to cover the total
amount of the loan to MTLC, as payment for Manuels
loan with MTLC.
We also find that under the circumstances, the
spouses Go Cinco have undertaken, at the very
least, the equivalent of a tender of payment that cannot
but have legal effect. Since payment was available and
was unjustifiably refused, justice and equity demand
that the spouses Go Cinco be freed from the
obligation to pay interest on the outstanding
amount from the time the unjust refusal took place;
[20]
they would not have been liable for any interest
from the time tender of payment was made if the

payment had only been accepted. Under Article 19 of
the Civil Code, they should likewise be entitled to
damages, as the unjust refusal was effectively an
abusive act contrary to the duty to act with honesty and
good faith in the exercise of rights and the fulfillment
of duty.
For these reasons, we delete the amounts
awarded by the RTC to the spouses Go Cinco
(P1,044,475.15, plus P563.63 per month)
representing loss of savings on interests for lack of
legal basis. These amounts were computed based on
the difference in the interest rates charged by the
MTLC (36% per annum) and the PNB (17% to 18%
per annum), from the date of tender of payment up to
the time of the promulgation of the RTC decision. The
trial court failed to consider the effects of a tender of
payment and erroneously declared that MTLC can
charge interest at the rate of only 18% per annum the
same rate that PNB charged, not the 36% interest rate
that MTLC charged; the RTC awarded the difference
in the interest rates as actual damages.
As part of the actual and compensatory damages, the
RTC also awarded P100,000.00 to the spouses Go
Cinco representing unrealized profits. Apparently, if
the proceeds of the PNB loan (P1,203,685.17) had
been applied to the MTLC loan (P1,071,256.55), there
would have been a balance of P132,428.62 left, which
amount the spouses Go Cinco could have invested in
their businesses that would have earned them a profit
of at least P100,000.00.
We find no factual basis for this award. The
spouses Go Cinco were unable to substantiate the
amount they claimed as unrealized profits; there was
only their bare claim that the excess could have been
invested in their other businesses. Without more, this
claim of expected profits is at best speculative and
cannot be the basis for a claim for damages. In Lucas
v. Spouses Royo,[21] we declared that:
In determining actual damages, the
Court cannot rely on speculation,
conjecture or guesswork as to the
amount. Actual and compensatory
damages are those recoverable because
of pecuniary loss in business, trade,
property, profession, job or occupation
and the same must be sufficiently
proved, otherwise, if the proof is
flimsy and unsubstantiated, no
38
damages will be given. [Emphasis
supplied.]
We agree, however, that there was basis for the award
of moral and exemplary damages and attorneys fees.
Esters act of refusing payment was motivated by bad
faith as evidenced by the utter lack of substantial
reasons to support it. Her unjust refusal, in her behalf
and for the MTLC which she represents, amounted to
an abuse of rights; they acted in an oppressive manner
and, thus, are liable for moral and exemplary damages.
[22]
We nevertheless reduce
the P1,000,000.00 to P100,000.00 as the originally
awarded amount for moral damages is plainly
excessive.
We affirm the grant of exemplary damages by
way of example or correction for the public good in
light of the same reasons that justified the grant of
moral damages.
As the spouses Go Cinco were compelled to
litigate to protect their interests, they are entitled to
payment of 10% of the total amount of awarded
damages as attorneys fees and expenses of litigation.
WHEREFORE, we GRANT the petitioners
petition for review on certiorari, and REVERSE the
decision of June 22, 2001 of the Court of Appeals in
CA-G.R. CV No. 47578, as well as the resolution
of January 25, 2002 that
followed. We REINSTATE the decision dated August
16, 1994 of the Regional Trial Court, Branch 25,
Maasin, Southern Leyte, with the
following MODIFICATIONS:
(1) The respondents are
hereby directed to accept the
proceeds of the spouses Go Cincos
PNB loan, if still available, and to
consent to the release of the
mortgage on the property given as
security for the loan upon PNBs
acknowledgment that the proceeds
of the loan, sufficient to cover the
total indebtedness to respondent
Maasin Traders Lending
Corporation computed as of June
20, 1989, shall forthwith be
released;

(2) The award for loss of
savings and unrealized profit is
deleted;
(3) The award for moral
damages is reduced
to P100,000.00; and
(4) The awards for
exemplary damages, attorneys
fees, and expenses of litigation are
retained.
The awards under (3) and (4) above shall be deducted
from the amount of the outstanding loan due the
respondents as of June 20, 1989. Costs against the
respondents.
SO ORDERED.
[ GR No. 202514, Jul 25, 2016 ]
ANNA MARIE L. GUMABON v. PHILIPPINE NATIONAL BANK +
RESOLUTION
BRION, J.:
Before us is a petition for review on certiorari[1] under Rule 45
of the Rules of Court filed by Anna Marie Gumabon (Anna Marie)
assailing the December 16, 2011 decision[2] and June 26, 2012
resolution[3] of the Court of Appeals (CA) in CA-G.R. CV. No.
96289. The CA reversed the Regional Trial Court (RTC)'s
ruling[4] in Civil Case No. Q-04-53432 favoring Anna Marie.
The Facts
On August 12, 2004, Anna Marie filed a complaint for recovery of
sum of money and damages before the RTC against the
Philippine National Bank (PNB) and the PNB Delta branch
manager Silverio Fernandez (Fernandez). The case stemmed
from the PNB's refusal to release Anna Marie's money in a
consolidated savings account and in two foreign exchange time
deposits, evidenced by Foreign Exchange Certificates of Time
Deposit (FXCTD).
In 2001, Anna Marie, together with her mother Angeles and her
siblings Anna Elena and Santiago, (the Gumabons) deposited
with the PNB Delta Branch $10,945.28 and $16,830.91, for
which they were issued FXCTD Nos. A-993902[5] and A-993992,
[6] respectively.
The Gumabons also maintained eight (8) savings accounts[7] in
the same bank. Anna Marie decided to consolidate the eight (8)
savings accounts and to withdraw P-2,727,235.85 from the
consolidated savings account to help her sister's financial needs.
Anna Marie called the PNB employee handling her accounts,
Reino Antonio Salvoro (Salvoro), to facilitate the consolidation of
the savings accounts and the withdrawal. When she went to the
bank on April 14, 2003, she was informed that she could not
withdraw from the savings accounts since her bank records were
missing and Salvoro could not be contacted.
On April 15, 2003, Anna Marie presented her two FXCTDs, but
was also unable to withdraw against them. Fernandez informed
her that the bank would still verify and investigate before
39
allowing the withdrawal since Salvoro had not reported for work.
Thus, Anna Marie sent two demand letters[8] dated April 23 and
April 25, 2003 to the PNB.
After a month, the PNB finally consolidated the savings accounts
and issued a passbook for Savings Account (SA) No. 6121200.
[9] The PNB also confirmed that the total deposits amounted to
P-2,734,207.36. Anna Marie, her mother, and the PNB executed
a Deed of Waiver and Quitclaim dated May 23, 2003[10] to settle
all questions regarding the consolidation of the savings accounts.
After withdrawals, the balance of her consolidated savings
account was P250,741.82.
On July 30, 2003, the PNB sent letters to Anna Marie to inform
her that the PNB refused to honor its obligation under FXCTD
Nos. 993902 and 993992,[11] and that the PNB withheld the
release of the balance of P-250,741.82 in the consolidated
savings account.[12] According to the PNB, Anna Marie pre-
terminated, withdrew and/or debited sums against her deposits.
Thus, Anna Marie filed before the RTC a complaint for sum of
money and damages against the PNB and Fernandez.[13]
As to the two FXCTDs, Anna Marie contended that the PNB's
refusal to pay her time deposits is contrary to law. The PNB
cannot claim that the bank deposits have been paid since the
certificates of the time deposits are still with Anna Marie.[14]
As to the consolidated savings account, Anna Marie stated that
the PNB had already acknowledged the account's balance in the
Deed of Waiver and Quitclaim amounting to P2,734,207.36. As of
January 26, 2004, the remaining balance was P250,741.82. PNB
presented no concrete proof that this amount had been
withdrawn.
Anna Marie prayed that the PNB and Fernandez be held solidarily
liable for actual, moral, and exemplary damages, as well as
attorney's fees, costs of suit, and legal interests because of the
PNB's refusal to honor its obligations.
In its answer,[15] the PNB argued that: (1) Anna Marie is not
entitled to the balance of the consolidated savings account based
on solutio indebiti; (2) the PNB already paid the $10,058.01
covered by FXCTD No. 993902; (3) the PNB is liable to pay only
$10,718.87 of FXCTD No. 993992, instead of the full amount of
$17,235.41; and (4) Anna Marie is guilty of contributory
negligence. The PNB's arguments are discussed below.
First, Anna Marie is not entitled to the alleged balance of
P250,741.82. The PNB's investigation showed that Anna Marie
withdrew a total of P251,246.81[16] from two of the eight
savings accounts and she used this amount to purchase
manager's check no. 0000760633.[17] Hence, P251,246.81
should be deducted from the sum agreed upon in the Deed of
Waiver and Quitclaim. The PNB offered photocopies of the PNB's
miscellaneous ticket[18] and the manager's check as evidence to
prove the withdrawals. The PNB argued that unjust enrichment
would result if Anna Marie would be allowed to collect P-
250,741.82 from the consolidated savings account without
deducting her previous withdrawal of P251,246.81.
Second, Anna Marie is not entitled to receive $10,058.01 covered
by FXCTD No. 993902. Based on the PNB's records, Anna Marie
pre-terminated FXCTD No. 993902 on March 11, 2002, and used
the deposit, together with another deposit covered by FXCTD No.
993914 (for $8,111.35), to purchase a foreign demand draft (FX
Demand Draft No. 4699831) payable to Anna Rose/Angeles
Gumabon. The PNB presented a facsimile copy of Anna Rose's
Statement of Account (SOA)[19] from the PNB Bank to prove
that the amount covered by FXCTD No. 993902 was already
paid.
Third, Anna Marie is only entitled to receive $10,718.87 instead
of the full amount of $17,235.41 covered by FXCTD No. 993992

because: (a) the amount of $1,950.00 was part of the money
used by Anna Marie to purchase the manager's check; (2) the
amount of $2,566.54 was credited to Current Account No. 227-
810961-8 owned by Anna Marie's aunt, Lolita Lim; and (3) the
amount of $2,000.00 was credited to Current Account No.
2108107498 of Anna Marie and Savings Account No. 212-
5057333 of Anna Marie/or Angeles or Santiago/or Elena (all
surnamed Gumabon). Hence, these amounts should be deducted
from the amount payable to Anna Marie.
Finally, the PNB alleged that Anna Marie was guilty of
contributory negligence in her bank dealings.
In her reply,[20] Anna Marie argued that the best evidence of
her withdrawals is the withdrawal slips duly signed by her and
the passbooks pertaining to the accounts. PNB, however, failed
to show any of the withdrawal slips and/or passbooks, and also
failed to present sufficient evidence that she used her accounts'
funds.
The RTC Ruling
The RTC ruled in Anna Marie's favour.[21]
The RTC held that the PNB had not yet paid the remaining
balance of $10,058.01 under FXCTD No. 993902. Anna Marie's
SOA,[22] which the PNB relied upon, is a mere photocopy and
does not satisfy the best evidence rule. Moreover, there is no
indication on the stated amounts in the SOA that the funds have
come from FXCTD No. 993902.[23] The PNB failed to obtain the
deposition of a PNC Bank officer or present any other evidence to
show that the amounts stated in the SOA came from FXCTD No.
993902. The RTC also held that the alleged pre-termination of
FXCTD No. 993902 on March 11, 2002, is hard to believe since
the certificate shows that the last entry was made on March 24,
2003, with a reflected balance of $10,058.01.
On FXCTD No. 993992, the RTC held that the PNB failed to prove
Anna Marie's alleged withdrawals. These alleged withdrawals are
not reflected at the back of the certificate. Anna Marie's ledger
was also not presented as evidence to show that several
withdrawals had been made against FXCTD No. 993992.
On the consolidated savings account, the RTC held that the PNB
failed to prove that Anna Marie withdrew the balance of
P250,741.82. The RTC excluded PNB's evidence, i.e., photocopies
of the miscellaneous ticket and manager's check, to prove the
alleged withdrawals, since these documents were just
photocopies and thus failed to satisfy the best evidence rule.
The RTC awarded damages to Anna Marie due to the PNB's
mishandling of her account through its employee, Salvoro. The
RTC also held that the PNB failed to establish Anna Marie's
contributory negligence.
In conclusion, the RTC ordered the PNB to pay Anna Marie these
amounts:
(1) Actual damages of:
(a) $10,058.01, as the outstanding balance of FXCTD No.
993902;
(b) $20,244.42, as the outstanding balance of FXCTD No.
993992;and
(c) P-250,741.82, as the outstanding balance of SA No.
6121200;
(2) P-100,000.00 as moral damages;
(3) P-50,000.00 as exemplary damages;
(4) P150,000.00 as attorney's fees; and
(5) Costs of suit.
From this ruling, the PNB appealed before the CA.
The CA Ruling
The CA reversed the RTC's ruling.[24]
40
The CA held that the PNB had paid the actual amounts claimed
by Anna Marie in her complaint. The CA noted Anna Marie's
suspicious and exclusive dealings with Salvoro and the
Gumabons' instruction to Salvoro to make unauthorized and
unrecorded withdrawals. Hence, there are no entries of
withdrawals reflected in Anna Marie's passbook.
The CA also considered Anna Rose's SOA as proof that the PNB
had paid the remaining balance of $10,058.01 on FXCTD No.
993902. The CA held that the PNB verified the SOA and it was
corroborated by the affidavit[25] of the PNB Branch Operations
Officer in New York. The CA stated that the RTC should have
allowed the taking of the deposition of the PNB bank officer.
The CA also relied on the PNB's investigation and concluded that
the PNB had already paid the amounts claimed by Anna Marie
under FXCTD Nos. 993902 and 993992.
As to Anna Marie's consolidated savings account, the CA gave
credence to the miscellaneous ticket and the manager's check
presented by the PNB to prove that it had already paid the
balance.
Anna Marie moved but failed to obtain reconsideration of the
CA's decision; hence, the present petition.[26]
The Petition
Anna Marie filed the present petition for review to question the
CA's decision and resolution which reversed the RTC's ruling.
Anna Marie argues that: first, the CA should not have
disregarded the RTC's conclusive findings; second, the CA erred
in considering the PNB New York bank officer's affidavit because
it was not formally offered as evidence; third, the CA erroneously
relied on a foreign demand draft[27] to prove the PNB's payment
of the amount due under FXCTD No. 993902; fourth, the CA
erroneously considered the miscellaneous ticket and the
manager's check because these documents are mere photocopies
and inadmissible under the best evidence rule; and fifth, the CA's
conclusion about a purported "connivance" between Anna Marie
and Salvoro has no evidentiary basis.
In its comment, the PNB counters that: first, the CA can rectify
the RTC's factual findings since the RTC committed errors in its
appreciation of the evidence; second, the RTC completely
ignored the PNB's several evidence proving its payment of Anna
Marie's FXCTDs; third, Anna Marie did not refute the PNB's
allegations of payment; fourth, the CA has the right to review
even those exhibits which were excluded by the RTC; and fifth,
the CA correctly ruled that the PNB should not be faulted about
the unrecorded transactions, and that the PNB had done its duty
to its depositors when it conducted investigations and an internal
audit of Anna Marie's accounts.
The Issues
The issue before this Court is whether Anna Marie is entitled to
the payment of the following amounts:
(a) $10,058.01 or the outstanding balance under FXCTD No.
993902;
(b) $20,244.42 for FXCTD No. 993992;
(c) P250.741.82 for SA No. 6121200; and (3) Damages.
Our Ruling
We grant the petition and reverse the CA 's ruling.
The core issue raised in the present petition is a question of fact.
As a general rule, a petition for review under Rule 45 of the
Rules of Court covers only questions of law. Questions of fact are
not reviewable and cannot be passed upon by the Court in the
exercise of its power to review under Rule 45.[28]

There are, however, exceptions to the general rule. Questions of
fact may be raised before this Court in any of these instances:
(1) when the findings are grounded entirely on speculations,
surmises, or conjectures; (2) when the inference made is
manifestly mistaken, absurd, or impossible; (3) when there is a
grave abuse of discretion; (4) when the judgment is based on
misappreciation of facts; (5) when the findings of fact are
conflicting; (6) when in making its findings, the same are
contrary to the admissions of both appellant and appellee; (7)
when the findings are contrary to those of the trial court; (8)
when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in
the petition as well as in the petitioners main and reply briefs are
not disputed by the respondent; and (10) when the findings of
fact are premised on the supposed absence of evidence and
contradicted by the evidence on record.[29]
The present case falls under two of the exceptions, particularly
that the CA's findings are contrary to the RTC's findings, and that
the CA's findings of fact are premised on absent evidence and
contradicted by the evidence on record.
We note that the CA considered pieces of evidence which are
inadmissible under the Rules of Court, particularly the manager's
check and the corresponding miscellaneous ticket, Anna Rose's
SO A, and the affidavit of the PNB New York's bank officer. The
inadmissibility of these documents is explained more fully in the
following discussion.
PNB failed to establish the fact of
payment to Anna Marie in FXCTD
Nos. 993902 and 993992, and SA
No. 6121200.
It is a settled rule in evidence that the one who alleges payment
has the burden of proving it.[30] The burden of proving that the
debt had been discharged by payment rests upon the debtor
once the debt's existence has been fully established by the
evidence on record. When the debtor introduces some evidence
of payment, the burden of going forward with the evidence - as
distinct from the burden of proof - shifts to the creditor.
Consequently, the creditor has a duty to produce evidence to
show nonpayment.[31]
In the present case, both the CA and the RTC declared that the
PNB has the burden of proving payment. The lower courts,
however, differed in resolving the question of whether the PNB
presented sufficient evidence of payment to shift the burden of
evidence to Anna Marie. The RTC ruled that the PNB failed to do
so, after excluding PNB's evidence, i.e., miscellaneous ticket,
manager's check, and the affidavit of the PNB New York's bank
officer, based on the rules of evidence. The CA, on the other
hand, considered the excluded evidence and found that the PNB
presented sufficient proof of payment.
i. The PNB's alleged payment of the
amount covered by SA No. 6121200
The PNB alleged that it had already paid the balance of the
consolidated savings account (SA No. 6121200) amounting to P-
250,741.82. It presented the manager's check to prove that
Anna Marie purchased the check using the amounts covered by
the Gumabon's two savings accounts which were later part of
Anna Marie's consolidated savings account. The PNB also
presented the miscellaneous ticket to prove Anna Marie's
withdrawal from the savings accounts.
The RTC denied the admission of the manager's check and the
miscellaneous ticket since the original copies were never
presented.[32] The PNB moved to tender the excluded evidence
and argued that even without the presentation of the original
copies, the photocopies are admissible because they have been
identified by Fernandez.[33]
Evidence, to be admissible, must comply with two qualifications:
41
(a) relevance and (b) competence. Evidence is relevant if it has a
relation to the fact in issue as to induce a belief in its existence
or nonexistence.[34] On the other hand, evidence is competent if
it is not excluded by the law or by the Rules of Court.[35]
One of the grounds under the Rules of Court that determines the
competence of evidence is the best evidence rule. Section 3,
Rule 130 of the Rules of Court provides that the original copy of
the document must be presented whenever the content of the
document is under inquiry.[36]
However, there are instances when the Court may allow the
presentation of secondary evidence in the absence of the original
document. Section 3, Rule 130 of the Rules of Court enumerates
these exceptions:
(a) when the original has been lost, or destroyed, or cannot be
produced in court, without bad faith on the part of the offeror;
(b) when the original is in the custody or under the control of
the party against whom the evidence is offered, and the latter
fails to produce it after reasonable notice;
(c) when the original consists of numerous accounts or other
documents which cannot be examined in court without great loss
of time and the fact sought to be established from them is only
the general result of the whole; and
(d) when the original is a public record in the custody of a public
officer or is recorded in a public office.
While the RTC cannot consider the excluded evidence to resolve
the issues, such evidence may still be admitted on appeal
provided there has been tender of the excluded evidence under
Section 40 of Rule 132 of the Rules of Court.[37]
The PNB cannot simply substitute the mere photocopies of the
subject documents for the original copies without showing the
court that any of the exceptions under Section 3 of Rule 130 of
the Rules of Court applies. The PNB's failure to give a justifiable
reason for the absence of the original documents and to maintain
a record of Anna Marie's transactions only shows the PNB's
dismal failure to fulfill its fiduciary duty to Anna Marie.[38] The
Court expects the PNB to "treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature
of their relationship."[39] The Court explained in Philippine
Banking Corporation v. CA,[40] the fiduciary nature of the bank's
relationship with its depositors, to wit:
The business of banking is imbued with public interest. The
stability of banks largely depends on the confidence of the people
in the honesty and efficiency of banks. In Simex International
(Manila) Inc. v. Court of Appeals we pointed out the depositor's
reasonable expectations from a bank and the bank's
corresponding duty to its depositor, as follows:
In every case, the depositor expects the bank to treat his
account with the utmost fidelity, whether such account consists
only of a few hundred pesos or of millions. The bank must record
every single transaction accurately, down to the last centavo,
and as promptly as possible. This has to be done if the account
is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver
it as and to whomever he directs, (emphasis and underscoring
supplied)
Consequently, the CA should not have admitted the subject
documents even if the PNB tendered the excluded evidence.
Notably, the PNB clearly admitted in the executed Deed of
Waiver and Quitclaim that it owed Anna Marie P2,734,207.36
under the consolidated savings account. After a number of
uncontested transactions, the remaining balance of Anna Marie's
deposit became P250,741.82. The inevitable conclusion is that
PNB's obligation to pay P250,741.82 under SA No. 6121200

subsists.
ii. The PNB's alleged payment of the
amount covered by FXCTD No. 993902
The PNB claimed that it had already paid the amount of
$10,058.01 covered by FXCTD No. 993902. It presented the
foreign demand draft dated March 11, 2002 which Anna Marie
allegedly purchased with the funds of FXCTD No. 993902. In
addition, the PNB also presented Anna Rose's SOA to show that
there was a fund transfer involving the contested amount. To
further support its claim, the PNB annexed the affidavit of the
PNB New York's branch officer about the fund transfer. The PNB,
however, failed to formally offer the affidavit as evidence.
Anna Marie moved for the exclusion of the photocopy of Anna
Rose's SOA for failing to conform to the best evidence rule. The
RTC granted her motion and denied its admission. When the case
reached the CA, the CA stated that the RTC should have
considered the evidence in the light of the PNB's identification of
the SOA as an exact copy of the original and the claim that it is
corroborated by the affidavit of the PNB New York's bank officer.
The PNB explained that its failure to present the original copy of
Anna Rose's SOA was because the original was not in the PNB's
possession.
We rule that the SOA is inadmissible because it fails to qualify as
relevant evidence. As the RTC correctly stated, the SOA "does
not show which of the amount stated therein came from the
funds of Certificate of Time Deposit No. A-993902."[41]
The affidavit of the PNB New York's bank officer is also
inadmissible in the light of the following self-explanatory
provision of the Rules of Court:
"Sec. 34. Offer of evidence. - The court shall consider no
evidence which has not been formally offered, x x x."[42]
Formal offer means that the offeror shall inform the court of the
purpose of introducing its exhibits into evidence. Without a
formal offer of evidence, courts cannot take notice of this
evidence even if this has been previously marked and identified.
[43]
In Heirs of Pedro Pasag v. Parocha,[44] we reiterated the
importance of a formal offer of evidence. Courts are mandated to
rest their factual findings and their judgment only and strictly
upon the evidence offered by the parties at the trial. The formal
offer enables the judge to know the purpose or purposes for
which the proponent is presenting the evidence. It also affords
the opposing parties the chance to examine the evidence and to
object to its admissibility. Moreover, it facilitates review as the
appellate court will not be required to review documents not
previously scrutinized by the trial court.
In People v. Napat-a[45] People v. Mate[46] and Heirs of
Romana Saves, et al. v. Escolastico Saves, et al.[47] we
recognized the exceptions from the requirement of a formal offer
of evidence, namely: (a) the evidence must have been duly
identified by testimony duly recorded; and (b) the evidence must
have been incorporated in the records of the case.
It is unmistakable that the PNB did not include the affidavit of
the PNB New York's bank officer in its formal offer of evidence to
corroborate Anna Rose's SOA. Although the affidavit was
included in the records and identified by Fernandez, it remains
inadmissible for being hearsay. Jurisprudence dictates that an
affidavit is merely hearsay evidence when its affiant or maker did
not take the witness stand.[48]
In the present case, Fernandez is not the proper party to identify
the affidavit executed by the PNB New York's bank officer since
he is not the affiant. Therefore the affidavit is inadmissible.
42
Thus, the PNB failed to present sufficient and admissible
evidence to prove payment of the $10,058.01.This failure leads
us to conclude that the PNB is still liable to pay the amount
covered by FXCTD No. 993902.
iii. The PNB's alleged payment of
the amount covered by FXCTD
No. 993992
The PNB alleged that Anna Marie's claim over FXCTD No. 993992
should only be limited to $5,857.79. It presented the manager's
check, which admissibility we have heretofore discussed and
settled, and the miscellaneous tickets.
We cannot absolve the PNB from liability based on these
miscellaneous tickets alone. As the RTC correctly stated, the
transactions allegedly evidenced by these tickets were neither
posted at the back of Anna Marie's certificate, nor recorded on
her ledger to show that several withdrawals had been made on
the account.
At this point, we remind the PNB of the negotiability of a
certificate of deposit as it is a written acknowledgment by the
bank of the receipt of a sum of money on deposit which the bank
promises to pay to the depositor, to the latter's order, or to some
other person or the latter's order.[49] To discharge a debt, the
bank must pay to someone authorized to receive the payment.
[50] A bank acts at its peril when it pays deposits evidenced by a
certificate of deposit, without its production and surrender after
proper indorsement.[51]
Again, as the RTC had correctly stated, the PNB should not have
allowed the withdrawals, if there were indeed any, without the
presentation of the covering foreign certificates of time deposit.
There are no irregularities on Anna Marie's certificates to justify
the PNB's refusal to pay the stated amounts in the certificates
when it was presented for payment.
Therefore, the PNB is liable for Anna Marie's claims since it failed
to prove that it had already been discharged from its obligation.
PNB is liable to Anna Marie
for actual, Moral, and exemplary
damages as well as attorney's fees
for its negligent acts as a
banking institution.
Since the PNB is clearly liable to Anna Marie for her deposits, the
Court now determines PNB's liability for damages under existing
laws and jurisprudence.
Section 2 of Republic Act No. 8791,[52] declares the State's
recognition of the "fiduciary nature of banking that requires high
standards of integrity and performance." It cannot be
overemphasized that the banking business is impressed with
public interest. The trust and confidence of the public to the
industry is given utmost importance.[53] Thus, the bank is under
obligation to treat its depositor's accounts with meticulous care,
having in mind the nature of their relationship.[54] The bank is
required to assume a degree of diligence higher than that of a
good father of a family.[55]
As earlier settled, the PNB was negligent for its failure to update
and properly handle Anna Marie's accounts. This is patent from
the PNB's letter to Anna Marie, admitting the error and
unauthorized withdrawals from her account. Moreover, Anna
Marie was led to believe that the amounts she has in her
accounts would remain because of the Deed of Waiver and
Quitclaim executed by her, her mother, and PNB. Assuming
arguendo that Anna Marie made the contested withdrawals, due
diligence requires the PNB to record the transactions in her
passbooks.
The Court has established in a number of cases the standard of
care required from banks, and the bank's liability for the

damages sustained by the depositor. The bank is not absolved
from liability by the fact that it was the bank's employee who
committed the wrong and caused damage to the depositor.[56]
Article 2180 of the New Civil Code provides that the owners and
managers of an establishment are responsible for damages
caused by their employees while performing their functions.[57]
In addition, we held in PNB v. Pike,[58] that although the bank's
employees are the ones negligent, a bank is primarily liable for
the employees' acts because banks are expected to exercise the
highest degree of diligence in the selection and supervision of
their employees.
Indeed, a great possibility exists that Salvoro was involved in the
unauthorized withdrawals. Anna Marie entrusted her accounts to
and made her banking transactions only through him. Salvaro's
unexplained disappearance further confirms this Court's
suspicions. The Court is alarmed that he was able to repeatedly
do these unrecorded transactions without the bank noticing it.
This only shows that the PNB has been negligent in the
supervision of its employees.
As to contributory negligence, the Court agrees with the RTC that
the PNB failed to substantiate its allegation that Anna Marie was
guilty of contributory negligence.
Contributory negligence is conduct on the part of the injured
party, contributing as a legal cause to the harm he has suffered,
which falls below the standard to which he is required to conform
for his own protection.[59] Whether contributory negligence
transpired is a factual matter that must be proven.
In the present case, Anna Marie cannot be held responsible for
entrusting her account with Salvoro. As shown in the records,
Salvoro was the bank's time deposit specialist. Anna Marie
cannot thus be faulted if she engaged the bank's services
through Salvoro for transactions related to her time deposits.
The Court also cannot accept the CA's conclusion that there was
connivance between Anna Marie and Salvoro. This conclusion is
simply not supported by the records and is therefore baseless.
In these lights, we hold that Anna Marie is entitled to moral
damages of P-l 00,000.00. In cases of breach of contract, moral
damages are recoverable only if the defendant acted fraudulently
or in bad faith, or is guilty of gross negligence amounting to bad
faith, or in clear disregard of his contractual obligations.[60]
Anna Marie was able to establish the mental anguish and serious
anxiety that she suffered because of the PNB's refusal to honor
its obligations.
Anna Marie is likewise entitled to exemplary damages of P-
50,000.00. Article 2229 of the New Civil Code imposes
exemplary damages by way of example or correction for the
public good. To repeat, banks must treat the accounts of its
depositors with meticulous care and always have in mind the
fiduciary nature of its relationship with them.[61] Having failed
to observe these, the award of exemplary damages is justified.
As exemplary damages are awarded herein[62] and as Anna
Marie was compelled to litigate to protect her interests,[63] the
award of attorney's fees and expenses of litigation of
P150,000.00 is proper.
Finally, we impose legal interest pursuant to the guidelines in
Nacar v. Gallery Frames,[64] We held in that case that for
interest awarded on actual and compensatory damages, the
interest rate 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
43
annum [changed to 6% per annum starting July 1, 2013] to be
computed from default, i.e., from extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
xxxx
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest x x x shall
be 6% per annum frorn such finality until its satisfaction, x x x
We note that pursuant to the Bangko Sentral ng Pilipinas-
Monetary Board Circular No. 799, the legal interest rate is 6%
per annum effective July 1, 2013. The new rate is applicable
prospectively; thus, the 12% per annum shall still apply until
June 30, 2013.
In the present case, Anna Marie filed her complaint on August
12, 2004. PNB is therefore liable for legal interest of 12% per
annum from August 12, 2004 until June 30, 2013, and 6% per
annum from July 1, 2013, until its full satisfaction.
WHEREFORE, the petition is GRANTED. The assailed December
16, 2011 decision and June 26, 2012 resolution of the Court of
Appeals is hereby reversed. The October 26, 2010 decision of the
Regional Trial Court is REINSTATED with MODIFICATIONS. Thus,
the Philippine National Bank is ORDERED to pay Anna Marie
Gumabon the following:
(1) Actual damages of:
(a) $10,058.01, as the outstanding balance of FXCTD No.
993902;
(b) $ 20,244.42, as the outstanding balance of FXCTD No.
993992; and
(c) P250/741.82, as the outstanding balance of SA No. 6121200;
(2) Legal interest of twelve percent (12%) per annum of the
total actual damages from August 12, 2004 to June 30, 2013,
and six percent (6%) per annum from July 1, 2013 until full
satisfaction;
(3) P100,000.00 as moral damages;
(4) P50,000.00 as exemplary damages;
(5) P150,000.00 as attorney's fees; and (7) Costs of suit.
Let a copy of this Decision be furnished the Financial Consumers
Protection Department of the Bangko Sentral ng Pilipinas, for
information and possible action in accordance with the Bangko
Sentral ng Pilipinas' mandate to protect the banking public.
SO ORDERED.
FIRST DIVISION
phili
STRONGHOLD INSURANCE G.R. No. 147561
COMPANY, INC.,
Petitioner, Present:
Panganiban, CJ,
Chairman,
- versus - Ynares-Santiago,
 44
Austria-Martinez, (P5,300,000.00) inclusive of value
Callejo, Sr., and added tax for said construction, which
Chico-Nazario, JJ was supposed to be completed within a
period of two hundred forty (240) days
REPUBLIC-ASAHI GLASS Promulgated: beginning May 8, 1989. In order to
CORPORATION, guarantee the faithful and satisfactory
Respondent. June 22, 2006 performance of its undertakings x x x
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- JDS, shall post a performance bond of
-- -- -- -- x seven hundred ninety five thousand
pesos (P795,000.00). x x x JDS
DECISION executed, jointly and severally with
[petitioner] Stronghold Insurance Co.,
Inc. (SICI) Performance Bond No.
PANGANIBAN, CJ: SICI-25849/g(13)9769.

A surety companys liability under the On May 23, 1989, [respondent] paid to
performance bond it issues is solidary. The death of the x x x JDS seven hundred ninety five
principal obligor does not, as a rule, extinguish the thousand pesos (P795,000.00) by way
obligation and the solidary nature of that liability. of downpayment.

Two progress billings dated August 14,

The Case 1989 and September 15, 1989, for the
total amount of two hundred seventy
Before us is a Petition for Review under Rule 45 of the
[1]
four thousand six hundred twenty one
Rules of Court, seeking to reverse the March 13, 2001 pesos and one centavo (P274,621.01)
Decision of the Court of Appeals (CA) in CA-GR CV
[2]
were submitted by x x x JDS to
No. 41630. The assailed Decision disposed as follows: [respondent], which the latter
paid. According to [respondent], these
WHEREFORE, the Order two progress billings accounted for
dated January 28, 1993 issued by the only 7.301% of the work supposed to
lower court is REVERSED and SET be undertaken by x x x JDS under the
ASIDE. Let the records of the instant terms of the contract.
case be REMANDED to the lower
court for the reception of evidence of all Several times prior to November of
parties. [3]
1989, [respondents] engineers called
the attention of x x x JDS to the alleged
alarmingly slow pace of the
The Facts construction, which resulted in the fear
that the construction will not be
The facts of the case are narrated by the CA in this finished within the stipulated 240-day
wise: period. However, said reminders went
unheeded by x x x JDS.
On May 24, 1989, [respondent]
Republic-Asahi Glass Corporation On November 24, 1989, dissatisfied
(Republic-Asahi) entered into a contract with the progress of the work
with x x x Jose D. Santos, Jr., the undertaken by x x x JDS, [respondent]
proprietor of JDS Construction (JDS), Republic-Asahi extrajudicially
for the construction of roadways and a rescinded the contract pursuant to
drainage system in Republic-Asahis Article XIII of said contract, and wrote
compound in Barrio Pinagbuhatan, a letter to x x x JDS informing the latter
Pasig City, where [respondent] was to of such rescission. Such rescission,
pay x x x JDS five million three according to Article XV of the contract
hundred thousand pesos shall not be construed as a waiver of

[respondents] right to recover damages
from x x x JDS and the latters sureties.
[Respondent] alleged that, as a result of
x x x JDSs failure to comply with the
provisions of the contract, which
resulted in the said contracts rescission,
it had to hire another contractor to
finish the project, for which it incurred
an additional expense of three million
two hundred fifty six thousand, eight
hundred seventy four pesos
(P3,256,874.00).
On January 6, 1990, [respondent] sent a
letter to [petitioner] SICI filing its claim
under the bond for not less
than P795,000.00. On March 22, 1991,
[respondent] again sent another letter
reiterating its demand for payment
under the aforementioned bond. Both
letters allegedly went unheeded.
[Respondent] then filed [a] complaint
against x x x JDS and SICI. It sought
from x x x JDS payment
of P3,256,874.00 representing the
additional expenses incurred by
[respondent] for the completion of the
project using another contractor, and
from x x x JDS and SICI, jointly and
severally, payment of P750,000.00 as
damages in accordance with the
performance bond; exemplary damages
in the amount of P100,000.00 and
attorneys fees in the amount of at
least P100,000.00.
According to the Sheriffs Return
dated June 14, 1991, submitted to the
lower court by Deputy Sheriff Rene R.
Salvador, summons were duly served
on defendant-appellee SICI. However,
x x x Jose D. Santos, Jr. died the
previous year (1990), and x x x JDS
Construction was no longer at its
address at 2nd Floor, Room 208-A, San
Buena Bldg. Cor. Pioneer St., Pasig,
Metro Manila, and its whereabouts
were unknown.
On July 10, 1991, [petitioner] SICI filed
its answer, alleging that the
45
[respondents] money claims against
[petitioner and JDS] have been
extinguished by the death of Jose D.
Santos, Jr. Even if this were not the
case, [petitioner] SICI had been
released from its liability under the
performance bond because there was no
liquidation, with the active participation
and/or involvement, pursuant to
procedural due process, of herein surety
and contractor Jose D. Santos, Jr.,
hence, there was no ascertainment of
the corresponding liabilities of Santos
and SICI under the performance
bond. At this point in time, said
liquidation was impossible because of
the death of Santos, who as such can no
longer participate in any
liquidation. The unilateral liquidation
on the party (sic) of [respondent] of the
work accomplishments did not bind
SICI for being violative of procedural
due process. The claim of [respondent]
for the forfeiture of the performance
bond in the amount of P795,000.00 had
no factual and legal basis, as payment
of said bond was conditioned on the
payment of damages which
[respondent] may sustain in the event x
x x JDS failed to complete the
contracted works.[Respondent] can no
longer prove its claim for damages in
view of the death of Santos. SICI was
not informed by [respondent] of the
death of Santos. SICI was not informed
by [respondent] of the unilateral
rescission of its contract with JDS, thus
SICI was deprived of its right to protect
its interests as surety under the
performance bond, and therefore it was
released from all liability. SICI was
likewise denied due process when it
was not notified of plaintiff-appellants
process of determining and fixing the
amount to be spent in the completion of
the unfinished project. The procedure
contained in Article XV of the contract
is against public policy in that it denies
SICI the right to procedural due
process. Finally, SICI alleged that
[respondent] deviated from the terms
and conditions of the contract without
the written consent of SICI, thus the
 46
latter was released from all Santos, Jr. (deceased)
liability. SICI also prayed for the award remains undisturbed.
of P59,750.00 as attorneys fees,
and P5,000.00 as litigation expenses. Motion for Preliminary
On August 16, 1991, the lower court hearing and
issued an order dismissing the Manifestation with
complaint of [respondent] against x x x Motion filed by
JDS and SICI, on the ground that the [Stronghold] Insurance
claim against JDS did not survive the Company Inc., are set
death of its sole proprietor, Jose D. for hearing
Santos, Jr. The dispositive portion of on November 7,
the [O]rder reads as follows: 1991 at 2:00 oclock in
the afternoon.
ACCORDINGLY, the
complaint against the SO ORDERED.
defendants Jose D.
Santos, Jr., doing On June 4, 1992, [petitioner] SICI filed
business under trade and its Memorandum for
style, JDS Construction Bondsman/Defendant SICI (Re: Effect
and Stronghold of Death of defendant Jose D. Santos,
Insurance Company, Inc. Jr.) reiterating its prayer for the
is ordered DISMISSED. dismissal of [respondents] complaint.

SO ORDERED. On January 28, 1993, the lower court

On September 4, 1991, [respondent]
filed a Motion for Reconsideration
seeking reconsideration of the lower
courts August 16, 1991 order
dismissing its complaint. [Petitioner]
SICI field its Comment and/or
Opposition to the Motion for
Reconsideration. On October 15, 1991,
issued the assailed Order reconsidering
its Order dated October 15, 1991, and
ordered the case, insofar as SICI is
concerned, dismissed. [Respondent]
filed its motion for reconsideration
which was opposed by [petitioner]
SICI. On April 16, 1993, the lower
court denied [respondents] motion for
reconsideration. x x x.
[4]

the lower court issued an Order, the

dispositive portion of which reads as
follows:
Ruling of the Court of Appeals
WHEREFORE,
premises considered, the The CA ruled that SICIs obligation under the surety
Motion for agreement was not extinguished by the death of Jose
Reconsideration is D. Santos, Jr. Consequently, Republic-Asahi could still
hereby given due go after SICI for the bond.
course. The Order
dated 16 August The appellate court also found that the lower court had
1991 for the dismissal of erred in pronouncing that the performance of the
the case against Contract in question had become impossible by
Stronghold Insurance respondents act of rescission. The Contract was
Company, Inc., is rescinded because of the dissatisfaction of respondent
reconsidered and hereby with the slow pace of work and pursuant to Article
reinstated (sic).However, XIII of its Contract with JDS.
the case against
defendant Jose D. The CA ruled that [p]erformance of the [C]ontract was
impossible, not because of [respondents] fault, but

because of the fault of JDS Construction and Jose D.
Santos, Jr. for failure on their part to make satisfactory
progress on the project, which amounted to non-
performance of the same. x x x [P]ursuant to the
[S]urety [C]ontract, SICI is liable for the non-
performance of said [C]ontract on the part of JDS
Construction. [5]
Hence, this Petition. [6]
Issue
Petitioner states the issue for the Courts consideration
in the following manner:
Death is a defense of Santos heirs
which Stronghold could also adopt as
its defense against obligees claim. [7]
More precisely, the issue is whether petitioners
liability under the performance bond was
automatically extinguished by the death of Santos, the
principal.
The Courts Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Suretys Liability
Petitioner contends that the death of Santos, the bond
principal, extinguished his liability under the surety
bond. Consequently, it says, it is automatically
released from any liability under the bond.
As a general rule, the death of either the
creditor or the debtor does not extinguish the
obligation. Obligations are transmissible to the heirs,
[8]
except when the transmission is prevented by the law,
the stipulations of the parties, or the nature of the
obligation. Only obligations that are personal or are
[9] [10]
identified with the persons themselves are
extinguished by death. [11]
Section 5 of Rule 86 of the Rules of Court
[12]
expressly allows the prosecution of money claims
47
arising from a contract against the estate of a deceased
debtor. Evidently, those claims are not actually
extinguished. What is extinguished is only the
[13]
obligees action or suit filed before the court, which is
not then acting as a probate court.
[14]
In the present case, whatever monetary
liabilities or obligations Santos had under his contracts
with respondent were not intransmissible by their
nature, by stipulation, or by provision of law. Hence,
his death did not result in the extinguishment of those
obligations or liabilities, which merely passed on to his
estate. Death is not a defense that he or his estate can
[15]
set up to wipe out the obligations under the
performance bond. Consequently, petitioner as surety
cannot use his death to escape its monetary obligation
under its performance bond.
The liability of petitioner is contractual in nature,
because it executed a performance bond worded as
follows:
KNOW ALL MEN BY THESE
PRESENTS:
That we, JDS CONSTRUCTION of
208-A San Buena Building, contractor,
of Shaw Blvd., Pasig, MMPhilippines,
as principal and the STRONGHOLD
INSURANCE COMPANY, INC. a
corporation duly organized and existing
under and by virtue of the laws of the
Philippines with head office at Makati,
as Surety, are held and firmly bound
unto the REPUBLIC ASAHI GLASS
CORPORATION and to any individual,
firm, partnership, corporation or
association supplying the principal with
labor or materials in the penal sum of
SEVEN HUNDRED NINETY FIVE
THOUSAND (P795,000.00), Philippine
Currency, for the payment of which
sum, well and truly to be made, we bind
ourselves, our heirs, executors,
administrators, successors and assigns,
jointly and severally, firmly by these
presents.
The CONDITIONS OF THIS
OBLIGATION are as follows;
WHEREAS the above bounden
principal on the ___ day of
__________, 19__ entered into a

contract with the REPUBLIC ASAHI
GLASS CORPORATION represented
by _________________, to fully and
faithfully. Comply with the site
preparation works road and drainage
system of Philippine Float Plant at
Pinagbuhatan, Pasig, Metro Manila.
WHEREAS, the liability of the Surety
Company under this bond shall in no
case exceed the sum of PESOS SEVEN
HUNDRED NINETY FIVE
THOUSAND (P795,000.00) Philippine
Currency, inclusive of interest,
attorneys fee, and other damages, and
shall not be liable for any advances of
the obligee to the principal.
WHEREAS, said contract requires the
said principal to give a good and
sufficient bond in the above-stated sum
to secure the full and faithfull
performance on its part of said contract,
and the satisfaction of obligations for
materials used and labor employed
upon the work;
NOW THEREFORE, if the principal
shall perform well and truly and fulfill
all the undertakings, covenants, terms,
conditions, and agreements of said
contract during the original term of said
contract and any extension thereof that
may be granted by the obligee, with
notice to the surety and during the life
of any guaranty required under the
contract, and shall also perform well
and truly and fulfill all the
undertakings, covenants, terms,
conditions, and agreements of any and
all duly authorized modifications of
said contract that may hereinafter be
made, without notice to the surety
except when such modifications
increase the contract price; and such
principal contractor or his or its sub-
contractors shall promptly make
payment to any individual, firm,
partnership, corporation or association
supplying the principal of its sub-
contractors with labor and materials in
the prosecution of the work provided
for in the said contract, then, this
48
obligation shall be null and void;
otherwise it shall remain in full force
and effect. Any extension of the period
of time which may be granted by the
obligee to the contractor shall be
considered as given, and any
modifications of said contract shall be
considered as authorized, with the
express consent of the Surety.
The right of any individual, firm,
partnership, corporation or association
supplying the contractor with labor or
materials for the prosecution of the
work hereinbefore stated, to institute
action on the penal bond, pursuant to
the provision of Act No. 3688, is hereby
acknowledge and confirmed. [16]
As a surety, petitioner is solidarily liable
with Santos in accordance with the Civil Code, which
provides as follows:
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
[17]
3, Title I of this Book shall be
observed. In such case the contract is
called a suretyship.
xxxxxxxxx
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.
Elucidating on these provisions, the Court in Garcia v.
Court of Appeals stated thus:
[18]
 49
x x x. The suretys obligation is not an handed P100,000.00 in a sealed envelope to the latter's security
guard. While in Manila, Jalandoni again borrowed money for the
original and direct one for the following errands:[4]
performance of his own act, but 1. Publication in SunStar Daily of Georgia's missing children
P11,000.00
merely accessory or collateral to the 2. Reproduction of the pictures of Georgia's children
obligation contracted by the 720.00
principal. Nevertheless, although the 3. Additional reproduction of pictures
1,350.00
contract of a surety is in essence 4. Plane fare for Georgia's secretary to Manila
secondary only to a valid principal 3,196.00
5. Allowance of Germana Berning in going to Manila
obligation, his liability to the creditor 4,080.00
or promisee of the principal is said to 6. Cash airbill of Kabayan Forwarders
49.50
be direct, primary and absolute; in 7. Cash airbill of Kabayan Forwarders
other words, he isdirectly and equally 49.50
bound with the principal. x x x. [19] 8. Salary of Georgia's household helper Reynilda Atillo for March
16-31, 1997
750.00
9. Salary of Georgia's driver Billy Tano for March 16-31, 1997
2,000.00
10. Petty cash for Germana Berning
Under the law and jurisprudence, respondent may sue, 250.00
separately or together, the principal debtor and the 11. Consultancy fee of Germana Berning
7,000.00
petitioner herein, in view of the solidary nature of their 12. Filing fee of case filed by Georgia against CIS
liability. The death of the principal debtor will not 100,500.00
13. Cebu cable bill per receipt No. 197743
work to convert, decrease or nullify the substantive 380.00
right of the solidary creditor. Evidently, despite the 14. Cebu cable bill per receipt No. 197742
380.00
death of the principal debtor, respondent may still sue 15. Bankard bill of Georgia
petitioner alone, in accordance with the solidary nature 840.00
of the latters liability under the performance bond. 16. Services of 2 security guards for 2/1-15/97 and 3/1-31/97
14,715.00
17. One sack of rice and gasoline
WHEREFORE, the Petition is DENIED and 1,270.00
18. Food allowance for Georgia's household and payment for
the Decision of the Court of food ordered
Appeals AFFIRMED.Costs against petitioner. 2,900.00
19. Shipping charge of immigration papers sent to Georgia in
Manila
SO ORDERED. 145.45
20. Shipping charge of cellphone and easy call pager sent to
Georgia
------- 145.45
21. Salary of Georgia's helper Renilda Atillo from April 1-15,
1997
750.00
SECOND DIVISION 22. Purchase of cellphone registered in the name of
[ G.R. No. 205578, March 01, 2017 ] Encomienda's sister, Paz
GEORGIA OSMEÑA-JALANDONI, PETITIONER, VS. CARMEN A. 10,260.00
ENCOMIENDA, RESPONDENT. 23. Pager acquired on April 10, 1997 upon Georgia's request
6,351.00
DECISION 24. Wanted ad in Panay News and expenses of Georgia's
PERALTA, J.: secretary
8,500.00
This is an appeal from the Decision[1] of the Court of Appeals, 25. Salary of Billy Tano from April 1-15, 1997
Cebu City (CA) dated March 29, 2012 and its Resolution[2] dated 2,000.00
December 19, 2012 in CA-G.R. CV No. 01339 which set aside the 26. Water consumption of Georgia's house in Paradise Village
Decision[3] of the Cebu Regional Trial Court (RTC), Branch 57, 1,120.00
dated January 9, 2006, dismissing respondent Carmen 27. Services of security guard from April 1-15, 1997
Encomienda's claim for sum of money. 4,905.00
28. Telephone bill for Georgia's residential phone from March 25
The facts, as shown by the records of the case, are as follows: to April 24, 1997
3,609.77
Encomienda narrated that she met petitioner Georgia Osmeña- 29. Telephone bill for Georgia's other telephone line
Jalandoni in Cebu on October 24, 1995, when the former was 440.20
purchasing a condominium unit and the latter was the real estate 30. Plane ticket for Georgia's psychic friends
broker. Thereafter, Encomienda and Jalandoni became close $1,570.00
friends. On March 2, 1997, Jalandoni called Encomienda to ask if 31. Petty cash for GRO Co. owned by Georgia
she could borrow money for the search and rescue operation of 3,150.00
her children in Manila, who were allegedly taken by their father, 32. Bill of cellphone under the name of Paz Encomienda
Luis Jalandoni. Encomienda then went to Jalandoni's house and 5,468.70
 50
33. Another bill of cellphone used by Georgia now crying, Jalandoni asked if Encomienda could lend her an
3,923.87 additional P900,000.00. Encomienda still acceded, albeit already
34. Cost of reproduction of pictures feeling annoyed. All in all, Encomienda spent around
2,500.00 P3,245,836.02 and $6,638.20 for Jalandoni.
35. Salary of driver and house help of Georgia from May 15-31,
1997 When Jalandoni came back to Cebu on July 14, 1997, she never
3,250.00 informed Encomienda. Encomienda then later gave Jalandoni six
36. Service charge of Georgia's cellphone number (6) weeks to settle her debts. Despite several demands, no
550.00 payment was made. Jalandoni insisted that the amounts given
37. Ritual performed in Georgia's house to drive away evil spirits were not in the form of loans. When they had to appear before
17,500.00 the Barangay for conciliation, no settlement was reached. But a
38. Prayers for Georgia's missing children member of the Lupong Tagapamayapa of Barangay Kasambagan,
5,500.00 Laureano Rogero, attested that Jalandoni admitted having
39. Amount given to priest who performed a blessing of the borrowed money from Encomienda and that she was willing to
house of Georgia return it. Jalandoni said she would talk to her lawyer first, but
500.00 she never came back. Hence, Encomienda filed a complaint. She
40. Globe cellular phone bill of Georgia as of 5/10/97 impleaded Luis as a necessary party, being Georgia's husband.
7,957.24
41. Salary of Germana Berning for May 1997 For her defense, Jalandoni claimed that there was never a
6,000.00 discussion or even just an allusion about a loan. She confirmed
42. Amount given to priest for mass and blessing that Encomienda would indeed deposit money in her bank
2,500.00 account and pay her bills in Cebu. But when asked, Encomienda
43. Cash given to G. Berning for payment of Georgia's phone bill would tell her that she just wanted to extend some help and that
3,000.00 it was not a loan. When Jalandoni returned to Cebu, Encomienda
44. Gasoline for Georgia's car paid on 6/10/97 per cash slip wanted to fetch her at the airport but the former refused. This
#221088 allegedly made Encomienda upset, causing her to eventually
150.00 demand payment for the amounts originally intended to be
45. Gasoline for Georgia's car paid on 6/10/97 per cash slip gratuitous.
#220997
379.44 On January 9, 2006, the RTC of Cebu City dismissed Encomienda
46. Bill for Georgia's Easycall pager complaint, the dispositive portion of which states:
1,605.09 WHEREFORE, in view of the foregoing, this case is hereby
47. Security guard services for May 16-31 dismissed.
4,905.00
48. Globe bill for cellular phone from April 18, 1997 to May 17, SO ORDERED.[5]
1997 Therefore, Encomienda brought the case to the CA. On March 29,
5,543.98 2012, the appellate court granted the appeal and reversed the
49. Bill of cellular phone registered in the name of Paz RTC Decision, to wit:
Encomienda but used by Georgia paid on June 18, 1997 WHEREFORE, the defendant-appellant's appeal is GRANTED. The
14,169.21 decision of the trial court dated January 9, 2006 is hereby
50. Charge for changing the cap of Easycall pager on June 21, REVERSED and SET ASIDE and in its stead render judgment
1997 against defendant-appellee Georgia Osmeña-Jalandoni ordering
275.00 the latter to pay plaintiff-appellant Carmen A. Encomienda the
51. Monthly bill for Georgia's Easycall pager from 7/15/97 to following:
10/14/97 The sum of Three Million Two Hundred Forty-Five Thousand Eight
1,551.00 Hundred Thirty-Six (P3,245,836.02) Pesos and 02/100 and Six
52. Water bill for April-May 1997 paid on June 25, 1997 Thousand Six Hundred Thirty-Eight (US$6,638.20) US Dollars
1,728.31 and 20/100;
53. Cebu Cable bill paid on 6/25/97
380.00 Legal interest of Twelve (12%) Percent from August 14, 1997 the
54. PLDT bill for the telephone in Georgia's residence date of extrajudicial demand.
2,097.98
55. Electric bill paid on 6/25/97 Attorney's fees and expenses of litigation in the amount of One
1,964.43 Hundred Thousand (P100,000.00) Pesos.
56. Purchase of steel cabinet on 6/25/97 Let a copy of this Decision be served upon defendants-appellees
2,750.00 through their respective counsels. The Division Clerk of Court is
57. Airbill of JRS in sending the cap of Easycall pager directed to furnish a copy of this Decision to plaintiff-appellant
20.00 who, to date, has yet to submit the name of her new counsel
58. Bill for the cellphone in the name of Paz Encomienda but following the death of appellant's original counsel of record, Atty.
used by Georgia, June to July 8, 1997 Richard W. Sison.
8,630.11
59. Penalty for downgrading of executive line of cellphone SO ORDERED.[6]
1,045.00 Jalandoni filed a motion for reconsideration, but the same was
60. Globe cellphone bill paid on 9/10/97 denied.[7] Hence, the instant petition.
1,903.00
61. Charge for downgrading of cellphone plan from Advantage to The sole issue in this case is whether or not Encomienda is
Basic entitled to be reimbursed for the amounts she defrayed for
660.00 Jalandoni.
62. Penalty for Easycall 11/17/97
1,248.50 Jalandoni insists that she never borrowed any amount of money
On April 1, 1997, Jalandoni borrowed P1 Million from Encomienda from Encomienda. During the entire time that Encomienda was
and promised that she would pay the same when her money in sending her money and paying her bills, there was not one
the bank matured. Thereafter, Encomienda went to Manila to reference to a loan. In other words, Jalandoni would have the
attend the hearing of Jalandoni's habeas corpus case before the Court believe that Encomienda volunteered to spend about
CA where P100,000.00 more was requested. On May 26, 1997, P3,245,836.02 and $6,638.20 of her hard-earned money in a

span of eight (8) months for her and her family simply out of
pure generosity and the kindness of her heart, without expecting
anything in return. Such presupposition is incredible, highly
unusual, and contrary to common experience, unless the
benefactor is a billionaire philanthropist who usually spends his
days distributing his fortune to the needy. It is a notable fact
that Jalandoni was married to one of the richest hacienderos of
Iloilo and belong to the privileged and affluent Osmeña family,
being the daughter of the la Senator Sergio Osmeña, Jr. Clearly
then, Jalandoni is not one to be convincing object of anyone's
charitable acts, especially not from someone like Encomienda
who has not been endowed with such wealth and powerful
pedigree.
The appellate court aptly pointed out that when Encomienda
gave a Barbie doll to Jalandoni's daughter, she was quick to send
a letter acknowledging receipt and thanking Encomienda for the
simple gift. However, not once did Jalandoni ever send a simple
note or letter, let alone a card, expressing her gratitude towards
Encomienda for the countless instances she received various
amounts of money supposedly given to her as gifts.
Jalandoni also contends that the amounts she received from
Encomienda were mostly provided and paid without her prior
knowledge and thus she could not have consented to any loan
agreement. She relies oh the trial court's finding that
Encomienda's claims were not supported by any documentary
evidence. It must be stressed, however, that the trial court
merely found that no documentary evidence was offered
showing, Jalandoni's authorization or undertaking to pay the
expenses. But the second paragraph of Article 1236 of the Civil
Code provides:
xxxx
Whoever pays for another may demand from the debtor what he
has paid, except that if he paid without the knowledge or against
the will of the debtor, he can recover only insofar as the payment
has been beneficial to the debtor.[8]
Clearly, Jalandoni greatly benefited from the purportedly
unauthorized payments. Thus, even if she asseverates that
Encomienda'is payment of her household bills was without her
knowledge or against her will, she cannot deny the fact that the
same still inured to her benefit and Encomienda must therefore
be consequently reimbursed for it. Also, when Jalandoni learned
about the payments, she did nothing to express her objection to
or repudiation of the same, within a reasonable time. Even when
she claimed that she was prepared with her own money,[9] she
still accepted the financial assistance and actually made use of it.
While she asserts to have been upset because of Encomienda's
supposedly intrusive actions, she failed to protest and, in fact,
repeatedly accepted money from her and further allowed her to
pay her driver, security guard, househelp, and bills for her
cellular phone, cable television, pager, gasoline, food, and other
utilities. She cannot, therefore, deny the benefits she reaped
from said acts now that the time for restitution has come. The
debtor who knows that another has paid his obligation for him
and who does not repudiate it at any time, must corollarily pay
the amount advanced by such third person.[10]
The RTC likewise harped on the fact that if Encomienda really
intended the amounts to be a loan, normal human behavior
would have prompted at least a handwritten acknowledgment or
a promissory note the moment she parted with her money for
the purpose of granting a loan. This would be particularly true if
the loan obtained was part of a business dealing and not one
extended to a close friend who suddenly needed monetary aid. In
fact, in case of loans between friends and relatives, the absence
of acknowledgment receipts or promissory notes is more natural
and real. In a similar case,[11] the Court upheld the CA's
pronouncement that the existence of a contract of loan cannot be
denied merely because it was not reduced in writing. Surely,
there can be a verbal loan. Contracts are binding between the
parties, whether oral or written. The law is explicit that contracts
shall be obligatory in whatever form they may have been entered
into, provided all the essential requisites for their validity are
51
present. A simple loan or mutuum exists when a person receives
a loan of money or any other fungible thing and acquires its
ownership. He is bound to pay to the creditor the equal amount
of the same kind and quality. Jalandoni posits that the more
logical reason behind the disbursements would be what
Encomienda candidly told the trial court, that her acts were
plainly an "unselfish display of Christian help" and done out of
"genuine concern for Georgia's children." However, the "display
of Christian help" is not inconsistent with the existence of a loan.
Encomienda immediately offered a helping hand when a friend
asked for it. But this does not mean that she had already waived
her right to collect in the future. Indeed, when Encomienda felt
that Jalandonli was beginning to avoid her, that was when she
realized that she had to protect her right to demand payment.
The fact that Encomienda kept the receipts even for the smallest
amounts she had advanced, repeatedly sen demand letters, and
immediately filed the instant case when Jalandon stubbornly
refused to heed her demands sufficiently disproves the latter's
belief that all the sums of money she received were merely given
out of charity.
Truly, Jalandoni herself admitted that she received the
aforementioned amounts from Encomienda and is merely using
her lack of authorization over the payments as her defence. In
fact, Lupong Tagapamayapa member Rogero, a disinterested
third party, confirmed this, saying that during the barangay
conciliation, Jalandoni indeed admitted having borrowed money
from Encomienda and that she would return it. Jalandoni,
however, reneged on said promise.
The principle of unjust enrichment finds application in this case.
Unjust enrichment exists when a person unfairly retains a benefit
to the loss of another, or when a person retains money or
property of another against the fundamental principles of justice,
equity, and good conscience. 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. The principle of unjust enrichment
essentially contemplates payment when there is no duty to pay,
and the person who receives the payment has no right to receive
it.[12] The CA is then correct when it ruled that allowing
Jalandoni to keep the amounts received from Encomienda will
certainly cause an unjust enrichment on Jalandoni's part and to
Encomienda's damage and prejudice.
WHEREFORE, PREMISES CONSIDERED, the Count DISMISSES
the petition for lack of merit and AFFIRMS the Decision of the
Court of Appeals, Cebu City dated March 29, 2012 and its
Resolution dated December 19, 2012 in CA-G.R. CV No. 01339,
with MODIFICATION as to the interest which must be twelve
percent (12%) per annum of the amount awarded from the time
of demand on August 14, 1997 to June 30, 2013, and six percent
(6%)[13] per annum from July 1, 2013 until its full satisfaction.
SO ORDERED.
SECOND DIVISION
[G.R. No. 108630. April 2, 1996]

PHILIPPINE NATIONAL BANK, petitioner,
vs. COURT OF APPEALS and
LORETO TAN,respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND
CONTRACTS; A DEBT IS PAID BY
COMPLETE DELIVERY OF THE THING
OR RENDITION OF SERVICE. - There is no
question that no payment had ever been made to
private respondent as the check was never
delivered to him. When the court ordered
petitioner to pay private respondent the amount of
P32,480.00, it had the obligation to deliver the
same to him. Under Art. 1233 of the Civil Code, a
debt shall not be understood to have been paid
unless the thing or service in which the obligation
consists has been completely delivered or
rendered, as the case may be.
2. REMEDIAL LAW; EVIDENCE; BURDEN OF
PROOF OF PAYMENT OF OBLIGATION
LIES WITH THE DEBTOR; PAYMENT NOT
PROVED IN CASE AT BAR. - The burden of
proof of such payment lies with the debtor. In the
instant case, neither the SPA nor the check issued
by petitioner was ever presented in court. The
testimonies of petitioners own witnesses regarding
the check were conflicting. Tagamolila testified
that the check was issued to the order of Sonia
Gonzaga as attorney-in-fact of Loreto Tan, while
Elvira Tibon, assistant cashier of PNB (Bacolod
Branch), stated that the check was issued to the
order of Loreto Tan. Furthermore, contrary to
petitioners contention that all that is needed to be
proved is the existence of the SPA, it is also
necessary for evidence to be presented regarding
the nature and extent of the alleged powers and
authority granted to Sonia Gonzaga; more
specifically, to determine whether the document
indeed authorized her to receive payment intended
for private respondent. However, no such
evidence was ever presented.
3. ID.; ID.; BEST EVIDENCE RULE; WHEN
SECONDARY EVIDENCE IS ALLOWED.
- Section 4, Rule 130 of the Rules of Court allows
the presentation of secondary evidence when the
original is lost or destroyed.
4. ID.; ID.; ID.; PAYMENT OF OBLIGATION
NEGATED BY FAILURE TO PRESENT
SPECIAL POWER OF ATTORNEY IN CASE
AT BAR. - Considering that the contents of the
52
SPA are also in issue here, the best evidence rule
applies. Hence, only the original document (which
has not been presented at all) is the best evidence
of the fact as to whether or not private respondent
indeed authorized Sonia Gonzaga to receive the
check from petitioner. In the absence of such
document, petitioners arguments regarding due
payment must fail.
5. CIVIL LAW; DAMAGES; ATTORNEYS FEES;
AVAILABLE TO PARTY WHO WAS
COMPELLED TO LITIGATE. - Regarding the
award of attorneys fees, we hold that private
respondent Tan is entitled to the same. Art. 2208
of the Civil Code allows attorneys fees to be
awarded if the claimant is compelled to litigate
with third persons or to incur expenses to protect
his interest by reason of an unjustified act or
omission of the party from whom it is sought.
6. ID.; ID.; EXEMPLARY DAMAGES; WHEN
RECOVERABLE. - Under Art. 2232 of the Civil
Code, exemplary damages may be awarded if a
party acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner. However, they
cannot be recovered as a matter of right; the court
has yet to decide whether or not they should be
adjudicated.
7. ID.; ID.; ID.; REQUIREMENTS FOR GRANT.
- Jurisprudence has set down the requirements for
exemplary damages to be awarded: 1. they may be
imposed by way of example in addition to
compensatory damages, and only after the
claimants right to them has been established; 2.
they cannot be recovered as a matter of right, their
determination depending upon the amount of
compensatory damages that may be awarded to
the claimant; 3. the act must be accompanied by
bad faith or done in a wanton, fraudulent,
oppressive or malevolent manner.
8. ID.; ID.; ID.; CANNOT BE RECOVERED
WHERE THERE IS NO CLEAR BREACH
OF OBLIGATION TO PAY OR THAT A
PARTY ACTED IN FRAUDULENT,
WANTON, RECKLESS OR OPPRESSIVE
MANNER. - As for the award of exemplary
damages, we agree with the appellate court that
the same should be deleted. In the case at bench,
while there is a clear breach of petitioners
obligation to pay private respondents, there is no
evidence that it acted in a fraudulent, wanton,
reckless or oppressive manner. Furthermore, there

is no award of compensatory damages which is a
prerequisite before exemplary damages may be
awarded. Therefore, the award by the trial court of
P5,000.00 as exemplary damages is baseless.
APPEARANCES OF COUNSEL
Santiago, Jr., Vidad, Corpus & Associates for
petitioner.
Jose G. Jover, Jr. for private respondent.
DECISION
ROMERO, J.:
Petitioner Philippine National Bank (PNB)
questions the decision1 of the Court of Appeals
partially affirming the judgment of the Regional Trial
Court, Branch 44, Bacolod City. The dispositive
portion of the trial courts decision states:
WHEREFORE, premises considered, the Court hereby
renders judgment in favor of the plaintiff and against
the defendants as follows:
1) Ordering defendants to pay plaintiff jointly and
severally the sum of P32,480.00, with legal rate of
interest to be computed from May 2, 1979, date of
filing of this complaint until fully paid;
2) Ordering defendants to pay plaintiff jointly and
severally the sum of P5,000.00 as exemplary damages;
3) Ordering defendants to pay plaintiff jointly and
severally the sum of P5,000.00 as attorneys fees;
4) To pay the costs of this suit.
SO ORDERED.2
The facts are the following:
Private respondent Loreto Tan (Tan) is the owner
of a parcel of land abutting the national highway in
Mandalagan, Bacolod City. Expropriation proceedings
were instituted by the government against private
respondent Tan and other property owners before the
then Court of First Instance of Negros Occidental,
Branch IV, docketed as Civil Case No. 12924.
Tan filed a motion dated May 10, 1978 requesting
issuance of an order for the release to him of the
expropriation price of P3 2,480.00.
53
On May 22, 1978, petitioner PNB (Bacolod
Branch) was required by the trial court to release to
Tan the amount of P32,480.00 deposited with it by the
government.
On May 24, 1978, petitioner, through its Assistant
Branch Manager Juan Tagamolila, issued a managers
check for P3 2,480.00 and delivered the same to one
Sonia Gonzaga without Tans knowledge, consent or
authority. Sonia Gonzaga deposited it in her account
with Far East Bank and Trust Co. (FEBTC) and later
on withdrew the said amount.
Private respondent Tan subsequently demanded
payment in the amount of P32,480.00 from petitioner,
but the same was refused on the ground that petitioner
had already paid and delivered the amount to Sonia
Gonzaga on the strength of a Special Power of
Attorney (SPA) allegedly executed in her favor by Tan.
On June 8, 1978, Tan executed an affidavit before
petitioners lawyer, Alejandro S. Somo, stating that:
1) he had never executed any Special Power of
Attorney in favor of Sonia S. Gonzaga;
2) he had never authorized Sonia Gonzaga to receive
the sum of P32,480.00 from petitioner;
3) he signed a motion for the court to issue an Order to
release the said sum of money to him and gave the
same to Mr. Nilo Gonzaga (husband of Sonia) to be
filed in court. However, after the Order was
subsequently issued by the court, a certain Engineer
Decena of the Highway Engineers Office issued the
authority to release the funds not to him but to Mr.
Gonzaga.
When he failed to recover the amount from PNB,
private respondent filed a motion with the court to
require PNB to pay the same to him.
Petitioner filed an opposition contending that
Sonia Gonzaga presented to it a copy of the May 22,
1978 order and a special power of attorney by virtue of
which petitioner delivered the check to her.
The matter was set for hearing on July 21, 1978
and petitioner was directed by the court to produce the
said special power of attorney thereat. However,
petitioner failed to do so.
The court decided that there was need for the
matter to be ventilated in a separate civil action and
thus private respondent

filed a complaint with the Regional Trial Court in
Bacolod City (Branch 44) against petitioner and Juan
Tagamolila, PNBs Assistant Branch Manager, to
recover the said amount.
In its defense, petitioner contended that private
respondent had duly authorized Sonia Gonzaga to act
as his agent.
On September 28, 1979, petitioner filed a third-
party complaint against the spouses Nilo and Sonia
Gonzaga praying that they be ordered to pay private
respondent the amount of P32,480.00. However, for
failure of petitioner to have the summons served on the
Gonzagas despite opportunities given to it, the third-
party complaint was dismissed.
Tagamolila, in his answer, stated that Sonia
Gonzaga presented a Special Power of Attorney to him
but borrowed it later with the promise to return it,
claiming that she needed it to encash the check.
On June 7, 1989, the trial court rendered judgment
ordering petitioner and Tagamolila to pay private
respondent jointly and severally the amount of
P32,480.00 with legal interest, damages and attorneys
fees.
Both petitioner and Tagamolila appealed the case
to the Court of Appeals.
In a resolution dated April 8, 1991, the appellate
court dismissed Tagamolilas appeal for failure to pay
the docket fee within the reglementary period.
On August 31, 1992, the Court of Appeals
affirmed the decision of the trial court against
petitioner, with the modification that the award of
P5,000.00 for exemplary damages and P5,000.00 for
attorneys fees by the trial court was deleted.
Hence, this petition.
Petitioner PNB states that the issue in this case is
whether or not the SPA ever existed. It argues that the
existence of the SPA need not be proved by it under
the best evidence rule because it already proved the
existence of the SPA from the testimonies of its
witnesses and by the certification issued by the Far
East Bank and Trust Company that it allowed Sonia
Gonzaga to encash Tans check on the basis of the SPA.
We find the petition unmeritorious.
There is no question that no payment had ever
been made to private respondent as the check was
never delivered to him. When the court ordered
petitioner to pay private respondent the amount of P3
54
2,480.00, it had the obligation to deliver the same to
him. Under Art. 1233 of the Civil Code, a debt shall
not be understood to have been paid unless the thing or
service in which the obligation consists has been
completely delivered or rendered, as the case may be.
The burden of proof of such payment lies with the
debtor.3 In the instant case, neither the SPA nor the
check issued by petitioner was ever presented in court.
The testimonies of petitioners own witnesses
regarding the check were conflicting. Tagamolila
testified that the check was issued to the order of Sonia
Gonzaga as attorney-in-fact of Loreto Tan,4 while
Elvira Tibon, assistant cashier of PNB (Bacolod
Branch), stated that the check was issued to the order
of Loreto Tan.5
Furthermore, contrary to petitioners contention
that all that is needed to be proved is the existence of
the SPA, it is also necessary for evidence to be
presented regarding the nature and extent of the
alleged powers and authority granted to Sonia
Gonzaga; more specifically, to determine whether the
document indeed authorized her to receive payment
intended for private respondent. However, no such
evidence was ever presented.
Section 2, Rule 130 of the Rules of Court states
that:
SEC. 2. Original writing must be produced;
exceptions.
- There can be no evidence of a writing the contents of
which is the subject of inquiry, other than the original
writing itself, except in the following cases:
(a) When the original has been lost, destroyed, or
cannot be produced in court;
(b) When the original is in the possession of the party
against whom the evidence is offered, and the latter
fails to produce it after reasonable notice;
(c) When the original is a record or other document in
the custody of a public officer;
(d) When the original has been recorded in an existing
record a certified copy of which is made evidence by
law;
(e) When the original consists of numerous accounts or
other documents which cannot be examined in court

without great loss of time and the fact sought to be
established from them is only the general result of the
whole.
Section 4, Rule 130 of the Rules of Court allows
the presentation of secondary evidence when the
original is lost or destroyed, thus:
SEC. 4. Secondary evidence when original is lost or
destroyed. - When the original writing has been lost or
destroyed, or cannot be produced in court, upon proof
of its execution and loss or destruction, or
unavailability, its contents may be proved by a copy, or
by a recital of its contents in some authentic document,
or by the recollection of witnesses.
Considering that the contents of the SPA are also
in issue here, the best evidence rule applies. Hence,
only the original document (which has not been
presented at all) is the best evidence of the fact as to
whether or not private respondent indeed authorized
Sonia Gonzaga to receive the check from petitioner. In
the absence of such document, petitioners arguments
regarding due payment must fail.
Regarding the award of attorneys fees, we hold
that private respondent Tan is entitled to the same. Art.
2208 of the Civil Code allows attorneys fees to be
awarded if the claimant is compelled to litigate with
third persons or to incur expenses to protect his
interest by reason of an unjustified act or omission of
the party from whom it is sought.6
7
In Rasonable v. NLRC, et al., we held that when a
party is forced to litigate to protect his rights, he is
entitled to an award of attorneys fees.
As for the award of exemplary damages, we agree
with the appellate court that the same should be
deleted.
Under Art. 2232 of the Civil Code, exemplary
damages may be awarded if a party acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner.
However, they cannot be recovered as a matter of
right; the court has yet to decide whether or not they
should be adjudicated.8
Jurisprudence has set down the requirements for
exemplary damages to be awarded:
1. they may be imposed by way of example in addition
to compensatory damages, and only after the claimants
right to them has been established;
55
2. they cannot be recovered as a matter of right, their
determination depending upon the amount of
compensatory damages that may be awarded to the
claimant;
3. the act must be accompanied by bad faith or done in
a wanton, fraudulent, oppressive or malevolent
manner.9
In the case at bench, while there is a clear breach
of petitioners obligation to pay private respondents,
there is no evidence that it acted in a fraudulent,
wanton, reckless or oppressive manner. Furthermore,
there is no award to compensatory damages which is a
prerequisite before exemplary damages may be
awarded. Therefore, the award by the trial court of
P5,000.00 as exemplary damages is baseless.
WHEREFORE, the decision of the Court of
Appeals is AFFIRMED with the modification that the
award by the Regional Trial Court of P5,000.00 as
attorneys fees is REINSTATED.
SO ORDERED.
SECOND DIVISION
[G.R. No. 125862. April 15, 2004]
FRANCISCO CULABA and DEMETRIA
CULABA, doing business under the name
and style Culaba Store, petitioners, vs.
COURT OF APPEALS and SAN MIGUEL
CORPORATION, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review under Rule 45 of the
Revised Rules of Civil Procedure of the Decision[1] of
the Court of Appeals in CA-G.R. CV No. 19836
affirming in toto the Decision[2] of the Regional Trial
Court of Makati, Branch 138, in Civil Case No. 1033
for collection of sum of money, and the
Resolution[3] denying the motion for reconsideration of
the said decision.
The Undisputed Facts

The spouses Francisco and Demetria Culaba were
the owners and proprietors of the Culaba Store and
were engaged in the sale and distribution of San
Miguel Corporations (SMC) beer products. SMC sold
beer products on credit to the Culaba spouses in the
amount of P28,650.00, as evidenced by Temporary
Credit Invoice No. 42943.[4] Thereafter, the Culaba
spouses made a partial payment of P3,740.00, leaving
an unpaid balance of P24,910.00. As they failed to pay
despite repeated demands, SMC filed an action for
collection of a sum of money against them before the
RTC of Makati, Branch 138.
The defendant-spouses denied any liability,
claiming that they had already paid the plaintiff in full
on four separate occasions. To substantiate this claim,
the defendants presented four (4) Temporary Charge
Sales (TCS) Liquidation Receipts, as follows:
April 19, 1983 Receipt No. 27331 for P8,000[5]
April 22, 1983 Receipt No. 27318 for
P9,000[6]
April 27, 1983 Receipt No. 27339 for
P4,500[7]
April 30, 1983 Receipt No. 27346 for P3,410[8]
Defendant Francisco Culaba testified that he made
the foregoing payments to an SMC supervisor who
came in an SMC van. He was then showed a list of
customers accountabilities which included his account.
The defendant, in good faith, then paid to the said
supervisor, and he was, in turn, issued genuine SMC
liquidation receipts.
For its part, SMC submitted a publishers
affidavit[9] to prove that the entire booklet of TCSL
Receipts bearing Nos. 27301-27350 were reported lost
by it, and that it caused the publication of the notice of
loss in the July 9, 1983 issue of the Daily Express, as
follows:
NOTICE OF LOSS
OUR CUSTOMERS ARE HEREBY INFORMED
THAT TEMPORARY CHARGE SALES
LIQUIDATION RECEIPTS WITH SERIAL NOS.
27301-27350 HAVE BEEN LOST.
ANY TRANSACTION, THEREFORE, ENTERED
INTO WITH THE USE OF THE ABOVE RECEIPTS
WILL NOT BE HONORED.
SAN MIGUEL CORPORATION
BEER DIVISION
56
[10]
Makati Beer Region
The Trial Courts Ruling
After trial on the merits, the trial court rendered
judgment in favor of SMC, and held the Culaba
spouses liable on the balance of its obligation, thus:
Wherefore, judgment is hereby rendered in favor of
the plaintiff, as follows:
1. Ordering defendants to pay the amount
of P24,910.00 plus legal interest of 6% per annum
from April 12, 1983 until the whole amount is fully
paid;
2. Ordering defendants to pay 20% of the amount due
to plaintiff as and for attorneys fees plus costs.
SO ORDERED.[11]
According to the trial court, it was unusual that
defendant Francisco Culaba forgot the name of the
collector to whom he made the payments and that he
did not require the said collector to print his name on
the receipts. The court also noted that although they
were part of a single booklet, the TCS Liquidation
Receipts submitted by the defendants did not appear to
have been issued in their natural sequence.
Furthermore, they were part of the lost booklet
receipts, which the public was duly warned of through
the Notice of Loss the plaintiff caused to be published
in a daily newspaper. This confirmed the plaintiffs
claim that the receipts presented by the defendants
were spurious ones.
The Case on Appeal
On appeal, the appellants interposed the following
assignment of errors:
I
THE TRIAL COURT ERRED IN FINDING THAT
THE RECEIPTS PRESENTED BY DEFENDANTS
EVIDENCING HIS PAYMENTS TO PLAINTIFF
SAN MIGUEL CORPORATION, ARE SPURIOUS.
II

THE TRIAL COURT ERRED IN CONCLUDING
THAT PLAINTIFF-APPELLEE HAS
SUFFICIENTLY PROVED ITS CAUSE OF ACTION
AGAINST THE DEFENDANTS.
III
THE TRIAL COURT ERRED IN ORDERING
DEFENDANTS TO PAY 20% OF THE AMOUNT
DUE TO PLAINTIFF AS ATTORNEYS FEES.[12]
The appellants asserted that while the trial courts
observations were true, it was the usual business
practice in previous transactions between them and
SMC. The SMC previously honored receipts not
bearing the salesmans name. According to appellant
Francisco Culaba, he even lost some of the receipts,
but did not encounter any problems.
According to appellant Francisco, he could not be
faulted for paying the SMC collector who came in a
van and was in uniform, and that any regular customer
would, without any apprehension, transact with such
an SMC employee.Furthermore, the respective receipts
issued to him at the time he paid on the four occasions
mentioned had not yet then been declared lost. Thus,
the subsequent publication in a daily newspaper
declaring the booklets lost did not affect the validity
and legality of the payments made. Accordingly, by its
actuations, the SMC was estopped from questioning
the legality of the payments and had no cause of action
against the appellants.
Anent the issue of attorneys fees, the order of the
trial court for payment thereof is without basis.
According to the appellant, the provision for attorneys
fees is a contingent fee, already provided for in the
SMCs contract with the law firm. To further order
them to pay 20% of the amount due as attorneys fees is
double payment, tantamount to undue enrichment and
therefore improper.[13]
The appellee, for its part, contended that the
primary issue in the case at bar revolved around the
basic and fundamental principles of agency. [14] It was
incumbent upon the defendants-appellants to exercise
ordinary prudence and reasonable diligence to verify
and identify the extent of the alleged agents authority.
It was their burden to establish the true identity of the
assumed agent, and this could not be established by
mere representation, rumor or general reputation. As
they utterly failed in this regard, the appellants must
suffer the consequences.
57
The Court of Appeals affirmed the decision of the
trial court, thus:
In the face of the somewhat tenuous evidence
presented by the appellants, we cannot fault the lower
court for giving more weight to appellees testimonial
and documentary evidence, all of which establish with
some degree of preponderance the existence of the
account sued upon.
ALL CONSIDERED, we cannot find any justification
to reject the factual findings of the lower court to
which we must accord respect, for which reason, the
judgment appealed from is hereby AFFIRMED in all
respects.
SO ORDERED.[15]
Hence, the instant petition.
The petitioners pose the following issues for the
Courts resolution:
I. WHETHER OR NOT THE RESPONDENT HAD
PROVEN BY PREPONDERANT EVIDENCE THAT
IT HAD PROPERLY AND TIMELY NOTIFIED
PETITIONER OF LOST BOOKLET OF RECEIPTS
II. WHETHER OR NOT RESPONDENT HAD
PROVEN BY PREPONDERANT EVIDENCE THAT
PETITIONER WAS REMISS IN THE PAYMENT OF
HIS ACCOUNTS TO ITS AGENT.[16]
According to the petitioners, receiving receipts
from the private respondents agents instead of its
salesmen was a usual occurrence, as they had been
operating the store since 1979. Thus, on four occasions
in April 1983, when an agent of the respondent came
to the store wearing an SMC uniform and driving an
SMC van, petitioner Francisco Culaba, without
question, paid his accounts. He received the receipts
without fear, as they were similar to what he used to
receive before. Furthermore, the petitioners assert that,
common experience will attest that unless the attention
of the customers is called for, they would not take note
of the serial number of the receipts.
The petitioners contend that the private
respondent advertised its warning to the public only
after the damage was done, or on July 9, 1993. Its
belated notice showed its glaring lack of interest or
concern for its customers welfare, and, in sum, its
negligence.

Anent the second issue, petitioner Francisco
Culaba avers that the agent to whom the accounts were
paid had all the physical and material attributes or
indications of a representative of the private
respondent, leaving no doubt that he was duly
authorized by the latter. Petitioner Francisco Culabas
testimony that he does not necessarily check the
contents of the receipts issued to him except for the
amount indicated if [the] same accurately reflects his
actual payment is a common attitude of customers. He
could, thus, not be faulted for paying the private
respondents agent on four occasions. Petitioner
Francisco Culaba asserts that he made the payment in
good faith, to an agent who issued SMC receipts which
appeared to be genuine. Thus, according to the
petitioners, they had duly paid their obligation in
accordance with Articles 1240 and 1242 of the New
Civil Code.
The private respondent, for its part, avers that the
burden of proving payment is with the debtor, in
consonance with the express provision of Article 1233
of the New Civil Code. The petitioners miserably
failed to prove the self-serving allegation that they
already paid their liability to the private respondent.
Furthermore, under normal circumstances, an obligor
would not just pay a substantial amount to someone
whom he saw for the first time, without even asking
for the latters name.
The Ruling of the Court
The petition is dismissed.
The petitioners question the findings of the Court
of Appeals as to whether the payment of the petitioners
obligation to the private respondent was properly
made, thus, extinguishing the same. This is clearly a
factual issue, and beyond the purview of the Court to
delve into. This is in consonance with the well-settled
rule that findings of fact of the trial court, especially
when affirmed by the Court of Appeals, are accorded
the highest degree of respect, and generally will not be
disturbed on appeal. Such findings are binding and
conclusive on the Court.[17] Furthermore, it is not the
Courts function under Rule 45 of the Rules of Court,
as amended, to review, examine and evaluate or weigh
the probative value of the evidence presented.[18]
To reiterate, the issue being raised by the
petitioners does not involve a question of law, but a
question of fact, not cognizable by this Court in a
58
petition for review under Rule 45. The jurisdiction of
the Court in such a case is limited to reviewing only
errors of law, unless the factual findings being assailed
are not supported by evidence on record or the
impugned judgment is based on a misapprehension of
facts.[19]
A careful study of the records of the case reveal
that the appellate court affirmed the trial courts factual
findings as follows:
First. Receipts Nos. 27331, 27318, 27339 and
27346 were included in the private respondents lost
booklet, which loss was duly advertised in a
newspaper of general circulation; thus, the private
respondent could not have officially issued them to the
petitioners to cover the alleged payments on the dates
appearing thereon.
Second. There was something amiss in the way
the receipts were issued to the petitioners, as one
receipt bearing a higher serial number was issued
ahead of another receipt bearing a lower serial number,
supposedly covering a later payment. The petitioners
failed to explain the apparent mix-up in these receipts,
and no attempt was made in this regard.
Third. The fact that the salesmans name was
invariably left blank in the four receipts and that the
petitioners could not even remember the name of the
supposed impostor who received the said payments
strongly argue against the veracity of the petitioners
claim.
We find no cogent reason to reverse the said
findings.
The dismissal of the petition is inevitable even
upon close perusal of the merits of the case.
Payment is a mode of extinguishing an obligation.
[20]
Article 1240 of the Civil Code provides that
payment shall be made to the person in whose favor
the obligation has been constituted, or his successor-
in-interest, or any person authorized to receive it.[21] In
this case, the payments were purportedly made to a
supervisor of the private respondent, who was clad in
an SMC uniform and drove an SMC van. He appeared
to be authorized to accept payments as he showed a
list of customers accountabilities and even issued SMC
liquidation receipts which looked genuine.
Unfortunately for petitioner Francisco Culaba, he did
not ascertain the identity and authority of the said
supervisor, nor did he ask to be shown any
identification to prove that the latter was, indeed, an
SMC supervisor. The petitioners relied solely on the

mans representation that he was collecting payments
for SMC. Thus, the payments the petitioners claimed
they made were not the payments that discharged their
obligation to the private respondent.
The basis of agency is representation. [22] A person
dealing with an agent is put upon inquiry and must
discover upon his peril the authority of the agent.[23] In
the instant case, the petitioners loss could have been
avoided if they had simply exercised due diligence in
ascertaining the identity of the person to whom they
allegedly made the payments. The fact that they were
parting with valuable consideration should have made
them more circumspect in handling their business
transactions. Persons dealing with an assumed agent
are bound at their peril to ascertain not only the fact of
agency but also the nature and extent of authority, and
in case either is controverted, the burden of proof is
upon them to establish it.[24]The petitioners in this case
failed to discharge this burden, considering that the
private respondent vehemently denied that the
payments were accepted by it and were made to its
authorized representative.
Negligence is the omission to do something which
a reasonable man, guided by those considerations
which ordinarily regulate the conduct of human affairs,
would do, or the doing of something, which a prudent
and reasonable man would not do.[25] In the case at bar,
the most prudent thing the petitioners should have
done was to ascertain the identity and authority of the
person who collected their payments. Failing this, the
petitioners cannot claim that they acted in good faith
when they made such payments. Their claim therefor
is negated by their negligence, and they are bound by
its consequences. Being negligent in this regard, the
petitioners cannot seek relief on the basis of a
supposed agency.[26]
WHEREFORE, the instant petition is hereby
DENIED. The assailed Decision dated April 16, 1996,
and the Resolution dated July 19, 1996 of the Court of
Appeals are AFFIRMED. Costs against the petitioners.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
59
ALLIED BANKING G.R. No. 133179
CORPORATION,
Petitioner, Present:
QUISUMBING, J., Chairperson,
- versus - CARPIO MORALES,
TINGA,
VELASCO, JR., and
CHICO-NAZARIO,* JJ.
LIM SIO WAN, METROPOLITAN
BANK AND TRUST CO., and Promulgated:
PRODUCERS BANK,
Respondents. March 27, 2008
x----------------------------------------------------------------
-------------------------x
DECISION
VELASCO, JR., J.:
To ingratiate themselves to their valued
depositors, some banks at times bend over backwards
that they unwittingly expose themselves to great risks.
The Case
This Petition for Review on Certiorari under
Rule 45 seeks to reverse the Court of Appeals (CAs)
Decision promulgated on March 18, 1998[1] in CA-
G.R. CV No. 46290 entitled Lim Sio Wan v. Allied
Banking Corporation, et al. The CA Decision
modified the Decision dated November 15, 1993[2] of
the Regional Trial Court (RTC), Branch 63
in Makati City rendered in Civil Case No. 6757.
The Facts
The facts as found by the RTC and affirmed by the CA
are as follows:
On November 14, 1983, respondent Lim Sio Wan
deposited with petitioner Allied Banking Corporation
(Allied) at its Quintin Paredes Branch in Manila a
money market placement of PhP 1,152,597.35 for a
term of 31 days to mature on December 15, 1983,[3] as
evidenced by Provisional Receipt No. 1356
dated November 14, 1983.[4]
On December 5, 1983, a person claiming to be Lim
Sio Wan called up Cristina So, an officer of Allied, and
instructed the latter to pre-terminate Lim Sio Wans
money market placement, to issue a managers check
representing the proceeds of the placement, and to give
the check to one Deborah Dee Santos who would pick
up the check.[5]Lim Sio Wan described the appearance
of Santos so that So could easily identify her.[6]

Later, Santos arrived at the bank and signed the
application form for a managers check to be issued.
[7]
The bank issued Managers Check No. 035669 for
PhP 1,158,648.49, representing the proceeds of Lim
Sio Wans money market placement in the name of Lim
Sio Wan, as payee.[8] The check was cross-checked For
Payees Account Only and given to Santos.[9]
Thereafter, the managers check was deposited in the
account of Filipinas Cement Corporation (FCC) at
respondent Metropolitan Bank and Trust Co.
(Metrobank),[10] with the forged signature of Lim Sio
Wan as indorser.[11]
Earlier, on September 21, 1983, FCC had deposited a
money market placement for PhP 2 million with
respondent Producers Bank. Santos was the money
market trader assigned to handle FCCs account.
[12]
Such deposit is evidenced by Official Receipt No.
317568[13] and a Letter dated September 21,
1983 of Santos addressed to Angie Lazo of FCC,
acknowledging receipt of the placement.[14] The
placement matured on October 25, 1983 and was
rolled-over until December 5, 1983 as evidenced by a
Letter dated October 25, 1983.[15] When the placement
matured, FCC demanded the payment of the proceeds
of the placement.[16] On December 5, 1983, the same
date that So received the phone call instructing her to
pre-terminate Lim Sio Wans placement, the managers
check in the name of Lim Sio Wan was deposited in
the account of FCC, purportedly representing the
proceeds of FCCs money market placement with
Producers Bank.[17] In other words, the Allied check
was deposited with Metrobank in the account of FCC
as Producers Banks payment of its obligation to FCC.
To clear the check and in compliance with the
requirements of the Philippine Clearing House
Corporation (PCHC) Rules and Regulations,
Metrobank stamped a guaranty on the check, which
reads: All prior endorsements and/or lack of
endorsement guaranteed.[18]
The check was sent to Allied through the PCHC. Upon
the presentment of the check, Allied funded the check
even without checking the authenticity of Lim Sio
Wans purported indorsement. Thus, the amount on the
face of the check was credited to the account of FCC.
[19]
60
On December 9, 1983, Lim Sio Wan deposited with
Allied a second money market placement to mature
on January 9, 1984.[20]
On December 14, 1983, upon the maturity date of the
first money market placement, Lim Sio Wan went to
Allied to withdraw it.[21] She was then informed that
the placement had been pre-terminated upon her
instructions. She denied giving any instructions and
receiving the proceeds thereof. She desisted from
further complaints when she was assured by the banks
manager that her money would be recovered.[22]
When Lim Sio Wans second placement matured
on January 9, 1984, So called Lim Sio Wan to ask for
the latters instructions on the second placement. Lim
Sio Wan instructed So to roll-over the placement for
another 30 days.[23]On January 24, 1984, Lim Sio Wan,
realizing that the promise that her money would be
recovered would not materialize, sent a demand letter
to Allied asking for the payment of the first placement.
[24]
Allied refused to pay Lim Sio Wan, claiming that
the latter had authorized the pre-termination of the
placement and its subsequent release to Santos.[25]
Consequently, Lim Sio Wan filed with the RTC a
Complaint dated February 13, 1984[26] docketed as
Civil Case No. 6757 against Allied to recover the
proceeds of her first money market placement.
Sometime in February 1984, she withdrew her second
placement from Allied.
Allied filed a third party complaint [27] against
Metrobank and Santos. In turn, Metrobank filed a
fourth party complaint[28] against FCC. FCC for its part
filed a fifth party complaint[29] against Producers Bank.
Summonses were duly served upon all the parties
except for Santos, who was no longer connected with
Producers Bank.[30]
On May 15, 1984, or more than six (6) months after
funding the check, Allied informed Metrobank that the
signature on the check was forged.[31] Thus, Metrobank
withheld the amount represented by the check from
FCC.Later on, Metrobank agreed to release the amount
to FCC after the latter executed an Undertaking,
promising to indemnify Metrobank in case it was
made to reimburse the amount.[32]
Lim Sio Wan thereafter filed an amended
complaint to include Metrobank as a party-defendant,
along with Allied.[33] The RTC admitted the amended
complaint despite the opposition of Metrobank.

[34]
Consequently, Allieds third party complaint against
Metrobank was converted into a cross-claim and the
latters fourth party complaint against FCC was
converted into a third party complaint.[35]
After trial, the RTC issued its Decision, holding as
follows:
WHEREFORE, judgment is hereby
rendered as follows:
1. Ordering defendant Allied Banking
Corporation to pay plaintiff the amount
of P1,158,648.49 plus 12% interest per
annum from March 16, 1984 until fully
paid;
2. Ordering defendant Allied Bank to
pay plaintiff the amount of P100,000.00
by way of moral damages;
3. Ordering defendant Allied Bank to
pay plaintiff the amount of P173,792.20
by way of attorneys fees; and,
4. Ordering defendant Allied Bank to
pay the costs of suit.
Defendant Allied Banks cross-claim
against defendant Metrobank is
DISMISSED.
Likewise defendant Metrobanks third-
party complaint as against Filipinas
Cement Corporation is DISMISSED.
Filipinas Cement Corporations fourth-
party complaint against Producers Bank
is also DISMISSED.
SO ORDERED.[36]
The Decision of the Court of Appeals
Allied appealed to the CA, which in turn issued the
assailed Decision on March 18, 1998, modifying the
RTC Decision, as follows:
WHEREFORE, premises considered,
the decision appealed from is
MODIFIED. Judgment is rendered
ordering and sentencing defendant-
appellant Allied Banking Corporation to
pay sixty (60%) percent and defendant-
61
appellee Metropolitan Bank and Trust
Company forty (40%) of the amount of
P1,158,648.49 plus 12% interest per
annum from March 16, 1984 until fully
paid. The moral damages, attorneys
fees and costs of suit adjudged shall
likewise be paid by defendant-appellant
Allied Banking Corporation and
defendant-appellee Metropolitan Bank
and Trust Company in the same
proportion of 60-40. Except as thus
modified, the decision appealed from is
AFFIRMED.
SO ORDERED.[37]
Hence, Allied filed the instant petition.
The Issues
Allied raises the following issues for our
consideration:
The Honorable Court of
Appeals erred in holding that Lim Sio
Wan did not authorize [Allied] to pre-
terminate the initial placement and to
deliver the check to Deborah Santos.
The Honorable Court of
Appeals erred in absolving Producers
Bank of any liability for the
reimbursement of amount adjudged
demandable.
The Honorable Court of
Appeals erred in holding [Allied] liable
to the extent of 60% of amount
adjudged demandable in clear disregard
to the ultimate liability of Metrobank as
guarantor of all endorsement on the
check, it being the collecting bank.[38]
The petition is partly meritorious.
A Question of Fact
Allied questions the finding of both the trial and
appellate courts that Allied was not authorized to
release the proceeds of Lim Sio Wans money market
 62
placement to Santos. Allied clearly raises a question of amounts) where lenders and borrowers
fact. When the CA affirms the findings of fact of the do not deal directly with each other but
RTC, the factual findings of both courts are binding on through a middle man or dealer in open
this Court.[39] market. In a money market transaction,
the investor is a lender who loans his
We also agree with the CA when it said that it could money to a borrower through a
not disturb the trial courts findings on the credibility of middleman or dealer.
witness So inasmuch as it was the trial court that heard
the witness and had the opportunity to observe closely In the case at bar, the money
her deportment and manner of testifying. Unless the market transaction between the
trial court had plainly overlooked facts of substance or petitioner and the private respondent is
value, which, if considered, might affect the result of in the nature of a loan.[44]
the case,[40] we find it best to defer to the trial court on
matters pertaining to credibility of witnesses.
Additionally, this Court has held that the matter of Lim Sio Wan, as creditor of the bank for her
negligence is also a factual question. [41] Thus, the money market placement, is entitled to payment upon
finding of the RTC, affirmed by the CA, that the her request, or upon maturity of the placement, or until
respective parties were negligent in the exercise of the bank is released from its obligation as debtor. Until
their obligations is also conclusive upon this Court. any such event, the obligation of Allied to Lim Sio
Wan remains unextinguished.
The Liability of the Parties
Art. 1231 of the Civil Code enumerates the
As to the liability of the parties, we find that Allied is instances when obligations are considered
liable to Lim Sio Wan. Fundamental and familiar is the extinguished, thus:
doctrine that the relationship between a bank and a
client is one of debtor-creditor.
Art. 1231. Obligations are
Articles 1953 and 1980 of the Civil Code provide: extinguished:

Art. 1953. A person who receives a loan (1) By payment or

of money or any other fungible thing performance;
acquires the ownership thereof, and is (2) By the loss of the
bound to pay to the creditor an equal thing due;
amount of the same kind and quality. (3) By the condonation
or remission of the debt;
Art. 1980. Fixed, savings, and current (4) By the confusion or
deposits of money in banks and similar merger of the rights of creditor
institutions shall be governed by the and debtor;
provisions concerning simple loan. (5) By compensation;
(6) By novation.

Thus, we have ruled in a line of cases that a Other causes of extinguishment

bank deposit is in the nature of a simple loan or
mutuum.[42]More succinctly, in Citibank,
N.A. (Formerly First National City Bank) v.
Sabeniano, this Court ruled that a money market
placement is a simple loan or mutuum. [43] Further, we
defined a money market in Cebu International
Finance Corporation v. Court of Appeals, as follows:
[A] money market is a market dealing
in standardized short-term
credit instruments (involving large
of obligations, such as annulment,
rescission, fulfillment of a resolutory
condition, and prescription, are
governed elsewhere in this
Code. (Emphasis supplied.)
From the factual findings of the trial and
appellate courts that Lim Sio Wan did not authorize the
release of her money market placement to Santos and
the bank had been negligent in so doing, there is no

question that the obligation of Allied to pay Lim Sio
Wan had not been extinguished. Art. 1240 of the Code
states that payment shall be made to the person in
whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to
receive it. As commented by Arturo Tolentino:
Payment made by the debtor to
a wrong party does not extinguish the
obligation as to the creditor, if there is
no fault or negligence which can be
imputed to the latter. Even when the
debtor acted in utmost good faith and
by mistake as to the person of his
creditor, or through error induced by the
fraud of a third person, the payment to
one who is not in fact his creditor, or
authorized to receive such payment, is
void, except as provided in Article
1241. Such payment does not
prejudice the creditor, and accrual of
interest is not suspended by it.
[45]
(Emphasis supplied.)
Since there was no effective payment of Lim Sio Wans
money market placement, the bank still has an
obligation to pay her at six percent (6%) interest
from March 16, 1984 until the payment thereof.
We cannot, however, say outright that Allied is solely
liable to Lim Sio Wan.
Allied claims that Metrobank is the proximate cause of
the loss of Lim Sio Wans money. It points out that
Metrobank guaranteed all prior indorsements inscribed
on the managers check, and without Metrobanks
guarantee, the present controversy would never have
occurred. According to Allied:
Failure on the part of the collecting
bank to ensure that the proceeds of the
check is paid to the proper party is,
aside from being an efficient
intervening cause, also the last
negligent act, x x x contributory to the
injury caused in the present case, which
thereby leads to the conclusion that it is
the collecting bank, Metrobank that is
the proximate cause of the alleged loss
of the plaintiff in the instant case.[46]
We are not persuaded.
63
Proximate cause is that cause, which, in natural and
continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without
which the result would not have occurred.[47] Thus,
there is an efficient supervening event if the event
breaks the sequence leading from the cause to the
ultimate result. To determine the proximate cause of a
controversy, the question that needs to be asked is: If
the event did not happen, would the injury have
resulted? If the answer is NO, then the event is the
proximate cause.
In the instant case, Allied avers that even if it had not
issued the check payment, the money represented by
the check would still be lost because of Metrobanks
negligence in indorsing the check without verifying
the genuineness of the indorsement thereon.
Section 66 in relation to Sec. 65 of the
Negotiable Instruments Law provides:
Section 66. Liability of general
indorser.Every indorser who indorses
without qualification, warrants to all
subsequent holders in due course;
a) The matters and
things mentioned in
subdivisions (a), (b)
and (c) of the next
preceding section; and
b) That the instrument is
at the time of his
indorsement valid and
subsisting;
And in addition, he engages that
on due presentment, it shall be accepted
or paid, or both, as the case may be
according to its tenor, and that if it be
dishonored, and the necessary
proceedings on dishonor be duly taken,
he will pay the amount thereof to the
holder, or to any subsequent indorser
who may be compelled to pay it.
Section 65. Warranty where
negotiation by delivery, so forth.Every
person negotiating an instrument by
 64
delivery or by a qualified indorsement, of forged indorsements, we held the collecting bank
warrants: solely liable for the whole amount of the checks
involved for having indorsed the same. In Republic
a) That the instrument Bank v. Ebrada,[49] the check was properly issued by
is genuine and in all the Bureau of Treasury. While in Banco de Oro
respects what it Savings and Mortgage Bank (Banco de Oro) v.
purports to be; Equitable Banking Corporation,[50] Banco de Oro
b) That he has a good admittedly issued the checks in the name of the correct
title of it; payees. And in Traders Royal Bank v. Radio
c) That all prior parties Philippines Network, Inc.,[51] the checks were issued at
had capacity to contract; the request of Radio Philippines Network, Inc. from
d) That he has no Traders Royal Bank.
knowledge of any fact However, in Bank of the Philippine Islands v. Court of
which would impair the Appeals, we said that the drawee bank is liable for
validity of the 60% of the amount on the face of the negotiable
instrument or render it instrument and the collecting bank is liable for
valueless. 40%. We also noted the relative negligence exhibited
by two banks, to wit:
But when the negotiation is by
delivery only, the warranty extends in Both banks were negligent in
favor of no holder other than the the selection and supervision of their
immediate transferee. employees resulting in the encashment
of the forged checks by an impostor.
The provisions of subdivision Both banks were not able to overcome
(c) of this section do not apply to the presumption of negligence in the
persons negotiating public or selection and supervision of their
corporation securities, other than bills employees. It was the gross negligence
and notes. (Emphasis supplied.) of the employees of both banks which
resulted in the fraud and the subsequent
loss. While it is true that petitioner BPIs
The warranty that the instrument is genuine and in all negligence may have been the
respects what it purports to be covers all the defects in proximate cause of the loss, respondent
the instrument affecting the validity thereof, including CBCs negligence contributed equally to
a forged indorsement. Thus, the last indorser will be the success of the impostor in
liable for the amount indicated in the negotiable encashing the proceeds of the forged
instrument even if a previous indorsement was checks. Under these circumstances, we
forged. We held in a line of cases that a collecting bank apply Article 2179 of the Civil Code to
which indorses a check bearing a forged indorsement the effect that while respondent CBC
and presents it to the drawee bank guarantees all prior may recover its losses, such losses are
indorsements, including the forged indorsement itself, subject to mitigation by the courts.
and ultimately should be held liable therefor.[48] (See Phoenix Construction Inc. v.
Intermediate Appellate Courts, 148
However, this general rule is subject to exceptions. SCRA 353 [1987]).
One such exception is when the issuance of the check
itself was attended with negligence. Thus, in the cases Considering the comparative
cited above where the collecting bank is generally held negligence of the two (2) banks, we
liable, in two of the cases where the checks were rule that the demands of substantial
negligently issued, this Court held the institution justice are satisfied by allocating the
issuing the check just as liable as or more liable than loss of P2,413,215.16 and the costs of
the collecting bank. the arbitration proceeding in the amount
of P7,250.00 and the cost of litigation
In isolated cases where the checks were deposited in on a 60-40 ratio.[52]
an account other than that of the payees on the strength

Similarly, we ruled in Associated Bank v. Court of
Appeals that the issuing institution and the collecting
bank should equally share the liability for the loss of
amount represented by the checks concerned due to the
negligence of both parties:
The Court finds as reasonable, the
proportionate sharing of fifty percent-
fifty percent (50%-50%). Due to the
negligence of the Province of Tarlac in
releasing the checks to an unauthorized
person (Fausto Pangilinan), in allowing
the retired hospital cashier to receive
the checks for the payee hospital for a
period close to three years and in not
properly ascertaining why the retired
hospital cashier was collecting checks
for the payee hospital in addition to the
hospitals real cashier, respondent
Province contributed to the loss
amounting to P203,300.00 and shall be
liable to the PNB for fifty (50%)
percent thereof. In effect,
the Province of Tarlac can only recover
fifty percent (50%) of P203,300.00
from PNB.
The collecting bank, Associated
Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is
liable on its warranties as indorser of
the checks which were deposited by
Fausto Pangilinan, having guaranteed
the genuineness of all prior
indorsements, including that of the
chief of the payee hospital, Dr. Adena
Canlas. Associated Bank was also
remiss in its duty to ascertain the
genuineness of the payees indorsement.
[53]
A reading of the facts of the two immediately
preceding cases would reveal that the reason why the
bank or institution which issued the check was held
partially liable for the amount of the check was
because of the negligence of these parties which
resulted in the issuance of the checks.
In the instant case, the trial court correctly found
Allied negligent in issuing the managers check and in
transmitting it to Santos without even a written
authorization.[54] In fact, Allied did not even ask for the
65
certificate evidencing the money market placement or
call up Lim Sio Wan at her residence or office to
confirm her instructions. Both actions could have
prevented the whole fraudulent transaction from
unfolding. Allieds negligence must be considered as
the proximate cause of the resulting loss.
To reiterate, had Allied exercised the diligence due
from a financial institution, the check would not have
been issued and no loss of funds would have resulted.
In fact, there would have been no issuance of
indorsement had there been no check in the first place.
The liability of Allied, however, is concurrent with that
of Metrobank as the last indorser of the check. When
Metrobank indorsed the check in compliance with the
PCHC Rules and Regulations[55] without verifying the
authenticity of Lim Sio Wans indorsement and when it
accepted the check despite the fact that it was cross-
checked payable to payees account only,[56] its
negligent and cavalier indorsement contributed to the
easier release of Lim Sio Wans money and
perpetuation of the fraud. Given the relative
participation of Allied and Metrobank to the instant
case, both banks cannot be adjudged as equally liable.
Hence, the 60:40 ratio of the liabilities of Allied and
Metrobank, as ruled by the CA, must be upheld.
FCC, having no participation in the negotiation of the
check and in the forgery of Lim Sio Wans
indorsement, can raise the real defense of forgery as
against both banks.[57]
As to Producers Bank, Allied Banks argument
that Producers Bank must be held liable as employer
of Santosunder Art. 2180 of the Civil Code is
erroneous. Art. 2180 pertains to the vicarious liability
of an employer for quasi-delicts that an employee has
committed. Such provision of law does not apply to
civil liability arising from delict.
One also cannot apply the principle of
subsidiary liability in Art. 103 of the Revised Penal
Code in the instant case. Such liability on the part of
the employer for the civil aspect of the criminal act of
the employee is based on the conviction of the
employee for a crime. Here, there has been no
conviction for any crime.
As to the claim that there was unjust
enrichment on the part of Producers Bank, the same is
correct. Allied correctly claims in its petition that
Producers Bank should reimburse Allied for whatever

judgment that may be rendered against it pursuant to
Art. 22 of the Civil Code, which provides: Every
person who through an act of performance by another,
or any other means, acquires or comes into possession
of something at the expense of the latter without just
cause or legal ground, shall return the same to him.
The above provision of law was clarified
in Reyes v. Lim, where we ruled that [t]here is unjust
enrichment when a person unjustly retains a benefit to
the loss of another, or when a person retains money or
property of another against the fundamental principles
of justice, equity and good conscience.[58]
In Tamio v. Ticson, we further clarified the
principle of unjust enrichment, thus: Under Article 22
of the Civil Code, there is unjust enrichment when (1)
a person is unjustly benefited, and (2) such benefit is
derived at the expense of or with damages to another.
[59]
In the instant case, Lim Sio Wans money
market placement in Allied Bank was pre-terminated
and withdrawn without her consent. Moreover, the
proceeds of the placement were deposited in Producers
Banks account in Metrobank without any justification.
In other words, there is no reason that the proceeds of
Lim Sio Wans placement should be deposited in FCCs
account purportedly as payment for FCCs money
market placement and interest in Producers Bank. With
such payment, Producers Banks indebtedness to FCC
was extinguished, thereby benefitting the former.
Clearly, Producers Bank was unjustly enriched at the
expense of Lim Sio Wan. Based on the facts and
circumstances of the case, Producers Bank should
reimburse Allied and Metrobank for the amounts the
two latter banks are ordered to pay Lim Sio Wan.
It cannot be validly claimed that FCC, and not
Producers Bank, should be considered as having been
unjustly enriched. It must be remembered that FCCs
money market placement with Producers Bank was
already due and demandable; thus, Producers Banks
payment thereof was justified. FCC was entitled to
such payment. As earlier stated, the fact that the
indorsement on the check was forged cannot be raised
against FCC which was not a part in any stage of the
negotiation of the check. FCC was not unjustly
enriched.
From the facts of the instant case, we see
that Santos could be the architect of the entire
66
controversy. Unfortunately, since summons had not
been served on Santos, the courts have not acquired
jurisdiction over her.[60]We, therefore, cannot ascribe to
her liability in the instant case.
Clearly, Producers Bank must be held liable to
Allied and Metrobank for the amount of the check plus
12% interest per annum, moral damages, attorneys
fees, and costs of suit which Allied and Metrobank are
adjudged to pay Lim Sio Wan based on a proportion of
60:40.
WHEREFORE, the petition is PARTLY
GRANTED. The March 18, 1998 CA Decision in CA-
G.R. CV No. 46290 and the November 15, 1993 RTC
Decision in Civil Case No. 6757
are AFFIRMED with MODIFICATION.
Thus, the CA Decision is AFFIRMED,
the fallo of which is reproduced, as follows:
WHEREFORE, premises considered,
the decision appealed from is
MODIFIED. Judgment is rendered
ordering and sentencing defendant-
appellant Allied Banking Corporation
to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank
and Trust Company forty (40%) of the
amount of P1,158,648.49 plus 12%
interest per annum from March 16,
1984 until fully paid. The moral
damages, attorneys fees and costs of
suit adjudged shall likewise be paid by
defendant-appellant Allied Banking
Corporation and defendant-appellee
Metropolitan Bank and Trust Company
in the same proportion of 60-40. Except
as thus modified, the decision appealed
from is AFFIRMED.
SO ORDERED.
Additionally and by way
of MODIFICATION, Producers Bank is hereby
ordered to pay Allied and Metrobank the
aforementioned amounts. The liabilities of the parties
are concurrent and independent of each other.
SO ORDERED.

THIRD DIVISION
G.R. No. 172825 October 11, 2012
SPOUSES MINIANO B. DELA CRUZ and LETA
L. DELA CRUZ, Petitioners,
vs.
ANA MARIE CONCEPCION, Respondent.
DECISION
PERALTA, J.:
Assailed in this petition for review on certiorari under
Rule 45 of the Rules of Court filed by petitioners
spouses Miniano B. Dela Cruz and Leta L. Dela Cruz
against respondent Ana Marie Concepcion are the
Court of Appeals (CA) Decision1 dated March 31,
2005 and Resolution2 dated May 24, 2006 in CA-G.R.
CV No. 83030.
The facts of the case are as follows:
On March 25, 1996, petitioners (as vendors) entered
into a Contract to Sell3 with respondent (as vendee)
involving a house and lot in Cypress St., Phase I, Town
and Country Executive Village, Antipolo City for a
consideration of P2,000,000.00 subject to the
following terms and conditions:
a) That an earnest money of P100,000.00 shall be paid
immediately;
b) That a full down payment of Four Hundred
Thousand Pesos (P400,000.00) shall be paid on
February 29, 1996;
c) That Five Hundred Thousand Pesos (P500,000.00)
shall be paid on or before May 5, 1996; and
d) That the balance of One Million Pesos
(P1,000,000.00) shall be paid on installment with
interest of Eighteen Percent (18%) per annum or One
and a half percent (1-1/2 %) interest per month, based
on the diminishing balance, compounded monthly,
effective May 6, 1996. The interest shall continue to
run until the whole obligation shall have been fully
paid. The whole One Million Pesos shall be paid
within three years from May 6, 1996;
67
e) That the agreed monthly amortization of Fifty
Thousand Pesos (P50,000.00), principal and interest
included, must be paid to the Vendors, without need of
prior demand, on or before May 6, 1996, and every
month thereafter. Failure to pay the monthly
amortization on time, a penalty equal to Five Percent
(5%) of the amount due shall be imposed, until the
account is updated. In addition, a penalty of One
Hundred Pesos per day shall be imposed until the
account is updated;
f) That after receipt of the full payment, the Vendors
shall execute the necessary Absolute Deed of Sale
covering the house and lot mentioned above x x x4
Respondent made the following payments, to wit: (1)
P500,000.00 by way of downpayment; (2)
P500,000.00 on May 30, 1996; (3) P500,000.00 paid
on January 22, 1997; and (4) P500,000.00 bounced
check dated June 30, 1997 which was subsequently
replaced by another check of the same amount, dated
July 7, 1997. Respondent was, therefore, able to pay a
total of P2,000,000.00.5
Before respondent issued the P500,000.00 replacement
check, she told petitioners that based on the
computation of her accountant as of July 6, 1997, her
unpaid obligation which includes interests and
penalties was only P200,000.00.6 Petitioners agreed
with respondent and said "if P200,000.00 is the correct
balance, it is okay with us."7
Meanwhile, the title to the property was transferred to
respondent. Petitioners later reminded respondent to
pay P209,000.00 within three months.8 They claimed
that the said amount remained unpaid, despite the
transfer of the title to the property to respondent.
Several months later, petitioners made further demands
stating the supposed correct computation of
respondent’s liabilities.9 Despite repeated demands,
petitioners failed to collect the amounts they claimed
from respondent. Hence, the Complaint for Sum of
Money With Damages10 filed with the Regional Trial
Court (RTC)11 of Antipolo, Rizal. The case was
docketed as Civil Case No. 98-4716.
In her Answer with Compulsory Counterclaim,12 
respondent claimed that her unpaid obligation to
petitioners is only P200,000.00 as earlier confirmed by
petitioners and not P487,384.15 as later alleged in the
complaint. Respondent thus prayed for the dismissal of
the complaint. By way of counterclaim, respondent

prayed for the payment of moral damages and
attorney’s fees. During the presentation of the parties’
evidence, in addition to documents showing the
statement of her paid obligations, respondent presented
a receipt purportedly indicating payment of the
remaining balance of P200,000.00 to Adoracion
Losloso (Losloso) who allegedly received the same on
behalf of petitioners.13
On March 8, 2004, the RTC rendered a Decision14 in
favor of respondent, the dispositive portion of which
reads:
WHEREFORE, premises considered, this case is
hereby DISMISSED. The plaintiff is hereby ordered to
pay the defendant’s counterclaim, amounting to wit:
a) P300,000 as moral damages; and
b) P100,000 plus P2,000 per court appearance as
attorney’s fees.
SO ORDERED.15
The RTC noted that the evidence formally offered by
petitioners have not actually been marked as none of
the markings were recorded. Thus, it found no basis to
grant their claims, especially since the amount claimed
in the complaint is different from that testified to. The
court, on the other hand, granted respondent’s
counterclaim.16
On appeal, the CA affirmed the decision with
modification by deleting the award of moral damages
and attorney’s fees in favor of respondent.17 It agreed
with the RTC that the evidence presented by
petitioners cannot be given credence in determining
the correct liability of respondent.18 Considering that
the purchase price had been fully paid by respondent
ahead of the scheduled date agreed upon by the parties,
petitioners were not awarded the excessive penalties
and interests.19 The CA thus maintained that
respondent’s liability is limited to P200,000.00 as
claimed by respondent and originally admitted by
petitioners.20 This amount, however, had already been
paid by respondent and received by petitioners’
representative.21 Finally, the CA pointed out that the
RTC did not explain in its decision why moral
damages and attorney’s fees were awarded.
Considering also that bad faith cannot be attributed to
petitioners when they instituted the collection suit, the
CA deleted the grant of their counterclaims.22
68
Aggrieved, petitioners come before the Court in this
petition for review on certiorari under Rule 45 of the
Rules of Court raising the following errors:
I.
"THE TRIAL COURT ERRED IN DISMISSING THE
COMPLAINT ON THE GROUND THAT
PLAINTIFF FAILED TO FORMALLY OFFER
THEIR EVIDENCE AS DEFENDANT JUDICIALLY
ADMITTED IN HER ANSWER WITH
COMPULS[O]RY COUNTERCLAIM HER
OUTSTANDING OBLIGATION STILL DUE TO
PLAINTIFFS AND NEED NO PROOF.
II.
THE TRIAL COURT ERRED IN DISMISSING THE
COMPLAINT FOR ALLEGED FAILURE OF
PLAINTIFFS TO PRESENT COMPUTATION OF
THE AMOUNT BEING CLAIMED AS
DEFENDANT JUDICIALLY ADMITTED HAVING
RECEIVED THE DEMAND LETTER DATED
OCTOBER 22, 1997 WITH COMPUTATION OF
THE BALANCE DUE.
III.
THE TRIAL COURT ERRED IN DISMISSING THE
COMPLAINT ON THE GROUND THAT THE
DEFENDANT FULLY PAID THE CLAIMS OF
PLAINTIFFS BASED ON THE ALLEGED RECEIPT
OF PAYMENT BY ADORACION LOSLOSO FROM
ANA MARIE CONCEPCION MAGLASANG
WHICH HAS NOTHING TO DO WITH THE
JUDICIALLY ADMITTED OBLIGATION OF
APPELLEE."23
Invoking the rule on judicial admission, petitioners
insist that respondent admitted in her Answer with
Compulsory Counterclaim that she had paid only a
total amount of P2 million and that her unpaid
obligation amounts to P200,000.00.24 They thus
maintain that the RTC and the CA erred in concluding
that said amount had already been paid by respondent.
Petitioners add that respondent’s total liability as
shown in the latter’s statement of account was
erroneously computed for failure to compound the
monthly interest agreed upon.25 Petitioners also claim
that the RTC and the CA erred in giving credence to
the receipt presented by respondent to show that her
unpaid obligation had already been paid having been

allegedly given to a person who was not armed with
authority to receive payment.26
The petition is without merit.
It is undisputed that the parties entered into a contract
to sell a house and lot for a total consideration of P2
million. Considering that the property was payable in
installment, they likewise agreed on the payment of
interest as well as penalty in case of default. It is
likewise settled that respondent was able to pay the
total purchase price of P2 million ahead of the agreed
term. Afterwhich, they agreed on the remaining
balance by way of interest and penalties which is
P200,000.00. Considering that the term of payment
was not strictly followed and the purchase price had
already been fully paid by respondent, the latter
presented to petitioners her computation of her
liabilities for interests and penalties which was agreed
to by petitioners. Petitioners also manifested their
conformity to the statement of account prepared by
respondent.
In paragraph (9) of petitioners’ Complaint, they stated
that:
9) That the Plaintiffs answered the Defendant as
follows: "if P200,000 is the correct balance, it is okay
with us." x x x.27
But in paragraph (17) thereof, petitioners claimed that
defendant’s outstanding liability as of November 6,
1997 was P487,384.15.28 Different amounts, however,
were claimed in their demand letter and in their
testimony in court.
With the foregoing factual antecedents, petitioners
cannot be permitted to assert a different computation
of the correct amount of respondent’s liability.
It is noteworthy that in answer to petitioners’ claim of
her purported unpaid obligation, respondent admitted
in her Answer with Compulsory Counterclaim that she
paid a total amount of P2 million representing the
purchase price of the subject house and lot. She then
manifested to petitioners and conformed to by
respondent that her only balance was P200,000.00.
Nowhere in her Answer did she allege the defense of
payment. However, during the presentation of her
evidence, respondent submitted a receipt to prove that
she had already paid the remaining balance. Both the
RTC and the CA concluded that respondent had
69
already paid the remaining balance of P200,000.00.
Petitioners now assail this, insisting that the court
should have maintained the judicial admissions of
respondent in her Answer with Compulsory
Counterclaim, especially as to their agreed stipulations
on interests and penalties as well as the existence of
outstanding obligations.
It is, thus, necessary to discuss the effect of failure of
respondent to plead payment of its obligations.
Section 1, Rule 9 of the Rules of Court states that
"defenses and objections not pleaded either in a
motion to dismiss or in the answer are deemed
waived." Hence, respondent should have been barred
from raising the defense of payment of the unpaid
P200,000.00. However, Section 5, Rule 10 of the
Rules of Court allows the amendment to conform to or
authorize presentation of evidence, to wit:
Section 5. Amendment to conform to or authorize
presentation of evidence. – When issues not raised by
the pleadings are tried with the express or implied
consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings.
Such amendment of the pleadings as may be necessary
to cause them to conform to the evidence and to raise
these issues may be made upon motion of any party at
any time, even after judgment; but failure to amend
does not affect the result of the trial of these issues. If
evidence is objected to at the trial on the ground that it
is not within the issues made by the pleadings, the
court may allow the pleadings to be amended and shall
do so with liberality if the presentation of the merits of
the action and the ends of substantial justice will be
subserved thereby. The court may grant a continuance
to enable the amendment to be made.
The foregoing provision envisions two scenarios,
namely, when evidence is introduced in an issue not
alleged in the pleadings and no objection was
interjected; and when evidence is offered on an issue
not alleged in the pleadings but this time an objection
was raised.29 When the issue is tried without the
objection of the parties, it should be treated in all
respects as if it had been raised in the pleadings. 30 On
the other hand, when there is an objection, the
evidence may be admitted where its admission will not
prejudice him.31
Thus, while respondent judicially admitted in her
Answer that she only paid P2 million and that she still

owed petitioners P200,000.00, respondent claimed
later and, in fact, submitted an evidence to show that
she already paid the whole amount of her unpaid
obligation. It is noteworthy that when respondent
presented the evidence of payment, petitioners did not
object thereto. When the receipt was formally offered
as evidence, petitioners did not manifest their
objection to the admissibility of said document on the
ground that payment was not an issue. Apparently,
petitioners only denied receipt of said payment and
assailed the authority of Losloso to receive payment.
Since there was an implied consent on the part of
petitioners to try the issue of payment, even if no
motion was filed and no amendment of the pleading
has been ordered,32 the RTC cannot be faulted for
admitting respondent’s testimonial and documentary
evidence to prove payment.33
As stressed by the Court in Royal Cargo Corporation
v. DFS Sports Unlimited, Inc.,34
The failure of a party to amend a pleading to conform
to the evidence adduced during trial does not preclude
adjudication by the court on the basis of such evidence
which may embody new issues not raised in the
pleadings. x x x Although, the pleading may not have
been amended to conform to the evidence submitted
during trial, judgment may nonetheless be rendered,
not simply on the basis of the issues alleged but also
on the issues discussed and the assertions of fact
proved in the course of the trial. The court may treat
the pleading as if it had been amended to conform to
the evidence, although it had not been actually
amended. x x x Clearly, a court may rule and render
judgment on the basis of the evidence before it even
though the relevant pleading had not been previously
amended, so long as no surprise or prejudice is thereby
caused to the adverse party. Put a little differently, so
long as the basic requirements of fair play had been
met, as where the litigants were given full opportunity
to support their respective contentions and to object to
or refute each other's evidence, the court may validly
treat the pleadings as if they had been amended to
conform to the evidence and proceed to adjudicate on
the basis of all the evidence before it. (Emphasis
supplied)35
To be sure, petitioners were given ample opportunity
to refute the fact of and present evidence to prove
payment.
70
With the evidence presented by the contending parties,
the more important question to resolve is whether or
not respondent’s obligation had already been
extinguished by payment.
We rule in the affirmative as aptly held by the RTC
and the CA.
Respondent’s obligation consists of payment of a sum
of money. In order to extinguish said obligation,
payment should be made to the proper person as set
forth in Article 1240 of the Civil Code, to wit:
Article 1240. Payment shall be made to the person in
whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to
receive it. (Emphasis supplied)
The Court explained in Cambroon v. City of Butuan, 36 
cited in Republic v. De Guzman,37 to whom payment
should be made in order to extinguish an obligation:
Payment made by the debtor to the person of the
creditor or to one authorized by him or by the law to
receive it extinguishes the obligation. When payment
is made to the wrong party, however, the obligation is
not extinguished as to the creditor who is without fault
or negligence even if the debtor acted in utmost good
faith and by mistake as to the person of the creditor or
through error induced by fraud of a third person.
In general, a payment in order to be effective to
discharge an obligation, must be made to the proper
person. Thus, payment must be made to the obligee
himself or to an agent having authority, express or
implied, to receive the particular payment. Payment
made to one having apparent authority to receive the
money will, as a rule, be treated as though actual
authority had been given for its receipt. Likewise, if
payment is made to one who by law is authorized to
act for the creditor, it will work a discharge. The
receipt of money due on a judgment by an officer
authorized by law to accept it will, therefore, satisfy
the debt.38
Admittedly, payment of the remaining balance of
P200,000.00 was not made to the creditors themselves.
Rather, it was allegedly made to a certain Losloso.
Respondent claims that Losloso was the authorized
agent of petitioners, but the latter dispute it.

Losloso’s authority to receive payment was embodied
in petitioners’ Letter39 addressed to respondent, dated
August 7, 1997, where they informed respondent of
the amounts they advanced for the payment of the
1997 real estate taxes. In said letter, petitioners
reminded respondent of her remaining balance,
together with the amount of taxes paid. Taking into
consideration the busy schedule of respondent,
petitioners advised the latter to leave the payment to a
certain "Dori" who admittedly is Losloso, or to her
trusted helper. This is an express authority given to
Losloso to receive payment.
Moreover, as correctly held by the CA:
Furthermore, that Adoracion Losloso was indeed an
agent of the appellant spouses is borne out by the
following admissions of plaintiff-appellant Atty.
Miniano dela Cruz, to wit:
Q: You would agree with me that you have authorized
this Doiry Losloso to receive payment of whatever
balance is due you coming from Ana Marie
Concepcion, that is correct?
A: In one or two times but not total authority, sir.
Q: Yes, but you have authorized her to receive
payment?
A: One or two times, yes x x x. (TSN, June 28, 1999,
pp. 16-17)40
Thus, as shown in the receipt signed by petitioners’
agent and pursuant to the authority granted by
petitioners to Losloso, payment made to the latter is
deemed payment to petitioners. We find no reason to
depart from the RTC and the CA conclusion that
payment had already been made and that it
extinguished respondent's obligations.
WHEREFORE, premises considered, the petition is
DENIED for lack of merit. The Court of Appeals
Decision dated March 31, 2005 and Resolution dated
May 24, 2006 in CA-G.R. CV No. 83030, are
AFFIRMED.
SO ORDERED.
FIRST DIVISION
71
NATIONAL POWER G.R. No. 168732
CORPORATION,
Petitioner,
Present:
-versus-
LUCMAN G. IBRAHIM, OMAR PUNO, C.J., Chairperson,
G. MARUHOM, ELIAS G. SANDOVAL-GUTIERREZ, *
MARUHOM, BUCAY G. CORONA,
MARUHOM, FAROUK G. AZCUNA, and
MARUHOM, HIDJARA G. GARCIA, JJ.
MARUHOM, ROCANIA G.
MARUHOM, POTRISAM G.
MARUHOM, LUMBA G. Promulgated:
MARUHOM, SINAB G.
MARUHOM, ACMAD G.
MARUHOM, SOLAYMAN G. June 29, 2007
MARUHOM, MOHAMAD M.
IBRAHIM, and CAIRONESA M.
IBRAHIM,
Respondents.
X----------------------------------------------------------------
------------------------X
DECISION
AZCUNA, J.:
This is a petition for review on certiorari under
Rule 45 of the Rules of Court seeking to annul the
Decision dated June 8, 2005 rendered by the Court of
[1]
Appeals (CA) in C.A.-G.R. CV No. 57792.
The facts are as follows:
On November 23, 1994, respondent Lucman G.
Ibrahim, in his personal capacity and in behalf of his
co-heirs Omar G. Maruhom, Elias G. Maruhom,
Bucay G. Maruhom, Mamod G. Maruhom, Farouk G.
Maruhom, Hidjara G. Maruhom, Rocania G.
Maruhom, Potrisam G. Maruhom, Lumba G.
Maruhom, Sinab G. Maruhom, Acmad G. Maruhom,
Solayman G. Maruhom, Mohamad M. Ibrahim and
Caironesa M. Ibrahim, instituted an action against
petitioner National Power Corporation (NAPOCOR)
for recovery of possession of land and damages before
the Regional Trial Court (RTC) of Lanao del Sur.
In their complaint, Ibrahim and his co-heirs
claimed that they were owners of several parcels of
land described in Survey Plan FP (VII-5) 2278
consisting of 70,000 square meters, divided into three
(3) lots, i.e. Lots 1, 2, and 3 consisting of 31,894,
14,915, and 23,191 square meters each respectively.

Sometime in 1978, NAPOCOR, through alleged
stealth and without respondents knowledge and prior
consent, took possession of the sub-terrain area of their
lands and constructed therein underground tunnels.
The existence of the tunnels was only discovered
sometime in July 1992 by respondents and then later
confirmed on November 13, 1992 by NAPOCOR itself
through a memorandum issued by the latters Acting
Assistant Project Manager. The tunnels were
apparently being used by NAPOCOR in siphoning the
water of Lake Lanao and in the operation of
NAPOCORs Agus II, III, IV, V, VI, VII projects
located in Saguiran, Lanao del Sur; Nangca and Balo-i
in Lanao del Norte; and Ditucalan and Fuentes
in Iligan City.
On September 19, 1992, respondent Omar G.
Maruhom requested the Marawi City Water District for
a permit to construct and/or install a motorized deep
well in Lot 3 located in Saduc, Marawi City but his
request was turned down because the construction of
the deep well would cause danger to lives and
property. On October 7, 1992, respondents demanded
that NAPOCOR pay damages and vacate the sub-
terrain portion of their lands but the latter refused to
vacate much less pay damages. Respondents further
averred that the construction of the underground
tunnels has endangered their lives and properties
as Marawi City lies in an area of local volcanic and
tectonic activity. Further, these illegally constructed
tunnels caused them sleepless nights, serious anxiety
and shock thereby entitling them to recover moral
damages and that by way of example for the public
good, NAPOCOR must be held liable for exemplary
damages.
Disputing respondents claim, NAPOCOR filed an
answer with counterclaim denying the material
allegations of the complaint and interposing
affirmative and special defenses, namely that (1) there
is a failure to state a cause of action since respondents
seek possession of the sub-terrain portion when they
were never in possession of the same, (2) respondents
have no cause of action because they failed to show
proof that they were the owners of the property, and
(3) the tunnels are a government project for the benefit
of all and all private lands are subject to such easement
as may be necessary for the same. [2]
On August 7, 1996, the RTC rendered a Decision, the
decretal portion of which reads as follows:
WHEREFORE, judgment is
hereby rendered:
72
1. Denying plaintiffs
[private respondents] prayer for
defendant [petitioner] National Power
Corporation to dismantle the
underground tunnels constructed
between the lands of plaintiffs in Lots
1, 2, and 3 of Survey Plan FP (VII-5)
2278;
2. Ordering defendant
to pay to plaintiffs the fair market value
of said 70,000 square meters of land
covering Lots 1, 2, and 3 as described
in Survey Plan FP (VII-5) 2278 less the
area of 21,995 square meters
at P1,000.00 per square meter or a total
of P48,005,000.00 for the remaining
unpaid portion of 48,005 square meters;
with 6% interest per annum from the
filing of this case until paid;
3. Ordering defendant
to pay plaintiffs a reasonable monthly
rental of P0.68 per square meter of the
total area of 48,005 square meters
effective from its occupancy of the
foregoing area in 1978 or a total
of P7,050,974.40.
4. Ordering defendant
to pay plaintiffs the sum of P200,000.00
as moral damages; and
5. Ordering defendant
to pay the further sum of P200,000.00
as attorneys fees and the costs.
SO ORDERED. [3]
On August 15, 1996, Ibrahim, joined by his co-heirs,
filed an Urgent Motion for Execution of Judgment
Pending Appeal. On the other hand, NAPOCOR filed
a Notice of Appeal by registered mail on August 19,
1996. Thereafter, NAPOCOR filed a vigorous
opposition to the motion for execution of judgment
pending appeal with a motion for reconsideration of
the Decision which it had received on August 9, 1996.
On August 26, 1996, NAPOCOR filed a
Manifestation and Motion withdrawing its Notice of
Appeal purposely to give way to the hearing of its
motion for reconsideration.
 73
preserve their rights over their
On August 28, 1996, the RTC issued an Order parcels of land in so far as the
granting execution pending appeal and denying part of the decision decreeing
NAPOCORs motion for reconsideration, which Order just compensation for
was received by NAPOCOR on September 6, 1996. petitioners properties;

On September 9, 1996, NAPOCOR filed its 5) they would never have

Notice of Appeal by registered mail which was denied agreed to the alienation of their
by the RTC on the ground of having been filed out of property in favor of anybody,
time. Meanwhile, the Decision of the RTC was considering the fact that the
executed pending appeal and funds of NAPOCOR parcels of land involved in this
were garnished by respondents Ibrahim and his co- case were among the valuable
heirs. properties they inherited from
their dear father and they would
On October 4, 1996, a Petition for Relief from rather see their land crumble to
Judgment was filed by respondents Omar G. dust than sell it to anybody.
[4]

Maruhom, Elias G. Maruhom, Bucay G. Maruhom,

Mamod G. Maruhom, Farouk G. Maruhom, Hidjara G.
Maruhom, Potrisam G. Maruhom and Lumba G. The RTC granted the petition and rendered a
Maruhom asserting as follows: modified judgment dated September 8, 1997, thus:

1) they did not file a motion WHEREFORE, a modified judgment is

to reconsider or appeal the hereby rendered:
decision within the
reglementary period of fifteen
(15) days from receipt of 1) Reducing the
judgment because they believed judgment award of
in good faith that the decision plaintiffs for the fair
was for damages and rentals and market value
attorneys fees only as prayed for of P48,005,000.00 by
in the complaint: 9,526,000.00 or for a
difference
2) it was only on August 26, by P38,479,000.00 and
1996 that they learned that the by the further sum
amounts awarded to the of P33,603,500.00
plaintiffs represented not only subject of the execution
rentals, damages and attorneys pending appeal leaving a
fees but the greatest portion of difference of
which was payment of just 4,878,500.00 which may
compensation which in effect be the subject of
would make the defendant NPC execution upon the
the owner of the parcels of land finality of this modified
involved in the case; judgment with 6%
interest per annum from
3) when they learned of the the filing of the case
nature of the judgment, the until paid.
period of appeal has already
expired; 2) Awarding the sum
of P1,476,911.00 to
4) they were prevented by herein petitioners Omar
fraud, mistake, accident, or G. Maruhom, Elias G.
excusable negligence from Maruhom, Bucay G.
taking legal steps to protect and Maruhom, Mahmod G.
 74
Maruhom, Farouk G. vis the actual amount of damages
Maruhom, Hidjara G. awarded by this Court. Such additional
Maruhom, Portrisam G. filing fee shall constitute a lien on the
Maruhom and Lumba G. judgment.
Maruhom as reasonable
rental deductible from SO ORDERED. [6]

the awarded sum

of P7,050,974.40
pertaining to plaintiffs. Hence, this petition ascribing the following
errors to the CA:
3) Ordering
defendant embodied in
the August 7, 1996 (a) RESPONDENTS WERE
decision to pay plaintiffs NOT DENIED THE
the sum of P200,000.00 BENEFICIAL USE OF THEIR
as moral damages; and SUBJECT PROPERTIES TO
further sum ENTITLE THEM TO JUST
of P200,000.00 as COMPENSATION BY WAY
attorneys fees and costs. OF DAMAGES;

SO ORDERED. [5]
(b) ASSUMING THAT
RESPONDENTS ARE
ENTITLED TO JUST
Subsequently, both respondent Ibrahim and COMPENSATION BY WAY
NAPOCOR appealed to the CA. OF DAMAGES, NO
EVIDENCE WAS
In the Decision dated June 8, 2005, the CA set PRESENTED ANENT THE
aside the modified judgment and reinstated the original VALUATION OF
Decision dated August 7, 1996, amending it further by RESPONDENTS PROPERTY
deleting the award of moral damages and reducing the AT THE TIME OF ITS
amount of rentals and attorneys fees, thus: TAKING IN THE YEAR 1978
TO JUSTIFY THE AWARD OF
WHEREFORE, premises considered, ONE THOUSAND SQUARE
herein Appeals are hereby METERS (P1000.00/SQ. M.)
partially GRANTED, the Modified EVEN AS PAYMENT OF
Judgment is ordered SET ASIDE and BACK RENTALS IS ITSELF
rendered of no force and effect and the IMPROPER.
original Decision of the court a
quo dated 7 August 1996 is This case revolves around the propriety of paying just
hereby RESTORED with compensation to respondents, and, by extension, the
the MODIFICATION that the award basis for computing the same. The threshold issue of
of moral damages is DELETED and whether respondents are entitled to just compensation
the amounts of rentals and attorneys hinges upon who owns the sub-terrain area occupied
fees are REDUCED to P6,888,757.40 by petitioner.
and P50,000.00, respectively.
Petitioner maintains that the sub-terrain portion
In this connection, the Clerk of Court of where the underground tunnels were constructed does
RTC Lanao del Sur is hereby directed not belong to respondents because, even conceding the
to reassess and determine the additional fact that respondents owned the property, their right to
filing fee that should be paid by the subsoil of the same does not extend beyond what is
Plaintiff-Appellant IBRAHIM taking necessary to enable them to obtain all the utility and
into consideration the total amount of convenience that such property can normally give. In
damages sought in the complaint vis-- any case, petitioner asserts that respondents were still

able to use the subject property even with the existence
of the tunnels, citing as an example the fact that one of
the respondents, Omar G. Maruhom, had established
his residence on a part of the property. Petitioner
concludes that the underground tunnels 115 meters
below respondents property could not have caused
damage or prejudice to respondents and their claim to
this effect was, therefore, purely conjectural and
speculative.[7]
The contention lacks merit.
Generally, in an appeal by certiorari under Rule 45 of
the Rules of Court, the Court does not pass upon
questions of fact. Absent any showing that the trial and
appellate courts gravely abused their discretion, the
Court will not examine the evidence introduced by the
parties below to determine if they correctly assessed
and evaluated the evidence on record. The [8]
jurisdiction of the Court in cases brought to it from the
CA is limited to reviewing and revising the errors of
law imputed to it, its findings of fact being as a rule
conclusive and binding on the Court.
In the present case, petitioner failed to point to
any evidence demonstrating grave abuse of discretion
on the part of the CA or to any other circumstances
which would call for the application of the exceptions
to the above rule. Consequently, the CAs findings
which upheld those of the trial court that respondents
owned and possessed the property and that its substrata
was possessed by petitioner since 1978 for the
underground tunnels, cannot be disturbed. Moreover,
the Court sustains the finding of the lower courts that
the sub-terrain portion of the property similarly
belongs to respondents. This conclusion is drawn from
Article 437 of the Civil Code which provides:
ART. 437. The owner of a
parcel of land is the owner of its surface
and of everything under it, and he can
construct thereon any works or make
any plantations and excavations which
he may deem proper, without detriment
to servitudes and subject to special laws
and ordinances. He cannot complain of
the reasonable requirements of aerial
navigation.
Thus, the ownership of land extends to the surface as
well as to the subsoil under it. In Republic of the
Philippines v. Court of Appeals, this principle was
[9]
applied to show that rights over lands are indivisible
75
and, consequently, require a definitive and categorical
classification, thus:
The Court of Appeals justified this by
saying there is no conflict of interest
between the owners of the surface
rights and the owners of the sub-
surface rights. This is rather strange
doctrine, for it is a well-known
principle that the owner of a piece of
land has rights not only to its surface
but also to everything underneath and
the airspace above it up to a
reasonable height. Under the aforesaid
ruling, the land is classified as mineral
underneath and agricultural on the
surface, subject to separate claims of
title. This is also difficult to
understand, especially in its practical
application.
Under the theory of the
respondent court, the surface owner
will be planting on the land while the
mining locator will be boring tunnels
underneath. The farmer cannot dig a
well because he may interfere with the
mining operations below and the
miner cannot blast a tunnel lest he
destroy the crops above. How deep
can the farmer, and how high can the
miner go without encroaching on each
others rights? Where is the dividing
line between the surface and the sub-
surface rights?
The Court feels that the rights
over the land are indivisible and that the
land itself cannot be half agricultural
and half mineral. The classification
must be categorical; the land must be
either completely mineral or completely
agricultural.
Registered landowners may even be ousted of
ownership and possession of their properties in the
event the latter are reclassified as mineral lands
because real properties are characteristically
indivisible. For the loss sustained by such owners, they
are entitled to just compensation under the Mining
Laws or in appropriate expropriation proceedings. [10]

Moreover, petitioners argument that the
landowners right extends to the sub-soil insofar as
necessary for their practical interests serves only to
further weaken its case. The theory would limit the
right to the sub-soil upon the economic utility which
such area offers to the surface owners. Presumably, the
landowners right extends to such height or depth
where it is possible for them to obtain some benefit or
enjoyment, and it is extinguished beyond such limit as
there would be no more interest protected by law. [11]
In this regard, the trial court found that
respondents could have dug upon their property
motorized deep wells but were prevented from doing
so by the authorities precisely because of the
construction and existence of the tunnels underneath
the surface of their property. Respondents, therefore,
still had a legal interest in the sub-terrain portion
insofar as they could have excavated the same for the
construction of the deep well. The fact that they could
not was appreciated by the RTC as proof that the
tunnels interfered with respondents enjoyment of their
property and deprived them of its full use and
enjoyment, thus:
Has it deprived the plaintiffs of
the use of their lands when from the
evidence they have already existing
residential houses over said tunnels and
it was not shown that the tunnels either
destroyed said houses or disturb[ed] the
possession thereof by plaintiffs? From
the evidence, an affirmative answer
seems to be in order. The plaintiffs and
[their] co-heirs discovered [these] big
underground tunnels in 1992. This was
confirmed by the defendant
on November 13, 1992 by the Acting
Assistant Project Manager, Agus 1
Hydro Electric Project (Exh. K).
On September 16, 1992, Atty. Omar
Maruhom (co-heir) requested the
Marawi City Water District for permit
to construct a motorized deep well
over Lot 3 for his residential house
(Exh. Q). He was refused the permit
because the construction of the deep
well as (sic) the parcels of land will
cause danger to lives and property. He
was informed that beneath your lands
are constructed the Napocor
underground tunnel in connection with
Agua Hydroelectric plant (Exh. Q-2).
76
There in fact exists ample evidence that
this construction of the tunnel without
the prior consent of plaintiffs beneath
the latters property endangered the lives
and properties of said plaintiffs. It has
been proved indubitably
that Marawi City lies in an area of local
volcanic and tectonic
activity. Lake Lanao has been formed
by extensive earth movements and is
considered to be a drowned basin of
volcano/tectonic
origin. In Marawi City, there are a
number of former volcanoes and an
extensive amount of faulting. Some of
these faults are still moving.
(Feasibility Report on Marawi City
Water District by Kampsa-Kruger,
Consulting Engineers, Architects and
Economists, Exh. R). Moreover, it has
been shown that the underground
tunnels [have] deprived the plaintiffs of
the lawful use of the land and
considerably reduced its value.
On March 6, 1995, plaintiffs applied for
a two-million peso loan with the
Amanah Islamic Bank for the
expansion of the operation of the
Ameer Construction and Integrated
Services to be secured by said land
(Exh. N), but the application was
disapproved by the bank in its letter
of April 25, 1995 (Exh. O) stating that:
Apropos to this, we
regret to inform you that
we cannot consider your
loan application due to
the following reasons, to
wit:
That per my actual ocular
inspection and
verification, subject
property offered as
collateral has an existing
underground tunnel by
the NPC for the Agus I
Project, which tunnel is
traversing underneath
your property, hence, an
encumbrance. As a
matter of bank policy,

property with an existing
encumbrance cannot be
considered neither
accepted as collateral for
a loan.
All the foregoing evidence and
findings convince this Court that
preponderantly plaintiffs have
established the condemnation of their
land covering an area of 48,005 sq.
meters located at
Saduc, Marawi City by the defendant
National Power Corporation without
even the benefit of expropriation
proceedings or the payment of any just
compensation and/or reasonable
monthly rental since 1978. [12]
In the past, the Court has held that if the government
takes property without expropriation and devotes the
property to public use, after many years, the property
owner may demand payment of just compensation in
the event restoration of possession is neither
convenient nor feasible. This is in accordance with
[13]
the principle that persons shall not be deprived of their
property except by competent authority and for public
use and always upon payment of just compensation. [14]
Petitioner contends that the underground
tunnels in this case constitute an easement upon the
property of respondents which does not involve any
loss of title or possession. The manner in which the
easement was created by petitioner, however, violates
the due process rights of respondents as it was without
notice and indemnity to them and did not go through
proper expropriation proceedings. Petitioner could
have, at any time, validly exercised the power of
eminent domain to acquire the easement over
respondents property as this power encompasses not
only the taking or appropriation of title to and
possession of the expropriated property but likewise
covers even the imposition of a mere burden upon the
owner of the condemned property. Significantly,
[15]
though, landowners cannot be deprived of their right
over their land until expropriation proceedings are
instituted in court. The court must then see to it that
the taking is for public use, that there is payment of
just compensation and that there is due process of law.
[16]
77
In disregarding this procedure and failing to
recognize respondents ownership of the sub-terrain
portion, petitioner took a risk and exposed itself to
greater liability with the passage of time. It must be
emphasized that the acquisition of the easement is not
without expense. The underground tunnels impose
limitations on respondents use of the property for an
indefinite period and deprive them of its ordinary
use. Based upon the foregoing, respondents are clearly
entitled to the payment of just compensation.
Notwithstanding the fact that petitioner only
[17]
occupies the sub-terrain portion, it is liable to pay not
merely an easement fee but rather the full
compensation for land. This is so because in this case,
the nature of the easement practically deprives the
owners of its normal beneficial use. Respondents, as
the owners of the property thus expropriated, are
entitled to a just compensation which should be neither
more nor less, whenever it is possible to make the
assessment, than the money equivalent of said
property.[18]
The entitlement of respondents to just
compensation having been settled, the issue now is on
the manner of computing the same. In this regard,
petitioner claims that the basis for the computation of
the just compensation should be the value of the
property at the time it was taken in 1978. Petitioner
also impugns the reliance made by the CA
upon National Power Corporation v. Court of Appeals
and Macapanton Mangondato as the basis for
[19]
computing the amount of just compensation in this
action. The CA found that the award of damages is not
excessive because the P1000 per square meter as the
fair market value was sustained in a case involving a
lot adjoining the property in question which case
involved an expropriation by [petitioner] of portion of
Lot 1 of the subdivision plan (LRC) PSD 116159
which is adjacent to Lots 2 and 3 of the same
subdivision plan which is the subject of the instant
controversy. [20]
Just compensation has been understood to be
the just and complete equivalent of the loss and is
[21]
ordinarily determined by referring to the value of the
land and its character at the time it was taken by the
expropriating authority. There is a taking in this
[22]
sense when the owners are actually deprived or
dispossessed of their property, where there is a
practical destruction or a material impairment of the
value of their property, or when they are deprived of
the ordinary use thereof. There is a taking in this
context when the expropriator enters private property

not only for a momentary period but for more
permanent duration, for the purpose of devoting the
property to a public use in such a manner as to oust the
owner and deprive him of all beneficial enjoyment
thereof. Moreover, taking of the property for
[23]
purposes of eminent domain entails that the entry into
the property must be under warrant or color of legal
authority.[24]
Under the factual backdrop of this case, the last
element of taking mentioned, i.e., that the entry into
the property is under warrant or color of legal
authority, is patently lacking. Petitioner justified its
nonpayment of the indemnity due respondents upon its
mistaken belief that the property formed part of the
public dominion.
This situation is on all fours with that in
the Mangondato case. NAPOCOR in that case took the
property of therein respondents in 1979, using it to
build its Aqua I Hydroelectric Plant Project, without
paying any compensation, allegedly under the
mistaken belief that it was public land. It was only in
1990, after more than a decade of beneficial use, that
NAPOCOR recognized therein respondents ownership
and negotiated for the voluntary purchase of the
property.
In Mangondato, this Court held:
The First Issue: Date of Taking or Date
of Suit?
The general rule in
determining just compensation in
eminent domain is the value of the
property as of the date of the filing of
the complaint, as follows:
Sec. 4. Order of Condemnation. When
such a motion is overruled or when any
party fails to defend as required by this
rule, the court may enter an order of
condemnation declaring that the
plaintiff has a lawful right to take the
property sought to be condemned, for
the public use or purpose described in
the complaint, upon the payment of just
compensation to be determined as of
the date of the filing of the complaint. x
x x (Italics supplied).
Normally, the time of the taking
coincides with the filing of the
78
complaint for expropriation. Hence,
many ruling of this Court have equated
just compensation with the value of the
property as of the time of filing of the
complaint consistent with the above
provision of the Rules. So too, where
the institution of the action precedes
entry to the property, the just
compensation is to be ascertained as of
the time of filing of the complaint.
The general rule, however, admits of
an exception: where this Court fixed
the value of the property as of the
date it was taken and not the date of
the commencement of the
expropriation proceedings.
In the old case of Provincial
Government of Rizal vs. Caro de
Araullo, the Court ruled that x x x the
owners of the land have no right to
recover damages for this unearned
increment resulting from the
construction of the public improvement
(lengthening of Taft Avenue from
Manila to Pasay) from which the land
was taken. To permit them to do so
would be to allow them to recover more
than the value of the land at the time it
was taken, which is the true measure of
the damages, or just compensation, and
would discourage the construction of
important public improvements.
In subsequent cases, the Court,
following the above doctrine,
invariably held that the time of
taking is the critical date in
determining lawful or just
compensation. Justifying this stance,
Mr. Justice (later Chief Justice) Enrique
Fernando, speaking for the
Court in Municipality of La Carlota vs.
The Spouses Felicidad Baltazar and
Vicente Gan, said, x x x the owner as is
the constitutional intent, is paid what he
is entitled to according to the value of
the property so devoted to public use as
of the date of taking. From that time, he
had been deprived thereof. He had no
choice but to submit. He is not,
however, to be despoiled of such a

right. No less than the fundamental law
guarantees just compensation. It would
be injustice to him certainly if from
such a period, he could not recover the
value of what was lost. There could be
on the other hand, injustice to the
expropriator if by a delay in the
collection, the increment in price
would accrue to the owner. The
doctrine to which this Court has been
committed is intended precisely to
avoid either contingency fraught with
unfairness.
Simply stated, the exception finds the
application where the owner would
be given undue incremental
advantages arising from the use to
which the government devotes the
property expropriated -- as for
instance, the extension of a main
thoroughfare as was in the case in Caro
de Araullo. In the instant case,
however, it is difficult to conceive of
how there could have been an extra-
ordinary increase in the value of the
owners land arising from the
expropriation, as indeed the records
do not show any evidence that the
valuation of P1,000.00 reached in
1992 was due to increments directly
caused by petitioners use of the
land. Since the petitioner is claiming an
exception to Rule 67, Section 4, it has
the burden in proving its claim that its
occupancy and use -- not ordinary
inflation and increase in land values --
was the direct cause of the increase in
valuation from 1978 to 1992.
Side Issue: When is there Taking of
Property?
But there is yet another cogent reason
why this petition should be denied and
why the respondent Court should be
sustained. An examination of the
undisputed factual environment would
show that the taking was not really
made in 1978.
79
This Court has defined the elements of
taking as the main ingredient in the
exercise of power of eminent domain,
in the following words:
A number of circumstances must be
present in taking of property for
purposes of eminent domain: (1) the
expropriator must enter a private
property; (2) the entrance into private
property must be for more than a
momentary period; (3) the entry into
the property should be under warrant
or color of legal authority; (4) the
property must be devoted to a public
use or otherwise informally
appropriated or injuriously affected;
and (5) the utilization of the property
for public use must be in such a way to
oust the owner and deprive him of all
beneficial enjoyment of the property.
(Italics supplied)
In this case, the petitioners entrance in
1978 was without intent to expropriate
or was not made under warrant or
color of legal authority, for it believed
the property was public land covered by
Proclamation No. 1354. When the
private respondent raised his claim of
ownership sometime in 1979, the
petitioner flatly refused the claim for
compensation, nakedly insisted that the
property was public land and wrongly
justified its possession by alleging it
had already paid financial assistance
to Marawi City in exchange for the
rights over the property. Only in 1990,
after more than a decade of beneficial
use, did the petitioner recognize private
respondents ownership and negotiate
for the voluntary purchase of the
property. A Deed of Sale with
provisional payment and subject to
negotiations for the correct price was
then executed. Clearly, this is not the
intent nor the expropriation
contemplated by law. This is a simple
attempt at a voluntary purchase and
sale. Obviously, the petitioner neglected
and/or refused to exercise the power of
eminent domain.

Only in 1992, after the private
respondent sued to recover possession
and petitioner filed its Complaint to
expropriate, did petitioner manifest its
intention to exercise the power of
eminent domain. Thus the respondent
Court correctly held:
If We decree that the fair market
value of the land be determined as of
1978, then We would be sanctioning a
deceptive scheme whereby
NAPOCOR, for any reason other
than for eminent domain would
occupy anothers property and when
later pressed for payment, first
negotiate for a low price and then
conveniently expropriate the
property when the land owner
refuses to accept its offer claiming
that the taking of the property for the
purpose of the eminent domain
should be reckoned as of the date
when it started to occupy the
property and that the value of the
property should be computed as of
the date of the taking despite the
increase in the meantime in the value
of the property.
In Noble vs. City of Manila, the City
entered into a lease-purchase agreement
of a building constructed by the
petitioners predecessor-in-interest in
accordance with the specifications of
the former. The Court held that being
bound by the said contract, the City
could not expropriate the
building. Expropriation could be
resorted to only when it is made
necessary by the opposition of the
owner to the sale or by the lack of any
agreement as to the price. Said the
Court:
The contract, therefore, in so far as it
refers to the purchase of the building, as
we have interpreted it, is in force, not
having been revoked by the parties or
by judicial decision. This being the
case, the city being bound to buy the
building at an agreed price, under a
valid and subsisting contract, and the
80
plaintiff being agreeable to its sale, the
expropriation thereof, as sought by the
defendant, is baseless. Expropriation
lies only when it is made necessary by
the opposition of the owner to the sale
or by the lack of any agreement as to
the price. There being in the present
case a valid and subsisting contract,
between the owner of the building and
the city, for the purchase thereof at an
agreed price, there is no reason for the
expropriation. (Italics supplied)
In the instant case, petitioner effectively
repudiated the deed of sale it entered
into with the private respondent when it
passed Resolution No. 92-121 on May
25, 1992 authorizing its president to
negotiate, inter alia, that payment shall
be effective only after Agus I HE
project has been placed in operation. It
was only then that petitioners intent to
expropriate became manifest as private
respondent disagreed and, barely a
month, filed suit.[25]
In the present case, to allow petitioner to use
the date it constructed the tunnels as the date of
valuation would be grossly unfair. First, it did not enter
the land under warrant or color of legal authority or
with intent to expropriate the same. In fact, it did not
bother to notify the owners and wrongly assumed it
had the right to dig those tunnels under their
property. Secondly, the improvements introduced by
petitioner, namely, the tunnels, in no way contributed
to an increase in the value of the land. The trial court,
therefore, as affirmed by the CA, rightly computed the
valuation of the property as of 1992, when respondents
discovered the construction of the huge underground
tunnels beneath their lands and petitioner confirmed
the same and started negotiations for their purchase
but no agreement could be reached. [26]
As to the amount of the valuation, the RTC and
the CA both used as basis the value of the adjacent
property, Lot 1 (the property involved herein being
Lots 2 and 3 of the same subdivision plan), which was
valued at P1,000 per sq. meter as of 1990, as sustained
by this Court in Mangondato, thus:
The Second Issue: Valuation
We now come to the issue of valuation.

The fair market value as held by the
respondent Court, is the amount
of P1,000.00 per square meter. In an
expropriation case where the principal
issue is the determination of just
compensation, as is the case here, a trial
before Commissioners is indispensable
to allow the parties to present evidence
on the issue of just
compensation. Inasmuch as the
determination of just compensation in
eminent domain cases is a judicial
function and factual findings of the
Court of Appeals are conclusive on the
parties and reviewable only when the
case falls within the recognized
exceptions, which is not the situation
obtaining in this petition, we see no
reason to disturb the factual findings as
to valuation of the subject property.As
can be gleaned from the records, the
court-and-the-parties-appointed
commissioners did not abuse their
authority in evaluating the evidence
submitted to them nor misappreciate the
clear preponderance of evidence. The
amount fixed and agreed to by the
respondent appellate Court is not
grossly exorbitant. To quote:
Commissioner Ali comes from the
Office of the Register of Deeds who
may well be considered an expert, with
a general knowledge of the appraisal of
real estate and the prevailing prices of
land in the vicinity of the land in
question so that his opinion on the
valuation of the property cannot be
lightly brushed aside.
The prevailing market value of the land
is only one of the determinants used by
the commissioners report the other
being as herein shown:
xxx
xxx
Commissioner Doromals report,
recommending P300.00 per square
meter, differs from the 2 commissioners
only because his report was based on
81
the valuation as of 1978 by the City
Appraisal Committee as clarified by the
latters chairman in response to
NAPOCORs general counsels query.
In sum, we agree with the Court of
Appeals that petitioner has failed to
show why it should be granted an
exemption from the general rule in
determining just compensation
provided under Section 4 of Rule 67.
On the contrary, private respondent has
convinced us that, indeed, such general
rule should in fact be observed in this
case.[27]
Petitioner has not shown any error on the part
of the CA in reaching such a valuation. Furthermore,
these are factual matters that are not within the ambit
of the present review.
WHEREFORE, the petition is DENIED and
the Decision of the Court of Appeals in C.A.-G.R. CV
No. 57792 dated June 8, 2005 is AFFIRMED.
No costs.
SO ORDERED.
----
THIRD DIVISION
SPS. RAFAEL P. ESTANISLAO G.R. No. 178537
AND ZENAIDA ESTANISLAO,
Petitioners, Present:
Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,
Corona, *
N
achura,
and
R
eyes, JJ.
EAST WEST BANKING
CORPORATION, Promulgated:
Respondent.
 82
February 11, 2008 case. The trial court suspended the proceedings, and
x during the course of negotiations, a deed of
------------------------------------------------------------------ assignment dated August 16, 2000 was drafted by the
[3]

---------------------- x respondent, which provides in part, that:

DECISION x x x the ASSIGNOR

is indebted to the ASSIGNEE in the
YNARES-SANTIAGO, J.: aggregate sum of SEVEN MILLION
THREE HUNDRED FIVE
THOUSAND FOUR HUNDRED
This is a petition for review of the FIFTY NINE PESOS and FIFTY
Decision of the Court of Appeals dated April 13,
[1] TWO CENTAVOS (P7,305,459.52),
2007 in CA-G.R. CV No. 87114 which reversed and Philippine currency, inclusive of
set aside the Decision of accrued interests and penalties as of
the Regional Trial Court of Antipolo City, Branch 73 August 16, 2000, and in full payment
in Civil Case No. 00-5731. The appellate court entered thereof, the ASSIGNOR does hereby
a new judgment ordering petitioners spouses ASSIGN, TRANSFER and CONVEY
Estanislao to pay respondent East West Banking unto the ASSIGNEE those motor
Corporation P4,275,919.65 plus interest and attorneys vehicles, with all their tools and
fees. Also assailed is the Resolution dated June 25,
[2] accessories, more particularly described
2007 denying the motion for reconsideration. as follows:

The facts are as follows: Make : Isuzu Dump Truck

On July 24, 1997, petitioners obtained a loan
from the respondent in the amount of P3,925,000.00
evidenced by a promissory note and secured by two
deeds of chattel mortgage dated July 10, 1997: one
covering two dump trucks and a bulldozer to secure
the loan amount of P2,375,000.00, and another
covering bulldozer and a wheel loader to secure the
loan amount of P1,550,000.00. Petitioners defaulted in
the amortizations and the entire obligation became due
and demandable.
On April 10, 2000, respondent bank filed a suit
for replevin with damages, praying that the equipment
covered by the first deed of chattel mortgage be seized
and delivered to it. In the alternative, respondent
prayed that petitioners be ordered to pay the
outstanding principal amount of P3,846,127.73 with
19.5% interest per annum reckoned from judicial
demand until fully paid, exemplary damages of
P50,000.00, attorneys fees equivalent to 20% of the
total amount due, other expenses and costs of suit.
The case was filed in the Regional Trial Court
of Antipolo and raffled to Branch 73 thereof.
Subsequently, respondent moved for
suspension of the proceedings on account of an earnest
attempt to arrive at an amicable settlement of the
xxx
Make : Isuzu Dump Truck
xxx
Make : x x x Caterpillar
Bulldozer x x x
That the ASSIGNEE hereby
accepts the assignment in full
payment of the above-mentioned
debt x x x.(Emphasis supplied)
Petitioners affixed their signatures on the deed
of assignment. However, for some unknown reason,
respondent banks duly authorized representative failed
to sign the deed.
On October 6, 2000 and March 8, 2001,
respectively, petitioners completed the delivery of the
heavy equipment mentioned in the deed of assignment
two dump trucks and a bulldozer to respondent, which
accepted the same without protest or objection.
However, on June 20, 2001, respondent filed a
manifestation and motion to admit an amended
complaint for the seizure and delivery of two more
heavy equipment the bulldozer and wheel loader
which are covered under the second deed of chattel
mortgage. Respondent claimed that its representative
inadvertently failed to include the second deed of
chattel mortgage among the documents forwarded to

its counsel when the original complaint was being
drafted. Respondent likewise claimed that petitioners
were given a chance to submit a refinancing scheme
that would allow them to keep the remaining two
heavy equipment, but they failed to come up with such
a scheme despite repeated promises to do so.
Respondents amended complaint for replevin
alleged that petitioners outstanding indebtedness as of
June 14, 2001 stood at P4,275,919.61 which is more or
less equal to the aggregate value of the additional units
of heavy equipment sought to be recovered. It also
prayed that, in the event the two heavy equipment
could not be replevied, petitioners be ordered to pay
the outstanding sum of P3,846,127.73 with 19.5%
interest per annum reckoned from January 24, 1998,
compound interest, exemplary damages of P50,000.00,
attorneys fees equivalent to 20% of the total amount
due, other expenses and costs of suit.
Petitioners sought to dismiss the amended
complaint. They alleged that their previous payments
on loan amortizations, the execution of the deed of
assignment on August 16, 2000, and respondents
acceptance of the three units of heavy equipment, had
the effect of full payment or satisfaction of their total
outstanding obligation which is a bar on respondent
bank from recovering any more amounts from
them. By way of counterclaim, petitioners sought the
award of nominal damages in the amount of
P500,000.00, moral damages in the amount of
P500,000.00, exemplary damages in the amount of
P500,000.00, attorneys fees, litigation expenses,
interest and costs.
On March 14, 2006, the trial court dismissed
the amended complaint for lack of merit. It held that
the deed of assignment and the petitioners delivery of
the heavy equipment effectively extinguished
petitioners total loan obligation. It also held that
respondent was estopped from further collecting from
the petitioners when it accepted, without any protest,
delivery of the three units of heavy equipment as full
and complete satisfaction of the petitioners total loan
obligation. Respondent likewise failed to timely rectify
its alleged mistake in the original complaint and deed
of assignment, taking almost a year to act.
Respondent bank appealed to the Court of
Appeals, which reversed the trial courts decision, the
dispositive portion of which reads:
83
WHEREFORE, premises
considered, the present appeal is hereby
GRANTED. The Decision dated March
14, 2006 of the Regional Trial Court of
Antipolo City, Branch 73 in Civil Case
No. 00-5731 is hereby REVERSED and
SET ASIDE. A new judgment is hereby
entered ordering the defendants-
appellees to pay, jointly and severally,
plaintiff-appellant East West Banking
Corporation the sum of FOUR
MILLION TWO HUNDRED
SEVENTY FIVE THOUSAND NINE
HUNDRED NINETEEN and 69/100
(P4,275,919.69) per Statement of
Account as of June 14, 2001 (Exh. E,
Records, p.328) with interest at 12%
per annum from June 15, 2001 until full
payment thereof. Defendants-appellees
are likewise ordered to pay the plaintiff-
appellant attorneys fees in the sum
equivalent to ten per cent (10%) of the
total amount due.
No pronouncement as to costs.
SO ORDERED. [4]
The reversal of the lower courts decision
hinges on: (1) the appellate courts finding that the deed
of assignment cannot bind the respondent because it
did not sign the same. The appellate court ruled that
the assignment contract was never perfected although
it was prepared and drafted by the respondent; (2)
respondent was not estopped by its own declarations in
the deed of assignment, because such declarations
were the result of ignorance founded upon an innocent
mistake and plain oversight on the part of respondents
staff in the banks loan operations department, who
failed to forward the complete documents pertaining to
petitioners account to the banks legal department, such
that when the original complaint for replevin was
prepared, the second deed of chattel mortgage
covering two other pieces of heavy equipment was
inadvertently excluded; (3) petitioners are aware that
there were five pieces of heavy equipment under
chattel mortgage for an outstanding balance of over P7
million; and (4) the appellate court held that even after
the delivery of the heavy equipment covered by the
deed of assignment, the petitioners continued to
negotiate with the respondent on a possible refinancing
scheme that will enable them to retain the two other
units of heavy equipment still in their possession and

which are the subject of the second deed of chattel
mortgage.
Petitioners argue that: a) the appellate court
erred in ordering the payment of the principal
obligation in a replevin suit which it erroneously
treated as a collection case; b) the deed of assignment
is binding between the parties although it was not
signed by the respondent, constituting as it did an offer
which they validly accepted; and c) the respondent is
estopped from collecting or foreclosing on the second
deed of chattel mortgage.
On the other hand, respondent argues that: a)
the deed of assignment produced no legal effect
between the parties for failure of the respondent to
sign the same; b) the deed was founded on a mistake
on its part because it honestly believed that only one
chattel mortgage had been constituted to secure the
petitioners obligation; c) the non-inclusion of the
second deed of chattel mortgage in the original
complaint was a case of plain oversight on the part of
the loan operations unit of respondent bank, which
failed to forward to the legal department the complete
documents pertaining to the petitioners loan account;
d) the continued negotiations in August 2001 between
the parties, after delivery of the three units of heavy
equipment, proves that petitioners acknowledged their
continuing obligations to respondent under the second
deed of mortgage; and, e) the deed of assignment did
not have the effect of novating the original loan
obligation.
The issue for resolution is: Did the deed of
assignment which expressly provides that the transfer
and conveyance to respondent of the three units of
heavy equipment, and its acceptance thereof, shall
be in full paymentof the petitioners total outstanding
obligation to the latter operate to extinguish petitioners
debt to respondent, such that the replevin suit could no
longer prosper?
We find merit in the petition.
The appellate court erroneously denominated
the replevin suit as a collection case. A reading of the
original and amended complaints show that what the
respondent initiated was a pure replevin suit, and not a
collection case. Recovery of the heavy equipment was
the principal aim of the suit; payment of the total
obligation was merely an alternative prayer which
respondent sought in the event manual delivery of the
heavy equipment could no longer be made.
84
Replevin, broadly understood, is both a form of
principal remedy and a provisional relief. It may refer
either to the action itself, i.e., to regain the possession
of personal chattels being wrongfully detained from
the plaintiff by another, or to the provisional remedy
that would allow the plaintiff to retain the thing during
the pendency of the action and hold it pendente lite. [5]
The deed of assignment was a perfected
agreement which extinguished petitioners total
outstanding obligation to the respondent. The deed
explicitly provides that the assignor (petitioners), in
full payment of its obligation in the amount
of P7,305,459.52, shall deliver the three units of heavy
equipment to the assignee (respondent), which accepts
the assignment in full payment of the above-
mentioned debt. This could only mean that should
petitioners complete the delivery of the three units of
heavy equipment covered by the deed, respondents
credit would have been satisfied in full, and petitioners
aggregate indebtedness of P7,305,459.52 would then
be considered to have been paid in full as well.
The nature of the assignment was a dation in
payment, whereby property is alienated to the creditor
in satisfaction of a debt in money. Such transaction is
governed by the law on sales. Even if we were to
[6]
consider the agreement as a compromise agreement,
there was no need for respondents signature on the
same, because with the delivery of the heavy
equipment which the latter accepted, the agreement
was consummated. Respondents approval may be
inferred from its unqualified acceptance of the heavy
equipment.
Consent to contracts is manifested by the
meeting of the offer and the acceptance of the thing
and the cause which are to constitute the contract; the
offer must be certain and the acceptance absolute.
The acceptance of an offer must be made known to
[7]
the offeror, and unless the offeror knows of the
acceptance, there is no meeting of the minds of the
parties, no real concurrence of offer and acceptance.
Upon due acceptance, the contract is perfected, and
[8]
from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but
also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and
law. [9]
With its years of banking experience, resources
and manpower, respondent bank is presumed to be
 85
familiar with the implications of entering into the deed
of assignment, whose terms are categorical and left WHEREFORE, the petition
nothing for interpretation. The alleged non-inclusion in is GRANTED. The Decision of the Court of Appeals
the deed of certain units of heavy equipment due to dated April 13, 2007 in CA-G.R. CV No. 87114 and its
inadvertence, plain oversight or mistake, is tantamount Resolution dated June 25, 2007 are hereby SET
to inexcusable manifest negligence, which should not ASIDE. The March 14, 2006 decision of the Regional
invalidate the juridical tie that was created. Trial Court of Antipolo, Branch 73, which dismisses
Respondent is presumed to have maintained a high
[10]
Civil Case No. 00-5731, is hereby REINSTATED.
level of meticulousness in its dealings with
petitioners. The business of a bank is affected with SO ORDERED.
public interest; thus, it makes a sworn profession of ---
diligence and meticulousness in giving irreproachable
service.
[11]

Besides, respondents protestations of mistake

and plain oversight are self-serving. The evidence
show that from August 16, 2000 (date of the deed of SECOND DIVISION
assignment) up to March 8, 2001 (the date of delivery
of the last unit of heavy equipment covered under the
deed), respondent did not raise any objections nor SPOUSES WILFREDO N. ONG and G.R. No. 17259
make any move to question, invalidate or rescind the EDNA SHEILA PAGUIO-ONG,
deed of assignment. It was not until June 20, 2001 that Petitioners, Present:
respondent raised the issue of its alleged mistake by
filing an amended complaint for replevin involving QUISUMBIN
different chattels, although founded on the same - versus - CARPIO MO
principal obligation. TINGA,
BRION, and
The legal presumption is always on the validity AUSTRIA-M
of contracts. In order to judge the intention of the
[12] ROBAN LENDING CORPORATION,
contracting parties, their contemporaneous and Respondent.
subsequent acts shall be principally considered. Promulgated:
When respondent accepted delivery of all three
[13] July 9, 2008
units of heavy equipment under the deed of
assignment, there could be no doubt that it intended to x-------------------------------------
be bound under the agreement. - - - - - - - - - - - - - -x

Since the agreement was consummated by the

delivery on March 8, 2001 of the last unit of heavy
equipment under the deed, petitioners are deemed to
have been released from all their obligations to
respondent.
Since there is no more credit to collect, no
principal obligation to speak of, then there is no more
second deed of chattel mortgage that may subsist. A
chattel mortgage cannot exist as an independent
contract since its consideration is the same as that of
the principal contract. Being a mere accessory
contract, its validity would depend on the validity of
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 No. 297840. [1]

the loan secured by it. This being so, the amended

[14]

complaint for replevin should be dismissed, because On February 12, 2001, petitioners and
the chattel mortgage agreement upon which it is based respondent executed an Amendment to Amended Real
had been rendered ineffectual. Estate Mortgage consolidating their loans inclusive
[2]
 86
of charges thereon which totaled P5,916,117.50. On unconscionable, and revolting to the conscience as
even date, the parties executed a Dacion in Payment they hardly allow any borrower any chance of survival
Agreement wherein
[3]
petitioners assigned the in case of default.
[10]

properties covered by TCT No. 297840 to respondent

in settlement of their total obligation, and a
Memorandum of Agreement reading:[4]
That the FIRST PARTY
[Roban Lending Corporation] and
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, hence,
accounting was in order. [11]

the SECOND PARTY [the

petitioners] agreed to consolidate Petitioners thus prayed for judgment:
and restructure all aforementioned
loans, which have been all past due a) Declaring the
and delinquent since April 19, 2000, Real Estate Mortgage Contract and
and outstanding obligations totaling its amendments x x x as null and
P5,916,117.50. The SECOND void and without legal force and
PARTY hereby sign [sic] another effect for having been renounced,
promissory note in the amount of abandoned, and given up;
P5,916,117.50 (a copy of which is
hereto attached and forms xxx an b) Declaring the
integral part of this document), with Memorandum of Agreement xxx and
a promise to pay the FIRST PARTY Dacion in Payment x x x as null and
in full within one year from the date void for being pactum
of the consolidation and commissorium;
restructuring, otherwise the
SECOND PARTY agree to have c) Declaring the
their DACION IN PAYMENT interests, penalties, Evat [sic] and
agreement, which they have attorneys fees assessed and loaded
executed and signed today in favor into the loan accounts of the
of the FIRST PARTY be enforced[.] plaintiffs with defendant as unjust,
[5]
iniquitous, unconscionable and
illegal and therefore, stricken out or
set aside;
In April 2002 (the day is illegible), petitioners d) Ordering an
filed a Complaint, docketed as Civil Case No. 9322,
[6]
accounting on plaintiffs loan
before the Regional Trial Court (RTC) of Tarlac City, accounts to determine the true and
for declaration of mortgage contract as abandoned, correct balances on their obligation
annulment of deeds, illegal exaction, unjust against legal charges only; and
enrichment, accounting, and damages, alleging that the
Memorandum of Agreement and the Dacion in e) Ordering
Payment executed are void for being pactum defendant to [pay] to the plaintiffs: --
commissorium. [7]

e.1 Moral damages in

Petitioners alleged that the loans extended to an amount not less
them from July 14, 1999 to March 20, 2000 were than P100,000.00 and
founded on several uniform promissory notes, which exemplary damages
provided for 3.5% monthly interest rates, 5% penalty of P50,000.00;
per month on the total amount due and demandable,
and a further sum of 25% attorneys fees thereon, and
[8]
e.2 Attorneys fees in
in addition, respondent exacted certain sums the amount of
denominated as EVAT/AR. Petitioners decried these
[9]
P50,000.00 plus
additional charges as illegal, iniquitous,

P1,000.00 appearance
fee per hearing; and
e.3 The cost of suit. [12]
as well as other just and equitable reliefs.
In its Answer with Counterclaim, respondent [13]
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 P4,000,000 and if indeed it
became beyond the Plaintiffs
capacity to pay then the fault is
attributed to them and not the
Defendant[.] [14]
After pre-trial, the initial hearing of the case,
originally set on December 11, 2002, was reset several
times due to, among other things, the parties efforts to
settle the case amicably. [15]
During the scheduled initial hearing of May 7,
2003, the RTC issued the following order:
87
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 for summary judgment. [16]
(Underscoring supplied)
It appears that the June 18, 2003 setting was
eventually rescheduled to February 11, 2004 at which
both counsels were present and the RTC issued the
[17]
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.
x x x x [18]
(Underscoring
supplied)
At the scheduled April 14, 2004 hearing, both
counsels appeared but only the counsel of respondent
filed a memorandum. [19]
By Decision of April 21, 2004, Branch 64 of
the Tarlac City RTC, finding on the basis of the
pleadings that there was no pactum commissorium,
dismissed the complaint. [20]
On appeal, [21]
the Court of Appeals [22]
noted that
 88
x x x [W]hile the trial court THAT THE
in its decision stated that it was MEMORANDUM OF
rendering judgment on the pleadings, AGREEMENT (MOA) AND
x x x what it actually rendered was a THE DACION EN PAGO
summary judgment. A judgment on AGREEMENT (DPA)
the pleadings is proper when the WERE DESIGNED TO
answer fails to tender an issue, or CIRCUMVENT THE LAW
otherwise admits the material AGAINST PACTUM
allegations of the adverse partys COMMISSORIUM; and
pleading. However, a judgment on
the pleadings would not have been IV. . . . WHEN IT FAILED
proper in this case as the answer TO CONSIDER THAT THE
tendered an issue, i.e. the validity of MEMORANDUM OF
the MOA and DPA. On the other AGREEMENT (MOA) AND
hand, a summary judgment may be THE DACION EN PAGO
rendered by the court if the (DPA) ARE NULL AND
pleadings, supporting affidavits, and VOID FOR BEING
other documents show that, except CONTRARY TO LAW AND
as to the amount of damages, there is PUBLIC POLICY. [29]

no genuine issue as to any material

fact. [23]

The petition is meritorious.

Nevertheless, finding the error in nomenclature
to be mere semantics with no bearing on the merits of
the case, the Court of Appeals upheld the RTC
[24]
decision that there was no pactum commissorium.
Their Motion for Reconsideration having [26]
Both parties admit the execution and contents
of the Memorandum of Agreement and Dacion in
Payment.They differ, however, on whether both
[25]
contracts constitute pactum commissorium or dacion
en pago.

been denied, petitioners filed the instant Petition for

[27]
This Court finds that the Memorandum of
Review on Certiorari, faulting the Court of Appeals
[28]
Agreement and Dacion in Payment constitute pactum
for having committed a clear and reversible error commissorium, which is prohibited under Article 2088
of the Civil Code which provides:
I. . . . WHEN IT
FAILED AND REFUSED The creditor cannot
TO APPLY PROCEDURAL appropriate the things given by way
REQUISITES WHICH of pledge or mortgage, or dispose of
WOULD WARRANT THE them. Any stipulation to the contrary
SETTING ASIDE OF THE is null and void.
SUMMARY JUDGMENT
IN VIOLATION OF The elements of pactum commissorium, which
APPELLANTS RIGHT TO enables the mortgagee to acquire ownership of the
DUE PROCESS; mortgaged property without the need of any
foreclosure proceedings, are: (1) there should be a
[30]

II. . . . WHEN IT FAILED property mortgaged by way of security for the

TO CONSIDER THAT payment of the principal obligation, and (2) there
TRIAL IN THIS CASE IS should be a stipulation for automatic appropriation by
NECESSARY BECAUSE the creditor of the thing mortgaged in case of non-
THE FACTS ARE VERY payment of the principal obligation within the
MUCH IN DISPUTE; stipulated period.
[31]

III. . . . WHEN IT FAILED In the case at bar, the Memorandum of

AND REFUSED TO HOLD 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 whereby the debtor alienates property to the
creditor in satisfaction of a monetary obligation.
This does not persuade. In a true dacion en pago,
[32]
the assignment of the property extinguishes the
monetary debt. In the case at bar, the alienation of
[33]
the properties was by way of security, and not by way
of satisfying the debt. The Dacion in Payment did
[34]
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 P5,916,117.50 which they were to pay within one
year. [35]
Respondent cites Solid Homes, Inc. v. Court of
Appeals where this Court upheld a Memorandum of
[36]
Agreement/Dacion en Pago. That case did not
[37]
involve the issue of pactum commissorium. [38]
That the questioned contracts were freely and
voluntarily executed by petitioners and respondent is
of no moment, pactum commissorium being void for
being prohibited by law. [39]
Respecting the charges on the loans, courts
may reduce interest rates, penalty charges, and
attorneys fees if they are iniquitous or unconscionable.
[40]
This Court, based on existing jurisprudence,
finds the monthly interest rate of 3.5%, or 42% per
[41]
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 principal and likewise bearing
interest at the same rate, compounded
monthly unconscionable and reduces it to a yearly
[42]
rate of 12% of the amount due, to be computed from
the time of demand. This Court finds the attorneys
[43]
89
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 principal
amount only. [44]
The prayer for accounting in petitioners
complaint requires presentation of evidence, they
claiming to have made partial payments on their
loans, vis a vis respondents denial thereof. A remand
[45]
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 law. A summary judgment
[46]
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 issues
are not genuine. A genuine issue, as opposed to a
[47]
fictitious or contrived one, is an issue of fact that
requires the presentation of evidence. As mentioned
[48]
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 of the
adverse partys pleadings. In the case at bar,
[49]
respondents Answer with Counterclaim disputed
petitioners claims that the Memorandum of Agreement
and Dation in Payment are illegal and that the extra
charges on the loans are unconscionable. Respondent
[50]
disputed too petitioners allegation of bad faith. [51]
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
90
November 18, 1996 and April 18, 1997 three Real
Estate Mortgages covering two parcels of land
registered in the name of respondent Lilia D.
Laigo, . . . married to Reynaldo Laigo, one containing
569 square meters and the other containing 537 square
meters.
The mortgages were duly registered in the Registry of
Deeds of Quezon City.

3. The attorneys fees are reduced to The loans were payable within 12 months from the
25% of the principal amount only. execution of the promissory notes covering the
loans. As of 2000, respondents failed to settle their
Civil Case No. 9322 is REMANDED to the outstanding obligation, drawing them to verbally offer
court of origin only for the purpose of receiving to cede to Dao Heng one of the two mortgaged lots by
evidence on petitioners prayer for accounting. way of dacion en pago. To appraise the value of the
mortgaged lands, Dao Heng in fact commissioned an
SO ORDERED. appraiser whose fees were shouldered by it and
---- respondents.
NG BANK, INC., now G.R. No. 173856
DE ORO UNIVERSAL There appears to have been no further action taken by
Present: the parties after the appraisal of the properties.

QUISUMBING, J., Chairperson, Dao Heng was later to demand the settlement
CARPIO MORALES, of respondents obligation by letter of August 18,
TINGA, 2000 wherein it indicated that they had an outstanding
[1]

VELASCO, JR., and obligation of P10,385,109.92 inclusive of interests and

BRION, JJ. other charges. Respondents failed to heed the demand,
however.

A and REYNALDO LAIGO, Promulgated: Dao Heng thereupon filed in September 2000 an
ts. application to foreclose the real estate mortgages
November 20, 2008 executed by respondents. The properties subject of the
mortgage were sold for P10,776,242 at a public
auction conducted on December 20, 2000 to Banco de
Oro Universal Bank (hereafter petitioner) which was
SECOND DIVISION the highest bidder.

x------------------------------------- It appears that respondents negotiated for the

-------x redemption of the mortgages for by a June 29,
2001 letter to them, petitioner, to which Dao Heng
[2]

had been merged, through its Vice President on

Property Management & Credit Services Department,
DECISION advised respondent Lilia Laigo as follows:

This is to formally advise you of the

CARPIO MORALES, J.
The Spouses Lilia and Reynaldo Laigo (respondents)
obtained loans from Dao Heng Bank, Inc. (Dao Heng)
in the total amount of P11 Million, to secure the
payment of which they forged on October 28, 1996,
banks response to your proposal
pertaining to the redemption of the two
(2) foreclosed lots located in Fairview,
Quezon City as has been relayed to you
last June 13, 2001 as follows:
 91
1. Redemption price shall
be P11.5MM plus 12%
interest based on
diminishing balance payable Nothing was heard from respondents, hence,
in staggered payments up petitioner by its Manager, Property Management &
to January 2, 2002 as Credit Services Department, advised her by letter of
follows: December 26, 2001 that in view of their failure to
[3]

conform to the conditions set by it for the redemption

a. P3MM of the properties, it would proceed to consolidate the
immediately upon titles immediately after the expiration of the
receipt of this redemption period on January 2, 2002.
approval
b. Balance payable in Six days before the expiration of the
staggered payments redemption period or on December 27, 2001,
(plus interest) up respondents filed a complaint before the Regional Trial
to January 2, 2002 Court (RTC) of Quezon City, for Annulment,
Injunction with Prayer for Temporary Restraining
2. Release Values for Partial Order (TRO), praying for the annulment of the
Redemption: foreclosure of the properties subject of the real estate
mortgages and for them to be allowed to deliver by
a. TCT No. 92257 (along way of dacion en pago one of the mortgaged
Commonwealth) P7.500 properties as full payment of [their] mortgaged
MM* obligation and to, in the meantime, issue a TRO
b. TCT No. N-146289 directing the defendant-herein petitioner to desist from
(along Regalado) P4.000 consolidating ownership over their properties.
MM*
By respondents claim, Dao
* excluding 12% interest Heng verbally agreed to enter into a dacion en pago.

3. Other Conditions: In its Opposition to respondents Application

for a TRO, petitioner claimed that there was no
[4]

a. Payments shall be meeting of the minds between the parties on the

covered by post settlement of respondents loan via dacion en pago.
dated checks
b. TCT No. 92257 A hearing on the application for a TRO was
shall be the first conducted by Branch 215 of the RTC of Quezon City
property to be following which it denied the same.
released upon
payment of the first Petitioner thereupon filed a Motion to Dismiss
P7.5MM plus the complaint on the ground that the claim on which
interest respondents action is founded is unenforceable under
c. Arrangement to be the Statute of Frauds and the complaint states no cause
covered by an of action. Respondents opposed the motion,
Agreement contending that their delivery of the titles to the
mortgaged properties constituted partial performance
If you are agreeable to the of their obligation under the dacion en pago to take it
foregoing terms and conditions, out from the coverage of the Statute of Frauds.
please affix your signature
showing your conformity The trial court granted petitioners Motion to
thereto at the space provided Dismiss in this wise:
below. (Emphasis and [P]laintiffs claim must be based on a
underscoring in the original; document or writing evidencing the
italics supplied) alleged dacion en pago, otherwise, the

same cannot be enforced in an action in
court. The Court is not persuaded by
plaintiffs contention that their case is an
exception to the operation of the rule on
statute of frauds because of their partial
performance of the obligation in the
dacion en pago consisting of the
delivery of the titles of the properties to
the defendants. As correctly pointed out
by the defendants, the titles were not
delivered to them pursuant to the
dacion en pago but by reason of the
execution of the mortgage loan
agreement. If indeed a dacion en pago
agreement was entered into between the
parties, it is inconceivable that a written
document would not be drafted
considering the magnitude of the
amount involved. (Emphasis
[5]
and
underscoring supplied)
92
paid P5,000.00 for the appraisal
expense. As reported by the appraiser
commissioned by Defendant Dao Heng,
the appraised value of the mortgaged
properties were as follows: x x x
Having done so, petitioners are at least
entitled to a reasonable opportunity to
prove their case in the course of a full
trial, to which the respondents may
equally present their evidence in
refutation of the formers
case. (Underscoring supplied)
Petitioners Motion for Reconsideration having been
denied by the appellate court by Resolution of July 19,
2006, the present petition was filed faulting the
appellate court in ruling:
I.

Respondents assailed the dismissal of their . . . THAT THE COMPLAINT

complaint via Petition for Review before this ALLEGED A SUFFICIENT CAUSE
Court which referred it to the Court of Appeals OF ACTION DESPITE THE
for disposition. ALLEGATIONS, AS WELL AS
ADMISSIONS FROM THE
Reversing the trial courts dismissal of the RESPONDENTS, THAT THERE WAS
complaint, the appellate court, by Decision of January NO PERFECTED DACION EN PAGO
26, 2006, reinstated respondents complaint.
[6] [7]
CONTRACT;

In ordering the reinstatement of respondents II.

complaint, the appellate court held that the complaint
states a cause of action, respondents having alleged . . . THAT THE ALLEGED DACION
that there was partial performance of the agreement to EN PAGO IS NOT
settle their obligation via dacion en pago when they UNENFORCEABLE UNDER THE
agreed to have the properties appraised to thus place STATUTE OF FRAUDS, DESPITE
their agreement within the exceptions provided under THE ABSENCE OF A WRITTEN &
Article 1403 of the Civil Code on Statute of
[8]
BINDING CONTRACT;
Frauds. Thus the appellate court ratiocinated:
III.
Particularly, in seeking exception to the
application of the Statute of Frauds, . . . THAT THE COMPLAINT
petitioners[-herein respondents] averred SUFFICIENTLY STATED A CAUSE
partial performance of the supposed OF ACTION. [9]

verbal dacion en pago. In paragraph 5

of their complaint, they stated: As part
of the agreement, defendant Dao Heng Generally, the presence of a cause of action is
Bank had the mortgaged property determined from the facts alleged in the complaint.
appraised to determine which of the two
shall be delivered as full payment of the In their complaint, respondents alleged:
mortgage obligation; Also as part of the
deal, plaintiffs for their part xxxx
 93

4. Sometime in the middle of the year 2000,
defendant Dao Heng Bank as the
creditor bank agreed to the full
settlement of plaintiffs mortgage
obligation of P9 Million through the
assignment of one of the two (2)
mortgaged properties;
[5] As part of the agreement, defendant
Even if a complaint states a cause of action,
however, a motion to dismiss for insufficiency of
cause of action may be granted if the evidence
discloses facts sufficient to defeat the claim and
enables the court to go beyond the disclosures in the
complaint. In such instances, the court can dismiss a
complaint on this ground, even without a hearing, by
taking into account the discussions in said motion to
dismiss and the disposition thereto.
[10]

Dao Heng Bank had the mortgaged

properties appraised to determine which In its Opposition to respondents application for
of the two (2) mortgaged properties the issuance of a TRO, petitioner, responding to
[11]

shall be delivered as full payment of the
mortgage obligation; Also as part of the
deal, plaintiffs for their part
paid P5,000.00 for the appraisal
expense; As reported by the appraiser
commissioned by defendant Dao Heng,
the appraised value of the mortgaged
properties were as follows:
(a) Property No. 1
T.C.T. No.
92257: P12,518,000.
00
L2A Blk 12 Don
Mariano Marcos
Ave., Fairview, QC
(b) Property No. 2
T.C.T. No.
146289: P8,055,000.
00 L36 Blk 87
Regalado Ave.
Cor. Ipil
St., Neopolitan, QC
[6] Sometime in December, year 2000,
the protest of plaintiffs notwithstanding
and in blatant breach of the agreed
Dacion en Pago as the mode of full
payment of plaintiffs mortgage
obligation, defendant Dao Heng Bank
proceeded to foreclose the mortgaged
properties above-described and sold
said properties which were aggregately
valued at more than P20 Million for
only P10,776,242.00, an
unconscionably very low
price; (Underscoring supplied)
respondents allegation that it agreed to the settlement
of their obligation via the assignment of one of the
twomortgaged properties, alleged that there was no
meeting of the minds thereon:
4. Plaintiffs claim that defendant Dao
Heng Bank[s] foreclosure sale of the
mortgaged properties was improper
because there was an agreement to
dacion one of the two (2) mortgaged
properties as full settlement of the loan
obligation and that defendant Dao Heng
Bank and Banco de Oro were already
negotiating and colluding for the latters
acquisition of the mortgaged
[properties] for the unsconscionably
low price of P10,776.242.00 are
clearly WITHOUT BASIS. Quite to
the contrary, there was no meeting of
the minds between defendant Dao Heng
Bank and the plaintiffs to dacion any of
the mortgaged properties as full
settlement of the loan. Although there
was a PROPOSAL and
NEGOTIATIONS to settle the loan by
way of dacion, nothing came out of
said proposal, much less did the
negotiations mature into the execution
of a dacion en pago
instrument. Defendant Dao Heng Bank
found the offer to settle by way of
dacion not acceptable and thus, it opted
to foreclose on the mortgage.
The law clearly provides that the debtor
of a thing cannot compel the creditor to
receive a different one, although the
latter may be of the same value, or
more valuable than that which is
due (Article 1244, New Civil

Code). The oblige is entitled to demand
fulfillment of the obligation or
performance as stipulated (Palmares v.
Court of Appeals, 288 SCRA 422 at p.
444 [1998]). The power to decide
whether or not to foreclose on the
mortgage is the sole prerogative of the
mortgagee (Rural Bank of San Mateo,
Inc. vs. Intermediate Appellate
Court, 146 SCRA 205, at 213
[1986]) Defendant Dao Heng Bank
merely opted to exercise such
prerogative. (Emphasis
[12]
in the
original; capitalization and
underscoring supplied)
Dacion en pago as a mode of extinguishing an existing
obligation partakes of the nature of sale whereby
property is alienated to the creditor in satisfaction of a
debt in money. It is an objective novation of the
[13]
obligation, hence, common consent of the parties is
required in order to extinguish the obligation.
. . . In dacion en pago, as a special
mode of payment, the debtor offers
another thing to the creditor who
accepts it as equivalent of payment of
an outstanding debt. The undertaking
really partakes in one sense of the
nature of sale, that is, the creditor is
really buying the thing or property of
the debtor, payment for which is to be
charged against the debtors debt. As
such the elements of a contract of sale,
namely, consent, object certain, and
cause or consideration must be
present. In its modern concept, what
actually takes place in dacion en
pago is an objective novation of the
obligation where the thing offered as an
accepted equivalent of the performance
of an obligation is considered as the
object of the contract of sale, while the
debt is considered the purchase price. In
any case, common
consent is an essential prerequisite, be
it sale or novation, to have the effect of
totally extinguishing the debt or
obligation. (Emphasis, italics and
[14]
underscoring supplied; citation omitted)
94
Being likened to that of a contract of sale, dacion en
pago is governed by the law on sales. The partial
[15]
execution of a contract of sale takes the transaction out
of the provisions of the Statute of Frauds so long as the
essential requisites of consent of the contracting
parties, object and cause of the obligation concur and
are clearly established to be present. [16]
Respondents claim that petitioners commissioning of
an appraiser to appraise the value of the mortgaged
properties, his services for which they and petitioner
paid, and their delivery to petitioner of the titles to the
properties constitute partial performance of their
agreement to take the case out of the provisions on the
Statute of Frauds.
There is no concrete showing, however, that
after the appraisal of the properties, petitioner
approved respondents proposal to settle their
obligation via dacion en pago. The delivery to
petitioner of the titles to the properties is a usual
condition sine qua non to the execution of the
mortgage, both for security and registration
purposes. For if the title to a property is not delivered
to the mortgagee, what will prevent the mortgagor
from again encumbering it also by mortgage or even
by sale to a third party.
Finally, that respondents did not deny proposing to
redeem the mortgages, as
[17]
reflected in
petitioners June 29, 2001 letter to them, dooms their
claim of the existence of a perfected dacion en pago.
WHEREFORE, the Court of Appeals Decision
of January 26, 2006 is REVERSED and SET
ASIDE. The Resolution of July 2, 2002 of the
Regional Trial Court of Quezon City, Branch 215
dismissing respondents complaint is REINSTATED.
SO ORDERED.
 95
Republic of the Philippines
o makabayad bago sumapit ang ……………………., 19 …… maaari ni
SUPREME COURT
akong ibigay sa may kapangyarihan. Kung ang pagsisingilan ay
Manila
makakarating sa Juzgado ay sinasagutan ko ang lahat ng kaniyang gugo
SECOND DIVISION
[Sgd. by respondent]
G.R. No. 190375 February 8, 2012 P………………………................ …………………………………
Lagda
TAN SHUY, Petitioner,
vs. Most of the transactions involving Tan Shuy and
Spouses GUILLERMO MAULAWIN and PARING Guillermo were coursed through Elena Tan, daughter
CARIÑO-MAULAWIN, Respondents. of petitioner. She served as cashier in the business of
Tan Shuy, who primarily prepared and issued the
DECISION pesada. In case of her absence, Vicente would issue the
pesada. He also helped his father in buying copra and
SERENO, J.: granting loans to customers (copra sellers). According
to Vicente, part of their agreement with Guillermo was
Before the Court is a Petition for Review on Certiorari that they would put the annotation "sulong" on the
filed under Rule 45 of the Rules of Court, assailing the pesada when partial payment for the loan was made.
31 July 2009 Decision and 13 November 2009
Resolution of the Court of Appeals (CA).1 Petitioner alleged that despite repeated demands,
Guillermo remitted only ₱ 23,000 in August 1998 and
Facts ₱ 5,500 in October 1998, or a total of ₱ 28,500. 4 He
claimed that respondent had an outstanding balance of
Petitioner Tan Shuy is engaged in the business of ₱ 391,500. Thus, convinced that Guillermo no longer
buying copra and corn in the Fourth District of Quezon had the intention to pay the loan, petitioner brought the
Province. According to Vicente Tan (Vicente), son of controversy to the Lupon Tagapamayapa. When no
petitioner, whenever they would buy copra or corn settlement was reached, petitioner filed a Complaint
from crop sellers, they would prepare and issue a before the Regional Trial Court (RTC).
pesada in their favor. A pesada is a document
containing details of the transaction, including the date Respondent Guillermo countered that he had already
of sale, the weight of the crop delivered, the trucking paid the subject loan in full. According to him, he
cost, and the net price of the crop. He then explained continuously delivered and sold copra to petitioner
that when a pesada contained the annotation "pd" on from April 1998 to April 1999. Respondent said they
the total amount of the purchase price, it meant that the had an oral arrangement that the net proceeds thereof
crop delivered had already been paid for by petitioner.2 shall be applied as installment payments for the loan.
He alleged that his deliveries amounted to ₱
Guillermo Maulawin (Guillermo), respondent in this 420,537.68 worth of copra. To bolster his claim, he
case, is a farmer-businessman engaged in the buying presented copies of pesadas issued by Elena and
and selling of copra and corn. On 10 July 1997, Tan Vicente. He pointed out that the pesadas did not
Shuy extended a loan to Guillermo in the amount of ₱ contain the notation "pd," which meant that actual
420,000. In consideration thereof, Guillermo obligated payment of the net proceeds from copra deliveries was
himself to pay the loan and to sell lucad or copra to not given to him, but was instead applied as loan
petitioner. Below is a reproduction of the contract:3 payment. He averred that Tan Shuy filed a case against
him, because petitioner got mad at him for selling
copra to other copra buyers.
2567 Lopez, Quezon July 10, 1997
On 27 July 2007, the trial court issued a Decision,
anggap ko kay G. TAN SHUY ang halagang
ruling that the net proceeds from Guillermo’s copra
…………………………………………………………. (P420,000.00)
deliveries – represented in the pesadas, which did not
aping Filipino. Inaako ko na isusulit sa kanya ang aking LUCAD at
bear the notation "pd" – should be applied as
ayaran ko ang nasabing halaga. Kung hindi ako makasulit ng LUCAD
installment payments for the loan. It gave weight and

credence to the pesadas, as their due execution and
authenticity was established by Elena and Vicente,
children of petitioner.5 However, the court did not
credit the net proceeds from 12 pesadas, as they were
deliveries for corn and not copra. According to the
RTC, Guillermo himself testified that it was the net
proceeds from the copra deliveries that were to be
applied as installment payments for the loan. Thus, it
ruled that the total amount of ₱ 41,585.25, which
corresponded to the net proceeds from corn deliveries,
should be deducted from the amount of ₱ 420,537.68
claimed by Guillermo to be the total value of his copra
deliveries. Accordingly, the trial court found that
respondent had not made a full payment for the loan,
as the total creditable copra deliveries merely
amounted to ₱ 378,952.43, leaving a balance of ₱
41,047.57 in his loan.6
On 31 July 2009, the CA issued its assailed Decision,
which affirmed the finding of the trial court.
According to the appellate court, petitioner could have
easily belied the existence of the pesadas and the
purpose for which they were offered in evidence by
presenting his daughter Elena as witness; however, he
failed to do so. Thus, it gave credence to the testimony
of respondent Guillermo in that the net proceeds from
the copra deliveries were applied as installment
payments for the loan.7 On 13 November 2009, the CA
issued its assailed Resolution, which denied the
Motion for Reconsideration of petitioner.
Petitioner now assails before this Court the
aforementioned Decision and Resolution of the CA
and presents the following issues:
Issues
1. Whether the pesadas require authentication before
they can be admitted in evidence, and
2. Whether the delivery of copra amounted to
installment payments for the loan obtained by
respondents from petitioner.
Discussion
As regards the first issue, petitioner asserts that the
pesadas should not have been admitted in evidence,
since they were private documents that were not duly
authenticated.8 He further contends that the pesadas
were fabricated in order to show that the goods
delivered were copra and not corn. Finally, he argues
96
that five of the pesadas mentioned in the Formal Offer
of Evidence of respondent were not actually offered.9
With regard to the second issue, petitioner argues that
respondent undertook two separate obligations – (1) to
pay for the loan in cash and (2) to sell the latter’s lucad
or copra. Since their written agreement did not
specifically provide for the application of the net
proceeds from the deliveries of copra for the loan,
petitioner contends that he cannot be compelled to
accept copra as payment for the loan. He emphasizes
that the pesadas did not specifically indicate that the
net proceeds from the copra deliveries were to be used
as installment payments for the loan. He also claims
that respondent’s copra deliveries were duly paid for in
cash, and that the pesadas were in fact documentary
receipts for those payments.
We reiterate our ruling in a line of cases that the
jurisdiction of this Court, in cases brought before it
from the CA, is limited to reviewing or revising errors
of law.10 Factual findings of courts, when adopted and
confirmed by the CA, are final and conclusive on this
Court except if unsupported by the evidence on
record.11 There is a question of fact when doubt arises
as to the truth or falsehood of facts; or when there is a
need to calibrate the whole evidence, considering
mainly the credibility of the witnesses and the
probative weight thereof, the existence and relevancy
of specific surrounding circumstances, as well as their
relation to one another and to the whole, and the
probability of the situation.12
Here, a finding of fact is required in the ascertainment
of the due execution and authenticity of the pesadas, as
well as the determination of the true intention behind
the parties’ oral agreement on the application of the net
proceeds from the copra deliveries as installment
payments for the loan.13 This function was already
exercised by the trial court and affirmed by the CA.
Below is a reproduction of the relevant portion of the
trial court’s Decision:
x x x The defendant further averred that if in the
receipts or "pesadas" issued by the plaintiff to those
who delivered copras to them there is a notation "pd"
on the total amount of purchase price of the copras, it
means that said amount was actually paid or given by
the plaintiff or his daughter Elena Tan Shuy to the
seller of the copras. To prove his averments the
defendant presented as evidence two (2) receipts or
pesadas issued by the plaintiff to a certain "Cariño"

(Exhibits "1" and "2" – defendant) showing the
notation "pd" on the total amount of the purchase price
for the copras. Such claim of the defendant was further
bolstered by the testimony of Apolinario Cariño which
affirmed that he also sell copras to the plaintiff Tan
Shuy. He also added that he incurred indebtedness to
the plaintiff and whenever he delivered copras the
amount of the copras sold were applied as payments to
his loan. The witness also pointed out that the plaintiff
did not give any official receipts to those who transact
business with him (plaintiff). This Court gave weight
and credence to the documents receipts (pesadas)
(Exhibits "3" to "64") offered as evidence by the
defendant which does not bear the notation "pd" or
paid on the total amount of the purchase price of
copras appearing therein. Although said "pesadas"
were private instrument their execution and
authenticity were established by the plaintiff’s
daughter Elena Tan and sometimes by plaintiff’s son
Vicente Tan. x x x.14 (Emphasis supplied)
In affirming the finding of the RTC, the CA reasoned
thus:
In his last assigned error, plaintiff-appellant herein
impugns the conclusion arrived at by the trial court,
particularly with respect to the giving of evidentiary
value to Exhs. "3" to "64" by the latter in order to
prove the claim of defendant-appellee Guillermo that
he had fully paid the subject loan already.
The foregoing deserves scant consideration.
Here, plaintiff-appellant could have easily belied the
existence of Exhs. "3" to "64", the pesadas or receipts,
and the purposes for which they were offered in
evidence by simply presenting his daughter, Elena Tan
Shuy, but no effort to do so was actually done by the
former given that scenario.15 (Emphasis supplied)
We found no clear showing that the trial court and the
CA committed reversible errors of law in giving
credence and according weight to the pesadas
presented by respondents. According to Rule 132,
Section 20 of the Rules of Court, there are two ways of
proving the due execution and authenticity of a private
document, to wit:
SEC. 20. Proof of private document. – Before any
private document offered as authentic is received in
evidence, its due execution and authenticity must be
proved either:
97
(a) By anyone who saw the document executed or
written; or
(b) By evidence of the genuineness of the signature or
handwriting of the maker.
Any other private document need only be identified as
that which it is claimed to be. (21a)
As reproduced above, the trial court found that the due
execution and authenticity of the pesadas were
"established by the plaintiff’s daughter Elena Tan and
sometimes by plaintiff’s son Vicente Tan." 16 The RTC
said:
On cross-examination, [Vicente] reiterated that he and
her [sic] sister Elena Tan who acted as their cashier are
helping their father in their business of buying copras
and mais. That witness agreed that in the business of
buying copra and mais of their father, if a seller is
selling copra, a pesada is being issued by his sister.
The pesada that she is preparing consists of the date
when the copra is being sold to the seller. Being
familiar with the penmanship of Elena Tan, the witness
was shown a sample of the pesada issued by his sister
Elena Tan. x x x
xxx xxx xxx
x x x. He clarified that in the "pesada" (Exh. "1")
prepared by Elena and also in Exh "2", there appears
on the lower right hand portion of the said pesadas the
letter "pd", the meaning of which is to the effect that
the seller of the copra has already been paid during
that day. He also confirmed the penmanship and
handwriting of his sister Ate Elena who acted as a
cashier in the pesada being shown to him. He was even
made to compare the xerox copies of the pesadas with
the original copies presented to him and affirmed that
they are faithful reproduction of the
17
originals. (Emphasis supplied)
In any event, petitioner is already estopped from
questioning the due execution and authenticity of the
pesadas.1âwphi1 As found by the CA, Tan Shuy
"could have easily belied the existence of x x x the
pesadas or receipts, and the purposes for which they
were offered in evidence by simply presenting his
daughter, Elena Tan Shuy, but no effort to do so was
actually done by the former given that scenario." The
pesadas having been admitted in evidence, with
petitioner failing to timely object thereto, these

documents are already deemed sufficient proof of the
facts contained therein.18 We hereby uphold the factual
findings of the RTC, as affirmed by the CA, in that the
pesadas served as proof that the net proceeds from the
copra deliveries were used as installment payments for
the debts of respondents.19
Indeed, pursuant to Article 1232 of the Civil Code, an
obligation is extinguished by payment or performance.
There is payment when there is delivery of money or
performance of an obligation.20 Article 1245 of the
Civil Code provides for a special mode of payment
called dation in payment (dación en pago). There is
dation in payment when property is alienated to the
creditor in satisfaction of a debt in money.21 Here, the
debtor delivers and transmits to the creditor the
former’s ownership over a thing as an accepted
equivalent of the payment or performance of an
outstanding debt.22 In such cases, Article 1245
provides that the law on sales shall apply, since the
undertaking really partakes – in one sense – of the
nature of sale; that is, the creditor is really buying the
thing or property of the debtor, the payment for which
is to be charged against the debtor’s obligation. 23 
Dation in payment extinguishes the obligation to the
extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless
the parties by agreement – express or implied, or by
their silence – consider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished.24
The trial court found thus:
x x x [T]he preponderance of evidence is on the side of
the defendant. x x x The defendant explained that for
the receipts (pesadas) from April 1998 to April 1999
he only gets the payments for trucking while the total
amount which represent the total purchase price for the
copras that he delivered to the plaintiff were all given
to Elena Tan Shuy as installments for the loan he owed
to plaintiff. The defendant further averred that if in the
receipts or "pesadas" issued by the plaintiff to those
who delivered copras to them there is a notation "pd"
on the total amount of purchase price of the copras, it
means that said amount was actually paid or given by
the plaintiff or his daughter Elena Tan Shuy to the
seller of the copras. To prove his averments the
defendant presented as evidence two (2) receipts or
pesadas issued by the plaintiff to a certain "Cariño"
(Exhibits "1" and "2" – defendant) showing the
notation "pd" on the total amount of the purchase price
for the copras. Such claim of the defendant was further
98
bolstered by the testimony of Apolinario Cariño which
affirmed that he also sell [sic] copras to the plaintiff
Tan Shuy. He also added that he incurred indebtedness
to the plaintiff and whenever he delivered copras the
amount of the copras sold were applied as payments to
his loan. The witness also pointed out that the plaintiff
did not give any official receipts to those who transact
business with him (plaintiff). x x x
Be that it may, this Court cannot however subscribe to
the averments of the defendant that he has fully paid
the amount of his loan to the plaintiff from the
proceeds of the copras he delivered to the plaintiff as
shown in the "pesadas" (Exhibits "3" to "64").
Defendant claimed that based on the said "pesadas" he
has paid the total amount of P420,537.68 to the
plaintiff. However, this Court keenly noted that some
of the "pesadas" offered in evidence by the defendant
were not for copras that he delivered to the plaintiff
but for "mais" (corn). The said pesadas for mais or
corn were the following, to wit:
xxx xxx xxx
To the mind of this Court the aforestated amount
(P41,585.25) which the above listed pesadas show as
payment for mais or corn delivered by the defendant to
the plaintiff cannot be claimed by the defendant to
have been applied also as payment to his loan with the
plaintiff because he does not testify on such fact. He
even stressed during his testimony that it was the
proceeds from the copras that he delivered to the
plaintiff which will be applied as payments to his loan.
x x x Thus, equity dictates that the total amount of
P41,585.25 which corresponds to the payment for
"mais" (corn) delivered by the plaintiff shall be
deducted from the total amount of P420,537.68 which
according to the defendant based on the pesadas
(Exhibits "3" to "64") that he presented as evidence, is
the total amount of the payment that he made for his
loan to the plaintiff. x x x
xxx xxx xxx
Clearly from the foregoing, since the total amount of
defendant’s loan to the plaintiff is P420,000.00 and the
evidence on record shows that the actual amount of
payment made by the defendant from the proceeds of
the copras he delivered to the plaintiff is P378,952.43,
the defendant is still indebted to the plaintiff in the
amount of P41,047.53 (sic) (P420,000.00-
25 
P378,952.43). (Emphasis supplied)

In affirming this finding of fact by the trial court, the
CA cited the above-quoted portion of the RTC’s
Decision and stated the following:
In fact, as borne by the records on hand, herein
defendant-appellee Guillermo was able to describe and
spell out the contents of Exhs. "3" to "64" which were
then prepared by Elena Tan Shuy or sometimes by
witness Vicente Tan. Herein defendant-appellee
Guillermo professed that since the release of the
subject loan was subject to the condition that he shall
sell his copras to the plaintiff-appellant, the former did
not already receive any money for the copras he
delivered to the latter starting April 1998 to April
1999. Hence, this Court can only express its approval
to the apt observation of the trial court on this matter[.]
xxx xxx xxx
Notwithstanding the above, however, this Court fully
agrees with the pronouncement of the trial court that
not all amounts indicated in Exhs. "3" to "64" should
be applied as payments to the subject loan since
several of which clearly indicated "mais" deliveries on
the part of defendant-appellee Guillermo instead of
"copras"[.]26 (Emphasis supplied)
The subsequent arrangement between Tan Shuy and
Guillermo can thus be considered as one in the nature
of dation in payment. There was partial payment every
time Guillermo delivered copra to petitioner, chose not
to collect the net proceeds of his copra deliveries, and
instead applied the collectible as installment payments
for his loan from Tan Shuy. We therefore uphold the
findings of the trial court, as affirmed by the CA, that
the net proceeds from Guillermo’s copra deliveries
amounted to ₱ 378,952.43. With this partial payment,
respondent remains liable for the balance totaling ₱
41,047.57.27
WHEREFORE the Petition is DENIED. The 31 July
2009 Decision and 13 November 2009 Resolution of
the Court of Appeals in CA-G.R. CV No. 90070 are
hereby AFFIRMED.
SO ORDERED.
G.R. No. 171845 October 10, 2012
SPOUSES GODFREY and GERARDINA
SERFINO, Petitioners,
vs.
99
FAR EAST BANK AND TRUST COMPANY, INC.,
now BANK OF THE PHILIPPINE
ISLANDS, Respondent.
DECISION
BRION, J.:
Before the Court is a petition for review
on certiorari, 1 filed under Rule 45 of the Rules of
Court, assailing the decision2 dated February 23, 2006
of the Regional Trial Court (RTC) of Bacolod City,
Branch 41, in Civil Case No. 95-9344.
FACTUAL ANTECEDENTS
The present case traces its roots to the compromise
judgment dated October 24, 19953 of the RTC of
Bacolod City, Branch 47, in Civil Case No. 95-9880.
Civil Case No. 95-9880 was an action for collection of
sum of money instituted by the petitioner spouses
Godfrey and Gerardina Serfino (collectively, spouses
Serfino) against the spouses Domingo and Magdalena
Cortez (collectively, spouses Cortez). By way of
settlement, the spouses Serfino and the spouses Cortez
executed a compromise agreement on October 20,
1995, in which the spouses Cortez acknowledged their
indebtedness to the spouses Serfino in the amount of ₱
108,245.71. To satisfy the debt, Magdalena bound
herself "to pay in full the judgment debt out of her
retirement benefits[.]"4 Payment of the debt shall be
made one (1) week after Magdalena has received her
retirement benefits from the Government Service
Insurance System (GSIS). In case of default, the debt
may be executed against any of the properties of the
spouses Cortez that is subject to execution, upon
motion of the spouses Serfino.5 After finding that the
compromise agreement was not contrary to law,
morals, good custom, public order or public policy, the
RTC approved the entirety of the parties’ agreement
and issued a compromise judgment based thereon.6 
The debt was later reduced to ₱ 155,000.00 from ₱
197,000.00 (including interest), with the promise that
the spouses Cortez would pay in full the judgment debt
not later than April 23, 1996.7
No payment was made as promised. Instead, Godfrey
discovered that Magdalena deposited her retirement
benefits in the savings account of her daughter-in-law,
Grace Cortez, with the respondent, Far East Bank and
Trust Company, Inc. (FEBTC). As of April 23, 1996,
Grace’s savings account with FEBTC amounted to ₱

245,830.37, the entire deposit coming from
Magdalena’s retirement benefits.8 That same day, the
spouses Serfino’s counsel sent two letters to FEBTC
informing the bank that the deposit in Grace’s
name was owned by the spouses Serfino by virtue
of an assignment made in their favor by the spouses
Cortez. The letter requested FEBTC to prevent the
delivery of the deposit to either Grace or the spouses
Cortez until its actual ownership has been resolved in
court.
On April 25, 1996, the spouses Serfino instituted Civil
Case No. 95- 9344 against the spouses Cortez, Grace
and her husband, Dante Cortez, and FEBTC for
the recovery of money on deposit and the payment
of damages, with a prayer for preliminary attachment.
On April 26, 1996, Grace withdrew ₱ 150,000.00
from her savings account with FEBTC. On the same
day, the spouses Serfino sent another letter to FEBTC
informing it of the pending action; attached to the
letter was a copy of the complaint filed as Civil Case
No. 95-9344.
During the pendency of Civil Case No. 95-9344, the
spouses Cortez manifested that they were turning over
the balance of the deposit in FEBTC (amounting to ₱
54,534.00) to the spouses Serfino as partial payment of
their obligation under the compromise judgment. The
RTC issued an order dated July 30, 1997, authorizing
FEBTC to turn over the balance of the deposit to the
spouses Serfino.
On February 23, 2006, the RTC issued the assailed
decision (a) finding the spouses Cortez, Grace and
Dante liable for fraudulently diverting the amount due
the spouses Serfino, but (b) absolving FEBTC from
any liability for allowing Grace to withdraw the
deposit. The RTC declared that FEBTC was not a
party to the compromise judgment; FEBTC was thus
not chargeable with notice of the parties’ agreement, as
there was no valid court order or processes requiring it
to withhold payment of the deposit. Given the nature
of bank deposits, FEBTC was primarily bound by its
contract of loan with Grace. There was, therefore, no
legal justification for the bank to refuse payment of the
account, notwithstanding the claim of the spouses
Serfino as stated in their three letters.
THE PARTIES’ ARGUMENTS
100
The spouses Serfino appealed the RTC’s ruling
absolving FEBTC from liability for allowing the
withdrawal of the deposit. They allege that the RTC
cited no legal basis for declaring that only a court
order or process can justify the withholding of the
deposit in Grace’s name. Since FEBTC was informed
of their adverse claim after they sent three letters, they
claim that:
Upon receipt of a notice of adverse claim in proper
form, it becomes the duty of the bank to: 1. Withhold
payment of the deposit until there is a reasonable
opportunity to institute legal proceedings to contest
ownership; and 2) give prompt notice of the adverse
claim to the depositor. The bank may be held liable to
the adverse claimant if it disregards the notice of
adverse claim and pays the depositor.
When the bank has reasonable notice of a bona fide
claim that money deposited with it is the property
of another than the depositor, it should withhold
payment until there is reasonable opportunity to
institute legal proceedings to contest the
ownership.9(emphases and underscoring supplied)
Aside from the three letters, FEBTC should be deemed
bound by the compromise judgment, since Article
1625 of the Civil Code states that an assignment of
credit binds third persons if it appears in a public
instrument.10 They conclude that FEBTC, having been
notified of their adverse claim, should not have
allowed Grace to withdraw the deposit.
While they acknowledged that bank deposits are
governed by the Civil Code provisions on loan, the
spouses Serfino allege that the provisions on voluntary
deposits should apply by analogy in this case,
particularly Article 1988 of the Civil Code, which
states:
Article 1988. The thing deposited must be returned to
the depositor upon demand, even though a specified
period or time for such return may have been fixed.
This provision shall not apply when the thing is
judicially attached while in the depositary’s
possession, or should he have been notified of the
opposition of a third person to the return or the
removal of the thing deposited. In these cases, the
depositary must immediately inform the depositor of
the attachment or opposition.

Based on Article 1988 of the Civil Code, the
depository is not obliged to return the thing to the
depositor if notified of a third party’s adverse claim.
By allowing Grace to withdraw the deposit that is due
them under the compromise judgment, the spouses
Serfino claim that FEBTC committed an actionable
wrong that entitles them to the payment of actual
and moral damages.
FEBTC, on the other hand, insists on the correctness
of the RTC ruling. It claims that it is not bound by the
compromise judgment, but only by its contract of loan
with its depositor. As a loan, the bank deposit is owned
by the bank; hence, the spouses Serfino’s claim of
ownership over it is erroneous.
Based on these arguments, the case essentially
involves a determination of the obligation of banks to
a third party who claims rights over a bank deposit
standing in the name of another.
THE COURT’S RULING
We find the petition unmeritorious and see no reason
to reverse the RTC’s ruling.
Claim for actual damages not
meritorious because there could be
no pecuniary loss that should be
compensated if there was no
assignment of credit
The spouses Serfino’s claim for damages against
FEBTC is premised on their claim of ownership of the
deposit with FEBTC. The deposit consists of
Magdalena’s retirement benefits, which the spouses
Serfino claim to have been assigned to them under the
compromise judgment. That the retirement benefits
were deposited in Grace’s savings account with
FEBTC supposedly did not divest them of ownership
of the amount, as "the money already belongs to the
[spouses Serfino] having been absolutely assigned to
them and constructively delivered by virtue of the x x
x public instrument[.]"11 By virtue of the assignment
of credit, the spouses Serfino claim ownership of the
deposit, and they posit that FEBTC was duty bound to
protect their right by preventing the withdrawal of the
deposit since the bank had been notified of the
assignment and of their claim.
101
We find no basis to support the spouses Serfino’s
claim of ownership of the deposit.
"An 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 consent of the
debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor
could enforce it against the debtor. It may be in the
form of 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."12 As a dation in
payment, the assignment of credit operates as a
mode of extinguishing the obligation;13 the delivery
and transmission of ownership of a thing (in this case,
the credit due from a third person) by the debtor to the
creditor is accepted as the equivalent of the
performance of the obligation.14
The terms of the compromise judgment, however, did
not convey an intent to equate the assignment of
Magdalena’s retirement benefits (the credit) as the
equivalent of the payment of the debt due the spouses
Serfino (the obligation). There was actually no
assignment of credit; if at all, the compromise
judgment merely identified the fund from which
payment for the judgment debt would be sourced:
(c) That before the plaintiffs file a motion for
execution of the decision or order based [on this]
Compromise Agreement, the defendant, Magdalena
Cortez undertake[s] and bind[s] herself to pay in
full the judgment debt out of her retirement
benefits as Local [T]reasury Operation Officer in the
City of Bacolod, Philippines, upon which full
payment, the plaintiffs waive, abandon and relinquish
absolutely any of their claims for attorney’s fees
stipulated in the Promissory Note (Annex "A" to the
Complaint).15 [emphasis ours]
Only when Magdalena has received and turned over to
the spouses Serfino the portion of her retirement
benefits corresponding to the debt due would the debt
be deemed paid.
In Aquitey v. Tibong,16 the issue raised was whether the
obligation to pay the loan was extinguished by the
execution of the deeds of assignment. The Court ruled
in the affirmative, given that, in the deeds involved,

the respondent (the debtor) assigned to the petitioner
(the creditor) her credits "to make good" the balance of
her obligation; the parties agreed to relieve the
respondent of her obligation to pay the balance of her
account, and for the petitioner to collect the same from
the respondent’s debtors.17 The Court concluded that
the respondent’s obligation to pay the balance of her
accounts with the petitioner was extinguished, pro
tanto, by the deeds of assignment of credit executed by
the respondent in favor of the petitioner.18
In the present case, the judgment debt was not
extinguished by the mere designation in the
compromise judgment of Magdalena’s retirement
benefits as the fund from which payment shall be
sourced. That the compromise agreement authorizes
recourse in case of default on other executable
properties of the spouses Cortez, to satisfy the
judgment debt, further supports our conclusion that
there was no assignment of Magdalena’s credit with
the GSIS that would have extinguished the obligation.
The compromise judgment in this case also did not
give the supposed assignees, the spouses Serfino, the
power to enforce Magdalena’s credit against the GSIS.
In fact, the spouses Serfino are prohibited from
enforcing their claim until after the lapse of one (1)
week from Magdalena’s receipt of her retirement
benefits:
(d) That the plaintiffs shall refrain from having the
judgment based upon this Compromise Agreement
executed until after one (1) week from receipt by the
defendant, Magdalena Cortez of her retirement
benefits from the [GSIS] but fails to pay within the
said period the defendants’ judgment debt in this case,
in which case [this] Compromise Agreement [may be]
executed upon any property of the defendants that are
subject to execution upon motion by the plaintiffs.19
An assignment of credit not only entitles the assignee
to the credit itself, but also gives him the power to
enforce it as against the debtor of the assignor.
Since no valid assignment of credit took place, the
spouses Serfino cannot validly claim ownership of the
retirement benefits that were deposited with
FEBTC. Without ownership rights over the amount,
they suffered no pecuniary loss that has to be
compensated by actual damages. The grant of actual
damages presupposes that the claimant suffered a duly
proven pecuniary loss.20
102
Claim for moral damages not
meritorious because no duty exists
on the part of the bank to protect
interest of third person claiming
deposit in the name of another
Under Article 2219 of the Civil Code, moral damages
are recoverable for acts referred to in Article 21 of the
Civil Code.21 Article 21 of the Civil Code, in
conjunction with Article 19 of the Civil Code, is part
of the cause of action known in this jurisdiction as
"abuse of rights." The elements of abuse of rights are:
(a) there is a legal right or duty; (b) exercised in bad
faith; and (c) for the sole intent of prejudicing or
injuring another.1âwphi1
The spouses Serfino invoke American common law
that imposes a duty upon a bank receiving a notice
of adverse claim to the fund in a depositor’s
account to freeze the account for a reasonable
length of time, sufficient to allow the adverse
claimant to institute legal proceedings to enforce
his right to the fund.22 In other words, the bank has a
duty not to release the deposits unreasonably early
after a third party makes known his adverse claim to
the bank deposit. Acknowledging that no such duty is
imposed by law in this jurisdiction, the spouses
Serfino ask the Court to adopt this foreign rule.23
To adopt the foreign rule, however, goes beyond the
power of this Court to promulgate rules governing
pleading, practice and procedure in all courts. 24 The
rule reflects a matter of policy that is better
addressed by the other branches of government,
particularly, the Bangko Sentral ng Pilipinas, which is
the agency that supervises the operations and activities
of banks, and which has the power to issue "rules of
conduct or the establishment of standards of operation
for uniform application to all institutions or functions
covered[.]"25 To adopt this rule will have significant
implications on the banking industry and practices, as
the American experience has shown. Recognizing that
the rule imposing duty on banks to freeze the deposit
upon notice of adverse claim adopts a policy adverse
to the bank and its functions, and opens it to liability to
both the depositor and the adverse claimant, 26 many
American states have since adopted adverse claim
statutes that shifted or, at least, equalized the burden.
Essentially, these statutes do not impose a duty on
banks to freeze the deposit upon a mere notice of
adverse claim; they first require either a court order or
an indemnity bond.27

In the absence of a law or a rule binding on the Court,
it has no option but to uphold the existing policy that
recognizes the fiduciary nature of banking. It likewise
rejects the adoption of a judicially-imposed rule giving
third parties with unverified claims against the deposit
of another a better right over the deposit. As current
laws provide, the bank’s contractual relations are with
its depositor, not with the third party;28 "a bank is
under obligation to treat the accounts of its depositors
with meticulous care and always to have in mind the
fiduciary nature of its relationship with them." 29 In the
absence of any positive duty of the bank to an adverse
claimant, there could be no breach that entitles the
latter to moral damages.
WHEREFORE, in view of the foregoing, the petition
for review on certiorari is DENIED, and the decision
dated February 23, 2006 of the Regional Trial Court of
Bacolod City, Branch 41, in Civil Case No. 95-9344
is AFFIRMED. Costs against the petitioners.
SO ORDERED.
G.R. No. 160408
SPOUSES ROBERTO and ADELAIDA
PEN, Petitioners,
vs.
SPOUSES SANTOS and LINDA
JULIAN, Respondents.
DECISION
BERSAMIN, J.:
The petitioners who were the buyers of the mortgaged
property of the respondents seek the reversal of the
decision promulgated on October 20, 2003,1 whereby
the Court of Appeals (CA) affirmed with modification
the adverse judgment rendered on August 30, 1999 by
the Regional Trial Court (RTC), Branch 77, in Quezon
City.2 In their respective rulings, the CA and the RTC
both declared the deed of sale respecting the
respondents' property as void and inexistent, albeit
premised upon different reasons.
Antecedents
The CA summarized the antecedent facts and
procedural matters in its assailed decision as follows:
103
On April 9, 1986, the appellees (the Julians) obtained a
P60,000.00 loan from appellant Adelaida Pen. On May
23, 1986 and on the (sic) May 27, 1986, they were
again extended loans in the amounts of P50,000.00
and P10,000.00, respectively by appellant Adelaida.
The initial interests were deducted by appellant
Adelaida, (1) P3,600.00 from the P60,000.00 loan; (2)
P2,400.00 from the P50,000.00 loan; and (3) P600.00
from the P10,000.00 loan. Two (2) promissory notes
were executed by the appellees in favor of appellant
Adelaida to evidence the foregoing loans, one dated
April 9, 1986 and payable on June 15, 1986 for the
P60,000.00 loan and another dated May 22, 1986
payable on July 22, 1986 for the P50,000.00 loan.
Both Joans were charged interest at 6% per month. As
security, on May 23, 1986, the appellees executed a
Real Estate Mortgage over their property covered by
TCT No. 327733 registered under the name of
appellee Santos Julian, Jr. The owner's duplicate of
TCT No. 327733 was delivered to the appellants.
Appellant's version of the subsequent events run as
follows: When the loans became due and demandable,
appellees failed to pay despite several demands. As
such, appellant Adelaida decided to institute
foreclosure proceedings. However, she was prevailed
upon by appellee Linda not to foreclose the property
because of the cost of litigation and since it would
cause her embarrassment as the proceedings will be
announced in public places at the City Hall, where she
has many friends. Instead, appellee Linda offered their
mortgaged property as payment in kind. After the
ocular inspection, the parties agreed to have the
property valued at P70,000.00. Thereafter, on October
22, 1986 appellee executed a two (2) page Deed of
Sale duly signed by her on the left margin and over her
printed name. After the execution of the Deed of Sale,
appellant Pen paid the capital gains tax and the
required real property tax. Title to the property was
transferred to the appellants by the issuance of TCT
No. 364880 on July 17, 1987. A reconstituted title was
also issued to the appellants on July 09, 1994 when the
Quezon City Register of Deeds was burned (sic).
On July 1989, appellants allege that appellee Linda
offered to repurchase the property to which the former
agreed at the repurchase price of P436,l 15.00 payable
in cash on July 31, 1989. The appellees failed to
repurchase on the agreed date. On February 1990,
appellees again offered to repurchase the property for
the same amount, but they still failed to repurchase.
On June 28, 1990, another offer was made to
repurchase the property for the same amount. Appellee

Linda offered to pay P100,000.00 in cash as sign of
good faith. The offer was rejected by appellant
Adelaida. The latter held the money only for
safekeeping upon the pleading of appellee Linda.
Upon the agreement of the parties, the amount of
P100,000.00 was deducted from the balance of the
appellees' indebtedness, so that as of October 15, 1997,
their unpaid balance amounted to P319,065.00.
Appellants allege that instead of paying lthe] said
balance, the appellees instituted on September 8, 1994
the civil complaint and filed an adverse claim and lis
pendens which were annotated at the back of the title
to the property.
On the other hand, the appellees aver the following: At
the time the mortgage was executed, they were
likewise required by the appellant Adelaida to sign a
one (1) page document purportedly an "Absolute Deed
of Sale". Said document did not contain any
consideration, and was "undated, unfilled and
unnotarized". They allege that their total payments
amounted to P115,400.00 and that their last payment
was on June 28, 1990 in the amount of P100,000.00.
In December 1992, appellee Linda Julian offered to
pay appellant Adelaida the amount of P150,000.00.
The latter refused to accept the offer and demanded
that she be paid the amount of P250,000.00. Unable to
meet the demand, appellee Linda desisted from the
offer and requested that she be shown the land title
which she conveyed to the appellee Adelaida, but the
latter refused. Upon verification with the Registry of
Deeds of Quezon City, she was informed that the title
to the mortgaged property had already been registered
in the name of appellee Adelaida under TCT No.
364880, and that the transfer was entered on July 17,
1987. A reconstituted title, TCT No. RT-45272
(364880), also appeared on file in the Registry of
Deeds replacing TCT No. 364880.
By reason of the foregoing discoveries, appellee filed
an Affidavit of Adverse Claim on January
1993.1avvphi1 Counsel for the appellees, on August
12, 1994, formally demanded the reconveyance of the
title and/or the property to them, but the appellants
refused. In the process of obtaining other documents;
the appellees also discovered that the appellants have
obtained several Declarations of Real Property, and a
Deed of Sale consisting of two (2) pages which was
notarized by one Atty. Cesar Ching. Said document
indicates a consideration of P70,000.00 for the lot, and
was made to appear as having been executed on
October 22, 1986. On September 8, 1994, appellees
104
filed a suit for the Cancellation of Sale, Cancellation
of Title issued to the appellants; Recovery of
Possession; Damages with Prayer for Preliminary
Injunction. The complaint alleged that appellant
Adelaida, through obvious bad faith, maliciously
typed, unilaterally filled up, and caused to be notarized
the Deed of Sale earlier signed by appellee Julian, and
used this spurious deed of sale as the vehicle for her
fraudulent transfer unto herself the parcel of land
covered by TCT No. 327733.3
Judgment of the RTC
In its judgment rendered on August 30, 1999, 4 the RTC
ruled in favor of the respondents. According greater
credence to the version of the respondents on the true
nature of their transaction, the trial court concluded
that they had not agreed on the consideration for the
sale at the time they signed the deed of sale; that in the
absence of the consideration, the sale lacked one of the
essential requisites of a valid contract; that the defense
of prescription was rejected because the action to
impugn the void contract was imprescriptible; and that
the promissory notes and the real estate mortgage in
favor of the petitioners were nonetheless valid,
rendering the respondents liable to still pay their
outstanding obligation with interest.
The RTC disposed thusly:
WHEREFORE, judgment is hereby rendered:
1. Declaring the Deed of Sale, dated October 22, 1986,
void or inexistent;
2. Cancelling TCT No. RT-45272 (364480) and
declaring it to be of no further legal force and effect;
3. Ordering the defendants to reconvey the subject
property to the plaintiffs and to deliver to them the
possession thereof; and
4. Ordering the plaintiffs to pay to the defendants the
unpaid balance of their indebtedness plus accrued
interest totaling P,319,065.00 as of October 15, 1997,
plus interests at the legal rate counted from the date of
filing of the complaint and until the full payment
thereof, without prejudice to the right of the
defendants to foreclose the mortgage in the event that
plaintiffs will fail to pay their obligation.
No pronouncement as to cost.

5
SO ORDERED.
Decision of the CA
On appeal by the petitioners, the CA affirmed the RTC
with modification under its assailed decision of
October 20, 2003,6 decreeing:
WHEREFORE, premises considered, the Decision of
the Regional Trial Court of Quezon City is
AFFIRMED WITH modification. Judgement is hereby
rendered:
1. Declaring the Deed of Sale, dated October 22, 1986,
void or inexistent;
2. Cancelling TCT No. RT-45272 (364880) and
declaring it to be of no further legal force and effect;
3. Ordering the appellants-defendants to reconvey the
subject property to the plaintiffs-appellees and to
deliver to them the possession thereof; and
4. Ordering the plaintiffs-appellces to pay to the
defendants the unpaid balance of their indebtedness,
P43,492.15 as of June 28, 1990, plus interests at the
legal rate of 12% per annum from said date and until
the full payment thereof, without prejudice to the right
of the defendants to foreclose the mortgage in the
event that plaintiffs-appellees will fail to pay their
obligation.
SO ORDERED.7
The CA pronounced the deed of sale as void but not
because of the supposed lack of consideration as the R
TC had indicated, but because of the deed of sale
having been executed at the same time as the real
estate mortgage, which rendered the sale as a
prohibited pactum commissorium in light of the fact
that the deed of sale was blank as to the consideration
and the date, which details would be filled out upon
the default by the respondents; that the promissory
notes contained no stipulation on the payment of
interest on the obligation, for which reason no
monetary interest could be imposed for the use of
money; and that compensatory interest should instead
be imposed as a form of damages arising from Linda's
failure to pay the outstanding obligation.
Issues
105
In this appeal, the petitioners posit the following
issues, namely: (1) whether or not the CA erred in
ruling against the validity of the deed of sale; and (2)
whether or not the CA erred in ruling that no monetary
interest was due for Linda's use of Adelaida's money.
Ruling of the Court
The appeal is partly meritorious.
That the petitioners are raising factual issues about the
true nature of their transaction with the respondent is
already of itself, sufficient reason to forthwith deny
due course to the petition for review
on certiorari. They cannot ignore that any appeal to
the Court is limited to questions of law because the
Court is not a trier of facts. As such, the factual
findings of the CA should be respected and accorded
great weight, and even finality when supported by the
substantial evidence on record.8 Moreover, in view of
the unanimity between the RTC and the CA on the
deed of sale being void, varying only in their
justifications, the Court affirms the CA, and adopts its
conclusions on the invalidity of the deed of sale.
Nonetheless, We will take the occasion to explain why
we concur with the CA's justification in discrediting
the deed of sale between the parties as pactum
commissorium.
Article 2088 of the Civil Code prohibits the creditor
from appropriating the things given by way of pledge
or mortgage, or from disposing of them; any
stipulation to the contrary is null and void. The
elements for pactum commissorium to exist are as
follows, to wit: (a) that there should be a pledge or
mortgage wherein property is pledged or mortgaged by
way of security for the payment of the principal
obligation; and (b) that there should be a stipulation
for an automatic appropriation by the creditor of the
thing pledged or mortgaged in the event of non-
payment of the principal obligation within the
stipulated period.9 The first element was present
considering that the property of the respondents was
mortgaged by Linda in favor of Adelaida as security
for the farmer's indebtedness. As to the second, the
authorization for Adelaida to appropriate the property
subject of the mortgage upon Linda's default was
implied from Linda's having signed the blank deed of
sale simultaneously with her signing of the real estate
mortgage. The haste with which the transfer of
property was made upon the default by Linda on her

obligation, and the eventual transfer of the property in
a manner not in the form of a valid dacion en
pago ultimately confirmed the nature of the transaction
as a pactum commissorium.
It is notable that in reaching its conclusion that Linda's
deed of sale had been executed simultaneously with
the real estate mortgage, the CA first compared the
unfilled deed of sale presented by Linda with the
notarized deed of sale adduced by Adelaida. The CA
justly deduced that the completion and execution of
the deed of sale had been conditioned on the non-
payment of the debt by Linda, and reasonably
pronounced that such circumstances rendered the
transaction pactum commissorium. The Court should
not disturb or undo the CA's conclusion in the absence
of the clear showing of abuse, arbitrariness or
capriciousness on the part of the CA.10
The petitioners have theorized that their transaction
with the respondents was a valid dacion en pago by
highlighting that it was Linda who had offered to sell
her property upon her default. Their theory cannot
stand scrutiny. Dacion en pago is in the nature of a
sale because property is alienated in favor of the
creditor in satisfaction of a debt in money. 11 For a
valid dacion en pago to transpire, however, the
attendance of the following elements must be
established, namely: (a) the existence of a money
obligation; (b) the alienation to the creditor of a
property by the debtor with the consent of the former;
and (c) the satisfaction of the money obligation of the
debtor.12 To have a valid dacion en pago, therefore, the
alienation of the property must fully extinguish the
debt. Yet, the debt of the respondents subsisted despite
the transfer of the property in favor of Adelaida.
The petitioners insist that the parties agreed that the
deed of sale would not yet contain the date and the
consideration because they had still to agree on the
price.13 Their insistence is not supported by the
established circumstances. It appears that two days
after the loan fell due on October 15, 1986, 14 Linda
offered to sell the mortgaged property;15 hence, the
parties made the ocular inspection of the premises on
October 18, 1986. By that time, Adelaida had already
become aware that the appraiser had valued the
property at P70,000.00. If that was so, there was no
plausible reason for still leaving the consideration on
the deed of sale blank if the deed was drafted by
Adelaida on October 20, 1986, especially considering
that they could have conveniently communicated with
each other in the meanwhile on this significant aspect
106
of their transaction. It was also improbable for
Adelaida to still hand the unfilled deed of sale to Linda
as her copy if, after all, the deed of sale would be
eventually notarized on October 22, 1986.
According to Article 1318 of the Civil Code, the
requisites for any contract to be valid are,
namely: (a) the consent of the contracting parties;
(b) the object; and (c) the consideration. There is a
perfection of a contract when there is a meeting of the
minds of the parties on each of these requisites.16 The
following passage has fittingly discussed the process
of perfection in Moreno, Jr. v. Private Management
Office:17
To reach that moment of perfection, the parties must
agree on the same thing in the same sense, so that their
minds meet as to all the terms. They must have a
distinct intention common to both and without doubt
or difference; until all understand alike, there can be
no assent, and therefore no contract. The minds of
parties must meet at every point; nothing can be left
open for further arrangement. So long as there is any
uncertainty or indefiniteness, or future negotiations or
considerations to be had between the parties, there is
not a completed contract, and in fact, there is no
contract at all.18
In a sale, the contract is perfected at the moment when
the seller obligates herself to deliver and to transfer
ownership of a thing or right to the buyer for a price
certain, as to which the latter agrees.19 The absence of
the consideration from Linda's copy of the deed of sale
was credible proof of the lack of an essential requisite
for the sale. In other words, the meeting of the minds
of the parties so vital in the perfection of the contract
of sale did not transpire. And, even assuming that
Linda's leaving the consideration blank implied the
authority of Adelaida to fill in that essential detail in
the deed of sale upon Linda's default on the loan, the
conclusion of the CA that the deed of sale was
a pactum commisorium still holds, for, as earlier
mentioned, all the elements of pactum
commisorium were present.
Anent interest, the CA deleted the imposition of
monetary interest but decreed compensatory interest of
12% per annum.
Interest that is the compensation fixed by the parties
for the use or forbearance of money is referred to as
monetary interest.1âwphi1 On the other hand, interest
 107
that may be imposed by law or by the courts as penalty June 30, 2013, and 6% per annum from July 1, 2013
or indemnity for damages is called compensatory until full payment.
interest. In other words, the right to recover interest
arises only either by vi11ue of a contract or as Without pronouncement on costs of suit.
damages for delay or failure to pay the principal loan
on which the interest is demanded.20 SO ORDERED.

The CA correctly deleted the monetary interest from

the judgment. Pursuant to Article 1956 of the Civil FIRST DIVISION
Code, no interest shall be due unless it has been
expressly stipulated in writing. In order for monetary EQUITABLE PCI BANK, G.R. No. 171545
*

interest to be imposed, therefore, two requirements AIMEE YU and BEJAN

must be present, specifically: (a) that there has been an LIONEL APAS,
express stipulation for the payment of interest; and Petitioners, Present:
(b) that the agreement for the payment of interest has PUNO, C.J., Chairperson,
been reduced in writing.21Considering that the - v e r s u s - SANDOVAL-GUTIERREZ,
promissory notes contained no stipulation on the CORONA,
payment of monetary interest, monetary interest A
cannot be validly imposed. ZCUNA
and
The CA properly imposed compensatory interest to LEON
offset the delay in the respondents' performance of ARDO-DE
their obligation. Nonetheless, the imposition of the CASTRO, JJ.
legal rate of interest should be modified to conform to NG SHEUNG NGOR * doing *

the prevailing jurisprudence. The rate of 12% per business under the name
annum imposed by the CA was the rate set in and style KEN MARKETING, Promulgated:
accordance with Eastern Shipping Lines, Inc., v. Court KEN APPLIANCE DIVISION,
of Appeals.22 In the meanwhile, Bangko Sentral ng INC. and BENJAMIN E. GO,
Pilipinas Monetary Board Resolution No. 796 dated Respondents. December 19, 2007
May 16, 2013, amending Section 2 of Circular No.
905, Series of 1982, and Circular No. 799, Series of
2013, has lowered to 6% per annum the legal rate of x-------------------------------------
interest for a loan or forbearance of money, goods or - - - - - - -- - - - - - - x
credit starting July 1, 2013. This revision is expressly
recognized in Nacar v. Gallery Frames.23 It should be DECISION
noted, however, that imposition of the legal rate of
interest at 6% per annum is prospective in application. CORONA, J.:

Accordingly, the legal rate of interest on the This petition for review on certiorari seeks to set
[1]

outstanding obligation of P43,492.15 as of June 28, aside the decision of the Court of Appeals (CA) in
[2]

1990, as the CA found, should be as follows: (a) from CA-G.R. SP No. 83112 and its resolution denying [3]

the time of demand on October 13, 1994 until June 30, reconsideration.
2013, the legal rate of interest was 12% per On October 7, 2001, respondents Ng Sheung
annum conformably with Eastern Shipping Ngor, Ken Appliance Division, Inc. and Benjamin E.
[4]

lines; and (b) following Nacar, from July 1, 2013 until Go filed an action for annulment and/or reformation of
full payment, the legal interest is 6% per annum. documents and contracts against petitioner Equitable
[5]

PCI Bank (Equitable) and its employees, Aimee Yu

WHEREFORE, the Court AFFIRMS the decision and Bejan Lionel Apas, in the Regional Trial Court
promulgated on October 20, 2003 subject to (RTC), Branch 16 of Cebu City. They claimed that
[6]

the MODIFICATION that the amount of P43,492.l5 Equitable induced them to avail of its peso and dollar
due from the respondents shall earn legal interest of credit facilities by offering low interest rates so they
[7]

12% per annum reckoned from October 13, 1994 until accepted Equitable's proposal and signed the bank's
 108
pre-printed promissory notes on various dates [m]illion [p]esos as moral and
beginning 1996. They, however, were unaware that the exemplary damages;
documents contained identical escalation clauses
granting Equitable authority to increase interest rates E) Ordering [Equitable, Aimee
without their consent. [8]
Yu and Bejan Lionel Apas],
jointly and severally, to pay
Equitable, in its answer, asserted that respondents [respondents'] attorney's fees in
knowingly accepted all the terms and conditions the sum of P300,000; litigation
contained in the promissory notes. In fact, they [9]
expenses in the sum of P50,000
continuously availed of and benefited from Equitable's and the cost of suit;
credit facilities for five years. [10]

F) Directing plaintiffs Ng Sheung

After trial, the RTC upheld the validity of the Ngor and Ken Marketing to pay
promissory notes. It found that, in 2001 alone, [Equitable] the unpaid principal
Equitable restructured respondents' loans amounting to obligation for the peso loan as
US$228,200 and P1,000,000. The trial court,
[11]
well as the unpaid obligation for
however, invalidated the escalation clause contained the dollar denominated loan;
therein because it violated the principle of mutuality of G) Directing plaintiff Ng Sheung
contracts. Nevertheless, it took judicial notice of the
[12]
Ngor and Ken Marketing to pay
steep depreciation of the peso during the intervening [Equitable] interest as follows:
period and declared the existence of extraordinary
[13]

deflation. Consequently, the RTC ordered the use of

[14]
1) 12% per annum for the
the 1996 dollar exchange rate in computing peso loans;
respondents' dollar-denominated loans. Lastly,
[15]

because the business reputation of respondents was 2) 8% per annum for the
(allegedly) severely damaged when Equitable froze dollar loans. The basis for
their accounts, the trial court awarded moral and
[16]
the payment of the dollar
exemplary damages to them. [17]
obligation is the conversion
rate of P26.50 per dollar
The dispositive portion of the February 5, 2004 RTC availed of at the time of
decision provided:
[18]
incurring of the obligation in
WHEREFORE, premises considered, accordance with Article
judgment is hereby rendered: 1250 of the Civil Code of
the Philippines;
A) Ordering [Equitable] to
reinstate and return the amount H) Dismissing [Equitable's]
of [respondents'] deposit placed counterclaim except the
on hold status; payment of the aforestated
unpaid principal loan
B) Ordering [Equitable] to pay obligations and interest.
[respondents] the sum of P12
[m]illion [p]esos as moral SO ORDERED. [19]

damages;

C) Ordering [Equitable] to pay Equitable and respondents filed their respective

[respondents] the sum of P10 notices of appeal. [20]

[m]illion [p]esos as exemplary

damages; In the March 1, 2004 order of the RTC, both notices
were denied due course because Equitable and
D) Ordering defendants Aimee Yu respondents failed to submit proof that they paid their
and Bejan [Lionel] Apas to pay respective appeal fees. [21]

[respondents], jointly and

severally, the sum of [t]wo
 109
WHEREFORE, premises
considered, the appeal interposed by On October 28, 2005, the CA dismissed the petition
defendants from the Decision in the for certiorari. It found Equitable guilty of forum
[37]

above-entitled case is DENIED due shopping because the bank filed its petition for
course. As of February 27, 2004, the certiorari in the CA several hours before withdrawing
Decision dated February 5, 2004, is its petition for relief in the RTC. Moreover, [38]

considered final and executory in so
far as [Equitable, Aimee Yu and
Bejan Lionel Apas] are concerned.
(emphasis supplied)
[22]
Equitable failed to disclose, both in the statement of
material dates and certificate of non-forum shopping
(attached to its petition for certiorari in the CA), that it
had a pending petition for relief in the RTC. [39]

Equitable moved for reconsideration but it was [40]

denied. Thus, this petition.

[41]

Equitable moved for the reconsideration of the March

1, 2004 order of the RTC on the ground that it did in
[23]
fact pay the appeal fees. Respondents, on the other
hand, prayed for the issuance of a writ of execution.
Equitable asserts that it was not guilty of forum
shopping because the petition for relief was withdrawn
[24]
on the same day the petition for certiorari was filed.
It likewise avers that its petition for certiorari was
[42]

On March 24, 2004, the RTC issued an omnibus
order denying Equitable's motion for reconsideration
for lack of merit and ordered the issuance of a writ
[25]
of execution in favor of respondents. According to
[26]
the RTC, because respondents did not move for the
reconsideration of the previous order (denying due
meritorious because the RTC committed grave abuse
of discretion in issuing the March 24, 2004 omnibus
order which was based on an erroneous assumption.
The March 1, 2004 order denying its notice of appeal
for non payment of appeal fees was erroneous because
it had in fact paid the required fees. Thus, the RTC,
[43]

course to the parties notices of appeal), the February

[27]
by issuing its March 24, 2004 omnibus order,
5, 2004 decision became final and executory as to both effectively prevented Equitable from appealing the
parties and a writ of execution against Equitable was patently wrong February 5, 2004 decision. [44]

in order. [28]

This petition is meritorious.

A writ of execution was thereafter issued and three
[29]

real properties of Equitable were levied upon. [30]

On March 26, 2004, Equitable filed a petition for relief E

in the RTC from the March 1, 2004 order. It, [31]
Q
however, withdrew that petition on March 30, U
2004 and instead filed a petition for certiorari with
[32]
I
an application for an injunction in the CA to enjoin the T
implementation and execution of the March 24, 2004 A
omnibus order. [33]
B
L
On June 16, 2004, the CA granted Equitable's E
application for injunction. A writ of preliminary
injunction was correspondingly issued. [34]
W
A
Notwithstanding the writ of injunction, the properties S
of Equitable previously levied upon were sold in a
public auction on July 1, 2004. Respondents were the N
highest bidders and certificates of sale were issued to O
them. [35]
T

On August 10, 2004, Equitable moved to annul the G

July 1, 2004 auction sale and to cite the sheriffs who U
conducted the sale in contempt for proceeding with the I
auction despite the injunction order of the CA. [36]
L
 110
T petition for relief in the RTC, it rectified what was
Y doubtlessly a careless oversight by withdrawing the
petition for relief just a few hours after it filed its
O petition for certiorari in the CA ― a clear indication
F that it had no intention of maintaining the two actions
at the same time.
F
O
R T
U H
M E

S T
H R
O I
P A
P L
I
N C
G O
U
R
Forum shopping exists when two or more actions T
involving the same transactions, essential facts and
circumstances are filed and those actions raise C
identical issues, subject matter and causes of action. O
The test is whether, in two or more pending cases,
[45]
M
there is identity of parties, rights or causes of actions M
and reliefs.
[46]
I
T
Equitable's petition for relief in the RTC and its T
petition for certiorari in the CA did not have identical E
causes of action. The petition for relief from the denial D
of its notice of appeal was based on the RTCs
judgment or final order preventing it from taking an G
appeal by fraud, accident, mistake or excusable R
negligence. On the other hand, its petition for
[47]
A
certiorari in the CA, a special civil action, sought to V
correct the grave abuse of discretion amounting to lack E
of jurisdiction committed by the RTC. [48]

A
In a petition for relief, the judgment or final B
order is rendered by a court with competent U
jurisdiction. In a petition for certiorari, the order is S
rendered by a court without or in excess of its E
jurisdiction.
O
Moreover, Equitable substantially complied with the F
rule on non-forum shopping when it moved to
withdraw its petition for relief in the RTC on the same D
day (in fact just four hours and forty minutes after) it I
filed the petition for certiorari in the CA. Even if S
Equitable failed to disclose that it had a pending C
 111
R 4
E
T O
I R
O D
N E
R
I S
N
Section 1, Rule 65 of the Rules of Court
I provides:
S
S Section 1. Petition for
U Certiorari. When any tribunal, board
I or officer exercising judicial or quasi-
N judicial function has acted without or
G in excess of its or his jurisdiction,
or with grave abuse of discretion
I amounting to lack or excess of
T jurisdiction, and there is no appeal,
S nor any plain, speedy or adequate
remedy in the ordinary course of law,
M a person aggrieved thereby may file a
A verified petition in the proper court,
R alleging the facts with certainty and
C praying that judgment be rendered
H annulling or modifying the proceedings
of such tribunal, board or officer, and
1 granting such incidental reliefs as law
, and justice may require.

2 The petition shall be accompanied by a

0 certified true copy of the judgment,
0 order or resolution subject thereof,
4 copies of all pleadings and documents
relevant and pertinent thereto, and a
A sworn certificate of non-forum
N shopping as provided in the third
D paragraph of Section 3, Rule 46.

M There are two substantial requirements in a petition for

A certiorari. These are:
R
C 1. that the tribunal, board or
H officer exercising judicial or
quasi-judicial functions acted
2 without or in excess of his or
4 its jurisdiction or with grave
, abuse of discretion amounting
to lack or excess of
2 jurisdiction; and
0
0
 112
2. that there is no appeal or any E
plain, speedy and adequate Q
remedy in the ordinary course U
of law. I
T
For a petition for certiorari premised on grave abuse of A
discretion to prosper, petitioner must show that the B
public respondent patently and grossly abused his L
discretion and that abuse amounted to an evasion of E
positive duty or a virtual refusal to perform a duty
enjoined by law or to act at all in contemplation of law, R
as where the power was exercised in an arbitrary and A
despotic manner by reason of passion or hostility. [49]
I
S
The March 1, 2004 order denied due course to the E
notices of appeal of both Equitable and respondents. D
However, it declared that the February 5, 2004
decision was final and executory only with respect P
to Equitable. As expected, the March 24, 2004
[50]
U
omnibus order denied Equitable's motion for R
reconsideration and granted respondents'motion for the E
issuance of a writ of execution.[51]

Q
The March 1, 2004 and March 24, 2004 orders U
of the RTC were obviously intended to prevent E
Equitable, et al. from appealing the February 5, 2004 S
decision. Not only that. The execution of the decision T
was undertaken with indecent haste, effectively I
obviating or defeating Equitable's right to avail of O
possible legal remedies. No matter how we look at it, N
the RTC committed grave abuse of discretion in S
rendering those orders.
O
With regard to whether Equitable had a plain, speedy F
and adequate remedy in the ordinary course of law, we
hold that there was none. The RTC denied due course L
to its notice of appeal in the March 1, 2004 order. It A
affirmed that denial in the March 24, 2004 omnibus W
order. Hence, there was no way Equitable could have
possibly appealed the February 5, 2004 decision. [52]
I
Although Equitable filed a petition for relief from the N
March 24, 2004 order, that petition was not a plain,
speedy and adequate remedy in the ordinary course of I
law. A petition for relief under Rule 38 is an
[53]
T
equitable remedy allowed only in exceptional S
circumstances or where there is no other available or
adequate remedy. [54]
P
E
Thus, we grant Equitable's petition for certiorari and T
consequently give due course to its appeal. I
T
I
O
 113
N E
F
O V
R A
L
R I
E D
V
I The RTC upheld the validity of the promissory
E notes despite respondents assertion that those
W documents were contracts of adhesion.

The jurisdiction of this Court in Rule 45 petitions is A contract of adhesion is a contract whereby almost all
limited to questions of law. There is a question of
[55]
of its provisions are drafted by one party. The [58]

law when the doubt or controversy concerns the participation of the other party is limited to affixing his
correct application of law or jurisprudence to a certain signature or his adhesion to the contract. For this
[59]

set of facts; or when the issue does not call for the reason, contracts of adhesion are strictly construed
probative value of the evidence presented, the truth or against the party who drafted it. [60]

falsehood of facts being admitted. [56]

It is erroneous, however, to conclude that contracts of

Equitable does not assail the factual findings of the
trial court. Its arguments essentially focus on the
nullity of the RTCs February 5, 2004 decision.
Equitable points out that that decision was patently
erroneous, specially the exorbitant award of
damages, as it was inconsistent with existing law and
jurisprudence.[57]
adhesion are invalid per se. They are, on the contrary,
as binding as ordinary contracts. A party is in reality
free to accept or reject it. A contract of adhesion
becomes void only when the dominant party takes
advantage of the weakness of the other party,
completely depriving the latter of the opportunity to
bargain on equal footing. [61]

That was not the case here. As the trial court noted, if
T the terms and conditions offered by Equitable had been
H truly prejudicial to respondents, they would have
E walked out and negotiated with another bank at the
first available instance. But they did not. Instead, they
P continuously availed of Equitable's credit facilities for
R five long years.
O
M While the RTC categorically found that respondents
I had outstanding dollar- and peso-denominated loans
S with Equitable, it, however, failed to ascertain the total
S amount due (principal, interest and penalties, if any) as
O of July 9, 2001. The trial court did not explain how it
R arrived at the amounts of US$228,200 and P1,000,000.
Y In Metro Manila Transit Corporation v. D.M.
[62]

Consunji, we reiterated that this Court is not a trier

[63]

N of facts and it shall pass upon them only for

O compelling reasons which unfortunately are not
T present in this case. Hence, we ordered the partial
[64]

E remand of the case for the sole purpose of determining

S the amount of actual damages. [65]

W
E
R
 114
I
T
Y
E
S O
C F
A
L C
A O
T N
I T
O R
N A
C
C T
L S
A
U Escalation clauses are not void per se. However, one
S which grants the creditor an unbridled right to adjust
E the interest independently and upwardly, completely
depriving the debtor of the right to assent to an
V important modification in the agreement is void.
I Clauses of that nature violate the principle of
O mutuality of contracts. Article 1308 of the Civil
[66] [67]

L Code holds that a contract must bind both contracting

A parties; its validity or compliance cannot be left to the
T will of one of them.[68]

E
D For this reason, we have consistently held that a valid
escalation clause provides:
T
H 1. that the rate of interest will
E only be increased if the
applicable maximum rate of
P interest is increased by law or
R by the Monetary Board; and
I
N 2. that the stipulated rate of
C interest will be reduced if
I the applicable maximum rate of
P interest is reduced by law or by
L the Monetary Board (de-
E escalation clause). [69]

O
F The RTC found that Equitable's promissory notes
uniformly stated:
M
U If subject promissory note is extended,
T the interest for subsequent extensions
U shall be at such rate as shall be
A determined by the bank. [70]

L
 115
Equitable dictated the interest rates if the term D
(or period for repayment) of the loan was extended. E
Respondents had no choice but to accept them. This F
was a violation of Article 1308 of the Civil Code. L
Furthermore, the assailed escalation clause did not A
contain the necessary provisions for validity, that is, it T
neither provided that the rate of interest would be I
increased only if allowed by law or the Monetary O
Board, nor allowed de-escalation. For these reasons, N
the escalation clause was void.

With regard to the proper rate of interest, in New
Sampaguita Builders v. Philippine National Bank we [71]
held that, because the escalation clause was annulled,
the principal amount of the loan was subject to the
original or stipulated rate of interest. Upon maturity,
the amount due was subject to legal interest at the rate
of 12% per annum. [72]
Consequently, respondents should pay Equitable the
Extraordinary inflation exists when there is an unusual
decrease in the purchasing power of currency (that is,
beyond the common fluctuation in the value of
currency) and such decrease could not be reasonably
foreseen or was manifestly beyond the contemplation
of the parties at the time of the obligation.
Extraordinary deflation, on the other hand, involves an
inverse situation.[73]

interest rates of 12.66% p.a. for their dollar- Article 1250 of the Civil Code provides:
denominated loans and 20% p.a. for their peso-
denominated loans from January 10, 2001 to July 9,
2001. Thereafter, Equitable was entitled to legal Article 1250. In case an extraordinary
interest of 12% p.a. on all amounts due. inflation or deflation of the currency
stipulated should intervene, the value
of the currency at the time of the
T establishment of the obligation shall
H be the basis of payment, unless there
E is an agreement to the contrary.
R
E
For extraordinary inflation (or deflation) to
W affect an obligation, the following requisites must be
A proven:
S 1. that there was an official
declaration of extraordinary
N inflation or deflation from the
O Bangko Sentral ng Pilipinas
(BSP); [74]

E
X 2. that the obligation was
T contractual in nature; and
[75]

R
A 3. that the parties expressly
O agreed to consider the effects
R of the extraordinary inflation or
D deflation. [76]

I
N
A Despite the devaluation of the peso, the BSP never
R declared a situation of extraordinary
Y inflation. Moreover, although the obligation in this
instance arose out of a contract, the parties did not
 116
agree to recognize the effects of extraordinary inflation E
(or deflation). The RTC never mentioned that there
[77]
D
was a such stipulation either in the promissory note or B
loan agreement. Therefore, respondents should pay A
their dollar-denominated loans at the exchange rate S
fixed by the BSP on the date of maturity. [78]
I
S

T Moral damages are in the category of an award

H designed to compensate the claimant for actual injury
E suffered, not to impose a penalty to the wrongdoer.
To be entitled to moral damages, a claimant must
[79]

A prove:
W
A
R 1. That he or she suffered
D besmirched reputation, or
physical, mental or
O psychological suffering
F sustained by the claimant;

M 2. That the defendant

O committed a wrongful act or
R omission;
A
L 3. That the wrongful act or
omission was the proximate
A cause of the damages the
N claimant sustained;
D
4. The case is predicated on any
E of the instances expressed or
X envisioned by Article
E 2219 and 2220 .
[80] [81] [82]

M
P
L In culpa contractual or breach of contract,
A moral damages are recoverable only if the defendant
R acted fraudulently or in bad faith or in wanton
Y disregard of his contractual obligations. The breach [83]

must be wanton, reckless, malicious or in bad faith,

D and oppressive or abusive. [84]

A The RTC found that respondents did not pay Equitable

M the interest due on February 9, 2001 (or any month
A thereafter prior to the maturity of the loan) or the [85]

G amount due (principal plus interest) due on July 9,

E 2001. Consequently, Equitable applied respondents'
[86]

S deposits to their loans upon maturity.

L The relationship between a bank and its depositor is

A that of creditor and debtor. For this reason, a bank
[87]

C has the right to set-off the deposits in its hands for the
K payment of a depositor's indebtedness. [88]
 117
2. ordering respondents Ng Sheung
Respondents indeed defaulted on their obligation. For Ngor, doing business under the name
this reason, Equitable had the option to exercise its and style of Ken Marketing, Ken
legal right to set-off or compensation. However, the Appliance Division, Inc. and Benjamin
RTC mistakenly (or, as it now appears, deliberately) E. Go to pay petitioner Equitable PCI
concluded that Equitable acted fraudulently or in bad Bank interest at:
faith or in wanton disregard of its contractual a) 12.66% p.a. with respect to
obligations despite the absence of proof. The their dollar-denominated loans
undeniable fact was that, whatever damage from January 10, 2001 to July 9,
respondents sustained was purely the consequence of 2001;
their failure to pay their loans. There was therefore b) 20% p.a. with respect to
absolutely no basis for the award of moral damages to their peso-denominated
them. loans from January 10, 2001 to
July 9, 2001; [91]

Neither was there reason to award exemplary damages. c) pursuant to our ruling
Since respondents were not entitled to moral damages, in Eastern Shipping Lines v.
neither should they be awarded exemplary damages. Court of Appeals, the total
[92]

And if respondents were not entitled to moral and

[89]
amount due on July 9, 2001
exemplary damages, neither could they be awarded shall earn legal interest at
attorney's fees and litigation expenses.
[90]
12% p.a. from the time
petitioner Equitable PCI Bank
ACCORDINGLY, the petition is hereby GRANTED. demanded payment, whether
judicially or extra-judicially;
The October 28, 2005 decision and February 3, 2006 and
resolution of the Court of Appeals in CA-G.R. SP No. d) after this Decision becomes
83112 are hereby REVERSED and SET ASIDE. final and executory, the
applicable rate shall be
The March 24, 2004 omnibus order of the Regional 12% p.a. until full satisfaction;
Trial Court, Branch 16, Cebu City in Civil Case No. 3. all other claims and counterclaims
CEB-26983 is hereby ANNULLED for being are dismissed.
rendered with grave abuse of discretion amounting to As a starting point, the Regional Trial Court, Branch
lack or excess of jurisdiction. All proceedings 16 of Cebu City shall compute the exact amounts due
undertaken pursuant thereto are likewise declared null on the respective dollar-denominated and peso-
and void. denominated loans, as of July 9, 2001, of respondents
Ng Sheung Ngor, doing business under the name and
The March 1, 2004 order of the Regional Trial Court, style of Ken Marketing, Ken Appliance Division and
Branch 16 of Cebu City in Civil Case No. CEB-26983 Benjamin E. Go.
is hereby SET ASIDE. The appeal of petitioners
Equitable PCI Bank, Aimee Yu and Bejan Lionel Apas SO ORDERED.
is therefore given due course.

The February 5, 2004 decision of the Regional Trial

Court, Branch 16 of Cebu City in Civil Case No. CEB-
Republic of the Philippines
26983 is accordingly SET ASIDE. New judgment is
Supreme Court
hereby entered:
Manila
1. ordering respondents Ng Sheung
THIRD DIVISION
Ngor, doing business under the name
and style of Ken Marketing, Ken EUFEMIA ALMEDA and G.R. No. 150806
Appliance Division, Inc. and Benjamin ROMEL ALMEDA,
E. Go to pay petitioner Equitable PCI Petitioners, Present:
Bank the principal amount of their
dollar- and peso-denominated loans; YNARES-SAN

- versus -
BATHALA MARKETING
INDUSTRIES, INC.,
Respondent.
x---------------------------------------------------------------------
-------------------------x
D E C I S I O N
NACHURA, J.:
This is a Petition for Review
on Certiorari under Rule 45 of the Rules of Court, of
the Decision of the Court of Appeals (CA),
[1]
dated September 3, 2001, in CA-G.R. CV No. 67784,
and its Resolution dated November 19, 2001. The
[2]
assailed Decision affirmed with modification the
Decision of
[3]
the Regional Trial Court
(RTC), Makati City, Branch 136, dated May 9, 2000 in
Civil Case No. 98-411.
Sometime in May 1997, respondent Bathala Marketing
Industries, Inc., as lessee, represented by its president
Ramon H. Garcia, renewed its Contract of Lease with
Ponciano L. Almeda (Ponciano), as lessor, husband of
petitioner Eufemia and father of petitioner Romel
Almeda. Under the said contract, Ponciano agreed to
lease a portion of the Almeda Compound, located at
2208 Pasong Tamo Street, Makati City, consisting of
7,348.25 square meters, for a monthly rental
of P1,107,348.69, for a term of four (4) years from
May 1, 1997 unless sooner terminated as provided in
the contract. The contract of lease contained the
[5]
following pertinent provisions which gave rise to the
instant case:
SIXTH It is expressly understood by
the parties hereto that the rental rate
stipulated is based on the present rate of
assessment on the property, and that in
case the assessment should hereafter be
increased or any new tax, charge or
burden be imposed by authorities on the
lot and building where the leased
118
Chairperson, premises are located, LESSEE shall
AUSTRIA-MARTINEZ,pay, when the rental herein provided
CORONA,* becomes due, the additional rental or
NACHURA, and charge corresponding to the portion
REYES, JJ. hereby leased; provided, however, that
in the event that the present assessment
or tax on said property should be
Promulgated: reduced, LESSEE shall be entitled to
reduction in the stipulated rental,
January 28, 2008 likewise in proportion to the portion
leased by him;
SEVENTH In case an extraordinary
inflation or devaluation of Philippine
Currency should supervene, the value
of Philippine peso at the time of the
establishment of the obligation shall be
the basis of payment;[6]
During the effectivity of the contract, Ponciano
died. Thereafter, respondent dealt with petitioners. In a
letter dated December 29, 1997, petitioners advised
[7]
respondent that the former shall assess and collect
Value Added Tax (VAT) on its monthly rentals. In
response, respondent contended that VAT may not be
imposed as the rentals fixed in the contract of lease
were supposed to include the VAT therein, considering
that their contract was executed on May 1, 1997 when
the VAT law had long been in effect. [8]
On January 26, 1998, respondent received
another letter from petitioners informing the former
that its monthly rental should be increased by 73%
[4]
pursuant to condition No. 7 of the contract and Article
1250 of the Civil Code. Respondent opposed
petitioners demand and insisted that there was no
extraordinary inflation to warrant the application of
Article 1250 in light of the pronouncement of this
Court in various cases.[9]
Respondent refused to pay the VAT and
adjusted rentals as demanded by petitioners but
continued to pay the stipulated amount set forth in
their contract.
On February 18, 1998, respondent instituted an
action for declaratory relief for purposes of
determining the correct interpretation of condition
Nos. 6 and 7 of the lease contract to prevent damage
and prejudice. The case was docketed as Civil Case
[10]
No. 98-411 before the RTC of Makati.
On March 10, 1998, petitioners in turn filed an
action for ejectment, rescission and damages against

respondent for failure of the latter to vacate the
premises after the demand made by the former.
Before respondent could file an answer, petitioners
[11]
filed a Notice of Dismissal. They subsequently
[12]
refiled the complaint before the Metropolitan Trial
Court of Makati; the case was raffled to Branch 139
and was docketed as Civil Case No. 53596.
Petitioners later moved for the dismissal of the
declaratory relief case for being an improper remedy
considering that respondent was already in breach of
the obligation and that the case would not end the
litigation and settle the rights of the parties. The trial
court, however, was not persuaded, and consequently,
denied the motion.
After trial on the merits, on May 9, 2000, the
RTC ruled in favor of respondent and against
petitioners. The pertinent portion of the decision reads:
WHEREFORE, premises
considered, this Court renders judgment
on the case as follows:
1) declaring that plaintiff is not
liable for the payment of Value-Added
Tax (VAT) of 10% of the rent for [the]
use of the leased premises;
2) declaring that plaintiff is not
liable for the payment of any rental
adjustment, there being no
[extraordinary] inflation or devaluation,
as provided in the Seventh Condition of
the lease contract, to justify the same;
3) holding defendants liable to
plaintiff for the total amount
of P1,119,102.19, said amount
representing payments erroneously
made by plaintiff as VAT charges and
rental adjustment for the months of
January, February and March, 1999;
and
4) holding defendants liable to
plaintiff for the amount
of P1,107,348.69, said amount
representing the balance of plaintiffs
rental deposit still with defendants.
SO ORDERED. [13]
119
The trial court denied petitioners their right to pass on
to respondent the burden of paying the VAT since it
was not a new tax that would call for the application of
the sixth clause of the contract. The court, likewise,
denied their right to collect the demanded increase in
rental, there being no extraordinary inflation or
devaluation as provided for in the seventh clause of the
contract. Because of the payment made by respondent
of the rental adjustment demanded by petitioners, the
court ordered the restitution by the latter to the former
of the amounts paid, notwithstanding the well-
established rule that in an action for declaratory relief,
other than a declaration of rights and obligations,
affirmative reliefs are not sought by or awarded to the
parties.
Petitioners elevated the aforesaid case to the Court of
Appeals which affirmed with modification the RTC
decision.The fallo reads:
WHEREFORE, premises considered,
the present appeal is DISMISSED and
the appealed decision in Civil Case No.
98-411 is hereby AFFIRMED with
MODIFICATION in that the order for
the return of the balance of the rental
deposits and of the amounts
representing the 10% VAT and rental
adjustment, is hereby DELETED.
No pronouncement as to costs.
SO ORDERED. [14]
The appellate court agreed with the conclusions of law
and the application of the decisional rules on the
matter made by the RTC. However, it found that the
trial court exceeded its jurisdiction in granting
affirmative relief to the respondent, particularly the
restitution of its excess payment.
Petitioners now come before this Court raising the
following issues:
I.
WHETHER OR NOT ARTICLE 1250
OF THE NEW CIVIL CODE IS
APPLICABLE TO THE CASE AT
BAR.
II.
WHETHER OR NOT THE
DOCTRINE ENUNCIATED IN
FILIPINO PIPE AND FOUNDRY

CORP. VS. NAWASA CASE, 161
SCRA 32 AND COMPANION CASES
ARE (sic) APPLICABLE IN THE
CASE AT BAR.
III.
WHETHER OR NOT IN NOT
APPLYING THE DOCTRINE IN THE
CASE OF DEL ROSARIO VS. THE
SHELL COMPANY OF
THE PHILIPPINES, 164 SCRA 562,
THE HONORABLE COURT OF
APPEALS SERIOUSLY ERRED ON A
QUESTION OF LAW.
IV.
WHETHER OR NOT THE FINDING
OF THE HONORABLE COURT OF
APPEALS THAT RESPONDENT IS
NOT LIABLE TO PAY THE 10%
VALUE ADDED TAX IS IN
ACCORDANCE WITH THE
MANDATE OF RA 7716.
V.
WHETHER OR NOT
DECLARATORY RELIEF IS PROPER
SINCE PLAINTIFF-APPELLEE WAS
IN BREACH WHEN THE PETITION
FOR DECLARATORY RELIEF WAS
FILED BEFORE THE TRIAL COURT.
In fine, the issues for our resolution are as
follows: 1) whether the action for declaratory relief is
proper; 2) whether respondent is liable to pay 10%
VAT pursuant to Republic Act (RA) 7716; and 3)
whether the amount of rentals due the petitioners
should be adjusted by reason of extraordinary inflation
or devaluation.
Declaratory relief is defined as an action by any
person interested in a deed, will, contract or other
written instrument, executive order or resolution, to
determine any question of construction or validity
arising from the instrument, executive order or
regulation, or statute, and for a declaration of his rights
and duties thereunder. The only issue that may be
raised in such a petition is the question of construction
or validity of provisions in an instrument or
statute. Corollary is the general rule that such an action
must be justified, as no other adequate relief or remedy
is available under the circumstances. [15]
120
Decisional law enumerates the requisites of an
action for declaratory relief, as follows: 1) the subject
matter of the controversy must be a deed, will, contract
or other written instrument, statute, executive order or
regulation, or ordinance; 2) the terms of said
documents and the validity thereof are doubtful and
require judicial construction; 3) there must have been
no breach of the documents in question; 4) there must
be an actual justiciable controversy or the ripening
seeds of one between persons whose interests are
adverse; 5) the issue must be ripe for judicial
determination; and 6) adequate relief is not available
through other means or other forms of action or
proceeding. [16]
It is beyond cavil that the foregoing requisites
are present in the instant case, except that petitioners
insist that respondent was already in breach of the
contract when the petition was filed.
We do not agree.
After petitioners demanded payment of adjusted
rentals and in the months that followed, respondent
complied with the terms and conditions set forth in
their contract of lease by paying the rentals stipulated
therein. Respondent religiously fulfilled its obligations
to petitioners even during the pendency of the present
suit. There is no showing that respondent committed an
act constituting a breach of the subject contract of
lease. Thus, respondent is not barred from instituting
before the trial court the petition for declaratory relief.
Petitioners claim that the instant petition is not proper
because a separate action for rescission, ejectment and
damages had been commenced before another court;
thus, the construction of the subject contractual
provisions should be ventilated in the same forum.
We are not convinced.
It is true that in Panganiban v. Pilipinas Shell
Petroleum Corporation we held that the petition for
[17]
declaratory relief should be dismissed in view of the
pendency of a separate action for unlawful
detainer. However, we cannot apply the same ruling to
the instant case. In Panganiban, the unlawful detainer
case had already been resolved by the trial court before
the dismissal of the declaratory relief case; and it was
petitioner in that case who insisted that the action for
declaratory relief be preferred over the action for
unlawful detainer. Conversely, in the case at bench, the
trial court had not yet resolved the rescission/ejectment
case during the pendency of the declaratory relief

petition. In fact, the trial court, where the rescission
case was on appeal, itself initiated the suspension of
the proceedings pending the resolution of the action for
declaratory relief.
We are not unmindful of the doctrine enunciated
in Teodoro, Jr. v. Mirasol where the declaratory relief
[18]
action was dismissed because the issue therein could
be threshed out in the unlawful detainer suit. Yet,
again, in that case, there was already a breach of
contract at the time of the filing of the declaratory
relief petition. This dissimilar factual milieu proscribes
the Court from applying Teodoro to the instant case.
Given all these attendant circumstances, the Court is
disposed to entertain the instant declaratory relief
action instead of dismissing it, notwithstanding the
pendency of the ejectment/rescission case before the
trial court. The resolution of the present petition would
write finis to the parties dispute, as it would settle once
and for all the question of the proper interpretation of
the two contractual stipulations subject of this
controversy.
Now, on the substantive law issues.
Petitioners repeatedly made a demand on
respondent for the payment of VAT and for rental
adjustment allegedly brought about by extraordinary
inflation or devaluation. Both the trial court and the
appellate court found no merit in petitioners claim. We
see no reason to depart from such findings.
As to the liability of respondent for the payment of
VAT, we cite with approval the ratiocination of the
appellate court, viz.:
Clearly, the person primarily liable for
the payment of VAT is the lessor who
may choose to pass it on to the lessee or
absorb the same. Beginning January 1,
1996, the lease of real property in the
ordinary course of business, whether
for commercial or residential use, when
the gross annual receipts
exceed P500,000.00, is subject to 10%
VAT. Notwithstanding the mandatory
payment of the 10% VAT by the lessor,
the actual shifting of the said tax
burden upon the lessee is clearly
optional on the part of the lessor, under
the terms of the statute. The word may
in the statute, generally speaking,
121
denotes that it is directory in nature. It
is generally permissive only and
operates to confer discretion.In this
case, despite the applicability of the
rule under Sec. 99 of the NIRC, as
amended by R.A. 7716, granting the
lessor the option to pass on to the lessee
the 10% VAT, to existing contracts of
lease as of January 1, 1996, the original
lessor, Ponciano L. Almeda did not
charge the lessee-appellee the 10% VAT
nor provided for its additional
imposition when they renewed the
contract of lease in May 1997. More
significantly, said lessor did not
actually collect a 10% VAT on the
monthly rental due from the lessee-
appellee after the execution of the May
1997 contract of lease. The inevitable
implication is that the lessor intended
not to avail of the option granted him
by law to shift the 10% VAT upon the
lessee-appellee. x x x.[19]
In short, petitioners are estopped from shifting to
respondent the burden of paying the VAT.
Petitioners reliance on the sixth condition of the
contract is, likewise, unavailing. This provision clearly
states that respondent can only be held liable for new
taxes imposed after the effectivity of the contract of
lease, that is, after May 1997, and only if they pertain
to the lot and the building where the leased premises
are located.Considering that RA 7716 took effect in
1994, the VAT cannot be considered as a new tax in
May 1997, as to fall within the coverage of the sixth
stipulation.
Neither can petitioners legitimately demand rental
adjustment because of extraordinary inflation or
devaluation.
Petitioners contend that Article 1250 of the
Civil Code does not apply to this case because the
contract stipulation speaks of extraordinary inflation or
devaluation while the Code speaks of extraordinary
inflation or deflation. They insist that the doctrine
pronounced in Del Rosario v. The Shell Company,
Phils. Limited should apply.
[20]
Essential to contract construction is the ascertainment
of the intention of the contracting parties, and such
determination must take into account the

contemporaneous and subsequent acts of the
parties. This intention, once ascertained, is deemed an
integral part of the contract.
[21]
While, indeed, condition No. 7 of the contract speaks
of extraordinary inflation or devaluation as compared
to Article 1250s extraordinary inflation or deflation,
we find that when the parties used the term
devaluation, they really did not intend to depart from
Article 1250 of the Civil Code. Condition No. 7 of the
contract should, thus, be read in harmony with the
Civil Code provision.
That this is the intention of the parties is evident from
petitioners letter dated January 26, 1998, where, in
[22]
demanding rental adjustment ostensibly based on
condition No. 7, petitioners made explicit reference to
Article 1250 of the Civil Code, even quoting the law
verbatim. Thus, the application of Del Rosario is not
warranted. Rather, jurisprudential rules on the
application of Article 1250 should be considered.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or
deflation of the currency stipulated
should supervene, the value of the
currency at the time of the establishment
of the obligation shall be the basis of
payment, unless there is an agreement to
the contrary.
Inflation has been defined as the sharp increase of
money or credit, or both, without a corresponding
increase in business transaction. There is inflation
when there is an increase in the volume of money and
credit relative to available goods, resulting in a
substantial and continuing rise in the general price
level. In a number of cases, this Court had provided
[23]
a discourse on what constitutes extraordinary inflation,
thus:
[E]xtraordinary inflation exists when
there is a decrease or increase in the
purchasing power of the Philippine
currency which is unusual or beyond the
common fluctuation in the value of said
currency, and such increase or decrease
could not have been reasonably foreseen
or was manifestly beyond the
contemplation of the parties at the time
of the establishment of the obligation.
[24]
122
The factual circumstances obtaining in the present case
do not make out a case of extraordinary inflation or
devaluation as would justify the application of Article
1250 of the Civil Code. We would like to stress that the
erosion of the value of the Philippine peso in the past
three or four decades, starting in the mid-sixties, is
characteristic of most currencies. And while the Court
may take judicial notice of the decline in the purchasing
power of the Philippine currency in that span of time,
such downward trend of the peso cannot be considered
as the extraordinary phenomenon contemplated by
Article 1250 of the Civil Code. Furthermore, absent an
official pronouncement or declaration by competent
authorities of the existence of extraordinary inflation
during a given period, the effects of extraordinary
inflation are not to be applied. [25]
WHEREFORE, premises considered, the petition
is DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 67784, dated September 3, 2001, and
its Resolution dated November 19, 2001,
are AFFIRMED.
SO ORDERED.
G.R. No. 176246 February 13, 2009
PREMIERE DEVELOPMENT BANK, Petitioner,
vs.
CENTRAL SURETY & INSURANCE COMPANY, INC., Respondent.
DECISION
NACHURA, J.:
Before us is a petition for review on certiorari assailing the Court
of Appeals (CA) Decision1 in CA-G.R. CV No. 85930, which
reversed and set aside the decision of the Regional Trial Court
(RTC), Branch 132, Makati City in Civil Case No. 0051306.2
On August 20, 1999, respondent Central Surety & Insurance
Company (Central Surety) obtained an industrial loan of
₱6,000,000.00 from petitioner Premiere Development Bank
(Premiere Bank) with a maturity date of August 14, 2000. This
₱6,000,000.00 loan, evidenced by Promissory Note (PN) No.
714-Y,3 stipulates payment of 17% interest per annum payable
monthly in arrears and the principal payable on due date. In
addition, PN No. 714-Y provides for a penalty charge of 24%
interest per annum based on the unpaid amortization/installment
or the entire unpaid balance of the loan. In all, should Central
Surety fail to pay, it would be liable to Premiere Bank for: (1)
unpaid interest up to maturity date; (2) unpaid penalties up to
maturity date; and (3) unpaid balance of the principal.
To secure payment of the ₱6,000,000.00 loan, Central Surety
executed in favor of Premiere Bank a Deed of Assignment with
Pledge4 covering Central Surety’s Membership Fee Certificate
No. 217 representing its proprietary share in Wack Wack Golf
and Country Club Incorporated (Wack Wack Membership). In
both PN No. 714-Y and Deed of Assignment, Constancio T.
Castañeda, Jr. and Engracio T. Castañeda, president and vice-
president of Central Surety, respectively, represented Central
Surety and solidarily bound themselves to the payment of the
obligation.
Parenthetically, Central Surety had another commercial loan with
Premiere Bank in the amount of ₱40,898,000.00 maturing on
October 10, 2001. This loan was, likewise, evidenced by a PN
numbered 376-X5 and secured by a real estate mortgage over

Condominium Certificate of Title No. 8804, Makati City. PN No.
376-X was availed of through a renewal of Central Surety’s prior
loan, then covered by PN No. 367-Z.6 As with the ₱6,000,000.00
loan and the constituted pledge over the Wack Wack
Membership, the ₱40,898,000.00 loan with real estate mortgage
was transacted by Constancio and Engracio Castañeda on behalf
of Central Surety.
It appears that on August 22, 2000, Premiere Bank sent a letter
to Central Surety demanding payment of the ₱6,000,000.00
loan, to wit:
August 22, 2000
CENTRAL SURETY AND INSURANCE CO.
2nd Floor Universalre Bldg.
No. 106 Paseo de Roxas, Legaspi Village
Makati City
Attention: Mr. Constancio T. Castaneda, Jr.
President
Mr. Engracio T. Castaneda
Vice President
-------------------------------------------------
Gentlemen:
This has reference to your overdue loan of ₱6.0 Million.
We regret to inform you that despite efforts to restructure the
same, you have failed up to this time, to submit the required
documents and come up with equity necessary to implement the
restructuring scheme.
In view thereof, we regret that unless the above loan is settled
on or before five (5) days from the date hereof, we shall exercise
our option to have the Stock Certificate No. 217 with Serial No.
1793 duly issued by Wack Wack Golf and Country Club, Inc.
transferred in the name of Premiere Development Bank in
accordance with the terms and conditions of the Deed of
Assignment with Pledge executed in favor of Premiere
Development Bank.
We shall appreciate your prompt compliance.
Very truly yours,
(sgd.)
IGNACIO R. NEBRIDA, JR.
Senior Asst. Vice President/
Business Development Group - Head7
Posthaste, Central Surety responded and sent the following letter
dated August 24, 2000:
24 August 2000
Mr. Ignacio R. Nebrida, Jr.
Senior Asst. Vice President/
Business Development Group – Head
Premiere Bank
EDSA cor. Magallanes Avenue
Makati City
Sir:
With reference to this 6.0 Million loan account, we have informed
Ms. Evangeline Veloira that we are intending to settle the
account by the end of September. As of 14 August 2000 we
made payment to your bank as per receipt attached.
As you may know, present conditions have been difficult for the
insurance industry whose performance is so closely linked to the
nation’s economic prosperity; and we are now asking for some
consideration and leeway on your very stiff and immediate
demands.
123
Kindly extend to us your favorable approval.
Very truly yours,
(sgd.)
ENGRACIO T. CASTANEDA
Vice-President8
Accordingly, by September 20, 2000, Central Surety issued Bank
of Commerce (BC) Check No. 081149 dated September 22, 2000
in the amount of ₱6,000,000.00 and payable to Premiere Bank.
The check was received by Premiere Bank’s Senior Account
Manager, Evangeline Veloira, with the notation "full payment of
loan-Wack Wack," as reflected in Central Surety’s Disbursement
Voucher.10 However, for undisclosed reasons, Premiere Bank
returned BC Check No. 08114 to Central Surety, and in its letter
dated September 28, 2000, demanded from the latter, not just
payment of the ₱6,000,000.00 loan, but also the ₱40,898,000.00
loan which was originally covered by PN No. 367-Z.11 In the
same letter, Premiere Bank threatened foreclosure of the loans’
respective securities, the pledge and real estate mortgage,
should Central Surety fail to pay these within ten days from date,
thus:
28 September 2000
CENTRAL SURETY & INSURANCE CO.
By: Constancio T. Castañeda Jr. – President
Engracio T. Castañeda – Vice President
2nd Floor Universalre Bldg. No. 106
Paseo de Roxas, Legaspi Village, Makati City
RE: YOUR COMMERCIAL LOAN OF ₱40,898,000.00 &
₱6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y
**************************************************
Dear Sirs:
We write on behalf of our client, Premiere Development Bank, in
connection with your above-captioned loan account.
While our client has given you all the concessions, facilities and
opportunities to service your loans, we regret to inform you that
you have failed to settle the same despite their past due status.
In view of the foregoing and to protect the interest of our client,
please be advised that unless the outstanding balances of your
loan accounts as of date plus interest, penalties and other fees
and charges are paid in full or necessary arrangements
acceptable to our client is made by you within ten (10) days from
date hereof, we shall be constrained much to our regret, to file
foreclosure proceedings against the collateral of the loan
mortgaged to the Bank or pursue such action necessary in the
premises.
We trust, therefore, that you will give this matter your
preferential attention.
Very truly yours,
(sgd.)
PACITA M. ARAOS12
(italics supplied)
The very next day, on September 29, 2000, Central Surety,
through its counsel, wrote Premiere Bank and re-tendered
payment of the check:
29 September 2000
PREMIERE BANK
EDSA cor. Magallanes Avenue

Makati City
Attention: Mr. Ignacio R. Nebrida, Jr.
Senior Asst. Vice President/
Business Development Group – Head
Re : Promissory Note No. 714-Y
Sir:
This is further to our client’s letter to you dated 24 August 2000,
informing you that it would settle its account by the end of
September 2000.
Please be advised that on 20 September 2000 our client
delivered to your bank BC cheque no. 08114 payable to Premiere
Bank in the amount of SIX MILLION PESOS (₱6,000,000.00),
which was received by your Senior Account Manager, Ms.
Evangeline Veloira. However, for unexplained reasons the cheque
was returned to us.
We are again tendering to you the said cheque of SIX MILLION
PESOS (₱6,000,000.00), in payment of PN#714-Y. Please accept
the cheque and issue the corresponding receipt thereof. Should
you again refuse to accept this cheque, then I shall advise my
client to deposit it in court for proper disposition.
Thank you.
Very truly yours,
(sgd.)
EPIFANIO E. CUA
Counsel for Central Surety & Insurance Company13
(italics supplied)
On even date, a separate letter with another BC Check No.
08115 in the amount of ₱2,600,000.00 was also tendered to
Premiere Bank as payment for the Spouses Engracio and Lourdes
Castañeda’s (Spouses Castañeda’s) personal loan covered by PN
No. 717-X and secured by Manila Polo Club, Inc. membership
shares.
On October 13, 2000, Premiere Bank responded and signified
acceptance of Central Surety’s checks under the following
application of payments:
13 October 2000
ATTY. EPIFANIO E. CUA
2/F Universalre Condominium
106 Paseo de Roxas
Legaspi Village, Makati City
Dear Atty. Cua:
Thank you for your two (2) letters both dated 29 September
2000 on behalf of your clients with the enclosed check nos.
0008114 and 0008115 for the total of ₱8,600,000.00.
As previously relayed to your client, Premiere Bank cannot
accept the two (2) checks as full settlement of the obligation
under Account Nos. PN #714-Y and PN # 717-X, as the amount
is insufficient.
In accordance with the terms and conditions of the Promissory
Notes executed by your clients in favor of Premiere Development
Bank, we have applied the two (2) checks to the due obligations
of your clients as follows:
1) Account No.: COM 235-Z14 ₱1,044,939.45
2) Account No.: IND 717-X ₱1,459,693.15
3) Account No.: COM 367-Z15 ₱4,476,200.18
124
4) Account No.: COM 714-Y ₱1,619,187.22
TOTAL ₱8,600,000.00
We are enclosing Xerox copy each of four (4) official receipts
covering the above payments. The originals are with us which
your clients or their duly authorized representative may pick-up
anytime during office hours.
We shall appreciate the settlement in full of the accounts of your
client or necessary arrangements for settlement thereof be made
as soon as possible to put the accounts on up to-date status.
Thank you.
Very truly yours,
(sgd.)
MS. ELSA M. SAPAPO
Manager
Loans Accounting and
Control Department16
Significantly, the ₱8,600,000.00 check payments were not
applied in full to Central Surety’s ₱6,000,000.00 loan under PN
No. 714-Y and the Spouses Castañeda’s personal loan of
₱2,600,000.00 under PN No. 717-X. Premiere Bank also applied
proceeds thereof to a commercial loan under PN No. 235-Z taken
out by Casent Realty and Development Corporation (Casent
Realty),17 and to Central Surety’s loan originally covered by PN
No. 367-Z, renewed under PN No. 376-X, maturing on October
20, 2001.
Strongly objecting to Premiere Bank’s application of payments,
Central Surety’s counsel wrote Premiere Bank and reiterated
Central Surety’s demand for the application of the check
payments to the loans covered by PN Nos. 714-X and 714-Y.
Additionally, Central Surety asked that the Wack Wack
Membership pledge, the security for the ₱6,000,000.00 loan,
should be released.
In the final exchange of correspondence, Premiere Bank, through
its SAVP/Acting Head-LGC, Atty. Pacita Araos, responded and
refused to accede to Central Surety’s demand. Premiere Bank
insisted that the PN covering the ₱6,000,000.00 loan granted
Premiere Bank sole discretion respecting: (1) debts to which
payments should be applied in cases of several obligations by an
obligor and/or debtor; and (2) the initial application of payments
to other costs, advances, expenses, and past due interest
stipulated thereunder.
As a result, Central Surety filed a complaint for damages and
release of security collateral, specifically praying that the court
render judgment: (1) declaring Central Surety’s ₱6,000,000.00
loan covered by PN No. 714-Y as fully paid; (2) ordering
Premiere Bank to release to Central Surety its membership
certificate of shares in Wack Wack; (3) ordering Premiere Bank
to pay Central Surety compensatory and actual damages,
exemplary damages, attorney’s fees, and expenses of litigation;
and (4) directing Premiere Bank to pay the cost of suit.
On July 12, 2005, the RTC rendered a decision dismissing Central
Surety’s complaint and ordering it to pay Premiere Bank
₱100,000.00 as attorney’s fees. The RTC ruled that the
stipulation in the PN granting Premiere Bank sole discretion in
the application of payments, although it partook of a contract of
adhesion, was valid. It disposed of the case, to wit:
Now that the issue as to the validity of the stipulation is settled,
[Premiere Bank] was right in contending that it had the right to
apply [Central Surety’s] payment to the most onerous obligation
or to the one it sees fit to be paid first from among the several
obligations. The application of the payment to the other two
loans of Central Surety namely, account nos. COM 367-Z and

IND 714-Y was within [Premiere Bank’s] valid exercise of its right
according the stipulation.lawphil.net However, [Premiere Bank]
erred in applying the payment to the loan of Casent Realty and
to the personal obligation of Mr. Engracio Castañeda despite their
connection with one another. Therefore, [Premiere Bank] cannot
apply the payment tendered by Central Surety to the other two
entities capriciously and expressly violating the law and pertinent
Central Bank rules and regulations. Hence, the application of the
payment to the loan of Casent Realty (Account No. COM 236-Z)
and to the loan of Mr. Engracio Castañeda (Account No. IND 717-
X) is void and must be annulled.
As to the issue of whether or not [Central Surety] is entitled to
the release of Membership Fee Certificate in the Wack Wack Golf
and Country Club, considering now that [Central Surety] cannot
compel [Premiere Bank] to release the subject collateral.
With regard to the issue of damages and attorney’s fees, the
court finds no basis to grant [Premiere Bank’s] prayer for moral
and exemplary damages but deems it just and equitable to
award in its favor attorney’s fees in the sum of Php 100,000.00.
WHEREFORE, judgment is hereby rendered dismissing the
complaint and ordering [Central Surety] to pay [Premiere Bank]
Php 100,000.00 as attorney’s fees.18 (emphasis supplied)
On appeal by Central Surety, the CA reversed and set aside the
trial court’s ruling. The appellate court held that with Premiere
Bank’s letter dated August 22, 2000 specifically demanding
payment of Central Surety’s ₱6,000,000.00 loan, it was deemed
to have waived the stipulation in PN No. 714-Y granting it the
right to solely determine application of payments, and was,
consequently, estopped from enforcing the same. In this regard,
with the holding of full settlement of Central Surety’s
₱6,000,000.00 loan under PN No. 714-Y, the CA ordered the
release of the Wack Wack Membership pledged to Premiere
Bank.
Hence, this recourse by Premiere Bank positing the following
issues:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
COMMITTED REVERSIBLE AND PALPABLE ERROR WHEN IT
APPLIED THE PRINCIPLE OF WAIVER AND ESTOPPEL IN THE
PRESENT CASE INSOFAR AS THE DEMAND LETTER SENT TO
[CENTRAL SURETY] IS CONCERNED NULLIFYING THE
APPLICATION OF PAYMENTS EXERCISED BY [PREMIERE BANK]
WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY
THE HONORABLE COURT OF APPEALS COULD PREVAIL OVER THE
CLEAR AND UNMISTAKABLE STATUTORY AND CONTRACTUAL
RIGHT OF [PREMIERE BANK] TO EXERCISE APPLICATION OF
PAYMENT AS WARRANTED BY THE PROMISSORY NOTE
EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE
APPLIED TO THE SUBJECT LOAN OF RESPONDENT, WHETHER OR
NOT THE SUBJECT WACK-WACK SHARES COULD BE RELEASE[D]
DESPITE THE CROSS DEFAULT AND CROSS GUARANTEE
PROVISIONS OF THE DEED OF ASSIGNMENT WITH PLEDGE AND
RELEVANT REAL ESTATE MORTGAGE CONTRACTS EXECUTED BY
[CENTRAL SURETY], CASENT REALTY AND SPS. CASTAÑEDA.
WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND
CONSIGNATION OF THE SUBJECT TWO CHECK PAYMENTS BY
[CENTRAL SURETY].
WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A
QUO [CENTRAL SURETY] IS ESTOPPED FROM CONTESTING THE
STIPULATIONS OR PROVISIONS OF THE PROMISSORY NOTES
AUTHORIZING [PREMIERE BANK] TO MAKE SUCH APPLICATION
OF PAYMENTS
WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER
COURT [PREMIERE BANK] IS ENTITLED TO AN AWARD OF
125
DAMAGES AS OCCASIONED BY THE MALICIOUS FILING OF THIS
SUIT.19
At the outset, we qualify that this case deals only with the
extinguishment of Central Surety’s ₱6,000,000.00 loan secured
by the Wack Wack Membership pledge. We do not dispose herein
the matter of the ₱2,600,000.00 loan covered by PN No. 717-X
subject of BC Check No. 08115.
We note that both lower courts were one in annulling Premiere
Bank’s application of payments to the loans of Casent Realty and
the Spouses Castañeda under PN Nos. 235-Z and 717-X,
respectively, thus:
It bears stressing that the parties to PN No. 714-Y secured by
Wack Wack membership certificate are only Central Surety, as
debtor and [Premiere Bank], as creditor. Thus, when the
questioned stipulation speaks of "several obligations", it only
refers to the obligations of [Central Surety] and nobody else.
[I]t is plain that [Central Surety] has only two loan obligations,
namely: 1.) Account No. 714-Y – secured by Wack Wack
membership certificate; and 2.) Account No. 367-Z – secured by
Condominium Certificate of Title. The two loans are secured by
separate and different collaterals. The collateral for Account No.
714-Y, which is the Wack Wack membership certificate answers
only for that account and nothing else. The collateral for Account
No. 367-Z, which is the Condominium Certificate of Title, is
answerable only for the said account.
The fact that the loan obligations of [Central Surety] are secured
by separate and distinct collateral simply shows that each
collateral secures only a particular loan obligation and does not
cover loans including future loans or advancements.
As regards the loan covered by Account No. 235-Z, this was
obtained by Casent Realty, not by [Central Surety]. Although Mr.
Engracio Castañeda is the vice-president of [Central Surety], and
president of Casent Realty, it does not follow that the two
corporations are one and the same. Both are invested by law
with a personality separate and distinct from each other.
Thus, [Central Surety] cannot be held liable for the obligation of
Casent Realty, absent evidence showing that the latter is being
used to defeat public convenience, justify wrong, protect fraud or
defend crime; or used as a shield to confuse the legitimate
issues, or when it is merely an adjunct, a business conduit or an
alter ego of [Central Surety] or of another corporation; or used
as a cloak to cover for fraud or illegality, or to work injustice, or
where necessary to achieve equity or for the protection of
creditors.1avvphi1
Likewise, [Central Surety] cannot be held accountable for the
loan obligation of spouses Castañeda under Account No. IND
717-X. Settled is the rule that a corporation is invested by law
with a personality separate and distinct from those of the
persons composing it. The corporate debt or credit is not the
debt or credit of the stockholder nor is the stockholder’s debt or
credit that of the corporation.
The mere fact that a person is a president of the corporation
does not render the property he owns or possesses the property
of the corporation, since that president, as an individual, and the
corporation are separate entities.20
In fact, Premiere Bank did not appeal or question the RTC’s
ruling specifically annulling the application of the ₱6,000,000.00
check payment to the respective loans of Casent Realty and the
Spouses Castañeda. Undoubtedly, Premiere Bank cannot be
allowed, through this petition, to surreptitiously include the
validity of its application of payments concerning the loans to
Casent Realty and the Spouses Castañeda.
Thus, we sift through the issues posited by Premiere Bank and
restate the same, to wit:

1. Whether Premiere Bank waived its right of application of
payments on the loans of Central Surety.
2. In the alternative, whether the ₱6,000,000.00 loan of Central
Surety was extinguished by the encashment of BC Check No.
08114.
3. Corollarily, whether the release of the Wack Wack Membership
pledge is in order.
The Petition is meritorious.
We shall take the first and the second issues in tandem.
Creditor given right to apply payments
At the hub of the controversy is the statutory provision on
application of payments, specifically Article 1252 of the Civil
Code, viz.:
Article 1252. He who has various debts of the same kind in favor
of one and the same creditor, may declare at the time of making
the payment, to which of them the same must be applied. Unless
the parties so stipulate, or when the application of payment is
made by the party for whose benefit the term has been
constituted, application shall not be made as to debts which are
not yet due.
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot complain
of the same, unless there is a cause for invalidating the contract.
The debtor’s right to apply payment is not mandatory. This is
clear from the use of the word "may" rather than the word
"shall" in the provision which reads: "He who has various debts
of the same kind in favor of one and the same creditor, may
declare at the time of making the payment, to which of the same
must be applied."
Indeed, the debtor’s right to apply payment has been considered
merely directory, and not mandatory,21 following this Court’s
earlier pronouncement that "the ordinary acceptation of the
terms ‘may’ and ‘shall’ may be resorted to as guides in
ascertaining the mandatory or directory character of statutory
provisions."22
Article 1252 gives the right to the debtor to choose to which of
several obligations to apply a particular payment that he tenders
to the creditor. But likewise granted in the same provision is the
right of the creditor to apply such payment in case the debtor
fails to direct its application. This is obvious in Art. 1252, par. 2,
viz.: "If the debtor accepts from the creditor a receipt in which
an application of payment is made, the former cannot complain
of the same." It is the directory nature of this right and the
subsidiary right of the creditor to apply payments when the
debtor does not elect to do so that make this right, like any other
right, waivable.
Rights may be waived, unless the waiver is contrary to law,
public order, public policy, morals or good customs, or prejudicial
to a third person with a right recognized by law.23
A debtor, in making a voluntary payment, may at the time of
payment direct an application of it to whatever account he
chooses, unless he has assigned or waived that right. If the
debtor does not do so, the right passes to the creditor, who may
make such application as he chooses. But if neither party has
exercised its option, the court will apply the payment according
to the justice and equity of the case, taking into consideration all
its circumstances.24
Verily, the debtor’s right to apply payment can be waived and
even granted to the creditor if the debtor so agrees.25 This was
126
explained by former Senator Arturo M. Tolentino, an
acknowledged expert on the Civil Code, thus:
The following are some limitations on the right of the debtor to
apply his payment:
xxxx
5) when there is an agreement as to the debts which are to be
paid first, the debtor cannot vary this agreement.26
Relevantly, in a Decision of the Supreme Court of Kansas in a
case with parallel facts, it was held that:
The debtor requested Planters apply the payments to the 1981
loan rather than to the 1978 loan. Planters refused. Planters
notes it was expressly provided in the security agreement on the
1981 loan that Planters had a legal right to direct application of
payments in its sole discretion. Appellees do not refute this.
Hence, the debtors had no right by agreement to direct the
payments. This also precludes the application of the U.S. Rule,
which applies only in absence of a statute or specific agreement.
Thus the trial court erred. Planters was entitled to apply the Hi-
Plains payments as it saw fit.27
In the case at bench, the records show that Premiere Bank and
Central Surety entered into several contracts of loan, securities
by way of pledges, and suretyship agreements. In at least two
(2) promissory notes between the parties, Promissory Note No.
714-Y and Promissory Note No. 376-X, Central Surety expressly
agreed to grant Premiere Bank the authority to apply any and all
of Central Surety’s payments, thus:
In case I/We have several obligations with [Premiere Bank],
I/We hereby empower [Premiere Bank] to apply without notice
and in any manner it sees fit, any or all of my/our deposits and
payments to any of my/our obligations whether due or not. Any
such application of deposits or payments shall be conclusive and
binding upon us.
This proviso is representative of all the other Promissory Notes
involved in this case. It is in the exercise of this express
authority under the Promissory Notes, and following Bangko
Sentral ng Pilipinas Regulations, that Premiere Bank applied
payments made by Central Surety, as it deemed fit, to the
several debts of the latter.
All debts were due; There was no
waiver on the part of petitioner
Undoubtedly, at the time of conflict between the parties material
to this case, Promissory Note No. 714-Y dated August 20, 1999,
in the amount of ₱6,000,000.00 and secured by the pledge of
the Wack Wack Membership, was past the due and demand
stage. By its terms, Premiere Bank was entitled to declare said
Note and all sums payable thereunder immediately due and
payable, without need of "presentment, demand, protest or
notice of any kind." The subsequent demand made by Premiere
Bank was, therefore, merely a superfluity, which cannot be
equated with a waiver of the right to demand payment of all the
matured obligations of Central Surety to Premiere Bank.
Moreover, this Court may take judicial notice that the standard
practice in commercial transactions to send demand letters has
become part and parcel of every collection effort, especially in
light of the legal requirement that demand is a prerequisite
before default may set in, subject to certain well-known
exceptions, including the situation where the law or the
obligations expressly declare it unnecessary.28
Neither can it be said that Premiere Bank waived its right to
apply payments when it specifically demanded payment of the
₱6,000,000.00 loan under Promissory Note No. 714-Y. It is an
elementary rule that the existence of a waiver must be positively
demonstrated since a waiver by implication is not normally

countenanced. The norm is that a waiver must not only be
voluntary, but must have been made knowingly, intelligently,
and with sufficient awareness of the relevant circumstances and
likely consequences. There must be persuasive evidence to show
an actual intention to relinquish the right. Mere silence on the
part of the holder of the right should not be construed as a
surrender thereof; the courts must indulge every reasonable
presumption against the existence and validity of such waiver.29
Besides, in this case, any inference of a waiver of Premiere
Bank’s, as creditor, right to apply payments is eschewed by the
express provision of the Promissory Note that: "no failure on the
part of [Premiere Bank] to exercise, and no delay in exercising
any right hereunder, shall operate as a waiver thereof."
Thus, we find it unnecessary to rule on the applicability of the
equitable principle of waiver that the Court of Appeals ascribed to
the demand made by Premiere Bank upon Central Surety to pay
the amount of ₱6,000,000.00, in the face of both the express
provisions of the law and the agreements entered into by the
parties. After all, a diligent creditor should not needlessly be
interfered with in the prosecution of his legal remedies.30
When Central Surety directed the application of its payment to a
specific debt, it knew it had another debt with Premiere Bank,
that covered by Promissory Note 367-Z, which had been renewed
under Promissory Note 376-X, in the amount of ₱40.898 Million.
Central Surety is aware that Promissory Note 367-Z (or 376-X)
contains the same provision as in Promissory Note No 714-Y
which grants the Premiere Bank authority to apply payments
made by Central Surety, viz.:
In case I/We have several obligations with [Premiere Bank],
I/We hereby empower [Premiere Bank] to apply without notice
and in any manner it sees fit, any or all of my/our deposits and
payments to any of my/our obligations whether due or not. Any
such application of deposits or payments shall be conclusive and
binding upon us.31
Obviously, Central Surety is also cognizant that Promissory Note
367-Z contains the proviso that:
the bank shall be entitled to declare this Note and all sums
payable hereunder to be immediately due and payable, without
need of presentment, demand, protest or notice of nay kind, all
of which I/We hereby expressly waive, upon occurrence of any of
the following events: x x x (ii) My/Our failure to pay any
amortization or installment due hereunder; (iii) My/Our failure to
pay money due under any other document or agreement
evidencing obligations for borrowed money x x x.32
by virtue of which, it follows that the obligation under Promissory
Note 367-Z had become past due and demandable, with further
notice expressly waived, when Central Surety defaulted on its
obligations under Promissory Note No. 714-Y.
Mendoza v. Court of Appeals33 forecloses any doubt that an
acceleration clause is valid and produces legal effects. In fact, in
Selegna Management and Development Corporation v. United
Coconut Planters Bank,34 we held that:
Considering that the contract is the law between the parties,
respondent is justified in invoking the acceleration clause
declaring the entire obligation immediately due and payable.
That clause obliged petitioners to pay the entire loan on January
29, 1999, the date fixed by respondent.
It is worth noting that after the delayed payment of
₱6,000,000.00 was tendered by Central Surety, Premiere Bank
returned the amount as insufficient, ostensibly because there
was, at least, another account that was likewise due. Obviously,
in its demand of 28 September 2000, petitioner sought payment,
not just of the ₱6,000,000.00, but of all these past due accounts.
There is extant testimony to support this claim, as the transcript
of stenographic notes on the testimony of Atty. Araos reveals:
127
Atty. Opinion: Q. But you accepted this payment of Six Million
(₱6,000,000.00) later on when together with this was paid
another check for 1.8 Million?
Witness: A. We accepted.
Atty. Opinion: Q. And you applied this to four (4) other accounts
three (3) other accounts or to four (4) accounts mentioned in
Exhibit "J." Is that correct?
Atty. Tagalog: We can stipulate on that. Your Honor.
Court: This was stipulated?
Atty. Tagalog: Yes, Your Honor. In fact, there is already
stipulation that we confirm that those are the applications of
payments made by the defendant Bank on those loan accounts.
Atty. Opinion: Q. Were these accounts due already when you
made this application, distribution of payments?
Witness: A. Yes sir.35
Conversely, in its evidence-in-chief, Central Surety did not
present any witness to testify on the payment of its obligations.
In fact, the record shows that after marking its evidence, Central
Surety proceeded to offer its evidence immediately. Only on the
rebuttal stage did Central Surety present a witness; but even
then, no evidence was adduced of payment of any other
obligation. In this light, the Court is constrained to rule that all
obligations of Central Surety to Premiere Bank were due; and
thus, the application of payments was warranted.
Being in receipt of amounts tendered by Central Surety, which
were insufficient to cover its more onerous obligations, Premiere
Bank cannot be faulted for exercising the authority granted to it
under the Promissory Notes, and applying payment to the
obligations as it deemed fit. Subject to the caveat that our ruling
herein shall be limited only to the transactions entered into by
the parties to this case, the Court will not disturb the finding of
the lower court that Premiere Bank rightly applied the payments
that Central Surety had tendered. Corollary thereto, and upon
the second issue, the tender of the amount of ₱6,000,000.00 by
Central Surety, and the encashment of BC Check No. 08114 did
not totally extinguish the debt covered by PN No. 714-Y.
Release of the pledged
Wack Wack Membership
Contract of Adhesion
To the extent that the subject promissory notes were prepared
by the Premiere Bank and presented to Central Surety for
signature, these agreements were, indeed, contracts of
adhesion. But contracts of adhesion are not invalid per se.
Contracts of adhesion, where one party imposes a ready-made
form of contract on the other, are not entirely prohibited. The
one who adheres to the contract is, in reality, free to reject it
entirely; if he adheres, he gives his consent.
In interpreting such contracts, however, courts are expected to
observe greater vigilance in order to shield the unwary or weaker
party from deceptive schemes contained in ready-made
covenants.36 Thus, Article 24 of the Civil Code pertinently
states:
In all contractual, property or other relations, when one of the
parties is at a disadvantage on account of his moral dependence,
ignorance, indigence, mental weakness, tender age or other
handicap, the courts must be vigilant for his protection.

But in this case, Central Surety does not appear so weak as to be
placed at a distinct disadvantage vis-à-vis the bank. As found by
the lower court:
Considering that [Central Surety] is a known business entity, the
[Premiere Bank] was right in assuming that the [Central Surety]
could not have been cheated or misled in agreeing thereto, it
could have negotiated with the bank on a more favorable term
considering that it has already established a certain reputation
with the [Premiere Bank] as evidenced by its numerous
transactions. It is therefore absurd that an established company
such as the [Central Surety] has no knowledge of the law
regarding bank practice in loan transactions.
The Dragnet Clause.
The factual circumstances of this case showing the chain of
transactions and long-standing relationship between Premiere
Bank and Central Surety militate against the latter’s prayer in its
complaint for the release of the Wack Wack Membership, the
security attached to Promissory Note 714-Y.
A tally of the facts shows the following transactions between
Premiere Bank and Central Surety:
Date Instrument Amount covered Stipulation
August 20, 1999 PN 714-Y
P6M
August 29, 1999 Deed of Assignment with Pledge ₱ 15 M
As security for PN 714-Y and/or such Promissory Note/s
which the ASSIGNOR / PLEDGOR shall hereafter execute in favor
of the ASSIGNEE/PLEDGEE
From these transactions and the proviso in the Deed of
Assignment with Pledge, it is clear that the security, which
peculiarly specified an amount at ₱15,000,000.00 (notably
greater than the amount of the promissory note it secured), was
intended to guarantee not just the obligation under PN 714-Y,
but also future advances. Thus, the said deed is explicit:
As security for the payment of loan obtained by the
ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the
amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine
Currency in accordance with the Promissory Note attached hereto
and made an integral part hereof as Annex "A" and/or such
Promissory Note/s which the ASSIGNOR/PLEDGOR shall hereafter
execute in favor of the ASSIGNEE/PLEDGEE, the
ASSIGNOR/PLEDGOR hereby transfers, assigns, conveys,
endorses, encumbers and delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and assigns, that certain
Membership fee Certificate Share in Wack Wack Golf and Country
Club Incorporate covered by Stock Certificate No. 217 with Serial
No. 1793 duly issue by Wack Wack Golf and Country Club
Incorporated on August 27, 1996 in the name of the ASSIGNOR."
(Emphasis made in the Petition.)
Then, a Continuing Guaranty/Comprehensive Surety Agreement
was later executed by Central Surety as follows:
Date Instrument Amount Stipulation
Notarized, Sept. 22, 1999Continuing Guaranty/Comprehensive
Surety Agreement ₱40,898,000.00 In consideration of the
loan and/or any credit accommodation which you (petitioner)
have extended and/or will extend to Central Surety and
Insurance Co.
And on October 10, 2000, Promissory Note 376-X was entered
into, a renewal of the prior Promissory Note 367-Z, in the
amount of ₱40,898,000.00. In all, the transactions that
transpired between Premiere Bank and Central Surety manifest
themselves, thusly:
Date Instrument Amount covered Stipulation
128
August 20, 1999 PN 714-Y ₱ 6 M
August 29, 1999 Deed of Assignment with Pledge ₱ 15 M
As security for PN 714-Y and/or such Promissory Note/s
which the ASSIGNOR / PLEDGOR shall hereafter execute in favor
of the ASSIGNEE/PLEDGEE
Notarized,
Sept. 22, 1999 Continuing Guaranty/Comprehensive Surety
Agreement ₱40,898,000.00 In consideration of the loan
and/or any credit accommodation which you (petitioner) have
extended and/or will extend to Central Surety and Insurance Co.
October 10, 2000 Promissory Note 376-X (PN 367-Z)
₱40,898,000.00
From the foregoing, it is more than apparent that when, on
August 29, 1999, the parties executed the Deed of Assignment
with Pledge (of the Wack Wack Membership), to serve as security
for an obligation in the amount of ₱15,000,000.00 (when the
actual loan covered by PN No. 714-Y was only ₱6,000,000.00),
the intent of the parties was for the Wack Wack Membership to
serve as security also for future advancements. The subsequent
loan was nothing more than a fulfillment of the intention of the
parties. Of course, because the subsequent loan was for a much
greater amount (₱40,898,000.00), it became necessary to put up
another security, in addition to the Wack Wack Membership.
Thus, the subsequent surety agreement and the specific security
for PN No. 367-X were, like the Wack Wack Membership, meant
to secure the ballooning debt of the Central Surety.
The above-quoted provision in the Deed of Assignment, also
known as the "dragnet clause" in American jurisprudence, would
subsume all debts of respondent of past and future origins. It is
a valid and legal undertaking, and the amounts specified as
consideration in the contracts do not limit the amount for which
the pledge or mortgage stands as security, if from the four
corners of the instrument, the intent to secure future and other
indebtedness can be gathered. A pledge or mortgage given to
secure future advancements is a continuing security and is not
discharged by the repayment of the amount named in the
mortgage until the full amount of all advancements shall have
been paid.37
Our ruling in Prudential Bank v. Alviar38 is instructive:
A "blanket mortgage clause," also known as a "dragnet clause" in
American jurisprudence, is one which is specifically phrased to
subsume all debts of past or future origins. Such clauses are
"carefully scrutinized and strictly construed." Mortgages of this
character enable the parties to provide continuous dealings, the
nature or extent of which may not be known or anticipated at the
time, and they avoid the expense and inconvenience of executing
a new security on each new transaction. A "dragnet clause"
operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to
execute additional security documents, thereby saving time,
travel, loan closing costs, costs of extra legal services, recording
fees, et cetera. Indeed, it has been settled in a long line of
decisions that mortgages given to secure future advancements
are valid and legal contracts, and the amounts named as
consideration in said contracts do not limit the amount for which
the mortgage may stand as security if from the four corners of
the instrument the intent to secure future and other
indebtedness can be gathered.
The "blanket mortgage clause" in the instant case states:

That for and in consideration of certain loans, overdraft and other
credit accommodations obtained from the Mortgagee by the
Mortgagor and/or ________________ hereinafter referred to,
irrespective of number, as DEBTOR, and to secure the payment
of the same and those that may hereafter be obtained, the
principal or all of which is hereby fixed at Two Hundred Fifty
Thousand (₱250,000.00) Pesos, Philippine Currency, as well as
those that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other obligation
owing to the Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by
way of mortgage unto the Mortgagee, its successors or assigns,
the parcels of land which are described in the list inserted on the
back of this document, and/or appended hereto, together with all
the buildings and improvements now existing or which may
hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all
liens and incumbrances. . . .
xxxx
In the case at bar, the subsequent loans obtained by
respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by a "hold-
out" on his foreign currency savings account, while PN BD#76/C-
430, executed by respondents for Donalco Trading, Inc., was
secured by "Clean-Phase out TOD CA 3923" and eventually by a
deed of assignment on two promissory notes executed by
Bancom Realty Corporation with Deed of Guarantee in favor of
A.U. Valencia and Co., and by a chattel mortgage on various
heavy and transportation equipment. The matter of PN
BD#76/C-430 has already been discussed. Thus, the critical
issue is whether the "blanket mortgage" clause applies even to
subsequent advancements for which other securities were
intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have
emerged on this question. One school advocates that a "dragnet
clause" so worded as to be broad enough to cover all other debts
in addition to the one specifically secured will be construed to
cover a different debt, although such other debt is secured by
another mortgage. The contrary thinking maintains that a
mortgage with such a clause will not secure a note that
expresses on its face that it is otherwise secured as to its
entirety, at least to anything other than a deficiency after
exhausting the security specified therein, such deficiency being
an indebtedness within the meaning of the mortgage, in the
absence of a special contract excluding it from the arrangement.
The latter school represents the better position. The parties
having conformed to the "blanket mortgage clause" or "dragnet
clause," it is reasonable to conclude that they also agreed to an
implied understanding that subsequent loans need not be
secured by other securities, as the subsequent loans will be
secured by the first mortgage. In other words, the sufficiency of
the first security is a corollary component of the "dragnet
clause." But of course, there is no prohibition, as in the mortgage
contract in issue, against contractually requiring other securities
for the subsequent loans. Thus, when the mortgagor takes
another loan for which another security was given it could not be
inferred that such loan was made in reliance solely on the
original security with the "dragnet clause," but rather, on the
new security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California
court in the cited case made an inquiry whether the second loan
was made in reliance on the original security containing a
"dragnet clause." Accordingly, finding a different security was
taken for the second loan no intent that the parties relied on the
security of the first loan could be inferred, so it was held. The
rationale involved, the court said, was that the "dragnet clause"
in the first security instrument constituted a continuing offer by
the borrower to secure further loans under the security of the
129
first security instrument, and that when the lender accepted a
different security he did not accept the offer.
In another case, it was held that a mortgage with a "dragnet
clause" is an "offer" by the mortgagor to the bank to provide the
security of the mortgage for advances of and when they were
made. Thus, it was concluded that the "offer" was not accepted
by the bank when a subsequent advance was made because (1)
the second note was secured by a chattel mortgage on certain
vehicles, and the clause therein stated that the note was secured
by such chattel mortgage; (2) there was no reference in the
second note or chattel mortgage indicating a connection between
the real estate mortgage and the advance; (3) the mortgagor
signed the real estate mortgage by her name alone, whereas the
second note and chattel mortgage were signed by the mortgagor
doing business under an assumed name; and (4) there was no
allegation by the bank, and apparently no proof, that it relied on
the security of the real estate mortgage in making the advance.
Indeed, in some instances, it has been held that in the absence
of clear, supportive evidence of a contrary intention, a mortgage
containing a "dragnet clause" will not be extended to cover
future advances unless the document evidencing the subsequent
advance refers to the mortgage as providing security therefor.
It was therefore improper for petitioner in this case to seek
foreclosure of the mortgaged property because of non-payment
of all the three promissory notes. While the existence and
validity of the "dragnet clause" cannot be denied, there is a need
to respect the existence of the other security given for PN
BD#76/C-345. The foreclosure of the mortgaged property should
only be for the ₱250,000.00 loan covered by PN BD#75/C-252,
and for any amount not covered by the security for the second
promissory note. As held in one case, where deeds absolute in
form were executed to secure any and all kinds of indebtedness
that might subsequently become due, a balance due on a note,
after exhausting the special security given for the payment of
such note, was in the absence of a special agreement to the
contrary, within the protection of the mortgage, notwithstanding
the giving of the special security. This is recognition that while
the "dragnet clause" subsists, the security specifically executed
for subsequent loans must first be exhausted before the
mortgaged property can be resorted to.
The security clause involved in the case at bar shows that, by its
terms:
As security for the payment of loan obtained by the
ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the
amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine
Currency in accordance with the Promissory Note attached
hereto and made an integral part hereof as Annex "A" and/or
such Promissory Note/s which the ASSIGNOR/PLEDGOR shall
hereafter execute in favor of the ASSIGNEE/PLEDGEE, the
ASSIGNOR/ PLEDGOR hereby transfers, assigns, conveys,
endorses, encumbers and delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and assigns, that certain
Membership fee Certificate Share in Wack Wack Golf and Country
Club Incorporated covered by Stock Certificate No. 217 with
Serial No. 1793 duly issue by Wack Wack Golf and Country Club
Incorporated on August 27, 1996 in the name of the ASSIGNOR."
it is comparable with the security clause in the case of
Prudential, viz.:
That for and in consideration of certain loans, overdraft and
other credit accommodations obtained from the Mortgagee by
the Mortgagor and/or ________________ hereinafter referred
to, irrespective of number, as DEBTOR, and to secure the
payment of the same and those that may hereafter be obtained,
the principal or all of which is hereby fixed at Two Hundred Fifty
Thousand (₱250,000.00) Pesos, Philippine Currency, as well as
those that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other obligation
owing to the Mortgagee, whether direct or indirect, principal or

secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by
way of mortgage unto the Mortgagee, its successors or assigns,
the parcels of land which are described in the list inserted on the
back of this document, and/or appended hereto, together with all
the buildings and improvements now existing or which may
hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all
liens and incumbrances. . . .
and there is no substantive difference between the terms utilized
in both clauses securing future advances.
To recall, the critical issue resolved in Prudential was whether the
"blanket mortgage" clause applies even to subsequent
advancements for which other securities were intended. We then
declared that the special security for subsequent loans must first
be exhausted in a situation where the creditor desires to
foreclose on the "subsequent" loans that are due. However, the
"dragnet clause" allows the creditor to hold on to the first
security in case of deficiency after foreclosure on the special
security for the subsequent loans.
In Prudential, we disallowed the petitioner’s attempt at multiple
foreclosures, as it foreclosed on all of the mortgaged properties
serving as individual securities for each of the three loans. This
Court then laid down the rule, thus:
where deeds absolute in form were executed to secure any and
all kinds of indebtedness that might subsequently become due, a
balance due on a note, after exhausting the special security
given for the payment of such note, was, in the absence of a
special agreement to the contrary, within the protection of the
mortgage, notwithstanding the giving of the special security. This
is recognition that while the "dragnet clause" subsists, the
security specifically executed for subsequent loans must first be
exhausted before the mortgaged property can be resorted to.
However, this does not prevent the creditor from foreclosing on
the security for the first loan if that loan is past due, because
there is nothing in law that prohibits the exercise of that right.
Hence, in the case at bench, Premiere Bank has the right to
foreclose on the Wack Wack Membership, the security
corresponding to the first promissory note, with the deed of
assignment that originated the "dragnet clause." This conforms
to the doctrine in Prudential, as, in fact, acknowledged in the
decision’s penultimate paragraph, viz.:
Petitioner, however, is not without recourse. Both the Court of
Appeals and the trial court found that respondents have not yet
paid the ₱250,000.00 and gave no credence to their claim that
they paid the said amount when they paid petitioner
₱2,000,000.00. Thus, the mortgaged property could still be
properly subjected to foreclosure proceedings for the unpaid
₱250,000.00 loan, and as mentioned earlier, for any deficiency
after D/A SFDX#129, security for PN BD#76/c-345, has been
exhausted, subject of course to defenses which are available to
respondents.
In any event, even without this Court’s prescription in Prudential,
the release of the Wack Wack Membership as the pledged
security for Promissory Note 714-Y cannot yet be done as sought
by Central Surety. The chain of contracts concluded between
Premiere Bank and Central Surety reveals that the Wack Wack
Membership, which stood as security for Promissory Note 714-Y,
and which also stands as security for subsequent debts of Central
Surety, is a security in the form of a pledge. Its return to Central
Surety upon the pretext that Central Surety is entitled to pay
only the obligation in Promissory Note No. 714-Y, will result in
the extinguishment of the pledge, even with respect to the
subsequent obligations, because Article 2110 of the Civil Code
provides:
(I)f the thing pledged is returned by the pledgor or owner, the
pledge is extinguished. Any stipulation to the contrary is void.
130
This is contrary to the express agreement of the parties,
something which Central Surety wants this Court to undo. We
reiterate that, as a rule, courts cannot intervene to save parties
from disadvantageous provisions of their contracts if they
consented to the same freely and voluntarily.39
Attorney’s Fees
The final issue is the propriety of attorney’s fees. The trial court
based its award on the supposed malice of Central Surety in
instituting this case against Premiere Bank. We find no malice on
the part of Central Surety; indeed, we are convinced that Central
Surety filed the case in the lower court in good faith, upon the
honest belief that it had the prerogative to choose to which loan
its payments should be applied.
Malicious prosecution, both in criminal and civil cases, requires
the presence of two elements, to wit: (a) malice and (b) absence
of probable cause. Moreover, there must be proof that the
prosecution was prompted by a sinister design to vex and
humiliate a person; and that it was initiated deliberately,
knowing that the charge was false and baseless. Hence, the
mere filing of what turns out to be an unsuccessful suit does not
render a person liable for malicious prosecution, for the law could
not have meant to impose a penalty on the right to litigate.40
Malice must be proved with clear and convincing evidence, which
we find wanting in this case.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The
assailed Decision of the Court of Appeals in CA-G.R. CV No.
85930 dated July 31, 2006, as well as its Resolution dated
January 4, 2007, are REVERSED and SET ASIDE. The Decision of
the Regional Trial Court of Makati City, Branch 132, in Civil Case
No. 00-1536, dated July 12, 2005, is REINSTATED with the
MODIFICATION that the award of attorney’s fees to petitioner is
DELETED. No pronouncement as to costs.
SO ORDERED.
[G.R. No. 116805. June 22, 2000]
MARIO S. ESPINA, petitioner, vs. THE COURT OF APPEALS and
RENE G. DIAZ, respondents. batas
DECISION
PARDO, J.:
The case before the Court is an appeal from a decision of the
Court of Appeals[1] reversing that of the Regional Trial Court,
Antipolo, Rizal,[2] affirming in all respects the decision of the
Municipal Trial Court, Antipolo, Rizal,[3] ordering respondent
Rene G. Diaz to vacate the condominium unit owned by
petitioner and to pay back current rentals, attorney's fees and
costs.
The facts, as found by the Court of Appeals, are as follows:
"Mario S. Espina is the registered owner of a Condominium Unit
No. 403, Victoria Valley Condominium, Valley Golf Subdivision,
Antipolo, Rizal. Such ownership is evidenced by Condominium
Certificate of Title No. N-10 (p. 31, Rollo).
"On November 29, 1991, Mario S. Espina, the private respondent
as seller, and Rene G. Diaz, the petitioner as buyer, executed a
Provisional Deed of Sale, whereby the former sold to the latter
the aforesaid condominium unit for the amount of P100,000.00
to be paid upon the execution of the contract and the balance to
be paid through PCI Bank postdated checks as follows:
"1...........P400,000.00
..............Check No. 301245
..............January 15, 1992
"2...........P200,000.00

..............Check No. 301246
..............February 1, 1992
"3...........P200,000.00
..............Check No. 301247
..............February 22, 1992
"4...........P200,000.00
..............Check No. 301248
..............March 14, 1992 haideem
"5...........P200,000.00
..............Check No. 301249
..............April 4, 1992
"6...........P200,000.00
..............Check No. 301250
..............April 25, 1992
.............................(pp. 59-61, Rollo).
"Subsequently, in a letter dated January 22, 1992, petitioner
informed private respondent that his checking account with PCI
Bank has been closed and a new checking account with the same
drawee bank is opened for practical purposes. The letter further
stated that the postdated checks issued will be replaced with new
ones in the same drawee bank (p. 63, Rollo).
"On January 25, 1992, petitioner through Ms. Socorro Diaz, wife
of petitioner, paid private respondent Mario Espina P200,000.00,
acknowledged by him as partial payment for the condominium
unit subject of this controversy (p.64, Rollo).
"On July 26, 1992, private respondent sent petitioner a "Notice
of Cancellation" of the Provisional Deed of Sale (p. 48, Rollo).
"However, despite the Notice of Cancellation from private
respondent, the latter accepted payment from petitioner per
Metrobank Check No. 395694 dated and encashed on October
28, 1992 in the amount of P 100,000.00 (p. 64, Rollo).
"On February 24, 1993, private respondent filed a complaint
docketed as Civil Case No. 2104 for Unlawful Detainer against
petitioner before the Municipal Trial Court of Antipolo, Branch 1.
"On November 12, 1993, the trial court rendered its decision, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing consideration, judgment is
hereby rendered ordering the defendant and all persons claiming
rights under him to vacate unit 403 of the Victoria Golf Valley
Condominium, Valley Golf Subdivision, Antipolo, Rizal; to pay the
total arrears of P126,000.00, covering the period July 1991 up to
the filing (sic) complaint, and to pay P7,000.00 every month
thereafter as rentals unit (sic) he vacates the premises; to pay
the amount of P5,000.00 as and attorney's fees; the amount of
P300.00 per appearance, and costs of suit. Chiefx
However, the plaintiff may refund to the defendant the balance
from (sic) P400,000.00 after deducting all the total obligations of
the defendant as specified in the decision from receipt of said
decision.
SO ORDERED.' (Decision, Annex "B"; p. 27, Rollo)
"From the said decision, petitioner appealed to the Regional Trial
Court Branch 71, Antipolo, Rizal. On April 29, 1994, said
appellate court affirmed in all respects the decision of the trial
court."[4]
On June 14, 1994, petitioner filed with the Court of Appeals a
petition for review.
131
On July 20, 1994, the Court of Appeals promulgated its decision
reversing the appealed decision and dismissing the complaint for
unlawful detainer with costs against petitioner Espina.
On August 8, 1994, petitioner filed a motion for reconsideration
of the decision of the Court of Appeals.[5]
On August 19, 1994, the Court of Appeals denied the motion.[6]
Hence, this appeal via petition for review on certiorari.[7]
The basic issue raised is whether the Court of Appeals erred in
ruling that the provisional deed of sale novated the existing
contract of lease and that petitioner had no cause of action for
ejectment against respondent Diaz.
We resolve the issue in favor of petitioner.
According to respondent Diaz, the provisional deed of sale that
was subsequently executed by the parties novated the original
existing contract of lease. The contention cannot be sustained.
Respondent originally occupied the condominium unit in question
in 1987 as a lessee.[8] While he occupied the premises as
lessee, petitioner agreed to sell the condominium unit to
respondent by installments.[9] The agreement to sell was
provisional as the consideration was payable in installments.
Esmsc
The question is, did the provisional deed of sale novate the
existing lease contract? The answer is no. The novation must be
clearly proved since its existence is not presumed.[10] "In this
light, novation is never presumed; it must be proven as a fact
either by express stipulation of the parties or by implication
derived from an irreconcilable incompatibility between old and
new obligations or contracts."[11] Novation takes place only if
the parties expressly so provide, otherwise, the original contract
remains in force. In other words, the parties to a contract must
expressly agree that they are abrogating their old contract in
favor of a new one.[12] Where there is no clear agreement to
create a new contract in place of the existing one, novation
cannot be presumed to take place, unless the terms of the new
contract are fully incompatible with the former agreement on
every point.[13] Thus, a deed of cession of the right to
repurchase a piece of land does not supersede a contract of lease
over the same property.[14] In the provisional deed of sale in
this case, after the initial down payment, respondent's checks in
payment of six installments all bounced and were dishonored
upon presentment for the reason that the bank account was
closed.[15] Consequently, on July 26, 1992, petitioner
terminated the provisional deed of sale by a notarial notice of
cancellation.[16] Nonetheless, respondent Diaz continued to
occupy the premises, as lessee, but failed to pay the rentals due.
On October 28, 1992, respondent made a payment of
P100,000.00 that may be applied either to the back rentals or for
the purchase of the condominium unit. On February 13, 1993,
petitioner gave respondent a notice to vacate the premises and
to pay his back rentals.[17] Failing to do so, respondent's
possession became unlawful and his eviction was proper. Hence,
on February 24, 1993, petitioner filed with the Municipal Trial
Court, Antipolo, Rizal, Branch 01 an action for unlawful detainer
against respondent Diaz.[18]
Now respondent contends that the petitioner's subsequent
acceptance of such payment effectively withdrew the cancellation
of the provisional sale. We do not agree. Unless the application
of payment is expressly indicated, the payment shall be applied
to the obligation most onerous to the debtor.[19] In this case,
the unpaid rentals constituted the more onerous obligation of the
respondent to petitioner. As the payment did not fully settle the
unpaid rentals, petitioner's cause of action for ejectment
survives. Thus, the Court of Appeals erred in ruling that the
payment was "additional payment" for the purchase of the
property.
 132
WHEREFORE, the Court GRANTS the petition for review on BDC-0408
certiorari, and REVERSES the decision of the Court of Appeals.
[20] Consequently, the Court REVIVES the decision of the 1,000,000.00
Regional Trial Court, Antipolo, Rizal, Branch 71,[21] affirming in
toto the decision of the Municipal Trial Court, Antipolo, Rizal, 13 August 1997
Branch 01.[22]
BDC-0422
No costs.
1,100,000.00
SO ORDERED.
18 August 1997
G.R. No. 200299, August 17, 2016 - SPOUSES JUAN CHUY
TAN AND MARY TAN (DECEASED) SUBSTITUTED BY THE BDC-0432
SURVIVING HEIRS, JOEL TAN AND ERIC TAN, Petitioners, v.
CHINA BANKING CORPORATION, Respondent. 1,960.000.00
PHILIPPINE SUPREME COURT DECISIONS
21 August 1997
THIRD DIVISION
BDC-0438
G.R. No. 200299, August 17, 2016
1,490.000.00
SPOUSES JUAN CHUY TAN AND MARY TAN (DECEASED)
SUBSTITUTED BY THE SURVIVING HEIRS, JOEL TAN AND ERIC 2 September 1997
TAN, Petitioners, v. CHINA BANKING CORPORATION,
Respondent. BDC-0455

DECISION 2,200,000.00

PEREZ, J.: 1 October 1997

For resolution of the Court is the instant Petition for Review on BDC-0506
Certiorari1 filed by petitioner Spouses Juan Chuy Tan and Mary
Tan (deceased) substituted by the surviving heirs, Joel Tan and 1,700,000.00
Eric Tan, seeking to reverse and set aside the Decision2 dated 14
October 2011 and Resolution3 dated 24 January 2012 of the 20 November 1997
Court of Appeals (CA) in CA-G.R. CV. No. 87450. The assailed
decision and resolution affirmed with modification the 29 DLS-0316
December 2003 Decision4 of the Regional Trial Court (RTC) of
Makati City, Branch 142 by ordering that the penalty surcharge 2,800,000.00
of 24% per annum as stipulated in the contract of loan is
reduced to 12% per annum. 18 June 1997

DLS-0324
The Facts
5,500,000.00
Petitioner Lorenze Realty and Development Corporation (Lorenze
Realty) is a domestic corporation duly authorized by Philippine 18 June 1997
laws to engage in real estate business. It is represented in this
action by petitioners Joel Tan and Eric Tan as substitutes for their DLS-0325
deceased parents, Spouses Juan Chuy Tan and Mary Tan
(Spouses Tan). 2,675,000.00

Respondent China Banking Corporation (China Bank), on the 04 July 1997

other hand, is a universal banking corporation duly authorized by
Bangko Sentral ng Pilipinas (BSP) to engage in banking business. DLS-0360

On several occasions in 1997, Lorenze Realty obtained from 7,000,000.00

China Bank various amounts of loans and credit accommodations
in the following amounts: 24 July 1997

chanRoblesvirtualLawlibrary DLS-0403
DATE
4,000,000.00
PROMISSORY NOTE NOS.
28 August 1997
PRINCIPAL AMOUNT
BDC-0449
27 June 1997
1,550,000.00
BDC-0345
20 November 1997
P1,600,000.00
BDC-0340
30 July 1997
1,550,000.00
 133
351,300.00
8 September 1997
Publication Fee
BDC-0466
25,970.00
1,262,500.00
Sheriffs Fee
31 September 1997
2,000.00
BDC-0479
Posting Fee
662,500.00
700.00
10 July 1997

DLS 0379 After deducting from the total amount of loan obligation the
P85,000,000.00 proceeds of the public sale, there remains a
33,000,000.00 balance in the amount of P29,258,179.81. In its effort to collect
the deficiency obligation, China Bank demanded from Lorenze
TOTAL Realty for the payment of the remaining loan but such demand
just went to naught.

Consequently, China Bank initiated an action for the collection of

P71,050,000.00
It is expressly stipulated in the Promissory Notes that Lorenze
Realty agreed to pay the additional amount of 1/10 of 1% per
day of the total amount of obligation due as penalty to be
computed from the day that the default was incurred up to the
time that the loan obligations are fully paid. The debtor also
undertook pay an additional 10% of the total amount due
including interests, surcharges and penalties as attorney's fees.
As a security for the said obligations, Lorenze Realty executed
Real Estate Mortgages (REM) over 11 parcels of land covered by
Transfer Certificates of Title (TCT) Nos. B-44428, B-44451, B-
44452, V-4J275: V-44276, V-44277, V-44278, V-44280, V-
44281, V-44283 and V-44284 registered by the Registry of
Deeds of Valenzuela City.
Subsequently, Lorenze Realty incurred in default in the payment
of its amortization prompting China Bank to cause the extra-
judicial foreclosure of the REM constituted on the securities after
the latter failed to heed to its demand to settle the entire
obligation.
After the notice and publication requirements were complied
with, the mortgaged properties were sold at a public auction
wherein China emerged as the highest bidder for the amount of
P85,000,000.0u as evidenced by a certificate of sale.
As shown by the Statement of Account dated 10 August 1998,
the indebtedness of Lorenze Realty already reached the amount
P114,258,179.81, broken down as follows:
chanRoblesvirtualLawlibrary
Principal Amount
P71,050,000.00
Interest
13,521,939.31
Penalties
19,763,257.50
Registration Expenses
9,542,013.00
Filing Fee
sum of money against the Lorenze Realty and its officers,
namely, Lawrence Ong, Victoria Ong, Juan Chuy Tan and Mary
Tan before the RTC of Makati City, Branch 142. In its Complaint
docketed as Civil Case No. 98-3069, China Bank alleged that it is
entitled to deficiency judgment because the purchase price of the
securities pledged by the debtor is not sufficient to settle the
entire obligation incurred by the latter including the interest,
penalties and surcharges that had accrued from the time of
default. China Bank thus prayed that defendants be ordered to
pay the amount of P29,25 8,179.81, representing the deficiency
in its obligation in accordance with the express terms of the
promissory notes.
While conceding that they have voluntarily signed the promissory
notes, defendants, for their part, disclaim liability by alleging that
the surety agreements did not express the true intention of the
parties. The officers of the corporation who represented Lorenze
Realty below claimed that they just signed the surety contracts
without reading the fine terms stipulated therein because they
were macle to believe by the bank manager that the collaterals
they offered to obtain the loans were already sufficient to cover
the entire obligation should they incur in default. The collection
suit for the deficiency obligation came as a surprise to them after
China Bank managed to successfully foreclose the securities of
the obligation and purchased for itself the mortgaged properties
at the public sale. In addition, defendants averred that the
penalty in the amount of 1/10 of 1% per day of the total amount
due is usurious and shocking to the conscience and should be
nullified by the court. Finally, they prayed that the RTC declare
Lorenze Realty's obligation fully settled on account of the sale of
the securities.
On 29 December 2003, the RTC found in favor of China Bank
declaring the defendants jointly and severally liable for the
amount of P29,258,179.81 representing the deficiency judgment.
It was held by the trial court that Lorenze Realty, "[a]fter having
voluntarily signed the surety agreements, cannot be discharged
from the consequences of the undertaking because the terms
and conditions contained therein is considered to be the law
between the parties as long as it is not contrary to law, morals,
good customs and public policy. The mistake, misapprehension
and ignorance of the defendants as to the legal effects of the
obligations are no reason for relieving them of their liabilities."
The RTC disposed in this wise:ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, judgment is rendered
ordering the defendants to pay [China Bank], jointly and
severally, the following:
[T]he amount of £29,258,179.81 representing the deficiency
claim as of August 10, 1998 plus penalties accruing
thereafter at the rate of 2% per month until fully paid;
5% of the total amount due as Attorney's [F]ees;

Expenses of litigation and cost of suit.
SO ORDERED.5chanroblesvirtuallawlibrary
On appeal, the CA affirmed with modification the judgment of the
RTC by reducing the rate of the penalty surcharge from 24% per
annum to 12% per annum, and, likewise the award of attorney's
fees was reduced from 5% to 2% of the total amount due. The
appellate court deemed that the rate of penalty agreed by the
parties is unconscionable under the circumstances considering
that the obligation was already partially satisfied by the sale of
the securities constituted for the loan and resolved to fairly and
equitably reduce it to 12% per annum. The decretal portion of
the appellate court's decision reads:ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, the assailed Decision dated
December 29, 2003 of the Regional Trial Court of Makati City,
Branch 142 is AFFIRMED with MODIFICATION in that the penalty
surcharge of 2% per month or 24% per annum is reduced to
12% per annum and, likewise, the award of attorney's fees is
reduced from 5% to 2% of the total amount due.
No pronouncement as to costs.
SO ORDERED.
In a Resolution dated 24 January 2012, the CA refused to
reconsider its earlier decision by denying the Motion for
Reconsideration interposed by Lorenze Realty.
The Issue
Dissatisfied with the disquisition of the Court of Appeals, Lorenze
Realty elevated the matter before the Court by filing a Petition
for Review on Certiorari. For the resolution of the Court is the
sole issue of:ChanRoblesVirtualawlibrary
WHETHER LORENZE REALTY'S OBLIGATION IS FULLY SETTLED
WHEN THE REAL PROPERTIES CONSTITUTED AS SECURITIES
FOR THE LOAN WERE SOLD AT THE PUBLIC AUCTION FOR
P85,000,000.00.
The Court's Ruling
In assailing the CA Decision, Lorenze Realty argues that it is no
longer liable to pay the deficiency obligation because the
proceeds of the sale of the foreclosed properties in the amount of
P85,000,000.00 is more than enough to cover the principal
amount of the loan which is just P71,050,000.00. In fact, it
further asserted that after applying the proceeds of the public
sale to the principal amount of loan, there remains a balance of
P13,950,000.00 which should more than enough to cover the
penalties, interests and surcharges.
For its part, China Bank maintains that the obligation of Lorenze
Realty is not extinguished by the foreclosure and sale of real
properties constituted as securities citing Article 1253 of the New
Civil Code which explicitly states that "If the debt produces
interest, payment of the principal shall not be deemed to have
been made until the interests have been covered." By first
applying the proceeds of the sale to the interest, penalties and
expenses of the sale, there yields a balance in the principal
obligation in the amount of P29,258,179.81.
We resolve to deny the petition.
Obligations are extinguished, among others, by payment or
performance, the mode most relevant to the factual situation in
the present case.6 Under Article 1232 of the Civil Code, payment
means not only the delivery of money but also the performance,
in any other manner, of an obligation.7 Article 1233 of the Civil
Code states that a debt shall not be understood to have been
paid unless the thing or service in which the obligation consists
has been completely delivered or rendered, as the case may be.8
In contracts of loan, the debtor is expected to deliver the sum of
money due the creditor.9 These provisions must be read in
relation with the other rules on payment under the Civil Code,
such as the application of payment, to
wit:ChanRoblesVirtualawlibrary
Art. 1252. He who has various debts of the same kind in favor of
one and the same creditor, may declare at the time of making
the payment, to which of them the same must be applied. Unless
the parties so stipulate, or when the application of payment is
134
made by the party for whose benefit the term has been
constituted, application shall not be made as to debts which are
not yet due.
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot complain
of the same, unless there is a cause for invalidating the contract.
In interpreting the foregoing provision of the statute, the Court
in Premiere Development Bank v. Central Surety & Insurance
Company Inc.10 held that the right of the debtor to apply
payment is merely directory in nature and must be promptly
exercised, lest, such right passes to the creditor,
viz:
"The debtor[']s right to apply payment is not mandatory. This is
clear from the use of the word [']may['] rather than the word
[']shall['] in the provision which reads: [']He who has various
debts of the same kind in favor of one and the same creditor,
may declare at the time of making the payment, to which of the
same must be applied.[']
Indeed, the debtor[']s right to apply payment has been
considered merely directory, and not mandatory, following this
Court[']s earlier pronouncement that [']the ordinary acceptation
of the terms [']may['] and [']shall['] may be resorted to as
guides in ascertaining the mandatory or directory character of
statutory provisions. [']
Article 1252 gives the right to the debtor to choose to which of
several obligations to apply a particular payment that he tenders
to the creditor. But likewise granted in the same provision is the
right of the creditor to apply such payment in case the debtor
fails to direct its application. This is obvious in Art. 1252, par. 2,
viz.: [']If the debtor accepts from the creditor a receipt in which
an application of payment is made, the former cannot complain
of the same.[‘] It is the directory nature of this right and the
subsidiary right of the creditor to apply payments when the
debtor does not elect to do so that make this right, like any other
right, waivable.
Rights may be waived, unless the waiver is contrary to law,
public order, public policy, morals or good customs, or prejudicial
to a third person with a right recognized by law.
A debtor, in making a voluntary payment, may at the time of
payment direct an application of it to whatever account he
chooses, unless he has assigned or waived that right. If the
debtor does not do so, the right passes to the creditor, who may
make such application as he chooses. But if neither party has
exercised its option, the court will apply the payment according
to the justice and equity of the case, taking into consideration all
its circumstances." [Emphasis supplied, citations omitted.]
In the event that the debtor failed to exercise the right to elect
the creditor may choose to which among the debts the payment
is applied as in the case at bar. It is noteworthy that after the
sale of the foreclosed properties at the public auction, Lorenze
Realty failed to manifes": its preference as to which among the
obligations that were all due the proceeds of the sale should be
applied. Its silence can be construed as acquiescence to China
Bank's application of the payment first to the interest and
penalties and the remainder to the principal which is sanctioned
by Article 1253 of the New Civil Code which provides that:,
Art. 1253. If the debt produces interest, payment of the principal
shall not be deemed to have been made until the interests have
been covered.
That they assume that the obligation is fully satisfied by the sale
of the securities does not hold any water. Nowhere in our
statutes and jurisprudence do they provide that the sale of the
collaterals constituted as security of the obligation results in the
extinguishment of the obligation. The rights and obligations of
parties are governed by the terms and conditions of the contract
and not by assumptions and presuppositions of the parties. The
amount of their entire liability should be computed on the basis
of the rate of interest as imposed by the CA minus the proceeds
of the sale of the foreclosed properties in public auction.

It is worth mentioning that the appellate court aptly reduced the
interest rate to 12%' per annum which is in consonance to
existing jurisprudence. in Albos v. Embisan, 11MCMP
Construction Corp. v. Monark Equipment Corp.,12 Bognot v. RRI
Lending Corporation,13 and Menchavez v. Bermudez,14 the
Court struck down the stipulated rates of interest for being
excessive, iniquitous, unconscionable and exorbitant and
uniformly reduced the rates to 12% per annum.
Lorenze Realty's plea to further reduce the interest to 3% per
annum has no leg to stand on and could not be adopted by this
Court. On the other hand, the appellate court, consistent with
the ruling of this Court in a number of cases, correctly pegged
the rate of interest at 1% per month or 12% per annum. We
need not unsettle the principle we had affirmed in a plethora of
cases that 12% per annum is the legal rate of interest imposed
by this Court on occasions that we nullified the rates stipulated
by parties. While the Court has the power to nullify excessive
interest rates and impose new rates for the parties, such
reduction, however, must always be guided by reason and
equity.
WHEREFORE, premises considered, the petition is DENIED. The
assailed Decision and Resolution of the Court of Appeals are
hereby AFFIRMED.
SO ORDERED.chanRoblesvirtualLawlibrary
[ G.R. No. 194642, April 06, 2015 ]
NUNELON R. MARQUEZ, PETITIONER, VS. ELISAN CREDIT
CORPORATION, RESPONDENTS.
DECISION
BRION, J.:
We resolve the present petition for review on certiorari[1]
assailing the May 17, 2010 decision[2] and the November 25,
2010 resolution[3] of the Court of Appeals (CA) in CA-G.R. SP
No. 102144.[4]
The Factual Antecedents
On December 16, 1991, Nunelon R. Marquez (petitioner)
obtained a (first loan) from Elisan Credit Corporation
(respondent) for fifty-three thousand pesos (Php 53,000.00)
payable in one-hundred eighty (180) days.[5]
The petitioner signed a promissory note which provided that it is
payable in weekly installments and subject to twenty-six percent
(26%) annual interest. In case of non-payment, the petitioner
agreed to pay ten percent (10%) monthly penalty based on the
total amount unpaid and another twenty-five percent (25%) of
such amount for attorney's fees exclusive of costs, and judicial
and extrajudicial expenses.[6]
To further secure payment of the loan, the petitioner executed a
chattel mortgage[7] over a motor vehicle. The contract of chattel
mortgage provided among others, that the motor vehicle shall
stand as a security for the first loan and "all other obligations of
every kind already incurred or which may hereafter be
incurred."[8]
Both the petitioner and respondent acknowledged the full
payment of the first loan.[9]
Subsequently, the petitioner obtained another loan (second loan)
from the respondent for fifty-five thousand pesos (P55,000.00)
evidenced by a promissory note[10] and a cash voucher[11]
both dated June 15, 1992.
The promissory note covering the second loan contained exactly
the same terms and conditions as the first promissory note.
When the second loan matured on December 15, 1992, the
petitioner had only paid twenty-nine thousand nine hundred sixty
135
pesos (P29,960.00), leaving an unpaid balance of twenty five
thousand forty pesos (P25,040.00).[12]
Due to liquidity problems, the petitioner asked the respondent if
he could pay in daily installments (daily payments) until the
second loan is paid. The respondent granted the petitioner's
request. Thus, as of September 1994 or twenty-one (21) months
after the second loan's maturity, the petitioner had already paid
a total of fifty-six thousand four-hundred forty pesos
(P56,440.00), an amount greater than the principal.[13]
Despite the receipt of more than the amount of the principal, the
respondent filed a complaint for judicial foreclosure of the chattel
mortgage because the petitioner allegedly failed to settle the
balance of the second loan despite demand.[14]
The respondent further alleged that pursuant to the terms of the
promissory note, the petitioner's failure to fully pay upon
maturity triggered the imposition of the ten percent (10%)
monthly penalty and twenty-five percent (25%) attorney's fees.
The respondent prayed that the petitioner be ordered to pay the
balance of the second loan plus accrued penalties and interest.
[15]
Before the petitioner could file an answer, the respondent applied
for the issuance of a writ of replevin. The MTC issued the writ
and by virtue of which, the motor vehicle covered by the chattel
mortgage was seized from the petitioner and delivered to the
respondent.[16]
Trial on the merits thereafter ensued.
The MTC Ruling[17]
The MTC found for the petitioner and held that the second loan
was fully extinguished as of September 1994.
It held that when an obligee accepts the performance or
payment of an obligation, knowing its incompleteness or
irregularity and without expressing any protest or objection, the
obligation is deemed fully complied with.[18] The MTC noted that
the respondent accepted the daily payments made by the
petitioner without protest. The second loan having been fully
extinguished, the MTC ruled that respondent's claim for interests
and penalties plus the alleged unpaid portion of the principal is
without legal basis.
The MTC ordered:
"the plaintiff Elisan Credit Corporation to return/deliver the
seized motor vehicle with Plate No. UV-TDF-193 to the
possession of the defendant and in the event its delivery is no
longer possible, to pay the defendant the amount of P30,000.00
corresponding to the value of the said vehicle;"
"the bonding company People's Trans-East Asia Insurance
Corporation to pay the defendant the amounts of P20,000.00
and P5,000.00 representing the damages and attorney's fees
under P.T.E.A.LC Bond No. JCL (13)-00984;"
"the plaintiff is likewise directed to surrender to the defendant
the originals of the documents evidencing indebtedness in this
case so as to prevent further use of the same in another
proceeding."
The RTC Ruling[19]
Except for the MTC's order directed to the bonding company, the
RTC initially affirmed the ruling of the MTC.
Acting on the respondent's motion for reconsideration, the RTC
reversed itself. Citing Article 1253 of the Civil Code, it held that
"if the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been
covered." It also sustained the contention of the respondent that

the chattel mortgage was revived when the petitioner executed
the promissory note covering the second loan.
The RTC ordered:
"the defendant to pay the plaintiff the following: a) P25,040.00,
plus interest thereon at the rate of 26% per annum and penalties
of 10% per month thereon from due date of the second
promissory note until fully paid, b) 25% of the defendant's
outstanding obligation as and for attorney's fees, c) costs of this
suit;"
"the foreclosure of the chattel mortgage dated December 16,
1991 and the sale of the mortgaged property at a public auction,
with the proceeds thereof to be applied as and in payment of the
amounts awarded in a and b above."
The CA Ruling[20]
The CA affirmed the RTC's ruling with modification.
The CA observed that the disparity in the amount loaned and the
amount paid by the petitioner supports the respondent's view
that the daily payments were properly applied first for the
payment of interests and not for the principal.
According to the CA, if the respondent truly condoned the
payment of interests as claimed by the petitioner, the latter did
not have to pay an amount in excess of the principal. The CA
believed the petitioner knew his payments were first applied to
the interests due.
The CA held that Article 1253 of the Civil Code is clear that if
debt produces interest, payment of the principal shall not be
deemed made until the interests have been covered. It ruled that
even if the official receipts issued by the respondent did not
mention that the payments were for the interests, the omission
is irrelevant as it is deemed by law to be for the payment of
interests first, if any, and then for the payment of the principal
amount.
The CA, however, reduced the monthly penalty from ten percent
(10%) to two percent (2%) pursuant to Article 1229 of the Civil
Code which gives the courts the power to decrease the penalty
when the principal obligation has been partly or irregularly
complied with by the debtor.
The dispositive portion of the CA decision provides:
"WHEREFORE, premises considered, the Petition is hereby
DENIED for lack of merit. The Order dated 07 May 2007 of the
Regional Trial Court, Branch 222, Quezon City is hereby
AFFIRMED with MODIFICATION that the penalty charge should
only be two (2%) per month until fully paid."
The CA denied the petitioner's Motion for Reconsideration dated
May 17, 2010 on November 25, 2010 for failing to raise new
matters. Hence, this present petition.
The Petition
The petitioner seeks the reversal of the CA's decision and
resolution. He argues that he has fully paid his obligation. Thus,
the respondent has no right to foreclose the chattel mortgage.
The petitioner insists that his daily payments should be deemed
to have been credited against the principal, as the official
receipts issued by the respondent were silent with respect to the
payment of interest and penalties. He cites Article 1176 of the
Civil Code which ordains that [t]he receipt of the principal by the
creditor without reservation with respect to the interest, shall
give rise to the presumption that the interest has been paid. The
petitioner invokes Article 1235 of the Civil Code which states that
"[w]hen the obligee accepts the performance of an obligation,
knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed
fully complied with."
136
The petitioner denies having stipulated upon and consented to
the twenty-six per cent (26%) per annum interest charge, ten
percent (10%) monthly penalty and twenty-five percent (25%)
attorney's fees. According to the petitioner, he signed the
promissory note in blank.
The petitioner likewise disclaims receiving any demand letter
from the respondent for the alleged balance of the second loan
after he had paid fifty-six thousand four-hundred forty pesos
(Php56,440.00) as of September 1994, and further argues that
the chattel mortgage could not cover the second loan as it was
annulled and voided upon full payment of the first loan.
The Respondent's Case[21]
The respondent claims that the daily payments were properly
credited against the interest and not against the principal
because the petitioner incurred delay in the full payment of the
second loan.
It argues that pursuant to the terms and conditions of the
promissory note, the interest and penalties became due and
demandable when the petitioner failed to pay in full upon
maturity. The respondent relies on Article 1253 of the Civil Code
which provides that if the debt produces interest, payment of the
principal shall not be deemed to have been made until the
interests have been covered.
The respondent likewise maintains that the chattel mortgage
could validly secure the second loan invoking its provision which
provided that it covers "obligations...which may hereafter be
incurred."
Issues
The petitioner raises the following issues for our resolution:
"WHETHER THE HONORABLE COURT OF APPEALS ERRED IN
AFFIRMING THE DECISION OF THE REGIONAL TRIAL COURT
ORDERING THE PETITIONER TO PAY THE RESPONDENT THE
AMOUNT OF PHP24,040.00 PLUS INTEREST AND PENALTY FROM
DUE DATE UNTIL FULLY PAID; AND
"WHETHER THE HONORABLE COURT OF APPEALS ERRED IN
AFFIRMING THE DECISION OF THE REGIONAL TRIAL COURT
ORDERING THE FORECLOSURE AND SALE OF THE MORTGAGED
PROPERTY."[22]
In simpler terms, did the respondent act lawfully when it credited
the daily payments against the interest instead of the principal?
Could the chattel mortgage cover the second loan?
The Court's Ruling
We find the petition partly meritorious.
We rule that: (1) the respondent acted pursuant to law and
jurisprudence when it credited the daily payments against the
interest instead of the principal; and (2) the chattel mortgage
could not cover the second loan.
Rebuttable presumptions; Article 1176 vis-a-vis Article 1253
There is a need to analyze and harmonize Article 1176 and
Article 1253 of the Civil Code to determine whether the daily
payments made after the second loan's maturity should be
credited against the interest or against the principal.
Article 1176 provides that:
"The receipt of the principal by the creditor, without reservation
with respect to the interest, shall give rise to the presumption
that said interest has been paid.
xxx."
On the other hand, Article 1253 states:

"If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been
covered."
The above provisions appear to be contradictory but they in fact
support, and are in conformity with, each other. Both provisions
are also presumptions and, as such, lose their legal efficacy in
the face of proof or evidence to the contrary.
Thus, the settlement of the first issue depends on which of these
presumptions prevails under the given facts of the case.
There are two undisputed facts crucial in resolving the first issue:
(1) the petitioner failed to pay the full amount of the second loan
upon maturity; and (2) the second loan was subject to interest,
and in case of default, to penalty and attorney's fees.
But before proceeding any further, we first tackle the petitioner's
denial of the genuineness and due execution of the second
promissory note. He denies that he stipulated upon and
consented to the interest, penalty and attorney's fees because he
purportedly signed the promissory note in blank.[23]
This allegation deserves scant consideration. It is self-serving
and unsupported by evidence.
As aptly observed by the RTC and the CA, the promissory notes
securing the first and second loan contained exactly the same
terms and conditions. They were mirror-image of each other
except for the date and amount of principal Thus, we see
sufficient basis to believe that the petitioner knew or was aware
of such terms and conditions even assuming that the entries on
the interest and penalty charges were in blank when he signed
the promissory note.
Moreover, we find it significant that the petitioner does not deny
the genuineness and due execution of the first promissory note.
Only when he failed to pay the second loan did he impugn the
validity of the interest, penalty and attorney's fees. The CA and
the RTC also noted that the petitioner is a schooled individual, an
engineer by profession, who, because of these credentials, will
not just sign a document in blank without appreciating the
import of his action.[24]
These considerations strongly militate against the petitioner's
claim that he did not consent to and stipulated on the interest
and penalty charges of the second loan. Thus, he did not only fail
to fully pay the second loan upon maturity; the loan was also
subject to interest, penalty and attorney's fees.
Article 1176 in relation to Article 1253
Article 1176 falls under Chapter I (Nature and Effect of
Obligations) while Article 1253 falls under Subsection I
(Application of Payments), Chapter IV (Extinguishment of
Obligations) of Book IV (Obligations and Contracts) of the Civil
Code.
The structuring of these provisions, properly taken into account,
means that Article 1176 should be treated as a general
presumption subject to the more specific presumption under
Article 1253. Article 1176 is relevant on questions pertaining to
the effects and nature of obligations in general, while Article
1253 is specifically pertinent on questions involving application of
payments and extinguishment of obligations.
A textual analysis of the above provisions yields the results we
discuss at length below:
The presumption under Article 1176 does not resolve the
question of whether the amount received by the creditor is a
payment for the principal or interest. Under this article the
amount received by the creditor is the payment for the principal,
but a doubt arises on whether or not the interest is waived
because the creditor accepts the payment for the principal
without reservation with respect to the interest. Article 1176
137
resolves this doubt by presuming that the creditor waives the
payment of interest because he accepts payment for the
principal without any reservation.
On the other hand, the presumption under Article 1253 resolves
doubts involving payment of interest-bearing debts. It is a given
under this Article that the debt produces interest. The doubt
pertains to the application of payment; the uncertainty is on
whether the amount received by the creditor is payment for the
principal or the interest. Article 1253 resolves this doubt by
providing a hierarchy: payments shall first be applied to the
interest; payment shall then be applied to the principal only after
the interest has been fully-paid.
Correlating the two provisions, the rule under Article 1253 that
payments shall first be applied to the interest and not to the
principal shall govern if two facts exist: (1) the debt produces
interest (e.g., the payment of interest is expressly stipulated)
and (2) the principal remains unpaid.
The exception is a situation covered under Article 1176, i.e.,
when the creditor waives payment of the interest despite the
presence of (1) and (2) above. In such case, the payments shall
obviously be credited to the principal.
Since the doubt in the present case pertains to the application of
the daily payments, Article 1253 shall apply. Only when there is
a waiver of interest shall Article 1176 become relevant.
Under this analysis, we rule that the respondent properly
credited the daily payments to the interest and not to the
principal because: (1) the debt produces interest, i.e., the
promissory note securing the second loan provided for payment
of interest; (2) a portion of the second loan remained unpaid
upon maturity; and (3) the respondent did not waive the
payment of interest.
There was no waiver of interest
The fact that the official receipts did not indicate whether the
payments were made for the principal or the interest does not
prove that the respondent waived the interest.
We reiterate that the petitioner made the daily payments after
the second loan had already matured and a portion of the
principal remained unpaid. As stipulated, the principal is subject
to 26% annual interest.
All these show that the petitioner was already in default of the
principal when he started making the daily payments. The
stipulations providing for the 10% monthly penalty and the
additional 25% attorney's fees on the unpaid amount also
became effective as a result of the petitioner's failure to pay in
full upon maturity.
In other words, the so-called interest for default[25] (as
distinguished from the stipulated monetary interest of 26% per
annum) in the form of the 10% monthly penalty accrued and
became due and demandable. Thus, when the petitioner started
making the daily payments, two types of interest were at the
same time accruing, the 26% stipulated monetary interest and
the interest for default in the form of the 10% monthly penalty.
Article 1253 covers both types of interest. As noted by learned
civilist, Arturo M. Tolentino, no distinction should be made
because the law makes no such distinction. He explained:
"Furthermore, the interest for default arises because of non-
performance by the debtor, and to allow him to apply payment
to the capital without first satisfying such interest, would be to
place him in a better position than a debtor who has not incurred
in delay. The delay should worsen, not improve, the position of a
debtor."[26] [Emphasis supplied.]
The petitioner failed to specify which of the two types of interest
the respondent allegedly waived. The respondent waived neither.

In Swagman Hotels and Travel Inc. v. Court of Appeals,[27] we
applied Article 1253 of the Civil Code in resolving whether the
debtor has waived the payments of interest when he issued
receipts describing the payments as "capital repayment." We
held that,
"Under Article 1253 of the Civil Code, if the debt produces
interest, payment of the principal shall not be deemed to have
been made until the interest has been covered. In this case, the
private respondent would not have signed the receipts describing
the payments made by the petitioner as "capital repayment" if
the obligation to pay the interest was still subsisting.
"There was therefore a novation of the terms of the three
promissory notes in that the interest was waived..."[28]
[Emphasis supplied.]
The same ruling was made in an older case[29] where the
creditor issued a receipt which specifically identified the payment
as referring to the principal. We held that the interest allegedly
due cannot be recovered, in conformity with Article 1110 of the
Old Civil Code, a receipt from the creditor for the principal, that
contains no stipulation regarding interest, extinguishes the
obligation of the debtor with regard thereto when the receipt
issued by the creditor showed that no reservation whatever was
made with respect to the interest.
In both of these cases, it was clearly established that the
creditors accepted the payment of the principal. The creditors
were deemed to have waived the payment of interest because
they issued receipts expressly referring to the payment of the
principal without any reservation with respect to the interest. As
a result, the interests due were deemed waived. It was
immaterial whether the creditors intended to waive the interest
or not. The law presumed such waiver because the creditors
accepted the payment of the principal without reservation with
respect to the interest.
In the present case, it was not proven that the respondent
accepted the payment of the principal. The silence of the receipts
on whether the daily payments were credited against the unpaid
balance of the principal or the accrued interest does not mean
that the respondent waived the payment of interest. There is no
presumption of waiver of interest without any evidence showing
that the respondent accepted the daily installments as payments
for the principal.
Ideally, the respondent could have been more specific by
indicating on the receipts that the daily payments were being
credited against the interest. Its failure to do so, however,
should not be taken against it. The respondent had the right to
credit the daily payments against the interest applying Article
1253.
It bears stressing that the petitioner was already in default.
Under the promissory note, the petitioner waived demand in case
of non-payment upon due date.[30] The stipulated interest and
interest for default have both accrued. The only logical result,
following Article 1253 of the Civil Code, is that the daily
payments were first applied against either or both the stipulated
interest and interest for default.
Moreover, Article 1253 is viewed as having an obligatory
character and not merely suppletory. It cannot be dispensed with
except by mutual agreement. The creditor may oppose an
application of payment made by the debtor contrary to this rule.
[31]
In any case, the promissory note provided that "interest not paid
when due shall be added to, and become part of the principal
and shall likewise bear interest at the same rate, compounded
monthly."[32]
Hence, even if we assume that the daily payments were applied
against the principal, the principal had also increased by the
amount of unpaid interest and the interest on such unpaid
138
interest. Even under this assumption, it is doubtful whether the
petitioner had indeed fully paid the second loan.
Excessive interest, penalty and attorney's fees
Notwithstanding the foregoing, we find the stipulated rates of
interest, penalty and attorney's fees to be exorbitant, iniquitous,
unconscionable and excessive. The courts can and should reduce
such astronomical rates as reason and equity demand.
Article 1229 of the Civil Code provides:
"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."
Article 2227 of the Civil Code ordains:
"Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
More importantly, Article 1306 of the Civil Code is emphatic:
"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."
Thus, stipulations imposing excessive rates of interest and
penalty are void for being contrary to morals, if not against the
law.[33]
Further, we have repeatedly held that 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 that would be
unduly burdensome, to the point of oppression on their
borrowers.[34]
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
may be totally just and equitable in another.[35]
In the recent case of MCMP Construction Corp. v. Monark
Equipment Corp.,[36] we reduced the interest rate of twenty-
four percent (24%) per annum to twelve percent (12%) per
annum; the penalty and collection charge of three percent (3%)
per month, or thirty-six percent (36%) per annum, to six percent
(6%) per annum; and the amount of attorney's fees from
twenty-five percent (25%) of the total amount due to five
percent (5%).
Applying the foregoing principles, we hereby reduce the
stipulated rates as follows: the interest of twenty-six percent
(26%) per annum is reduced to two percent (2%) per annum;
the penalty charge of ten percent (10%) per month, or one-
hundred twenty percent (120%) per annum is reduced to two
percent (2%) per annum; and the amount of attorney's fees
from twenty-five percent (25%) of the total amount due to two
percent (2%) of the total amount due.
We believe the markedly reduced rates are reasonable, equitable
and just under the circumstances.
It is not entirely the petitioner's fault that he honestly, albeit
wrongly, believed that the second loan had been fully paid. The
respondent is partly to blame for issuing receipts not indicating
that the daily payments were being applied against the interest.
Moreover, the reduction of the rates is justified in the context of
its computation period. In Trade & Investment Dev't Corp. of the
Phil. v. Roblett Industrial Construction Corp.,[37] we equitably
reduced the interest rate because the case was decided with
finality sixteen years after the filing of the complaint. We noted

that the amount of the loan swelled to a considerably
disproportionate sum, far exceeding the principal debt.
It is the same in the present case where the complaint was filed
almost twenty-years ago.[38]
The Chattel Mortgage could not cover the second loan.
The chattel mortgage could not validly cover the second loan.
The order for foreclosure was without legal and factual basis.
In Acme Shoe, Rubber and Plastic Corp. v. Court of Appeals,[39]
the debtor executed a chattel mortgage, which had a provision to
this effect:
"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."[40] [Emphasis supplied.]
In due time, the debtor settled the loan covered by the chattel
mortgage. Subsequently, the debtor again borrowed from the
creditor. Due to financial constraints, the subsequent loan was
not settled at maturity.
On the issue whether the chattel mortgage could be foreclosed
due to the debtor's failure to settle the subsequent loan, we held
that,
"[c]ontracts of security are either personal or real, x x x 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; x x x — 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, but that should the obligation be duly paid, then the
contract is automatically extinguished proceeding from the
accessory character 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."[41]
While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as these
future debts are accurately described, 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. 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."[42]
[Emphasis supplied.]
We noted that the Chattel Mortgage Law[43] requires the parties
to the contract to attach an affidavit of good faith and 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
purposes, and that the same is a just and valid obligation, and
one not entered into for the purposes of fraud."[44]
139
It is obvious therefore that the debt referred in the law is a
current, not an obligation that is yet merely contemplated.[45]
"x x x in consideration of the credit accommodation granted by
the MORTGAGEE to the MORTGAGOR(S) in the amount of FIFTY-
THREE THOUSAND ONLY PESOS (P53,000.00) xxx and all other
obligations of every kind already incurred or which may hereafter
be incurred, for or accommodation of the MORTGAGOR(S), as
well as the faithful performance of the terms and conditions of
this mortgage x x x."[46] [Emphasis supplied.]
The only obligation specified in the chattel mortgage contract
was the first loan which the petitioner later fully paid. By virtue
of Section 3 of the Chattel Mortgage Law,[47] the payment of
the obligation automatically rendered the chattel mortgage
terminated; the chattel mortgage had ceased to exist upon full
payment of the first loan. Being merely an accessory in nature, it
cannot exist independently of the principal obligation.
The parties did not execute a fresh chattel mortgage nor did they
amend the chattel mortgage to comply with the Chattel Mortgage
Law which requires that the obligation must be specified in the
affidavit of good faith. Simply put, there no longer was any
chattel mortgage that could cover the second loan upon full
payment of the first loan. The order to foreclose the motor
vehicle therefore had no legal basis.
WHEREFORE, in view of the foregoing findings and legal
premises, we PARTIALLY GRANT the petition. We MODIFY the
May 17, 2010 Decision and the November 25, 2010 Resolution of
the Court of Appeals in CA G.R. SP No. 102144.
ACCORDINGLY, petitioner Nunelon R. Marquez is ORDERED to
pay:
Twenty-five thousand forty pesos (P25,040.00) representing the
amount of the unpaid balance of the second loan;
Interest of two percent (2%) per annum on the unpaid balance
to be computed from December 15, 1992[48] until full payment;
Penalty of two percent (2%) per annum on the unpaid balance to
be computed from December 15, 1992;
Attorney's Fees of two percent (2%) of the total amount to be
recovered.
The total amount to be recovered shall further be subject to the
legal interest rate of six percent (6 %) per annum from the
finality of this Decision until fully paid.[49]
Respondent Elisan Credit Corporation, on the other hand, is
ORDERED to return/deliver the seized motor vehicle with Plate
No. UV-TDF-193, subject of the chattel mortgage, to the
possession of the petitioner; in the event its delivery is no longer
possible, to pay the petitioner the amount of P30,000.00
corresponding to the value of the said vehicle.
No pronouncement as to costs.
SO ORDERED.
[G.R. No. 138588. August 23, 2001]
FAR EAST BANK & TRUST COMPANY, petitioner, vs. DIAZ REALTY
INC., respondent.
DECISION
PANGANIBAN, J.:
For a valid tender of payment, it is necessary that there be a
fusion of intent, ability and capability to make good such offer,
which must be absolute and must cover the amount due. Though
a check is not legal tender, and a creditor may validly refuse to
accept it if tendered as payment, one who in fact accepted a fully
funded check after the debtors manifestation that it had been
given to settle an obligation is estopped from later on
denouncing the efficacy of such tender of payment.

The Case
The foregoing principle is used by this Court in resolving the
Petition for Review[1] on Certiorari before us, challenging the
January 26, 1999 Decision[2] of the Court of Appeals[3] (CA) in
CA-GR CV No. 45349. The dispositive portion of the assailed
Decision reads as follows:
WHEREFORE, the judgment appealed from is hereby MODIFIED,
to read as follows:
WHEREFORE, JUDGMENT IS HEREBY RENDERED, ORDERING:
1. The plaintiffs to pay Far East Bank & Trust Company the
principal sum of P1,067,000.00 plus interests thereon computed
at 12% per annum from July 9, 1988 until fully paid;
2. The parties to negotiate for a new lease over the subject
premises; and
3. The defendant to pay the plaintiff the sum of fifteen thousand
(P15,000.00) pesos as and for attorneys fees plus the costs of
litigation.
All other claims of the parties against each other are DENIED.[4]
Likewise assailed is the May 4, 1999 CA Resolution,[5] which
denied petitioners Motion for Reconsideration.
The Facts
The court a quo summarized the antecedents of the case as
follows:
Sometime in August 1973, Diaz and Company got a loan from
the former PaBC [Pacific Banking Corporation] in the amount of
P720,000.00, with interest at 12% per annum, later increased to
14%, 16%, 18% and 20%. The loan was secured by a real
estate mortgage over two parcels of land owned by the plaintiff
Diaz Realty, both located in Davao City. In 1981, Allied Banking
Corporation rented an office space in the building constructed on
the properties covered by the mortgage contract, with the
conformity of mortgagee PaBC, whereby the parties agreed that
the monthly rentals shall be paid directly to the mortgagee for
the lessors account, either to partly or fully pay off the aforesaid
mortgage indebtedness. Pursuant to such contract, Allied Bank
paid the monthly rentals to PaBC instead of to the plaintiffs. On
July 5, 1985, the Central Bank closed PaBC, placed it under
receivership, and appointed Renan Santos as its liquidator.
Sometime in December 1986, appellant FEBTC purchased the
credit of Diaz & Company in favor of PaBC, but it was not until
March 23, 1988 that Diaz was informed about it.
According to the plaintiff as alleged in the complaint and testified
to by Antonio Diaz (President of Diaz & Company and Vice-
President of Diaz Realty), on March 23, 1988, he went to office of
PaBC which by then housed FEBTC and was told that the latter
had acquired PaBC; that Cashier Ramon Lim told him that as of
such date, his loan was P1,447,142.03; that he (Diaz) asked the
defendant to make an accounting of the monthly rental
payments made by Allied Bank; that on December 14, 1988,[6]
Diaz tendered to FEBTC the amount of P1,450,000.00 through an
Interbank check, in order to prevent the imposition of additional
interests, penalties and surcharges on its loan; that FEBTC did
not accept it as payment; that instead, Diaz was asked to deposit
the amount with the defendants Davao City Branch Office,
allegedly pending the approval of Central Bank Liquidator Renan
Santos; that in the meantime, Diaz wrote the defendant, asking
that the interest rate be reduced from 20% to 12% per annum,
but no reply was ever made; that subsequently, the defendant
told him to change the P1,450,000.00 deposit into a money
market placement, which he did; that the money market
placement expired on April 14, 1989; that when there was still
no news from the defendant whether or not it [would] accept his
140
tender of payment, he filed this case at the Regional Trial Court
of Davao City.
In its responsive pleading, the defendant set up the following
special/affirmative defenses: that sometime in December 1986,
FEBTC purchased from the PaBC the account of the plaintiffs for
a total consideration of P1,828,875.00; that despite such
purchase, PaBC Davao Branch continued to collect interests and
penalty charges on the loan from January 6, 1987 to July 8,
1988; that it was therefore not FEBTC which collected the
interest rates mentioned in the complaint, but PaBC; that it is
not true that FEBTC was trying to impose [exorbitant] rates of
interest; that as a matter of fact, after the transfer of plaintiffs
account, it sought to negotiate with the plaintiffs, and in fact,
negotiations were made for a settlement and possible reduction
of charges; that FEBTC has no knowledge of the rates of interest
imposed and collected by PaBC prior to the purchase of the
account from the latter, hence it could not be held responsible
for those transactions which transpired prior to the purchase;
and that the defendant acted at the opportune time for the
settlement of the account, albeit exercising prudence in the
handling of such account. The rest of the affirmative defenses
are bare denials.
After trial, the court a quo rendered judgment on August 6,
1993, the dispositive portion of which reads as follows:
WHEREFORE, judgment is hereby rendered as follows:
1. The plaintiff and defendant shall jointly compute the interest
due on the P1,057,000.00 loan from April 18, 1985 until
November 14, 1988 at 12% per annum (IBAA Salazar Case
Supra).
2. That the parties shall then add the result of the joint
computation mentioned in paragraph one of the dispositive
portion to the P1,057,000.00 principal.
3. The result of the addition of the P1,057,000.00 principal and
the interests arrived at shall then be compared with the
P1,450,000.00 deposit and if P1,450,000.00 is not enough, then
the plaintiff shall pay the difference/deficiency between the
P1,450,000.00 deposit and what the parties jointly computed[;]
conversely, if the P1,450,000.00 is more than what the parties
have arrived [at] after the computation, the defendant shall
return the difference or the excess to the plaintiffs.
4. The defendant shall cancel the mortgage.
5. Paragraph eight of the Lease Contract between Allied Bank
and the plaintiffs in which the defendants predecessor, Pacific
Banking gave its conformity (Exh. H) is hereby cancelled, so that
the rental should now be paid to the plaintiffs.
6. The defendant shall pay the plaintiffs the sums:
6-A. Fifteen thousand pesos as attorneys fees.
6-B. Three [h]undred [t]housand [p]esos (P300,000.00) as
exemplary damages.
6-C. The cost of suit.
SO ORDERED.
Upon a motion for reconsideration filed by defendant FEBTC and
after due notice and hearing, the court a quo issued an order on
October 12, 1993, modifying the aforequoted decision, such that
its dispositive portion as amended would now read as follows:
IN VIEW WHEREOF, the decision rendered last August 6, is
modified, accordingly, to wit:

1. The plaintiff and defendant shall jointly compute the interest
due on the P1,167,000.00 loan from April 18, 1985 until
November 14, 1988 at 12% per annum.
2. That the parties shall then add the result of the joint
computation mentioned in paragraph one above to the
P1,067,000.00 principal.
3. The result of the addition of the P1,067,000.00 principal and
the interests arrived at shall then be compared with the
P1,450,000.00 money market placement put up by the plaintiff
with the defendant bank if the same is still existing or has not
yet matured.
4. The defendant shall cancel the mortgage.
5. Paragraph eight of the lease contract between Allied Bank and
the plaintiff in which the defendant[s predecessor], Pacific
Banking gave its conformity (Exh. H) is hereby cancelled and
deleted, so that the rental should now be paid to the plaintiff.
6. The defendant shall pay the plaintiff the sums:
6.A Fifteen [t]housand [p]esos as attorneys fees;
6.B Cost of suit.[7]
The CA Ruling
The CA sustained the trial courts finding that there was a valid
tender of payment in the sum of P1,450,000, made by Diaz
Realty Inc. in favor of Far East Bank and Trust Company. The
appellate court reasoned that petitioner failed to effectively rebut
respondents evidence that it so tendered the check to liquidate
its indebtedness, and that petitioner had unilaterally treated the
same as a deposit instead.
The CA further ruled that in the computation of interest charges,
the legal rate of 12 percent per annum should apply, reckoned
from July 9, 1988, until full and final payment of the whole
indebtedness. It explained that while petitioners purchase of
respondents account from Pacific Banking Corporation (PaBC)
was valid, the 20 percent interest stipulated in the Promissory
Note should not apply, because the account transfer was without
the knowledge and the consent of respondent-obligor.
The appellate court, however, sustained petitioners assertion
that the trial court should not have cancelled the real estate
mortgage contract, inasmuch as the principal obligation upon
which it was anchored was yet to be extinguished. As to the
lease contract, the CA held that the same was subject to
renegotiation by the parties.
Lastly, the court a quo upheld the trial courts award of attorneys
fees, pointing to petitioners negligence in not immediately
informing respondent of the purchase and transfer of its credit,
and in failing to negotiate in order to avoid litigation.
Issues
Petitioner submits for our resolution the following issues:
A.
Whether or not the Court of Appeals correctly ruled that the
validity of the tender of payment was not properly raised in the
trial court and could not thus be raised in the appeal.
B.
Whether or not the Court of Appeals erred in failing to apply
settled jurisprudential principles militating against the private
respondents contention that a valid tender of payment had been
made by it.
141
C.
Whether or not the Court of Appeals correctly found that the
transaction between petitioner and PaBC was an ineffective
novation and that the consent of private respondent was
necessary therefor.
D.
Whether or not the Court of Appeals erred in refusing to apply
the rate of interest freely stipulated upon by the parties to the
respondents obligation.
E.
Whether or not the Court of Appeals committed an irreconcilable
error in ordering the parties to re-negotiate the terms of the
contract while finding at the same time that the mortgage
contract containing the lease was valid.
F.
Whether or not the petition, as argued by private respondent,
raises questions of fact not reviewable by certiorari.[8]
In the main, the Court will determine (1) the efficacy of the
alleged tender of payment made by respondent, (2) the effect of
the transfer to petitioner of respondents account with PaBC, (3)
the interest rate applicable, and (4) the status of the Real Estate
Mortgage.
The Courts Ruling
The Petition[9] is not meritorious.
First Issue: Tender of Payment
Petitioner resolutely argues that the CA erred in upholding the
validity of the tender of payment made by respondent. What the
latter had tendered to settle its outstanding obligation, it points
out, was a check which could not be considered legal tender.
We disagree. The records show that petitioner bank purchased
respondents account from PaBC in December 1986, and that the
latter was notified of the transaction only on March 23, 1988.
Thereafter, Antonio Diaz, president of respondent corporation,
inquired from petitioner on the status and the amount of its
obligation. He was informed that the obligation summed up to
P1,447,142.03. On November 14, 1988, petitioner received from
respondent Interbank Check No. 81399841 dated November 13,
1988, bearing the amount of P1,450,000, with the notation Re:
Full Payment of Pacific Bank Account now turn[ed] over to Far
East Bank.[10] The check was subsequently cleared and honored
by Interbank, as shown by the Certification it issued on January
20, 1992.[11]
True, jurisprudence holds that, in general, a check does not
constitute legal tender, and that a creditor may validly refuse it.
[12] It must be emphasized, however, that this dictum does not
prevent a creditor from accepting a check as payment. In other
words, the creditor has the option and the discretion of refusing
or accepting it.
In the present case, petitioner bank did not refuse respondents
check. On the contrary, it accepted the check which, it insisted,
was a deposit. As earlier stated, the check proved to be fully
funded and was in fact honored by the drawee bank. Moreover,
petitioner was in possession of the money for several months.
In further contending that there was no valid tender of payment,
petitioner emphasizes our pronouncement in Roman Catholic
Bishop of Malolos, Inc. v. Intermediate Appellate Court,[13] as
follows:

Tender of payment involves a positive and unconditional act by
the obligor of offering legal tender currency as payment to the
obligee for the formers obligation and demanding that the latter
accept the same.
xxxxxxxxx
Thus, tender of payment cannot be presumed by a mere
inference from surrounding circumstances. At most, sufficiency of
available funds is only affirmative of the capacity or ability of the
obligor to fulfill his part of the bargain. But whether or not the
obligor avails himself of such funds to settle his outstanding
account remains to be proven by independent and credible
evidence. Tender of payment presupposes not only that the
obligor is able, ready, and willing, but more so, in the act of
performing his obligation. Ab posse ad actu non vale illatio. A
proof that an act could have been done is no proof that it was
actually done.
In other words, tender of payment is the definitive act of offering
the creditor what is due him or her, together with the demand
that the creditor accept the same. More important, there must be
a fusion of intent, ability and capability to make good such offer,
which must be absolute and must cover the amount due.[14]
That respondent intended to settle its obligation with petitioner is
evident from the records of the case. After learning that its loan
balance was P1,447,142.03, it presented to petitioner a check in
the amount of P1,450,000, with the specific notation that it was
for full payment of its Pacific Bank account that had been
purchased by petitioner. The latter accepted the check, even if it
now insists that it considered the same as a mere deposit. The
check was sufficiently funded, as in fact it was honored by the
drawee bank. When petitioner refused to release the mortgage,
respondent instituted the present case to compel the bank to
acknowledge the tender of payment, accept payment and cancel
the mortgage. These acts demonstrate respondents intent, ability
and capability to fully settle and extinguish its obligation to
petitioner.
That respondent subsequently withdrew the money from
petitioner-bank is of no moment, because such withdrawal would
not affect the efficacy or the legal ramifications of the tender of
payment made on November 14, 1988. As already discussed, the
tender of payment to settle respondents obligation as computed
by petitioner was accepted, the check given in payment thereof
converted into money, and the money kept in petitioners
possession for several months.
Finally, petitioner points out that, in any case, tender of payment
extinguishes the obligation only after proper consignation, which
respondent did not do.
The argument does not persuade. For a consignation to be
necessary, the creditor must have refused, without just cause, to
accept the debtors payment.[15] However, as pointed out
earlier, petitioner accepted respondents check.
To iterate, the tender was made by respondent for the purpose
of settling its obligation. It was incumbent upon petitioner to
refuse, or accept it as payment. The latter did not have the right
or the option to accept and treat it as a deposit. Thus, by
accepting the tendered check and converting it into money,
petitioner is presumed to have accepted it as payment. To hold
otherwise would be inequitable and unfair to the obligor.
Second Issue: Nature of the Transfer of Respondents Account
Petitioner bewails the CAs characterization of the transfer of
respondents account from Pacific Banking Corporation to
petitioner as an ineffective novation. Petitioner contends that the
transfer was an assignment of credit.
Indeed, the transfer of respondents credit from PaBC to
petitioner was an assignment of credit. Petitioners acquisition of
142
respondents credit did not involve any changes in the original
agreement between PaBC and respondent; neither did it vary the
rights and the obligations of the parties. Thus, no novation by
conventional subrogation could have taken place.
An 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 debtors consent, transfers that 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.[16]
In the present case, it is undisputed that petitioner purchased
respondents loan from PaBC. In doing so, the former acquired all
of the latters rights against respondent. Thus, petitioner had the
right to collect the full value of the credit from respondent,
subject to the terms as originally agreed upon in the Promissory
Note.
Third Issue: Applicable Interest Rate
Petitioner bank, as assignee of respondents credit, is entitled to
the interest rate of 20 percent in the computation of the debt of
private respondent, as stipulated in the August 26, 1983
Promissory Note executed by the latter in favor of PaBC.[17]
However, because there was a valid tender of payment made on
November 14, 1988, the accrual of interest based on the
stipulated rate should stop on that date. Thus, respondent should
pay petitioner-bank its principal obligation in the amount of
P1,067,000 plus accrued interest thereon at 20 percent per
annum until November 14, 1988, less interest payments given to
PaBC from December 1986 to July 8, 1988.[18] Thereafter, the
interest shall be computed at 12 percent per annum until full
payment.
Fourth Issue: Status of Mortgage Contract
The Real Estate Mortgage executed between respondent and
PaBC to secure the formers principal obligation, as well as the
provision in the Contract of Lease between respondent and Allied
Bank with regard to the application of rent payment to the
formers indebtedness, should subsist until full and final
settlement of such obligation pursuant to the guidelines set forth
in this Decision. Thereafter, the parties are free to negotiate a
renewal of either or both contracts, or to end any and all of their
contractual relations.
WHEREFORE, the Petition is hereby DENIED. The assailed
Decision of the Court of Appeals is AFFIRMED with the following
modifications: Respondent Diaz Realty Inc. is ORDERED to pay
Far East Bank and Trust Co. its principal loan obligation in the
amount of P1,067,000, with interest thereon computed at 20
percent per annum until November 14, 1988, less any interest
payments made to PaBC, petitioners assignor. Thereafter,
interest shall be computed at 12 percent per annum until fully
paid.
SO ORDERED.
[G.R. No. 156846. February 23, 2004]
TEDDY G. PABUGAIS, petitioner, vs. DAVE P. SAHIJWANI,
respondent.
DECISION
YNARES-SANTIAGO, J.:
Assailed in this petition for review on certiorari is the January 16,
2003 Amended Decision[1] of the Court of Appeals[2] in CA-G.R.
CV No. 55740 which set aside the November 29, 1996
Decision[3] of the Regional Trial Court of Makati, Branch 64, in
Civil Case No. 94-2363.

Pursuant to an Agreement And Undertaking[4] dated December
3, 1993, petitioner Teddy G. Pabugais, in consideration of the
amount of Fifteen Million Four Hundred Eighty Seven Thousand
Five Hundred Pesos (P15,487,500.00), agreed to sell to
respondent Dave P. Sahijwani a lot containing 1,239 square
meters located at Jacaranda Street, North Forbes Park, Makati,
Metro Manila. Respondent paid petitioner the amount of
P600,000.00 as option/reservation fee and the balance of
P14,887,500.00 to be paid within 60 days from the execution of
the contract, simultaneous with delivery of the owners duplicate
Transfer Certificate of Title in respondents name the Deed of
Absolute Sale; the Certificate of Non-Tax Delinquency on real
estate taxes and Clearance on Payment of Association Dues. The
parties further agreed that failure on the part of respondent to
pay the balance of the purchase price entitles petitioner to forfeit
the P600,000.00 option/reservation fee; while non-delivery by
the latter of the necessary documents obliges him to return to
respondent the said option/reservation fee with interest at 18%
per annum, thus
5. DEFAULT In case the FIRST PARTY [herein respondent] fails to
pay the balance of the purchase price within the stipulated due
date, the sum of P600,000.00 shall be deemed forfeited, on the
other hand, should the SECOND PARTY [herein petitioner] fail to
deliver within the stipulated period the documents hereby
undertaken, the SECOND PARTY shall return the sum of
P600,000.00 with interest at 18% per annum.[5]
Petitioner failed to deliver the required documents. In compliance
with their agreement, he returned to respondent the latters
P600,000.00 option/reservation fee by way of Far East Bank &
Trust Company Check No. 25AO54252P, which was, however,
dishonored.
What transpired thereafter is disputed by both parties. Petitioner
claimed that he twice tendered to respondent, through his
counsel, the amount of P672,900.00 (representing the
P600,000.00 option/reservation fee plus 18% interest per annum
computed from December 3, 1993 to August 3, 1994) in the
form of Far East Bank & Trust Company Managers Check No.
088498, dated August 3, 1994, but said counsel refused to
accept the same. His first attempt to tender payment was
allegedly made on August 3, 1994 through his messenger;[6]
while the second one was on August 8, 1994,[7] when he sent
via DHL Worldwide Services, the managers check attached to a
letter dated August 5, 1994.[8] On August 11, 1994, petitioner
wrote a letter to respondent saying that he is consigning the
amount tendered with the Regional Trial Court of Makati City.[9]
On August 15, 1994, petitioner filed a complaint for consignation.
[10]
Respondents counsel, on the other hand, admitted that his office
received petitioners letter dated August 5, 1994, but claimed
that no check was appended thereto.[11] He averred that there
was no valid tender of payment because no check was tendered
and the computation of the amount to be tendered was
insufficient,[12] because petitioner verbally promised to pay 3%
monthly interest and 25% attorneys fees as penalty for default,
in addition to the interest of 18% per annum on the P600,000.00
option/reservation fee.[13]
On November 29, 1996, the trial court rendered a decision
declaring the consignation invalid for failure to prove that
petitioner tendered payment to respondent and that the latter
refused to receive the same. It further held that even assuming
that respondent refused the tender, the same is justified because
the managers check allegedly offered by petitioner was not legal
tender, hence, there was no valid tender of payment. The trial
court ordered petitioner to pay respondent the amount of
P600,000.00 with interest of 18% per annum from December 3,
1993 until fully paid, plus moral damages and attorneys fees.
[14]
143
Petitioner appealed the decision to the Court of Appeals.
Meanwhile, his counsel, Atty. Wilhelmina V. Joven, died and she
was substituted by Atty. Salvador P. De Guzman, Jr.[15] On
December 20, 2001, petitioner executed a Deed of
Assignment[16] assigning in favor of Atty. De Guzman, Jr., part
of the P672,900.00 consigned with the trial court as partial
payment of the latters attorneys fees.[17] Thereafter, on
January 7, 2002, petitioner filed an Ex Parte Motion to Withdraw
Consigned Money.[18] This was followed by a Motion to
Intervene filed by Atty. De Guzman, Jr., praying that the amount
consigned be released to him by virtue of the Deed of
Assignment.[19]
Petitioners motion to withdraw the amount consigned was denied
by the Court of Appeals and the decision of the trial court was
affirmed with modification as to the amount of moral damages
and attorneys fees.[20]
On a motion for reconsideration, the Court of Appeals declared
the consignation as valid in an Amended Decision dated January
16, 2003. It held that the validity of the consignation had the
effect of extinguishing petitioners obligation to return the
option/reservation fee to respondent. Hence, petitioner can no
longer withdraw the same. The decretal portion of the Amended
Decision states:
WHEREFORE, premises considered, our decision dated April 26,
2002 is RECONSIDERED. The trial courts decision is hereby
REVERSED and SET ASIDE, and a new one is entered (1)
DECLARING as valid the consignation by the plaintiff-appellant in
favor of defendant-appellee of the amount of P672,900.00 with
the Makati City RTC Clerk of Court and deposited under Official
Receipt No. 379061 dated 15 August 1994 and (2) DECLARING
as extinguished appellants obligation in favor of appellee under
paragraph 5 of the parties AGREEMENT AND UNDERTAKING.
Neither party shall recover costs from the other.
SO ORDERED.[21]
Unfazed, petitioner filed the instant petition for review
contending, inter alia, that he can withdraw the amount
deposited with the trial court as a matter of right because at the
time he moved for the withdrawal thereof, the Court of Appeals
has yet to rule on the consignations validity and the respondent
had not yet accepted the same.
The resolution of the case at bar hinges on the following issues:
(1) Was there a valid consignation? and (2) Can petitioner
withdraw the amount consigned as a matter of right?
Consignation is the act of depositing the thing due with the court
or judicial authorities whenever the creditor cannot accept or
refuses to accept payment and it generally requires a prior
tender of payment.[22] In order that consignation may be
effective, the debtor must show that: (1) there was a debt due;
(2) the consignation of the obligation had been made because
the creditor to whom tender of payment was made refused to
accept it, or because he was absent or incapacitated, or because
several persons claimed to be entitled to receive the amount due
or because the title to the obligation has been lost; (3) previous
notice of the consignation had been given to the person
interested in the performance of the obligation; (4) the amount
due was placed at the disposal of the court; and (5) after the
consignation had been made the person interested was notified
thereof. Failure in any of these requirements is enough ground to
render a consignation ineffective.[23]
The issues to be resolved in the instant case concerns one of the
important requisites of consignation, i.e, the existence of a valid
tender of payment. As testified by the counsel for respondent,
the reasons why his client did not accept petitioners tender of
payment were (1) the check mentioned in the August 5, 1994
letter of petitioner manifesting that he is settling the obligation
was not attached to the said letter; and (2) the amount tendered
was insufficient to cover the obligation. It is obvious that the

reason for respondents non-acceptance of the tender of payment
was the alleged insufficiency thereof and not because the said
check was not tendered to respondent, or because it was in the
form of managers check. While it is true that in general, a
managers check is not legal tender, the creditor has the option of
refusing or accepting it.[24] Payment in check by the debtor may
be acceptable as valid, if no prompt objection to said payment is
made.[25] Consequently, petitioners tender of payment in the
form of managers check is valid.
Anent the sufficiency of the amount tendered, it appears that
only the interest of 18% per annum on the P600,000.00
option/reservation fee stated in the default clause of the
Agreement And Undertaking was agreed upon by the parties,
thus
5. DEFAULT In case the FIRST PARTY [herein respondent] fails to
pay the balance of the purchase price within the stipulated due
date, the sum of P600,000.00 shall be deemed forfeited, on the
other hand, should the SECOND PARTY [herein petitioner] fail to
deliver within the stipulated period the documents hereby
undertaken, the SECOND PARTY shall return the sum of
P600,000.00 with interest at 18% per annum.[26]
The managers check in the amount of P672,900.00 (representing
the P600,000.00 option/reservation fee plus 18% interest per
annum computed from December 3, 1993 to August 3, 1994)
which was tendered but refused by respondent, and thereafter
consigned with the court, was enough to satisfy the obligation.
There being a valid tender of payment in an amount sufficient to
extinguish the obligation, the consignation is valid.
As regards petitioners right to withdraw the amount consigned,
reliance on Article 1260 of the Civil Code is misplaced. The said
Article provides
Art. 1260. Once the consignation has been duly made, the debtor
may ask the judge to order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a
judicial confirmation that the consignation has been properly
made, the debtor may withdraw the thing or the sum deposited,
allowing the obligation to remain in force.
The amount consigned with the trial court can no longer be
withdrawn by petitioner because respondents prayer in his
answer that the amount consigned be awarded to him is
equivalent to an acceptance of the consignation, which has the
effect of extinguishing petitioners obligation.
Moreover, petitioner failed to manifest his intention to comply
with the Agreement And Undertaking by delivering the necessary
documents and the lot subject of the sale to respondent in
exchange for the amount deposited. Withdrawal of the money
consigned would enrich petitioner and unjustly prejudice
respondent.
The withdrawal of the amount deposited in order to pay
attorneys fees to petitioners counsel, Atty. De Guzman, Jr.,
violates Article 1491 of the Civil Code which forbids lawyers from
acquiring by assignment, property and rights which are the
object of any litigation in which they may take part by virtue of
their profession.[27] Furthermore, Rule 10 of the Canons of
Professional Ethics provides that the lawyer should not purchase
any interest in the subject matter of the litigation which he is
conducting. The assailed transaction falls within the prohibition
because the Deed assigning the amount of P672,900.00 to Atty.
De Guzman, Jr., as part of his attorneys fees was executed
during the pendency of this case with the Court of Appeals. In his
Motion to Intervene, Atty. De Guzman, Jr., not only asserted
ownership over said amount, but likewise prayed that the same
be released to him. That petitioner knowingly and voluntarily
assigned the subject amount to his counsel did not remove their
144
agreement within the ambit of the prohibitory provisions.[28] To
grant the withdrawal would be to sanction a void contract.[29]
WHEREFORE, in view of all the foregoing, the instant petition for
review is DENIED. The January 16, 2003 Amended Decision of
the Court of Appeals in CA-G.R. CV No. 55740, which declared
the consignation by the petitioner in favor of respondent of the
amount of P672,900.00 with the Clerk of Court of the Regional
Trial Court of Makati City valid, and which declared petitioners
obligation to respondent under paragraph 5 of the Agreement
And Undertaking as having been extinguished, is AFFIRMED. No
costs.
SO ORDERED.
G.R. No. 172259 December 5, 2006
SPS. JAIME BENOS and MARINA BENOS, petitioners,
vs.
SPS. GREGORIO LAWILAO and JANICE GAIL LAWILAO,
respondents.
DECISION
YNARES-SANTIAGO, J.:
This petition for review under Rule 45 of the Rules of Court
assails the December 5, 2005 Decision1 of the Court of Appeals
in CA-G.R. SP No. 78845, affirming the Judgment2 dated July 1,
2003 of the Regional Trial Court of Bontoc, Mountain Province,
Branch 35, in Civil Case No. 1091. The Regional Trial Court
reversed the Decision3 dated November 14, 2002 of the
Municipal Circuit Trial Court of Bauko, Mountain Province in Civil
Case No. 314, and ordered the consolidation of ownership of
subject property in the name of respondent-spouses Gregorio
and Janice Gail Lawilao. Also assailed is the March 17, 2006
Resolution4 denying petitioners’ motion for reconsideration.
The antecedent facts are as follows:
On February 11, 1999, petitioner-spouses Jaime and Marina
Benos ("the Benos spouses") and respondent-spouses Gregorio
and Janice Gail Lawilao ("the Lawilao spouses") executed a Pacto
de Retro Sale5 where the Benos spouses sold their lot covered
by Tax Declaration No. 25300 and the building erected thereon
for P300,000.00, one half of which was to be paid in cash to the
Benos spouses and the other half to be paid to the bank to pay
off the loan of the Benos spouses which was secured by the
same lot and building. Under the contract, the Benos spouses
could redeem the property within 18 months from date of
execution by returning the contract price, otherwise, the sale
would become irrevocable without necessity of a final deed to
consolidate ownership over the property in the name of the
Lawilao spouses.
After paying the P150,000.00, the Lawilao spouses immediately
took possession of the property and leased out the building
thereon. However, instead of paying the loan to the bank, Janice
Lawilao restructured it twice. Eventually, the loan became due
and demandable.
On August 14, 2000, a son of the Benos spouses paid the bank
P159,000.00 representing the principal and interest. On the
same day, the Lawilao spouses also went to the bank and offered
to pay the loan, but the bank refused to accept the payment. The
Lawilao spouses then filed with the Municipal Circuit Trial Court a
petition6 docketed as Civil Case No. 310 for consignation against
the bank and simultaneously deposited the amount of
P159,000.00. Upon the bank’s motion, the court dismissed the
petition for lack of cause of action.
Subsequently, the Lawilao spouses filed with the Municipal Circuit
Trial Court a complaint docketed as Civil Case No. 314, for
consolidation of ownership. This complaint is the precursor of the
instant petition. The Benos spouses moved to dismiss on grounds

of lack of jurisdiction and lack of cause of action but it was
denied and the parties went to trial.
On November 14, 2002, the Municipal Circuit Trial Court
rendered judgment in favor of the Benos spouses, the dispositive
portion of which states:
IN THE LIGHT of all the foregoing considerations, for lack of legal
and factual basis to demand consolidation of ownership over the
subject property, the above-entitled case is hereby ordered
dismissed.
No pronouncement as to damages on the ground that no
premium should be assessed on the right to litigate.
No costs.
SO ORDERED.7
The Lawilao spouses appealed before the Regional Trial Court
which reversed the Municipal Circuit Trial Court and declared the
ownership of the subject property consolidated in favor of the
Lawilao spouses.8
The Benos spouses appealed to the Court of Appeals which
affirmed the Regional Trial Court on December 5, 2005. The
dispositive portion of the Decision reads:
WHEREFORE, the petition for review is DISMISSED for lack of
sufficient merit. The decision rendered by the Regional Trial
Court, Branch 35, Bontoc, Mountain Province in Civil Case No.
1091 on 1 July 2003, reversing the decision of the Municipal
Circuit Trial Court of Bauko-Sabangan, Mountain Province in
(Civil Case No.) 314, is AFFIRMED.
SO ORDERED.9
The appellate court denied petitioners’ motion for
reconsideration, hence, the instant petition on the following
assignment of errors:
4.0. It was error for the Regional Trial Court and, subsequently,
the Court of Appeals to rule that respondents can consolidate
ownership over the subject property.
4.1. It was likewise error for said lower courts not to have ruled
that the contract between the parties is actually an equitable
mortgage.10
The Benos spouses argue that consolidation is not proper
because the Lawilao spouses violated the terms of the contract
by not paying the bank loan; that having breached the terms of
the contract, the Lawilao spouses cannot insist on the
performance thereof by the Benos spouses; that the contract
was actually an equitable mortgage as shown by the inadequacy
of the consideration for the subject property; and that
respondent-spouses’ remedy should have been for recovery of
the loan or foreclosure of mortgage.
The Lawilao spouses, on the other hand, assert that the Pacto de
Retro Sale reflected the parties’ true agreement; that the Benos
spouses cannot vary its terms and conditions because they did
not put in issue in their pleadings its ambiguity, mistake or
imperfection as well as its failure to express the parties’ true
intention; that the Benos spouses admitted its genuineness and
due execution; and that the delivery of the property to the
Lawilao spouses after the execution of the contract shows that
the agreement was a sale with a right of repurchase and not an
equitable mortgage.
The Lawilao spouses also claim that they complied with their
obligation when they offered to pay the loan to the bank and
filed a petition for consignation; and that because of the failure
of the Benos spouses to redeem the property, the title and
145
ownership thereof immediately vested in them (Lawilao
spouses).
The issue for resolution is whether the Lawilao spouses can
consolidate ownership over the subject property.
The petition is impressed with merit.
In ruling for respondents, the Court of Appeals held that: (1) the
pacto de retro sale was perfected because the parties voluntarily
agreed upon the object thereof and the price; (2) the Lawilao
spouses acquired possession over the property immediately after
execution of the pacto de retro sale; (3) the pacto de retro sale
does not provide for automatic rescission in case the Lawilao
spouses fail to pay the full price; (4) the Benos spouses did not
rescind the contract after the Lawilao spouses failed to pay the
P150,000.00 loan; (5) Janice Lawilao offered to pay the loan and
deposited P150,000.00 to the bank although the period for
payment had expired thus, complying with Article 1592 of the
Civil Code allowing payment even after expiration of the period
as long as no demand for rescission of the contract had been
made either judicially or by a notarial act; (6) the title and
ownership of the Lawilao spouses became absolute when the
Benos spouses failed to repurchase the lot within the redemption
period; and (7) the payment by the Benos spouses’ son of
P159,000.00 to the bank does not amount to a repurchase as it
violates Article 1616 of the Civil Code requiring the vendor to
return to the vendee the price of the sale, the expenses of the
contract and other necessary and useful expenses.11
Contrary to the aforesaid findings, the evidence shows that the
Lawilao spouses did not make a valid tender of payment and
consignation of the balance of the contract price. As correctly
found by the Regional Trial Court:
As matters stand, no valid tender of payment and/or
consignation of the P150,000.00 which the Appellant (Lawilaos)
still owes the Appellee (Benos) has been effected by the former.
The amount of P159,000.00 deposited with the MCTC is in
relation to Civil Case No. 310 earlier dismissed by said court, and
not to the instant action. Hence, this Court cannot automatically
apply such sum in satisfaction of the aforesaid debt of the
Appellant and order the Appellee creditor to accept the same.12
(Emphasis supplied)
The Lawilao spouses did not appeal said finding, and it has
become final and binding on them. Although they had repeatedly
alleged in their pleadings that the amount of P159,000.00 was
still with the trial court which the Benos spouses could withdraw
anytime, they never made any step to withdraw the amount and
thereafter consign it. Compliance with the requirements of
tender and consignation to have the effect of payment are
mandatory. Thus –
Tender of payment is the manifestation by debtors of their desire
to comply with or to pay their obligation. If the creditor refuses
the tender of payment without just cause, the debtors are
discharged from the obligation by the consignation of the sum
due. Consignation is made by depositing the proper amount to
the judicial authority, before whom the tender of payment and
the announcement of the consignation shall be proved. All
interested parties are to be notified of the consignation.
Compliance with these requisites is mandatory.13 (Emphasis
supplied)
In the instant case, records show that the Lawilao spouses filed
the petition for consignation against the bank in Civil Case No.
310 without notifying the Benos spouses. The petition was
dismissed for lack of cause of action against the bank. Hence,
the Lawilao spouses failed to prove their offer to pay the balance
of the purchase price and consignation. In fact, even before the
filing of the consignation case, the Lawilao spouses never notified
the Benos spouses of their offer to pay.

Thus, as far as the Benos are concerned, there was no full and
complete payment of the contract price, which gives them the
right to rescind the contract pursuant to Articles 1191 in relation
to Article 1592 of the Civil Code, which provide:
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with Articles
1385 and 1388 of the Mortgage Law.
Art. 1592. In the sale of immovable property, even though it
may have been stipulated that upon failure to pay the price at
the time agreed upon the rescission of the contract shall of right
take place, the vendee may pay, even after the expiration of the
period, as long as no demand for rescission of the contract has
been made upon him either judicially or by a notarial act. After
the demand, the court may not grant him a new term.
In the instant case, while the Benos spouses did not rescind the
Pacto de Retro Sale through a notarial act, they nevertheless
rescinded the same in their Answer with Counterclaim where
they stated that:
14. Plaintiffs did not perform their obligation as spelled out in the
Pacto de Retro Sale (ANNEX "A"), particularly the assumption of
the obligation of defendants to the Rural Bank of Bontoc.
Defendants were the ones who paid their loan through their son,
ZALDY BENOS. As a result, ANNEX "A" is rendered null and of no
effect. Therefore, the VENDEE a retro who is one of plaintiffs
herein cannot consolidate her ownership over the property
subject of the null and ineffective instrument.
15. Since plaintiffs did not perform their corresponding obligation
under ANNEX "A", defendants have been all too willing to return
the amount of ON[E] HUNDRED FIFTY THOUSAND PESOS
(P150,000.00) and reasonable interest thereon to plaintiffs. But
plaintiffs refused to accept the same.
With the filing of this answer, defendants pray that this serves as
a notice of tender of payment, and they shall consign the amount
with the proper court as soon as it is legally feasible.14
They also prayed that the Municipal Circuit Trial Court render
judgment "[d]eclaring the Pacto de Retro Sale rescinded or
ineffective or void for lack of, or insufficient consideration."15
In Iringan v. Court of Appeals,16 we ruled that "even a
crossclaim found in the Answer could constitute a judicial
demand for rescission that satisfies the requirement of the law."
Similarly, the counterclaim of the Benos spouses in their answer
satisfied the requisites for the judicial rescission of the subject
Pacto de Retro Sale.
The Municipal Circuit Trial Court thus correctly dismissed the
complaint for consolidation of ownership filed by the Lawilao
spouses for their failure to comply with the conditions of the
Pacto de Retro Sale. Nevertheless, it refused to declare the
rescission of the Pacto de Retro Sale as prayed for in the
counterclaim of the Benos spouses, stating that:
How about the other obligations and/or rights owing to either
party by virtue of the Pacto de Retro Sale? This, the court opines
that it can not delve into without overstepping the limits of his
functions there being appropriate remedies. It is hornbook in our
146
jurisprudence that a right in law may be enforced and a wrong
way be remedied but always through the appropriate action.17
The issue of rescission having been put in issue in the answer
and the same having been litigated upon without objections by
the Lawilao spouses on grounds of jurisdiction, the Municipal
Circuit Trial Court should have ruled on the same and wrote finis
to the controversy.
Thus, as a necessary consequence of its ruling that the Lawilao
spouses breached the terms of the Pacto de Retro Sale, the
Municipal Circuit Trial Court should have rescinded the Pacto de
Retro Sale and directed the Benos spouses to return
P150,000.00 to the Lawilao spouses, pursuant to our ruling in
Cannu v. Galang,18 to wit:
Petitioners maintain that inasmuch as respondents-spouses
Galang were not granted the right to unilaterally rescind the sale
under the Deed of Sale with Assumption of Mortgage, they
should have first asked the court for the rescission thereof before
they fully paid the outstanding balance of the mortgage loan with
the NHMFC. They claim that such payment is a unilateral act of
rescission which violates existing jurisprudence.
In Tan v. Court of Appeals, this court said:
. . . [T]he power to rescind obligations is implied in reciprocal
ones in case one of the obligors should not comply with what is
incumbent upon him is clear from a reading of the Civil Code
provisions. However, it is equally settled that, in the absence of a
stipulation to the contrary, this power must be invoked judicially;
it cannot be exercised solely on a party’s own judgment that the
other has committed a breach of the obligation. Where there is
nothing in the contract empowering the petitioner to rescind it
without resort to the courts, the petitioner’s action in unilaterally
terminating the contract in this case is unjustified.
It is evident that the contract under consideration does not
contain a provision authorizing its extrajudicial rescission in case
one of the parties fails to comply with what is incumbent upon
him. This being the case, respondents-spouses should have
asked for judicial intervention to obtain a judicial declaration of
rescission. Be that as it may, and considering that respondents-
spouses’ Answer (with affirmative defenses) with Counterclaim
seeks for the rescission of the Deed of Sale with Assumption of
Mortgage, it behooves the court to settle the matter once and for
all than to have the case re-litigated again on an issue already
heard on the merits and which this court has already taken
cognizance of. Having found that petitioners seriously breached
the contract, we, therefore, declare the same is rescinded in
favor of respondents-spouses.
As a consequence of the rescission or, more accurately,
resolution of the Deed of Sale with Assumption of Mortgage, it is
the duty of the court to require the parties to surrender whatever
they may have received from the other. The parties should be
restored to their original situation.
The record shows petitioners paid respondents-spouses the
amount of P75,000.00 out of the P120,000.00 agreed upon.
They also made payments to NHMFC amounting to P55,312.47.
As to the petitioners’ alleged payment to CERF Realty of
P46,616.70, except for petitioner Leticia Cannu’s bare allegation,
we find the same not to be supported by competent evidence. As
a general rule, one who pleads payment has the burden of
proving it. However, since it has been admitted in respondents-
spouses’ Answer that petitioners shall assume the second
mortgage with CERF Realty in the amount of P35,000.00, and
that Adelina Timbang, respondents-spouses’ very own witness,
testified that same has been paid, it is but proper to return this
amount to petitioners. The three amounts total P165,312.47 --
the sum to be returned to petitioners.
WHEREFORE, the petition is GRANTED. The Decision dated
December 5, 2005 and Resolution dated March 17, 2006 of the

Court of Appeals in CA-G.R. SP No. 78845, affirming the
Judgment dated July 1, 2003 of the Regional Trial Court of
Bontoc, Mountain Province, Branch 35, in Civil Case No. 1091,
are REVERSED and SET ASIDE. The Decision dated November
14, 2002 of the Municipal Circuit Trial Court of Bauko, Mountain
Province in Civil Case No. No. 314 dismissing respondents’
complaint for consolidation of ownership and damages is
REINSTATED WITH THE MODIFICATION that the Pacto de Retro
Sale dated February 11, 1999 is declared rescinded and
petitioners are ordered to return the amount of P150,000.00 to
respondents. No costs.
SO ORDERED.
G.R. No. 171298 April 15, 2013
SPOUSES OSCAR and THELMA CACAYORIN, Petitioners,
vs.
ARMED FORCES AND POLICE MUTUAL BENEFIT ASSOCIATION,
INC., Respondent.
DECISION
DEL CASTILLO, J.:
Consignation is necessarily judicial. Article 1258 of the Civil Code
specifically provides that consignation shall be made by
depositing the thing or things due at the disposal of judicial
authority. The said provision clearly precludes consignation in
venues other than the courts.
Assailed in this Petition for Review on Certiorari1 are the
September 29, 2005 Decision2 of the Court of Appeals (CA)
which granted the Petition for Certiorari in CA-G.R. SP No. 84446
and its January 12, 2006 Resolution3 denying petitioners' Motion
for Reconsideration.4
Factual Antecedents
Petitioner Oscar Cacayorin (Oscar) is a member of respondent
Armed Forces and Police Mutual Benefit Association, Inc.
(AFPMBAI), a mutual benefit association duly organized and
existing under Philippine laws and engaged in the business of
developing low-cost housing projects for personnel of the Armed
Forces of the Philippines, Philippine National Police, Bureau of
Fire Protection, Bureau of Jail Management and Penology, and
Philippine Coast Guard. He filed an application with AFPMBAI to
purchase a piece of property which the latter owned, specifically
Lot 5, Block 8, Phase I, Kalikasan Mutual Homes, San Pedro,
Puerto Princesa City (the property), through a loan facility.
On July 4, 1994, Oscar and his wife and co-petitioner herein,
Thelma, on one hand, and the Rural Bank of San Teodoro (the
Rural Bank) on the other, executed a Loan and Mortgage
Agreement5 with the former as borrowers and the Rural Bank as
lender, under the auspices of Pag-IBIG or Home Development
Mutual Fund’s Home Financing Program.
The Rural Bank issued an August 22, 1994 letter of guaranty6
informing AFPMBAI that the proceeds of petitioners’ approved
loan in the amount of ₱77,418.00 shall be released to AFPMBAI
after title to the property is transferred in petitioners’ name and
after the registration and annotation of the parties’ mortgage
agreement.
On the basis of the Rural Bank’s letter of guaranty, AFPMBAI
executed in petitioners’ favor a Deed of Absolute Sale,7 and a
new title – Transfer Certificate of Title No. 370178 (TCT No.
37017) – was issued in their name, with the corresponding
annotation of their mortgage agreement with the Rural Bank,
under Entry No. 3364.9
Unfortunately, the Pag-IBIG loan facility did not push through
and the Rural Bank closed and was placed under receivership by
the Philippine Deposit Insurance Corporation (PDIC). Meanwhile,
AFPMBAI somehow was able to take possession of petitioners’
147
loan documents and TCT No. 37017, while petitioners were
unable to pay the loan/consideration for the property.
AFPMBAI made oral and written demands for petitioners to pay
the loan/ consideration for the property.10
In July 2003, petitioners filed a Complaint11 for consignation of
loan payment, recovery of title and cancellation of mortgage
annotation against AFPMBAI, PDIC and the Register of Deeds of
Puerto Princesa City. The case was docketed as Civil Case No.
3812 and raffled to Branch 47 of the Regional Trial Court (RTC)
of Puerto Princesa City (Puerto Princesa RTC). Petitioners alleged
in their Complaint that as a result of the Rural Bank’s closure and
PDIC’s claim that their loan papers could not be located, they
were left in a quandary as to where they should tender full
payment of the loan and how to secure cancellation of the
mortgage annotation on TCT No. 37017. Petitioners prayed,
thus:
a. That after the filing of this complaint an order be made
allowing the consignation x x x of Php77,418.00.
b. For the court to compute and declare the amount of interest to
be paid by the plaintiffs and thereafter to allow the consignation
of the interest payments in order to give way for the full
discharge of the loan.
c. To order the AFPMBAI to turn over to the custody of the court
the loan records and title (T.C.T. No. 37017) of the plaintiffs if
the same are in their possession.
d. To declare the full payment of the principal loan and interest
and ordering the full discharge from mortgage of the property
covered by T.C.T. No. 37017.
e. To order the Register of Deeds of Puerto Princesa City to
cancel the annotation of real estate mortgage under Entry No.
3364 at the back of T.C.T. No. 37017.
f. Thereafter, to turn over to the plaintiffs their title free from the
aforesaid mortgage loan.12
AFPMBAI filed a Motion to Dismiss13 claiming that petitioners’
Complaint falls within the jurisdiction of the Housing and Land
Use Regulatory Board (HLURB) and not the Puerto Princesa RTC,
as it was filed by petitioners in their capacity as buyers of a
subdivision lot and it prays for specific performance of
contractual and legal obligations decreed under Presidential
Decree No. 95714 (PD 957). It added that since no prior valid
tender of payment was made by petitioners, the consignation
case was fatally defective and susceptible to dismissal.
Ruling of the Regional Trial Court
In an October 16, 2003 Order,15 the trial court denied
AFPMBAI’s Motion to Dismiss, declaring that since title has been
transferred in the name of petitioners and the action involves
consignation of loan payments, it possessed jurisdiction to
continue with the case. It further held that the only remaining
unsettled transaction is between petitioners and PDIC as the
appointed receiver of the Rural Bank.
AFPMBAI filed a Motion for Reconsideration,16 which the trial
court denied in its March 19, 2004 Order.17
Ruling of the Court of Appeals
AFPMBAI thus instituted CA-G.R. SP No. 84446, which is a
Petition for Certiorari18 raising the issue of jurisdiction. On
September 29, 2005, the CA rendered the assailed Decision
decreeing as follows:
WHEREFORE, premises considered, this Petition is GRANTED. The
Assailed 16 October 2003 and 19 March 2004 Orders of the

public respondent judge are hereby ordered VACATED and SET
ASIDE.
SO ORDERED.19
The CA held that Civil Case No. 3812 is a case for specific
performance of AFPMBAI’s contractual and statutory obligations
as owner/developer of Kalikasan Mutual Homes, which makes PD
957 applicable and thus places the case within the jurisdiction of
the HLURB. It said that since one of the remedies prayed for is
the delivery to petitioners of TCT No. 37017, the case is
cognizable exclusively by the HLURB.
Petitioners moved for reconsideration which was denied by the
CA in its January 12, 2006 Resolution.
Hence, the instant Petition.
Issue
The sole issue that must be resolved in this Petition is: Does the
Complaint in Civil Case No. 3812 fall within the exclusive
jurisdiction of the HLURB?
Petitioners’ Arguments
Petitioners assert that the elements which make up a valid case
for consignation are present in their Complaint. They add that
since a deed of absolute sale has been issued in their favor, and
possession of the property has been surrendered to them, not to
mention that title has been placed in their name, the HLURB lost
jurisdiction over their case. And for this same reason, petitioners
argue that their case may not be said to be one for specific
performance of contractual and legal obligations under PD 957 as
nothing more was left to be done in order to perfect or
consolidate their title.
Petitioners thus pray that the herein assailed Decision and
Resolution of the CA be set aside, and that the trial court be
ordered to continue with the proceedings in Civil Case No. 3812.
Respondent's Arguments
Respondent, on the other hand, insists in its Comment20 that
jurisdiction over petitioners’ case lies with the HLURB, as it
springs from their contractual relation as seller and buyer,
respectively, of a subdivision lot. The prayer in petitioners’
Complaint involves the surrender or delivery of the title after full
payment of the purchase price, which respondent claims are
reciprocal obligations in a sale transaction covered by PD 957.
Respondent adds that in effect, petitioners are exacting specific
performance from it, which places their case within the
jurisdiction of the HLURB.
Our Ruling
The Court grants the Petition.
The Complaint makes out a case for consignation.
The settled principle is that "the allegations of the Complaint
determine the nature of the action and consequently the
jurisdiction of the courts. This rule applies whether or not the
plaintiff is entitled to recover upon all or some of the claims
asserted therein as this is a matter that can be resolved only
after and as a result of the trial."21
Does the Complaint in Civil Case No. 3812 make out a case for
consignation? It alleges that:
6.0 – Not long after however, RBST22 closed shop and defendant
Philippine Deposit Insurance Corporation (PDIC) was appointed
as its receiver. The plaintiffs, through a representative, made a
verbal inquiry to the PDIC regarding the payment of their loan
but were told that it has no information or record of the said
148
loan. This made [sic] the plaintiffs in quandary as to where or
whom they will pay their loan, which they intend to pay in full, so
as to cancel the annotation of mortgage in their title.
7.0 – It was discovered that the loan papers of the plaintiffs,
including the duplicate original of their title, were in the
possession of defendant AFPMBAI. It was unclear though why the
said documents including the title were in the possession of
AFPMBAI. These papers should have been in RBST’s possession
and given to PDIC after its closure in the latter’s capacity as
receiver.
8.0 – Plaintiffs are now intending to pay in full their real estate
loan but could not decide where to pay the same because of
RBST [sic] closure and PDIC’s failure to locate the loan records
and title. This court’s intervention is now needed in order to
determine to [sic] where or whom the loan should be paid.
9.0 – Plaintiffs hereby respectfully prays [sic] for this court to
allow the deposit of the amount of Php77,418.00 as full payment
of their principal loan, excluding interest, pursuant to the Loan
and Mortgage Agreement on 4 July 1994.23
From the above allegations, it appears that the petitioners’ debt
is outstanding; that the Rural Bank’s receiver, PDIC, informed
petitioners that it has no record of their loan even as it took over
the affairs of the Rural Bank, which on record is the petitioners’
creditor as per the July 4, 1994 Loan and Mortgage Agreement;
that one way or another, AFPMBAI came into possession of the
loan documents as well as TCT No. 37017; that petitioners are
ready to pay the loan in full; however, under the circumstances,
they do not know which of the two – the Rural Bank or AFPMBAI
– should receive full payment of the purchase price, or to whom
tender of payment must validly be made.
Under Article 1256 of the Civil Code,24 the debtor shall be
released from responsibility by the consignation of the thing or
sum due, without need of prior tender of payment, when the
creditor is absent or unknown, or when he is incapacitated to
receive the payment at the time it is due, or when two or more
persons claim the same right to collect, or when the title to the
obligation has been lost. Applying Article 1256 to the petitioners’
case as shaped by the allegations in their Complaint, the Court
finds that a case for consignation has been made out, as it now
appears that there are two entities which petitioners must deal
with in order to fully secure their title to the property: 1) the
Rural Bank (through PDIC), which is the apparent creditor under
the July 4, 1994 Loan and Mortgage Agreement; and 2)
AFPMBAI, which is currently in possession of the loan documents
and the certificate of title, and the one making demands upon
petitioners to pay. Clearly, the allegations in the Complaint
present a situation where the creditor is unknown, or that two or
more entities appear to possess the same right to collect from
petitioners. Whatever transpired between the Rural Bank or PDIC
and AFPMBAI in respect of petitioners’ loan account, if any, such
that AFPMBAI came into possession of the loan documents and
TCT No. 37017, it appears that petitioners were not informed
thereof, nor made privy thereto.
Indeed, the instant case presents a unique situation where the
buyer, through no fault of his own, was able to obtain title to real
property in his name even before he could pay the purchase
price in full. There appears to be no vitiated consent, nor is there
any other impediment to the consummation of their agreement,
just as it appears that it would be to the best interests of all
parties to the sale that it be once and for all completed and
terminated. For this reason, Civil Case No. 3812 should at this
juncture be allowed to proceed.
Moreover, petitioners’ position is buttressed by AFPMBAI’s own
admission in its Comment25 that it made oral and written
demands upon the former, which naturally aggravated their
confusion as to who was their rightful creditor to whom payment
should be made – the Rural Bank or AFPMBAI. Its subsequent
filing of the Motion to Dismiss runs counter to its demands to

pay. If it wanted to be paid with alacrity, then it should not have
moved to dismiss Civil Case No. 3812, which was brought
precisely by the petitioners in order to be able to finally settle
their obligation in full.
Finally, the lack of prior tender of payment by the petitioners is
not fatal to their consignation case. They filed the case for the
exact reason that they were at a loss as to which between the
two – the Rural Bank or AFPMBAI – was entitled to such a tender
of payment. Besides, as earlier stated, Article 1256 authorizes
consignation alone, without need of prior tender of payment,
where the ground for consignation is that the creditor is
unknown, or does not appear at the place of payment; or is
incapacitated to receive the payment at the time it is due; or
when, without just cause, he refuses to give a receipt; or when
two or more persons claim the same right to collect; or when the
title of the obligation has been lost.
Consignation is necessarily judicial; hence, jurisdiction lies with
the RTC, not with the HLURB.
On the question of jurisdiction, petitioners’ case should be tried
in the Puerto Princesa RTC, and not the HLURB. Consignation is
necessarily judicial,26 as the Civil Code itself provides that
consignation shall be made by depositing the thing or things due
at the disposal of judicial authority, thus:
Art. 1258. Consignation shall be made by depositing the things
due at the disposal of judicial authority, before whom the tender
of payment shall be proved, in a proper case, and the
announcement of the consignation in other cases.
The consignation having been made, the interested parties shall
also be notified thereof. (Emphasis and underscoring supplied)
The above provision clearly precludes consignation in venues
other than the courts.1âwphi1 Elsewhere, what may be made is
a valid tender of payment, but not consignation. The two,
however, are to be distinguished.
Tender of payment must be distinguished from consignation.
Tender is the antecedent of consignation, that is, an act
preparatory to the consignation, which is the principal, and from
which are derived the immediate consequences which the debtor
desires or seeks to obtain. Tender of payment may be
extrajudicial, while consignation is necessarily judicial, and the
priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. (8 Manresa
325).27
While it may be true that petitioners’ claim relates to the terms
and conditions of the sale of AFPMBAI’s subdivision lot, this is
overshadowed by the fact that since the Complaint in Civil Case
No. 3812 pleads a case for consignation, the HLURB is without
jurisdiction to try it, as such case may only be tried by the
regular courts.
WHEREFORE, premises considered, the Petition is GRANTED. The
September 29, 2005 Decision and January 12, 2006 Resolution
of the Court of Appeals in CA-G.R. SP No. 84446 are ANNULLED
and SET ASIDE. The October 16, 2003 and March 19, 2004
Orders of the Regional Trial Court of Puerto Princesa City, Branch
47, are REINSTATED, and the case is REMANDED to the said
court for continuation of the proceedings.
SO ORDERED.
March 13, 2017
G.R. No. 206037
PHILIPPINE NATIONAL BANK, Petitioner
vs
LILIBETH S. CHAN, Respondent
DECISION
DEL CASTILLO, J.:
149
We resolve the Petition for Review on Certiorari under Rule 45 of
the Rules of Court, assailing the May 28, 2012 Decision1 and the
February 21, 2013 Resolution2 of the Court of Appeals (CA) in
CA-G.R. SP No. 98112.
The Antecedent Facts
Respondent Lilibeth S. Chan owns a three-story commercial
building located along A. Linao Street, Paco, Manila covered by
Transfer Certificate of Title (TCT) No. 208782.3 On May 10,
2000, she leased said commercial building to petitioner Philippine
National Bank (PNB) for a period of five years from December
15, 1999 to December 14, 2004, with a monthly rental of
₱76,160.00.4 When the lease expired, PNB continued to occupy
the property on a month-to-month basis with a monthly rental of
₱116,788.44. PNB vacated the premises on March 23, 2006.5
Meanwhile, on January 22, 2002, respondent obtained a
₱l,500,000.00 loan from PNB which was secured by a Real Estate
Mortgage constituted over the leased property.6 In addition,
respondent executed a Deed of Assignment7 over the rental
payments in favor of PNB.
The amount of the respondent's loan was subsequently increased
to ₱7,500,000.00. Consequently, PNB and the respondent
executed an "Amendment to the Real Estate Mortgage by
Substitution of Collateral" on March 31, 2004, where the
mortgage over the leased property was released and substituted
by a mortgage over a parcel of land located in Paco, Manila,
covered by TCT No. 209631.8
On August 26, 2005, respondent filed a Complaint for Unlawful
Detainer before the Metropolitan Trial Court (MeTC), Branch 7,
Manila against PNB, alleging that the latter failed to pay its
monthly rentals from October 2004 until August 2005:9
In its defense, PNB claimed that it applied the rental proceeds
from October 2004 to January 15, 2005 as payment for
respondent's outstanding loan which became due and
demandable in October 2004.10 As for the monthly rentals from
January 16, 2005 to February 2006, PNB explained that it
received a demand letter11 from a certain Lamberto Chua
(Chua) who claimed to be the new owner of the leased property
and requested that the rentals be paid directly to him, reckoned
from January 15, 2005 until PNB decides to vacate the premises
or a new lease contract with Chua is executed. PNB thus
deposited the rentals in a separate non-drawing savings account
for the benefit of the rightful party.12
The MeTC held a hearing on April 25, 2006 where the parties
agreed to apply the rental proceeds from October 2004 to
January 15, 2005 to the respondent's outstanding loan.13 PNB,
too, consigned the amount of ₱l,348,643.92, representing ti1ie
rentals due from January 16, 2005 to February 2006, with the
court on May 31, 2006.14
Ruling of the Metropolitan Trial Court
In its August 9, 2006 Decision,15 the MeTC ordered PNB to pay
respondent accrued rentals in the amount of ₱l,348,643.92,16
with interest at 6% per annum from January 16, 2005 up to
March 23, 2006, when PNB finally vacated the leased propeity.17
The MeTC likewise directed PNB to pay attorney's fees in the
amount of ₱20,000.00 and the cost of suit.
PNB appealed the August 9, 2006 MeTC Decision to the Regional
Trial Court (RTC), Branch 14, Manila, insisting that respondent is
not entitled to the disputed rental proceeds amounting to
₱l,348,643.92. According to PNB, the money should be applied to
offset respondent's outstanding loan pursuant to the
Deed of Assignment the latter executed in its favor. PNB also
argued that it is not liable to pay any interest on the lease
rentals since it did not incur any delay in the payment of rent.18

While the appeal was pending before the RTC, PNB initiated
foreclosure proceedings on the mortgaged property covered by
TCT No. 209631.19 The property was sold on October 31, 2006
for ₱l5,311,000.00 to PNB as the highest bidder. Notably, the
Certificate of Sale provides that respondent's indebtedness
amounted to ₱ll,211,283.53 as of May 15, 2005, "exclusive of
penalties, expenses, charges and the ten (10) percent attorney's
fees, plus sheriff fees and other lawful expenses of foreclosure
and sale."20
In light of this development, respondent filed a Memorandum21
before the RTC, claiming that PNB had no right to retain foe
₱l,348,643.92 consigned with the court. She insisted that her
loan was fully paid when PNB bought the mortgaged property at
₱15,3ll,000.00.22
PNB filed a Rejoinder23 and argued that respondent's
outstanding obligation as of October 31, 2006 was
₱18,016,300.71 while the bid price was only ₱l5,31l,000.00.
Thus, PNB claimed that it is entitled to a deficiency claim
amounting to ₱2,705,300.71 to which the rental proceeds of
₱l,348,643.92 can be applied.24
Ruling of the Regional Trial Court
The RTC affirmed the MeTC ruling in its December 7, 2006
Decision.25 It found that respondent's obligation to PNB "has
already been paid, notwithstanding the belated claim of [the
latter] that there remains a deficiency."26 The RTC noted that
the ₱11,211,283.53 amount of indebtedness stated in the Notice
of Extra-Judicial Sale27 dated August 9, 2006 as of May 15, 2006
plus penalties, expenses, charges, attorney's fees and expenses
could have been easily covered by the ₱l5,31l,000.00 bid
price.28
In addition, the RTC held that PNB incurred delay "when despite
demand, it refused to pay and vacate the premises.29 " As such,
the RTC ruled that the respondent is entitled to legal interest at
6% per annum and attorney's fees for having been compelled to
litigate to protect her interests.30
The respondent then moved for the issuance of a Writ of
Execution which was granted by the HTC in its December 18,
2006 Order.31 According to the Sheriff's Report of Execution32
dated January 2, 2007, the amount of ₱l,348,643.92,
representing the monthly rentals from January 16, 2005 up to
March 23, 2006, was turned over to the respondent on
December 20, 2006.33
PNB filed a motion for reconsideration of the December 7, 2006
Decision and for the quashal of the Writ of Execution, but the
RTC denied the motion in its Order dated February 6, 2007.34
Following the denial, PNB filed a Petition for Review under Rule
42 of the Rules of Court before the CA, challenging the RTC's
December 7, 2006 Decision and February 6, 2007 Order.
Ruling of the Court of Appeals
The CA pointed out that PNB' s entitlement to the rental proceeds
in the amount of ₱1,348,643.92 is dependent on whether there is
a deficiency in payment after the foreclosure sale.35 It, however,
found no sufficient evidence on record that the amount of
respondent's liability as of October 31, 2006 is indeed
₱18,016,300.71, as PNB claims.36 Consequently, the CA
remanded the case the MeTC for the proper reception of
evidence and determination, if any, of the deficiency on the
foreclosure sale with the following guidelines:37
(1) From October 2004 to January 15, 2005: Principal+
Interest+ Penalties - Monthly Rentals (from October 2004 to
January 15, 2005 by virtue of the Deed of Assignment) =New
Principal
150
(2) From January 16, 2005 to October 31, 2006: New Principal +
Interest + Penalties - Interest Earned by PN'B from the Savings
Account = Outstanding Obligation as of October 31, 2006
(3) Outstanding Obligation as of October 31, 2006 –
₱15,311,000.00 = Deficiency38
As regards the payment of legal interest, the CA noted that PNB
merely opened a non-drawing savings account wherein it
deposited the monthly rentals from January 16, 2005 to
February 2006. Such deposit of the rentals in a savings account,
however, is not the consignation contemplated by law. Thus, the
CA found PNB liable to pay the 6% legal interest rate prescribed
under Article 2209 of the Civil Code for having defaulted in the
payment of its monthly rentals to the respondent.39
Finally, the CA deleted the award of atton1ey's fees, pursuant to
the general rule that attorney's fees cannot be recovered as part
of damages because of the public policy that no premium should
be placed on the right to litigate.40
PNB filed a partial Motion for Reconsideration, but the CA denied
the motion in its Resolution dated February 21, 2013. As a
consequence, PNB filed the present Petition for Review on
Certiorari before the Court, assailing the CA's May 28, 2012
Decision and February 21, 2013 Resolution.
Issues
In the present Petition, PNB raises the following issues for the
Court's resolution: first, whether PNB properly consigned the
disputed rental payments in the amount of ₱l,348,643.92 with
the Office of the Clerk of Court of the MeTC of Manila;41 second,
whether PNB incurred delay in the payment of rentals to the
respondent, making it liable to pay legal interest to the latter;42
and third, whether PNB is entitled to the disputed rental
proceeds in order to cover the alleged deficiency in payment of
the respondent's liability after the foreclosure proceedings.43
The Court's Ruling
We DENY the Petition for Review on Certiorari as we find no
reversible error committed by the CA in issuing its assailed
Decision and Resolution.
"Consignation is the act of depositing the thing due with the
court or judicial authorities whenever the creditor cannot accept
or refuses to accept payment. [ I]t generally requires a prior
tender of payment."44
Under Article 1256 of the Civil Code, consignation alone is
sufficient even without a prior tender of payment a) when the
creditor is absent or unknown or does not appear at the place of
payment; b) when he is incapacitated to receive the payment at
the time it is due; c) when, without just cause, he refuses to give
a receipt; d) when two or more persons claim the same right to
collect; and e) when the title of the obligation has been lost.
For consignation to be valid, the debtor must comply with the
following requirements under the law:
1) there was a debt due;
2) valid prior tender of payment, unless the consignation was
made because of some legal cause provided in Article 1256;
3) previous notice of the consignation has been given to the
persons interested in the performance of the obligation;
4) the amount or thing due was placed at the disposal of the
court; and,
5) after the consignation had been made, the persons interested
were notified thereof:45

"Failure in any of the requirements is enough ground to render a
consignation ineffective."46
In the present case, the records show that: first, PNB had the
obligation to pay respondent a monthly rental of ₱l16,788.44,
amounting to ₱l,348,643.92, from January 16, 2005 to March 23,
2006;47 second, PNB had the option to pay the monthly rentals
to respondent or to apply the same as payment for respondent's
loan with the bank, but PNB did neither;48 third, PNB instead
opened a non-drawing savings account at its Paco Branch under
Account No. 202- 565327-3, where it deposited the subject
monthly rentals, due to the claim of Chua of the same right to
collect the rent;49 and fourth, PNB consigned the amount of
Pl,348,643.92 with the Office of the Clerk of Court of the MeTC of
Manila on
May 31, 2006.50
Note that PNB's deposit of the subject monthly rentals in a non-
drawing savings account is not the consignation contemplated by
law, precisely because it does not place the same at the disposal
of the court.51 Consignation is necessarily judicial; it is not
allowed in venues other than the courts.52 Consequently, PNB's
obligation to pay rent for the period of January 16, 2005 up to
March 23, 2006 remained subsisting, as the deposit of the
rentals cannot be considered to have the effect of payment.
It is important to point out that PNB's obligation to pay the
subject monthly rentals had already fallen due and demandable
before PNB consigned the rental proceeds with the MeTC on May
31, 2006. Although it is true that consignment has a retroactive
effect, such payment is deemed to have been made only at the
time of the deposit of the thing in court or when it was placed at
the disposal of the judicial authority.53 Based on these premises,
PNB's payment of the monthly rentals can only be considered to
have been made not earlier than May 31, 2006.
Given its belated consignment of the rental proceeds in court,
PNB clearly defaulted in the payment of monthly rentals to the
respondent for the period January 16, 2005 up to March 23,
2006, when it finally vacated the leased property, As such, it is
liable to pay interest in accordance with Article 2209 of the Civil
Code.1âwphi1
Article 2209 provides that if the debtor incurs delay in the
performance of an obligation consisting of the payment of a sum
of money, he shall be liable to pay the interest agreed upon, and
in the absence of stipulation, the legal interest at 6% per annum.
There being no stipulated interest in this case, PNB is liable to
pay legal interest at 6% per annum, from January 16, 2005 up to
May 30, 2006
As for the issue on PNB' s entitlement to the subject rental
proceeds to cover the deficiency in payment after the foreclosure
sale of the mortgaged property, we agree with the CA's finding
that there is no sufficient evidence on record to show that such a
deficiency exists.54 Unfortunately, the Statement of Account55
submitted by PNB is not enough to prove this claim, considering
that it is unsupported by any corroborating evidence. Besides,
the copy of the document in our records, both in the CA rollo and
the Supreme Court rollo,56 consists of illegible pages.
We likewise agree with the CA's conclusion that the RTC seriously
erred when it categorically stated that the loan was folly paid by
virtue of the foreclosure sale without determining the extent of
the respondent's liability as of October 1, 2006, the date of the
foreclosure sale.57 Specifically, the RTC held that:
x x x In this regard, the amount of the indebtedness was clearly
stated in the Notice of Extra-Judicial Sale dated August 9, 2006
as ₱l1,211,283.53, as of May 15, [2006], exclusive of penalties,
expenses, charges, attorney's fees and expenses. And since the
property was sold to the bank as the winning bidder at
₱15,311,000,00, obviously, the difference could have easily
covered the said penalties, etc."58
151
This is clearly an error. It is settled that a mortgagee has the
light to recover the deficiency resulting from the difference
between the amount obtained in the sale at public auction and
the outstanding obligation of the mortgagor at the time of the
foreclosure proceedings.59 The RTC failed to consider that the
amount of indebtedness indicated in the Notice of Extra-Judicial
Sale60 dated August 9, 2006 was computed by PNB as of May
15, 2006. Surely, the respondent's liability would have
significantly increased by the time the foreclosure sale was held
on October 31, 2006.
It also appears that the RTC merely assumed that the bid price
would cover the deficiency in payment, without actually making a
determination of whether such a deficiency exists and how much
it really is.
In these lights, we uphold the CA's ruling remanding the case to
the MeTC for the proper reception of evidence and computation
of respondent's total indebtedness as of October 31, 2006, in
order to determine whether there exists a deficiency in payment
as PNB insists.
WHEREFORE, we DENY the Petition for Review on Certiorari and
AFFIRM the Decision dated May 28, 2012 and the Resolution
dated February 21, 2013 of the Court of Appeals in CA-G.R. SP
No. 98112.
SO ORDERED.
[G.R. No. 116896. May 5, 1997]
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION
petitioner, vs. COURT OF APPEALS, MA. TERESA S. RAYMUNDO-
ABARRA, JOSE S. RAYMUNDO, ANTONIO S. RAYMUNDO, RENE S.
RAYMUNDO, and AMADOR S. RAYMUNDO, respondents.
DECISION
DAVIDE, JR., J.:
This petition for review on certiorari has its roots in Civil Case
No. 53444, which was sparked by the petitioner's refusal to pay
the rentals as stipulated in the contract of lease[1] on an
undivided portion of 30,000 square meters of a parcel of land
owned by the private respondents.
The lease contract, executed on 18 November 1985, reads in
part as follows:
1. TERM OF LEASE - This lease shall be for a period of five (5)
years, commencing on the date of issuance of the industrial
clearance by the Ministry of Human Settlements, renewable for a
like or other period at the option of the LESSEE under the same
terms and conditions.
2. RATE OF RENT - LESSEE shall pay to the LESSOR rent at the
monthly rate of TWENTY THOUSAND PESOS (P20,000.00),
Philippine Currency, in the manner set forth in Paragraph 3
below. This rate shall be increased yearly by Five Percent (5%)
based on the agreed monthly rate of P20,000.00 as follows:
Monthly Rate Period Applicable
P21,000.00 Starting on the 2nd year
P22,000.00 Starting on the 3rd year
P23,000.00 Starting on the 4th year
P24,000.00 Starting on the 5th year
3. TERMS OF PAYMENT - The rent stipulated in Paragraph 2
above shall be paid yearly in advance by the LESSEE. The first
annual rent in the amount of TWO HUNDRED FORTY THOUSAND
PESOS (P240,000.00), Philippine currency, shall be due and
payable upon the execution of this Agreement and the

succeeding annual rents shall be payable every twelve (12)
months thereafter during the effectivity of this Agreement.
4. USE OF LEASED PROPERTY - It is understood that the Property
shall be used by the LESSEE as the site, grounds and premises of
a rock crushing plant and field office, sleeping quarters and
canteen/mess hall. The LESSORS hereby grant to the LESSEE the
right to erect on the Leased Property such structure(s) and/or
improvement(s) necessary for or incidental to the LESSEE's
purposes.
...
11. TERMINATION OF LEASE - This Agreement may be
terminated by mutual agreement of the parties. Upon the
termination or expiration of the period of lease without the same
being renewed, the LESSEE shall vacate the Leased Property at
its expense.
On 7 January 1986, petitioner obtained from the Ministry of
Human Settlements a Temporary Use Permit[2] for the proposed
rock crushing project. The permit was to be valid for two years
unless sooner revoked by the Ministry.
On 16 January 1986, private respondents wrote petitioner
requesting payment of the first annual rental in the amount of
P240,000 which was due and payable upon the execution of the
contract. They also assured the latter that they had already
stopped considering the proposals of other aggregates plants to
lease the property because of the existing contract with
petitioner.[3]
In its reply-letter, petitioner argued that under paragraph 1 of
the lease contract, payment of rental would commence on the
date of the issuance of an industrial clearance by the Ministry of
Human Settlements, and not from the date of signing of the
contract. It then expressed its intention to terminate the
contract, as it had decided to cancel or discontinue with the rock
crushing project "due to financial, as well as technical,
difficulties."[4]
The private respondents refused to accede to petitioner's request
for the pretermination of the lease contract. They insisted on the
performance of petitioner's obligation and reiterated their
demand for the payment of the first annual rental.[5]
Petitioner objected to the claim of the private respondents and
argued that it was "only obligated to pay ... the amount of
P20,000.00 as rental payments for the one-month period of
lease, counted from 07 January 1986 when the Industrial Permit
was issued by the Ministry of Human Settlements up to 07
February 1986 when the Notice of Termination was served"[6] on
private respondents.
On 19 May 1986, the private respondents instituted with the
Regional Trial Court of Pasig an action against petitioner for
Specific Performance with Damages.[7] The case was docketed
as Civil Case No. 53444 at Branch 160 of the said court. After the
filing by petitioner of its Answer with Counterclaim, the case was
set for trial on the merits.
What transpired next was summarized by the trial court in this
wise:
Plaintiffs rested their case on September 7, 1987 (p. 87 rec.).
Defendant asked for postponement of the reception of its
evidence scheduled on August 10, 1988 and as prayed for, was
reset to August 25, 1988 (p. 91 rec.) Counsel for defendant
again asked for postponement, through representative, as he
was presently indisposed. The case was reset, intransferable to
September 15 and 26, 1988 (p. 94 rec.) On September 2, 1988,
the office of the Government Corporate Counsel entered its
appearance for defendant (p. 95, rec.) and the original counsel
later withdrew his appearance. On September 15, 1988 the
Government Corporate Counsel asked for postponement,
152
represented by Atty. Elpidio de Vega, and with his conformity in
open court, the hearing was reset, intransferable to September
26 and October 17, 1988. (p. 98, rec.) On September 26, 1988
during the hearing, defendant's counsel filed a motion for
postponement (urgent) as he had "sore eyes", a medical
certificate attached.
Counsel for plaintiffs objected to the postponement and the court
considered the evidence of the government terminated or
waived. The case was deemed submitted for decision upon the
filing of the memorandum. Plaintiffs filed their memorandum on
October 26, 1988. (p. 111, rec.).
On October 18, 1988 in the meantime, the defendant filed a
motion for reconsideration of the order of the court on
September 26, 1988 (p. 107, rec.) The motion was not asked to
be set for hearing (p. 110 rec.) There was also no proof of notice
and service to counsel for plaintiff. The court in the interest of
justice set the hearing on the motion on November 29, 1988. (p.
120, rec.) but despite notice, again defendant's counsel was
absent (p. 120-A, dorsal side, rec.) without reason. The court
reset the motion to December 16, 1988, in the interest of justice.
The motion for reconsideration was denied by the court. A
second motion for reconsideration was filed and counsel set for
hearing the motion on January 19, 1989. During the hearing,
counsel for the government was absent. The motion was deemed
abandoned but the court at any rate, after a review of the
incidents and the grounds relied upon in the earlier motion of
defendant, found no reason to disturb its previous order.[8]
On 12 April 1989, the trial court rendered a decision ordering
petitioner to pay the private respondents the amount of
P492,000 which represented the rentals for two years, with legal
interest from 7 January 1986 until the amount was fully paid,
plus attorney's fees in the amount of P20,000 and costs.[9]
Petitioner then appealed to the Court of Appeals alleging that the
trial court erred in ordering it to pay the private respondent the
amount of P492,000 and in denying it the right to be heard.
Upon the affirmance of the trial court's decision[10] and the
denial of its motion for reconsideration, petitioner came to this
Court ascribing to the respondent Court of Appeals the same
alleged errors and reiterating their arguments.
First. Petitioner invites the attention of this Court to paragraph 1
of the lease contract, which reads: "This lease shall be for a
period of five (5) years, commencing on the date of issuance of
the industrial clearance by the Ministry of Human
Settlements...." It then submits that the issuance of an industrial
clearance is a suspensive condition without which the rights
under the contract would not be acquired. The Temporary Use
Permit is not the industrial clearance referred to in the contract;
for the said permit requires that a clearance from the National
Production Control Commission be first secured, and besides,
there is a finding in the permit that the proposed project does
not conform to the Zoning Ordinance of Rodriguez, (formerly
Montalban), Rizal, where the leased property is located. Without
the industrial clearance the lease contract could not become
effective and petitioner could not be compelled to perform its
obligation under the contract.
Petitioner is now estopped from claiming that the Temporary Use
Permit was not the industrial clearance contemplated in the
contract. In its letter dated 24 April 1986, petitioner states:
We wish to reiterate PNCC Management's previous stand that it
is only obligated to pay your clients the amount of P20,000.00 as
rental payments for the one-month period of the lease, counted
from 07 January 1986 when the Industrial Permit was issued by
the Ministry of Human Settlements up to 07 February 1986 when
the Notice of Termination was served on your clients.[11]
(Underscoring Supplied).

The "Industrial Permit" mentioned in the said letter could only
refer to the Temporary Use Permit issued by the Ministry of
Human Settlements on 7 January 1986. And it can be gleaned
from this letter that petitioner has considered the permit as
industrial clearance; otherwise, petitioner could have simply told
the private respondents that its obligation to pay rentals has not
yet arisen because the Temporary Use Permit is not the industrial
clearance contemplated by them. Instead, petitioner recognized
its obligation to pay rental counted from the date the permit was
issued.
Also worth noting is the earlier letter of petitioner; thus:
[P]lease be advised of PNCC Management's decision to cancel or
discontinue with the rock crushing project due to financial as well
as technical difficulties. In view thereof, we would like to
terminate our Lease Contract dated 18 November, 1985. Should
you agree to the mutual termination of our Lease Contract,
kindly indicate your conformity hereto by affixing your signature
on the space provided below. May we likewise request Messrs.
Rene, Jose and Antonio, all surnamed Raymundo and Mrs.
Socorro A. Raymundo as Attorney-in-Fact of Amador S.
Raymundo to sign on the spaces indicated below.[12]
It can be deduced from this letter that the suspensive condition -
issuance of industrial clearance - has already been fulfilled and
that the lease contract has become operative. Otherwise,
petitioner did not have to solicit the conformity of the private
respondents to the termination of the contract for the simple
reason that no juridical relation was created because of the non-
fulfillment of the condition.
Moreover, the reason of petitioner in discontinuing with its
project and in consequently cancelling the lease contract was
financial as well as technical difficulties, not the alleged
insufficiency of the Temporary Use Permit.
Second. Invoking Article 1266 and the principle of rebus sic
stantibus, petitioner asserts that it should be released from the
obligatory force of the contract of lease because the purpose of
the contract did not materialize due to unforeseen events and
causes beyond its control, i.e., due to abrupt change in political
climate after the EDSA Revolution and financial difficulties.
It is a fundamental rule that contracts, once perfected, bind both
contracting parties, and obligations arising therefrom have the
force of law between the parties and should be complied with in
good faith.[13] But the law recognizes exceptions to the principle
of the obligatory force of contracts. One exception is laid down in
Article 1266 of the Civil Code, which reads: "The debtor in
obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the
obligor."
Petitioner cannot, however, successfully take refuge in the said
article, since it is applicable only to obligations "to do", and not
to obligations "to give".[14] An obligation "to do" includes all
kinds of work or service; while an obligation "to give" is a
prestation which consists in the delivery of a movable or an
immovable thing in order to create a real right, or for the use of
the recipient, or for its simple possession, or in order to return it
to its owner.[15]
The obligation to pay rentals[16] or deliver the thing in a
contract of lease[17] falls within the prestation to give; hence, it
is not covered within the scope of Article 1266. At any rate, the
unforeseen event and causes mentioned by petitioner are not the
legal or physical impossibilities contemplated in said article.
Besides, petitioner failed to state specifically the circumstances
brought about by the abrupt change in the political climate in the
country except the alleged prevailing uncertainties in
government policies on infrastructure projects.
The principle of rebus sic stantibus[18] neither fits in with the
facts of the case. Under this theory, the parties stipulate in the
153
light of certain prevailing conditions, and once these conditions
cease to exist the contract also ceases to exist.[19] This theory
is said to be the basis of Article 1267 of the Civil Code, which
provides:
ART. 1267. When the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor
may also be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events,
is not, however, an absolute application of the principle of rebus
sic stantibus, which would endanger the security of contractual
relations. The parties to the contract must be presumed to have
assumed the risks of unfavorable developments. It is therefore
only in absolutely exceptional changes of circumstances that
equity demands assistance for the debtor.[20]
In this case, petitioner wants this Court to believe that the
abrupt change in the political climate of the country after the
EDSA Revolution and its poor financial condition rendered the
performance of the lease contract impractical and inimical to the
corporate survival of the petitioner.
This Court cannot subscribe to this argument. As pointed out by
private respondents:[21]
It is a matter of record that petitioner PNCC entered into a
contract with private respondents on November 18, 1985. Prior
thereto, it is of judicial notice that after the assassination of
Senator Aquino on August 21, 1983, the country has experienced
political upheavals, turmoils, almost daily mass demonstrations,
unprecedented, inflation, peace and order deterioration, the
Aquino trial and many other things that brought about the hatred
of people even against crony corporations. On November 3,
1985, Pres. Marcos, being interviewed live on U.S. television
announced that there would be a snap election scheduled for
February 7, 1986.
On November 18, 1985, notwithstanding the above, petitioner
PNCC entered into the contract of lease with private respondents
with open eyes of the deteriorating conditions of the country.
Anent petitioners alleged poor financial condition, the same will
neither release petitioner from the binding effect of the contract
of lease. As held in Central Bank v. Court of Appeals,[22] cited
by the private respondents, mere pecuniary inability to fulfill an
engagement does not discharge a contractual obligation, nor
does it constitute a defense to an action for specific performance.
With regard to the non-materialization of petitioners particular
purpose in entering into the contract of lease, i.e., to use the
leased premises as a site of a rock crushing plant, the same will
not invalidate the contract. The cause or essential purpose in a
contract of lease is the use or enjoyment of a thing.[23] As a
general principle, the motive or particular purpose of a party in
entering into a contract does not affect the validity or existence
of the contract; an exception is when the realization of such
motive or particular purpose has been made a condition upon
which the contract is made to depend.[24] The exception is not
apply here.
Third. According to petitioner, the award of P492,000
representing the rent for two years is excessive, considering that
it did not benefit from the property. Besides, the temporary
permit, conformably with the express provision therein, was
deemed automatically revoked for failure of petitioner to use the
same within one year from the issuance thereof. Hence, the rent
payable should only be for one year.
Petitioner cannot be heard to complain that the award is
excessive. The temporary permit was valid for two years but was
automatically revoked because of its non-use within one year
from its issuance. The non-use of the permit and the non-entry
into the property subject of the lease contract were both
imputable to petitioner and cannot, therefore, be taken

advantage of in order to evade or lessen petitioners monetary
obligation. The damage or prejudice to private respondents is
beyond dispute. They unquestionably suffered pecuniary losses
because of their inability to use the leased premises. Thus, in
accordance with Article 1659 of the Civil Code,[25] they are
entitled to indemnification for damages; and the award of
P492,000 is fair and just under the circumstances of the case.
Finally, petitioner submits that the trial court gravely abused its
discretion in denying petitioner the right to be heard.
We disagree. The trial court was in fact liberal in granting several
postponements[26] to petitioner before it deemed terminated
and waived the presentation of evidence in petitioners behalf.
It must be recalled that private respondents rested their case on
7 September 1987 yet.[27] Almost a year after, or on 10 August
1988 when it was petitioners turn to present evidence,
petitioners counsel asked for postponement of the hearing to 25
August 1988 due to conflict of schedules,[28] and this was
granted.[29] At the rescheduled hearing, petitioners counsel,
through a representative, moved anew for postponement, as he
was allegedly indisposed.[30] The case was then reset
intransferable to September 15 and 26, 1988.[31] On 2
September 1988, the Office of the Government Corporate
Counsel, through Atty. Elpidio J. Vega, entered its appearance for
the petitioner,[32] and later the original counsel withdrew his
appearance.[33] On 15 September 1988, Atty. Vega requested
for postponement to enable him to go over the records of the
case.[34] With his conformity, the hearing was reset
intransferable to September 26 and October 17, 1988.[35] In the
morning of 26 September 1988, the court received Atty. Vegas
Urgent Motion for Postponement on the ground that he was
afflicted with conjunctivitis or sore eyes.[36] This time, private
respondents objected; and upon their motion, the court deemed
terminated and waived the presentation of evidence for the
petitioner.[37] Nevertheless, before the court considered the
case submitted for decision, it required the parties to submit
their respective memoranda within thirty days.[38] But petitioner
failed to file one.
Likewise, the court was liberal in respect to petitioners motion for
reconsideration. Notwithstanding the lack of request for hearing
and proof of notice and service to private respondents, the court
set the hearing of the said motion on 29 November 1988.[39]
Upon the denial of the said motion for lack of merit,[40]
petitioner filed a second motion for reconsideration. But during
the hearing of the motion on a date selected by him, Atty. Vega
was absent for no reason at all, despite due notice.[41]
From the foregoing narration of procedural antecedents, it
cannot be said that the petitioner was deprived of its day in
court. The essence of due process is simply an opportunity to be
heard.[42] To be heard does not only mean oral arguments in
court; one may be heard also through pleadings. Where
opportunity to be heard, either through oral arguments or
pleadings, is accorded, there is no denial of procedural due
process.[43]
WHEREFORE, the instant petition is DENIED and the challenged
decision of the Court of Appeals is AFFIRMED in toto.
No pronouncements as to costs.
SO ORDERED.
[G.R. No. 124221. August 4, 2000]
VICTORINO MAGAT, JR. substituted by heirs, OLIVIA D. MAGAT,
and minors MA. DULCE MAGAT, MA. MAGNOLIA MAGAT, RONALD
MAGAT and DENNIS MAGAT, petitioners, vs. COURT OF APPEALS
and SANTIAGO A. GUERRERO, respondents.
DECISION
PARDO, J.:
154
The case is an appeal[1] from the decision of the Court of
Appeals[2] reversing the decision of the Regional Trial Court of
Makati, Metro Manila,[3] ruling in favor of respondent Santiago
A. Guerrero and dismissing petitioners' complaint.
First, the facts.
Private respondent Santiago A. Guerrero (hereinafter referred to
as "Guerrero") was President and Chairman of[4] Guerrero
Transport Services", a single proprietorship.[5]
Sometime in 1972, Guerrero Transport Services won a bid for
the operation of a fleet of taxicabs within the Subic Naval Base,
in Olongapo. As highest bidder, Guerrero was to "provide radio-
controlled taxi service within the U. S. Naval Base, Subic Bay,
utilizing as demand requires... 160 operational taxis consisting of
four wheel, four-door, four passenger, radio controlled, meter
controlled, sedans, not more than one year..."[6]
On September 22, 1972, with the advent of martial law,
President Ferdinand E. Marcos issued Letter of Instruction No. 1
(hereinafter referred to as "the LOI"). We reproduce the text, as
follows:
"Letter of Instruction No. 1
"SUBJECT: SEIZURE AND CONTROL OF ALL PRIVATELY OWNED
NEWSPAPERS, MAGAZINES, RADIO AND TELEVISION FACILITIES
AND ALL OTHERMEDIA OF COMMUNICATION.
"To: 1.The Press Secretary
Office of the President
Manila
" 2. The Secretary
Department of National Defense
Camp E. Aguinaldo, Q.C.
"In view of the present national emergency which has been
brought about by the activities of those who are actively engaged
in a criminal conspiracy to seize political and state power in the
Philippines and to take over the Government by force and
violence the extent of which has now assumed the proportion of
an actual war against our people and their legitimate
Government, and pursuant to Proclamation No. 1081 dated
September 21, 1972, and in my capacity as commander in chief
of all the armed forces of the Philippines and in order to prevent
the use of privately owned newspapers, magazines, radio and
television facilities and all other media of communications, for
propaganda purposes against the government and its duly
constituted authorities or for any purpose that tend to undermine
the faith and confidence of the people in our government and
aggravate the present national emergency, you are hereby
ordered forthwith to take over and control or cause the taking
over and control of all such newspapers, magazines, radio and
television facilities and all other media of communications,
wherever they are, for the duration of the present national
emergency, or until otherwise ordered by me or by my duly
designated representative.
"In carrying out the foregoing order you are hereby also directed
to see to it that reasonable means are employed by you and your
men and that injury to persons and property must be carefully
avoided."
On September 25, 1972, pursuant to the aforequoted Letter of
Instruction, the Radio Control Office issued Administrative
Circular No. 4 (hereinafter referred to as "the Admin. Circular"),
herein quoted in full:
"SUBJECT: SUSPENDING THE ACCEPTANCE AND PROCESSING
OF APPLICATIONS FOR RADIO STATION CONSTRUCTION

PERMITS AND FOR PERMITS TO OWN AND/OR POSSESS RADIO
TRANSMITTERS OR TRANSCEIVERS.
"In view of the existence of a state of emergency and the
declaration by the President of martial law in the entire country
under Proclamation No. 1081 dated September 21, 1972,
effective immediately the acceptance and processing by the radio
control office of applications for radio stations constructions
permits and for permits to possess, own, transfer, purchase and
sale of radio transmitters and transreceivers as well as
manufacturers and dealers permits of said equipment is hereby
suspended. "Exempted from this circular are applications for
radio station construction permits and for permits to possess,
own, transfer, purchase and sell radio transmitters and
transceivers for the following radio stations:
"1. Aeronautical Stations;
" 2. Aeronautical Fixed Stations;
" 3. Aircraft Stations;
"4. Coastal Stations; and
"5. Ship Stations.
"This circular shall be strictly observed until lifted upon proper
instructions from higher authorities."
On September 25, 1972, Guerrero and Victorino D. Magat
(hereinafter referred to as Victorino), as General Manager of
Spectrum Electronic Laboratories, a single proprietorship,
executed a letter-contract for the purchase of transceivers at a
quoted price of US$77,620.59, FOB Yokohoma. Victorino was to
deliver the transceivers within 60 to 90 days after receiving
notice from Guerrero of the assigned radio frequency,[7] "taking
note of Government Regulations."[8]
The contract was signed and Victorino contacted his Japanese
supplier, Koide & Co., Ltd. and placed an order for the
transceivers.
On September 29, 1972, Navy Exchange Officer, A. G. Mason
confirmed that Guerrero won the bid for the commercial
transportation contract.[9]
On October 4, 1972, middle man and broker[10] Isidro Q.
Aligada of Reliance Group Engineers, Inc. (hereinafter referred to
as "Aligada"), wrote Victorino, informing him that a radio
frequency was not yet assigned to Guerrero and that government
regulations might complicate the importation of the transceivers.
However, in the same letter, Victorino was advised to advise his
supplier "to proceed (with) production pending frequency
information." Victorino was also assured of Guerrero's financial
capability to comply with the contract.[11]
On October 6, 1972, Guerrero informed Aligada of the frequency
number[12] assigned by Subic Naval Base authorities. Aligada
was instructed to "proceed with the order thru Spectrum
Electronics Laboratories."[13]
On October 7, 1972, Aligada informed Magat of the assigned
frequency number. Aligada also advised Victorino to "proceed
with the order upon receipt of letter of credit."[14]
On January 10, 1973, Guerrero applied for a letter of credit with
the Metropolitan Bank and Trust Company.[15] This application
was not pursued.[16]
On March 27, 1973, Victorino, represented by his lawyer, Atty.
Sinesio S. Vergara, informed Guererro that the order with the
Japanese supplier has not been canceled. Should the contract be
canceled, the Japanese firm would forfeit 30% of the deposit and
charge a cancellation fee in an amount not yet known, Guerrero
to bear the loss. Further, should the contract be canceled,
155
Victorino would demand an additional amount equivalent to 10%
of the contract price.[17]
Unable to get a letter of credit from the Central Bank due to the
refusal of the Philippine government[18] to issue a permit to
import the transceivers,[19] Guerrero commenced operation of
the taxi cabs within Subic Naval Base, using radio units borrowed
from the U.S. government (through the Subic Naval Base
authorities).[20] Victorino thus canceled his order with his
Japanese supplier.
On May 22, 1973, Victorino filed with the Regional Trial Court,
Makati a complaint for damages arising from breach of contract
against Guerrero.[21]
On June 7, 1973, Guerrero moved to dismiss the complaint on
the ground that it did not state a cause of action.[22]
On June 16, 1973, the trial court[23] granted the motion and
dismissed the complaint.[24]
On July 11, 1973, Victorino filed a petition for review on
certiorari with this Court assailing the dismissal of the complaint.
[25]
On April 20, 1983, this Court[26] ruled that the complaint
sufficiently averred a cause of action. We set aside the order of
dismissal and remanded the case to the trial court for further
proceedings, to wit:[27]
"ACCORDINGLY, the questioned order of dismissal is hereby set
aside and the case ordered remanded to the court of origin for
further proceedings. No costs.
"SO ORDERED."
On November 27, 1984, the trial court[28] ordered that the case
be archived for failure of Victorino to prosecute.[29]
On March 11, 1985, petitioners, Olivia, Dulce, Ma. Magnolia,
Ronald and Dennis Magat (hereinafter referred to as "heirs of
Victorino"), moved to reinstate the case and to substitute
Victorino in its prosecution. Apparently, Victorino died on
February 18, 1985.[30]
On April 29, 1985, the trial court granted the motion.[31]
On July 12, 1991, the trial court decided in favor of the heirs of
Victorino and ordered Guerrero to pay temperate, moral and
exemplary damages, and attorney's fees, disposing of the case in
this wise :[32]
"WHEREFORE, judgment is rendered for the substituted plaintiffs
and against the defendant
"1. Ordering defendant to pay substituted plaintiffs the sum of
-P25,000.00 for temperate damages for injury to plaintiff's
business dealings with foreign and local businessmen;
"2. P50,000.00 as moral damages;
"3. P25,000.00 as exemplary damages; and
"4. P20,000.00 as attorney's fees.
"SO ORDERED."
On August 21, 1991, Guerrero appealed to the Court of Appeals.
[33]
On October 4, 1995, the Court of Appeals rendered the decision
appealed from, disposing as follows:[34]
"WHEREFORE, judgment is hereby rendered DISMISSING the
complaint.

"No pronouncements as to costs.
" SO ORDERED."
On October 26, 1995, the heirs of Victorino filed with the Court
of Appeals a motion for reconsideration.[35]
On March 12, 1996, the Court of Appeals denied the motion for
reconsideration.[36]
Hence, this appeal.[37]
The issue is whether the contract between Victorino and
Guerrero for the purchase of radio transceivers was void. Stated
differently, whether the transceivers subject of the contract were
banned/ contraband items prohibited by the LOI and the
Administrative Circular to import.
The contract was valid; the radio transceivers were not
contraband.
"Contraband" generally refers to "any property which is unlawful
to produce or possess." It refers to goods which are exported
and imported into a country against its laws.[38]
In declaring the contract void ab initio, the Court of Appeals
ruled that the importation of the transceivers meant the
inevitable passing of such goods through Philippine Ports, where
the LOI and the Administrative Circular have to be observed and
applied with full force and effect.[39] The Court of Appeals
declared that the proposed importation of such goods was
contrary to law, hence, the nullity of the contract.[40]
We do not agree. The contract was not void ab initio. Nowhere in
the LOI and Admin. Circular is there an express ban on the
importation of transceivers.
The LOI and Administrative Circular did not render "radios and
transceivers" illegal per se. The Administrative Circular merely
ordered the Radio Control Office to suspend the "acceptance and
processing .... of applications... for permits to possess, own,
transfer, purchase and sell radio transmitters and
transceivers..."[41] Therefore, possession and importation of the
radio transmitters and transceivers was legal provided one had
the necessary license for it.[42] Transceivers were not prohibited
but merely regulated goods. The LOI and Administrative Circular
did not render the transceivers outside the commerce of man.
They were valid objects of the contract.[43]
Affirming the validity of the contract, we next discuss whether
the contract was breached.
Guerrero testified that a permit to import the transceivers from
Japan was denied by the Radio Control Board. He stated that he,
together with Aligada, Victorino and a certain John Dauden
personally went to the Radio Control Office, and were denied a
permit to import. They also went to the Office of the President,
where Secretary Ronaldo B. Zamora explained that radios were
"banned like guns because of martial law."[44] Guerrero testified
that this prevented him from securing a letter of credit from the
Central Bank.[45] This testimony was not rebutted.
The law provides that "[w]hen the service (required by the
contract) has become so manifestly beyond the contemplation of
the parties, the obligor may also be released therefrom, in whole
or in part."[46] Here, Guerrero's inability to secure a letter of
credit and to comply with his obligation was a direct consequence
of the denial of the permit to import. For this, he cannot be
faulted.
Even if we assume that there was a breach of contract, damages
cannot be awarded. Damnum absque injuria.
156
There was no bad faith.[47] Bad faith does not simply connote
bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of wrong. It means a
breach of a known duty through some motive or interest or ill
will that partakes of the nature of fraud.[48] Guerrero honestly
relied on the representations of the Radio Control Office and the
Office of the President.
True, Guerrero borrowed equipment from the Subic Naval Base
authorities at zero cost.[49] This does not automatically translate
to bad faith. Guerrero was faced with the danger of the
cancellation of his contract with Subic Naval Base. He borrowed
equipment as a prudent and swift alternative. There was no
proof that he resorted to this option with a deliberate and
malicious intent to dishonor his contract with Victorino. An award
of damages surely cannot be based on mere hypotheses,
conjectures and surmises. Good faith is presumed, the burden of
proving bad faith rests on the one alleging it.[50] Petitioners did
not effectively discharge the burden in this case.
To recover moral damages in an action for breach of contract,
the breach must be palpably wanton, reckless, malicious, in bad
faith, oppressive or abusive.[51] This is not the case here.
Exemplary damages also cannot be awarded. Guerrero did not
act in a wanton, fraudulent, reckless, oppressive or malevolent
manner.[52]
Neither can actual damages be awarded. True, indemnification
for damages contemplates not only actual loss suffered
(damnum emergens) but unrealized profits (lucrum cessans) as
well.[53] However, to be entitled to adequate compensation for
pecuniary loss, the loss must be actually suffered and duly
proved.[54] To recover actual damages, the amount of loss must
not only be capable of proof, but must be proven with a
reasonable degree of certainty. The claim must be premised
upon competent proof or upon the best evidence obtainable,[55]
such as receipts[56] or other documentary proof.
Only the testimony of Aligada was presented to substantiate
petitioners' claim for unrealized profits.[57] Aligada testified that
as a result of the cancellation of the contract, Victorino had to
suspend transactions with his Japanese supplier for six (6)
months. Aligada stated that the volume of Victorino's business
with Subic Naval Base also diminished significantly. Aligada
approximated that Victorino's unrealized business opportunities
amounted to P400,000.00.[58] Being a witness for Victorino's
heirs and standing to gain from the contract's fulfillment,
Aligada's testimony is self-serving. It is also hearsay. We fail to
see how this "evidence" proves actual damages with a
"reasonable degree of certainty."[59] If proof is "flimsy", we
cannot award actual damages.[60]
WHEREFORE, we AFFIRM the decision of the Court of Appeals
promulgated on October 11, 1995, in CA-G. R. CV No. 34952,
dismissing the complaint.
No costs.
SO ORDERED.
FIRST DIVISION
[ G.R. No. 160033, July 01, 2015 ]
TAGAYTAY REALTY CO., INC., PETITIONER, VS. ARTURO G.
GACUTAN, RESPONDENT.
DECISION
BERSAMIN, J.:
The Court reiterates the right of the installment buyer of a
subdivision lot to withhold payment of his amortizations for the
duration that the subdivision developer has not complied with its
contractual undertaking to build the promised amenities in the
subdivision.
The Case

On appeal by the subdivision developer is the decision
promulgated on May 29, 2003,[1] whereby the Court of Appeals
(CA) upheld the ruling in favor of the installment buyer issued on
December 6, 2001 by the Office of the President (OP).[2] By
such ruling, the OP affirmed the July 14, 1997 decision[3]
rendered by the Housing and Land Use Regulatory Board
(HLURB) Board of Commissioners adopting the HLURB Arbiter's
decision dated March 22, 1995.[4]
Antecedents
On September 6, 1976, the respondent entered into a contract to
sell with the petitioner for the purchase on installment of a
residential lot with an area of 308 square meters situated in the
Foggy Heights Subdivision then being developed by the
petitioner.[5] Earlier, on June 30, 1976, the petitioner executed
an express undertaking in favor of the respondent, as follows:[6]
We hereby undertake to complete the development of the roads,
curbs, gutters, drainage system, water and electrical systems, as
well as all the amenities to be introduced in FOGGY HEIGHTS
SUBDIVISION, such as, swimming pool, pelota court, tennis
and/or basketball court, bath house, children's playground and a
clubhouse within a period of two years from 15 July 1976, on the
understanding that failure on their part to complete such
development within the stipulated period shall give the VENDEE
the option to suspend payment of the monthly amortization on
the lot/s he/she purchased until completion of such development
without incurring penalty interest.
It is clearly understood, however, that the period or periods
during which we cannot pursue said development by reason of
any act of God, any act or event constituting force majeure or
fortuitous event, or any restriction, regulation, or prohibition by
the government or any of its branches or instrumentalities, shall
suspend the running of said 2-year period and the running
thereof shall resume upon the cessation of the cause of the
stoppage or suspension of said development.
In his letter dated November 12, 1979,[7] the respondent
notified the petitioner that he was suspending his amortizations
because the amenities had not been constructed in accordance
with the undertaking. Despite receipt of the respondent's other
communications requesting updates on the progress of the
construction of the amenities so that he could resume his
amortization,[8] the petitioner did not reply. Instead, on June
10, 1985, the petitioner sent to him a statement of account
demanding the balance of the price, plus interest and penalty.[9]
He refused to pay the interest and penalty.
On October 4, 1990, the respondent sued the petitioner for
specific performance in the HLURB, praying that the petitioner be
ordered to accept his payment of the balance of the contract
without interest and penalty, and to deliver to him the title of the
property.[10]
In its answer,[11] the petitioner sought to be excused from
performing its obligations under the contract, invoking Article
1267 of the Civil Code as its basis. It contended that the
depreciation of the Philippine Peso since the time of the
execution of the contract, the increase in the cost of labor and
construction materials, and the increase in the value of the lot in
question were valid justifications for its release from the
obligation to construct the amenities.
In its positiOn paper,[12] the petitiOner stated that it had
purposely suspended the construction of the amenities which
would have deteriorated at any rate because its lot buyers had
not constructed their houses in the subdivision.
On March 22, 1995, the HLURB Arbiter ruled m favor of the
respondent,[13] to wit:
WHEREFORE, premises considered, respondents are hereby
ordered to accept the payment of the balance of the contract
price in the amount of Eight Thousand Five Hundred Eighty
Seven and 80/100 Pesos (P8,587.80) without regular and
157
penalty interest and, thereafter, to execute and deliver to
complainant the absolute deed of sale covering the sale of
property subj,ct of this complaint, together with the valid title
over the said lot.[14]
The petitioner appealed, but the HLURB Board of Commissioners
affirmed the ruling of the HLURB Arbiter on July 14, 1997.[15]
Upon the denial of its motion for reconsideration, the petitioner
appealed to the OP.[16]
On December 6, 2001, the OP upheld the decision of the HLURB
Board of Commissioners.[17] The OP later denied the petitioner's
motion for reconsideration.[18]
On appeal, the CA affirmed the OP through the assailed decision
promulgated on May 29, 2003,[19] disposing:
WHEREFORE, premises considered and finding no reversible error
in the challenged Decision and Order dated December 6, 2001,
and July 1, 2002, respectively, of the Office of the President in
OP Case No. 98-C-8261 said Decision and Order are AFFIRMED
and UPHELD, and the petition is DISMISSED for lack of merit.
SO ORDERED.[20]
The CA denied the petitioner's motion for reconsideration.[21]
Issues
In this appeal by petition for review on certiorari, the petitioner
contends that the CA erred in affirming the incorrect findings of
the OP in a way probably not in accord with law; and in declaring
that the respondent was not guilty of laches.
The petitioner submits that the CA, by observing that the
petitioner did not fulfill its obligation to finish the subdivision
project and that it had itself admitted not having finished the
project, did not consider that it must be discharged because
extraordinary and unforeseeable circumstances had rendered its
duty to perform its obligation so onerous that to insist on the
performance would have resulted in its economic ruin; that the
Court should consider the practical circumstances surrounding
the construction of the luxurious amenities of the project; that
the luxurious amenities of the project would only be exposed to
the elements, resulting in wastage and loss of resources,
because none of the lot buyers had constructed any house in the
subdivision; that delaying the construction for that reason was
reasonable on its part considering that no one would have
benefited from the amenities anyway, and was also a sound
business practice because the construction would be at great
cost to it as the developer; that another justification for the non-
construction was its having suffered extreme economic hardships
during the political and economic turmoil of the 1980s that the
parties did not foresee at the time they entered into their
contract; that under Article 1267 of the Civil Code, equity
demanded a certain economic equilibrium between the prestation
and the counter-prestation, and did not permit the unlimited
impoverishment of one party for the benefit of the other by the
excessive rigidity of the principle of the obligatory force of
contracts; that as the debtor, it should be partially excused or
altogether released from its obligations due to the extraordinary
obstacles to the prestation, which could be overcome only by a
sacrifice that would be absolutely disproportionate, or with very
grave risks, or by violating some important duties; and that the
CA thereby erred in closing its eyes to the realities, and in opting
not to apply the principles of equity in favor of applying the
terms of the agreement even if doing so would cause the
economic ruin of one of the parties.
The petitioner further submits that the CA erred in declaring that
it was apparent that there was no "unreasonable failure" on the
part of the respondent because he had made timely written
demands on November 12, 1979, February 11, 1983, March 20,
1984, June 24, 1985 and November 16, 1988. It urges that the
CA's error consisted in its confusing laches as the failure to
assert a right, notwithstanding that jurisprudence has considered
laches to be the unreasonable failure to assert a claim that, by
exercising due diligence, could or should be done earlier; that

laches was not, in legal significance, mere delay, but a delay that
worked a disadvantage to another; that the letters of the
respondent could hardly be construed as motivated by prudence
and good faith; that the economy had worsened between 1979
and 1988, and such worsening became a factor that raised the
cost of real estate development by leaps and bounds; and that
the respondent, whose actuations smacked of bad faith and
opportunism at its expense, had then appeared out of nowhere
to seize the opportunity presented by the real estate boom of the
early 1990s, despite having been silent and having failed to act
for a long time, evincing his belief of not having any right at all.
In his comment, the respondent asserts that the submissions of
the petitioner did not warrant the non-construction of the
amemt1es; that Article 1159 of the Civil Code provides that
obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good
faith; that neither party could unilaterally and upon his own
exclusive volition escape his obligations under the contract
unless for causes sufficient in law and pronounced adequate by a
competent tribunal; that correlative to Article 1159 is Article
1308 of the Civil Code which holds that the validity or compliance
of a contract cannot be left to the will of one party; that a party
could not revoke or renounce a contract without the consent of
the other, nor could a party have a contract set aside on the
ground that he had made a bad bargain; that he was not liable
for the interest because it was not expressly stipulated in the
contract pursuant to Article 1956 of the Civil Code; that no
penalty should be imposed on him by virtue of the undertaking
clearly stating that the two-year period for the completion of the
amenities would be suspended only if the development could not
be pursued "by reason of any act God, any act or event
constituting force majeure or fortuitous event; or any restriction,
regulation, or prohibition by the government or any of its
branches or instrumentalities;" that the reason given by the
petitioner that "the contemplated amenities could not be
constructed as they would have only been left exposed to the
elements and would have come to naught on account of the fact
that there are no persons residing thereat" did not justify or
excuse the non construction of the amenities; that the petitioner
could not seek refuge in Article 1267 of the Civil Code by merely
alleging inflation without laying down the legal and factual basis
to justify the release from its obligation; that his written
extrajudicial demands negated the defense of laches; that he did
not fail to assert his right, or abandon it; and that his written
extrajudicial demands wiped out the period that had already
lapsed and started the prescriptive period anew.
In short, was the petitioner released from its obligation to
construct the amenities in the Foggy Heights Subdivision?
Ruling of the Court
The appeal is partly meritorious.
1.
Petitioner was not relieved from its statutory and contractual
obligations to complete the amenities
The arguments of the petitioner to be released from its obligation
to construct the amenities lack persuasion.
To start with, the law is not on the side of the petitioner.
Under Section 20 of Presidential Decree No. 957, all developers,
including the petitioner, are mandated to complete their
subdivision projects, including the amenities, within one year
from the issuance of their licenses. The provision reads:
Section 20. Time of Completion. - Every owner or developer shall
construct and provide the facilities, improvements,
infrastructures and other forms of development, including water
supply and lighting facilities, which are offered and indicated in
the approved subdivision or condominium plans, brochures,
prospectus, printed matters, letters or in any form of
158
advertisement, within one year from the date of the issuance of
the license for the subdivision or condominium project or such
other period of time as maybe fixed by the Authority.
Pursuant to Section 30 of Presidential Decree No. 957,[22] the
amenities, once constructed, are to be maintained by the
developer like the petitioner until a homeowners' association has
been organized to manage the amenities.
There is no question that the petitioner did not comply with its
legal obligation to complete the construction of the subdivision
project, including the amenities, within one year from the
issuance of the license. Instead, it unilaterally opted to suspend
the construction of the amenities to avoid incurring maintenance
expenses. In so opting, it was not driven by any extremely
difficult situation that would place it at any disadvantage, but by
its desire to benefit from cost savings. Such cost-saving strategy
dissuaded the lot buyers from constructing their houses in the
subdivision, and from residing therein.
Considering that the petitioner's unilateral suspension of the
construction of the amenities was intended to save itself from
costs, its plea for relief from its contractual obligations was
properly rejected because it would thereby gain a position of
advantage at the expense of the lot owners like the respondent.
Its invocation of Article 1267 of the Civil Code, which provides
that "(w)hen the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor
may also be released therefrom in whole or in part," was
factually unfounded. For Article 1267 to apply, the following
conditions should concur, namely: (a) the event or change in
circumstances could not have been foreseen at the time of the
execution of the contract; (b) it makes the performance of the
contract extremely difficult but not impossible; (c) it must not be
due to the act of any of the parties; and (d) the contract is for a
future prestation.[23] The requisites did not concur herein
because the difficulty of performance under Article 1267 of the
Civil Code should be such that one party would be placed at a
disadvantage by the unforeseen event.[24] Mere inconvenience,
or unexepected impediments, or increased expenses did not
suffice to relieve the debtor from a bad bargain.[25]
And, secondly, the unilateral suspension of the construction had
preceded the worsening of economic conditions in 1983; hence,
the latter could not reasonably justify the petitioner's plea for
release from its statutory and contractual obligations to its lot
buyers, particularly the respondent. Besides, the petitioner had
the legal obligation to complete the amenities within one year
from the issuance of the license (under Section 20 of Presidential
Decree No. 957), or within two years from July 15, 1976 (under
the express undertaking of the petitioner). Hence, it should have
complied with its obligation by July 15, 1978 at the latest, long
before the worsening of the economy in 1983.
2.
Respondent as instalment buyer should pay the annual interest
but not the penalty
The respondent insists that his unpaid obligation was only the
balance of the contract price amounting to P8,587.80.[26] He
declines to pay the interest and the penalty on the ground that
the petitioner had not constructed the amenities as promised
under the undertaking.
The Court holds that the respondent was liable for the stipulated
annual interest of 12% but not the penalty.
Paragraph 2.b, first sentence, of the contract to sell stipulated
the 12% annual interest, as follows:
xxxx
2.) The VENDEE/S hereby agree/s to pay the purchase price of
TWENTY SEVEN THOUSAND SEVEN HUNDRED TWENTY ONLY
PESOS (P27,720.00), Philippine Currency, at the office of the

VENDOR at Makati, Rizal, without necessity of demand or the
services of a collector in the following manner:
a.) As downpayment, the amount of FOUR THOUSAND ONE
HUNDRED FIFTY EIGHT ONLY PESOS (P4,158.00) upon the
execution of the contract.
b.) The balance of TWENTY THREE THOUSAND FIVE HUNDRED
SIXTY TWO ONLY PESOS (P23,562.00) in eighty four (84)
consecutive monthly installments of FOUR HUNDRED FIFTEEN &
95/100 PESOS (P415.95) each installment, including interest at
the rate of twelve (12%) percent per annum on all outstanding
balances, the first of such monthly installment to be paid on or
before the 6th day of each month, beginning October, 1976. It is
understood that unpaid installments or installments in arrears
shall earn a penalty interest of one (1%) percent per month until
fully paid.[27] (Bold underscoring supplied for emphasis of the
relevant portion)
xxxx
Accordingly, the parties agreed to an 84-month or seven-year
term of installment on the net contract price of P23,562.00 at the
monthly rate of P415.95, the monthly rate being inclusive of the
12% interest per annum. Such monthly installment of P415.95
included the principal and the annual interest, the latter being
legally termed the amortization interest. The annual interest was
designed to compensate the petitioner for waiting seven years
before receiving the total principal amount. As such, the total
cost of the lot purchased by the respondent for the seven-year
term would be P39,097.80, which amount would be inclusive of
the contract price of the lot and the amortization interest.[28]
The imposition of the annual or amortization interest on the price
for the purchase of a lot on installment was valid and
enforceable. As the Court has explained in Relucio v. Brillante-
Garfin:[29]
x x x The contract price of P10,800.00 may thus be seen to be
the cash price of the subdivision lots, that is, the amount payable
if the price of the lots were to be paid in cash and in full at the
execution of the contract; it is not the amount that the vendor
will have received in the aggregate after fifteen (15) years if the
vendee shall have religiously paid the monthly installments. The
installment price, upon the other hand, of the subdivision lots-
the sum total of the monthly installments (i.e., P16,101.00)
typically, as in the instant case, has an interest component which
compensates the vendor for waiting fifteen (15) years before
receiving the total principal amount of P10,600.00. Economically
or financially, P10,600.00 delivered in full today is simply worth
much more than a long series of small payments totalling, after
fifteen (15) years, P10,600.00. For the vendor, upon receiving
the full cash price, could have deposited that amount in a bank,
for instance, and earned interest income which at six percent
(6%) per year and for fifteen (15) years, would precisely total
P5,501.00 (the difference between the installment price of
P16,101.00 and the cash price of P10,600.00) To suppose, as
private respondent argues, that mere prompt payment of the
monthly installments as they fell due would obviate application of
the interest charge of six percent (6%) per annum, is to ignore
that simple economic fact. That economic fact is, of course,
recognized by law, which authorizes the payment of interest
when contractually stipulated for by the parties or when implied
in recognized commercial custom or usage.
Vendor and vendee are legally free to stipulate for the payment
of either the cash price of a subdivision lot or its installment
price. Should the vendee opt to purchase a subdivision lot via the
installment payment system, he is in effect paying interest on
the cash price, whether the fact and rate of such interest
payment is disclosed in the contract or not. The contract for the
purchase and sale of a piece of land on the installment payment
system in the case at bar is not only quite lawful; it also reflects
a very wide spread usage or custom in our present day
commercial life.[30]
In view of the foregoing, the respondent's insistence on
condoning his liability for the contractually-stipulated 12%
159
annual amortization interest is unwarranted. The condonation
will impose a harsh burden upon the petitioner, even as it will
result in the unjust enrichment of the respondent. We cannot
ignore that the former has waited for a very long period of time
before it would be able to use the proceeds of the lot sold to the
respondent.
The 1% monthly penalty sought to be charged on the arrears for
failure to pay the amortizations on time until the arrears would
be fully paid was also stipulated in paragraph 2.b, second
sentence, of the contract to sell, supra. But such stipulation
could not be enforced against the respondent because the
petitioner waived the penalty should the subdivision development
not be completed by July 15, 1978. The waiver should stand
considering that the suspension of the amortization payment in
1979 was excusable on account of the failure to construct the
amenities by July 15, 1978, and considering further that the
petitioner did not contest the suspension of payment of the
monthly amortization.[31]
Under Tamayo v. Huang,[32] the buyer has the option to
demand the reimbursement of the total amounts paid, or to
await the further development of the subdivision; when the
buyer opts for the latter alternative, he may suspend the
payment of his installments until the time when the developer
has fulfilled its obligation to him; should the developer persist in
refusing to complete the facilities, the National Housing Authority
may take over or cause the development and completion of the
subdivision at the expense of the developer.[33]
In this case, the respondent initially opted to suspend the
payment of his amortizations, but then offered to complete the
payment upon realizing that the petitioner did not anymore
intend to build the amenities. His payments from October 6,
1976 to October 6, 1979 corresponded to 36 monthly
amortizations totaling P14,974.20, leaving 48 installments
unpaid totaling P19,965.60.[34]
3.
Claim of respondent was not barred by laches
Laches is the failure of or neglect for an unreasonable and
unexplained length of time to do that which by exercising due
diligence could or should have been done earlier, or to assert a
right within a reasonable time. It warrants a presumption that
the party entitled thereto has either abandoned it or declined to
assert it.[35]
The CA correctly declared that laches did not set in to bar the
claim of the respondent because he had made periodic written
demands upon the petitioner that indicated that he had not
abandoned or declined to assert the claim. In 1979, he
manifested the intention to avail himself of his right to suspend
the payment of his amortizations pursuant to the undertaking.
Since then until 1984, he had continuously requested the
petitioner for updates on the progress of the construction of the
amenities so that he could resume his amortizations. The
petitioner did not respond to his requests. His efforts to have the
petitioner construct the amenities so that he would already pay
for the lot demonstrated his prudence and alacrity in insisting on
his rights, negating any hint of bad faith or of lack of diligence on
his part.
WHEREFORE, the Court AFFIRMS the judgment promulgated on
May 29, 2003 subject to the MODIFICATIONS, as follows: (1) the
respondent shall pay to the petitioner the amount of P19,965.60;
(2) the petitioner shall execute the deed of absolute sale
covering the property, and shall deliver the property to the
respondent together with the pertinent certificate of title in
accordance with the terms of their contract; and (3) the
petitioner shall pay the costs of suit.
SO ORDERED.
SECOND DIVISION

[G.R. No. 116792. March 29, 1996]
BANK OF THE PHILIPPINE ISLANDS and GRACE ROMERO,
petitioners, vs. COURT OF APPEALS and EDVIN F. REYES,
respondents.
DECISION
PUNO, J.:
Petitioners seek a review of the Decision1 of respondent Court of
Appeals in CA-G.R. CV No. 41543 reversing the Decision2 of the
Regional Trial Court of Quezon City, Branch 79, and ordering
petitioners to credit private respondents Savings
Account No. 3185-0172-56 with P10,556.00 plus interest.
The facts reveal that on September 25, 1985, private respondent
Edvin F. Reyes opened Savings Account No. 3 185-0172-56 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 No.
3185-0128-82 with his grandmother, Emeteria M. Fernandez,
opened3 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. $377.003 or P10,556.00. On January 4,
1990, private respondent deposited the said U.S. treasury check
of Fernandez in Savings Account No. 3 185-0128-82. The U.S.
Veterans Administration Office in Manila conditionally cleared the
check.4 The check was then sent to the United States for further
clearing.5
Two months after or on March 8, 1990, private respondent
closed Savings Account No. 3 185-0128-82 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.6 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.7 On the same
day, petitioner bank debited the amount of P10,556.00 from
private respondents 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 Damages8 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
160
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.9
In a Decision dated January 20, 1993, the trial court dismissed
the complaint of private respondent for lack of cause of action.10
Private respondent appealed to the respondent Court of Appeals.
On August 16, 1994, the Sixteenth Division of respondent court
in AC-G.R. CV No. 41543 reversed the impugned decision, viz:
WHEREFORE, the judgment appealed from is set aside, and
another one entered ordering defendant (petitioner) to credit
plaintiffs (private respondents) S.A. No. 3 185-0172-56 with
P10,556.00 plus interest at the applicable rates for express teller
savings accounts from February 19,1991, until compliance
herewith. The claim and counterclaim for damages are dismissed
for lack of merit.
SO ORDERED.11
Petitioners now contend that respondent Court of Appeals erred:
I
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT
HOLDING THAT RESPONDENT REYES GAVE EXPRESS AUTHORITY
TO PETITIONER BANK TO DEBIT HIS JOINT ACCOUNT WITH HIS
WIFE FOR THE VALUE OF THE RETURNED U.S. TREASURY
WARRANT.
II
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT
HOLDING THAT PETITIONER BANK HAS LEGAL RIGHT TO APPLY
THE DEPOSIT OF RESPONDENT REYES TO HIS OUTSTANDING
OBLIGATION TO PETITIONER BANK BROUGHT ABOUT BY THE
RETURN OF THE U.S. TREASURY WARRANT HE EARLIER
DEPOSITED UNDER THE PRINCIPLE OF LEGAL COMPENSATION.
III
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT
APPLYING CORRECTLY THE PRINCIPLES ENUNCIATED BY THE
SUPREME COURT IN THE CASE OF GULLAS V. PNB, 62 PHIL. 519.
IV
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT
APPRECIATING THE FACT THAT THE MONEY DEBITED BY
PETITIONER BANK WAS THE SAME MONEY TRANSFERRED BY
RESPONDENT REYES FROM HIS JOINT AND/OR ACCOUNT WITH
HIS GRANDMOTHER TO HIS JOINT AND/OR ACCOUNT WITH HIS
WIFE.12
We find merit in the petition.
The first issue for resolution is whether private respondent
verbally authorized petitioner bank to debit his joint account with
his wife for the amount of the returned U.S. Treasury Warrant.
We find that petitioners were able to prove this verbal authority
by preponderance of evidence. The testimonies of Bernardo and
Romero deserve credence. Bernardo testified:
xxx xxx xxx
Q: After that, what happened?
A: x x x Dr. Reyes called me up and I informed him about the
return of the U.S. Treasury Warrant and we are requested to
reimburse for the amount.
Q: What was his response if any?

A: Dont you worry about it, there is no personal problem.
xxx xxx xxx
Q: And so what was his response?
A: He said that dont you worry about it.
xxx xxx xxx
Q: You said that you asked him the advice and he did not
answer, what advice are you referring to?
A: In our conversation, he promised me that he will give me
written confirmation or authorization.13
The conversation was promptly relayed to Romero who testified:
xxx xxx xxx
Q: x x x Was there any opportunity wherein said Mrs. Bernardo
was able to convey to you the contents of their conversation?
A: This was immediately relayed to me as manager of the Bank
of the Philippine Islands, sir.
Q: What, if any was the content of her conversation, if you
know?
A: Mr. Reyes instructed Mrs. Bernardo to debit his account with
the bank. His account was maintained jointly with his wife then
he promised to drop by to give us a written confirmation, sir.
xxx xxx xxx
Q: You said that you authorized the debiting of the account on
February 19, 1991, is that correct?
A: I did not authorize, we merely followed the instruction of Mr.
Reyes, sir.14
We are not disposed to believe private respondents allegation
that he did not give any verbal authorization. His testimony is
uncorroborated. Nor does he inspire credence. His past and
fraudulent conduct is an evidence against him.15 He concealed
from petitioner bank the death of Fernandez on December 28,
1989.16 As of that date, he knew that Fernandez was no longer
entitled to receive any pension. Nonetheless, he still received the
U.S. Treasury Warrant of Fernandez, and on January 4, 1990
deposited the same in Savings Account No. 3185-0128-82. To
pre-empt a refund, private respondent closed his joint account
with Fernandez (Savings Account No. 31-85- 0128-82) on March
8, 1990 and transferred its balance to his joint account with his
wife (Savings Account No. 3 185-0172-56). Worse, private
respondent declared under the penalties of perjury in the
withdrawal slip17 dated March 8, 1990 that his co-depositor,
Fernandez, is still living. By his acts, private respondent has
stripped himself of credibility.
More importantly, the respondent court erred when it failed to
rule that legal compensation is proper. Compensation shall take
place when two persons, in their own right, are creditors and
debtors of each other.18 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.19 Since
this compensation takes place ipso jure, its effects arise on the
very day on which all its requisites concur.20 When used as a
defense, it retroacts to the date when its requisites are
fulfilled.21
161
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.
It is true that the joint account of private respondent and his wife
was debited in the case at bar. We hold that the presence of
private respondents wife does not negate the element of
mutuality of parties, i.e., that they must be creditors and debtors
of each other in their own right. The wife of private respondent is
not a party in the case at bar. She never asserted any right to
the debited U.S. Treasury Warrant. Indeed, the right of the
petitioner bank to make the debit is clear and cannot be
doubted. To frustrate the application of legal compensation on
the ground that the parties are not all mutually obligated would
result in unjust enrichment on the part of the private respondent
and his wife who herself out of honesty has not objected to the
debit.
The rule as to mutuality is strictly applied at law. But not in
equity, where to allow the same would defeat a clear right or
permit irremediable injustice.22
IN VIEW HEREOF, the Decision of respondent Court of Appeals in
CA-G.R. CV No. 41543 dated August 16,1994 is ANNULLED and
SET ASIDE and the Decision of the trial court in Civil Case No. Q-
91-8451 dated January 20, 1993 is REINSTATED. Costs against
private respondent.
SO ORDERED.
THIRD DIVISION
[G.R. No. 108052. July 24, 1996]
PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF
APPEALS and RAMON LAPEZ,[1] doing business under the name
and style SAPPHIRE SHIPPING, respondents.
DECISION
PANGANIBAN, J.:
Does a local bank, while acting as local correspondent bank,
have the right to intercept funds being coursed through it by its
foreign counterpart for transmittal and deposit to the account of
an individual with another local bank, and apply the said funds to
certain obligations owed to it by the said individual?
Assailed in this petition is the Decision of respondent Court of
Appeals[2] in CA-G.R. CV No. 27926 rendered on June 16, 1992
affirming the decision of the Regional Trial Court, Branch 107 of
Quezon City, the dispositive portion of which read:[3]
"WHEREFORE, judgment is hereby rendered:

1) In the main complaint, ordering the defendant (herein
petitioner PNB) to pay the plaintiff (private respondent herein)
the sum of US$2,627.11 or its equivalent in Philippine currency
with interest at the legal rate from January 13, 1987, the date of
judicial demand;
2) The plaintiff's supplemental complaint is hereby dfismissed
(sic);
3) The defendant's counterclaims are likewise dismissed.
The Facts
The factual antecedents as quoted by the respondent Court are
reproduced hereinbelow, the same being undisputed by the
parties:[4]
"The body of the decision reads:
"'After a close scrutiny and analysis of the pleadings as well as
the evidence of both parties, the Court makes the following
conclusions:
"'(a) The defendant applied/appropriated the amounts of
$2,627.11 and P34,340.38 from remittances of the plaintiff's
principals (sic) abroad. These were admitted by the defendant,
subject to the affirmative defenses of compensation for what is
owing to it on the principle of solution (sic) indebiti;
"'(b) The first remittance was made by the NCB of Jeddah for the
benefit of the plaintiff, to be credited to his account at Citibank,
Greenhills Branch; the second was from Libya, and was intended
to be deposited at the plaintiff's account with the defendant, No.
830-2410;
(c) The plaintiff made a written demand upon the defendant for
remittance of the equivalent of P2,627.11 by means of a letter
dated December 4, 1986 (Exh. D). This was answered by the
defendant on December 22, 1986 (Exh. 13), inviting the plaintiff
to come for a conference;
"'(d) There were indeed two instances in the past, one in
November 1980 and the other in January 1981 when the
plaintiff's account No. 830-2410 was doubly credited with the
equivalents of $5,679.23 and $5,885.38, respectively, which
amounted to an aggregate amount of P87,380.44. The
defendant's evidence on this point (Exhs. 1 thru 11, 14 and 15;
see also Annexes C and E to defendant's Answer), were never
refuted nor impugned by the plaintiff. He claims, however, that
plaintiffs claim has prescribed.
"'(e) Defendant PNB made a demand upon the plaintiff for refund
of the double or duplicated credits erroneously made on
plaintiff's account, by means of a letter (Exh. 12) dated October
23, 1986 or 5 years and 11 months from November 1980, and 5
years and 9 months from January 1981. Such letter was
answered by the plaintiff on December 2, 1986 (Annex C,
Complaint). This plaintiff's letter was likewise replied to by the
defendant through Exh. 13;
"'(f) The deduction of P34,340.38 was made by the defendant
not without the knowledge and consent of the plaintiff, who was
issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by
the defendant.
"'There is no question that the two erroneous double payments
made to plaintiff's accounts in 1980 and 1981 created an extra-
contractual obligation on the part of the plaintiff in favor of the
defendant, under the principle of solutio indebiti, as follows:
"'If something is received when there is no right to demand it,
and it was unduly delivered throughg (sic) mistake, the
obligation to return it arises."' (Article 2154, Civil Code of the
Phil.)
162
Two issues were raised before the trial court, namely, first,
whether the herein petitioner was legally justified in making the
compensation or set-off against the two remittances coursed
through it in favor of private respondent to recover on the double
credits it erroneously made in 1980 and 1981, based on the
principle of solutio indebiti, and second, whether or not
petitioner's claim is barred by the statute of limitations. The trial
court's ratiocination, as quoted by the appellate Court, follows:
[5]
"'Article 1279 of the Civil Code provides:
"'In order that compensation may prosper, 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 consists 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 by any retention or
controversy, commenced by third persons and communicated in
due time to the debtor."'
"'In the case of the $2,627.11, requisites Nos. 2 through 5 are
apparently present, for both debts consist in a sum of money,
are both due, liquidated and demandable, and over neither of
them is there a retention or controversy commenced by third
persons and communicated in due time to the debtor. The
question, however, is, where both of the obligors bound
principally, and was each one of them a debtor and creditor of
the other at the same time?
"'Analyzing now the relationship between the parties, it appears
that:
"'(a) With respect to the plaintiff's being a depositor of the
defendant bank, they are creditor and debtor respectively
(Guingona, et al. vs. City Fiscal, et al., 128 SCRA 577);
"'(b) As to the relationship created by the telexed fund transfers
from abroad: A contract between a foreign bank and local bank
asking the latter to pay an amount to a beneficiary is a
stipulation pour autrui. (Bank of America NT & SA vs. IAC, 145
SCRA 419).
"'A stipulation pour autrui is a stipulation in favor of a third
person (Florentino vs. Encarnacion, 79 SCRA 193; Bonifacio
Brothers vs. Mora, 20 SCRA 261; Uy Tam vs. Leonard, 30 Phils.
475).
"'Thus between the defendant bank (as the local correspondent
of the National Commercial Bank of Jeddah) and the plaintiff as
beneficiary, there is created an implied trust pursuant to Art.
1453 of the Civil Code, quoted as follows:
"'When the property is conveyed to a person in reliance upon his
declared intention to hold it for, or transfer it to another or the
grantor, there is an implied trust in favor of the person whose
benefit is contemplated (sic).
"'c) By the principle of solutio indebiti (Art. 2154, Civil Code), the
plaintiff who unduly received something (sic) by mistake (i.e.,
the 2 double credits, although he had no right to demand it),
became obligated to the defendant to return what he unduly
received. Thus, there was created between them a relationship of
obligor and obligee, or of debtor and creditor under a quasi-
contract.

"In view of the foregoing, the Court is of the opinion that the
parties are not both principally bound with respect to the
$2,627.11 from Jeddah neither are they at the same time
principal creditor of the other. Therefore, as matters stand, the
parties' obligations are not subject to compensation or set off
under Art. 1279 of the Civil Code, for the reason that the
defendant is not a principal debtor nor is the plaintiff a principal
creditor insofar as the amount of $2,627.11 is concerned. They
are debtor and creditor only with respect to the double
payments; but are trustee-beneficiary as to the fund transfer of
$2,627.11.
"'Only the plaintiff is principally bound as a debtor of the
defendant to the extent of the double credits. On the other hand,
the defendant was an implied trustee, who was obliged to deliver
to the Citibank for the benefit of the plaintiff the sum of
$2,627.11.
"'Thus while it may be concluded that the plaintiff owes the
defendant the equivalent of the sums of $5,179.23 and
$5,885.38 erroneously doubly credited to his account, the
defendant's actuation in intercepting the amount of $2,627.11
supposed to be remitted to another bank is not only improper; it
will also erode the trust and confidence of the international
banking community in the banking system of the country,
something we can ill afford at this time when we need to attract
and invite deposits of foreign currencies."'
"It would have been different has the telex advice from NCB of
Jeddah been for deposit of $2,627.11 to plaintiffs account No.
830-2410 with the defendant bank. However, the defendant
alleged this for the first time in its Memorandum (Pls. see par.
16, p. 6 of defendant's Memorandum). There was neither any
allegation thereof in its pleadings, nor was there any evidence to
prove such fact. On the contrary, the defendant admitted that
the telex advice was for credit of the amount of $2,627.11 to
plaintiffs account with Citibank, Greenhills, San Juan,
MetroManila (Pls. see par. of defendant's Answer with
Compulsory Counterclaim, in relation to plaintiff's Complaint).
Hence, it is submitted that the set-off or compensation of
$2,627.11 against the double payments to plaintiff's account is
not in accordance with law.
"'On this point, the Court finds the plaintiff's theory of agency to
be untenable. For one thing, there was no express contract of
agency. On the other hand, were we to infer that there was an
implied agency, the same would not be between the plaintiff and
defendant, but rather, between the National Commercial Bank of
Jeddah as principal on the one hand, and the defendant as agent
on the other. Thus, in case of violation of the agency, the cause
of action would accrue to the NCB and not to the plaintiff.
"'The P34,340.38 subject of the supplemental complaint is quite
another thing. The plaintiff's Exh. "E", which is a receipt issued to
the plaintiff by the defendant for the amount of P34,340.00 in
"full settlement of accounts receivables with RICB Fund Transfer
Department, PNB-Escolta base on Legal Department Memo dated
February 28, 1987" seems to uphold the defendant's theory that
the said amount was voluntarily delivered by the plaintiff to the
defendant as alleged in the last paragraph of defendant's
memorandum. The same is in accordance with the defendant's
answer, as follows:
"The retention and application of the amount of P34,340.38 was
done in a manner consonant with basic due process considering
that plaintiff was not only furnished documented proof of the
cause but was also given the opportunity to con(tro)vert such
Proof.
"Moreover, plaintiff, through counsel, communicated his
unequivocal and unconditional consent to the retention and
application of the amount in question." (Pls. see paragraphs 8-9,
defendant's Answer with Compulsory Counterclaim to Plaintiff's
Supplemental Complaint)."
163
This conclusion is borne by the fact that the receipt is in the
hands of the plaintiff, indicating that such receipt was handed
over to the plaintiff when he "paid" or allowed the deduction
from the amount of $28,392.38 from Libya.
"'At any rate, the plaintiff in his Memorandum, stated that the
subsequent fund transfer from Brega Petroleum Marketing
Company of Libya (from where the P34,340.38 was deducted)
was intended for credit and deposit in plaintiff's account at the
defendant's Bank CA No. 830-2410 (per par. 1, page 2,
Memorandum for the plaintiff). Such being the case, the Court
believes that insofar as the amount of P34,340.38 is concerned,
all the requirements of Art. 1279 of the Civil Code are present,
and the said amount may properly be the subject of
compensation or set-off. And since all the requisites of Art. 1279
of the Civil Code are present (insofar as the amount of
P34,392.38 is concerned), compensation takes place by
operation of law (Art. 1286, Ibid.), albeit only partial with
respect to plaintiff's indebtedness of P7,380.44.
"Now, on the question of prescription, the Court believes that
Art. 1149 as cited by the plaintiff is not applicable in this case.
Rather, the applicable law is Art. 1145, which fixes the
prescriptive period for actions upon a quasi-contract (such as
solutio indebiti) at six years.
In the dispositive portion of its decision, the trial court ruled that
the herein petitioner was obligated to pay private respondent the
amount of US$2,627.11 or its peso equivalent, with interest at
the legal rate. The court dismissed all other claims and
counterclaims.
On appeal to the respondent Court, petitioner bank continued to
insist that it validly retained the US$2,627.11 in payment of the
private respondent's indebtedness by way of compensation or
set-off, as provided under Art. 1279 of the Civil Code.
The respondent Court of Appeals rejected such argument,
saying:
"The telegraphic money transfer was sent by the IBN, plaintiff's
principal in Jeddah, Saudi Arabia, thru the National Commercial
Bank of Jeddah, Saudi Arabia (NCB, for short), for the
credit/account of Plaintiff with the Citibank, Greenhills Branch,
San Juan, Metro Manila, coursed thru the PNB's head office, the
NCB's corresponden(t) bank in the Philippines.
"The credit account, or simply account means that the amount
stated in the telegraphic money transfer is to be credited in the
account of plaintiff with the Citibank, and, in that sense,
presupposes a creditor-debtor relationship between the plaintiff,
as creditor and the Citibank, as debtor. Withal the telegraphic
money transfer, no such creditor-debtor relationship could have
been created between the plaintiff and defendant.
"The telegraphic money transfer, or simply telegraphic transfer(,)
was purchased by the IBN from the NCB in Saudi Arabia, and
since the PNB is the NCB's corresponden(t) bank in the
Philippines, there is created between the two banks a sort of
communication exchange for the corresponden(t) bank to
transmit and/or remit and/or pay the value of the telegraphic
transfer in accordance with the dictate of the correspondence
exchange. Some such responsibility of the corresponden(t) bank
is akin to Section 7 of the Rules and Regulations Implementing
E.O. 857, as amended by E.O. 925, "x x x to take charge of the
prompt payment" of the telegraphic transfer, that is, by
transmitting the telegraphic money transfer to the Citibank so
that the amount can be promptly credited to the account of the
plaintiff with the said bank. That is all that the PNB can do under
the remittance arrangement that it has with the NCB. With its
responsibility as defined as well as by the nature of its banking
business and the responsibility attached to it, and through which
the industry, trade and commerce of all countries and
communities are carried on, the PNB's liability as
corresponden(t) bank continues until it has completgely (sic)

performed and discharged it(s) obligation thereunder."
(underscoring ours)
Hence, the respondent Court affirmed the trial court's holding in
toto.
Dissatisfied, petitioner bank comes before this Court seeking a
review of the assailed Decision.
The Issue
Petitioner's arguments revolve around one single issue:[6]
"WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE
RESPONDENT LEGALLY BOUND (UNDER THE PRINCIPLE OF
SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF
US$2,627.11, IT ERRED IN NOT RULING THAT LEGAL
COMPENSATION HAS TAKEN PLACE WHEN PNB WAS ORDERED
BY THE TRIAL COURT TO RETURN TO PRIVATE RESPONDENT THE
SAME AMOUNT. SUCH COURSE OF ACTION IS IN CONSONANCE
WITH SPEEDY AND SUBSTANTIAL JUSTICE, AND WOULD
PREVENT THE UNNECESSARY FILING OF A SUBSEQUENT SUIT
BY PNB FOR THE COLLECTION OF THE SAME AMOUNT FROM
PRIVATE RESPONDENT."
The Court's Ruling
We note that in framing the issue in the manner aforecited, the
petitioner implicitly admits the correctness of the respondent
Court's affirmance of the trial court's ruling finding herein
petitioner liable to private respondent for the sum of
US$2,627.11 or its peso equivalent. And it could not have done
otherwise. After a careful scrutiny of both the decision of the trial
court and that of the appellate court, we find no reversible error
whatsoever in either ruling, and see no need to add to the
extensive discussions already made regarding the non-existence
of all the requisites for legal compensation to take place.
But petitioner has adopted a novel theory, contending that since
respondent Court found that private respondent is "an obligor of
PNB and the latter, as aforesaid, has become an obligor of
private respondent (resulting in legal compensation), the
(h)onorable respondent court should have ordered private
respondent to pay PNB what the latter is bound by the trial
court's decision to return the former.[7]
By this simplistic approach, petitioner in effect seeks to render
nugatory the decisions of the trial court and the appellate Court,
and have this Court validate its original misdeed, thereby making
a mockery of the entire judicial process of this country. What the
petitioner bank is effectively saying is that since the respondent
Court of Appeals ruled that petitioner bank could not do a
shortcut and simply intercept funds being coursed through it, for
transmittal to another bank, and eventually to be deposited to
the account of an individual who happens to owe some amount
of money to the petitioner, and because respondent Court
ordered petitioner bank to return the intercepted amount to said
individual, who in turn was found by the appellate Court to be
indebted to petitioner bank, THEREFORE, there must now be
legal compensation of the amounts each owes the other, and
hence, there is no need for petitioner bank to actually return the
amount, and finally, that petitioner bank ends up in exactly the
same position as when it first took the improper and
unwarranted shortcut by intercepting the said money transfer,
notwithstanding the assailed Decision saying that this could not
be done!
We see in this petition a clever ploy to use this Court to validate
or legalize an improper act of the petitioner bank, with the not
impossible intention of using this case as a precedent for similar
acts of interception in the future. This piratical attitude of the
nation's premier bank deserves a warning that it should not
abuse the justice system in its collection efforts, particularly
since we are aware that if the petitioner bank had been in good
faith, it could have easily disposed of this controversy in ten
164
minutes flat by means of an exchange of checks with private
respondent for the same amount. The litigation could have ended
there, but it did not. Instead, this plainly unmeritorious case had
to clog our docket and take up the valuable time of this Court.
WHEREFORE, the instant petition is herewith DENIED for being
plainly unmeritorious, and the assailed Decision is AFFIRMED in
toto. Costs against petitioner.
SO ORDERED.
Narvasa, C.J., (Chairman), Davide, Jr., and Francisco, JJ.,
concur.
Melo, J., no part, being a member of the CA division which
decided the case under review.
[1] Deceased and substituted by Teresita V. Lapez; Rollo, p. 51.
[2] Second Division, composed of J. Artemon D. Luna, ponente,
and JJ. Jose A.R. Melo (now Associate Justice of this Court) and
Segundino G. Chua, concurring.
[3] Rollo, p. 9.
[4] Id., pp. 10-11.
[5] Id., pp. 12-14.
[6] Id., p. 5.
[7] Id., p. 6.
SYLLABI/SYNOPSIS
FIRST DIVISION
[G.R. No. 120236. July 20, 1999]
E.G.V. REALTY DEVELOPMENT CORPORATION and CRISTINA
CONDOMINIUM CORPORATION, petitioners, vs. COURT OF
APPEALS and UNISHPERE INTERNATIONAL, INC. respondents.
DECISION
KAPUNAN, J.:
This petition for review on certiorari seeks to set aside the
decision and resolution of the Court of Appeals rendered on
February 17, 1995 and on May 15, 1995, respectively, in CA-
G.R. SP No. 22735 reversing the order of the Securities and
Exchange Commission (SEC) in SEC-AC No. 271 issued on
August 21, 1990.
The following facts are not disputed:
Petitioner E.G.V. Realty Development Corporation (hereinafter
referred to as E.G.V. Realty) is the owner/developer of a seven-
storey condominium building known as Cristina Condominium.
Cristina Condominium Corporation (hereinafter referred to as
CCC) holds title to all common areas of Cristina Condominium
and is in charge of managing, maintaining and administering the
condominiums common areas and providing for the buildings
security.
Respondent Unisphere International, Inc. (hereinafter referred to
as Unisphere) is the owner/occupant of Unit 301 of said
condominium.
On November 28, 1981, respondent Unispheres Unit 301 was
allegedly robbed of various items valued at P6,165.00. The
incident was reported to petitioner CCC.

On July 25, 1982, another robbery allegedly occurred at Unit 301
where the items carted away were valued at P6,130.00, bringing
the total value of items lost to P12,295.00. This incident was
likewise reported to petitioner CCC.
On October 5, 1982, respondent Unisphere demanded
compensation and reimbursement from petitioner CCC for the
losses incurred as a result of the robbery.
Petitioner CCC denied any liability for the losses claimed to have
been incurred by respondent Unisphere, stating that the goods
lost belonged to Amtrade, a third party.
As a consequence of the denial, respondent Unisphere withheld
payment of its monthly dues starting November 1982.
On September 13, 1983, respondent Unisphere received a letter
from petitioner CCC demanding payment of past dues.
On December 5, 1984, petitioner E.G.V. Realty executed a Deed
of Absolute Sale over Unit 301 in favor of respondent Unisphere.
Thereafter, Condominium Certificate of Title No. 7010 was issued
in respondent Unispheres name bearing the annotation of a lien
in favor of petitioner E.G.V. Realty for the unpaid condominium
dues in the amount of P13,142.67.
On January 28, 1987, petitioners E.G.V. Realty and CCC jointly
filed a petition with the Securities and Exchange Commission
(SEC) for the collection of the unpaid monthly dues in the
amount of P13,142.67 against respondent Unisphere.
In its answer, respondent Unisphere alleged that it could not be
deemed in default in the payment of said unpaid dues because
its tardiness was occasioned by the petitioners' failure to comply
with what was incumbent upon them, that is, to provide security
for the building premises in order to prevent, if not to stop, the
robberies taking place therein. It asserted as counterclaim that
the amount of P12,295.00 representing the total value of its loss
due to the two robberies be awarded to it by way of damages for
the latters failure to secure the premises.
On January 11, 1989, SEC Hearing Officer Antero F.L. Villaflor,
Jr. rendered a decision which dispositively read as follows:
WHEREFORE, respondent is hereby ordered to pay petitioner the
sum of P13,142.67 within fifteen (15) days from receipt of this
Decision. Further, petitioner is hereby ordered to pay respondent
within fifteen (15) days from receipt of this Decision, the sum of
P12,295.00.
Let copy of this Decision be furnished the Register of Deeds of
Makati, Metro Manila for the purpose of cancellation of the lien in
favor of Cristina Condominium found at the back of Title for
unpaid monthly dues in the sum of P13,142.67, upon full
payment of respondent of said amount unto petitioner.
SO ORDERED.[1]
Both parties filed their respective motions for reconsideration.
On July 17, 1989, the decision of Hearing Officer Villaflor was
modified and amended by Hearing Officer Enrique L. Flores, Jr. to
read as follows:
WHEREFORE, respondents motion for reconsideration should be,
as it is, hereby DENIED and the petitioners motion for
reconsideration is hereby GRANTED.
Accordingly, the decision dated January 11, 1989, is partially
reconsidered to the effect that petitioners are not made liable for
the value of the items/articles burglarized from respondents
condominium unit.
SO ORDERED.[2]
165
On July 18, 1989, respondent Unisphere filed a notice of appeal
with the SEC en banc questioning the above-mentioned decision.
On August 15, 1989, it filed a motion for an extension of thirty
(30) days to file its memorandum on appeal thirty (30) days
from the stated deadline of August 18, 1989.
Said motion was granted on August 17, 1989.
On September 18, 1989, respondent Unisphere filed a second
motion for extension of time to file its memorandum on appeal
for another twenty (20) days.
The motion was likewise granted on September 26, 1989.
On October 9, 1989, respondent Unisphere filed its memorandum
on appeal.
After the petitioners filed their reply thereto, the SEC en banc
issued the Order dated February 23, 1990 which is quoted
hereunder:
Before this Commission en banc is an appeal from the Order
dated July 17, 1989 of the Hearing Officer in SEC Case No. 3119
entitled E.G.V. Realty Development Corporation and Cristina
Condominium Corporation vs. Unisphere International , Inc.
The records of the case show that respondent-appellant received
a copy of the above order on July 18, 1989 and filed its Notice of
Appeal on July 21, 1989. On August 15, 1989, respondent asked
for an extension of thirty (30) days to file its Memorandum on
Appeal which was granted on August 17, 1989.
On September 18, 1989, respondent asked for an additional
period of twenty (20) days until October 8, 1989 to file his
Appeal which was also granted.
Respondent filed his Memorandum on October 13, 1989, five
days after the due date.
The penultimate paragraph of Section 6 of Presidential Decree
no. 902-A (as amended) clearly provides:
x x x The decision, ruling or order of any such Commissioner,
bodies, boards, committees, and/or officer as may be appealed
to the Commission sitting en banc within thirty (30) days after
receipt by the appellant of notice of such decision, ruling or
order. The Commission shall promulgate rules or procedure to
govern the proceedings, hearings and appeals of cases falling
within its jurisdiction.
Pursuant to the above provision, the Commission promulgated
the Revised Rules of Procedure of the Securities and Exchange
Commisison, Section 3, Rule XVI of said Rules reiterates the
thirty (30)-day period provided for under the above provision:
Appeal may be taken by filing with the Hearing Officer who
promulgated the decision, order or ruling within thirty (30) days
from notice thereof, and serving upon the adverse party, a notice
of appeal and a memorandum on appeal and paying the
corresponding docket fee therefor. The appeal shall be
considered perfected upon the filing of the memorandum on
appeal and payment of the docket fee within the period
hereinabove fixed.
The Commission en banc notes that respondent had, extensions
included, a total of eighty (80) days to file its Appeal
memorandum but failed to do so.
WHEREFORE, premises considered, the instant appeal is hereby
dismissed for having been filed out of time.
SO ORDERED.[3]

Respondent Unisphere moved for a reconsideration of the above-
quoted order but the same was denied, and so was it its second
motion for reconsideration.
On September 6, 1990, respondent Unisphere filed a notice of
appeal to the SEC en banc in order to question the latters ruling
to the Court of Appeals pursuant to Rule 43 of the Rules of Court,
as amended by Republic Act No. 5434.
On September 10, 1990, it filed a notice of appeal to the Court of
Appeals.
The Court of Appeals reversed the SEC en bancs Order of August
21, 1990 in its Decision dated February 17, 1995 which
dispositively reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed
Order dated August 21, 1989 is hereby REVERSED and SET
ASIDE. Another judgment is entered declaring that the appeal
memorandum before the SEC (en banc) of appellant Unisphere
was filed on time and that the amount of P13,142.67, the unpaid
monthly dues of Unisphere to the Corporation should be offset by
the losses suffered by the Unisphere in the amount of
P12,295.00. Unisphere is hereby ordered to pay the Cristina
Condominium Corporation the amount of P847.67 representing
the balance after offsetting the amount of P12,295.00 against
the said P13,142.67, with 12% interest per annum from January
28, 1987 when the Joint Petition of the petitioners-appellees was
filed before the SEC (for collection and damages) until fully paid.
No pronouncement as to costs.
SO ORDERED.[4]
Petitioners moved for reconsideration of the said decision but the
same was denied by the appellate court on May 15, 1995.
Hence, the instant petition for review interposed by petitioners
E.G.V. Realty and CCC challenging the decision of the Court of
Appeals on the following grounds: (a) the Court of Appeals did
not acquire jurisdiction over respondent Unispheres appeal
because the latter failed to comply with the prescribed mode of
appeal; (b) even if the jurisdictional infirmity is brushed aside,
the SEC en banc Order dated February 23, 1990 has already
attained finality; and (c) the ruling of the Court of Appeals on the
offsetting of the parties claims is unfounded.
A perusal of the foregoing issues readily reveals that petitioners
raise two (2) aspects of the case for consideration, that is, the
procedural aspect and the substantive aspect.
We will discuss the procedural aspect first. Petitioners contend
that (a) the Court of Appeals did not acquire jurisdiction over the
appeal because respondent failed to comply with the prescribed
mode of appeal; and (b) assuming that the Court of Appeals has
jurisdiction, the assailed SEC en banc Order of February 23, 1990
had already become final and executory.
Anent the first contention, petitioners claim that respondent
Unisphere erred in merely filing a notice of appeal as in ordinary
civil cases from the regular courts instead of a petition for review
with the Court of Appeals.
Contrary to petitioners contention, respondent Unisphere
complied with the prescribed mode of appeal. At the time the
appeal was elevated to the Court of Appeals in 1990, the rule
governing recourse to the Court of Appeals from the decision,
resolution or final order of a quasi-judicial body was Rule 43 of
the Revised Rules of Court, as amended by Republic Act No.
5434 as embodied in Batas Pambansa Blg. 129 and its Interim
Rules and Guidelines.[5] The rule provided for a uniform
procedure for appeals from the specified administrative tribunals,
SEC included, to the Court of Appeals by filing a notice of appeal
with the appellate court and with the court, officer, board,
commission or agency that made or rendered the assailed ruling
166
within fifteen (15) days from notice thereof. Records bear out
that respondent Unisphere complied with the foregoing rules
when it filed a notice of appeal with the SEC en banc on
September 6, 1990 and with the Court of Appeals on September
10, 1990. Clearly therefore, respondent Unisphere complied with
the proper mode of appeal as mandated by the rules.
With respect to the second contention, petitioners asseverate
that the February 23, 1990 order of the SEC en banc has already
become final and unappealable, therefore can no longer be
reversed, amended or modified. They maintain that respondent
Unisphere received a copy of said order on February 26, 1990
and that ten (10) days thereafter, it filed its motion for
reconsideration. Said motion was denied by the SEC on May 14,
1990 which was received by respondent Unisphere on May 15,
1990. Consequently, they assert that respondent Unisphere had
only the remaining five (5) days or on May 20, 1990 within which
to file a notice of appeal. However, instead of appealing
therefrom, respondent Unisphere filed a second motion for
reconsideration on May 25, 1990 with the SEC en banc.
Petitioners contend that no second motion for reconsideration is
allowed by SEC Rules unless with express prior to leave of the
hearing officer. Said second motion for reconsideration was
likewise denied on August 21, 1990. Fifteen (15) days later or on
September 5, 1990, respondent Unisphere filed its notice of
appeal.
Section 8, Rule XII of the Revised Rules of Procedure of the SEC
provides that:
SEC. 8. Reconsideration.-- Within thirty (30) days from receipt of
the order or decision of the Hearing Officer, the aggrieved party
may file a motion for reconsideration of such order or decision
together with proof of service thereof upon the adverse party. No
more than one motion for reconsideration shall be allowed unless
with the express prior leave of the Hearing Officer.
Respondent Unispheres non-observance of the foregoing rule
rendered the February 23, 1990 and the May 14, 1990 orders of
the SEC en banc final and unappealable. Its failure to perfect its
appeal in the manner and within the period fixed by law rendered
the decision sought to be appealed final, with the result that no
court can exercise appellate jurisdiction to review the decision.
[6] Contrary to petitioners view, the appeal to the Court of
Appeals in this case should have been perfected within fifteen
(15) days from receipt of the order denying the motion for
reconsideration on May 15, 1990. But instead of appealing,
respondent Unisphere filed a prohibited second motion for
reconsideration without express prior leave of the hearing officer.
Consequently, when it subsequently filed its notice of appeal on
September 6, 1990, it was already eighty-two (82) days late.
Therefore, the appeal before the Court of Appeals could have
been dismissed outright for being time-barred. Rules of
procedure are intended to ensure the proper administration of
justice and the protection of substantive rights in judicial and
quasi-judicial proceedings. Blatant violation of such rules smacks
of a dilatory tactic which we simply cannot countenance.
Now, we go to the substantive aspect.
It is petitioners assertion that the ruling of the Court of Appeals
to offset the alleged losses as a result of the robberies in the
amount of P12,295.00 from the unpaid monthly dues of
P13,142.67 is unfounded because respondent Unisphere is not
the owner of the goods lost but a third party, Amtrade.
Respondent Unisphere, on its part, claims that this issue is
factual, hence, not a proper issue to raise before this Court.
Actually, the issue for our consideration is whether or not set-off
or compensation has taken place in the instant case. The Court
of Appeals dissertation on the matter is commendably
instructive, but, lamentably, it reached a different conclusion. We
quote pertinent portions of the assailed decision:

Compensation or offset under the New Civil Code takes place
only when two persons or entities in their own rights, are
creditors and debtors of each other. (Art. 1278). xxx
A distinction must be made between a debt and a mere claim. A
debt is an amount actually ascertained. It is a claim which has
been formally passed upon by the courts or quasi-judicial bodies
to which it can in law be submitted and has been declared to be
a debt. A claim, on the other hand, is a debt in embryo. It is
mere evidence of a debt and must pass thru the process
prescribed by law before it develops into what is properly called a
debt. (Vallarta vs. CA, 163 SCRA 587). Absent, however, any
such categorical admission by an obligor or final adjudication, no
compensation or off-set can take place. Unless admitted by a
debtor himself, the conclusion that he is in truth indebted to
another cannot be definitely and finally pronounced, no matter
how convinced he may be from the examination of the pertinent
records of the validity of that conclusion the indebtedness must
be one that is admitted by the alleged debtor or pronounced by
final judgment of a competent court or in this case by the
Commission (Villanueva vs. Tantuico, 182 SCRA 263).
There can be no doubt that Unisphere is indebted to the
Corporation for its unpaid monthly dues in the amount of
P13,142.67. This is admitted. But whether the Corporation is
indebted to Unisphere is vigorously disputed by the former.
It appears quite clear that the offsetting of debts does not extend
to unliquidated, disputed claims arising from tort or breach of
contract. (Compania General de Tobacos vs. French and Unson,
39 Phil. 34; Lorenzo and Martinez vs. herrero, 17 Phil. 29).
It must be noted that Unisphere just stopped paying its monthly
dues to the Corporation on September 23, 1983 without notifying
the latter. It was only on February 24, 1984, or five months
after, that it informed the corporation of its suspension of
payment of the condominium dues to offset the losses it suffered
because of the robberies.
In resisting the finding which underscores their negligence,
E.G.V. Realty and Cristina condominium corporation, would have
this Court appreciate in their favor the admission of Mr. Alfonso
Zamora of Unisphere that there was no such agreement among
the unit owners that any member who incurred losses will be
indemnified from the common contribution. (TSN, July 7, 1987,
p. 60).
The herein appellees further argue that the cause of action for
reimbursement of the value of the items lost because of the
robberies should be against the security agency and not the
Corporation.
On the other hand, Unisphere invokes ART. 1170 of the Civil
Code which provides:
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.
There is weight in the initial factual findings of the SEC Hearing
Officer with respect to the losses suffered by Unisphere in the
amount of P12,295.00:
Plaintiff likewise does not dispute the fact of robbery that
occurred on November 28, 1981 and July 26, 1982 inside 301
Cristina Condominium.
Plaintiff admits that it had secured the services of Jimenez
Protective and Security Agency to safeguard the Condominium
premises under its instructions and supervision, but which failed
to detect the robbery incidents that occurred twice at Unit 301 of
respondent, canting (sic) away bulk items.
xxx xxx xxx
167
From the undisputed facts, plaintiff was remissed (sic) within its
obligation to provide safety to respondent inside its unit. This
was demonstrated by the fact that two robbery incidents befell
respondents under the negligent eye of plaintiffs hired security
guards. It can be safely pronounced that plaintiff has not
complied with what was incumbent upon it to do in a proper
manner.
Since it has been determined and proven by the evidence
presented before the hearing office of respondent SEC that
Unisphere indeed suffered losses because of the robbery
incidents and since it (Unisphere) did not refute its liability to the
corporation for the unpaid monthly dues in the amount of
P13,142. 67, this amount should be set-off against the
aforestated losses of Unisphere.[7]
We fully agree with the appellate courts dissertation on the
nature and character of a set-off or compensation. However, we
cannot subscribe to its conclusion that a set-off or compensation
took place in this case.
In Article 1278 of the Civil Code, compensation is said to take
place when two persons, in their own right, are creditors and
debtors of each other. Compensation is a mode of extinguishing
to the concurrent amount, the obligations of those persons who
in their own right are reciprocally debtors an creditors of each
other and the offsetting of two obligations which are reciprocally
extinguished if they are of equal value, or extinguished to the
concurrent amount if of different values.[8] Article 1279 of the
same Code provides:
Article 1279. 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.
Absent any showing that all of these requisites exist,
compensation may not take place.
While respondent Unisphere does not deny its liability for its
unpaid dues to petitioners, the latter do not admit any
responsibility for the loss suffered by the former occasioned by
the burglary. At best, what respondent Unisphere has against
petitioners is just a claim, not a debt. Such being the case, it is
not enforceable in court. It is only the debts that are enforceable
in court, there being no apparent defenses inherent in them.[9]
Respondent Unispheres claim for its loss has not been passed
upon by any legal authority so as to elevate it to the level of a
debt. So we held in Alfonso Vallarta v. Court of Appeals, et al.,
[10] that:
Compensation or offset takes place by operation of law when two
(2) persons, in their own right, are creditor and debtor of each
other. For compensation to take place, a distinction must be
made between a debt and a mere claim. A debt is a claim which
has been formally passed upon by the highest authority to which
it can in law be submitted and has been declared to be a debt. A
claim, on the other hand, is a debt in embryo. It is mere
evidence of a debt and must pass thru the process prescribed by
law before it develops into what is properly called a debt.[11]

Tested by the foregoing yardstick, it has not been sufficiently
established that compensation or set-off is proper here as there
is lack of evidence to show that petitioners E.G.V. Realty and
CCC and respondent Unisphere are mutually debtors and
creditors to each other.
Considering the foregoing disquisition, therefore, we find that
respondent Court of Appeals committed reversible error in ruling
that compensation or set-off is proper in the instant case.
WHEREFORE, for all the foregoing , the instant petition is hereby
GRANTED. The Decision of the Court of Appeals dated February
17, 1995 is REVERSED and SET ASIDE. The Order of the
Securities and Exchange Commission dated August 21, 1990
reiterating the Hearing Officers Decision dated January 11, 1989,
as amended by the Order of July 17, 1989, is hereby
REINSTATED.
SO ORDERED.
THIRD DIVISION
[G.R. No. 134436. August 16, 2000]
METROPOLITAN BANK and TRUST COMPANY, petitioner, vs.
JOAQUIN TONDA and MA. CRISTINA TONDA, respondents.
DECISION
GONZAGA_REYES, J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court seeking to set aside the Decision[1] of the Court
of Appeals[2] dated June 29, 1998 in CA-G.R. SP No. 38113
which: (1) reversed Resolution No. 417, s. 1994,[3] dated June
1, 1994 of the Department of Justice[4] directing to file the
appropriate Information against herein respondents Joaquin P.
Tonda and Ma. Cristina V. Tonda for violation of P.D. 115 in
relation to Article 315 (1) (b) of the Revised Penal Code; and (2)
effectively set aside the Resolutions dated April 7, 1995[5] and
July 12 1995[6] of the Department of Justice denying the
motions for reconsideration.
Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda, hereinafter
referred to as the TONDAS, applied for and were granted
commercial letters of credit by petitioner Metropolitan Bank and
Trust Company, hereinafter referred to as METROBANK for a
period of eight (8) months beginning June 14, 1990 to February
1, 1991 in connection with the importation of raw textile
materials to be used in the manufacturing of garments. The
TONDAS acting both in their capacity as officers of Honey Tree
Apparel Corporation (HTAC) and in their personal capacities,
executed eleven (11) trust receipts to secure the release of the
raw materials to HTAC. The imported fabrics with a principal
value of P2,803,000.00 were withdrawn by HTAC under the 11
trust receipts executed by the TONDAS. Due to their failure to
settle their obligations under the trust receipts upon maturity,
METROBANK through counsel, sent a letter dated August 10,
1992, making its final demand upon the TONDAS to settle their
past due TR/LC accounts on or before August 15, 1992. They
were informed that by said date, the obligations would amount to
P4,870,499.13. Despite repeated demands therefor, the TONDAS
failed to comply with their obligations stated in the trust receipts
agreements, i.e. the TONDAS failed to account to METROBANK
the goods and/or proceeds of sale of the merchandise, subject of
the trust receipts.
Consequently, on November 9, 1992, Metrobank, through its
account officer Eligio Labog, Jr., filed with the Provincial
Prosecutor of Rizal a complaint/affidavit against the TONDAS for
violation of P.D. No. 115 (Trust Receipts Law) in relation to
Article 315 (1) (b) of the Revised Penal Code. On February 12,
1993, the assigned Assistant Prosecutor of Rizal submitted a
Memorandum to the Provincial Prosecutor recommending that
the complaint in I.S. No. 92-8703 be dismissed on the ground
that the complainants had failed to establish the existence of the
168
essential elements of Estafa as charged. The recommendation
was approved by Rizal Provincial Prosecutor Mauro Castro on
May 18, 1993.
METROBANK then appealed to the Department of Justice (DOJ).
On June 1, 1994, Undersecretary Ramon. S. Esguerra reversed
the findings of the Provincial Prosecutor of Rizal and ordered the
latter to file the appropriate information against the TONDAS as
charged in the complaint.
The TONDAS immediately sought a reconsideration of the DOJ
Resolution but their motion was denied by the then acting Justice
Secretary Demetrio G. Demetria in a Letter-Resolution dated
April 7, 1995. A second motion for reconsideration by the
TONDAS was likewise denied by then Justice Secretary Teofisto
Guingona on July 12, 1995.
Subsequently, the TONDAS filed with the Court of Appeals a
special civil action for certiorari and prohibition with application
for a temporary restraining order or a writ of preliminary
injunction,[7] which was docketed as CA-G.R. SP No. 38113.
They contended therein that the Secretary of Justice acted
without or in excess of jurisdiction in issuing the aforementioned
Resolution dated July 12, 1995 denying with finality their motion
for the reconsideration of the Resolution dated April 7, 1995 of
the Acting Secretary of Justice, which in turn denied their motion
for the reconsideration of Resolution No. 417, s. 94, dated June
1, 1994, directing to file the appropriate Information against the
TONDAS.
The Court of Appeals granted the TONDAS' petition and ordered
the criminal complaint against them dismissed. The Court of
Appeals held that METROBANK had failed to show a prima facie
case that the TONDAS violated the Trust Receipts Law in relation
to Art. 315 (1) (b) of the Revised Penal Code in the face of
convincing proof that "that the amount of P2.8 Million
representing the outstanding obligation of the TONDAS under the
trust receipts account had already been settled by them in
compliance with the loan restructuring proposal; and that in the
absence of a loan restructuring agreement, METROBANK could
still validly apply the amount as payment thereof." The relevant
portions of the Court of Appeals decision are quoted as follows:
"Petitioners admitted that in 1991 their company, the Honey
Tree Apparel Corporation (HTAC), had some financial reversals
making it difficult for them to comply with their loan obligations
with Metrobank. They were then constrained to propose a loan
restructuring agreement with the private respondent to enable
them to finally settle all outstanding obligations with the latter.
In a letter dated 23 September 1991, petitioner Joaquin Tonda
submitted a proposed Loan Restructuring Scheme to Metrobank.
In said letter, petitioner Tonda proposed to immediately pay in
full the outstanding principal charges under the trust receipts
account and the remaining obligations under a separate schedule
of payment. Petitioners attached with said letter an itemized
proposal (Attachment "A"), part of which reads:
1. Trust Receipts - The new management and. Mr. Joaquin G.
Tonda will pay immediately the entire principal of the
outstanding Trust Receipts amounting to P2,803,097.14. While
the interest accrued up to September 13, 1991 amounting to
P409,601.57 plus the additional interest shall be re-structured
together with item no. 2 below. A joint sharing account in the
name of Joaquin G. Tonda and Wang Tien En equal to Trust
Receipt amount of 1.8 Million will be opened at Metrobank
Makati. (emphasis supplied)
It would appear that the aforestated amount of 1.8 Million was
erroneously written since the intention of the petitioners was to
open an account of P2.8 Million to pay the entire principal of the
outstanding trust receipts account. In fact, also on 23 September
1991, petitioner Joaquin Tonda and Wang Tien En deposited four
different checks with a total amount of P2,800,000.00 with
Metrobank. The checks were received by a certain Flor C.
Naanep. Notably, the petitioners had obtained a written

acknowledgement of receipt of the checks totaling P2.8 Million
from the Metrobank officer in order to show proof of compliance
with the loan restructuring proposal. If the petitioners had
intended it to be a simple deposit, then a deposit slip with a
machine validation by the private respondent bank would have
otherwise been sufficient.
In a letter dated 22 October 1991, Metrobank wrote to the
petitioners informing them that the bank had accepted their
proposal subject to certain conditions, the first of which referred
to the immediate payment of the amount of P2.8 Million,
representing the outstanding trust receipts account. The
petitioners appeared to have offered a counter proposal such
that no final agreement had yet been reached.
However, the succeeding negotiations between petitioners and
Metrobank, after the initial offer of 23 September 1991 was
made, dealt with the other outstanding obligations while the
matter regarding the trust receipts account remained
unchanged; therefore, it was settled between the parties that the
amount of P2.8 Million should be paid to cover all outstanding
obligations under the trust receipts account. Despite the inability
of both parties to reach a mutually agreeable loan restructured
agreement, the amount of P2.8 Million which was deposited on
23 September 1991 by the petitioners appears to remain intact
and untouched as Metrobank had failed to show evidence that
the money has been withdrawn from the savings account of the
petitioners.
Moreover, the deposit made by the petitioners was made known
to Metrobank clearly as a compliance with the proposed loan
restructuring agreement. As shown in the correspondence made
by the petitioners on 28 February 1992 to Metrobank, after the
latter had made a formal demand for payment of all outstanding
obligations, the deposit was mentioned, to wit:
"May we emphasize that to show sincerity and financial
capability, soon after we received your letter dated October 22,
1991 informing us of your approval of the restructuring and
consolidation of our firm's obligations, a personal account was
opened by two (2) of our stockholders in the amount equivalent
to the TR/LC, Account of about P2.8 Million which deposit is still
maintained with your bank, free from any lien or encumbrance,
and may be applied anytime to the payment of the TR/LC
Account upon the implementation by the parties of the terms of
restructuring.""(emphasis supplied)
The contention of Metrobank that the money had not been
actually applied as payment for petitioners' outstanding
obligation under the trust receipts account is absolutely devoid of
merit, considering that the petitioners were still in the process of
negotiating for a reasonable loan restructuring arrangement with
Metrobank when the latter abruptly abandoned all efforts to
negotiate and instantly demanded from the petitioners the
fulfillment of all their outstanding obligations.
In the case of Tan Tiong Tick vs. American Apothecaries, 65 Phil.
414, the Supreme Court had held that:
When a depositor is indebted to a bank, and the debts are
mutual - that is, between the same parties and in the, same right
- the bank may apply the deposit, or such portion thereof as may
be necessary, to the payment of the debt due it by the depositor,
provided there is no express agreement to the contrary and the
deposit is not specifically applicable to some other particular
purpose.
Applying the above-mentioned ruling in this case, if the parties
therefore fail to reach an agreement regarding the restructuring
of HTAC's loan, Metrobank can validly apply the amount
deposited by the petitioners as payment of the principal
obligation under the trust receipts account.
On the basis of all the evidence before Us, this Court is convinced
that the amount of P2.8 Million representing the outstanding
169
obligation of the petitioners under the trust receipts account had
already been settled by the petitioners. The money remains
deposited under the savings account of the petitioners awaiting a
final agreement with Metrobank regarding the loan restructuring
arrangement. Meanwhile, Metrobank has the right to use the
deposited amount in connection with any of its banking business.
With convincing proof that the amount of P2.8 Million deposited
under petitioners' savings account with Metrobank was indeed
intended to be applied as payment for the outstanding
obligations of HTAC under the trust receipts, Metrobank,
therefore, had failed to show a prima facie case that the
petitioners had violated the Trust Receipts Law (P.D. No. 115) in
relation to Art. 315 of the Revised Penal Code. Besides, there is
absolutely no evidence suggesting that Metrobank has been
damaged by the proposal and the deposit made by the
petitioners. As noted by the prosecutor:
It is clear from the evidence that complainant bank had, all the
while, been informed of the steps undertaken by the respondents
relative to the trust receipts and other financial obligations vis-a-
vis HTAC's financial difficulties. Hardly therefore, could it be said
that respondents were unfaithfully, deceptively, deceitfully and
fraudulently dealing with complainant bank to warrant an
indictment for Estafa.[8]
Hence, this recourse to this Court where petitioner submits for
the consideration of this Court the following issues:
I.
WHETHER METROBANK HAS SHOWN A PRIMA FACIE VIOLATION
OF THE TRUST RECEIPTS LAW IN RELATION TO ART. 315 OF THE
REVISED PENAL CODE
II.
WHETHER AN AGREEMENT WAS FORGED BETWEEN THE PARTIES
THAT THE 2.8 MILLION DEPOSITED IN THE JOINT ACCOUNT OF
JOAGUIN G. TONDA AND WANG TIEN EN WOULD BE
CONSIDERED AS PAYMENT FOR THE OUTSTANDING
OBLIGATIONS OF THE SPOUSES TONDA UNDER THE TRUST
RECEIPTS
III.
WHETHER INSPITE OF THE FAILURE OF THE PARTIES TO AGREE
UPON A RESTRUCTURING AGREEMENT, METROBANK CAN STILL
APPLY THE P2.8 MILLION DEPOSIT AS PAYMENT TO THE
PRINCIPAL AMOUNT COVERED BY THE TRUST RECEIPTS
IV.
WHETHER DAMAGE HAS BEEN CAUSED TO METROBANK
BECAUSE OF THE PROPOSAL AND OF THE DEPOSIT
V.
WHETHER METROBANK HAS THE STANDING TO PROSECUTE THE
CASE A QUO
VI.
WHETHER THE ASSIGNED ERRORS IN THE PETITION FOR
CERTIORARI FILED WITH THIS HONORABLE COURT RAISES
PURELY QUESTIONS OF FACTS[9]
In response to the foregoing, the TONDAS maintain that
METROBANK has no legal standing to file the present petition
without the conformity or authority of the prosecutor as it deals
solely with the criminal aspect of the case, a separate action to
recover civil liability having already been instituted; that the
issues raised in the present petition are purely factual; and that
the subject trust receipts obligations have been extinguished by
payment or legal compensation.

We find for petitioner bank.
Preliminarily, we shall resolve the issues raised by the TONDAS
regarding the standing of METROBANK to file the instant petition
and whether the same raises questions of law.
The general rule is that it is only the Solicitor General who is
authorized to bring or defend actions on behalf of the People or
the Republic of the Philippines once the case is brought before
this Court or the Court of Appeals. However, an exception has
been made that "if there appears to be grave error committed by
the judge or lack of due process, the petition will be deemed filed
by the private complainants therein as if it were filed by the
Solicitor General."[10] In that case, the Court gave due course to
the petition and allowed the petitioners to argue their case in lieu
of the Solicitor General. We accord the same treatment to the
instant petition on account of the grave errors committed by the
Court of Appeals. We add that no information having been filed
yet in court, there is, strictly speaking, no case yet for the People
or the Republic of the Philippines. In answer to the second issue
raised by the TONDAS, while the jurisdiction of the Supreme
Court in a petition for review on certiorari under Rule 45 of the
Revised Rules of Court is limited to reviewing only errors of law,
not of fact, one exception to the rule is when the factual findings
complained of are devoid of support by the evidence on record or
the assailed judgment is based on misappreciation of facts[11],
as will be shown to have happened in the instant case.
In the main, the issue is whether or not the dismissal by the
Court of Appeals of the charge for violation of the Trust Receipts
Law in relation to Art. 315(1) (b) of the Revised Penal Code
against the TONDAS is warranted by the evidence at hand and
by law.
The Court of Appeals gravely erred in reversing the Department
of Justice on the finding of probable cause to hold the TONDAS
for trial. The documentary evidence presented during the
preliminary investigation clearly show that there was probable
cause to warrant a criminal prosecution for violation of the Trust
Receipts Law.
The relevant penal provision of P.D. 115 provides:
SEC. 13. Penalty Clause. - The failure of an entrustee to turn
over the proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the extent of the
amount owing to the entruster or as appears in the trust receipt
or to return said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three Hundred and Fifteen, Paragraph One
(b), of Act Numbered Three Thousand Eight Hundred and Fifteen,
as amended, otherwise known as the Revised Penal Code. If the
violation or offense is committed by a corporation, partnership,
association or other judicial entities, the penalty provided for in
this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for
the offense, without prejudice to the civil liabilities arising from
the criminal offense.
Section 1 (b), Article 315 of the Revised Penal Code under which
the violation is made to fall, states:
"x x x Swindling (estafa). - Any person who shall defraud another
by any of the mans mentioned herein below x x x:
xxxxxxxxx
b. By misappropriating or converting, to the prejudice of another,
money, goods, or any other personal property received by the
offender in trust or on commission, or for administration, or
under any other obligation involving the duty to make delivery of
or to return the same, even though such obligation be totally or
170
partially guaranteed by a bond; or by denying having received
such money, goods, or other property.
Based on the foregoing, it is plain to see that the Trust Receipts
Law declares the failure to turn over the goods or the proceeds
realized from the sale thereof, as a criminal offense punishable
under Article 315 (1) (b) of the Revised Penal Code. The law is
violated whenever the entrustee or the person to whom the trust
receipts were issued in favor of fails to: (1) return the goods
covered by the trust receipts; or (2) return the proceeds of the
sale of the said goods. The foregoing acts constitute estafa
punishable under Article 315 (1) (b) of the Revised Penal Code.
Given that various trust receipts were executed by the TONDAS
and that as entrustees, they did not return the proceeds from
the goods sold nor the goods themselves to METROBANK, there
is no dispute that that the TONDAS failed to comply with the
obligations under the trust receipts despite several demands
from METROBANK.
Finding favorably for the TONDAS, however, and ordering the
dismissal of the complaint against them, the Court of Appeals
held that: (1) the TONDAS opened a savings account of P2.8
Million to pay the entire principal of the outstanding trust
receipts account; (2) the TONDAS obtained from a METROBANK
officer[12] a written acknowledgement of receipt of checks
totaling P2.8 Million in order to show proof of compliance with
the loan restructuring proposal; (3) it was settled between the
parties that the amount of 2.8 Million should be paid to cover all
outstanding obligations under the trust receipts account; (4) the
money remains deposited under the savings account of
petitioners awaiting a final agreement with METROBANK
regarding the loan restructuring arrangement; and that (5) there
is no evidence suggesting that METROBANK has been damaged
by the proposal and the deposit or that the TONDAS employed
fraud and deceit in their dealings with the bank.
The foregoing findings and conclusions are palpably erroneous.
First, the amount of P2.8 million was not directly paid to
METROBANK to settle the trust receipt accounts, but deposited in
a joint account of Joaquin G. Tonda and a certain Wang Tien En.
In a letter dated February 28, 1992, signed by HTAC's Vice
President for Finance, METROBANK was informed that the
amount "may be applied anytime to the payment of the trust
receipts account upon implementation of the parties of the terms
of the restructuring."[13] The parties failed to agree on the
terms of the loan restructuring agreement as the offer by the
TONDAS to restructure the loan was followed by a series of
counter-offers which yielded nothing. It is axiomatic that
acceptance of an offer must be unqualified and absolute[14] to
perfect a contract. The alleged payment of the trust receipts
accounts never became effectual on account of the failure of the
parties to finalize a loan restructuring arrangement.
Second, the handwritten note by the METROBANK officer
acknowledging receipt of the checks amounting to P2.8 Million
made no reference to the TONDAS' trust receipt obligations, and
we cannot presume that it was anything more than an ordinary
bank deposit. The Court of Appeals citing the case of Tan Tiong
Tick vs. American Apothecories[15] implied that in making the
deposit, the TONDAS are entitled to set off, by way of
compensation, their obligations to METROBANK. However, Article
1288 of the Civil Code provides that "compensation shall not be
proper when one of the debts consists in civil liability arising
from a penal offense" as in the case at bar. The raison d'etre for
this is that, "if one of the debts consists in civil liability arising
from a penal offense, compensation would be improper and
inadvisable because the satisfaction of such obligation is
imperative."[16]
Third, reliance on the negotiations for the settlement of the trust
receipts obligations between the TONDAS and METROBANK is
simply misplaced. The negotiations pertain and affect only the
civil aspect of the case but does not preclude prosecution for the
offense already committed. It has been held that "[a]ny

compromise relating to the civil liability arising from an offense
does not automatically terminate the criminal proceeding against
or extinguish the criminal liability of the malefactor."[17] All told,
the P2.8 Million deposit could not be considered as having settled
the trust receipts obligations of the TONDAS to the end of
extinguishing any incipient criminal culpability arising therefrom.
Hence, it has been held in Office of the Court Administrator vs.
Soriano[18] that:
xxx it is too well-settled for any serious argument that whether
in malversation of public funds or estafa, payment,
indemnification, or reimbursement of, or compromise as to, the
amounts or funds malversed or misappropriated, after the
commission of the crime, affects only the civil liability of the
offender but does not extinguish his criminal liability or relieve
him from the penalty prescribed by law for the offense
committed, because both crimes are public offenses against the
people that must be prosecuted and penalized by the
Government on its own motion, though complete reparation
should have been made of the damage suffered by the offended
parties. xxx."
As to the statement of the Court of Appeals that there is no
evidence that METROBANK has been damaged by the proposal
and the deposit, it must be clarified that the damage can be
traced from the non-fulfillment of an entrustee's obligation under
the trust receipts. The nature of trust receipt agreements and the
damage caused to trade circles and the banking community in
case of violation thereof was explained in Vintola vs. IBAA[19]
and echoed in People vs. Nitafan[20], as follows:
"[t]rust receipt arrangements do not involve a simple loan
transaction between a creditor and a debtor-importer. Apart from
a loan feature, the trust receipt arrangement has a security
feature that is covered by the trust receipt itself. The second
feature is what provides the much needed financial assistance to
traders in the importation or purchase of goods or merchandise
through the use of those goods or merchandise as collateral for
the advancements made by the bank. The title of the bank to the
security is the one sought to be protected and not the loan which
is a separate and distinct agreement."
xxx xxx xxx.
"Trust receipts are indispensable contracts in international and
domestic business transactions. The prevalent use of trust
receipts, the danger of their misuse and/or misappropriation of
the goods or proceeds realized from the sale of goods,
documents or instruments held in trust for entruster-banks, and
the need for regulation of trust receipt transactions to safeguard
the rights and enforce the obligations of the parties involved are
the main thrusts of P.D. 115. As correctly observed by the
Solicitor General, P.D. 115, like Bata Pambansa Blg. 22, punishes
the act "not as an offense against property, but as an offense
against public order. x x x The misuse of trust receipts therefore
should be deterred to prevent any possible havoc in trade circles
and the banking community. (citing Lozano vs. Martinez, 146
SCRA 323 [1986]; Rollo, p. 57) It is in the context of upholding
public interest that the law now specifically designates a breach
of a trust receipt agreement to be an act that "shall" make one
liable foe estafa."
The finding that there was no fraud and deceit is likewise
misplaced Considering that the offense is punished as a malum
prohibitum regardless of the existence of intent or malice. A
mere failure to deliver the proceeds of the sale or the goods if
not sold, constitutes a criminal offense that causes prejudice not
only to another, but more to the public interest.[21]
Finally, it is worthy of mention that a preliminary investigation
proper - whether or not there is reasonable ground to believe
that the accused is guilty of the offense and therefore, whether
or not he should be subjected to the expense, rigors and
embarrassment of trial - is the function of the prosecutor.[22]
171
Preliminary investigation is an executive, not a judicial function.
[23] Such investigation is not part of the trial, hence, a full and
exhaustive presentation of the parties' evidence is not required,
but only such as may engender a well-grounded belief that an
offense has been committed and that the accused is probably
guilty thereof.[24]
Section 4, Rule 112 of the Rules of Court recognizes the
authority of the Secretary of Justice to reverse the resolution of
the provincial or city prosecutor or chief state prosecutor upon
petition by a proper party.[25] Judicial review of the resolution of
the Secretary of Justice is limited to a determination of whether
there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction considering that the full discretionary
authority has been delegated to the executive branch in the
determination of probable cause during a preliminary
investigation. Courts are not empowered to substitute their
judgment for that of the executive branch; it may, however, look
into the question of whether such exercise has been made in
grave abuse of discretion.[26]
Verily, there was no grave abuse of discretion on the part of the
Secretary of Justice in directing the filing of the Information
against the TONDAS, end the Court of Appeals overstepped its
boundaries in reversing the same without basis in law and in
evidence. We emphasize that for purposes of preliminary
investigation, it is enough that there is evidence showing that a
crime has been committed and that the accused is probably
guilty thereof.[27] By reason of the abbreviated nature of
preliminary investigations, a dismissal of the charges as a result
thereof is not equivalent to a judicial pronouncement of acquittal,
[28] a converso, the finding of a prima facie case to hold the
accused for trial is not equivalent to a finding of guilt.
WHEREFORE, the petition is hereby GRANTED. The assailed
Decision is REVERSED and SET ASIDE.
SO ORDERED.
FIRST DIVISION
G.R. No. 147477 June 27, 2006
HERMENEGILDO M. TRINIDAD, Petitioner,
vs.
ESTRELLA ACAPULCO, Respondent
DECISION
AUSTRIA-MARTINEZ, J.:
Before this Court is a Petition for Review under Rule 45 of the
Rules of Court assailing the Decision1 of the Court of Appeals
(CA) in CA-G.R. CV No. 42518 promulgated on February 16,
2001, which affirmed the Decision2 of the Regional Trial Court
(RTC) Cebu City, Branch 6 dated March 23, 1992.
The facts are as follows:
On May 6, 1991, respondent Estrella Acapulco filed a Complaint
before the RTC seeking the nullification of a sale she made in
favor of petitioner Hermenegildo M. Trinidad. She alleged:
Sometime in February 1991, a certain Primitivo Cañete
requested her to sell a Mercedes Benz for P580,000.00. Cañete
also said that if respondent herself will buy the car, Cañete was
willing to sell it for P500,000.00. Petitioner borrowed the car
from respondent for two days but instead of returning the car as
promised, petitioner told respondent to buy the car from Cañete
for P500,000.00 and that petitioner would pay respondent after
petitioner returns from Davao. Following petitioner’s instructions,
respondent requested Cañete to execute a deed of sale covering
the car in respondent’s favor for P500,000.00 for which
respondent issued three checks in favor of Cañete. Respondent
thereafter executed a deed of sale in favor of petitioner even
though petitioner did not pay her any consideration for the sale.
When petitioner returned from Davao, he refused to pay
respondent the amount of P500,000.00 saying that said amount
would just be deducted from whatever outstanding obligation
respondent had with petitioner. Due to petitioner’s failure to pay
respondent, the checks that respondent issued in favor of Cañete
bounced, thus criminal charges were filed against her.3
Respondent then prayed that the deed of sale between her and

petitioner be declared null and void; that the car be returned to
her; and that petitioner be ordered to pay damages.4
In his Answer petitioner contended that: it is not true that he
borrowed the car and that any demand was made to return it; he
also did not give any instructions to respondent to buy the car
from Cañete because as early as September 28, 1990, Cañete
has already sold the car to respondent for P500,000.00; at the
time respondent executed the deed of sale in his favor on March
4, 1991, respondent was already in possession of the deed of
sale from Cañete; the amount of P500,000.00 was fully paid by
way of dation in payment to partially extinguish respondent’s
obligation with petitioner; the contract entered into was a true
sale of a motor vehicle and the mode of payment was that of
dation in payment agreed upon at the time of the sale.5
The parties filed their respective pre-trial briefs. Petitioner raised
as issue: whether or not there is valid dation in payment;6 while
respondent put forth the questions: whether or not she is
indebted to petitioner in the amount of P566,000.00, and
whether the car was ceded by her to petitioner in order to
partially pay off her obligation of P566,000.00 to petitioner as
dation in payment.7
On September 6, 1991, the trial court came out with its Pre-Trial
Order limiting the issue to whether there is dacion en pago
between petitioner and respondent.8
Trial ensued and on March 23, 1992, the RTC rendered its
Decision finding that no dacion en pago is present in this case as
common consent was not proven.9 The fallo of said decision
reads:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff (Acapulco) and against the defendant (Trinidad), to wit:
1. Declaring the deed of sale executed by plaintiff in favor of
defendant as null and void for being fictitious and/or simulated;
2. The defendant is ordered to return the Mercedes Benz car in
question to plaintiff in the same condition when it was delivered
to him by plaintiff;
3. Defendant is ordered to pay plaintiff the amount of
P100,000.00 as moral damages; P20,000.00 as exemplary
damages and attorney’s fees of P20,000.00 as well as litigation
expenses in the amount of P5,000.00 and costs.
SO ORDERED.10
Petitioner filed a Motion for Reconsideration arguing that contrary
to the findings of the trial court that there was no common
consent, the offer to deliver the car to him actually came from
respondent after petitioner told her that he was going to file
estafa cases against her for her failure to pay her debt to
petitioner.11
Petitioner also filed a Supplemental Motion and for the first time
averred that assuming that respondent did not agree to having
the purchase price charged against the P566,000.00 she owed
petitioner, nonetheless, with or without her consent and/or
knowledge, the obligations parties owed to each other were
extinguished by operation of law or through legal compensation
in the amount of P500,000.00.12
The RTC issued an Order dated October 18, 1992 denying the
Motion for Reconsideration and Supplemental Motion of petitioner
stating that the claim of dacion en pago is inexistent in this case
and the defense of legal compensation was not alleged or
pleaded in petitioner’s Answer.13
Petitioner appealed to the CA which affirmed the Decision of the
trial court, finding that the issue of legal compensation was filed
too late as it was brought up only in the supplemental motion for
reconsideration; that the parties agreed that the issue to be tried
172
was whether or not there was dacion en pago; that dacion en
pago however is not present in this case as the parties did not
give their consent thereto; that there can also be no legal
compensation as one of the obligations of this case did not entail
payment of a monetary debt but the delivery of a car; and that
the admission of petitioner that the sale price of the car was not
paid entitled respondent to file the action for rescission of sale.14
Petitioner now comes before this Court claiming that:
>1. THE HONORABLE APPELLATE COURT ERRED IN HOLDING
THAT THE ANSWER DID NOT ALLEGE FACTS AMOUNTING TO
EXTINGUISHMENT OF OBLIGATION BY LEGAL COMPENSATION;
>2. THE HONORABLE APPELLATE COURT ERRED IN GIVING
UNDUE RELIANCE TO PETITIONER’S CONCLUSION IN HIS
ANSWER THAT HIS OBLIGATION WAS DEEMED EXTINGUISHED
BECAUSE OF DATION IN PAYMENT INSTEAD OF DISREGARDING
SAID CONCLUSION AND SIMPLY APPRECIATING THE FACTS
ALLEGED AND PROVED AND DRAWING FOR ITSELF THE
JURIDICAL IMPLICATION OF SAID FACTS;
>3. ASSUMING THAT LEGAL COMPENSATION HAD NOT BEEN
ALLEGED IN THE ANSWER, STILL THE HONORABLE APPELLATE
COURT ERRED IN HOLDING THAT LEGAL COMPENSATION AS A
MANNER OF EFFECTING PAYMENT HAD TO BE SPECIFICALLY
ALLEGED, THE SAME BEING ONLY EVIDENTIARY;
>4. ASSUMING THAT LEGAL COMPENSATION HAD TO BE
ALLEGED AND THAT THE ANSWER FAILED TO DO SO,
NEVERTHELESS THE HONORABLE APPELLATE COURT ERRED IN
IGNORING THE EVIDENCE PRESENTED WITHOUT OBJECTION
FROM RESPONDENT SHOWING THAT PARITES’(SIC) MUTUAL
MONETARY OBLIGATIONS TO EACH OTHER HAD BEEN
EXTINGUISHED TO THE CONCURRENT AMOUNT OF P500,00.00;
>5. THE HONORABLE APPELLATE COURT ERRED IN HOLDING
THAT LEGAL COMPENSATION COULD BE EFFECTED ONLY
THROUGH THE CONSENT OF THE PARTIES;
>6. THE HONORABLE APPELLATE COURT ERRED IN HOLDING
THAT NON-PAYMENT OF THE PURCHASE PRICE MADE THE
CONTRACT OF SALE FICTITIOUS, HENCE NULL AND VOID;
>7. IN VIEW OF THE RESPONDENT’S ADMISSION THAT SHE
OWED PETITIONER P566,000.00, THE HONORABLE APPELLATE
COURT ERRED IN NOT ORDERING RESPONDENT TO PAY THE
SAME WITH LEGAL INTEREST;
>8. THE HONORABLE APPELLATE COURT ERRED IN ASSESSING
DAMAGES AGAINST THE PETITIONER.15
Petitioner argues that: the purchase price of the car had been
automatically offset by respondent’s own monetary obligation of
P566,000.00, even if he and respondent had not agreed to
offsetting following Article 129016 of the Civil Code; Bank of the
Philippine Islands v. Court of Appeals17 also held that
compensation shall take place when two persons, in their own
right, are creditors and debtors of each other; legal
compensation takes place by operation of law and may be taken
up even though it is not raised in the pleadings or during trial; it
is the duty of courts to grant the relief to which the parties are
entitled as shown by the allegations and the facts proven at the
trial; here, while petitioner claimed dation in payment, there was
more than enough testimony and admissions to prove elements
of legal compensation; failure to pay the agreed purchase price
does not make the contract of sale fictitious and null and void;
the CA erred in not ordering respondent to pay petitioner the
balance of her partially extinguished indebtedness and in
assessing damages against him as there was no basis
therefor.18
In her Comment, respondent counters that: it was only in the
Supplemental Motion for Reconsideration of the decision of the
trial court that petitioner changed his theory and started claiming

legal compensation as a defense; the CA did not commit any
error in rejecting the belated new defense of petitioner as it
would be offensive to the basic rule of fair play, justice and due
process; Article 1279 of the Civil Code also states that for legal
compensation to be proper both debts should consist of sum of
money; in this case, one of the obligations does not entail
payment of money but delivery of a car.19
Petitioner merely reiterated his arguments in his
Memorandum,20 while respondent in hers, further averred that:
she is not the owner of the car, but was only in possession
thereof in order to sell it at a price of P580,000.00 with
P80,000.00 going to her; both the trial court and the CA failed to
make a finding as to the exact amount respondent owed
petitioners.21
Stripped to its basics, what petitioner is contending is that legal
compensation should be appreciated, though not expressly
stated in his Answer to the Complaint before the trial court, as
his allegations therein and the facts proven at the trial show the
presence of legal compensation. He further argues that, in any
case, legal compensation takes place by operation of law even
without the consent of the interested parties.
The Court resolves to grant the petition.
Our rules recognize the broad discretionary power of an appellate
court to waive the lack of proper assignment of errors and to
consider errors not assigned.22 The interest of justice dictates
that the Court consider and resolve issues even though not
particularly raised if it is necessary for the complete adjudication
of the rights and obligations of the parties and it falls within the
issues already found by them.23 While it is true that petitioner
failed to raise the issue of legal compensation at the earliest
opportunity, this should not preclude the courts from
appreciating the same especially in this case, where ignoring the
same would only result to unnecessary and circuitous filing of
cases.
Indeed, the doctrine that higher courts are precluded from
entertaining matters neither alleged in the pleadings nor raised
during the proceedings below but ventilated for the first time
only in a motion for reconsideration or on appeal, is subject to
exceptions, such as when:
(a) grounds not assigned as errors but affecting jurisdiction over
the subject matter; (b) matters not assigned as errors on appeal
but are evidently plain or clerical errors within contemplation of
law; (c) matters not assigned as errors on appeal but
consideration of which is necessary in arriving at a just decision
and complete resolution of the case or to serve the interests of
justice or to avoid dispensing piecemeal justice; (d) matters not
specifically assigned as errors on appeal but raised in the trial
court and are matters of record having some bearing on the
issue submitted which the parties failed to raise or which the
lower court ignored; (e) matters not assigned as errors on
appeal but closely related to an error assigned; and (f) matters
not assigned as errors on appeal but upon which the
determination of a question properly assigned, is dependent.24
In this case, petitioner raised the issue of dacion en pago in his
Answer to respondent’s Complaint. The trial court thus focused
on ascertaining whether the elements of dacion en pago are
present in the case at bar, i.e.: whether there is consent, object
certain and cause or consideration, with common consent as an
essential prerequisite to have the effect of totally extinguishing
the debt or obligation.25 As respondent’s consent was not
adequately proven by petitioner, the trial court held that there
could be no dacion en pago. Petitioner thereafter filed a Motion
for Reconsideration and a Supplemental Motion for
Reconsideration where, for the first time, he raised the issue of
legal compensation. In striking down petitioner’s claim of legal
compensation, the trial court reasoned that it was raised too late.
This was affirmed by the CA.
173
This Court holds otherwise.
Compensation takes effect by operation of law even without the
consent or knowledge of the parties concerned when all the
requisites mentioned in Article 1279 of the Civil Code are
present.26 This is in consonance with Article 1290 of the Civil
Code which provides that:
Article 1290. 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.
Since it takes place ipso jure,27 when used as a defense, it
retroacts to the date when all its requisites are fulfilled.28
Article 1279 provides 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.
Here, petitioner’s stance is that legal compensation has taken
place and operates even against the will of the parties because:
(a) respondent and petitioner were personally both creditor and
debtor of each other; (b) the monetary obligation of respondent
was P566,000.00 and that of the petitioner was P500,000.00
showing that both indebtedness were monetary obligations the
amount of which were also both known and liquidated; (c) both
monetary obligations had become due and demandable—
petitioner’s obligation as shown in the deed of sale and
respondent’s indebtedness as shown in the dishonored checks;
and (d) neither of the debts or obligations are subject of a
controversy commenced by a third person.
While the proceedings in the RTC focused on ascertaining the
presence of the elements of dacion en pago, it was likewise
proven that petitioner owed respondent the amount of
P500,000.00 while respondent owed petitioner P566,000.00; that
both debts are due, liquidated and demandable, and; that
neither of the debts or obligations are subject of a controversy
commenced by a third person.
Respondent in her cross-examination categorically admitted that
she is indebted to petitioner as follows:
Q But you will admit that you have borrowed several times from
Mr. Trinidad some money?
A Yes.
Q And in fact the total amount of money that you have borrowed
from Mr. Trinidad reaches to P566,000.00, right?
A Yes.
Q And in fact you have issued checks to cover for this account?
A Yes.
Q There were several checks you have issued, right?
A Yes.

Q And all of these checks bounced?
A Yes.29
xxxx
Q x x x It is now very clear, Mrs. Acapulco, that at the time you
executed a deed of absolute sale of the car in favor of
Hermenegildo Trinidad you have an outstanding account with
him in the amount of P566,000.00?
A Yes.30
Ignoring this admission would only result in added burden to
petitioner as well as the courts as petitioner will be forced to file
a separate case for collection of sum of money just so he could
enforce his right to collect from respondent. This is precisely
what compensation seeks to avoid as its aim is to prevent
unnecessary suits and payments through the mutual extinction
of concurring debts by operation of law.31
The claim of respondent that there could be no legal
compensation in this case as one of the obligations consists of
delivery of a car and not a sum of money must also fail.
Respondent sold the car to petitioner on March 4, 1991 for
P500,000.00 while she filed her complaint for nullification of the
sale only on May 6, 1991. As legal compensation takes place ipso
jure, and retroacts to the date when its requisites are fulfilled,
legal compensation has already taken place at the time of the
sale. At such time, petitioner owed respondent the sum of
P500,000.00 which is the price of the vehicle.
Consequently, by operation of law, the P500,000.00 which
petitioner owed respondent is off-set against the P566,000.00
owed by respondent to petitioner, leaving a balance of
P66,000.00, which respondent should pay with 12% interest per
annum from date of judicial or extrajudicial deed.32 Since there
was no extrajudicial deed in this case, the interest shall be
resolved from the date petitioner filed its Supplemental Motion
for Reconsideration invoking for the first time legal
compensation, that is, May 20, 1992.33
Finally, the Court agrees with petitioner that the trial court erred
in awarding damages in favor of respondent.
In order that moral damages may be awarded, there must be
pleading and proof of moral suffering, mental anguish, fright and
the like, and while no proof of pecuniary loss is necessary in
order that moral damages may be awarded, it is nevertheless
essential that the claimant should satisfactorily show the
existence of the factual basis of damages and its causal
connection to defendant’s acts.34 Claims must be substantiated
by clear and convincing proof35 and there must be clear
testimony on the anguish and other forms of mental sufferings as
mere allegations will not suffice.36 Allegations of besmirched
reputation, embarrassment and sleepless nights are insufficient
for it must be shown that the proximate cause thereof was the
unlawful act or omission of the opposing party.37
Indeed, for a court to arrive upon a judicious approximation of
emotional or moral injury, competent and substantial proof of
the suffering experienced must be laid before it.38 There must
be definite findings as to what the supposed moral damages
suffered consisted of.39 The award of moral damages must be
solidly anchored on a definite showing that the claiming party
actually experienced emotional and mental sufferings.40
In this case, respondent merely testified that after petitioner
refused the payment of the car as well as its return, she was
very much worried, which if converted into monetary amount is
equivalent to P200,000.00.41 We deem such testimony
insufficient to warrant the award of moral damages.
174
Similarly, in order that exemplary damages may be awarded, it
must be shown that the wrongful act was accompanied by bad
faith or done in a wanton, fraudulent, reckless or malevolent
manner.42 Exemplary damages are also allowed only in addition
to moral damages such that no exemplary damage can be
awarded unless the claimant first establishes his clear right to
moral damages.43 As moral damages are improper in the
present case, so is the award of exemplary damages.
The decision of the trial court also does not mention the reason
for the award of attorney’s fees and the award was simply
contained in the dispositive portion of the decision. Again, the
trial court erred on this score as it must explicitly state in the
body of its decision and not only in the dispositive portion thereof
the legal reason for the award of attorney’s fees.44
WHEREFORE, the petition is GRANTED. The decision of the Court
of Appeals dated February 16, 2001 is REVERSED and SET
ASIDE. The P500,000.00 which Hermenegildo M. Trinidad owed
Estrella Acapulco is offset against the P566,000.00 which
Acapulco owed Trinidad. Acapulco is ordered to pay Trinidad the
amount of P66,000.00 plus interest at 12% per annum from May
20, 1992 until full payment.
SO ORDERED.
THIRD DIVISION
G.R. No. 171897, October 14, 2015
PHILIPPINE TRUST COMPANY, Petitioner, v. FLORO ROXAS AND
EUFEMIA ROXAS, Respondents.
DECISION
JARDELEZA, J.:
We consider whether the principle of legal compensation may be
applied to offset the judgment debt of petitioner Philippine Trust
Company ("PTC") and the loan obligation of private respondents
Floro and Eufemia Roxas ("Spouses Roxas").
I
The Spouses Roxas procured loans from PTC in the amount of
Php 2,523,200 to finance their real estate business.1 These loans
were secured by real estate mortgages on the Spouses Roxas'
real properties. On April 10, 1979, the Spouses Roxas, PTC, and
Roben Construction and Furnishing Group, Inc. entered into "a
contract of building construction," under which PTC granted an
additional loan of Php 900,000 to the Spouses Roxas to enable
them to finish their ongoing housing projects located at
Cabcaben, Mariveles, Bataan. This was superseded by a new
"contract of building construction" executed by and among PTC,
Spouses Roxas, and Rosendo P. Dominguez, Jr. ("Dominguez").
Dominguez substituted Roben Construction as the contractor
under the same terms and conditions of the contract dated April
10, 1979. The new contract stipulated that the money loaned
from PTC shall be devoted to the funding of the housing projects,
the rentals of which when finished, would then be used to
liquidate the loan. It also provided that PTC may only release the
proceeds of the loan for the purchase of materials and supplies
when requested by Dominguez and with the conformity of the
Spouses Roxas.2 Invoices covering materials previously
purchased with the funds should also be submitted to PTC before
any subsequent release of funds is made.3 PTC, however,
released to Dominguez the sum of Php 870,000 out of the Php
900,000 although the Spouses Roxas had agreed only to the
release of not more than Php 450,000, as evidenced by a
promissory note dated April 11, 1979.4
Due to financial difficulties, however, the Spouses Roxas did not
finish the housing project. As a result, they did not receive
monthly rentals from prospective lessees of the houses, which
led to missed amortization payments in their loans from PTC.5

On March 28, 1980, Dominguez filed a complaint against PTC
and the Spouses Roxas with the Court of First Instance (CFI) of
Manila,6 Branch XL for breach of the contract of building
construction. This was docketed as Civil Case No. 130783. The
Spouses Roxas in turn filed Civil Case No. 130892 with the CFI of
Manila against Dominguez and the insurance company that
issued his performance bond. These two cases were later
consolidated.7
When the Spouses Roxas filed their answer in Civil Case No.
130783, they included a cross-claim against PTC.8 In response,
PTC filed a counterclaim against the Spouses Roxas on their
unpaid loan obligation amounting to Php 3,053,738.509 plus
interest and the amount of Php 245,720 as attorney's fees; and,
in default of such payments, the foreclosure of the real estate
mortgages executed by the Spouses Roxas in favor of PTC. After
trial on the merits, the trial court rendered a decision in favor of
Dominguez. It denied PTC's counterclaim for lack of sufficient
proof, without prejudice to the filing of a collection suit against
the Spouses Roxas. Both PTC and the Spouses Roxas appealed to
the Court of Appeals, docketed as CA-G.R. CV No. 30340. To this
date, the same remains pending.10
In a parallel development, while Civil Case No. 130783 was still
pending in the trial court, PTC, on August 31, 1981, filed with the
provincial sheriff of Bataan a petition for extrajudicial foreclosure
of the same real estate mortgages, The Spouses Roxas opposed
the petition and filed a verified complaint against PTC for
damages with preliminary injunction in the Regional Trial Court
of Bataan docketed as Civil Case No. 4809 ("Main Case"). The
complaint sought to restrain and enjoin the sheriff from
proceeding with the foreclosure sale while Civil Case No. 130783
is still pending.11 On December 26, 1988, the Bataan RTC
rendered a Decision in favor of the Spouses Roxas, the
dispositive portion of which reads as follows:cralawlawlibrary
WHEREFORE, the Court hereby renders judgment (a) Ordering
the issuance of a writ of permanent injunction perpetually
enjoining defendant Philippine Trust Company and defendant
provincial sheriff of Bataan or any of his deputies from
foreclosing extrajudicially the real estate mortgage(s) executed
in its favor by plaintiffs covering the real properties subject of
this action;ChanRoblesVirtualawlibrary
(b) Condemning said defendant bank to pay to plaintiffs: (1)
Ordinary damages for breach of the provisions of the contract of
building construction (Exhs. "B" & "26"), in the sum of One
Hundred Thousand Pesos (P100,000.00); (2) Moral damages for
the improvident extrajudicial foreclosure of plaintiffs'
mortgage(s) after it had elected judicial foreclosure thereof, in
the amount of Three Hundred Thousand Pesos (P300,000.00) for
both plaintiffs; (3) Exemplary damages by way of example or
correction for the public good in the sum of Fifty Thousand Pesos
(P50,000.00); (4) Attorney's fees in the amount of Fifty
Thousand Pesos (P50,000.00); and (5) Double costs of suit
SO ORDERED.12chanrobleslaw
The Court of Appeals affirmed the decision of the Bataan RTC.
The decision became final and executory, prompting the Spouses
Roxas to file a Motion for Execution. PTC responded by filing an
Opposition to the Motion for Execution, where it raised for the
first time legal compensation to offset the judgment debt due to
the Spouses Roxas.
On January 25, 1994, the trial court denied PTC's Opposition and
issued a writ of execution, holding that PTC is deemed to have
waived legal compensation as a defense because it failed to
invoke the same as an affirmative defense in its answer. PTC
filed a motion for reconsideration of the order, which was denied
by the trial court on April 19, 1994.13 PTC filed another motion
for reconsideration, which was again denied by the trial court on
June 7, 1994.14
175
PTC filed a Petition for Certiorari15 under Rule 65 with the Court
of Appeals seeking the annulment of the trial court's order
issuing the writ of execution and its subsequent orders denying
PTC's motions for reconsideration. On November 17, 2005, the
Court of Appeals dismissed the petition for lack of merit. It found
that not all requisites of legal compensation under Article 1279 of
the Civil Code were present and that the defense of legal
compensation was belatedly raised by PTC, considering that it
was raised for the first time at the execution stage.16 The Court
of Appeals denied PTC's motion for reconsideration on March 9,
2006.17
PTC then filed this Petition for Review on Certiorari18 under Rule
45, arguing that the Court of Appeals erred in not finding that all
the requisites of legal compensation were present and in ruling
that the defense of compensation was belatedly raised. PTC
claims it did not raise legal compensation as a defense before the
Bataan RTC because the judgment debt was not yet due at the
time it filed its answer. Furthermore, it had already set up as a
compulsory counterclaim the loan obligation of the Spouses
Roxas in Civil Case No. 130783, which was pending with the
former CFI of Manila. But because the Manila court denied PTC's
counterclaims, PTC argues there is a change in the situation of
the parties that makes execution inequitable.
In response, the Spouses Roxas assert that the execution of the
Bataan RTC decision is proper because the prevailing party is
entitled to a writ of execution as a matter of right once a
judgment becomes final.19 Moreover, the decision in Civil Case
No. 130873 is not a supervening event that warrants the stay of
execution.20 The Spouses Roxas also dispute the applicability of
legal compensation because both the demandability of the loan
as well as the exact amount due had been put in issue in Civil
Case No. 130873, which is now pending appeal with the Court of
Appeals as CA-G.R. CV No. 30340.21 The Spouses Roxas
maintain that PTC is deemed to have waived compensation as a
defense because it did not raise compensation either in a motion
to dismiss or as an affirmative defense in its answer to the Main
Case.22 Finally, the Spouses Roxas point out that the orders of
the Bataan RTC were challenged by PTC through a Rule 65
petition. Thus, it was incumbent upon PTC to prove lack or grave
abuse of discretion on the part of the Bataan RTC, which PTC
ultimately failed to do.23
The petition has no merit.
II
A
We agree with the Court of Appeals that it was too late for PTC
to set up legal compensation as a defense because the Main Case
had already reached the execution stage. The rule is that once a
decision becomes final and executory, execution shall issue as a
matter of right,24 and the issuance of a writ of execution is the
court's ministerial duty, compellable by mandamus.25 This is in
accordance with the doctrine of immutability of final judgments,
which states that a judgment that has become final and
executory is immutable and unalterable, and may no longer be
modified in any respect, even if the modification is meant to
correct what is perceived to be an erroneous conclusion of fact or
law, and regardless of whether the modification is attempted to
be made by the court rendering it or by the highest Court of the
land.26 Although there are recognized exceptions to this
doctrine, one of which is where there is a supervening event that
renders execution inequitable or unjust,27 none obtains in this
case.
First, there is nothing unjust or inequitable in the issuance of the
writ of execution in this case because execution will have no
effect on the unpaid loan obligation of the Spouses Roxas to PTC.
The Spouses Roxas' unpaid loan obligation to PTC is the subject
of a separate case now pending before the Court of Appeals, CA-
G.R. CV No. 30340. Thus, there exists a proper forum where PTC
may be allowed to recover whatever is due from the Spouses

Roxas. What is inequitable is to allow PTC to recover its credit in
full in CA-G.R. CV No. 30340 while concurrently being allowed to
offset its judgment debt in this case. In such instance, there
would effectively be double recovery on the part of PTC—which
we cannot sanction because of the fundamental proscription
against unjust enrichment.28
Second, it would be more unjust to stay the execution of a
decision that had become final and executory twenty three (23)
years ago. There should be an end to litigation, for 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.29
Unjustified delay in the enforcement of a judgment sets at
naught the role and purpose of the courts to resolve justiciable
controversies with finality.30 To accept PTC's contentions would
not only be unfair to private respondents but, more importantly,
would defeat a vital poliey consideration behind the doctrine of
immutability of final judgments.
B III
The Bataan RTC and the Court of Appeals also correctly ruled
that PTC should have raised the argument on legal compensation
at the trial stage. The 1964 Rules of Court, which was then in
effect at the time the Main Case was filed by the Spouses Roxas
in 1980, provides that:cralawlawlibrary
RULE 9. Effect of Pleadings
Sec. 2. Defenses and objections not pleaded deemed waived.—
Defenses and objections not pleaded either in a motion to
dismiss or in the answer are deemed waived; except the failure
to state a cause of action which may be alleged in a later
pleading, if one is permitted, or by motion for judgment on the
pleadings, or at the trial on the merits; but in the last instance,
the motion shall be disposed of as provided in section 5 of Rule
10 in the light of any evidence which may have been received.
Whenever it appears that the court has no jurisdiction over the
subject-matter, it shall dismiss the action.31 (Emphasis
added)chanrobleslaw
Although legal compensation takes place by operation of law, it
must be alleged and proved as a defense by the debtor who
claims its benefits. Only after it is proved will its effects retroact
to the moment when all the requisites under Article 1279 of the
Civil Code have concurred.32
PTC's contention that it could not have raised legal compensation
as a defense because it was not yet a debtor of the Spouses
Roxas when it filed its answer is unconvincing. Under Rule 8,
Section 2 of the 1964 Rules of Court, "[a] party may set forth
two or more statements of a claim or defense alternatively or
hypothetically, either in one cause of action or defense or in
separate causes of action or defenses."33 Thus, the defense of
compensation would have been proper and allowed under the
rules even if PTC disclaimed any liability at the time it filed its
answer. In Marquez v. Valencia,34 we held that when a
defendant failed to set up such alternative defenses and chosen
or elected to rely on one only, the overruling thereof was a
complete determination of the controversy between the parties,
which bars a subsequent action based upon an unpleaded
defense. Unmistakably, the rationale behind this is the
proscription against the splitting of causes of action.
In any case, even if PTC were excused from pleading
compensation as a defense in its answer, we note that PTC still
failed to raise this defense in its motion for reconsideration of the
Bataan RTC decision and in its subsequent appeal. Hence, there
can be no other conclusion than that PTC is already estopped
from raising the issue of legal compensation.
It is fairly clear to us that the reason why PTC did not raise legal
compensation as a defense in the Main Case is because it was
banking on a favorable ruling on its counterclaim in the other
176
case, Civil Case No. 130873. It was presumably an informed
choice arrived at by PTC and its counsel, with full knowledge of
the consequences of its failure to plead this specific
claim/defense in the Main Case. Unfortunately for PTC, its
counterclaim in the other case was disallowed. Having adopted
the wrong legal strategy, PTC cannot now expediently change its
theory of the case or its defense at the execution stage of the
Main Case. Following the doctrine of election of remedies,35
PTC's choice of setting up the Spouses Roxas' unpaid loan
obligation as a counterclaim in Civil Case No. 130873, which has
gone to judgment on the merits but is pending appeal, precludes
it from raising compensation of the same loan obligation for the
purpose of opposing the writ of execution in the Main Case.
Equitable in nature, the doctrine of election of remedies is
designed to mitigate possible unfairness to both parties. It rests
on the moral premise that it is fair to hold people responsible for
their choices. The purpose of the doctrine is not to prevent any
recourse to any remedy, but to prevent a double redress for a
single wrong.36
Even if we assume that legal compensation was not waived and
was otherwise timely raised, we find that not all requisites of
legal compensation are present in this case. Under Article 1279,
in order for legal compensation to take place, the following
requisites must concur: (a) that each one of the obligors be
bound principally, and that he be at the same time a principal
creditor of the other; (b) 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;
(c) that the two debts be due; (d) that they be liquidated and
demandable; and (e) that over neither of them there be any
retention or controversy, commenced by third persons and
communicated in due time to the debtor.
Here, the fourth requisite is absent. A debt is liquidated when its
existence and amount are determined.37 Compensation can only
take place between certain and liquidated debts; it cannot
extend to unliquidated, disputed claims.38 Since the loan
obligation, including its amount and demandability, is still being
disputed in CA-G.R. CVNo. 30340, PTC's credit cannot be
considered liquidated as of yet. Consequently, no legal
compensation could have taken place between PTC's loan credit
and the Spouses Roxas' judgment credit.
IV
Finally, we observe that PTC appears to have willfully engaged in
forum shopping. PTC, in its own words, opposed the execution of
the Bataan RTC decision because '"the Decision promulgated on
September 4, 1990 by the RTC of Manila, Branch 40 [in Civil
Case No. 130783] denied Petitioner's counterclaims."39 Forum
shopping is committed by a party who, having received an
adverse judgment in one forum, seeks another opinion in
another court, other than by appeal or the special civil action of
certiorari. More accurately, forum shopping is the institution of
two or more suits in different courts, either simultaneously or
successively, in order to ask the courts to rule on the same or
related causes and/or to grant the same or substantially the
same reliefs.40
The relief PTC now seeks is compensation of its judgment debt
with the Spouses Roxas' loan obligation. In the other case, Civil
Case No. 130783 (now CA-G.R. CV No. 30340), PTC asks for the
payment of the same loan obligation of the Spouses Roxas.
Essentially, PTC is seeking the same relief in both cases: the
extinguishment of the Spouses Roxas' loan obligation. Under
Article 1231 of the Civil Code, payment and compensation are
modes of extinguishing an obligation. Although legally distinct,
both must be pleaded in the same case if the obligation sought
to be extinguished and the parties thereto arc identical;
otherwise, it would constitute splitting of causes of action.

Forum shopping exists when the elements of litis pendentia are
present, viz.: (a) identity of parties, or at least such parties as
those representing the same interests in both actions; (b)
identity of rights assered and relief prayed for, the relief being
founded on the same facts; and (c) the identity of the two
preceding particulars is such that any judgment rendered in the
other action, will, regardless of which party is successful, amount
to res judicata in the action under consideration.41
We find that the elements of litis pendentia—and, as a
consequence, forum shopping—exist in this case. PTC's claim for
legal compensation is founded on the same unpaid loan
obligation now being litigated in CA-G.R. CV No. 30340. Although
that case originated from a complaint filed by Dominguez for
breach of contract, PTC counterclaimed the entire unpaid loan
obligation, plus interest, owed to it by the Spouses Roxas. In
other words, PTC had squarely put in issue the matter of the
Spouses Roxas' indebtedness arising from the loans the latter
obtained from PTC. It is immaterial that PTC's cause of action in
the other case was set forth by way of a counterclaim, since the
latter partakes of the nature of a complaint by the defendant
against the plaintiff.42 On the other hand, while the Main Case
originally involved a different subject matter and cause of action
(i.e., the injunction against PTC's extrajudicial foreclosure and
the Spouses Roxas' claim for damages) as that embraced in CA-
G.R. CV No. 30340, the primary issue raised by PTC in its
Opposition to the Motion for Execution, and subsequently in the
petition for certiorari with the Court of Appeals and the present
petition, pertained to the same loan obtained by the Spouses
Roxas. Thus, with respect to the Spouses Roxas' indebtedness to
PTC, there is a clear identity of parties, of subject matter, and of
cause of action. Consequently, once a final decision in CA-G.R.
CV No. 30340 is rendered, it will constitute res judicata and bar
further litigation on the same loan obligation, including any
dispute on the applicability or non-applicability of legal
compensation.
Forum shopping is an act of malpractice that is prohibited and
condemned because it trifles with the courts and abuses their
processes, and degrades the administration of justice and adds
to the already congested court dockets.43 Under Section 5 of
Rule 8, willful and deliberate forum shopping is a ground for
summary dismissal of the case and constitutes direct contempt
of court, as well as a cause for administrative sanctions. The
litigation could have ended promptly if PTC had simply paid its
judgment debt and awaited the final decision in the other case to
recover whatever is due from the Spouses Roxas. Instead, this
plainly unmeritorious case had to clog our docket and take up
the valuable time of this Court.
WHEREFORE, the petition for review is DENIED for lack of merit.
The Decision dated November 17, 2005 and Resolution dated
March 9, 2006 of the Court of Appeals in CA-G.R. SP No. 35203
are hereby AFFIRMED. Costs against petitioner.
SO ORDERED.
DIVISION
[ GR No. 187922, Sep 21, 2016 ]
MARPHIL EXPORT CORPORATION & IRENEO LIM v. ALLIED
BANKING CORPORATION +
RESOLUTION
JARDELEZA, J.:
This is a petition[1] seeking to nullify the Court of Appeals' (CA)
January 12, 2009 Decision[2] and May 12, 2009 Resolution[3] in
CA-G.R. CV No. 89481. The CA modified[4] the April 23, 2007
Omnibus Decision[5] of Branch 61 of the Regional Trial Court
(RTC), Makati City in the consolidated cases of petition for
declaratory relief filed by petitioner Marphil Export Corporation
(Marphil) against Allied Banking Corporation (Allied Bank), and
the complaint for collection of sum of money with application for
177
writ of attachment filed by Allied Bank against Marphil's surety,
petitioner Ireneo Lim (Lim).
Facts
Marphil is a domestic company engaged in the exportation of
cuttlefish, cashew nuts and similar agricultural products.[6] To
finance its purchase and export of these products, Allied Bank
granted Marphil a credit line from which Marphil availed of
several loans evidenced by promissory notes (PN).[7] These
loans were in the nature of advances to finance the exporter's
working capital requirements and export bills.[8] The loans were
secured by three (3) Continuing Guaranty or Continuing Surety
(CG/CS) Agreements[9] executed by Lim, Lim Shiao Tong and
Enrique Ching.[10] Apart from the CG/CS Agreements,
irrevocable letters of credits also served as collaterals for the
loans obtained to pay export bills.[11] In turn, Allied Bank
required Marphil, through its authorized signatories Lim and
Rebecca Lim So, to execute a Letter of Agreement[12] where
they undertake to reimburse Allied Bank in the event the export
bills/drafts covering the letters of credit are refused by the
drawee. Upon negotiations of export bills/drafts that Allied Bank
purchases from Marphil, the amount of the face value of the
letters of credit is credited in favor of the latter.[13]
The transaction involved in this petition is the export of cashew
nuts to Intan Trading Ltd. Hongkong (Intan) in Llong Kong. Upon
application of Intan, Nanyang Commercial Bank (Nanyang Bank),
a bank based in China, issued irrevocable letters of credit. These
were Letter of Credit (L/C) No. 22518 and L/C No. 21970, with
Marphil as beneficiary and Allied Bank as correspondent bank.
[14] These covered two (2) separate purchase contracts/orders
for cashew nuts made by Intan.
The first order of cashew nuts was covered by L/C No. 22518.
After the first shipment was made, Marphil presented export
documents including drafts to Allied Bank. The latter credited
Marphil's: credit line the peso equivalent of the face value of L/C
No. 22518 (in the amount of P1,986,702.70 and this amount was
deducted from the existing loans of Marphil.[15] There were no
problems encountered for the shipment covered by L/C No.
22518. It was the second order covered by L/C No. 21970 that
encountered problems.
When Intan placed a second order for cashew nuts, Marphil
availed additional loans in their credit line evidenced by PN No.
0100-88-02463[16] (PN No. 2463) for P500,000.00 and PN No.
0100-88-02730[17] (PNNo. 2730) for P500,000.00. Similar to
the previous transaction, Intan applied for and opened L/C No.
21970 with Nanyang Bank in the amount of US$185,000.00, with
Marphil as the beneficiary and Allied Bank as correspondent
bank.[18] After receiving the export; documents including the
draft issued by Marphil, Allied Bank credited Marphil in the
amount of P1,913,763.45, the peso value of the amount in the
letter of credit.[19]
However, on July 2, 1988, Allied Bank informed Marphil that it
received a cable from Nanyang Bank noting some discrepancies
in the shipping documents.[20] On July 16, 1988, Allied Bank
again informed Marphil that it received another cable from
Nanyang Bank still noting the discrepancies and that Intan
refused to accept the discrepancies.[21] Consequently, Nanyang
Bank refused to reimburse Allied Bank the amount the latter had
credited in Marphil's credit line. In its debit memo, Allied Bank
informed Marphil of the dishonor of L/C No. 21970 and that it
was reversing the earlier credit entry of P1,913,763.45.[22] Lim
was made to sign a blank promissory note, PN No. 0100-88-
04202,[23] (PN No. 4202) on September 9, 1988 to cover for
the amount.[24] This was later filled up by Allied Bank in the
amount of P1,505,391.36.
On March 6, 1990, Marphil filed a Complaint[25] for declaratory
relief and damages against Allied Bank (Declaratory' Relief Case)
raffled to Branch 61 of RTC Makati.[26] In its Complaint, Marphil
asked the court to declare PN No. 4202 void, to declare as fully

paid its other obligations to Allied Bank, and to award it actual,
moral and exemplary damages, and attorney's fees.[27] Marphil
maintained that it had fully paid its account with Allied Bank, and
that PN No. 4202, which Lim executed on September 9, 1988,
was void for lack of consideration. Marphil alleged that it was
constrained to send back the shipment to the Philippines thereby
incurring expenses and tremendous business losses. It attributed
bad faith to Allied Bank because the latter did nothing to protect
its interest; Allied Bank merely accepted Nanyang Bank's position
despite L/C No. 21970 being irrevocable, and Allied Bank
allegedly confirmed Nanyang Bank's revocation.
On May 7, 1990, Allied Bank filed its Answer with Compulsory
Counterclaim and Petition for Writ of Preliminary Attachment.
[28] Allied Bank maintained that PN No. 4202 was supported by
consideration, and denied that Marphil has fully paid its
obligation to it. As counterclaim, Allied bank sought to collect on
three (3) promissory notes, PN Nos. 2463, 2730 and 4202.[29]
On September 14, 1990, Allied Bank filed a Complaint with
Petition for Writ of Preliminary Attachment[30] (Collection Case)
against Lim and Lim Shao Tong which was raffled to Branch 145
of RTC Makati. Allied Bank sued them as sureties under the
CG/CS Agreements for the loan obligations of Marphil under
three (3) promissory notes, PN Nos. 2463, 2730 and 4202, in the
total amount of P2,505,391.36. It also prayed for the issuance of
a writ of preliminary attachment on the ground that Lim was
guilty of fraud in contracting his obligations.
On February 7, 1992, Lim filed his Answer[31] in the Collection
Case. He raised as defense that Marphil had fully paid the loans
covered by PN Nos. 2463, 2730, while PN No. 4202 is null and
void.[32] He likewise maintained he could not be held personally
liable for the CG/CS Agreements because he could not remember
signing them. Lim claimed that the issuance of the writ of
preliminary attachment was improper because he never had any
preconceived intention not to pay his obligations with the bank.
He had been transacting with the bank for six (6) years arid the
gross value of the thirty-two (32) transactions between them
amounted to US$640,188.51.[33]
On March 15, 1994, Branch 145 of RTC Makati granted ex parte
the prayer for preliminary attachment in the Collection Case.[34]
On May 7, 1991, Allied Bank filed a Motion to Consolidate/Be
Accepted[35] with Branch 61 of RTC Makati, which was granted
by Order dated June 25, 1991.[36] The two civil cases were
jointly heard before Branch 61 of RTC Makati.
On April 23, 2007, the RTC rendered the Omnibus Decision.[37]
The RTC granted Marphil's complaint for declaratory relief, and
declared PN No. 4202 void. However, it held Marphil and/or
Ireneo Lim jointly and severally liable for any balance due on
their obligation under PN Nos. 2463 and 2730, and additionally
for the amount of P1,913,763.45 with interest rate fixed at 12%
per annum until fully paid.[38]
On May 9, 2007, petitioners filed a Notice of Appeal[39] with the
RTC. Allied Bank did not appeal the RTC decision. Records were
then forwarded to the CA, which began proceedings.[40]
The CA rendered its Decision[41] on January 12, 2009 modifying
the RTC decision. The CA declared PN Nos. 2463 and 2730 fully
paid, but held petitioners liable for the amount of P1,913,763.45,
the amount equal to the face value of L/C No. 21970.[42]
The CA found that Allied Bank is not directly liable for the
P1,913,763.45 under L/C No. 21970 because it was not a
confirming bank and did not undertake to assume the obligation
of Nanyang Bank to Marphil as its own. At most, it could only be
a discounting bank which bought drafts under the letter of credit.
Following the ruling in Bank of America, NT & SA v. Court of
Appeals,[43] it held that Allied Bank, as the negotiating bank,
has the ordinary right of recourse against the exporter in the
event of dishonor by the issuing bank. A negotiating bank has a
178
right of recourse against the issuing bank, and until
reimbursement is obtained, the drawer of the draft continues to
assume a contingent liability on the draft. That there is no
assumption of direct obligation is further affirmed by the terms
of the Letter Agreement. The CA also declared PN Nos. 2463 and
2730 as fully paid. The CA held that with these payments, the
only obligation left of Marphil was the amount of the reversed
credit of P1,913,763.45. On the writ of preliminary attachment,
the CA noted that petitioners did not file any motion to discharge
it on the ground of irregular issue. The CA found that no forum
shopping existed because the causes of actions for declaratory
relief and collection suit are different.[44]
In a Resolution[45] dated May 12, 2009, the CA denied
petitioners Motion for Partial Reconsideration[46] dated January
22, 2009.
Hence, this petition.
Meanwhile, Allied Bank and Philippine National Bank (PNB) jointly
filed a Motion for Substitution of Party with Notice of Change of
Address[47] on October 22, 2013 informing this Court that the
Securities and Exchange Commission approved a merger
between Allied Bank and PNB, with the latter as the surviving
corporation. They prayed that Allied Bank be dropped and
substituted by PNB as party respondent in this petition. This was
granted by this Court in a Resolution[48] dated December 4,
2013.
Issues
The issues are as follows:
Whether Allied Bank's debit memo on Maprhil's credit line in the
amount of P1,913,763.45 is valid.
Whether the RTC and CA created a new obligation when it held
Marphil liable for the amount of P1,913,763.45.
Whether Allied Bank committed forum shopping in filing the
Collection Case.
Whether the writ of preliminary attachment should be dissolved.
Ruling
We partly grant the petition.
At the outset, Allied Bank did not appeal from the decisions of
the RTC and CA respecting the nullification of PN No. 4202, and
the extinguishment by payment of PN Nos. 2730 and 2463. Allied
Bank (now PNB) can thus no longer seek their modification or
reversal, but may only oppose the arguments of petitioners on
grounds consistent with the judgment of the RTC and CA.[49]
Bearing this in mind, we proceed to dispose of the issues.
I. Validity of the debit memo
a. Allied Bank as correspondent bank in L/C No. 21970
Both the RTC and CA found that Allied Bank is not a confirming
bank which undertakes Nanyang Bank's obligation as issuing
bank, but at most, buys the drafts drawn by Marphil as exporter
at a discount.
Marphil, however, argues that the RTC and CA erred in ruling
that Allied Bank is not a confirming bank. It insists that Allied
Bank as correspondent bank assumed the risk when it confirmed
L/C No. 21970. It invokes the ruling in Feati Bank & Trust
Company v. Court of Appeals[50] on the rule of strict compliance
in letters of credit stating that "[a] correspondent bank which
departs from what has been stipulated under the letter of credit,
as when it accepts a faulty tender, acts on its own risks and it
may not thereafter be able to recover from the buyer or the
issuing bank x x x."[51] Thus, Marphil claims that Allied Bank
had no authority to debit the amount equivalent to the face value
of L/C No. 21970 since the latter is directly liable for it.

We affirm the RTC and CA's findings that Allied Bank did not act
as confirming bank in L/C No. 21970.
As noted by the CA, Feati is not in all fours with this case. The
correspondent bank in that case refused to negotiate the letter of
credit precisely because of the beneficiary's non-compliance with
its terms. Here, it is Nanyang Bank, the issuing bank, which
refused to make payment on L/C No. 21970 because there was
no strict compliance by Marphil.[52]
Further, while we said in Feati that a correspondent bank may be
held liable for accepting a faulty tender under the rule of strict
compliance, its liability is necessarily defined by the role it
assumed under the terms of the letter of credit. In order to
consider a correspondent bank as a confirming bank, it must
have assumed a direct obligation to the seller as if it had issued
the letter of credit itself.[53] We said that "[i]f the
[correspondent bank] was a confirming bank, then a categorical
declaration should have been stated in the letter of credit that
the [correspondent bank] is to honor all drafts drawn in
conformity with the letter of credit."[54] Thus, if we were to hold
Allied Bank liable to Marphil (which would result in a finding that
the former's debit from the latter's account is wrong) based on
the rule of strict compliance, it must be because Allied Bank
acted as confirming bank under the language of L/C No. 21970.
In finding that Allied Bank, as correspondent bank, did not act as
confirming bank; the CA reviewed the instructions of Nanyang
Bank to Allied Bank in L/C No. 21970. It found that based on the
instructions, there is nothing to support Marphil's argument that
Allied Bank undertook, as its own, Nanyang Bank's obligations in
the letter of credit:
In the case of [Bank of America], the functions assumed by a
correspondent bank are classified according to the obligations
taken up by it. In the case of a notifying bank, the correspondent
bank assumes no liability except to notify and/or transmit to the
beneficiary the existence of the L/C. A negotiating bank is a
correspondent bank which buys or discounts a draft under the
L/C. Its liability.is dependent upon the stage of the negotiation.
If before negotiation, it has no liability with respect to the seller
but after negotiation, a contractual relationship will then prevail
between the negotiating bank and the seller. A confirming bank
is a correspondent bank which assumes a direct obligation to the
seller and its liability is a primary one as if the correspondent
bank itself had issued the L/C.
In the instant case, the letter of Nanyang to Allied provided the
following instructions: 1) the negotiating bank is kindly
requested to forward all documents to Nanyang in one lot; 2) in
reimbursement for the negotiation(s), Nanyang shall remit cover
to Allied upon receipt of documents in compliance with the terms
and conditions of the credit; 3) the drafts drawn must be marked
"drawn under Nanyang Commercial Bank"; and 4) to advise
beneficiary.
From the above-instructions, it is clear that Allied did not
undertake to assume the obligation of Nanyang to Marphil as its
own, as if it had itself issued the L/C. At most, it can only be a
discounting bank which bought the drafts under the L/C.
Following then the rules laid down in the case of Bank of
America, a negotiating bank has a right of recourse against the
issuing bank, and until reimbursement is obtained, the drawer of
the draft continues to assume a contingent liability thereon. x x
x[55]
In this regard, this issue of whether Allied Bank confirmed L/C
No. 21970 and assumed direct obligation on it is a question of
fact that was resolved by both RTC and CA in the negative. This
Court is not a trier of facts and does not normally undertake the
re-examination of the evidence.[56] This is especially true where
the trial court's factual findings are adopted and affirmed by the
CA.[57] Factual findings of the trial court affirmed by the CA are
final and conclusive and may not be reviewed on appeal.[58]
Here, there is no reason to deviate from these findings of the
RTC and CA.
179
In any event, we find that Allied Bank may seek reimbursement
of the amount credited to Marphil's account on an independent
obligation it undertook under the Letter Agreement.
b. Allied Bank's right to reimbursement under the Letter
Agreement
To recall, Marphil and Allied Bank executed the Letter Agreement
dated June 24, 1988 the subject of which is the draft equivalent
to the face value of L/C No. 21970.
In the Letter Agreement, Marphil expressly bound itself to refund
the amount paid by Allied Bank in purchasing the export bill or
draft, in case of its dishonor by the drawee bank:
Purchase of the Draft shall be with recourse to me/us in the
event of non-payment for any reason whatsoever. Notice of
dishonor, non-acceptance, non-payment, protest and
presentment for payment are hereby waived.
xxx
If, for any reason, my/our Draft is not finally honored or retired
by the drawee, I/we hereby further undertake and bind
myself/ourselves to refund to you, on demand, the full amount of
this negotiation, together with the corresponding interest thereon
as well as your or your correspondent's charges and expenses
thereon, if any; and to compensate you fully for any damages
that you might incur arising out of any suit, action or
proceedings, whether judicial or extra-judicial that might be
instituted by the buyer or importer on the ground of lack of
faithful performance of the contract between said buyer or
importer and myself/ourselves. Likewise, should my/our Draft be
dishonored for any cause whatsoever, I/we hereby authorize
you, at your discretion and without any responsibility on your
part to sell, or cause to be sold, either publicly or privately, the
underlying goods, wherever they may be found, and, from the
proceeds thereof, I/we hereby empower you to collect all
expenses incident thereto, together with your commission,
interest and other charges, as well as to reimburse yourself
therefrom x x x the full amount of this negotiation, interest,
charges and other expenses thereon, returning to me/us only
whatever amount that may remain thereafter; and, should there
be any deficiency still in your favor, notwithstanding the sale
made as herein authorized, I/we likewise bind myself/ourselves
to pay the said deficiency to you upon demand.[59]
The case of Velasquez v. Solidbank Corporation[60] is instructive
as to the nature of obligations arising from this form of
undertaking. In that case, we ruled that the obligation under a
letter of undertaking, where the drawer undertakes to pay the
full amount of the draft in case of dishonor, is independent from
the liability under the sight draft.[61] The letter of undertaking of
this tenor is a separate contract the consideration for which is
the promise to pay the bank the value of the sight draft if it was
dishonored for any reason.[62] The liability provided is direct and
primary, without need to establish collateral facts such as the
violation of the letter of credit connected to it.[63]
Similarly, the Letter of Agreement is a contract between Marphil
and Allied Bank where the latter agreed to purchase the draft
and credit the former its value on the undertaking that Allied
Bank will be reimbursed in case the draft is dishonored. This
obligation is direct, and is independent, not only from the
obligation under the draft, but also from the obligation under L/C
No. 21970. In this connection, the CA is incorrect to say that the
Letter Agreement bolsters the bank's claim that it did not
undertake direct obligation under the letter of credit. The Letter
Agreement simply creates a separate obligation on Marphil's part
to refund the amount of the proceeds, in case of dishonor.[64]
As an independent obligation, Marphil is bound to fulfill this
obligation to reimburse Allied Bank.
However, a conflict arose because instead of waiting for Marphil's
own initiative to return the amount, Allied Bank on its own
debited from the former's credit line.

c. Allied Banti 's right to debit Marphil's account
We now proceed to determine whether Allied Bank may
unilaterally debit the amount it credited to Marphil's account.
In the case of Associated Bank v. Tan,[65] we upheld the right of
a collecting bank to debit a client's account for; the value of a
dishonored check it previously credited by virtue of the principle
of legal compensation. Since the relationship between banks and
depositors has been held to be that of creditor and debtor in a
simple loan, legal compensation may take place when the
conditions in Article 1279 of the Civil Code are present: (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; and (5) that
over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to
the debtor.[66]
In this case, when Allied Bank credited the amount of
P1,913,763.45 to Marphil's account, it became the debtor of
Marphil. However, once Nanyang Bank dishonored the export
documents and draft for L/C No. 21970, Marphil became the
debtor of Allied Bank for the amount by virtue of its obligation to
reimburse the bank under the Letter Agreement. This obligation
consisting of sum of money became demandable upon notice of
the dishonor by Nanyang Bank. Thus, legal compensation may
take place between the two debts.
In Associated Bank, we nevertheless emphasized that while the
bank has the right to set off, the exercise of such right must be
consistent with the required degree of diligence from banks, i.e.,
highest degree of care. Thus, the question that needs to be
resolved now is whether Allied Bank properly exercised its right
to set off.[67]
We rule that Allied Bank properly exercised its right to set off.
Firstly, having signed the Letter Agreement, Marphil expressly
undertook that in case of dishonor of the draft for the letter of
the credit, it will refund to Allied Bank whatever the latter has
credited in its favor. This places Marphil on its guard that the
dishonor will create an obligation to refund the amount credited.
Secondly, prior to debiting the amount, Allied Bank informed
Marphil twice of Nanyang Bank's refusal to honor the tender of
documents on L/C No. 21970. Thirdly, it immediately informed
Marphil that it was debiting the amount of the dishonored draft
from the credit line.
Most importantly, the debiting of the account was not the
proximate cause of the loss to Marphil brought about by the
reshipment of goods back to Manila. The proximate cause of the
loss is the subsequent dishonor of the documents by Nanyang
Bank, which came before the debiting of the account. The
P1,913,763.45 subject of the debit memo was already the costs
incurred in relation to the financing and shipping of the goods to
Hong Kong, and do not refer to the loss incurred when the goods
were shipped back to Manila. Thus, the debiting of Marphil's
account did not result in additional losses for Marphil.
In sum, we affirm that Allied Bank is not a confirming bank under
L/C No. 21970. In any case, whether Allied Bank is directly liable
as confirming bank will not affect Marphil's obligation to
reimburse Allied Bank the amount;of P1,913,763.45 because its
liability to refund the amount arose under an independent
contract, i.e. the Letter Agreement. And while Allied Bank is the
debtor of Marphil for the amount it credited under the draft, the
obligation under the Letter Agreement made Allied Bank the
creditor of Marphil for the same amount. Being debtor and
creditor of each other, Allied Bank was entitled to legal
compensation by debiting the amount, which did not result in
any loss to Marphil.
180
II. Obligation of P1,913,763.45 to Allied Bank
Marphil next argues that the RTC and CA erroneously held it
liable to Allied for P1,913,763.45 as a new obligation.
We rule that there is no new obligation created when1 both the
RTC and CA held petitioners liable for the P1,913,763.45. This
was a prior and existing obligation of Marphil separate from the
amount covered by the draft under L/C No. 21970. In filing the
Declaratory Relief Case, Marphil asked the court not only to
determine the status of its obligations evidenced by PN Nos.
2463, 2730 and 4202, but also to determine the status of its
existing loans with Allied Bank, regardless of the counterclaim of
the latter.
To recall, the arrangement between Marphil and Allied Bank is
that advances were made by the bank in the form of loans to
finance the exportation busiriess of Marphil. When Allied Bank
purchases the drafts for the letters of credit from Marphil, it
credits the amount to the latter's credit line and deducts; from
the total amount of Marphil's existing loans from Allied Bank.
This is what Allied Bank did in this case; it credited to Marphil's
account the amount of P1,913,763.45 upon purchase of the
draft. However, when L/C No. 21970 was dishonored by Nanyang
Bank, it reversed the credit memo thereby leaving the parties in
their situation prior to the credit memo — that Marphil has
existing loan obligations arising from the advances made by
Allied Bank. Simply put, Marphil is liable for the amount of
P1,913,763.45 because this is the only amount not proven to be
paid in the many loans obtained by Marphil in the credit line.
The CA imposed the legal interest rate of twelve percent (12%)
on this loan obligation. Notably, the CA made no factual
determination that the amount of P1,913,763.45 was subject to
any stipulated interest between the parties. Likewise, Allied Bank
neither claimed for the application of a stipulated interest nor
questioned the imposition of legal interest on the loan, as it no
longer appealed the decision. Considering this, we are
constrained to uphold that the amount of P1,913,763.45, as a
loan obligation, is only subject to the legal interest applicable as
of the time of this decision. This is in line with our ruling in Nacar
v. Gallery Frames[68] that in the absence of a stipulated
interest, a loan obligation shall earn legal interest from the time
of default, i.e., from judicial or extrajudicial demand.[69]
We, however, modify the rate of legal interest imposed by the CA
also in conformity with Nacar. The amount of P1,913,763.45
shall earn legal interest at the rate of six percent (6%) per
annum computed from the time of judicial demand, i.e. from the
date of the filing of the counterclaim in the Declaratory Relief
Case on May 7, 1990, until the date of finality of this judgment.
The total amount shall thereafter earn interest at the rate of six
percent (6%) per annum from such finality of judgment until its
satisfaction.[70]
III. Forum Shopping
Marphil argues that in determining that Allied Bank committed
forum shopping upon filing the Collection Case, the RTC and CA
should have considered the counterclaim filed in the Declaratory
Relief Case, and not the main petition itself. Marphil contends
that Allied Bank is collecting on the same three promissory notes
in its counterclaim in the two cases.
Forum shopping exists "when a party repetitively avails of
several judicial remedies in different courts, simultaneously or
successively, all substantially founded on the same transactions
and the same essential facts and circumstances, and all raising
substantially the same issues either pending in or already
resolved adversely by some other court."[71] Forum shopping is
proscribed by the rules because of the vexation caused to the
courts and parties-litigants by the filing of similar cases to claim
the same reliefs.[72] The rule against forum shopping aims to
avoid the grave evil that may result in the rendition by two

competent tribunals of two separate and contradictory decisions.
[73] Thus, any violation of the rule against forum shopping
results in the dismissal of a case, or can result in holding of
direct contempt against the actor.[74]
There is forum shopping when the elements of litis pendentia are
present, or when a final judgment in one case amounts to res
judicata in the other.[75] It must be shown that the following
elements are present: (a) identity of parties, or at least such
parties representing the same interests in both actions; (b)
identity of rights asserted and reliefs prayed for, the relief being
founded on the, same facts; and (c) the identity of the two
preceding particulars, such that any judgment rendered in the
other action will, regardless of which party is successful, amounts
to res judicata in the action under consideration.[76]
We rule that there is no forum shopping, albeit for a reason
different from that explained by the CA.
The CA concluded that there is no forum shopping because the
cases involve different causes of action: the first case is a
petition for declaratory relief while the second case is one of
collection of sum of money. We find this analysis too sweeping
and erroneous. The CA failed to take into account that it was
Allied Bank who is being charged with violating the rule on forum
shopping. As such, the cause of action that should have been
considered is the counterclaim of Allied Bank in the Declaratory
Relief Case, which is essentially a collection suit against the
principal debtor Marphil. Subsequently, it also filed another
Collection Case seeking to collect also on the surety Lim under
the same three (3) promissory notes. These cases are the
actions that the CA should have considered in deciding whether
Allied Bank committed forum shopping.
We rule that Allied Bank did not commit forum shopping when it
initiated the Collection Case against Lim despite the pendency of
the counterclaim in the Declaratory Relief Case, because there is
no identity of parties and cause1 of action.
In Gilat Satellite Networks, Ltd. v. United Coconut Planters Bank
General Insurance Co., Inc.,[77] we explained that while a
surety contract is merely ancillary to a principal obligation, the
surety's liability is direct, primary and absolute. The surety's
obligation is joint and solidary with that of the principal, and he
becomes liable for the debt and duty of the principal, even
without possessing a direct or personal interest in the principal
obligation. As such, a surety may be sued separately or together
with principal.[78] We emphasized this in Ong v. Philippine
Commercial International Bank[79] where we held that the right
to collect payment from the surety exists independently of its
right to proceed directly against the principal debtor.[80] In fact,
the creditor bank may go against the surety alone without prior
demand for payment on the principal debtor.[81]
Here, the parties in the counterclaim in the Declaratory Relief
Case are Allied Bank, as creditor, and Marphil, as principal
debtor. On the other hand, the parties in the Collection Case are
Allied Bank, as creditor, and Lim, as surety. There is no identity
of parties. Also, the causes of action pleaded are different
because the counterclaim in the Declaratory Relief Case involves
collection on the loan obligations, while Allied Bank in its
complaint in the Collection Case seeks to collect on the surety
obligation of Lim under the CG/CS Agreements. Another reason
why forum shopping does not obtain here is the circumstance
that the two cases were subsequently consolidated, jointly heard,
and a single decision was rendered. Thus, the evil that the rule
against forum shopping avoids, and the vexation on the court
and parties-litigant, are wanting.
IV. Validity of the writ of preliminary attachment
In its application for a writ of preliminary attachment in the
Collection Case against the surety Lim, Allied Bank alleged:
25.
181
Defendants in conspiracy with Marphil and with one another,
committed fraud in contracting the obligations upon which the
first, second and third causes of action are brought (Sec. 1, par.
(d) Rule 57, Rules of Court) when:
a.)
There is a preconceived intention not to pay their obligations as
further manifested by the premature and unjust filing of a
complaint by Marphil against the plaintiff in Civil Case No. 90-
640 before RTC, Makati, Branch 61;
b.)
To induce plaintiff to grant the credit accommodation, defendants
and Marphil represented to the plaintiff that they would present
the proper and sufficient documents to the issuing bank when in
truth and in fact, there were discrepancies noted in the
documents presented to the issuing bank by Marphil.
c.)
Further, defendants and Marphil committed misrepresentation in
shipping the cashew nuts at a volume less than that which was
required by the foreign buyer.[82] (Emphasis supplied.)
Subsequently, Branch 145 of RTC Makati issued the writ of
preliminary attachment ex parte. When the case reached it, the
CA summarily disposed of the issue of the propriety of the writ
by stating that petitioners did not file any motion to discharge.
However, the records show that Lim filed his Motion to Discharge
Attachment[83] dated May 20, 1994 before Branch 61 of RTC
Makati where Lim raised that no ground exists for the writ of
attachment, making it irregularly and improperly issued.
We grant the petition as to the dissolution of the writ of
preliminary attachment.
A writ of preliminary attachment is "a provisional remedy issued
upon order of the court where an action is pending to be levied
upon the property or properties of the defendant therein, the
same to be held thereafter by the sheriff as security for the
satisfaction of whatever judgment might be secured in said
action by the attaching creditor against the defendant."[84]
Section 1, Rule 57 of the Revised Rules of Court provides for the
grounds upon which the writ may issue. For this case, it is
grounded under Section 1 (d) of Rule 57 of the Revised Rules of
Court:
Sec. 1. Grounds upon which attachment may issue. — At the
commencement of the action or at any time before entry of
judgment, a plaintiff or any proper party may have the property
of the adverse party attached as security for the satisfaction of
any judgment that may be recovered in the following cases:
xxx
(d)
In an action against a party who has been guilty of a fraud in
contracting the debt or incurring the obligation upon which the
action is brought, or in the performance thereof;
xxx
Once issued, a writ of attachment may be dissolved or
discharged on the following grounds: (a) the debtor has posted,
a counter-bond or has made the requisite cash deposit; (b) the
attachment was improperly or irregularly issued as where there
is no ground for attachment, or the affidavit and/or bond filed
therefor are defective or insufficient; (c) the attachment is
excessive, but the discharge shall be limited to the excess; (d)
the property attachment is exempt from preliminary attachment;
or (e) the judgment is rendered against the attaching creditor.
[85]
In Ng Wee v. Tankiansee,[86] we explained that to justify the
attachment of the debtor's property under Section 1(d) of Rule
57 of the Rules of Court, the applicant must show that in
incurring the obligation sued upon, fraud must be the reason
which induced the other party into giving its consent. In addition,
the particular acts constituting the fraud imputed to the
defendant must be alleged with specificity. We held:
In the case at bench, the basis of petitioner" s application for the
issuance of the writ of preliminary attachment against the

properties of respondent is Section 1(d) of Rule 57 of the Rules
of Court which pertinently reads:
xxx
For a writ of attachment to issue under this rule, the applicant
must sufficiently show the factual circumstances of the alleged
fraud because fraudulent intent cannot be inferred from the
debtor's mere non-payment of the debt or failure to comply with
his obligation. The applicant must then be able to demonstrate
that the debtor has intended to defraud the creditor. In Liberty
Insurance Corporation v. Court of Appeals, we explained as
follows:
"To sustain an attachment on triis ground, it must be shown that
the debtor in contracting the debt or incurring the obligation
intended to defraud the creditor. The fraud must relate to the
execution of the agreement and must have been the reason
which induced the other party into giving consent which he would
not have otherwise given. To constitute a ground for attachment
in Section 1 (d), Rule 57 of the Rules of Court, fraud should be
committed upon contracting the obligation sued upon. A debt is
fraudulently contracted if at the time of contracting it the debtor
has a preconceived plan or intention not to pay, as it is in this
case. Fraud is a state of mind and need not be proved by direct
evidence but may be inferred1 from the circumstances attendant
in each case."
In the instant case, petitioner's October 12, 2000 Affidavit is
bereft of any factual statement that respondent committed a
fraud. The affidavit narrated only the alleged fraudulent
transaction between Wincorp and Virata and/or Power Merge,
which, by the way, explains why this Court, in G.R. No. 162928,
affirmed the writ of attachment issued against the latter. As to
the participation of respondent in the said transaction, the
affidavit merely states that respondent, an officer and director of
Wincorp, connived with the other defendants in the civil case to
defraud petitioner of his money placements. No other factual
averment or circumstance details how respondent committed a
fraud or how he connived with the other defendants to commit a
fraud in the transaction sued upon. In other words, petitioner
has not shown any specific act or deed to support the allegation
that respondent is guilty of fraud.
The affidavit, being the foundation of the writ, must contain such
particulars as to how the fraud imputed to respondent was
committed for the court to decide whether or not to issue the
writ. Absent any statement of other factual circumstances to
show that respondent, at the time of contracting the obligation,
had a preconceived plan or intention not to pay, or without any
showing of how respondent committed the alleged fraud, the
general averment in the affidavit that respondent is an officer
and director of Wincorp who allegedly connived with the other
defendants to commit a fraud, is insufficient to support the
issuance of a writ of preliminary attachment. In the application
for the writ under the said ground, compelling is the need to give
a hint about what constituted the fraud and how it was
perpetrated because established is the rule that fraud is never
presumed. Verily, the mere fact that respondent is an officer and
director of the company does not necessarily give rise to the
inference that he committed a fraud or that he connived with the
other defendants to commit a fraud. While under certain
circumstances, courts may treat a corporation as a mere
aggroupment of persons, to whom liability will directly attach,
this is only done when the wrongdoing has been clearly and
convincingly established.[87] (Citations omitted.)
We also reiterated in Ng Wee that the rules on the issuance of
the writ of preliminary attachment as a provisional remedy are
strictly construed against the applicant because it exposes the
debtor to humiliation and annoyance.[88] The applicant must
show that all requisites are present.[89] Otherwise, if issued on
false or insufficient allegations, the court acts in excess of its
jurisdiction which must be corrected.[90]
In this case, the writ of preliminary attachment was improperly
or irregularly issued because there is no ground for the
attachment.
182
To begin with, Allied Bank filed the application for the writ of
preliminary attachment in the Collection Case against Lim as
surety. However, the allegations of fraud refer to the execution
of the promissory notes, and not on the surety agreement. The
application was bereft of any allegation as to Lim's participation
in the alleged conspiracy of fraud. Also, the writ of preliminary
attachment was granted in the Collection Case against Lim as .
surety, yet there was no allegation on Lim's fraudulent intention
in incurring its obligation under the CG/CS Agreements. It cannot
be inferred that Lim had, at the time of contracting the
obligation, the preconceived intention to renege on his obligation
under the CG/CS Agreements. Continuing guaranty and surety
agreements are normally required by a bank or financing
company anticipating to enter into a series of credit transactions
with a particular principal debtor.[91] This avoids a need to
execute a separate surety contract or bond for each financing or
credit accommodation extended to the principal debtor.[92]
Here, the CG/CS Agreements were executed prior to the
issuance of L/C No. 21970, and were in force during other
transactions including the one involving L/C No. 22518 which
encountered no problem. Thus, this transaction cannot be
singled out to justify that the surety agreement has been
contracted through fraud.
Moreover, the filing of the Declaratory Relief Case cannot be
evidence of a preconceived intention not to pay the surety's
obligation because it was filed by Marphil, and not Lim. In any
case, the filing of the case is a legitimate means resorted to by
Marphil in, seeking to clarify its existing obligations with Allied
Bank. If its intention was to renege on its obligations, it would
not have submitted itself to the jurisdiction of the court where it
can be ordered to pay any existing obligations. The allegation
that petitioners made representations to induce it to grant them
a credit line is belied by the fact that it is only in the transaction
involving L/C No. 21970 where Allied Bank encountered
problems, because of Nanyang Bank's dishonor of the draft and
documents. Also, the allegation that petitioners committed
misrepresentation in shipping the cashew nuts at a volume less
than that which was required by the foreign buyer, relates to the
sale between Marphil and Intan, and not to the loan between
Marphil and Allied Bank.
From the foregoing, Allied Bank was not able to sufficiently
establish the factual circumstances of the alleged fraud in
contracting the obligation. Thus, there being no ground for its
issuance, the writ of preliminary attachment should be dissolved.
WHEREFORE, the petition for review on certiorari is PARTLY
GRANTED. The January 12, 2009 Decision and May 12, 2009
Resolution of the Court of Appeals are MODIFIED. Marphil Export
Corporation and Ireneo Lim are ordered to pay jointly and
severally Allied Banking Corporation (now Philippine National
Bank) the principal amount of P1,913,763.45, with interest at
the rate of six percent (6%) per annum computed from May 7,
1990, until the date of finality of this judgment. The total amount
shall thereafter earn interest at the rate of six percent (6%) per
annum from the finality of judgment until its satisfaction. Let the
writ of preliminary attachment issued against Ireneo Lim's
property be DISSOLVED.
SO ORDERED.
THIRD DIVISION
[G.R. No. 142838. August 9, 2001]
ABELARDO B. LICAROS, petitioner, vs. ANTONIO P. GATMAITAN,
respondent.
DECISION
GONZAGA-REYES, J.:

This is a petition for review on certiorari under Rule 45 of the
Rules of Court. The petition seeks to reverse and set aside the
Decision[1] dated February 10, 2000 of the Court of Appeals and
its Resolution[2] dated April 7, 2000 denying petitioners Motion
for Reconsideration thereto. The appellate court decision
reversed the Decision[3] dated November 11, 1997 of the
Regional Trial Court of Makati, Branch 145 in Civil Case No. 96-
1211.
The facts of the case, as stated in the Decision of the Court of
Appeals dated February 10, 2000, are as follows:
The Anglo-Asean Bank and Trust Limited (Anglo-Asean, for
brevity), is a private bank registered and organized to do
business under the laws of the Republic of Vanuatu but not in the
Philippines. Its business consists primarily in receiving fund
placements by way of deposits from institutions and individual
investors from different parts of the world and thereafter
investing such deposits in money market placements and
potentially profitable capital ventures in Hongkong, Europe and
the United States for the purpose of maximizing the returns on
those investments.
Enticed by the lucrative prospects of doing business with Anglo-
Asean, Abelardo Licaros, a Filipino businessman, decided to make
a fund placement with said bank sometime in the 1980s. As it
turned out, the grim outcome of Licaros foray in overseas fund
investment was not exactly what he envisioned it to be. More
particularly, Licaros, after having invested in Anglo-Asean,
encountered tremendous and unexplained difficulties in
retrieving, not only the interest or profits, but even the very
investments he had put in Anglo-Asean.
Confronted with the dire prospect of not getting back any of his
investments, Licaros then decided to seek the counsel of Antonio
P. Gatmaitan, a reputable banker and investment manager who
had been extending managerial, financial and investment
consultancy services to various firms and corporations both here
and abroad. To Licaros relief, Gatmaitan was only too willing
enough to help. Gatmaitan voluntarily offered to assume the
payment of Anglo-Aseans indebtedness to Licaros subject to
certain terms and conditions. In order to effectuate and formalize
the parties respective commitments, the two executed a
notarized MEMORANDUM OF AGREEMENT on July 29, 1988 (Exh.
B; also Exhibit 1), the full text of which reads:
Memorandum of Agreement
KNOW ALL MEN BY THESE PRESENTS:
This MEMORANDUM OF AGREEMENT made and executed this
29th day of July 1988, at Makati by and between:
ABELARDO B. LICAROS, Filipino, of legal age and holding office
at Concepcion Building, Intramuros, Manila hereinafter referred
to as THE PARTY OF THE FIRST PART,
and
ANTONIO P. GATMAITAN, Filipino, of legal age and residing at 7
Mangyan St., La Vista, hereinafter referred to as the PARTY OF
THE SECOND PART,
WITNESSETH THAT:
WHEREAS, ANGLO-ASEAN BANK & TRUST, a company
incorporated by the Republic of Vanuatu, hereinafter referred to
as the OFFSHORE BANK, is indebted to the PARTY OF THE FIRST
PART in the amount of US dollars; ONE HUNDRED FIFTY
THOUSAND ONLY (US$150,000) which debt is now due and
demandable.
WHEREAS, the PARTY OF THE FIRST PART has encountered
difficulties in securing full settlement of the said indebtedness
from the OFFSHORE BANK and has sought a business
183
arrangement with the PARTY OF THE SECOND PART regarding
his claims;
WHEREAS, the PARTY OF THE SECOND PART, with his own
resources and due to his association with the OFFSHORE BANK,
has offered to the PARTY OF THE FIRST PART to assume the
payment of the aforesaid indebtedness, upon certain terms and
conditions, which offer, the PARTY OF THE FIRST PART has
accepted;
WHEREAS, the parties herein have come to an agreement on the
nature, form and extent of their mutual prestations which they
now record herein with the express conformity of the third
parties concerned;
NOW, THEREFORE, for and in consideration of the foregoing and
the mutual covenants stipulated herein, the PARTY OF THE FIRST
PART and the PARTY OF THE SECOND PART have agreed, as they
do hereby agree, as follows:
1. The PARTY OF THE SECOND PART hereby undertakes to pay
the PARTY OF THE FIRST PART the amount of US DOLLARS ONE
HUNDRED FIFTY THOUSAND ((US$150,000) payable in Philippine
Currency at the fixed exchange rate of Philippine Pesos 21 to
US$1 without interest on or before July 15, 1993.
For this purpose, the PARTY OF THE SECOND PART shall execute
and deliver a non negotiable promissory note, bearing the
aforesaid material consideration in favor of the PARTY OF THE
FIRST PART upon execution of this MEMORANDUM OF
AGREEMENT, which promissory note shall form part as ANNEX A
hereof.
2. For and in consideration of the obligation of the PARTY OF THE
SECOND PART, the PARTY OF THE FIRST does hereby;
a. Sell, assign, transfer and set over unto the PARTY OF THE
SECOND PART that certain debt now due and owing to the PARTY
OF THE FIRST PART by the OFFSHORE BANK, to the amount of
US Dollars One Hundred Fifty Thousand plus interest due and
accruing thereon;
b. Grant the PARTY OF THE SECOND PART the full power and
authority, for his own use and benefit, but at his own cost and
expense, to demand, collect, receive, compound, compromise
and give acquittance for the same or any part thereof, and in the
name of the PARTY OF THE FIRST PART, to prosecute, and
withdraw any suit or proceedings therefor;
c. Agree and stipulate that the debt assigned herein is justly
owing and due to the PARTY OF THE FIRST PART from the said
OFFSHORE BANK, and that the PARTY OF THE FIRST PART has
not done and will not cause anything to be done to diminish or
discharge said debt, or to delay or prevent the PARTY OF THE
SECOND PART from collecting the same; and;
d. At the request of the PARTY OF SECOND PART and the latters
own cost and expense, to execute and do all such further acts
and deeds as shall be reasonably necessary for proving said debt
and to more effectually enable the PARTY OF THE SECOND PART
to recover the same in accordance with the true intent and
meaning of the arrangements herein.
IN WITNESS WHEREOF, the parties have caused this
MEMORANDUM OF AGREEMENT to be signed on the date and
place first written above.
Sgd. Sgd.
ABELARDO B. LICAROS ANTONIO P. GATMAITAN
PARTY OF THE FIRST PART PARTY OF THE FIRST PART
WITH OUR CONFORME:

ANGLO-ASEAN BANK & TRUST
BY: (Unsigned)
SIGNED IN THE PRESENCE OF:
Sgd. (illegible)
________________________ ________________________
Conformably with his undertaking under paragraph 1 of the
aforequoted agreement, Gatmaitan executed in favor of Licaros a
NON-NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF
CASH DIVIDENDS (Exhs. A; also Exh. 2), which promissory note,
appended as Annex A to the same Memorandum of Agreement,
states in full, thus
NON-NEGOTIABLE PROMISSORY NOTE
WITH ASSIGNMENT OF CASH DIVIDENDS
This promissory note is Annex A of the Memorandum of
Agreement executed between Abelardo B. Licaros and Antonio P.
Gatmaitan, on ______ 1988 at Makati, Philippines and is an
integral part of said Memorandum of Agreement.
P3,150,000.
On or before July 15, 1993, I promise to pay to Abelardo B.
Licaros the sum of Philippine Pesos 3,150,000 (P3,150,000)
without interest as material consideration for the full settlement
of his money claims from ANGLO-ASEAN BANK, referred to in the
Memorandum of Agreement as the OFFSHORE BANK.
As security for the payment of this Promissory Note, I hereby
ASSIGN, CEDE and TRANSFER, Seventy Percent (70%) of ALL
CASH DIVIDENDS, that may be due or owing to me as the
registered owner of ___________________ (__________)
shares of stock in the Prudential Life Realty, Inc.
This assignment shall likewise include SEVENTY PERCENT (70%)
of cash dividends that may be declared by Prudential Life Realty,
Inc. and due or owing to Prudential Life Plan, Inc., of which I am
a stockholder, to the extent of or in proportion to my aforesaid
shareholding in Prudential Life Plan, Inc., the latter being the
holding company of Prudential Life Realty, Inc.
In the event that I decide to sell or transfer my aforesaid shares
in either or both the Prudential Life Plan, Inc. or Prudential Life
Realty, Inc. and the Promissory Note remains unpaid or
outstanding, I hereby give Mr. Abelardo B. Licaros the first option
to buy the said shares.
Manila, Philippines
July _____, 1988
(SGD.)
Antonio P. Gatmaitan
7 Mangyan St., La Vista, QC
Signed in the Presence of
(SGD.)
_________________ __________________
Francisco A. Alba
President, Prudential Life Plan, Inc..
Thereafter, Gatmaitan presented to Anglo-Asean the
Memorandum of Agreement earlier executed by him and Licaros
184
for the purpose of collecting the latters placement thereat of U.S.
$150,000.00. Albeit the officers of Anglo-Asean allegedly
committed themselves to look into [this matter], no formal
response was ever made by said bank to either Licaros or
Gatmaitan. To date, Anglo-Asean has not acted on Gatmaitans
monetary claims.
Evidently, because of his inability to collect from Anglo-Asean,
Gatmaitan did not bother anymore to make good his promise to
pay Licaros the amount stated in his promissory note (Exh. A;
also Exh. 2). Licaros, however, thought differently. He felt that
he had a right to collect on the basis of the promissory note
regardless of the outcome of Gatmaitan's recovery efforts. Thus,
in July 1996, Licaros, thru counsel, addressed successive
demand letters to Gatmaitan (Exhs. C and D), demanding
payment of the latters obligations under the promissory note.
Gatmaitan, however, did not accede to these demands.
Hence, on August 1, 1996, in the Regional Trial Court at Makati,
Licaros filed the complaint in this case. In his complaint,
docketed in the court below as Civil Case No. 96-1211, Licaros
prayed for a judgment ordering Gatmaitan to pay him the
following:
a) Principal Obligation in the amount of Three Million Five
Hundred Thousand Pesos (P3,500,000.00);
b) Legal interest thereon at the rate of six (6%) percent per
annum from July 16, 1993 when the amount became due until
the obligation is fully paid;
c) Twenty percent (20%) of the amount due as reasonable
attorneys fees;
d) Costs of the suit.[4]
After trial on the merits, the court a quo rendered judgment in
favor of petitioner Licaros and found respondent Gatmaitan liable
under the Memorandum of Agreement and Promissory Note for
P3,150,000.00 plus 12% interest per annum from July 16, 1993
until the amount is fully paid. Respondent was likewise ordered
to pay attorneys fees of P200,000.00.[5]
Respondent Gatmaitan appealed the trial courts decision to the
Court of Appeals. In a decision promulgated on February 10,
2000, the appellate court reversed the decision of the trial court
and held that respondent Gatmaitan did not at any point become
obligated to pay to petitioner Licaros the amount stated in the
promissory note. In a Resolution dated April 7, 2000, the Court
of Appeals denied petitioners Motion for Reconsideration of its
February 10, 2000 Decision.
Hence this petition for review on certiorari where petitioner prays
for the reversal of the February 10, 2000 Decision of the Court of
Appeals and the reinstatement of the November 11, 1997
decision of the Regional Trial Court.
The threshold issue for the determination of this Court is whether
the Memorandum of Agreement between petitioner and
respondent is one of assignment of credit or one of conventional
subrogation. This matter is determinative of whether or not
respondent became liable to petitioner under the promissory
note considering that its efficacy is dependent on the
Memorandum of Agreement, the note being merely an annex to
the said memorandum.[6]
An assignment of credit has been defined as the process of
transferring the right of the assignor to the assignee who would
then have the right to proceed against the debtor. The
assignment may be done gratuitously or onerously, in which
case, the assignment has an effect similar to that of a sale.[7]
On the other hand, subrogation has been defined as the transfer
of all the rights of the creditor to a third person, who substitutes
him in all his rights. It may either be legal or conventional. Legal

subrogation is that which takes place without agreement but by
operation of law because of certain acts. Conventional
subrogation is that which takes place by agreement of parties.[8]
The general tenor of the foregoing definitions of the terms
subrogation and assignment of credit may make it seem that
they are one and the same which they are not. A noted expert in
civil law notes their distinctions thus:
Under our Code, however, conventional subrogation is not
identical to assignment of credit. In the former, the debtors
consent is necessary; in the latter it is not required. Subrogation
extinguishes the obligation and gives rise to a new one;
assignment refers to the same right which passes from one
person to another. The nullity of an old obligation may be cured
by subrogation, such that a new obligation will be perfectly valid;
but the nullity of an obligation is not remedied by the assignment
of the creditors right to another.[9]
For our purposes, the crucial distinction deals with the necessity
of the consent of the debtor in the original transaction. In an
assignment of credit, the consent of the debtor is not necessary
in order that the assignment may fully produce legal effects.[10]
What the law requires in an assignment of credit is not the
consent of the debtor but merely notice to him as the assignment
takes effect only from the time he has knowledge thereof.[11] A
creditor may, therefore, validly assign his credit and its
accessories without the debtors consent.[12] On the other hand,
conventional subrogation requires an agreement among the
three parties concerned the original creditor, the debtor, and the
new creditor. It is a new contractual relation based on the mutual
agreement among all the necessary parties. Thus, Article 1301 of
the Civil Code explicitly states that (C)onventional subrogation of
a third person requires the consent of the original parties and of
the third person.
The trial court, in finding for the petitioner, ruled that the
Memorandum of Agreement was in the nature of an assignment
of credit. As such, the court a quo held respondent liable for the
amount stated in the said agreement even if the parties thereto
failed to obtain the consent of Anglo-Asean Bank. On the other
hand, the appellate court held that the agreement was one of
conventional subrogation which necessarily requires the
agreement of all the parties concerned. The Court of Appeals
thus ruled that the Memorandum of Agreement never came into
effect due to the failure of the parties to get the consent of
Anglo-Asean Bank to the agreement and, as such, respondent
never became liable for the amount stipulated.
We agree with the finding of the Court of Appeals that the
Memorandum of Agreement dated July 29, 1988 was in the
nature of a conventional subrogation which requires the consent
of the debtor, Anglo-Asean Bank, for its validity. We note with
approval the following pronouncement of the Court of Appeals:
Immediately discernible from above is the common feature of
contracts involving conventional subrogation, namely, the
approval of the debtor to the subrogation of a third person in
place of the creditor. That Gatmaitan and Licaros had intended to
treat their agreement as one of conventional subrogation is
plainly borne by a stipulation in their Memorandum of
Agreement, to wit:
WHEREAS, the parties herein have come to an agreement on the
nature, form and extent of their mutual prestations which they
now record herein with the express conformity of the third
parties concerned (emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status
of a mere assignee of appellees credit, there is simply no sense
for them to have stipulated in their agreement that the same is
conditioned on the express conformity thereto of Anglo-Asean
Bank. That they did so only accentuates their intention to treat
185
the agreement as one of conventional subrogation. And it is basic
in the interpretation of contracts that the intention of the parties
must be the one pursued (Rule 130, Section 12, Rules of Court).
Given our finding that the Memorandum of Agreement (Exh. B;
also Exh. 1), is not one of assignment of credit but is actually a
conventional subrogation, the next question that comes to mind
is whether such agreement was ever perfected at all. Needless to
state, the perfection or non-perfection of the subject agreement
is of utmost relevance at this point. For, if the same
Memorandum of Agreement was actually perfected, then it
cannot be denied that Gatmaitan still has a subsisting
commitment to pay Licaros on the basis of his promissory note.
If not, Licaros suit for collection must necessarily fail.
Here, it bears stressing that the subject Memorandum of
Agreement expressly requires the consent of Anglo-Asean to the
subrogation. Upon whom the task of securing such consent
devolves, be it on Licaros or Gatmaitan, is of no significance.
What counts most is the hard reality that there has been an
abject failure to get Anglo-Aseans nod of approval over
Gatmaitans being subrogated in the place of Licaros. Doubtless,
the absence of such conformity on the part of Anglo-Asean,
which is thereby made a party to the same Memorandum of
Agreement, prevented the agreement from becoming effective,
much less from being a source of any cause of action for the
signatories thereto.[13]
Aside for the whereas clause cited by the appellate court in its
decision, we likewise note that on the signature page, right
under the place reserved for the signatures of petitioner and
respondent, there is, typewritten, the words WITH OUR
CONFORME. Under this notation, the words ANGLO-ASEAN BANK
AND TRUST were written by hand.[14] To our mind, this
provision which contemplates the signed conformity of Anglo-
Asean Bank, taken together with the aforementioned
preambulatory clause leads to the conclusion that both parties
intended that Anglo-Asean Bank should signify its agreement and
conformity to the contractual arrangement between petitioner
and respondent. The fact that Anglo-Asean Bank did not give
such consent rendered the agreement inoperative considering
that, as previously discussed, the consent of the debtor is
needed in the subrogation of a third person to the rights of a
creditor.
In this petition, petitioner assails the ruling of the Court of
Appeals that what was entered into by the parties was a
conventional subrogation of petitioners rights as creditor of the
Anglo-Asean Bank which necessarily requires the consent of the
latter. In support, petitioner alleges that: (1) the Memorandum
of Agreement did not create a new obligation and, as such, the
same cannot be a conventional subrogation; (2) the consent of
Anglo-Asean Bank was not necessary for the validity of the
Memorandum of Agreement; (3) assuming that such consent
was necessary, respondent failed to secure the same as was
incumbent upon him; and (4) respondent himself admitted that
the transaction was one of assignment of credit.
Petitioner argues that the parties to the Memorandum of
Agreement could not have intended the same to be a
conventional subrogation considering that no new obligation was
created. According to petitioner, the obligation of Anglo-Asean
Bank to pay under Contract No. 00193 was not extinguished and
in fact, it was the basic intention of the parties to the
Memorandum of Agreement to enforce the same obligation of
Anglo-Asean Bank under its contract with petitioner. Considering
that the old obligation of Anglo-Asean Bank under Contract No.
00193 was never extinguished under the Memorandum of
Agreement, it is contended that the same could not be
considered as a conventional subrogation.
We are not persuaded.
It is true that conventional subrogation has the effect of
extinguishing the old obligation and giving rise to a new one.

However, the extinguishment of the old obligation is the effect of
the establishment of a contract for conventional subrogation. It is
not a requisite without which a contract for conventional
subrogation may not be created. As such, it is not determinative
of whether or not a contract of conventional subrogation was
constituted.
Moreover, it is of no moment that the subject of the
Memorandum of Agreement was the collection of the obligation
of Anglo-Asean Bank to petitioner Licaros under Contract No.
00193. Precisely, if conventional subrogation had taken place
with the consent of Anglo-Asean Bank to effect a change in the
person of its creditor, there is necessarily created a new
obligation whereby Anglo-Asean Bank must now give payment to
its new creditor, herein respondent.
Petitioner next argues that the consent or conformity of Anglo-
Asean Bank is not necessary to the validity of the Memorandum
of Agreement as the evidence on record allegedly shows that it
was never the intention of the parties thereto to treat the same
as one of conventional subrogation. He claims that the
preambulatory clause requiring the express conformity of third
parties, which admittedly was Anglo-Asean Bank, is a mere
surplusage which is not necessary to the validity of the
agreement.
As previously discussed, the intention of the parties to treat the
Memorandum of Agreement as embodying a conventional
subrogation is shown not only by the whereas clause but also by
the signature space captioned WITH OUR CONFORME reserved
for the signature of a representative of Anglo-Asean Bank. These
provisions in the aforementioned Memorandum of Agreement
may not simply be disregarded or dismissed as superfluous.
It is a basic rule in the interpretation of contracts that (t)he
various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from
all of them taken jointly.[15] Moreover, under our Rules of Court,
it is mandated that (i)n the construction of an instrument where
there are several provisions or particulars, such a construction is,
if possible, to be adopted as will give effect to all.[16] Further,
jurisprudence has laid down the rule that contracts should be so
construed as to harmonize and give effect to the different
provisions thereof.[17]
In the case at bench, the Memorandum of Agreement embodies
certain provisions that are consistent with either a conventional
subrogation or assignment of credit. It has not been shown that
any clause or provision in the Memorandum of Agreement is
inconsistent or incompatible with a conventional subrogation. On
the other hand, the two cited provisions requiring consent of the
debtor to the memorandum is inconsistent with a contract of
assignment of credit. Thus, if we were to interpret the same as
one of assignment of credit, then the aforementioned stipulations
regarding the consent of Anglo-Asean Bank would be rendered
inutile and useless considering that, as previously discussed, the
consent of the debtor is not necessary in an assignment of credit.
Petitioner next argues that assuming that the conformity of
Anglo-Asean was necessary to the validity of the Memorandum of
Agreement, respondent only had himself to blame for the failure
to secure such conformity as was, allegedly, incumbent upon him
under the memorandum.
As to this argument regarding the party responsible for securing
the conformity of Anglo-Asean Bank, we fail to see how this
question would have any relevance on the outcome of this case.
Having ruled that the consent of Anglo-Asean was necessary for
the validity of the Memorandum of Agreement, the determinative
fact is that such consent was not secured by either petitioner or
respondent which consequently resulted in the invalidity of the
said memorandum.
With respect to the argument of petitioner that respondent
himself allegedly admitted in open court that an assignment of
186
credit was intended, it is enough to say that respondent
apparently used the word assignment in his testimony in the
general sense. Respondent is not a lawyer and as such, he is not
so well versed in law that he would be able to distinguish
between the concepts of conventional subrogation and of
assignment of credit. Moreover, even assuming that there was
an admission on his part, such admission is not conclusive on
this court as the nature and interpretation of the Memorandum of
Agreement is a question of law which may not be the subject of
stipulations and admissions.[18]
Considering the foregoing, it cannot then be said that the
consent of the debtor Anglo-Asean Bank is not necessary to the
validity of the Memorandum of Agreement. As above stated, the
Memorandum of Agreement embodies a contract for conventional
subrogation and in such a case, the consent of the original
parties and the third person is required.[19] The absence of such
conformity by Anglo-Asean Bank prevented the Memorandum of
Agreement from becoming valid and effective. Accordingly, the
Court of Appeals did not err when it ruled that the Memorandum
of Agreement was never perfected.
Having arrived at the above conclusion, the Court finds no need
to discuss the other issues raised by petitioner.
WHEREFORE, the instant petition is DENIED and the Decision of
the Court of Appeals dated February 10, 2000 and its Resolution
dated April 7, 2000 are hereby AFFIRMED.
Melo, (Chairman), Vitug, and Panganiban, JJ., concur.
Sandoval-Gutierrez, J., on leave.
FIRST DIVISION
[G.R. No. 154127. December 8, 2003]
ROMEO C. GARCIA, petitioner, vs. DIONISIO V. LLAMAS,
respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by
the express assent of the parties or by the complete
incompatibility between the old and the new agreements.
Petitioner herein fails to show either requirement convincingly;
hence, the summary judgment holding him liable as a joint and
solidary debtor stands.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules
of Court, seeking to nullify the November 26, 2001 Decision[2]
and the June 26, 2002 Resolution[3] of the Court of Appeals (CA)
in CA-GR CV No. 60521. The appellate court disposed as follows:
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment
appealed from, insofar as it pertains to [Petitioner] Romeo
Garcia, must be, as it hereby is, AFFIRMED, subject to the
modification that the award for attorneys fees and cost of suit is
DELETED. The portion of the judgment that pertains to x x x
Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the
case against x x x Eduardo de Jesus is REMANDED to the court of
origin for purposes of receiving ex parte [Respondent] Dionisio
Llamas evidence against x x x Eduardo de Jesus.[4]
The challenged Resolution, on the other hand, denied petitioners
Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:

This case started out as a complaint for sum of money and
damages by x x x [Respondent] Dionisio Llamas against x x x
[Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as
Civil Case No. Q97-32-873, the complaint alleged that on 23
December 1996[,] [petitioner and de Jesus] borrowed
P400,000.00 from [respondent]; that, on the same day, [they]
executed a promissory note wherein they bound themselves
jointly and severally to pay the loan on or before 23 January
1997 with a 5% interest per month; that the loan has long been
overdue and, despite repeated demands, [petitioner and de
Jesus] have failed and refused to pay it; and that, by reason of
the[ir] unjustified refusal, [respondent] was compelled to engage
the services of counsel to whom he agreed to pay 25% of the
sum to be recovered from [petitioner and de Jesus], plus
P2,000.00 for every appearance in court. Annexed to the
complaint were the promissory note above-mentioned and a
demand letter, dated 02 May 1997, by [respondent] addressed
to [petitioner and de Jesus].
Resisting the complaint, [Petitioner Garcia,] in his [Answer,]
averred that he assumed no liability under the promissory note
because he signed it merely as an accommodation party for x x x
de Jesus; and, alternatively, that he is relieved from any liability
arising from the note inasmuch as the loan had been paid by x x
x de Jesus by means of a check dated 17 April 1997; and that, in
any event, the issuance of the check and [respondents]
acceptance thereof novated or superseded the note.
[Respondent] tendered a reply to [Petitioner] Garcias answer,
thereunder asserting that the loan remained unpaid for the
reason that the check issued by x x x de Jesus bounced, and that
[Petitioner] Garcias answer was not even accompanied by a
certificate of non-forum shopping. Annexed to the reply were the
face of the check and the reverse side thereof.
For his part, x x x de Jesus asserted in his [A]nswer with
[C]ounterclaim that out of the supposed P400,000.00 loan, he
received only P360,000.00, the P40,000.00 having been advance
interest thereon for two months, that is, for January and
February 1997; that[,] in fact[,] he paid the sum of P120,000.00
by way of interests; that this was made when [respondents]
daughter, one Nits Llamas-Quijencio, received from the Central
Police District Command at Bicutan, Taguig, Metro Manila (where
x x x de Jesus worked), the sum of P40,000.00, representing the
peso equivalent of his accumulated leave credits, another
P40,000.00 as advance interest, and still another P40,000.00 as
interest for the months of March and April 1997; that he had
difficulty in paying the loan and had asked [respondent] for an
extension of time; that [respondent] acted in bad faith in
instituting the case, [respondent] having agreed to accept the
benefits he (de Jesus) would receive for his retirement, but
[respondent] nonetheless filed the instant case while his
retirement was being processed; and that, in defense of his
rights, he agreed to pay his counsel P20,000.00 [as] attorneys
fees, plus P1,000.00 for every court appearance.
During the pre-trial conference, x x x de Jesus and his lawyer did
not appear, nor did they file any pre-trial brief. Neither did
[Petitioner] Garcia file a pre-trial brief, and his counsel even
manifested that he would no [longer] present evidence. Given
this development, the trial court gave [respondent] permission to
present his evidence ex parte against x x x de Jesus; and, as
regards [Petitioner] Garcia, the trial court directed [respondent]
to file a motion for judgment on the pleadings, and for
[Petitioner] Garcia to file his comment or opposition thereto.
Instead, [respondent] filed a [M]otion to declare [Petitioner]
Garcia in default and to allow him to present his evidence ex
parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation
submitting his defense to a judgment on the pleadings.
Subsequently, [respondent] filed a [M]anifestation/[M]otion to
submit the case for judgement on the pleadings, withdrawing in
the process his previous motion. Thereunder, he asserted that
[petitioners and de Jesus] solidary liability under the promissory
187
note cannot be any clearer, and that the check issued by de
Jesus did not discharge the loan since the check bounced.[5]
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City
(Branch 222) disposed of the case as follows:
WHEREFORE, premises considered, judgment on the pleadings is
hereby rendered in favor of [respondent] and against [petitioner
and De Jesus], who are hereby ordered to pay, jointly and
severally, the [respondent] the following sums, to wit:
1) P400,000.00 representing the principal amount plus 5%
interest thereon per month from January 23, 1997 until the same
shall have been fully paid, less the amount of P120,000.00
representing interests already paid by x x x de Jesus;
2) P100,000.00 as attorneys fees plus appearance fee of
P2,000.00 for each day of [c]ourt appearance, and;
3) Cost of this suit.[6]
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a
judgment on the pleadings against De Jesus. According to the
appellate court, his Answer raised genuinely contentious issues.
Moreover, he was still required to present his evidence ex parte.
Thus, respondent was not ipso facto entitled to the RTC
judgment, even though De Jesus had been declared in default.
The case against the latter was therefore remanded by the CA to
the trial court for the ex parte reception of the formers evidence.
As to petitioner, the CA treated his case as a summary
judgment, because his Answer had failed to raise even a single
genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied
-- had taken place when respondent accepted the check from De
Jesus. According to the CA, the check was issued precisely to pay
for the loan that was covered by the promissory note jointly and
severally undertaken by petitioner and De Jesus. Respondents
acceptance of the check did not serve to make De Jesus the sole
debtor because, first, the obligation incurred by him and
petitioner was joint and several; and, second, the check -- which
had been intended to extinguish the obligation -- bounced upon
its presentment.
Hence, this Petition.[7]
Issues
Petitioner submits the following issues for our consideration:
I
Whether or not the Honorable Court of Appeals gravely erred in
not holding that novation applies in the instant case as x x x
Eduardo de Jesus had expressly assumed sole and exclusive
liability for the loan obligation he obtained from x x x Respondent
Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full
amount of the loan of P400,000.00 in favor of Respondent
Llamas, although the check subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which
resulted in [the] substitution by x x x de Jesus or [the
superseding of] the promissory note;
c) x x x de Jesus having paid interests on the loan in the total
amount of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x
x de Jesus that due to financial difficulties, he be given an
extension of time to pay his loan obligation and that his

retirement benefits from the Philippine National Police will answer
for said obligation.
II
Whether or not the Honorable Court of Appeals seriously erred in
not holding that the defense of petitioner that he was merely an
accommodation party, despite the fact that the promissory note
provided for a joint and solidary liability, should have been given
weight and credence considering that subsequent events showed
that the principal obligor was in truth and in fact x x x de Jesus,
as evidenced by the foregoing circumstances showing his
assumption of sole liability over the loan obligation.
III
Whether or not judgment on the pleadings or summary judgment
was properly availed of by Respondent Llamas, despite the fact
that there are genuine issues of fact, which the Honorable Court
of Appeals itself admitted in its Decision, which call for the
presentation of evidence in a full-blown trial.[8]
Simply put, the issues are the following: 1) whether there was
novation of the obligation; 2) whether the defense that petitioner
was only an accommodation party had any basis; and 3) whether
the judgment against him -- be it a judgment on the pleadings or
a summary judgment -- was proper.
The Courts Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint
and solidary debtor by insisting that novation took place, either
through the substitution of De Jesus as sole debtor or the
replacement of the promissory note by the check. Alternatively,
the former argues that the original obligation was extinguished
when the latter, who was his co-obligor, paid the loan with the
check.
The fallacy of the second (alternative) argument is all too
apparent. The check could not have extinguished the obligation,
because it bounced upon presentment. By law,[9] the delivery of
a check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in
place of the old one, or by subrogating a third person to the
rights of the creditor.[10] Article 1293 of the Civil Code defines
novation as follows:
Art. 1293. Novation which consists in substituting a new debtor
in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him
rights mentioned in articles 1236 and 1237.
In general, there are two modes of substituting the person of the
debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from -- and may even be
made without the knowledge of -- the debtor, since it consists of
a third persons assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third
person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are
necessary.[11] Both modes of substitution by the debtor require
the consent of the creditor.[12]
188
Novation may also be extinctive or modificatory. It is extinctive
when an old obligation is terminated by the creation of a new
one that takes the place of the former. It is merely modificatory
when the old obligation subsists to the extent that it remains
compatible with the amendatory agreement.[13] Whether
extinctive or modificatory, novation is made either by changing
the object or the principal conditions, referred to as objective or
real novation; or by substituting the person of the debtor or
subrogating a third person to the rights of the creditor, an act
known as subjective or personal novation.[14] For novation to
take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.[15]
Novation may also be express or implied. It is express when the
new obligation declares in unequivocal terms that the old
obligation is extinguished. It is implied when the new obligation
is incompatible with the old one on every point.[16] The test of
incompatibility is whether the two obligations can stand together,
each one with its own independent existence.[17]
Applying the foregoing to the instant case, we hold that no
novation took place.
The parties did not unequivocally declare that the old obligation
had been extinguished by the issuance and the acceptance of the
check, or that the check would take the place of the note. There
is no incompatibility between the promissory note and the check.
As the CA correctly observed, the check had been issued
precisely to answer for the obligation. On the one hand, the note
evidences the loan obligation; and on the other, the check
answers for it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioners
view, also constitutes novation[18] -- change the terms and
conditions of the obligation. Such payment was already provided
for in the promissory note and, like the check, was totally in
accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation
was novated by the substitution of debtors. In order to change
the person of the debtor, the old one must be expressly released
from the obligation, and the third person or new debtor must
assume the formers place in the relation.[19] Well-settled is the
rule that novation is never presumed.[20] Consequently, that
which arises from a purported change in the person of the debtor
must be clear and express.[21] It is thus incumbent on petitioner
to show clearly and unequivocally that novation has indeed taken
place.
In the present case, petitioner has not shown that he was
expressly released from the obligation, that a third person was
substituted in his place, or that the joint and solidary obligation
was cancelled and substituted by the solitary undertaking of De
Jesus. The CA aptly held:
x x x. Plaintiffs acceptance of the bum check did not result in
substitution by de Jesus either, the nature of the obligation being
solidary due to the fact that the promissory note expressly
declared that the liability of appellants thereunder is joint and
[solidary.] Reason: under the law, a creditor may demand
payment or performance from one of the solidary debtors or
some or all of them simultaneously, and payment made by one
of them extinguishes the obligation. It therefore follows that in
case the creditor fails to collect from one of the solidary debtors,
he may still proceed against the other or others. x x x [22]
Moreover, it must be noted that for novation to be valid and
legal, the law requires that the creditor expressly consent to the

substitution of a new debtor.[23] Since novation implies a waiver
of the right the creditor had before the novation, such waiver
must be express.[24] It cannot be supposed, without clear proof,
that the present respondent has done away with his right to
exact fulfillment from either of the solidary debtors.[25]
More important, De Jesus was not a third person to the
obligation. From the beginning, he was a joint and solidary
obligor of the P400,000 loan; thus, he can be released from it
only upon its extinguishment. Respondents acceptance of his
check did not change the person of the debtor, because a joint
and solidary obligor is required to pay the entirety of the
obligation.
It must be noted that in a solidary obligation, the creditor is
entitled to demand the satisfaction of the whole obligation from
any or all of the debtors.[26] It is up to the former to determine
against whom to enforce collection.[27] Having made himself
jointly and severally liable with De Jesus, petitioner is therefore
liable[28] for the entire obligation.[29]
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as
obligor when respondent agreed to extend the term of the
obligation.
This reasoning is misplaced, because the note herein is not a
negotiable instrument. The note reads:
PROMISSORY NOTE
P400,000.00
RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR
HUNDRED THOUSAND PESOS, Philippine Currency payable on or
before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon
City, with interest at the rate of 5% per month or fraction
thereof.
It is understood that our liability under this loan is jointly and
severally [sic].
Done at Quezon City, Metro Manila this 23rd day of December,
1996.[30]
By its terms, the note was made payable to a specific person
rather than to bearer or to order[31] -- a requisite for
negotiability under Act 2031, the Negotiable Instruments Law
(NIL). Hence, petitioner cannot avail himself of the NILs
provisions on the liabilities and defenses of an accommodation
party. Besides, a non-negotiable note is merely a simple contract
in writing and is evidence of such intangible rights as may have
been created by the assent of the parties.[32] The promissory
note is thus covered by the general provisions of the Civil Code,
not by the NIL.
Even granting arguendo that the NIL was applicable, still,
petitioner would be liable for the promissory note. Under Article
29 of Act 2031, an accommodation party is liable for the
instrument to a holder for value even if, at the time of its taking,
the latter knew the former to be only an accommodation party.
The relation between an accommodation party and the party
accommodated is, in effect, one of principal and surety -- the
accommodation party being the surety.[33] It is a settled rule
that a surety is bound equally and absolutely with the principal
and is deemed an original promissor and debtor from the
beginning. The liability is immediate and direct.[34]
Third Issue:
Propriety of Summary Judgment
189
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a
judgment on the pleadings and a summary judgment. Under
Section 3 of Rule 35 of the Rules of Court, a summary judgment
may be rendered after a summary hearing if the pleadings,
supporting affidavits, depositions and admissions on file show
that (1) except as to the amount of damages, there is no
genuine issue regarding any material fact; and (2) the moving
party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the
prompt disposition of actions in which the pleadings raise only a
legal, not a genuine, issue regarding any material fact.[35]
Consequently, facts are asserted in the complaint regarding
which there is yet no admission, disavowal or qualification; or
specific denials or affirmative defenses are set forth in the
answer, but the issues are fictitious as shown by the pleadings,
depositions or admissions.[36] A summary judgment may be
applied for by either a claimant or a defending party.[37]
On the other hand, under Section 1 of Rule 34 of the Rules of
Court, a judgment on the pleadings is proper when an answer
fails to render an issue or otherwise admits the material
allegations of the adverse partys pleading. The essential question
is whether there are issues generated by the pleadings.[38] A
judgment on the pleadings may be sought only by a claimant,
who is the party seeking to recover upon a claim, counterclaim
or cross-claim; or to obtain a declaratory relief. [39]
Apropos thereto, it must be stressed that the trial courts
judgment against petitioner was correctly treated by the
appellate court as a summary judgment, rather than as a
judgment on the pleadings. His Answer[40] apparently raised
several issues -- that he signed the promissory note allegedly as
a mere accommodation party, and that the obligation was
extinguished by either payment or novation. However, these are
not factual issues requiring trial. We quote with approval the CAs
observations:
Although Garcias [A]nswer tendered some issues, by way of
affirmative defenses, the documents submitted by [respondent]
nevertheless clearly showed that the issues so tendered were not
valid issues. Firstly, Garcias claim that he was merely an
accommodation party is belied by the promissory note that he
signed. Nothing in the note indicates that he was only an
accommodation party as he claimed to be. Quite the contrary,
the promissory note bears the statement: It is understood that
our liability under this loan is jointly and severally [sic].
Secondly, his claim that his co-defendant de Jesus already paid
the loan by means of a check collapses in view of the dishonor
thereof as shown at the dorsal side of said check.[41]
From the records, it also appears that petitioner himself moved
to submit the case for judgment on the basis of the pleadings
and documents. In a written Manifestation,[42] he stated that
judgment on the pleadings may now be rendered without further
evidence, considering the allegations and admissions of the
parties.[43]
In view of the foregoing, the CA correctly considered as a
summary judgment that which the trial court had issued against
petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
SECOND DIVISION
[G.R. No. 147950. December 11, 2003]
CALIFORNIA BUS LINES, INC., petitioner, vs. STATE
INVESTMENT HOUSE, INC., respondent.

DECISION
QUISUMBING, J.:
In this petition for review, California Bus Lines, Inc., assails the
decision,[1] dated April 17, 2001, of the Court of Appeals in CA-
G.R. CV No. 52667, reversing the judgment[2], dated June 3,
1993, of the Regional Trial Court of Manila, Branch 13, in Civil
Case No. 84-28505 entitled State Investment House, Inc. v.
California Bus Lines, Inc., for collection of a sum of money. The
Court of Appeals held petitioner California Bus Lines, Inc., liable
for the value of five promissory notes assigned to respondent
State Investment House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors CorporationM.A.N. Division
(Delta) applied for financial assistance from respondent State
Investment House, Inc. (hereafter SIHI), a domestic corporation
engaged in the business of quasi-banking. SIHI agreed to extend
a credit line to Delta for P25,000,000.00 in three separate credit
agreements dated May 11, June 19, and August 22, 1979.[3] On
several occasions, Delta availed of the credit line by discounting
with SIHI some of its receivables, which evidence actual sales of
Deltas vehicles. Delta eventually became indebted to SIHI to the
tune of P24,010,269.32.[4]
Meanwhile, from April 1979 to May 1980, petitioner California
Bus Lines, Inc. (hereafter CBLI), purchased on installment basis
35 units of M.A.N. Diesel Buses and two (2) units of M.A.N.
Diesel Conversion Engines from Delta. To secure the payment of
the purchase price of the 35 buses, CBLI and its president, Mr.
Dionisio O. Llamas, executed sixteen (16) promissory notes in
favor of Delta on January 23 and April 25, 1980.[5] In each
promissory note, CBLI promised to pay Delta or order,
P2,314,000 payable in 60 monthly installments starting August
31, 1980, with interest at 14% per annum. CBLI further
promised to pay the holder of the said notes 25% of the amount
due on the same as attorneys fees and expenses of collection,
whether actually incurred or not, in case of judicial proceedings
to enforce collection. In addition to the notes, CBLI executed
chattel mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it entered into a
restructuring agreement with Delta on October 7, 1981, to cover
its overdue obligations under the promissory notes.[6] The
restructuring agreement provided for a new schedule of
payments of CBLIs past due installments, extending the period to
pay, and stipulating daily remittance instead of the previously
agreed monthly remittance of payments. In case of default, Delta
would have the authority to take over the management and
operations of CBLI until CBLI and/or its president, Mr. Dionisio
Llamas, remitted and/or updated CBLIs past due account. CBLI
and Delta also increased the interest rate to 16% p.a. and added
a documentation fee of 2% p.a. and a 4% p.a. restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of
Assignment of Receivables[7] in favor of SIHI as security for the
payment of its obligations to SIHI per the credit agreements. In
view of Deltas failure to pay, the loan agreements were
restructured under a Memorandum of Agreement dated March
31, 1982.[8] Delta obligated itself to pay a fixed monthly
amortization of P400,000 to SIHI and to discount with SIHI
P8,000,000 worth of receivables with the understanding that
SIHI shall apply the proceeds against Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta.
This prompted Delta to threaten CBLI with the enforcement of
the management takeover clause. To pre-empt the take-over,
CBLI filed on May 3, 1982, a complaint for injunction[9],
docketed as Civil Case No. 0023-P, with the Court of First
Instance of Rizal, Pasay City, (now Regional Trial Court of Pasay
City). In due time, Delta filed its amended answer with
applications for the issuance of a writ of preliminary mandatory
190
injunction to enforce the management takeover clause and a writ
of preliminary attachment over the buses it sold to CBLI.[10] On
December 27, 1982,[11] the trial court granted Deltas prayer for
issuance of a writ of preliminary mandatory injunction and
preliminary attachment on account of the fraudulent disposition
by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of
Agreement, Delta executed a Deed of Sale[12] assigning to SIHI
five (5) of the sixteen (16) promissory notes[13] from California
Bus Lines, Inc. At the time of assignment, these five promissory
notes, identified and numbered as 80-53, 80-54, 80-55, 80-56,
and 80-57, had a total value of P16,152,819.80 inclusive of
interest at 14% per annum.
SIHI subsequently sent a demand letter dated December 13,
1983,[14] to CBLI requiring CBLI to remit the payments due on
the five promissory notes directly to it. CBLI replied informing
SIHI of Civil Case No. 0023-P and of the fact that Delta had
taken over its management and operations.[15]
As regards Deltas remaining obligation to SIHI, Delta offered its
available bus units, valued at P27,067,162.22, as payment in
kind.[16] On December 29, 1983, SIHI accepted Deltas offer,
and Delta transferred the ownership of its available buses to
SIHI, which in turn acknowledged full payment of Deltas
remaining obligation.[17] When SIHI was unable to take
possession of the buses, SIHI filed a petition for recovery of
possession with prayer for issuance of a writ of replevin before
the RTC of Manila, Branch 6, docketed as Civil Case No. 84-
23019. The Manila RTC issued a writ of replevin and SIHI was
able to take possession of 17 bus units belonging to Delta. SIHI
applied the proceeds from the sale of the said 17 buses
amounting to P12,870,526.98 to Deltas outstanding obligation.
Deltas obligation to SIHI was thus reduced to P20,061,898.97.
On December 5, 1984, Branch 6 of the RTC of Manila rendered
judgment in Civil Case No. 84-23019 ordering Delta to pay SIHI
this amount.
Thereafter, Delta and CBLI entered into a compromise
agreement on July 24, 1984,[18] in Civil Case No. 0023-P, the
injunction case before the RTC of Pasay. CBLI agreed that Delta
would exercise its right to extrajudicially foreclose on the chattel
mortgages over the 35 bus units. The RTC of Pasay approved
this compromise agreement the following day, July 25, 1984.[19]
Following this, CBLI vehemently refused to pay SIHI the value of
the five promissory notes, contending that the compromise
agreement was in full settlement of all its obligations to Delta
including its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil
Case No. 84-28505, against CBLI in the Regional Trial Court of
Manila, Branch 34, to collect on the five (5) promissory notes
with interest at 14% p.a. SIHI also prayed for the issuance of a
writ of preliminary attachment against the properties of CBLI.
[20]
On December 28, 1984, Delta filed a petition for extrajudicial
foreclosure of chattel mortgages pursuant to its compromise
agreement with CBLI. On January 2, 1985, Delta filed in the RTC
of Pasay a motion for execution of the judgment based on the
compromise agreement.[21] The RTC of Pasay granted this
motion the following day.[22]
In view of Deltas petition and motion for execution per the
judgment of compromise, the RTC of Manila granted in Civil Case
No. 84-28505 SIHIs application for preliminary attachment on
January 4, 1985.[23] Consequently, SIHI was able to attach and
physically take possession of thirty-two (32) buses belonging to
CBLI.[24] However, acting on CBLIs motion to quash the writ of
preliminary attachment, the same court resolved on January 15,
1986,[25] to discharge the writ of preliminary attachment. SIHI
assailed the discharge of the writ before the Intermediate
Appellate Court (now Court of Appeals) in a petition for certiorari
and prohibition, docketed as CA-G.R. SP No. 08378. On July 31,

1987, the Court of Appeals granted SIHIs petition in CA-GR SP
No. 08378 and ruled that the writ of preliminary attachment
issued by Branch 34 of the RTC Manila in Civil Case No. 84-
28505 should stay.[26] The decision of the Court of Appeals
attained finality on August 22, 1987.[27]
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of
Pasay, the sheriff of Pasay City conducted a public auction and
issued a certificate of sheriffs sale to Delta on April 2, 1987,
attesting to the fact that Delta bought 14 of the 35 buses for
P3,920,000.[28] On April 7, 1987, the sheriff of Manila, by virtue
of the writ of execution dated March 27, 1987, issued by Branch
6 of the RTC of Manila in Civil Case No. 84-23019, sold the same
14 buses at public auction in partial satisfaction of the judgment
SIHI obtained against Delta in Civil Case No. 84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to
Branch 13 of the RTC of Manila in view of the retirement of the
presiding judge of Branch 34. Subsequently, SIHI moved to sell
the sixteen (16) buses of CBLI which had previously been
attached by the sheriff in Civil Case No. 84-28505 pursuant to
the January 4, 1985, Order of the RTC of Manila.[29] SIHIs
motion was granted on December 16, 1987.[30] On November
29, 1988, however, SIHI filed an urgent ex-parte motion to
amend this order claiming that through inadvertence and
excusable negligence of its new counsel, it made a mistake in the
list of buses in the Motion to Sell Attached Properties it had
earlier filed.[31] SIHI explained that 14 of the buses listed had
already been sold to Delta on April 2, 1987, by virtue of the
January 3, 1985 Order of the RTC of Pasay, and that two of the
buses listed had been released to third party, claimant Pilipinas
Bank, by Order dated September 16, 1987[32] of Branch 13 of
the RTC of Manila.
CBLI opposed SIHIs motion to allow the sale of the 16 buses. On
May 3, 1989,[33] Branch 13 of the RTC of Manila denied SIHIs
urgent motion to allow the sale of the 16 buses listed in its
motion to amend. The trial court ruled that the best interest of
the parties might be better served by denying further sales of
the buses and to go direct to the trial of the case on the merits.
[34]
After trial, judgment was rendered in Civil Case No. 84-28505 on
June 3, 1993, discharging CBLI from liability on the five
promissory notes. The trial court likewise favorably ruled on
CBLIs compulsory counterclaim. The trial court directed SIHI to
return the 16 buses or to pay CBLI P4,000,000 representing the
value of the seized buses, with interest at 12% p.a. to begin
from January 11, 1985, the date SIHI seized the buses, until
payment is made. In ruling against SIHI, the trial court held that
the restructuring agreement dated October 7, 1981, between
Delta and CBLI novated the five promissory notes; hence, at the
time Delta assigned the five promissory notes to SIHI, the notes
were already merged in the restructuring agreement and cannot
be enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was
docketed as CA-G.R. CV No. 52667. On April 17, 2001, the Court
of Appeals decided CA-G.R. CV No. 52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the
appeal to be meritorious, We find defendant-appellee CBLI liable
for the value of the five (5) promissory notes subject of the
complaint a quo less the proceeds from the attached sixteen (16)
buses. The award of attorneys fees and costs is eliminated. The
appealed decision is hereby REVERSED. No costs.
SO ORDERED.[35]
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE
RESTRUCTURING AGREEMENT BETWEEN DELTA AND THE
PETITIONER DID NOT SUBSTANTIALLY NOVATE THE TERMS OF
THE FIVE PROMISSORY NOTES.
191
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE
COMPROMISE AGREEMENT BETWEEN DELTA AND THE
PETITIONER IN THE PASAY CITY CASE DID NOT SUPERSEDE
AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE
CONTINUING VALIDITY OF THE PRELIMINARY ATTACHMENT AND
EXONERATING THE RESPONDENT OF MALEFACTIONS IN
PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER.[36]
Essentially, the issues are (1) whether the Restructuring
Agreement dated October 7, 1981, between petitioner CBLI and
Delta Motors, Corp. novated the five promissory notes Delta
Motors, Corp. assigned to respondent SIHI, and (2) whether the
compromise agreement in Civil Case No. 0023-P superseded
and/or discharged the subject five promissory notes. The issues
being interrelated, they shall be jointly discussed.
CBLI first contends that the Restructuring Agreement did not
merely change the incidental elements of the obligation under all
sixteen (16) promissory notes, but it also increased the
obligations of CBLI with the addition of new obligations that were
incompatible with the old obligations in the said notes.[37] CBLI
adds that even if the restructuring agreement did not totally
extinguish the obligations under the sixteen (16) promissory
notes, the July 24, 1984, compromise agreement executed in
Civil Case No. 0023-P did.[38] CBLI cites paragraph 5 of the
compromise agreement which states that the agreement
between it and CBLI was in full and final settlement, adjudication
and termination of all their rights and obligations as of the date
of (the) agreement, and of the issues in (the) case. According to
CBLI, inasmuch as the five promissory notes were subject
matters of the Civil Case No. 0023-P, the decision approving the
compromise agreement operated as res judicata in the present
case.[39]
Novation has been defined as the extinguishment of an
obligation by the substitution or change of the obligation by a
subsequent one which terminates the first, either by changing
the object or principal conditions, or by substituting the person of
the debtor, or subrogating a third person in the rights of the
creditor.[40]
Novation, in its broad concept, may either be extinctive or
modificatory.[41] It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old
obligation subsists to the extent it remains compatible with the
amendatory agreement.[42] An extinctive novation results either
by changing the object or principal conditions (objective or real),
or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor (subjective or personal).[43]
Novation has two functions: one to extinguish an existing
obligation, the other to substitute a new one in its place.[44] For
novation to take place, four essential requisites have to be met,
namely, (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of
the old obligation; and (4) the birth of a valid new obligation.
[45]
Novation is never presumed,[46] and the animus novandi,
whether totally or partially, must appear by express agreement
of the parties, or by their acts that are too clear and unequivocal
to be mistaken.[47]
The extinguishment of the old obligation by the new one is a
necessary element of novation which may be effected either
expressly or impliedly.[48] The term "expressly" means that the
contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one.[49]
Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an
incompatibility between the two contracts.[50] While there is
really no hard and fast rule to determine what might constitute

to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of
novation and thereby produce the effect of extinguishing an
obligation by another which substitutes the same. The first is
when novation has been explicitly stated and declared in
unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of
incompatibility is whether the two obligations can stand together,
each one having its independent existence.[51] If they cannot,
they are incompatible and the latter obligation novates the first.
[52] Corollarily, changes that breed incompatibility must be
essential in nature and not merely accidental. The incompatibility
must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions
thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation.[53]
The necessity to prove the foregoing by clear and convincing
evidence is accentuated where the obligation of the debtor
invoking the defense of novation has already matured.[54]
With respect to obligations to pay a sum of money, this Court
has consistently applied the well-settled rule that the obligation
is not novated by an instrument that expressly recognizes the
old, changes only the terms of payment, and adds other
obligations not incompatible with the old ones, or where the new
contract merely supplements the old one.[55]
In Inchausti & Co. v. Yulo[56] this Court held that an obligation
to pay a sum of money is not novated in a new instrument
wherein the old is ratified, by changing only the term of payment
and adding other obligations not incompatible with the old one.
In Tible v. Aquino[57] and Pascual v. Lacsamana[58] this Court
declared that it is well settled that a mere extension of payment
and the addition of another obligation not incompatible with the
old one is not a novation thereof.
In this case, the attendant facts do not make out a case of
novation. The restructuring agreement between Delta and CBLI
executed on October 7, 1981, shows that the parties did not
expressly stipulate that the restructuring agreement novated the
promissory notes. Absent an unequivocal declaration of
extinguishment of the pre-existing obligation, only a showing of
complete incompatibility between the old and the new obligation
would sustain a finding of novation by implication.[59] However,
our review of its terms yields no incompatibility between the
promissory notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on
September 13, 1983, contained the following common
stipulations:
1. They were payable in 60 monthly installments up to July 31,
1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments would render the entire
remaining balance due and payable at the option of the holder of
the notes;
4. In case of judicial collection on the notes, the maker (CBLI)
and co-maker (its president, Mr. Dionisio O. Llamas, Jr) were
solidarily liable of attorneys fees and expenses of 25% of the
amount due in addition to the costs of suit.
The restructuring agreement, for its part, had the following
provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on
the following promissory notes:
192
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 P1,105,353.00
WHEREAS, the parties agreed to restructure the above-
mentioned past due installments under the following terms and
conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in consideration of the foregoing
premises, the parties hereby agree and covenant as follows:
1. That the past due installment referred to above plus the
current and/or falling due amortization as of October 1, 1981 for
Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by
CBL and/or LLAMAS in accordance with the following schedule of
payments:
Daily payments of P11,000.00 from
October 1 to December 31, 1981
Daily payments of P12,000.00 from
January 1, 1982 to March 31, 1982
Daily payments of P13,000.00 from
April 1, 1982 to June 30, 1982
Daily payments of P14,000.00 from
July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from
October 1, 1982 to December 31, 1982
Daily payments of P16,000.00 from
January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from
July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m.
everyday the daily cash payments due to DMC in accordance
with the schedule in paragraph 1. DMC may send a collector to
receive the amount due at CBLs premises. All delayed
remittances shall be charged additional 2% penalty interest per
month.
3. All payments shall be applied to amortizations and penalties
due in accordance with paragraph of the restructured past due
installments above mentioned and PN Nos. 16 to 26 and 52 to
57.
4. DMC may at anytime assign and/or send its representatives to
monitor the operations of CBL pertaining to the financial and field

operations and service and maintenance matters of M.A.N. units.
Records needed by the DMC representatives in monitoring said
operations shall be made available by CBL and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN
Nos. 16 to 26 and 52 to 57, CBL or LLAMAS shall remit in lump
sum whatever balance is left after deducting all payments made
from what is due and payable to DMC in accordance with
paragraph 1 of this agreement and PN Nos. 16 to 26 and 52 to
57.
6. In the event that CBL and LLAMAS fail to remit the daily
remittance agreed upon and the total accumulated unremitted
amount has reached and (sic) equivalent of Sixty (60) days, DMC
and Silverio shall exercise any or all of the following options:
(a) The whole sum remaining then unpaid plus 2% penalty per
month and 16% interest per annum on total past due
installments will immediately become due and payable. In the
event of judicial proceedings to enforce collection, CBL and
LLAMAS will pay to DMC an additional sum equivalent to 25% of
the amount due for attorneys fees and expenses of collection,
whether actually incurred or not, in addition to the cost of suit;
(b) To enforce in accordance with law, their rights under the
Chattel Mortgage over various M.A.N. Diesel bus with Nos. CU
80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or
(c) To take over management and operations of CBL until such
time that CBL and/or LLAMAS have remitted and/or updated
their past due account with DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of
spare parts for the M.A.N. Diesel Buses and shall make available
to CBL at the price prevailing at the time of purchase, an
inventory of spare parts consisting of at least ninety (90%)
percent of the needs of CBL based on a moving 6-month
requirement to be prepared and submitted by CBL, and
acceptable to DMC, within the first week of each month.
8. Except as otherwise modified in this Agreement, the terms
and conditions stipulated in PN Nos. 16 to 26 and 52 to 57 shall
continue to govern the relationship between the parties and that
the Chattel Mortgage over various M.A.N. Diesel Buses with Nos.
CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and CM No.
80-15 as well as the Deed of Pledge executed by Mr. Llamas shall
continue to secure the obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its
previous request to Notary Public Alberto G. Doller and to
instruct him not to proceed with the public auction sale of the
shares of stock of CBL subject-matter of the Deed of Pledge of
Shares. LLAMAS, on the other hand, undertakes to move for the
immediate dismissal of Civil Case No. 9460-P entitled Dionisio O.
Llamas vs. Alberto G. Doller, et al., Court of First Instance of
Pasay, Branch XXIX.[60]
It is clear from the foregoing that the restructuring agreement,
instead of containing provisions absolutely incompatible with the
obligations of the judgment, expressly ratifies such obligations in
paragraph 8 and contains provisions for satisfying them. There
was no change in the object of the prior obligations. The
restructuring agreement merely provided for a new schedule of
payments and additional security in paragraph 6 (c) giving Delta
authority to take over the management and operations of CBLI in
case CBLI fails to pay installments equivalent to 60 days. Where
the parties to the new obligation expressly recognize the
continuing existence and validity of the old one, there can be no
novation.[61] Moreover, this Court has ruled that an agreement
subsequently executed between a seller and a buyer that
provided for a different schedule and manner of payment, to
restructure the mode of payments by the buyer so that it could
settle its outstanding obligation in spite of its delinquency in
payment, is not tantamount to novation. [62]
193
The addition of other obligations likewise did not extinguish the
promissory notes. In Young v. CA[63], this Court ruled that a
change in the incidental elements of, or an addition of such
element to, an obligation, unless otherwise expressed by the
parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the
promissory notes.
Neither is there merit in CBLIs argument that the compromise
agreement dated July 24, 1984, in Civil Case No. 0023-P
superseded and/or discharged the five promissory notes. Both
Delta and CBLI cannot deny that the five promissory notes were
no longer subject of Civil Case No. 0023-P when they entered
into the compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI,
Delta had no more right to compromise the same. Deltas limited
authority to collect for SIHI stipulated in the September 13,
1985, Deed of Sale cannot be construed to include the power to
compromise CBLIs obligations in the said promissory notes. An
authority to compromise, by express provision of Article
1878[64] of the Civil Code, requires a special power of attorney,
which is not present in this case. Incidentally, Deltas authority to
collect in behalf of SIHI was, by express provision of the
Continuing Deed of Assignment,[65] automatically revoked when
SIHI opted to collect directly from CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983,
requiring CBLI to remit the payments directly to SIHI effectively
revoked Deltas limited right to collect in behalf of SIHI. This
should have dispelled CBLIs erroneous notion that Delta was
acting in behalf of SIHI, with authority to compromise the five
promissory notes.
But more importantly, the compromise agreement itself provided
that it covered the rights and obligations only of Delta and CBLI
and that it did not refer to, nor cover the rights of, SIHI as the
new creditor of CBLI in the subject promissory notes. CBLI and
Delta stipulated in paragraph 5 of the agreement that:
5. This COMPROMISE AGREEMENT constitutes the entire
understanding by and between the plaintiffs and the defendants
as well as their lawyers, and operates as full and final
settlement, adjudication and termination of all their rights and
obligations as of the date of this agreement, and of the issues in
this case.[66]
Even in the absence of such a provision, the compromise
agreement still cannot bind SIHI under the settled rule that a
compromise agreement determines the rights and obligations of
only the parties to it.[67] Therefore, we hold that the
compromise agreement covered the rights and obligations only
of Delta and CBLI and only with respect to the eleven (11) other
promissory notes that remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the
compromise agreement because SIHI failed to intervene in Civil
Case No. 0023-P after CBLI informed it of the takeover by Delta
of CBLIs management and operations and the resultant
impossibility for CBLI to comply with its obligations in the subject
promissory notes. CBLI also adds that SIHIs failure to intervene
in Civil Case No. 0023-P is proof that Delta continued to act in
SIHIs behalf in effecting collection under the notes.
The contention is untenable. As a result of the assignment, Delta
relinquished all its rights to the subject promissory notes in favor
of SIHI. This had the effect of separating the five promissory
notes from the 16 promissory notes subject of Civil Case No.
0023-P. From that time, CBLIs obligations to SIHI embodied in
the five promissory notes became separate and distinct from
CBLIs obligations in eleven (11) other promissory notes that
remained with Delta. Thus, any breach of these independent
obligations gives rise to a separate cause of action in favor of
SIHI against CBLI. Considering that Deltas assignment to SIHI of

these five promissory notes had the effect of removing the said
notes from Civil Case No. 0023-P, there was no reason for SIHI
to intervene in the said case. SIHI did not have any interest to
protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and
permissive.[68] Notably, Section 2,[69] Rule 12 of the then 1988
Revised Rules of Procedure uses the word may in defining the
right to intervene. The present rules maintain the permissive
nature of intervention in Section 1, Rule 19 of the 1997 Rules of
Civil Procedure, which provides as follows:
SEC. 1. Who may intervene.A person who has a legal interest in
the matter in litigation, or in the success of either of the parties,
or an interest against both, or is so situated as to be adversely
affected by a distribution or other disposition of property in the
custody of the court or of an officer thereof may, with leave of
court, be allowed to intervene in the action. The court shall
consider whether or not the intervention will unduly delay or
prejudice the adjudication of the rights of the original parties,
and whether or not the intervenor's rights may be fully protected
in a separate proceeding.[70]
Also, recall that Delta transferred the five promissory notes to
SIHI on September 13, 1983 while Civil Case No. 0023-P was
pending. Then as now, the rule in case of transfer of interest
pendente lite is that the action may be continued by or against
the original party unless the court, upon motion, directs the
person to whom the interest is transferred to be substituted in
the action or joined with the original party.[71] The non-inclusion
of a necessary party does not prevent the court from proceeding
in the action, and the judgment rendered therein shall be without
prejudice to the rights of such necessary party.[72]
In light of the foregoing, SIHIs refusal to intervene in Civil Case
No. 0023-P in another court does not amount to an estoppel that
may prevent SIHI from instituting a separate and independent
action of its own.[73] This is especially so since it does not
appear that a separate proceeding would be inadequate to
protect fully SIHIs rights.[74] Indeed, SIHIs refusal to intervene
is precisely because it considered that its rights would be better
protected in a separate and independent suit.
The judgment on compromise in Civil Case No. 0023-P did not
operate as res judicata to prevent SIHI from prosecuting its
claims in the present case. As previously discussed, the
compromise agreement and the judgment on compromise in Civil
Case No. 0023-P covered only Delta and CBLI and their
respective rights under the 11 promissory notes not assigned to
SIHI. In contrast, the instant case involves SIHI and CBLI and
the five promissory notes. There being no identity of parties and
subject matter, there is no res judicata.
CBLI maintains, however, that in any event, recovery under the
subject promissory notes is no longer allowed by Article 1484(3)
[75] of the Civil Code, which prohibits a creditor from suing for
the deficiency after it has foreclosed on the chattel mortgages.
SIHI, being the successor-in-interest of Delta, is no longer
allowed to recover on the promissory notes given as security for
the purchase price of the 35 buses because Delta had already
extrajudicially foreclosed on the chattel mortgages over the said
buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The
extrajudicial foreclosure of the chattel mortgages Delta effected
cannot prejudice SIHIs rights. As stated earlier, the assignment
of the five notes operated to create a separate and independent
obligation on the part of CBLI to SIHI, distinct and separate from
CBLIs obligations to Delta. And since there was a previous
revocation of Deltas authority to collect for SIHI, Delta was no
longer SIHIs collecting agent. CBLI, in turn, knew of the
assignment and Deltas lack of authority to compromise the
subject notes, yet it readily agreed to the foreclosure. To
194
sanction CBLIs argument and to apply Article 1484 (3) to this
case would work injustice to SIHI by depriving it of its right to
collect against CBLI who has not paid its obligations.
That SIHI later on levied on execution and acquired in the
ensuing public sale in Civil Case No. 84-23019 the buses Delta
earlier extrajudicially foreclosed on April 2, 1987, in Civil Case
No. 0023-P, did not operate to render the compromise
agreement and the foreclosure binding on SIHI. At the time SIHI
effected the levy on execution to satisfy its judgment credit
against Delta in Civil Case No. 84-23019, the said buses already
pertained to Delta by virtue of the April 2, 1987 auction sale.
CBLI no longer had any interest in the said buses. Under the
circumstances, we cannot see how SIHIs belated acquisition of
the foreclosed buses operates to hold the compromise
agreementand consequently Article 1484(3)applicable to SIHI as
CBLI contends. CBLIs last contention must, therefore, fail. We
hold that the writ of execution to enforce the judgment of
compromise in Civil Case No. 0023-P and the foreclosure sale of
April 2, 1987, done pursuant to the said writ of execution
affected only the eleven (11) other promissory notes covered by
the compromise agreement and the judgment on compromise in
Civil Case No. 0023-P.
In support of its third assignment of error, CBLI maintains that
there was no basis for SIHIs application for a writ of preliminary
attachment.[76] According to CBLI, it committed no fraud in
contracting its obligation under the five promissory notes
because it was financially sound when it issued the said notes on
April 25, 1980.[77] CBLI also asserts that at no time did it falsely
represent to SIHI that it would be able to pay its obligations
under the five promissory notes.[78] According to CBLI, it was
not guilty of fraudulent concealment, removal, or disposal, or of
fraudulent intent to conceal, remove, or dispose of its properties
to defraud its creditors;[79] and that SIHIs bare allegations on
this matter were insufficient for the preliminary attachment of
CBLIs properties.[80]
The question whether the attachment of the sixteen (16) buses
was valid and in accordance with law, however, has already been
resolved with finality by the Court of Appeals in CA-G.R. SP No.
08376. In its July 31, 1987, decision, the Court of Appeals
upheld the legality of the writ of preliminary attachment SIHI
obtained and ruled that the trial court judge acted with grave
abuse of discretion in discharging the writ of attachment despite
the clear presence of a determined scheme on the part of CBLI
to dispose of its property. Considering that the said Court of
Appeals decision has already attained finality on August 22,
1987, there exists no reason to resolve this question anew.
Reasons of public policy, judicial orderliness, economy and
judicial time and the interests of litigants as well as the peace
and order of society, all require that stability be accorded the
solemn and final judgments of courts or tribunals of competent
jurisdiction.[81]
Finally, in the light of the justness of SIHIs claim against CBLI,
we cannot sustain CBLIs contention that the Court of Appeals
erred in dismissing its counterclaim for lost income and the value
of the 16 buses over which SIHI obtained a writ of preliminary
attachment. Where the party who requested the attachment
acted in good faith and without malice, the claim for damages
resulting from the attachment of property cannot be sustained.
[82]
WHEREFORE, the decision dated April 17, 2001, of the Court of
Appeals in CA-G.R. CV No. 52667 is AFFIRMED. Petitioner
California Bus Lines, Inc., is ORDERED to pay respondent State
Investment House, Inc., the value of the five (5) promissory
notes subject of the complaint in Civil Case No. 84-28505 less
the proceeds from the sale of the attached sixteen (16) buses.
No pronouncement as to costs.
SO ORDERED.
FIRST DIVISION
 195
In their Pre-Trial Brief, the spouses Tibong maintained that they
G.R. No. 166704 December 20, 2006 have never obtained any loan from Agrifina without the benefit of
a written document.8
AGRIFINA AQUINTEY, petitioner,
vs. On August 17, 2000, the trial court issued a Pre-Trial Order
SPOUSES FELICIDAD AND RICO TIBONG, respondents. where the following issues of the case were defined:

Whether or not plaintiff is entitled to her claim of P773,000.00;

DECISION
CALLEJO, SR., J.:
Before us is a petition for review under Rule 45 of the Revised
Rules on Civil Procedure of the Decision1 of the Court of Appeals
in CA-G.R. CV No. 78075, which affirmed with modification the
Decision2 of the Regional Trial Court (RTC), Branch 61, Baguio
City, and the Resolution3 of the appellate court denying
reconsideration thereof.
The Antecedents
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC
of Baguio City, a complaint for sum of money and damages
against the respondents, spouses Felicidad and Rico Tibong.
Agrifina alleged that Felicidad had secured loans from her on
several occasions, at monthly interest rates of 6% to 7%.
Despite demands, the spouses Tibong failed to pay their
outstanding loan, amounting to P773,000.00 exclusive of
interests. The complaint contained the following prayer:
WHEREFORE, premises considered, it is most respectfully prayed
of this Honorable Court, after due notice and hearing, to render
judgment ordering defendants to pay plaintiff the following:
a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS
(P773,000.00) representing the principal obligation of the
defendants with the stipulated interests of six (6%) percent per
month from May 11, 1999 to date and or those that are
stipulated on the contracts as mentioned from paragraph two (2)
of the complaint.
Whether or not plaintiff is entitled to stipulated interests in the
promissory notes; and
Whether or not the parties are entitled to their claim for
damages.9
The Case for Petitioner
Agrifina and Felicidad were classmates at the University of
Pangasinan. Felicidad's husband, Rico, also happened to be a
distant relative of Agrifina. Upon Felicidad's prodding, Agrifina
agreed to lend money to Felicidad. According to Felicidad,
Agrifina would be earning interests higher than those given by
the bank for her money. Felicidad told Agrifina that since she
(Felicidad) was engaged in the sale of dry goods at the GP
Shopping Arcade, she would use the money to buy bonnels and
thread.10 Thus, Agrifina lent a total sum of P773,000.00 to
Felicidad, and each loan transaction was covered by either a
promissory note or an acknowledgment receipt.11 Agrifina stated
that she had lost the receipts signed by Felicidad for the
following amounts: P100,000.00, P34,000.00 and P2,000.00.12
The particulars of the transactions are as follows:
Amount
Date Obtained
Interest Per Mo.
Due Date
P 100,000.00

b). FIFTEEN PERCENT (15%) of the total accumulated obligations May 11, 1989
as attorney's fees.
6%
c). Actual expenses representing the filing fee and other charges
and expenses to be incurred during the prosecution of this case. August 11, 1989

Further prays for such other relief and remedies just and 4,000.00
equitable under the premises.4
June 8, 1989
Agrifina appended a copy of the Counter-Affidavit executed by
Felicidad in I.S. No. 93-334, as well as copies of the promissory -
notes and acknowledgment receipts executed by Felicidad
covering the loaned amounts.5 -

In their Answer with Counterclaim,6 spouses Tibong admitted 50,000.00

that they had secured loans from Agrifina. The proceeds of the
loan were then re-lent to other borrowers at higher interest June 13, 1989
rates. They, likewise, alleged that they had executed deeds of
assignment in favor of Agrifina, and that their debtors had 6%
executed promissory notes in Agrifina's favor. According to the
spouses Tibong, this resulted in a novation of the original On demand
obligation to Agrifina. They insisted that by virtue of these
documents, Agrifina became the new collector of their debtors; 60,000.00
and the obligation to pay the balance of their loans had been
extinguished. Aug. 16, 1989

The spouses Tibong specifically denied the material averments in 7%

paragraphs 2 and 2.1 of the complaint. While they did not state
the total amount of their loans, they declared that they did not January 1990
receive anything from Agrifina without any written receipt.7 They
prayed for that the complaint be dismissed. 205,000.00

Oct. 13, 1989

 196
Agrifina, Felicidad, and the latter's debtors had a conference20
7% where Atty. A-ayo explained that Agrifina could apply her
collections as payments of Felicidad's account.21
January 1990
From August 7, 1990 to October, 1990, Felicidad executed deeds
128,000.00 of assignment of credits (obligations)22 duly notarized by Atty.
A-ayo, in which Felicidad transferred and assigned to Agrifina the
Oct. 19, 1989 total amount of P546,459.00 due from her debtors.23 In the said
deeds, Felicidad confirmed that her debtors were no longer
7% indebted to her for their respective loans. For her part, Agrifina
conformed to the deeds of assignment relative to the loans of
January 1990 Virginia Morada and Corazon Dalisay.24 She was furnished
copies of the deeds as well as the promissory notes.25
2,000.00
The following debtors of Felicidad executed promissory notes
Nov. 12, 1989 where they obliged themselves to pay directly to Agrifina:

6% Debtors

April 28, 1990 Account

10,000.00 Date of Instrument

June 13, 1990 Date Payable

- Juliet & Tommy Tibong

- P50,000.00

80,000.00 August 7, 1990

Jan. 4, 1990 November 4, 1990 and February 4, 1991

- Corazon Dalisay

- 8,000.00

34,000.00 August 7, 1990

- No date

6% Rita Chomacog

October 19, 1989 4,480.00

100,000.00 August 8, 1990

July 14, 1989 September 23, 1990

5% Antoinette Manuel

October 198913 12,000.00

According to Agrifina, Felicidad was able to pay only her loans October 19, 1990
amounting to P122,600.00.14
March 30, 1991
In July 1990, Felicidad gave to Agrifina City Trust Bank Check
No. 126804 dated August 25, 1990 in the amount of P50,000.00 Rosemarie Bandas
as partial payment.15 However, the check was dishonored for
having been drawn against insufficient funds.16 Agrifina then 8,000.00
filed a criminal case against Felicidad in the Office of the City
Prosecutor. An Information for violation of Batas Pambansa August 8, 1990
Bilang 22 was filed against Felicidad, docketed as Criminal Case
No. 11181-R. After trial, the court ordered Felicidad to pay February 3, 1991
P50,000.00. Felicidad complied and paid the face value of the
check.17 Fely Cirilo

In the meantime, Agrifina learned that Felicidad had re-loaned 63,600.00

the amounts to other borrowers.18 Agrifina sought the
assistance of Atty. Torres G. A-ayo who advised her to require September 13, 1990
Felicidad to execute deeds of assignment over Felicidad's
debtors. The lawyer also suggested that Felicidad's debtors No date
execute promissory notes in Agrifina's favor, to "turn over" their
loans from Felicidad. This arrangement would facilitate collection Virginia Morada
of Felicidad's account. Agrifina agreed to the proposal.19

62,379.00
August 9, 1990
February 9, 1991
Carmelita Casuga
59,000.00
August 28, 1990
February 28, 1991
Merlinda Gelacio
17,200.00
August 29, 1990
November 29, 199026
Total
P284,659.00
Agrifina narrated that Felicidad showed to her the way to the
debtors' houses to enable her to collect from them. One of the
debtors, Helen Cabang, did not execute any promissory note but
conformed to the Deed of Assignment of Credit which Felicidad
executed in favor of Agrifina.27 Eliza Abance conformed to the
deed of assignment for and in behalf of her sister, Fely Cirilo.28
Edna Papat-iw was not able to affix her signature on the deed of
assignment nor sign the promissory note because she was in
Taipei, Taiwan.29
Following the execution of the deeds of assignment and
promissory notes, Agrifina was able to collect the total amount of
P301,000.00 from Felicidad's debtors.30 In April 1990, she tried
to collect the balance of Felicidad's account, but the latter told
her to wait until her debtors had money.31 When Felicidad
reneged on her promise, Agrifina filed a complaint in the Office of
the Barangay Captain for the collection of P773,000.00.
However, no settlement was arrived at.32
The Case for Respondents
Felicidad testified that she and her friend Agrifina had been
engaged in the money-lending business.33 Agrifina would lend
her money with monthly interest,34 and she, in turn, would re-
lend the money to borrowers at a higher interest rate. Their
business relationship turned sour when Agrifina started
complaining that she (Felicidad) was actually earning more than
Agrifina.35 Before the respective maturity dates of her debtors'
loans, Agrifina asked her to pay her account since Agrifina
needed money to buy a house and lot in Manila. However, she
told Agrifina that she could not pay yet, as her debtors' loan
payments were not yet due.36 Agrifina then came to her store
every afternoon to collect from her, and persuaded her to go to
Atty. Torres G. A-ayo for legal advice.37 The lawyer suggested
that she indorse the accounts of her debtors to Agrifina so that
the latter would be the one to collect from her debtors and she
would no longer have any obligation to Agrifina.38 She then
executed deeds of assignment in favor of Agrifina covering the
sums of money due from her debtors. She signed the deeds
prepared by Atty. A-ayo in the presence of Agrifina.39 Some of
the debtors signed the promissory notes which were likewise
prepared by the lawyer. Thereafter, Agrifina personally collected
from Felicidad's debtors.40 Felicidad further narrated that she
received P250,000.00 from one of her debtors, Rey Rivera, and
remitted the payment to Agrifina.41
Agrifina testified, on rebuttal, that she did not enter into a re-
lending business with Felicidad. When she asked Felicidad to
consolidate her loans in one document, the latter told her to seek
197
the assistance of Atty. A-ayo.42 The lawyer suggested that
Felicidad assign her credits in order to help her collect her
loans.43 She agreed to the deeds of assignment to help Felicidad
collect from the debtors.44
On January 20, 2003, the trial court rendered its Decision45 in
favor of Agrifina. The fallo of the decision reads:
WHEREFORE, judgment is rendered in favor of the plaintiff and
against the defendants ordering the latter to pay the plaintiffs
(sic) the following amounts:
1. P472,000 as actual obligation with the stipulated interest of
6% per month from May 11, 1999 until the said obligation is fully
paid. However, the amount of P50,000 shall be deducted from
the total accumulated interest for the same was already paid by
the defendant as admitted by the plaintiff in her complaint,
2. P25,000 as attorney's fees,
3. [T]o pay the costs.
SO ORDERED.46
The trial court ruled that Felicidad's obligation had not been
novated by the deeds of assignment and the promissory notes
executed by Felicidad's borrowers. It explained that the
documents did not contain any express agreement to novate and
extinguish Felicidad's obligation. It declared that the deeds and
notes were separate contracts which could stand alone from the
original indebtedness of Felicidad. Considering, however,
Agrifina's admission that she was able to collect from Felicidad's
debtors the total amount of P301,000.00, this should be
deducted from the latter's accountability.47 Hence, the balance,
exclusive of interests, amounted to P472,000.00.
On appeal, the CA affirmed with modification the decision of the
RTC and stated that, based on the promissory notes and
acknowledgment receipts signed by Felicidad, the appellants
secured loans from the appellee in the total principal amount of
only P637,000.00, not P773,000.00 as declared by the trial
court. The CA found that, other than Agrifina's bare testimony
that she had lost the promissory notes and acknowledgment
receipts, she failed to present competent documentary evidence
to substantiate her claim that Felicidad had, likewise, borrowed
the amounts of P100,000.00, P34,000.00, and P2,000.00. Of the
P637,000.00 total account, P585,659.00 was covered by the
deeds of assignment and promissory notes; hence, the balance
of Felicidad's account amounted to only P51,341.00. The fallo of
the decision reads:
WHEREFORE, in view of the foregoing, the decision dated
January 20, 2003 of the RTC, Baguio City, Branch 61 in Civil
Case No. 4370-R is hereby MODIFIED. Defendants-appellants are
hereby ordered to pay the balance of the total indebtedness in
the amount of P51,341.00 plus the stipulated interest of 6% per
month from May 11, 1999 until the finality of this decision.
SO ORDERED.48
The appellate court sustained the trial court's ruling that
Felicidad's obligation to Agrifina had not been novated by the
deeds of assignment and promissory notes executed in the
latter's favor. Although Agrifina was subrogated as a new
creditor in lieu of Felicidad, Felicidad's obligation to Agrifina
under the loan transaction remained; there was no intention on
their part to novate the original obligation. Nonetheless, the
appellate court held that the legal effects of the deeds of
assignment could not be totally disregarded. The assignments of
credits were onerous, hence, had the effect of payment, pro
tanto, of the outstanding obligation. The fact that Agrifina never
repudiated or rescinded such assignments only shows that she
had accepted and conformed to it. Consequently, she cannot
collect both from Felicidad and her individual debtors without
running afoul to the principle of unjust enrichment. Agrifina's

primary recourse then is against Felicidad's individual debtors on
the basis of the deeds of assignment and promissory notes.
The CA further declared that the deeds of assignment executed
by Felicidad had the effect of payment of her outstanding
obligation to Agrifina in the amount of P585,659.00. It ruled that,
since an assignment of credit is in the nature of a sale, the
assignors remained liable for the warranties as they are
responsible for the existence and legality of the credit at the time
of the assignment.
Both parties moved to have the decision reconsidered,49 but the
appellate court denied both motions on December 21, 2004.50
Agrifina, now petitioner, filed the instant petition, contending
that
1. The Honorable Court of Appeals erred in ruling that the deeds
of assignment in favor of petitioner has the effect of payment of
the original obligation even as it ruled out that the original
obligation and the assigned credit are distinct and separate and
can stand independently from each other;
2. The Honorable Court of Appeals erred in passing upon issues
raised for the first time on appeal; and
3. The Honorable Court of Appeals erred in resolving fact not in
issue.51
Petitioner avers that the appellate court erred in ruling that
respondents' original obligation amounted to only P637,000.00
(instead of P773,000.00) simply because she lost the promissory
notes/receipts which evidenced the loans executed by
respondent Felicidad Tibong. She insists that the issue of
whether Felicidad owed her less than P773,000.00 was not raised
by respondents during pre-trial and in their appellate brief; the
appellate court was thus proscribed from taking cognizance of
the issue.
Petitioner avers that respondents failed to deny, in their verified
answer, that they had secured the P773,000.00 loan; hence,
respondents are deemed to have admitted the allegation in the
complaint that the loans secured by respondent from her
amounted to P773,000.00. As gleaned from the trial court's pre-
trial order, the main issue is whether or not she should be made
to pay this amount.
Petitioner further maintains that the CA erred in deducting the
total amount of P585,659.00 covered by the deeds of assignment
executed by Felicidad and the promissory notes executed by the
latter's debtors, and that the balance of respondents' account
was only P51,341.00. Moreover, the appellate court's ruling that
there was no novation runs counter to its holding that the
primary recourse was against Felicidad's debtors. Petitioner avers
that of the 11 deeds of assignment and promissory notes, only
two bore her signature.52 She insists that she is not bound by
the deeds which she did not sign. By assigning the obligation to
pay petitioner their loan accounts, Felicidad's debtors merely
assumed the latter's obligation and became co-debtors to
petitioner. Respondents were not released from their obligation
under their loan transactions, and she had the option to demand
payment from them or their debtors. Citing the ruling of this
Court in Magdalena Estates, Inc. v. Rodriguez,53 petitioner
insists that the first debtor is not released from responsibility
upon reaching an agreement with the creditor. The payment by a
third person of the first debtor's obligation does not constitute
novation, and the creditor can still enforce the obligation against
the original debtor. Petitioner also cites the ruling of this Court in
Guerrero v. Court of Appeals.54
In their Comment on the petition, respondents aver that by
virtue of respondent Felicidad's execution of the deeds of
assignment, and the original debtors' execution of the
promissory notes (along with their conformity to the deeds of
assignment with petitioner's consent), their loan accounts with
198
petitioner amounting to P585,659.00 had been effectively
extinguished. Respondents point out that this is in accordance
with Article 1291, paragraph 2, of the Civil Code. Thus, the
original debtors of respondents had been substituted as
petitioner's new debtors.
Respondents counter that petitioner had been subrogated to
their right to collect the loan accounts of their debtors. In fact,
petitioner, as the new creditor of respondents' former debtors
had been able to collect the latter's loan accounts which
amounted to P301,000.00. The sums received by respondents'
debtors were the same loans which they obliged to pay to
petitioner under the promissory notes executed in petitioner's
favor.
Respondents aver that their obligation to petitioner cannot stand
or exist separately from the original debtors' obligation to
petitioner as the new creditor. If allowed to collect from them as
well as from their original debtors, petitioner would be enriching
herself at the expense of respondents. Thus, despite the fact that
petitioner had collected P172,600.00 from respondents and
P301,000.00 from the original debtors, petitioner still sought to
collect P773,000.00 from them in the RTC. Under the deeds of
assignment executed by Felicidad and the original debtors'
promissory notes, the original debtors' accounts were assigned
to petitioner who would be the new creditor. In fine, respondents
are no longer liable to petitioner for the balance of their loan
account inclusive of interests. Respondents also insist that
petitioner failed to prove that she (petitioner) was merely
authorized to collect the accounts of the original debtors so as to
to facilitate the payment of respondents' loan obligation.
The Issues
The threshold issues are: (1) whether respondent Felicidad
Tibong borrowed P773,000.00 from petitioner; and (2) whether
the obligation of respondents to pay the balance of their loans,
including interest, was partially extinguished by the execution of
the deeds of assignment in favor of petitioner, relative to the
loans of Edna Papat-iw, Helen Cabang, Antoinette Manuel, and
Fely Cirilo in the total amount of P371,000.00.
The Ruling of the Court
We have carefully reviewed the brief of respondents as
appellants in the CA, and find that, indeed, they had raised the
issue of whether they received P773,000.00 by way of loans
from petitioner. They averred that, as gleaned from the
documentary evidence of petitioner in the RTC, the total amount
they borrowed was only P673,000.00. They asserted that
petitioner failed to adduce concrete evidence that they received
P773,000.00 from her.55
We agree, however, with petitioner that the appellate court erred
in reversing the finding of the RTC simply because petitioner
failed to present any document or receipt signed by Felicidad.
Section 10, Rule 8 of the Rules of Civil Procedure requires a
defendant to "specify each material allegation of fact the truth of
which he does not admit and, whenever practicable, x x x set
forth the substance of the matters upon which he relies to
support his denial.56
Section 11, Rule 8 of the same Rules provides that allegations of
the complaint not specifically denied are deemed admitted.57
The purpose of requiring the defendant to make a specific denial
is to make him disclose the matters alleged in the complaint
which he succinctly intends to disprove at the trial, together with
the matter which he relied upon to support the denial. The
parties are compelled to lay their cards on the table.58
A denial is not made specific simply because it is so qualified by
the defendant. A general denial does not become specific by the
use of the word "specifically." When matters of whether the

defendant alleges having no knowledge or information sufficient
to form a belief are plainly and necessarily within the defendant's
knowledge, an alleged "ignorance or lack of information" will not
be considered as a specific denial. Section 11, Rule 8 of the Rules
also provides that material averments in the complaint other
than those as to the amount of unliquidated damages shall be
deemed admitted when not specifically denied.59 Thus, the
answer should be so definite and certain in its allegations that
the pleader's adversary should not be left in doubt as to what is
admitted, what is denied, and what is covered by denials of
knowledge as sufficient to form a belief.60
In the present case, petitioner alleged the following in her
complaint:
2. That defendants are indebted to the plaintiff in the principal
amount of SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS
(P773,000.00) Philippine Currency with a stipulated interest
which are broken down as follows. The said principal amounts
was admitted by the defendants in their counter-affidavit
submitted before the court. Such affidavit is hereby attached as
Annex "A;"61
xxxx
H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00)
with interest at six (6%) per cent per month and payable on
October 19, 1989, however[,] the receipt for the meantime
cannot be recovered as it was misplaced by the plaintiff but the
letter of defendant FELICIDAD TIBONG is hereby attached as
Annex "H" for the appreciation of the Honorable court;
I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00)
with interest at five (5%) percent per month, obtained on July
14, 1989 and payable on October 14, 1989. Such receipt was
lost but admitted by the defendants in their counter-affidavit as
attached [to] this complaint and marked as Annex "A" mentioned
in paragraph one (1); x x x62
In their Answer, respondents admitted that they had secured
loans from petitioner. While the allegations in paragraph 2 of the
complaint were specifically denied, respondents merely averred
that petitioner and respondent Felicidad entered into an
agreement for the lending of money to interested borrowers at a
higher interest rate. Respondents failed to declare the exact
amount of the loans they had secured from petitioner. They also
failed to deny the allegation in paragraph 2 of the complaint that
respondent Felicidad signed and submitted a counter-affidavit in
I.S. No. 93-334 where she admitted having secured loans from
petitioner in the amount of P773,000.00. Respondents, likewise,
failed to deny the allegation in paragraph 2(h) of the complaint
that respondents had secured a P34,000.00 loan payable on
October 19, 1989, evidenced by a receipt which petitioner had
misplaced. Although respondents specifically denied in paragraph
2.11 of their Answer the allegations in paragraph 2(I) of the
complaint, they merely alleged that "they have not received
sums of money from the plaintiff without any receipt therefor."
Respondents, likewise, failed to specifically deny another
allegation in the complaint that they had secured a P100,000.00
loan from petitioner on July 14, 1989; that the loan was payable
on October 14, 1989; and evidenced by a receipt which
petitioner claimed to have lost. Neither did respondents deny the
allegation that respondents admitted their loan of P100,000.00 in
the counter-affidavit of respondent Felicidad, which was
appended to the complaint as Annex "A." In fine, respondents
had admitted the existence of their P773,000.00 loan from
petitioner.
We agree with the finding of the CA that petitioner had no right
to collect from respondents the total amount of P301,000.00,
which includes more than P178,980.00 which respondent
Felicidad collected from Tibong, Dalisay, Morada, Chomacog,
Cabang, Casuga, Gelacio, and Manuel. Petitioner cannot again
collect the same amount from respondents; otherwise, she would
199
be enriching herself at their expense. Neither can petitioner
collect from respondents more than P103,500.00 which she had
already collected from Nimo, Cantas, Rivera, Donguis, Fernandez
and Ramirez.
There is no longer a need for the Court to still resolve the issue
of whether respondents' obligation to pay the balance of their
loan account to petitioner was partially extinguished by the
promissory notes executed by Juliet Tibong, Corazon Dalisay,
Rita Chomacog, Carmelita Casuga, Merlinda Gelacio and
Antoinette Manuel because, as admitted by petitioner, she was
able to collect the amounts under the notes from said debtors
and applied them to respondents' accounts.
Under Article 1231(b) of the New Civil Code, novation is
enumerated as one of the ways by which obligations are
extinguished. Obligations may be modified by changing their
object or principal creditor or by substituting the person of the
debtor.63 The burden to prove the defense that an obligation has
been extinguished by novation falls on the debtor.64 The nature
of novation was extensively explained in Iloilo Traders Finance,
Inc. v. Heirs of Sps. Oscar Soriano, Jr.,65 as follows:
Novation may either be extinctive or modificatory, much being
dependent on the nature of the change and the intention of the
parties. Extinctive novation is never presumed; there must be an
express intention to novate; in cases where it is implied, the acts
of the parties must clearly demonstrate their intent to dissolve
the old obligation as the moving consideration for the emergence
of the new one. Implied novation necessitates that the
incompatibility between the old and new obligation be total on
every point such that the old obligation is completely superseded
by the new one. The test of incompatibility is whether they can
stand together, each one having an independent existence; if
they cannot and are irreconciliable, the subsequent obligation
would also extinguish the first.
An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new
one in its stead. This kind of novation presupposes a confluence
of four essential requisites: (1) a previous valid obligation; (2)
an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid
new obligation. Novation is merely modificatory where the
change brought about by any subsequent agreement is merely
incidental to the main obligation (e.g., a change in interest rates
or an extension of time to pay); in this instance, the new
agreement will not have the effect of extinguishing the first but
would merely supplement it or supplant some but not all of its
provisions.66 (Citations Omitted)
Novation which consists in substituting a new debtor (delegado)
in the place of the original one (delegante) may be made even
without the knowledge or against the will of the latter but not
without the consent of the creditor. Substitution of the person of
the debtor may be effected by delegacion, meaning, the debtor
offers, and the creditor (delegatario), accepts a third person who
consents to the substitution and assumes the obligation. Thus,
the consent of those three persons is necessary.67 In this kind of
novation, it is not enough to extend the juridical relation to a
third person; it is necessary that the old debtor be released from
the obligation, and the third person or new debtor take his place
in the relation.68 Without such release, there is no novation; the
third person who has assumed the obligation of the debtor
merely becomes a co-debtor or a surety. If there is no
agreement as to solidarity, the first and the new debtor are
considered obligated jointly.69
In Di Franco v. Steinbaum,70 the appellate court ruled that as to
the consideration necessary to support a contract of novation,
the rule is the same as in other contracts. The consideration
need not be pecuniary or even beneficial to the person
promising. It is sufficient if it be a loss of an inconvenience, such
as the relinquishment of a right or the discharge of a debt, the

postponement of a remedy, the discontinuance of a suit, or
forbearance to sue.
In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court
of Appeals ruled that the theory of novation is that the new
debtor contracts with the old debtor that he will pay the debt,
and also to the same effect with the creditor, while the latter
agrees to accept the new debtor for the old. A novation is not
made by showing that the substituted debtor agreed to pay the
debt; it must appear that he agreed with the creditor to do so.
Moreover, the agreement must be based on the consideration of
the creditor's agreement to look to the new debtor instead of the
old. It is not essential that acceptance of the terms of the
novation and release of the debtor be shown by express
agreement. Facts and circumstances surrounding the transaction
and the subsequent conduct of the parties may show acceptance
as clearly as an express agreement, albeit implied.72
We find in this case that the CA correctly found that respondents'
obligation to pay the balance of their account with petitioner was
extinguished, pro tanto, by the deeds of assignment of credit
executed by respondent Felicidad in favor of petitioner.
An 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 consent of the debtor, transfers his credit and accessory
rights to another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor could
enforce it against the debtor.73 It may be in the form of 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.74
In Vda. de Jayme v. Court of Appeals,75 the Court held that
dacion en pago is the delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted equivalent of
the performance of the obligation. It is a special mode of
payment where the debtor offers another thing to the creditor
who accepts it as equivalent of payment of an outstanding debt.
The undertaking really partakes in one sense of the nature of
sale, that is, the creditor is really buying the thing or property of
the debtor, payment for which is to be charged against the
debtor's obligation. As such, the essential elements of a contract
of sale, namely, consent, object certain, and cause or
consideration must be present. In its modern concept, what
actually takes place in dacion en pago is an objective novation of
the obligation where the thing offered as an accepted equivalent
of the performance of an obligation is considered as the object of
the contract of sale, while the debt is considered as the purchase
price. In any case, common consent is an essential prerequisite,
be it sale or novation, to have the effect of totally extinguishing
the debt or obligation.76
The requisites for dacion en pago are: (1) there must be a
performance of the prestation in lieu of payment (animo
solvendi) which may consist in the delivery of a corporeal thing
or a real right or a credit against the third person; (2) there must
be some difference between the prestation due and that which is
given in substitution (aliud pro alio); and (3) there must be an
agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a
prestation different from that due.77
All the requisites for a valid dation in payment are present in this
case. As gleaned from the deeds, respondent Felicidad assigned
to petitioner her credits "to make good" the balance of her
obligation. Felicidad testified that she executed the deeds to
enable her to make partial payments of her account, since she
could not comply with petitioner's frenetic demands to pay the
account in cash. Petitioner and respondent Felicidad agreed to
relieve the latter of her obligation to pay the balance of her
account, and for petitioner to collect the same from respondent's
debtors.
200
Admittedly, some of respondents' debtors, like Edna Papat-iw,
were not able to affix their conformity to the deeds. In an
assignment of credit, however, the consent of the debtor is not
essential for its perfection; the knowledge thereof or lack of it
affecting only the efficaciousness or inefficaciousness of any
payment that might have been made. The assignment binds the
debtor upon acquiring knowledge of the assignment but he is
entitled, even then, to raise against the assignee the same
defenses he could set up against the assignor78 necessary in
order that assignment may fully produce legal effects. Thus, the
duty to pay does not depend on the consent of the debtor. The
purpose of the notice is only to inform that debtor from the date
of the assignment. Payment should be made to the assignee and
not to the original creditor.
The transfer of rights takes place upon perfection of the contract,
and ownership of the right, including all appurtenant accessory
rights, is acquired by the assignee79 who steps into the shoes of
the original creditor as subrogee of the latter80 from that
amount, the ownership of the right is acquired by the assignee.
The law does not require any formal notice to bind the debtor to
the assignee, all that the law requires is knowledge of the
assignment. Even if the debtor had not been notified, but came
to know of the assignment by whatever means, the debtor is
bound by it. If the document of assignment is public, it is
evidence even against a third person of the facts which gave rise
to its execution and of the date of the latter. The transfer of the
credit must therefore be held valid and effective from the
moment it is made to appear in such instrument, and third
persons must recognize it as such, in view of the authenticity of
the document, which precludes all suspicion of fraud with respect
to the date of the transfer or assignment of the credit.81
As gleaned from the deeds executed by respondent Felicidad
relative to the accounts of her other debtors, petitioner was
authorized to collect the amounts of P6,000.00 from Cabang, and
P63,600.00 from Cirilo. They obliged themselves to pay
petitioner. Respondent Felicidad, likewise, unequivocably
declared that Cabang and Cirilo no longer had any obligation to
her.
Equally significant is the fact that, since 1990, when respondent
Felicidad executed the deeds, petitioner no longer attempted to
collect from respondents the balance of their accounts. It was
only in 1999, or after nine (9) years had elapsed that petitioner
attempted to collect from respondents. In the meantime,
petitioner had collected from respondents' debtors the amount of
P301,000.00.
While it is true that respondent Felicidad likewise authorized
petitioner in the deeds to collect the debtors' accounts, and for
the latter to pay the same directly, it cannot thereby be
considered that respondent merely authorized petitioner to
collect the accounts of respondents' debtors and for her to apply
her collections in partial payments of their accounts. It bears
stressing that petitioner, as assignee, acquired all the rights and
remedies passed by Felicidad, as assignee, at the time of the
assignment.82 Such rights and remedies include the right to
collect her debtors' obligations to her.
Petitioner cannot find solace in the Court's ruling in Magdalena
Estates. In that case, the Court ruled that the mere fact that
novation does not follow as a matter of course when the creditor
receives a guaranty or accepts payments from a third person
who has agreed to assume the obligation when there is no
agreement that the first debtor would be released from
responsibility. Thus, the creditor can still enforce the obligation
against the original debtor.
In the present case, petitioner and respondent Felicidad agreed
that the amounts due from respondents' debtors were intended
to "make good in part" the account of respondents. Case law is
that, an assignment will, ordinarily, be interpreted or construed
in accordance with the rules of construction governing contracts
generally, the primary object being always to ascertain and carry

out the intention of the parties. This intention is to be derived
from a consideration of the whole instrument, all parts of which
should be given effect, and is to be sought in the words and
language employed.83
Indeed, the Court must not go beyond the rational scope of the
words used in construing an assignment, words should be
construed according to their ordinary meaning, unless something
in the assignment indicates that they are being used in a special
sense. So, if the words are free from ambiguity and expressed
plainly the purpose of the instrument, there is no occasion for
interpretation; but where necessary, words must be interpreted
in the light of the particular subject matter.84 And surrounding
circumstances may be considered in order to understand more
perfectly the intention of the parties. Thus, the object to be
accomplished through the assignment, and the relations and
conduct of the parties may be considered in construing the
document.
Although it has been said that an ambiguous or uncertain
assignment should be construed most strictly against the
assignor, the general rule is that any ambiguity or uncertainty in
the meaning of an assignment will be resolved against the party
who prepared it; hence, if the assignment was prepared by the
assignee, it will be construed most strictly against him or her.85
One who chooses the words by which a right is given ought to be
held to the strict interpretation of them, rather than the other
who only accepts them.86
Considering all the foregoing, we find that respondents still have
a balance on their account to petitioner in the principal amount
of P33,841.00, the difference between their loan of P773,000.00
less P585,659.00, the payment of respondents' other debtors
amounting to P103,500.00, and the P50,000.00 payment made
by respondents.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The
Decision and Resolution of the Court of Appeals are AFFIRMED
with MODIFICATION in that the balance of the principal account
of the respondents to the petitioner is P33,841.00. No costs.
SO ORDERED.
Austria-Martinez, and Chico-Nazario, JJ., concur.
Panganiban, C.J., retired as of December 7, 2006.
Ynares-Santiago, J., working Chairperson.
Footnotes
THIRD DIVISION
G.R. No. 160451 February 9, 2007
EDUARDO G. RICARZE, Petitioner,
vs.
COURT OF APPEALS, PEOPLE OF THE PHILIPPINES, CALTEX
PHILIPPINES, INC., PHILIPPINE COMMERCIAL AND INDUSTRIAL
BANK (PCIBANK), Respondents.
DECISION
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari of the
Decision1 of the Court of Appeals in CA-G.R. SP No. 68492, and
its Resolution2 which denied the Motion for Reconsideration and
the Supplemental Motion for Reconsideration thereof.
The Antecedents
Petitioner Eduardo G. Ricarze was employed as a collector-
messenger by City Service Corporation, a domestic corporation
engaged in messengerial services. He was assigned to the main
office of Caltex Philippines, Inc. (Caltex) in Makati City. His
201
primary task was to collect checks payable to Caltex and deliver
them to the cashier. He also delivered invoices to Caltex’s
customers.3
On November 6, 1997, Caltex, through its Banking and
Insurance Department Manager Ramon Romano, filed a criminal
complaint against petitioner before the Office of the City
Prosecutor of Makati City for estafa through falsification of
commercial documents. Romano alleged that, on October 16,
1997, while his department was conducting a daily electronic
report from Philippine Commercial & Industrial Bank (PCIB) Dela
Rosa, Makati Branch, one of its depositary banks, it was
discovered that unknown to the department, a company check,
Check No. 74001 dated October 13, 1997 in the amount of
₱5,790,570.25 payable to Dante R. Gutierrez, had been cleared
through PCIB on October 15, 1997. An investigation also
revealed that two other checks (Check Nos. 73999 and 74000)
were also missing and that in Check No. 74001, his signature
and that of another signatory, Victor S. Goquinco, were
forgeries. Another check, Check No. 72922 dated September 15,
1997 in the amount of ₱1,790,757.25 likewise payable to Dante
R. Gutierrez, was also cleared through the same bank on
September 24, 1997; this check was likewise not issued by
Caltex, and the signatures appearing thereon had also been
forged. Upon verification, it was uncovered that Check Nos.
74001 and 72922 were deposited at the Banco de Oro’s SM
Makati Branch under Savings Account No. S/A 2004-0047245-7,
in the name of a regular customer of Caltex, Dante R. Gutierrez.
Gutierrez, however, disowned the savings account as well as his
signatures on the dorsal portions thereof. He also denied having
withdrawn any amount from said savings account. Further
investigation revealed that said savings account had actually
been opened by petitioner; the forged checks were deposited
and endorsed by him under Gutierrez’s name. A bank teller from
the Banco de Oro, Winnie P. Donable Dela Cruz, positively
identified petitioner as the person who opened the savings
account using Gutierrez’s name.4
In the meantime, the PCIB credited the amount of ₱581,229.00
to Caltex on March 29, 1998. However, the City Prosecutor of
Makati City was not informed of this development. After the
requisite preliminary investigation, the City Prosecutor filed two
(2) Informations for estafa through falsification of commercial
documents on June 29, 1998 against petitioner before the
Regional Trial Court (RTC) of Makati City, Branch 63. The
Informations are worded as follows:
Criminal Case No. 98-1611
That on or about the 24th day of September 1997 in the City of
Makati, Metro Manila, Philippines, a place within the jurisdiction
of this Honorable Court, the above-named accused, a private
individual, with intent to defraud and intent to gain, without the
knowledge and consent of Caltex Philippines, Inc. through its
duly authorized officers/representatives, and by means of
falsification of commercial document, did then and there willfully,
unlawfully and feloniously defraud Caltex Phils., Inc., in the
following manner, to wit: said accused, having obtained
possession of PCIBank check no. 72922 dated September 15,
1997 payable to Dante R. Gutierrez, in the amount of
Php1,790,757.50 with intent to defraud or cause damage to
complainant Caltex Phils., Inc., willfully, unlawfully and
feloniously affixed or caused to be affixed signatures purporting
to be those of Ramon Romano and Victor Goquingco, Caltex
authorized officers/signatories, and of payee Dante R. Gutierrez,
causing it to appear that Ramon Romano and Victor Goquingco
have participated in the issuance of PCIBank check no. 72922
and that Dante R. Gutierrez had endorsed it, when in truth and
in fact, as said accused well knew, such was not the case, since
said check previously stolen from Payables Section of CALTEX,
was neither duly signed by Ramon Romano and Victor Goquingco
nor endorsed by Dante R. Gutierrez, after the check, a
commercial document, was falsified in the manner above set
forth, the said accused purporting himself to be the payee, Dante

R. Gutierrez, deposited the check with Banco De Oro under
Account No. 2004-0047245-7, thereby appropriating the
proceeds of the falsified but cleared check, to the damage and
prejudice of complainant herein represented by Ramon Romano,
in the amount of Php1,790,757.50.
Criminal Case No. 98-1612
That on or about the 15th day of October 1997 in the City of
Makati, Metro Manila, Philippines, a place within the jurisdiction
of this Honorable Court, the above-named accused, a private
individual, with intent to defraud and intent to gain, without the
knowledge and consent of Caltex Philippines, Inc. through its
duly authorized officers/representatives, and by means of
falsification of commercial document, did then and there willfully,
unlawfully and feloniously defraud Caltex Phils., Inc., in the
following manner, to wit: said accused, having obtained
possession of PCIBank check no. 74001 dated October 13, 1997
payable to Dante R. Gutierrez, in the amount of Php5,790,570.25
with intent to defraud or cause damage to complainant Caltex
Phils., Inc., willfully, unlawfully and feloniously affixed or caused
to be affixed signatures purporting to be those of Ramon
Romano and Victor Goquingco, Caltex authorized
officers/signatories, and of payee Dante R. Gutierrez, causing it
to appear that Ramon Romano and Victor Goquingco have
participated in the issuance of PCIBank check no. 74001 and that
Dante R. Gutierrez had endorsed it, when in truth and in fact, as
said accused well knew, such was not the case, since said check
previously stolen from Payables Section of CALTEX, was neither
duly signed by Ramon Romano and Victor Goquingco nor
endorsed by Dante R. Gutierrez, after the check, a commercial
document, was falsified in the manner above set forth, the said
accused purporting himself to be the payee, Dante R. Gutierrez,
deposited the check with Banco De Oro under Account No. 2004-
0047245-7, thereby appropriating the proceeds of the falsified
but cleared check, to the damage and prejudice of complainant
herein represented by Ramon Romano, in the amount of
Php5,790,570.25.5
Petitioner was arraigned on August 18, 1998, and pleaded not
guilty to both charges.6 Pre-trial ensued and the cases were
jointly tried. The prosecution presented its witnesses, after which
the Siguion Reyna, Montecillio and Ongsiako Law Offices (SRMO)
as private prosecutor filed a Formal Offer of Evidence.7 Petitioner
opposed the pleading, contending that the private complainant
was represented by the ACCRA Law Offices and the Balgos and
Perez Law Office during trial, and it was only after the
prosecution had rested its case that SRMO entered its
appearance as private prosecutor representing the PCIB. Since
the ACCRA and Balgos and Perez Law Offices had not withdrawn
their appearance, SRMO had no personality to appear as private
prosecutor. Under the Informations, the private complainant is
Caltex and not PCIB; hence, the Formal Offer of Evidence filed by
SRMO should be stricken from the records.
Petitioner further averred that unless the Informations were
amended to change the private complainant to PCIB, his right as
accused would be prejudiced. He pointed out, however, that the
Informations can no longer be amended because he had already
been arraigned under the original Informations.8 He insisted that
the amendments of the Informations to substitute PCIB as the
offended party for Caltex would place him in double jeopardy.
PCIB, through SRMO, opposed the motion. It contended that the
PCIB had re-credited the amount to Caltex to the extent of the
indemnity; hence, the PCIB had been subrogated to the rights
and interests of Caltex as private complainant. Consequently, the
PCIB is entitled to receive any civil indemnity which the trial
court would adjudge against the accused. Moreover, the re-
credited amount was brought out on cross-examination by
Ramon Romano who testified for the Prosecution. PCIB pointed
out that petitioner had marked in evidence the letter of the
ACCRA Law Office to PCIBank dated October 10, 1997 and the
credit memo sent by PCIB to Caltex.9
202
Petitioner filed a Motion to Expunge the Opposition of SRMO.10
In his Rejoinder, he averred that the substitution of PCIB as
private complainant cannot be made by mere oral motion; the
Information must be amended to allege that the private
complainant was PCIB and not Caltex after the preliminary
investigation of the appropriate complaint of PCIB before the
Makati City Prosecutor.
In response, the PCIB, through SRMO, averred that as provided
in Section 2, Rule 110 of the Revised Rules of Criminal
Procedure, the erroneous designation of the name of the
offended party is a mere formal defect which can be cured by
inserting the name of the offended party in the Information. To
support its claim, PCIB cited the ruling of this Court in Sayson v.
People.11
On July 18, 2001, the RTC issued an Order granting the motion
of the private prosecutor for the substitution of PCIB as private
complainant for Caltex. It however denied petitioner’s motion to
have the formal offer of evidence of SRMO expunged from the
record.12 Petitioner filed a motion for reconsideration which the
RTC denied on November 14, 2001.13
Petitioner filed a Petition for Certiorari under Rule 65 of the Rules
of Court with Urgent Application for Temporary Restraining Order
with the Court of Appeals (CA,) praying for the annulment of the
RTC’s Orders of July 18, 2001 and November 14, 2001. The
petitioner averred that:
I
RESPONDENT JUDGE GRIEVEOUSLY (SIC) ERRED IN RENDERING
ITS ORDER ISSUED WITH GRAVE ABUSE OF DISCRETION
TANTAMOUNT TO LACK OF OR IN EXCESS OF JURISDICTION BY
ALLOWING THE SUBSTITUTION OF PRIVATE COMPLAINANT,
AFTER THE ACUSED WAS ALREADY ARRAIGNED AND
PROSECUTION HAS ALREADY TERMINATED PRESENTING ITS
EVIDENCE THEREBY PATENTLY VIOLATING THE STRICT
CONDITION IMPOSED UPON BY RULE 110 SEC. 14 RULES ON
CRIMINAL ROCEDURE.
II
AND AS A COROLLARY GROUND RESPONDENT JUDGE
COMMITTED GRAVE ABUSE OF DISCRETION IN EXCESS OF
JURISDICTION IN RENDERING AN ORDER RECOGNIZING THE
APPEARANCE OF A NEW PROSECUTOR WITHOUT WRITTEN OR
EVEN ORAL WITHDRAWAL OF THE COUNSEL ON RECORD.14
According to petitioner, damage or injury to the offended party is
an essential element of estafa. The amendment of the
Informations substituting the PCIBank for Caltex as the offended
party would prejudice his rights since he is deprived of a defense
available before the amendment, and which would be unavailable
if the Informations are amended. Petitioner further insisted that
the ruling in the Sayson case did not apply to this case.
On November 5, 2002, the appellate court rendered judgment
dismissing the petition. The fallo reads:
WHEREFORE, premises considered, the petition to annul the
orders dated July 18, 2001 and November 14, 2001 of the
Regional Trial Court, Branch 63, Makati City in Criminal Case
Nos. 98-1611 and 98-1612 is hereby DENIED and consequently
DISMISSED.
SO ORDERED.15
The appellate court declared that when PCIB restored the
amount of the checks to Caltex, it was subrogated to the latter’s
right against petitioner. It further declared that in offenses
against property, the designation of the name of the offended
party is not absolutely indispensable for as long as the criminal
act charged in the complaint or information can be properly

identified. The appellate court cited the rulings of this Court in
People v. Ho16 and People v. Reyes.17
On October 17, 2003, the CA issued a Resolution denying
petitioner’s Motion for Reconsideration and Supplemental Motion
for Reconsideration.18
Hence, petitioner filed the instant petition which is anchored on
the following grounds:
I. THE PEOPLE V. YU CHAI HO 53 PHILIPPINES 874 IS
INAPPLICABLE TO THE CASE AT BAR CONSIDERING THE PACTS
ARE SUBSTANTIALLY DIFFERENT.
II. LIKEWISE, THE CASE OF PEOPLE VS. REYES CA, 50 (2) OG
665, NOVEMBER 11, 1953 HAS NO MATERIAL BEARING TO THE
PRESENT CASE.
III. THE SUBSTITUTION OF PCIBANK WILL SUBSTANTIALLY
PREJUDICE THE RIGHTS OF THE PETITIONER HENCE, IT IS
PROHIBITED BY SEC. 14 OF RULE 110.
IV. THERE IS NO VALID SUBROGATION BETWEEN CALTEX AND
PCIBANK. ASSUMING THERE IS, THE CIVIL CASE SHOULD BE
DISMISSED TO PROSECUTE.
V. THE TWIN INFORMATIONS UPON WHICH PETITIONER WAS
INDICTED, ARRAIGNED, PRE-TRIAL HELD AND PUBLIC
PROSECUTOR TERMINATED THE PRESENTATION OF ITS
EVIDENCE IN CHIEF ARE DEFECTIVE AND VOID, HENCE THE
DISMISSAL IS IN ORDER.
VI. PETITIONER TIMELY OBJECTED TO THE APPEARANCE OF
PRIVATE PROSECUTOR FOR PCIBANK.
VII. THE FINDINGS OF MATERIAL FACTS ARE NOT SUPORTED BY
THE RECORD NOR EVIDENCE AND BASED ON MISAPPRECIATION
OF FACTS.
VIII. PETITIONER’S SUPPLEMENTAL MOTION FOR
RECONSIDERATION DID NOT VIOLATE THE OMNIBUS MOTION
RULE UNDER SEC. 8, RULE 15 OF THE 1997 RULES OF CIVIL
PROCEDURE.19
The Court’s Ruling
Petitioner argues that the substitution of Caltex by PCIB as
private complainant at this late stage of the trial is prejudicial to
his defense. He argues that the substitution is tantamount to a
substantial amendment of the Informations which is prohibited
under Section 14, Rule 110 of the Rules of Court.
Under Section 5, Rule 11020 of the Revised Rules of Rules, all
criminal actions covered by a complaint or information shall be
prosecuted under the direct supervision and control of the public
prosecutor. Thus, even if the felonies or delictual acts of the
accused result in damage or injury to another, the civil action for
the recovery of civil liability based on the said criminal acts is
impliedly instituted, and the offended party has not waived the
civil action, reserved the right to institute it separately or
instituted the civil action prior to the criminal action, the
prosecution of the action (including the civil) remains under the
control and supervision of the public prosecutor. The prosecution
of offenses is a public function. Under Section 16, Rule 110 of the
Rules of Criminal Procedure, the offended party may intervene in
the criminal action personally or by counsel, who will act as
private prosecutor for the protection of his interests and in the
interest of the speedy and inexpensive administration of justice.
A separate action for the purpose would only prove to be costly,
burdensome and time-consuming for both parties and further
delay the final disposition of the case. The multiplicity of suits
must be avoided. With the implied institution of the civil action in
the criminal action, the two actions are merged into one
composite proceeding, with the criminal action predominating the
civil. The prime purpose of the criminal action is to punish the
203
offender in order to deter him and others from committing the
same or similar offense, to isolate him from society, reform and
rehabilitate him or, in general, to maintain social order.21
On the other hand, the sole purpose of the civil action is for the
resolution, reparation or indemnification of the private offended
party for the damage or injury he sustained by reason of the
delictual or felonious act of the accused.22 Under Article 104 of
the Revised Penal Code, the following are the civil liabilities of
the accused:
ART. 104. What is included in civil liability. – The civil liability
established in Articles 100, 101, 102 and 103 of this Code
includes:
1. Restitution;
2. Reparation of the damage caused;
3. Indemnification for consequential damages.
On the other hand, Section 14, Rule 110 of the Revised Rules of
Criminal Procedure states:
Section 14. Amendment or substitution. – A complaint or
information may be amended, in form or in substance, without
leave of court, at any time before the accused enters his plea.
After the plea and during the trial, a formal amendment may
only be made with leave of court and when it can be done
without causing prejudice to the rights of the accused.
However, any amendment before plea, which downgrades the
nature of the offense charged in or excludes any accused from
the complaint or information, can be made only upon motion by
the prosecutor, with notice to the offended party and with leave
of court. The court shall state its reasons in resolving the motion
and copies of its order shall be furnished all parties, especially
the offended party.
Thus, before the accused enters his plea, a formal or substantial
amendment of the complaint or information may be made
without leave of court. After the entry of a plea, only a formal
amendment may be made but with leave of court and if it does
not prejudice the rights of the accused. After arraignment, a
substantial amendment is proscribed except if the same is
beneficial to the accused.23
A substantial amendment consists of the recital of facts
constituting the offense charged and determinative of the
jurisdiction of the court. All other matters are merely of form.24
The following have been held to be mere formal amendments:
(1) new allegations which relate only to the range of the penalty
that the court might impose in the event of conviction; (2) an
amendment which does not charge another offense different or
distinct from that charged in the original one; (3) additional
allegations which do not alter the prosecution’s theory of the
case so as to cause surprise to the accused and affect the form
of defense he has or will assume; (4) an amendment which does
not adversely affect any substantial right of the accused; and (5)
an amendment that merely adds specifications to eliminate
vagueness in the information and not to introduce new and
material facts, and merely states with additional precision
something which is already contained in the original information
and which adds nothing essential for conviction for the crime
charged.25
The test as to whether a defendant is prejudiced by the
amendment is whether a defense under the information as it
originally stood would be available after the amendment is made,
and whether any evidence defendant might have would be
equally applicable to the information in the one form as in the
other. An amendment to an information which does not change
the nature of the crime alleged therein does not affect the
essence of the offense or cause surprise or deprive the accused

of an opportunity to meet the new averment had each been held
to be one of form and not of substance.26
In the case at bar, the substitution of Caltex by PCIB as private
complaint is not a substantial amendment. The substitution did
not alter the basis of the charge in both Informations, nor did it
result in any prejudice to petitioner. The documentary evidence
in the form of the forged checks remained the same, and all such
evidence was available to petitioner well before the trial. Thus,
he cannot claim any surprise by virtue of the substitution.
Petitioner next argues that in no way was PCIB subrogated to the
rights of Caltex, considering that he has no knowledge of the
subrogation much less gave his consent to it. Alternatively, he
posits that if subrogation was proper, then the charges against
him should be dismissed, the two Informations being "defective
and void due to false allegations."
Petitioner was charged of the crime of estafa complex with
falsification document. In estafa one of the essential elements
"to prejudice of another" as mandated by article 315 of the
Revise Penal Code.
The element of "to the prejudice of another" being as essential
element of the felony should be clearly indicated and charged in
the information with TRUTH AND LEGAL PRECISION.
This is not so in the case of petitioner, the twin information filed
against him alleged the felony committed " to the damage and
prejudice of Caltex." This allegation is UNTRUE and FALSE for
there is no question that as early as March 24, 1998 or THREE
(3) LONG MONTHS before the twin information were filed on
June 29, 1998, the prejudice party is already PCIBank since the
latter Re-Credit the value of the checks to Caltex as early as
March 24, 1998. In effect, assuming there is valid subrogation as
the subject decision concluded, the subrogation took place an
occurred on March 24, 1998 THREE (3) MONTHS before the twin
information were filed.
The phrase "to the prejudice to another" as element of the felony
is limited to the person DEFRAUDED in the very act of
embezzlement. It should not be expanded to other persons which
the loss may ultimately fall as a result of a contract which
contract herein petitioner is total stranger.
In this case, there is no question that the very act of commission
of the offense of September 24, 1997 and October 15, 1997
respectively, Caltex was the one defrauded by the act of the
felony.
In the light of these facts, petitioner submits that the twin
information are DEFECTIVE AND VOID due to the FALSE
ALLEGATIONS that the offense was committed to the prejudice of
Caltex when it truth and in fact the one prejudiced here was
PCIBank.
The twin information being DEFECTIVE AND VOID, the same
should be dismissed without prejudice to the filing of another
information which should state the offense was committed to the
prejudice of PCIBank if it still legally possible without prejudicing
substantial and statutory rights of the petitioner.27
Petitioner’s argument on subrogation is misplaced. The Court
agrees with respondent PCIB’s comment that petitioner failed to
make a distinction between legal and conventional subrogation.
Subrogation is the transfer of all the rights of the creditor to a
third person, who substitutes him in all his rights.28 It may
either be legal or conventional. Legal subrogation is that which
takes place without agreement but by operation of law because
of certain acts.29 Instances of legal subrogation are those
provided in Article 130230 of the Civil Code. Conventional
subrogation, on the other hand, is that which takes place by
agreement of the parties.31 Thus, petitioner’s acquiescence is
not necessary for subrogation to take place because the instant
204
case is one of legal subrogation that occurs by operation of law,
and without need of the debtor’s knowledge.
Contrary to petitioner’s asseverations, the case of People v. Yu
Chai Ho32 relied upon by the appellate court is in point. The
Court declared –
We do not however, think that the fiscal erred in alleging that
the commission of the crime resulted to the prejudice of Wm. H.
Anderson & Co. It is true that originally the International Banking
Corporation was the prejudiced party, but Wm. H. Anderson &
Co. compensated it for its loss and thus became subrogated to
all its rights against the defendant (article 1839, Civil Code).
Wm. H. Anderson & Co., therefore, stood exactly in the shoes of
the International Banking Corporation in relation to the
defendant's acts, and the commission of the crime resulted to
the prejudice of the firm previously to the filing of the
information in the case. The loss suffered by the firm was the
ultimate result of the defendant's unlawful acts, and we see no
valid reason why this fact should not be stated in the
information; it stands to reason that, in the crime of estafa, the
damage resulting therefrom need not necessarily occur
simultaneously with the acts constituting the other essential
elements of the crime.
Thus, being subrogated to the right of Caltex, PCIB, through
counsel, has the right to intervene in the proceedings, and under
substantive laws is entitled to restitution of its properties or
funds, reparation, or indemnification.
Petitioner’s gripe that the charges against him should be
dismissed because the allegations in both Informations failed to
name PCIB as true offended party does not hold water.
Section 6, Rule 110 of the Rules on Criminal Procedure states:
Sec. 6. Sufficiency of complaint or information. – A complaint or
information is sufficient if it states the name of the accused; the
designation of the offense by the statute; the acts or omissions
complained of as constituting the offense; the name of the
offended party; the approximate time of the commission of the
offense; and the place wherein the offense was committed.
When the offense is committed by more than one person, all of
them shall be included in the complaint or information.
On the other hand, Section 12 of the same Rule provides:
Section. 12. Name of the offended party. –The complaint or
information must state the name and surname of the person
against whom or against whose property the offense was
committed, or any appellation or nickname by which such person
has been or is known. If there is no better way of identifying
him, he must be described under a fictitious name.
(a) In offenses against property, if the name of the offended
party is unknown, the property must be described with such
particularity as to properly identify the offense charged.
(b) If the true name of the person against whom or against
whose property the offense was committed is thereafter
disclosed or ascertained, the court must cause such true name to
be inserted in the complaint or information and the record.
(c) If the offended party is a juridical person, it is sufficient to
state its name, or any name or designation by which it is known
or by which it may be identified, without need of averring that it
is a juridical person or that it is organized in accordance with
law. (12a)
In Sayson v. People,33 the Court held that in case of offenses
against property, the designation of the name of the offended
party is not absolutely indispensable for as long as the criminal
act charged in the complaint or information can be properly
identified:

The rules on criminal procedure require the complaint or
information to state the name and surname of the person against
whom or against whose property the offense was committed or
any appellation or nickname by which such person has been or is
known and if there is no better way of Identifying him, he must
be described under a fictitious name (Rule 110, Section 11,
Revised Rules of Court; now Rule 110, Section 12 of the 1985
Rules on Criminal Procedure.] In case of offenses against
property, the designation of the name of the offended party is
not absolutely indispensable for as long as the criminal act
charged in the complaint or information can be properly
identified. Thus, Rule 110, Section 11 of the Rules of Court
provides that:
Section 11. Name of the offended party-
… Herein respondent Capitol Development Corporation instituted
(a) In cases of offenses against property, if the name of the
offended party is unknown, the property, subject matter of the
offense, must be described with such particularity as to properly
Identify the particular offense charged.
(b) If in the course of the trial, the true name of the person
against whom or against whose property the offense was
committed is disclosed or ascertained, the court must cause the
true name to be inserted in the complaint or information or
record.
… Ms. Picache the principal amount of P30,000.00, with 36%
In U.S. v. Kepner [1 Phil. 519 (1902)], this Court laid down the
rule that when an offense shall have been described in the
complaint with sufficient certainty as to Identify the act, an
erroneous allegation as to the person injured shall be deemed
immaterial as the same is a mere formal defect which did not
tend to prejudice any substantial right of the defendant.
Accordingly, in the aforementioned case, which had a factual
backdrop similar to the instant case, where the defendant was
charged with estafa for the misappropriation of the proceeds of a
warrant which he had cashed without authority, the erroneous
allegation in the complaint to the effect that the unlawful act was
to the prejudice of the owner of the cheque, when in reality the
bank which cashed it was the one which suffered a loss, was held
to be immaterial on the ground that the subject matter of the
estafa, the warrant, was described in the complaint with such
particularity as to properly Identify the particular offense
charged. In the instant suit for estafa which is a crime against
property under the Revised Penal Code, since the check, which
was the subject-matter of the offense, was described with such
particularity as to properly identify the offense charged, it
becomes immaterial, for purposes of convicting the accused, that
it was established during the trial that the offended party was
actually Mever Films and not Ernesto Rufino, Sr. nor Bank of
America as alleged in the information.
Lastly, on petitioner’s claim that he timely objected to the
appearance of SRMO34 as private prosecutor for PCIB, the Court
agrees with the observation of the CA that contrary to his claim,
petitioner did not question the said entry of appearance even as
the RTC acknowledged the same on October 8, 1999.35 Thus,
petitioner cannot feign ignorance or surprise of the incident,
which are "all water under the bridge for [his] failure to make a
timely objection thereto."36
WHEREFORE, the petition is DENIED. The assailed decision and
resolution of the Court of Appeals are AFFIRMED. This case is
REMANDED to the Regional Trial Court of Makati City, Branch 63,
for further proceedings.
SO ORDERED.
THIRD DIVISION
G.R. No. 149040 July 4, 2007
205
EDGAR LEDONIO, petitioner,
vs.
CAPITOL DEVELOPMENT CORPORATION, respondent.
DECISION
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari1 under
Rule 45 of the Revised Rules of Court praying that (1) the
Decision,2 dated 20 March 2001, of the Court of Appeals in CA-
G.R. CV No. 43604, affirming in toto the Decision,3 dated 6
August 1993, of the Quezon City Regional Trial Court (RTC),
Branch 91, in Civil Case No. Q-90-5247, be set aside; and (2)
the Complaint4 in Civil Case No. Q-90-5247 be dismissed.
Civil Case No. Q-90-5247 by filing a Complaint for the collection
of a sum of money against herein petitioner Edgar Ledonio.
In its Complaint, respondent alleged that petitioner obtained
from a Ms. Patrocinio S. Picache two loans, with the aggregate
principal amount of P60,000.00, and covered by promissory
notes duly signed by petitioner. In the first promissory note,5
dated 9 November 1988, petitioner promised to pay to the order
of Ms. Picache the principal amount of P30,000.00, in monthly
installments of P3,000.00, with the first monthly installment due
on 9 January 1989. In the second promissory note,6 dated 10
November 1988, petitioner again promised to pay to the order of
interest per annum, on 1 December 1988. In case of default in
payment, both promissory notes provide that (a) petitioner shall
be liable for a penalty equivalent to 20% of the total outstanding
balance; (b) unpaid interest shall be compounded or added to
the balance of the principal amount and shall bear the same rate
of interest as the latter; and (c) in case the creditor, Ms. Picache,
shall engage the services of counsel to enforce her rights and
powers under the promissory notes, petitioner shall pay as
attorney's fees and liquidated damages the sum equivalent to
20% of the total amount sought to be recovered, but in no case
shall the said sum be less that P10,000.00, exclusive of costs of
suit.
On 1 April 1989, Ms. Picache executed an Assignment of Credit7
in favor of respondent, which reads –
KNOW ALL MEN BY THESE PRESENTS:
That I, PAT S. PICACHE of legal age and with postal address at
373 Quezon Avenue, Quezon City for and in consideration of
SIXTY THOUSAND PESOS (P60,000.00) Philippine Currency, to
me paid by [herein respondent] CAPITOL DEVELOPMENT
CORPORATION, a corporation organized and existing under the
laws of the Republic of the Philippines with principal office at 373
Quezon Avenue, Quezon City receipt whereof is hereby
acknowledged have sold, transferred, assigned and conveyed
and (sic) by me these presents do hereby sell, assign, transfer
and convey unto the said [respondent] CAPITOL DEVELOPMENT
CORPORATION, a certain debt due me from [herein petitioner]
EDGAR A. LEDONIO in the principal sum of SIXTY THOUSAND
PESOS (P60,000.00) Philippine Currency, under two (2)
Promissory Notes dated November 9, 1988 and November 10,
1988, respectively, photocopies of which are attached to as
annexes A & B to form integral parts hereof with full power to
sue for, collect and discharge, or sell and assign the same.
That I hereby declare that the principal sum of SIXTY THOUSAND
PESOS (P60,000.00) with interest thereon at THIRTY SIX (36%)
PER CENT per annum is justly due and owing to me as aforesaid.
IN WITNESS WHEREOF, I have hereunto set my hand this 1st
day of April, 1989 at Quezon City.
(SGD)PAT S. PICACHE

The foregoing document was signed by two witnesses and duly
acknowledged by Ms. Picache before a Notary Public also on 1
April 1989.
Since petitioner did not pay any of the loans covered by the
promissory notes when they became due, respondent -- through
its Vice President Nina P. King and its counsel King, Capuchino,
Banico & Associates -- sent petitioner several demand letters.8
Despite receiving the said demand letters, petitioner still failed
and refused to settle his indebtedness, thus, prompting
respondent to file the Complaint with the RTC, docketed as Civil
Case No. Q-90-5247.
In his Answer filed with the RTC, petitioner sought the dismissal
of the Complaint averring that respondent had no cause of action
against him. He denied obtaining any loan from Ms. Picache and
questioned the genuineness and due execution of the promissory
notes, for they were the result of intimidation and fraud; hence,
void. He asserted that there had been no transaction or privity of
contract between him, on one hand, and Ms. Picache and
respondent, on the other. The assignment by Ms. Picache of the
promissory notes to respondent was a mere ploy and simulation
to effect the unjust enforcement of the invalid promissory notes
and to insulate Ms. Picache from any direct counterclaims, and
he never consented or agreed to the said assignment.
Petitioner then presented his own narration of events leading to
the filing of Civil Case No. Q-90-5247. According to him, on 24
February 1988, he entered into a Contract of Lease9 of real
property located in Quezon City with Mission Realty &
Management Corporation (MRMC), of which Ms. Picache is an
incorporator and member of the Board of Directors.10 Petitioner
relocated the plant and machines used in his garments business
to the leased property. After a month or two, a foreign investor
was interested in doing business with him and sent a
representative to conduct an ocular inspection of petitioner's
plant at the leased property. During the inspection, a group of
Meralco employees entered the leased property to cut off the
electric power connections of the plant. The event gave an
unfavorable impression to the foreign investor who desisted from
further transacting with petitioner. Upon verification with
Meralco, petitioner discovered that there were unpaid electric
bills on the leased property amounting to hundreds of thousands
of pesos. These electric bills were supposedly due to the
surreptitious electrical connections to the leased property.
Petitioner claimed that he was never informed or advised by
MRMC of the existence of said unpaid electric bills. It took
Meralco considerable time to restore electric power to the leased
property and only after petitioner pleaded that he was not
responsible for the illegal electrical connections and/or the
unpaid electric bills, for he was only a recent lessee of the leased
property. Because of the work stoppage and loss of business
opportunities resulting from the foregoing incident, petitioner
purportedly suffered damages amounting to United States
$60,000.00, for which petitioner verbally attempted to recover
compensation from MRMC.
Having failed to obtain compensation from MRMC, petitioner
decided to vacate and pull out his machines from the leased
property but he can only do so, unhampered and uninterrupted
by MRMC security personnel, if he signed, as he did, blank
promissory note forms. Petitioner alleged that when he signed
the promissory note forms, the allotted spaces for the principal
amount of the loans, interest rates, and names of the promisee/s
were in blank; and that Ms. Picache took advantage of
petitioner's signatures on the blank promissory note forms by
filling up the blanks.
To raise even more suspicions of fraud and spuriousness of the
promissory notes and their subsequent assignment to
respondent, petitioner called attention to the fact that Ms.
Picache is an incorporator and member of the Board of Directors
of both MRMC and respondent.11
206
After the pre-trial conference and the trial proper, the RTC
rendered a Decision12 on 6 August 1993, ruling in favor of
respondent. The RTC gave more credence to respondent's
version of the facts, finding that –
[Herein petitioner]'s disclaimer of the promissory note[s] does
not inspire belief. He is a holder of a degree in Bachelor of
Science in Chemical Engineering and has been a manufacturer of
garments since 1979. As a matter of fact, [petitioner]'s
testimony that he was made to sign blank sheets of paper is
contrary to his admission in paragraphs 12 and 13 of his Answer
that as a condition to his removal of his machines [from] the
leased premises, he was made to sign blank promissory note
forms with respect to the amount, interest and promisee. It thus
appears incredulous that a businessman like [petitioner] would
simply sign blank sheets of paper or blank promissory notes just
[to] be able to vacate the leased premises.
Moreover, the credibility of [petitioner]'s testimony leaves much
to be desired. He contradicted his earlier testimony that he only
met Patrocinio Picache once, which took place in the office of
Mission Realty and Management Corporation, by stating that he
saw Patrocinio Picache a second time when she went to his
house. Likewise, his claim that the electric power in the leased
premises was cut off only two months after he occupied the
same is belied by his own evidence. The contract of lease
submitted by [petitioner] is dated February 24, 1988 and took
effect on March 1, 1988. His letter to Mission Realty and
Management Corporation dated September 21, 1988, complained
of the electric power disconnection that took place on September
6, 1988, that is, six (6) months after he had occupied the leased
premises, and did not even give a hint of his intention to vacate
the premises because of said incident. It appears that
[petitioner] was already advised to pay his rental arrearages in a
letter dated August 9, 1988 (Exh. "2") and was notified of the
termination of the lease contract in a letter dated September 19,
1988 (Exh. "4"). However, in a letter dated September 26, 1988,
[petitioner] requested for time to look for a place to transfer.
The RTC also sustained the validity and enforceability of the
Assignment of Credit executed by Ms. Picache in favor of
respondent, even in the absence of petitioner's consent to the
said assignment, based on the following reasoning –
The promissory notes (Exhs. "A" and "B") were assigned by Ms.
Patrocinio Picache to [herein respondent] by virtue of a notarized
Assignment of Credit dated April 1, 1989 for a consideration of
P60,000.00 (Exh. "C"). The fact that the assignment of credit
does not bear the conformity of [herein petitioner] is of no
moment. In C & C Commercial Corporation vs. Philippine
National Bank, 175 SCRA 1, 11, the Supreme Court held thus:
"x x x Article 1624 of the Civil Code provides that 'an assignment
of credits and other incorporeal rights shall be perfected in
accordance with the provisions of Article 1475' which in turn
states that 'the contract of sale is perfected at the moment there
is a meeting of the minds upon the thing which is the object of
the contract and upon the price.' The meeting of the minds
contemplated here is that between the assignor of the credit and
his assignee, there being no necessity for the consent of the
debtor, contrary to petitioner's claim. It is sufficient that the
assignment be brought to his knowledge in order to be binding
upon him. This may be inferred from Article 1626 of the Civil
Code which declares that 'the debtor who, before having
knowledge of the assignment, pays his creditor shall be released
from the obligation.'"
[Petitioner] does not deny having been notified of the
assignment of credit by Patrocinio Picache to the [respondent].
Thus, [respondent] sent several demand letters to the
[petitioner] in connection with the loan[s] (Exhs. "D", "E", "F"
and "G"). [Petitioner] acknowledged receipt of [respondent]'s
letter of demand dated June 13, 1989 (Exh. "F") and assured
[respondent] that he would settle his account, as per their
telephone conversation (Exhs. "H" and "9"). Such

communications between [respondent] and [petitioner] show
that the latter had been duly notified of the said assignment of
credit. x x x.
Given its aforequoted findings, the RTC proceeded to a
determination of petitioner's liabilities to respondent, taking into
account the provisions of the promissory notes, thus –
x x x Consequently, [herein respondent] is entitled to recover
from [herein petitioner] the principal amount of P30,000.00 for
the promissory note dated November 9, 1988. As said note did
not provide for any interest, [respondent] may only recover
interest at the legal rate of 12% per annum from April 18, 1990,
the date of the filing of the complaint. With respect to the
promissory note dated November 10, 1988, the same provided
for interest at 36% per annum and that interest not paid when
due shall be added to and shall become part of the principal and
shall bear the same rate of interest as the principal. Likewise,
both promissory notes provided for a penalty of 20% of the total
outstanding balance thereon and attorney's fees equivalent to
20% of the sum sought to be recovered in case of litigation.
In Garcia vs. Court of Appeals, 167 SCRA 815, it was held that
penalty interests are in the nature of liquidated damages and
may be equitably reduced by the courts if they are iniquitous or
unconscionable, pursuant to Articles 1229 and 2227 of the Civil
Code. Considering that the promissory note dated November 10,
1988 already provided for interest at 36% per annum on the
principal obligation, as well as for the capitalization of the unpaid
interest, the penalty charge of 20% of the total outstanding
balance of the obligation thus appears to be excessive and
unconscionable. The interest charges are enough punishment for
[petitioner]'s failure to comply with his obligation under the
promissory note dated November 10, 1988.
With respect to the attorney's fees, the court is likewise
empowered to reduce the same if they are unreasonable or
unconscionable, notwithstanding the express contract therefor.
(Insular Bank of Asia and America vs. Spouses Salazar, 159
SCRA 133, 139). Thus, an award of P10,000.00 as and for
attorney's fees appears to be enough.
Consequently, the fallo of the RTC Decision reads –
WHEREFORE, in view of the foregoing, judgment is hereby
rendered in favor of the [herein respondent] and against [herein
petitioner] ordering the latter as follows:
1. To pay [respondent], on the promissory note dated November
9, 1988, the amount of P30,000.00 with interest thereon at the
legal rate of 12% per annum from April 18, 1990 until fully paid
and a penalty of 20% on the total amount;
2. To pay [respondent], on the promissory note dated November
10, 1988, the amount of P30,000.00 with interest thereon at
36% per annum compounded at the same rate until fully paid;
3. To pay [respondent] the amount of P10,000.00, as and for
attorney's fees; and
4. To pay the costs of the suit.13
Aggrieved by the RTC Decision, dated 6 August 1993, petitioner
filed an appeal with the Court of Appeals, which was docketed as
CA-G.R. CV No. 43604. The appellate court, in a Decision,14
dated 20 March 2001, found no cogent reason to depart from the
conclusions arrived at by the RTC in its appealed Decision, dated
6 August 1993, and affirmed the latter Decision in toto. The
Court of Appeals likewise denied petitioner's Motion for
Reconsideration in a Resolution,15 dated 16 July 2001, stating
that the grounds relied upon by petitioner in his Motion were
mere reiterations of the issues and matters already considered,
weighed and passed upon; and that no new matter or substantial
argument was adduced by petitioner to warrant a modification,
207
much less a reversal, of the Court of Appeals Decision, dated 20
March 2001.
Comes now petitioner to this Court, via a Petition for Review on
Certiorari under Rule 45 of the Revised Rules of Court, raising
the sole issue16 of whether or not the Court of Appeals
committed grave abuse of discretion in affirming in toto the RTC
Decision, dated 6 August 1993. Petitioner's main argument is
that the Court of Appeals erred when it ruled that there was an
assignment of credit and that there was no novation/subrogation
in the case at bar. Petitioner asserts the position that consent of
the debtor to the assignment of credit is a basic/essential
element in order for the assignee to have a cause of action
against the debtor. Without the debtor's consent, the recourse of
the assignee in case of non-payment of the assigned credit, is to
recover from the assignor. Petitioner further argues that even if
there was indeed an assignment of credit, as alleged by the
respondent, then there had been a novation of the original loan
contracts when the respondent was subrogated in the rights of
Ms. Picache, the original creditor. In support of said argument,
petitioner invokes the following provisions of the Civil Code –
ART. 1300. Subrogation of a third person in the rights of the
creditor is either legal or conventional. The former is not
presumed, except in cases expressly mentioned in this Code; the
latter must be clearly established in order that it may take effect.
ART. 1301. Conventional subrogation of a third person requires
the consent of the original parties and the third person.
According to petitioner, the assignment of credit constitutes
conventional subrogation which requires the consent of the
original parties to the loan contract, namely, Ms. Picache (the
creditor) and petitioner (the debtor); and the third person, the
respondent (the assignee). Since petitioner never gave his
consent to the assignment of credit, then the subrogation of
respondent in the rights of Ms. Picache as creditor by virtue of
said assignment is without force and effect.
This Court finds no merit in the present Petition.
Before proceeding to a discussion of the points raised by
petitioner, this Court deems it appropriate to emphasize that the
findings of fact of the Court of Appeals and the RTC in this case
shall no longer be disturbed. It is axiomatic that this Court will
not review, much less reverse, the factual findings of the Court
of Appeals, especially where, as in this case, such findings
coincide with those of the trial court, since this Court is not a
trier of facts.17
The jurisdiction of this Court in a Petition for Review on Certiorari
under Rule 45 of the Revised Rules of Court is limited to
reviewing only errors of law, not of fact, unless it is shown, inter
alia, that: (a) the conclusion is grounded entirely on
speculations, surmises and conjectures; (b) the inference is
manifestly mistaken, absurd and impossible; (c) there is grave
abuse of discretion; (d) the judgment is based on a
misapplication of facts; (e) the findings of fact of the trial court
and the appellate court are contradicted by the evidence on
record and (f) the Court of Appeals went beyond the issues of
the case and its findings are contrary to the admissions of both
parties.18 None of these circumstances are present in the case
at bar. After a perusal of the records, this Court can only
conclude that the factual findings of the Court of Appeals,
affirming those of the RTC, are amply supported by evidence and
are, resultantly, conclusive on this Court.19
Therefore, the following facts are already beyond cavil: (1)
petitioner obtained two loans totaling P60,000.00 from Ms.
Picache, for which he executed promissory notes, dated 9
November 1988 and 10 November 1988; (2) he failed to pay any
of the said loans; (3) Ms. Picache executed on 1 April 1989 an
Assignment of Credit covering petitioner's loans in favor of
respondent for the consideration of P60,000.00; (4) petitioner
had knowledge of the assignment of credit; and (5) petitioner

still failed to pay his indebtedness despite repeated demands by
respondent and its counsel. Petitioner's persistent assertions that
he never acquired any loan from Ms. Picache, or that he signed
the promissory notes in blank and under duress, deserve scant
consideration. They were already found by both the Court of
Appeals and the RTC to be implausible and inconsistent with
petitioner's own evidence.
Now this Court turns to the questions of law raised by petitioner,
all of which hinges on the contention that a conventional
subrogation occurred when Ms. Picache assigned the debt, due
her from the petitioner, to the respondent; and without
petitioner's consent as debtor, the said conventional subrogation
should be deemed to be without force and effect.
This Court cannot sustain petitioner's contention and hereby
declares that the transaction between Ms. Picache and
respondent was an assignment of credit, not conventional
subrogation, and does not require petitioner's consent as debtor
for its validity and enforceability.
An assignment of credit has been defined as 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 or exchange or
donation - and without need of the debtor's consent, transfers
that 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.20
On the other hand, subrogation, by definition, is the transfer of
all the rights of the creditor to a third person, who substitutes
him in all his rights. It may either be legal or conventional. Legal
subrogation is that which takes place without agreement but by
operation of law because of certain acts. Conventional
subrogation is that which takes place by agreement of parties.21
Although it may be said that the effect of the assignment of
credit is to subrogate the assignee in the rights of the original
creditor, this Court still cannot definitively rule that assignment
of credit and conventional subrogation are one and the same.
A noted authority on civil law provided a discourse22 on the
difference between these two transactions, to wit –
Conventional Subrogation and Assignment of Credits. – In the
Argentine Civil Code, there is essentially no difference between
conventional subrogation and assignment of credit. The
subrogation is merely the effect of the assignment. In fact it is
expressly provided (article 769) that conventional redemption
shall be governed by the provisions on assignment of credit.
Under our Code, however, conventional subrogation is not
identical to assignment of credit. In the former, the debtor's
consent is necessary; in the latter, it is not required. Subrogation
extinguishes an obligation and gives rise to a new one;
assignment refers to the same right which passes from one
person to another. The nullity of an old obligation may be cured
by subrogation, such that the new obligation will be perfectly
valid; but the nullity of an obligation is not remedied by the
assignment of the creditor's right to another. (Emphasis
supplied.)
This Court has consistently adhered to the foregoing distinction
between an assignment of credit and a conventional
subrogation.23 Such distinction is crucial because it would
determine the necessity of the debtor's consent. In an
assignment of credit, the consent of the debtor is not necessary
in order that the assignment may fully produce the legal effects.
What the law requires in an assignment of credit is not the
consent of the debtor, but merely notice to him as the
assignment takes effect only from the time he has knowledge
thereof. A creditor may, therefore, validly assign his credit and
its accessories without the debtor's consent. On the other hand,
conventional subrogation requires an agreement among the
208
parties concerned – the original creditor, the debtor, and the new
creditor. It is a new contractual relation based on the mutual
agreement among all the necessary parties.24
Article 1300 of the Civil Code provides that conventional
subrogation must be clearly established in order that it may take
effect. Since it is petitioner who claims that there is conventional
subrogation in this case, the burden of proof rests upon him to
establish the same25 by a preponderance of evidence.26
In Licaros v. Gatmaitan,27 this Court ruled that there was
conventional subrogation, not just an assignment of credit; thus,
consent of the debtor is required for the effectivity of the
subrogation. This Court arrived at such a conclusion in said case
based on its following findings –
We agree with the finding of the Court of Appeals that the
Memorandum of Agreement dated July 29, 1988 was in the
nature of a conventional subrogation which requires the consent
of the debtor, Anglo-Asean Bank, for its validity. We note with
approval the following pronouncement of the Court of Appeals:
"Immediately discernible from above is the common feature of
contracts involving conventional subrogation, namely, the
approval of the debtor to the subrogation of a third person in
place of the creditor. That Gatmaitan and Licaros had intended to
treat their agreement as one of conventional subrogation is
plainly borne by a stipulation in their Memorandum of
Agreement, to wit:
"WHEREAS, the parties herein have come to an agreement on
the nature, form and extent of their mutual prestations which
they now record herein with the express conformity of the third
parties concerned" (emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status
of a mere "assignee" of appellee's credit, there is simply no
sense for them to have stipulated in their agreement that the
same is conditioned on the "express conformity" thereto of
Anglo-Asean Bank. That they did so only accentuates their
intention to treat the agreement as one of conventional
subrogation. And it is basic in the interpretation of contracts that
the intention of the parties must be the one pursued (Rule 130,
Section 12, Rules of Court).
xxxx
Aside for the 'whereas clause" cited by the appellate court in its
decision, we likewise note that on the signature page, right
under the place reserved for the signatures of petitioner and
respondent, there is, typewritten, the words "WITH OUR
CONFORME." Under this notation, the words "ANGLO-ASEAN
BANK AND TRUST" were written by hand. To our mind, this
provision which contemplates the signed conformity of Anglo-
Asean Bank, taken together with the aforementioned
preambulatory clause leads to the conclusion that both parties
intended that Anglo-Asean Bank should signify its agreement and
conformity to the contractual arrangement between petitioner
and respondent. The fact that Anglo-Asean Bank did not give
such consent rendered the agreement inoperative considering
that, as previously discussed, the consent of the debtor is
needed in the subrogation of a third person to the rights of a
creditor.
None of the foregoing circumstances are attendant in the present
case. The Assignment of Credit, dated 1 April 1989, executed by
Ms. Picache in favor of respondent, was a simple deed of
assignment. There is nothing in the said Assignment of Credit
which imparts to this Court, whether literally or deductively, that
a conventional subrogation was intended by the parties thereto.
The terms of the Assignment of Credit only convey the
straightforward intention of Ms. Picache to "sell, assign, transfer,
and convey" to respondent the debt due her from petitioner, as

evidenced by the two promissory notes of the latter, dated 9
November 1988 and 10 November 1988, for the consideration of
P60,000.00. By virtue of the same document, Ms. Picache gave
respondent full power "to sue for, collect and discharge, or sell
and assign" the very same debt. The Assignment of Credit was
signed solely by Ms. Picache, witnessed by two other persons. No
reference was made to securing the conforme of petitioner to the
transaction, nor any space provided for his signature on the said
document.
Perhaps more in point to the case at bar is Rodriguez v. Court of
Appeals, 28 in which this Court found that –
The basis of the complaint is not a deed of subrogation but an
assignment of credit whereby the private respondent became the
owner, not the subrogee of the credit since the assignment was
supported by HK $1.00 and other valuable considerations.
xxxx
The petitioner further contends that the consent of the debtor is
essential to the subrogation. Since there was no consent on his
part, then he allegedly is not bound.
Again, we find for the respondent. The questioned deed of
assignment is neither one of subrogation nor a power of attorney
as the petitioner alleges. The deed of assignment clearly states
that the private respondent became an assignee and, therefore,
he became the only party entitled to collect the indebtedness. As
a result of the Deed of Assignment, the plaintiff acquired all
rights of the assignor including the right to sue in his own name
as the legal assignee. Moreover, in assignment, the debtor's
consent is not essential for the validity of the assignment (Art.
1624 in relation to Art. 1475, Civil Code), his knowledge thereof
affecting only the validity of the payment he might make (Article
1626, Civil Code).
Since the Assignment of Credit, dated 1 April 1989, is just as its
title suggests, then petitioner's consent as debtor is not
necessary in order that the assignment may fully produce legal
effects. The duty to pay does not depend on the consent of the
debtor; otherwise, all creditors would be prevented from
assigning their credits because of the possibility of the debtors'
refusal to give consent.29 Moreover, this Court had already
noted previously that there does not appear to be anything in
Philippine statutes or jurisprudence which prohibits a creditor,
without the consent of the debtor, from making an assignment of
his credit and the rights accessory thereto; and, certainly, an
assignment of credit and its accessory rights does not at all
obliterate the obligation of the debtor to pay, but merely puts the
assignee in the place of the assignor.30 Hence, the obligation of
petitioner to pay his debt subsists despite the assignment
thereof; only, his obligation after he came to know of the said
assignment would be to pay the debt to the respondent (the
assignee), instead of Ms. Picache (the original creditor).
It bears to emphasize that even if the consent of petitioner as
debtor is unnecessary for the validity and enforceability of the
assignment of credit, nonetheless, the petitioner must have
knowledge, acquired either by formal notice or some other
means, of the assignment so that he may pay the debt to the
proper party, which shall now be the assignee. This much can be
gathered from a reading of Article 1626 of the Civil Code
providing that, "The debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the
obligation."
This Court, in Sison v. Yap Tico,31 presented and adopted
Manresa's analysis of Article 1626 of the Civil Code (then Article
1527 of the old Civil Code) –
Manresa, in commenting upon the provisions of article 1527 of
the Civil Code, after discussing the articles of the Mortgage Law,
says:
209
"We have said that article 1527 deals with the individual phase
or aspect which presupposes the existence of a relationship with
third parties, that is, with the person of the debtor. Let us see in
what way.
"The above-mentioned article states that a debtor who, before
having knowledge of the assignment, should pay the creditor
shall be released from the obligation.
"In the first place, the necessity for the notice to the debtor in
order that the assignment may fully produce its legal effects may
be inferred from the above. It refers to a notice and not to a
petition for the consent which is not necessary. We say that the
notice is not necessary in order that the legal effects may be fully
produced, because if it should be omitted, such omission will not
imply that the assignment will not exist legally, but that its
effects will be limited to the parties thereto; at least, they will
not reach the debtor.
"* * * * * * * *
"Let us go to the legal effects produced by the failure to give the
notice. In the beginning, we have said that the contract does not
lose its efficacy with respect to the parties who made it; but
article 1527 determines specifically one of the consequences
arising from the failure to give notice, for it evidently takes for
granted that the debtor who, before having knowledge of the
assignment, should pay the creditor shall be released from the
obligation. So that if the creditor assigned his credit, acting in
bad faith and taking advantage of the fact that the debtor does
not know anything about the assignment because the latter has
not been notified, and collects its amount, the debtor shall be
free from the obligation, inasmuch as it has been legally
extinguished by a payment which fully redounds to his benefit.
The assignee can take advantage of all civil and criminal actions
against the assignor, but he can ask nothing from the debtor,
because the latter did not know of the assignment, nor was he
bound to know it; the assignor should blame himself for his
failure to have the notice made.
"* * * * * * * *
"Hence, there not having been any notice to the debtor, the
existence of his knowledge of the assignment should be proved
by him who is interested therein; and the debtor is not bound to
prove his ignorance."
In a more recent case, Aquintey v. Spouses Tibong,32 this Court
stated: "The law does not require any formal notice to bind the
debtor to the assignee, all that the law requires is knowledge of
the assignment. Even if the debtor had not been notified, but
came to know of the assignment by whatever means, the debtor
is bound by it."
Since his consent is immaterial, the only other matter which this
Court must determine is whether petitioner had knowledge of the
Assignment of Credit, dated 1 April 1989, between Ms. Picache
and respondent. Both the Court of Appeals and the RTC ruled in
the affirmative, and so must this Court. Petitioner does not deny
having knowledge of the assignment of credit by Ms. Picache to
the respondent. In 1989, when petitioner's loans became
overdue, it was respondent and its counsel who sent several
demand letters to him. It can be reasonably presumed that
petitioner received said letters for they were sent by registered
mail, and the return cards were signed by petitioner's agent.
Petitioner expressly acknowledged receipt of respondent's
demand letter, dated 13 June 1989, to which he replied with
another letter, dated 21 June 1989, stating that he would settle
his account with respondent but also requesting consideration of
the losses he suffered from the electric power disconnection at
the property he leased from MRMC. It further appears that
petitioner had never questioned why it was respondent seeking
payment of the loans and not the original creditor, Ms. Picache.
All these circumstances tend to establish that respondent already
knew of the assignment of credit made by Ms. Picache in favor of

respondent and explains his acceptance of all the demands for
payment of the loans made upon him by the respondent.
Finally, assuming arguendo that this Court considers petitioner a
third person to the Assignment of Credit, dated 1 April 1989, the
fact that the said document was duly notarized makes it legally
enforceable even as to him. According to Article 1625 of the Civil
Code –
ART. 1625. An assignment of credit, right or action shall produce
no effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.
Notarization converted the Assignment of Credit, dated 1 April
1989, a private document, into a public document,33 thus,
complying with the mandate of the afore-quoted provision and
making it enforceable even as against third persons.
WHEREFORE, premises considered, the instant Petition for
Review is hereby DENIED, and the Decision, dated 20 March
2001, of the Court of Appeals in CA-G.R. CV No. 43604, affirming
in toto the Decision, dated 6 August 1993, of the Quezon City
Regional Trial Court, Branch 91, in Civil Case No. Q-90-5247, is
hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.
FIRST DIVISION
HEIRS OF SERVANDO FRANCO,
Petitioners,
- versus -
SPOUSES VERONICA AND DANILO GONZALES,
Respondents.
G.R. No. 159709
BERSAMIN, J.:
There is novation when there is an irreconcilable incompatibility
between the old and the new obligations. There is no novation in
case of only slight modifications; hence, the old obligation
prevails.
The petitioners challenge the decision promulgated on March 19,
2003,[1] whereby the Court of Appeals (CA) upheld the issuance
of a writ of execution by the Regional Trial Court (RTC), Branch
16, in Malolos, Bulacan.
Antecedents
The Court adopts the following summary of the antecedents
rendered by the Court in Medel v. Court of Appeals,[2] the case
from which this case originated, to wit:
On November 7, 1985, Servando Franco and Leticia Medel
(hereafter Servando and Leticia) obtained a loan from Veronica
R. Gonzales (hereafter Veronica), who was engaged in the
money lending business under the name Gonzales Credit
Enterprises, in the amount of P50,000.00, payable in two
months. Veronica gave only the amount of P47,000.00, to the
borrowers, as she retained P3,000.00, as advance interest for
one month at 6% per month. Servado and Leticia executed a
promissory note for P50,000.00, to evidence the loan, payable
on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained from
Veronica another loan in the amount of P90,000.00, payable in
two months, at 6% interest per month. They executed a
promissory note to evidence the loan, maturing on January 19,
1986. They received only P84,000.00, out of the proceeds of the
loan.
On maturity of the two promissory notes, the borrowers failed to
pay the indebtedness.
On June 11, 1986, Servando and Leticia secured from Veronica
still another loan in the amount of P300,000.00, maturing in one
210
month, secured by a real estate mortgage over a property
belonging to Leticia Makalintal Yaptinchay, who issued a special
power of attorney in favor of Leticia Medel, authorizing her to
execute the mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the sum of
P300,000.00, after a month, or on July 11, 1986. However, only
the sum of P275,000.00, was given to them out of the proceeds
of the loan.
Like the previous loans, Servando and Medel failed to pay the
third loan on maturity.
On July 23, 1986, Servando and Leticia with the latter's
husband, Dr. Rafael Medel, consolidated all their previous unpaid
loans totaling P440,000.00, and sought from Veronica another
loan in the amount of P60,000.00, bringing their indebtedness to
a total of P500,000.00, payable on August 23, 1986. They
executed a promissory note, reading as follows:
Baliwag, Bulacan July 23, 1986
Maturity Date August 23, 1986
P500,000.00
FOR VALUE RECEIVED, I/WE jointly and severally promise to pay
to the order of VERONICA R. GONZALES doing business in the
business style of GONZALES CREDIT ENTERPRISES, Filipino, of
legal age, married to Danilo G. Gonzales, Jr., of Baliwag Bulacan,
the sum of PESOS ........ FIVE HUNDRED THOUSAND .....
(P500,000.00) Philippine Currency with interest thereon at the
rate of 5.5 PER CENT per month plus 2% service charge per
annum from date hereof until fully paid according to the
amortization schedule contained herein. (Underscoring supplied)
Payment will be made in full at the maturity date.
Should I/WE fail to pay any amortization or portion hereof when
due, all the other installments together with all interest accrued
shall immediately be due and payable and I/WE hereby agree to
pay an additional amount equivalent to one per cent (1%) per
month of the amount due and demandable as penalty charges in
the form of liquidated damages until fully paid; and the further
sum of TWENTY FIVE PER CENT (25%) thereof in full, without
deductions as Attorney's Fee whether actually incurred or not, of
the total amount due and demandable, exclusive of costs and
judicial or extra judicial expenses. (Underscoring supplied)
I, WE further agree that in the event the present rate of interest
on loan is increased by law or the Central Bank of the
Philippines, the holder shall have the option to apply and collect
the increased interest charges without notice although the
original interest have already been collected wholly or partially
unless the contrary is required by law.
It is also a special condition of this contract that the parties
herein agree that the amount of peso-obligation under this
agreement is based on the present value of peso, and if there be
any change in the value thereof, due to extraordinary inflation or
deflation, or any other cause or reason, then the peso-obligation
herein contracted shall be adjusted in accordance with the value
of the peso then prevailing at the time of the complete fulfillment
of obligation.

Demand and notice of dishonor waived. Holder may accept
partial payments and grant renewals of this note or extension of
payments, reserving rights against each and all indorsers and all
parties to this note.
IN CASE OF JUDICIAL Execution of this obligation, or any part of
it, the debtors waive all his/their rights under the provisions of
Section 12, Rule 39, of the Revised Rules of Court.
On maturity of the loan, the borrowers failed to pay the
indebtedness of P500,000.00, plus interests and penalties,
evidenced by the above-quoted promissory note.
On February 20, 1990, Veronica R. Gonzales, joined by her
husband Danilo G. Gonzales, filed with the Regional Trial Court of
Bulacan, Branch 16, at Malolos, Bulacan, a complaint for
collection of the full amount of the loan including interests and
other charges.
In his answer to the complaint filed with the trial court on April 5,
1990, defendant Servando alleged that he did not obtain any
loan from the plaintiffs; that it was defendants Leticia and Dr.
Rafael Medel who borrowed from the plaintiffs the sum of
P500,000.00, and actually received the amount and benefited
therefrom; that the loan was secured by a real estate mortgage
executed in favor of the plaintiffs, and that he (Servando Franco)
signed the promissory note only as a witness.
In their separate answer filed on April 10,1990, defendants
Leticia and Rafael Medel alleged that the loan was the transaction
of Leticia Yaptinchay, who executed a mortgage in favor of the
plaintiffs over a parcel of real estate situated in San Juan,
Batangas; that the interest rate is excessive at 5.5% per month
with additional service charge of 2% per annum, and penalty
charge of 1% per month; that the stipulation for attorney's fees
of 25% of the amount due is unconscionable, illegal and
excessive, and that substantial payments made were applied to
interest, penalties and other charges.
After due trial, the lower court declared that the due execution
and genuineness of the four promissory notes had been duly
proved, and ruled that although the Usury Law had been
repealed, the interest charged by the plaintiffs on the loans was
unconscionable and "revolting to the conscience". Hence, the trial
court applied "the provision of the New [Civil] Code" that the
"legal rate of interest for loan or forbearance of money, goods or
credit is 12% per annum."
Accordingly, on December 9, 1991, the trial court rendered
judgment, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered,
as follows:
1. Ordering the defendants Servando Franco and Leticia Medel,
jointly and severally, to pay plaintiffs the amount of P47,000.00
211
plus 12% interest per annum from November 7, 1985 and 1%
per month as penalty, until the entire amount is paid in full.
2. Ordering the defendants Servando Franco and Leticia Y. Medel
to plaintiffs, jointly and severally the amount of P84,000.00 with
12% interest per annum and 1% per cent per month as penalty
from November 19,1985 until the whole amount is fully paid;
3. Ordering the defendants to pay the plaintiffs, jointly and
severally, the amount of P285,000.00 plus 12% interest per
annum and 1% per month as penalty from July 11, 1986, until
the whole amount is fully paid;
4. Ordering the defendants to pay plaintiffs, jointly and severally,
the amount of P50,000.00 as attorney's fees;
5. All counterclaims are hereby dismissed.
With costs against the defendants.
In due time, both plaintiffs and defendants appealed to the Court
of Appeals.
In their appeal, plaintiffs-appellants argued that the promissory
note, which consolidated all the unpaid loans of the defendants,
is the law that governs the parties. They further argued that
Circular No. 416 of the Central Bank prescribing the rate of
interest for loans or forbearance of money, goods or credit at
12% per annum, applies only in the absence of a stipulation on
interest rate, but not when the parties agreed thereon.
The Court of Appeals sustained the plaintiffs-appellants'
contention. It ruled that the Usury Law having become legally
inexistent with the promulgation by the Central Bank in 1982 of
Circular No. 905, the lender and borrower could agree on any
interest that may be charged on the loan. The Court of Appeals
further held that "the imposition of an additional amount
equivalent to 1% per month of the amount due and demandable
as penalty charges in the form of liquidated damages until fully
paid was allowed by law.
Accordingly, on March 21, 1997, the Court of Appeals
promulgated it decision reversing that of the Regional Trial
Court, disposing as follows:
WHEREFORE, the appealed judgment is hereby MODIFIED such
that defendants are hereby ordered to pay the plaintiffs the sum
of P500,000.00, plus 5.5% per month interest and 2% service
charge per annum effective July 23, 1986, plus 1% per month of
the total amount due and demandable as penalty charges
effective August 24, 1986, until the entire amount is fully paid.

The award to the plaintiffs of P50,000.00 as attorney's fees is
affirmed. And so is the imposition of costs against the
defendants.
SO ORDERED.
On April 15, 1997, defendants-appellants filed a motion for
reconsideration of the said decision. By resolution dated
November 25, 1997, the Court of Appeals denied the motion.[3]
On review, the Court in Medel v. Court of Appeals struck down as
void the stipulation on the interest for being iniquitous or
unconscionable, and revived the judgment of the RTC rendered
on December 9, 1991, viz:
WHEREFORE, the Court hereby REVERSES and SETS ASIDE the
decision of the Court of Appeals promulgated on March 21, 1997,
and its resolution dated November 25, 1997. Instead, we render
judgment REVIVING and AFFIRMING the decision dated
December 9, 1991, of the Regional Trial Court of Bulacan, Branch
16, Malolos, Bulacan, in Civil Case No. 134-M-90, involving the
same parties.
No pronouncement as to costs in this instance.
SO ORDERED.[4]
Upon the finality of the decision in Medel v. Court of Appeals, the
respondents moved for execution.[5] Servando Franco opposed,
[6] claiming that he and the respondents had agreed to fix the
entire obligation at P775,000.00.[7] According to Servando, their
agreement, which was allegedly embodied in a receipt dated
February 5, 1992,[8] whereby he made an initial payment of
P400,000.00 and promised to pay the balance of P375,000.00 on
February 29, 1992, superseded the July 23, 1986 promissory
note.
The RTC granted the motion for execution over Servandos
opposition, thus:
There is no doubt that the decision dated December 9, 1991 had
already been affirmed and had already become final and
executory. Thus, in accordance with Sec. 1 of Rule 39 of the
1997 Rules of Civil Procedure, execution shall issue as a matter
of right. It has likewise been ruled that a judgment which has
acquired finality becomes immutable and unalterable and hence
may no longer be modified at any respect except only to correct
clerical errors or mistakes (Korean Airlines Co. Ltd. vs. C.A., 247
SCRA 599). In this respect, the decision deserves to be
respected.
The argument about the modification of the contract or non-
participation of defendant Servando Franco in the proceedings on
appeal on the alleged belief that the payment he made had
already absolved him from liability is of no moment. Primarily,
the decision was for him and Leticia Medel to pay the plaintiffs
212
jointly and severally the amounts stated in the Decision. In other
words, the liability of the defendants thereunder is solidary.
Based on this aspect alone, the new defense raised by defendant
Franco is unavailing.
WHEREFORE, in the light of all the foregoing, the Court hereby
grants the Motion for Execution of Judgment.
Accordingly, let a writ of execution be issued for implementation
by the Deputy Sheriff of this Court.
SO ORDERED.[9]
On March 8, 2001, the RTC issued the writ of execution.[10]
Servando moved for reconsideration,[11] but the RTC denied his
motion.[12]
On March 19, 2003, the CA affirmed the RTC through its assailed
decision, ruling that the execution was proper because of
Servandos failure to comply with the terms of the compromise
agreement, stating:[13]
Petitioner cannot deny the fact that there was no full compliance
with the tenor of the compromise agreement. Private
respondents on their part did not disregard the payments made
by the petitioner. They even offered that whatever payments
made by petitioner, it can be deducted from the principal
obligation including interest. However, private respondents posit
that the payments made cannot alter, modify or revoke the
decision of the Supreme Court in the instant case.
In the case of Prudence Realty and Development Corporation vs.
Court of Appeals, the Supreme Court ruled that:
When the terms of the compromise judgment is violated, the
aggrieved party must move for its execution, not its invalidation.
It is clear from the aforementioned jurisprudence that even if
there is a compromise agreement and the terms have been
violated, the aggrieved party, such as the private respondents,
has the right to move for the issuance of a writ of execution of
the final judgment subject of the compromise agreement.
Moreover, under the circumstances of this case, petitioner does
not stand to suffer any harm or prejudice for the simple reason
that what has been asked by private respondents to be the

subject of a writ of execution is only the balance of petitioners
obligation after deducting the payments made on the basis of the
compromise agreement.
WHEREFORE, premises considered, the instant petition is hereby
DENIED DUE COURSE and consequently DISMISSED for lack of
merit.
SO ORDERED.
His motion for reconsideration having been denied,[14] Servando
appealed. He was eventually substituted by his heirs, now the
petitioners herein, on account of his intervening death. The
substitution was pursuant to the resolution dated June 15, 2005.
[15]
Issue
The petitioners submit that the CA erred in ruling that:
THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE
REGIONAL TRIAL COURT OF MALOLOS, BULACAN WAS NOT
NOVATED BY THE COMPROMISE AGREEMENT BETWEEN THE
PARTIES ON 5 FEBRUARY 1992.
II
THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD
BE BASED ON THE DECEMBER 1991 DECISION OF BRANCH 16
OF THE REGIONAL TRIAL COURT OF MALOLOS, BULACAN AND
NOT ON THE COMPROMISE AGREEMENT EXECUTED IN 1992.
The petitioners insist that the RTC could not validly enforce a
judgment based on a promissory note that had been already
novated; that the promissory note had been impliedly novated
when the principal obligation of P500,000.00 had been fixed at
P750,000.00, and the maturity date had been extended from
August 23, 1986 to February 29, 1992.
In contrast, the respondents aver that the petitioners seek to
alter, modify or revoke the final and executory decision of the
Court; that novation did not take place because there was no
complete incompatibility between the promissory note and the
memorandum receipt; that Servandos previous payment would
be deducted from the total liability of the debtors based on the
RTCs decision.
Issue
213
Was there a novation of the August 23, 1986 promissory note
when respondent Veronica Gonzales issued the February 5, 1992
receipt?
Ruling
The petition lacks merits.
Novation did not transpire because no
irreconcilable incompatibility existed
between the promissory note and the receipt
To buttress their claim of novation, the petitioners rely on the
receipt issued on February 5, 1992 by respondent Veronica
whereby Servandos obligation was fixed at P750,000.00. They
insist that even the maturity date was extended until February
29, 1992. Such changes, they assert, were incompatible with
those of the original agreement under the promissory note.
The petitioners assertion is wrong.
A novation arises when there is a substitution of an obligation by
a subsequent one that extinguishes the first, either by changing
the object or the principal conditions, or by substituting the
person of the debtor, or by subrogating a third person in the
rights of the creditor.[16] For a valid novation to take place,
there must be, therefore: (a) a previous valid obligation; (b) an
agreement of the parties to make a new contract; (c) an
extinguishment of the old contract; and (d) a valid new contract.
[17] In short, the new obligation extinguishes the prior
agreement only when the substitution is unequivocally declared,
or the old and the new obligations are incompatible on every
point. A compromise of a final judgment operates as a novation
of the judgment obligation upon compliance with either of these
two conditions.[18]
The receipt dated February 5, 1992, excerpted below, did not
create a new obligation incompatible with the old one under the
promissory note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI Managers Check No.
001700 in the amount of P400,00.00 as partial payment of loan.
Balance of P375,000.00 to be paid on or before FEBRUARY 29,
1992. In case of default an interest will be charged as stipulated
in the promissory note subject of this case.
(Sgd)
V. Gonzalez[19]

To be clear, novation is not presumed. This means that the
parties to a contract should expressly agree to abrogate the old
contract in favor of a new one. In the absence of the express
agreement, the old and the new obligations must be
incompatible on every point.[20] According to California Bus
Lines, Inc. v. State Investment House, Inc.:[21]
The extinguishment of the old obligation by the new one is a
necessary element of novation which may be effected either
expressly or impliedly. The term expressly means that the
contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the
other hand, no specific form is required for an implied novation,
and all that is prescribed by law would be an incompatibility
between the two contracts. While there is really no hard and fast
rule to determine what might constitute to be a sufficient change
that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the
old and the new obligations.
There is incompatibility when the two obligations cannot stand
together, each one having its independent existence. If the two
obligations cannot stand together, the latter obligation novates
the first.[22] Changes that breed incompatibility must be
essential in nature and not merely accidental. The
incompatibility must affect any of the essential elements of the
obligation, such as its object, cause or principal conditions
thereof; otherwise, the change is merely modificatory in nature
and insufficient to extinguish the original obligation.[23]
In light of the foregoing, the issuance of the receipt created no
new obligation. Instead, the respondents only thereby recognized
the original obligation by stating in the receipt that the
P400,000.00 was partial payment of loan and by referring to the
promissory note subject of the case in imposing the interest. The
loan mentioned in the receipt was still the same loan involving
the P500,000.00 extended to Servando. Advertence to the
interest stipulated in the promissory note indicated that the
contract still subsisted, not replaced and extinguished, as the
petitioners claim.
The receipt dated February 5, 1992 was only the proof of
Servandos payment of his obligation as confirmed by the
decision of the RTC. It did not establish the novation of his
agreement with the respondents. Indeed, the Court has ruled
that an obligation to pay a sum of money is not novated by an
instrument that expressly recognizes the old, or changes only the
terms of payment, or adds other obligations not incompatible
with the old ones, or the new contract merely supplements the
old one.[24] A new contract that is a mere reiteration,
acknowledgment or ratification of the old contract with slight
modifications or alterations as to the cause or object or principal
conditions can stand together with the former one, and there can
be no incompatibility between them.[25] Moreover, a creditors
acceptance of payment after demand does not operate as a
modification of the original contract.[26]
Worth noting is that Servandos liability was joint and solidary
with his co-debtors. In a solidary obligation, the creditor may
proceed against any one of the solidary debtors or some or all of
them simultaneously.[27] The choice to determine against whom
the collection is enforced belongs to the creditor until the
obligation is fully satisfied.[28] Thus, the obligation was being
214
enforced against Servando, who, in order to escape liability,
should have presented evidence to prove that his obligation had
already been cancelled by the new obligation or that another
debtor had assumed his place. In case of change in the person of
the debtor, the substitution must be clear and express,[29] and
made with the consent of the creditor.[30] Yet, these
circumstances did not obtain herein, proving precisely that
Servando remained a solidary debtor against whom the entire or
part of the obligation might be enforced.
Lastly, the extension of the maturity date did not constitute a
novation of the previous agreement. It is settled that an
extension of the term or period of the maturity date does not
result in novation.[31]
II
Total liability to be reduced by P400,000.00
The petitioners argue that Servandos remaining liability
amounted to only P375,000.00, the balance indicated in the
February 5, 1992 receipt. Accordingly, the balance was not yet
due because the respondents did not yet make a demand for
payment.
The petitioners cannot be upheld.
The balance of P375,000.00 was premised on the taking place of
a novation. However, as found now, novation did not take place.
Accordingly, Servandos obligation, being solidary, remained to be
that decreed in the December 9, 1991 decision of the RTC,
inclusive of interests, less the amount of P400,000.00 that was
meanwhile paid by him.
WHEREFORE, the Court AFFIRMS the decision of the Court of
Appeals promulgated on March 19, 2003; ORDERS the Regional
Trial Court, Branch 16, in Malolos, Bulacan to proceed with the
execution based on its decision rendered on December 9, 1991,
deducting the amount of P400,000.00 already paid by the late
Servando Franco; and DIRECTS the petitioners to pay the costs
of suit.
SO ORDERED.
------
FIRST DIVISION
[ G.R. No. 169407, March 25, 2015 ]
BANK OF THE PHILIPPINE ISLANDS, PETITIONER, VS. AMADOR
DOMINGO, RESPONDENT.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court is a Petition for Review on Certiorari under Rule
45 of the Rules of Court, filed by petitioner Bank of the Philippine
Islands (BPI), seeking the reversal and setting aside of the
Decision[1] dated July 11, 2005 and Resolution[2] dated August
19, 2005 of the Court of Appeals in CA-G.R. SP No. 88836.
The Petition arose from the following facts:

On September 27, 1993, respondent Amador Domingo (Amador)
and his wife, the late Mercy Maryden Domingo (Mercy),[3]
(collectively referred to as the spouses Domingo) executed a
Promissory Note[4] in favor of Makati Auto Center, Inc. in the
sum of P629,856.00, payable in 48 successive monthly
installments in the amount of P13,122.00 each. They
simultaneously executed a Deed of Chattel Mortgage[5] over a
1993 Mazda 323 (subject vehicle) to secure the payment of their
Promissory Note. Makati Auto Center, Inc. then assigned, ceded,
and transferred all its rights and interests over the said
Promissory Note and chattel mortgage to Far East Bank and
Trust Company (FEBTC).
On April 7, 2000, the Securities and Exchange Commission (SEC)
approved and issued the Certificate of Filing of the Articles of
Merger and Plan of Merger executed on January 20, 2000 by and
between BPI, the surviving corporation, and FEBTC, the absorbed
corporation. By virtue of said merger, all the assets and liabilities
of FEBTC were transferred to and absorbed by BPI.[6]
The spouses Domingo defaulted when they failed to pay 21
monthly installments that had fallen due consecutively from
January 15, 1996 to September 15, 1997. BPI, being the
surviving corporation after the merger, demanded that the
spouses Domingo pay the balance of the Promissory Note
including accrued late payment charges/interests or to return the
possession of the subject vehicle for the purpose of foreclosure in
accordance with the undertaking stated in the chattel mortgage.
When the spouses Domingo still failed to comply with its
demands, BPI filed on November 14, 2000 a Complaint[7] for
Replevin and Damages (or in the alternative, for the collection of
sum of money, interest and other charges, and attorney's fees)
which was raffled to the Metropolitan Trial Court (MeTC) of
Manila, Branch 9, and docketed as Civil Case No. 168949-CV. BPI
included a John Doe as defendant because at the time of filing of
the Complaint, BPI was already aware that the subject vehicle
was in the possession of a third person but did not yet know the
identity of said person.
In their Answer,[8] the spouses Domingo raised the following
affirmative defenses:
4. [BPI] has no cause of action against the [spouses Domingo].
5. The Honorable Court has no jurisdiction over this case,
6. As per the allegations in the complaint, JOHN DOE is an
indispensable party to this case so with his whereabouts
unknown, service by publication should first be made before
proceeding with the trial of this case;
7. Defendant Maryden Domingo once obtained a car loan from
Far East Bank and Trust Company but the car was later sold to
Carmelita S. Gonzales with the bank's conformity and the buyer
subsequently assumed payment of the balance of the mortgaged
loan.
During trial, the prosecution presented as witness Vicente
Magpusao, a former employee of FEBTC and now an Account
Analyst of BPI. His testimony was summed up by the MeTC as
follows:
Vicente Magpusao, [BPI's] Account Analyst and formerly
connected with Far East Bank and Trust Company testified that
on September 27, 1993, [the spouses Domingo] for
consideration executed and delivered to Makati Auto Center, Inc.
a Promissory Note in the sum of P629,856.00 payable in monthly
installments in accordance with the schedule of payment
indicated in said Promissory Note. In order to secure the
payment of the obligation, the [spouses Domingo] executed in
favor of said Makati Auto Center, Inc. on the same date a Chattel
Mortgage over one (1) unit of 1993 Mazda (323) with Motor No.
B6-270146 and with Serial No. BG1062M9100287. With notice to
[the spouses Domingo], said Makati Auto Center, Inc. assigned
to Far East Bank and Trust Co. the Chattel Mortgage as shown by
the Deed of Assignment executed by [Makati Auto Center, Inc.].
Far East Bank and Trust Co. on the other hand, has been merged
with and/or absorbed by herein plaintiff [BPI]. The [spouses
215
Domingo] defaulted in complying with the terms and conditions
of the Promissory Note with Chattel Mortgage by failing to pay
twenty[-one] (21) successive installments which fell due on
January 15, 1996 up to September 15, 1997. [BPI] sent a
demand letter [to] defendant Mercy Domingo thru registered
mail demanding payment of the whole balance of the Promissory
Note plus the stipulated interest and other charges or return to
[BPI] the possession of the above-described motor vehicle. There
were some negotiations made by the [spouses Domingo] to their
In House Legal Assistant but the same did not materialize. Based
on the Statement of Account dated October 31, 2000, [the
spouses Domingo have] an outstanding balance of P275,562.00
exclusive of interest and other charges.
On cross-examination, the witness explained that the first time
he came to handle [the spouses Domingo's] account was in
1997. Despite the fact that he was not yet employed with the
bank in 1993, he knew exactly what happened in this particular
transaction because of his experience in auto financing. He also
has an access [to] the Promissory Note, Chattel Mortgage and
other records of payment made by the bank. Based on the
records, the [spouses Domingo] issued several postdated checks
but not for the entire term. There were payments made from
October 30, 199[3] up to September 14, 1994. He was not the
one who received payments for the auto finance. If there were
receipts issued, they will only ride for the account of Mrs.
Domingo. He was not sure if these receipts are kept in the
warehouse or probably disposed of by the bank since the
transaction was made in 1997. They already have a computer
records of all payments made by their client. Based on the
subsidiary ledger, there were three (3) checks that bounced and
these are payments from the new buyer. They only have one (1)
photocopy of these checks in the amount of P325,431.60 while
the other two (2) are missing. He was not aware who owns
Cargo and Hardware Corporation but the check was issued by a
certain Miss Gonzales. The witness further testified that anyone
can pay the monthly amortization as long as the payment is for
the account of Maryden Domingo. They cannot include Carmelita
Gonzales as one of the defendants in this case because they
don't have a document executed by the latter in behalf of Far
East Bank and Trust Co. The bank did not approve the Deed of
Sale with Assumption of Mortgage.
Witness further testified that he found the photocopy of the Deed
of Sale in the records of Maryden Domingo. The Promissory Note
and Chattel Mortgage were executed by the defendants Maryden
and Amador Domingo. There was no assumption of obligation of
the [spouses Domingo]. Witness however admitted that Far East
Bank did not turn over to [BPI] all the records pertaining to the
account of the [spouses Domingo].[9] (Citations omitted.)
Amador himself testified for the defense. The MeTC provided the
following summary of Amador's testimony:
For his defense, defendant Amador Domingo testified that his
wife and co-defendant Mercy Maryden Domingo died on
November 27, 2003. He admitted that his wife bought a car and
was mortgaged to Far East Bank and Trust Company. He
identified the Chattel Mortgage and the Promissory Note he
executed together with his wife. In connection with the execution
of this Promissory Note, he recalled that his wife issued forty-
eight (48) checks. The twelve (12) checks were cleared by the
bank and his wife was able to obtain a discount for prompt
payments up to October 1994. While they were still paying for
the car, Carmelita Gonzales got interested to buy the car and is
willing to assume the mortgage. After furnishing the bank [with]
the Deed of Sale duly notarized, Carmelita Gonzales
subsequently issued a check payable to Far East Bank and Trust
Company and the remaining postdated checks were returned to
them. Based on the application of payment prepared by [BPI's]
witness, Carmelita Gonzales made payments from November 14,
1995 to December 1995.
Aside from these payments on May 19, 1997, Carmelita Gonzales
issued a check to Far East Bank in the amount of P385,431.60.
In 1996, he received a phone call from a certain Marvin Orence

asking for their assistance to locate the car which Carmelita
Gonzales bought from them. His lawyer went to Land
Transportation Office for assistance. From the time Ms. Gonzales
started to pay, they never received any demand letter from Far
East Bank. Thereafter, on February 29, 1997, they received a
demand letter from Espino Law Office [on] behalf of [FEBTC]. His
lawyer made a reply on March 31, 1997 stating therein that the
motor vehicle for which the loan was obtained had been sold to
Carmelita Gonzales as of July 5, 1994 with the knowledge and
approval of their client. After three years, they received another
demand letter dated October 31, 2000 from Labaguis Law Office.
His lawyer made the same reply on March 7, 2000 and another
letter on November 24, 2000.
Witness further testified that this malicious complaint probably
triggered the early demise of his wife who has a high blood
pressure. His wife died of aneurism. As damages, he is asking for
the amount of P200,000.00 as moral damages, P75,000.00 as
attorney's fees and P5,000.00 appearance fee.
On cross-examination, witness elaborates that when his wife
presented to Far East Bank the Deed of Sale with Assumption of
Mortgage, the bank made no objection and returned all their
postdated checks. His wife was the one who deal[t] with
Carmelita Gonzales but he always provide[d] assistance with
respect to paper works. Aside from the aforesaid Deed of Sale,
there is no other document which shows the conformity of the
bank. They were only verbally assured by Mr. Orence that their
papers are in order.[10]
On June 10, 2004, the MeTC rendered a Decision in favor of BPI
as the bank was able to establish by preponderance of evidence
a valid cause of action against the spouses Domingo. According
to the MeTC, novation is never presumed and must be clearly
shown by express agreement or by acts of equal import. To
effect a subjective novation by a change in the person of the
debtor, it is necessary that the old debtor be released expressly
from the obligation and the third person or new debtor assumes
his place. Without such release, there is no novation and the
third person who assumes the debtor's obligation merely
becomes a co-debtor or surety. The MeTC found Amador's bare
testimony as insufficient evidence to prove that he and his wife
Mercy had been expressly released from their obligations and
that Carmelita Gonzales (Carmelita) assumed their place as the
new debtor within the context of subjective novation; and if at
all, Carmelita only became the spouses Domingo's co-debtor or
surety. While finding that BPI was entitled to the reliefs prayed
for, the MeTC made no adjudication as to the entitlement of the
bank to the Writ of Replevin, and instead awarded monetary
reliefs as were just and equitable. The dispositive portion of the
MeTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered
in favor of [BPI], ordering defendant Amador Domingo:
To pay [BPI] the sum of P275,562.00 plus interest thereon at the
rate of 36% per annum from November 15, 2000 until fully paid;
To pay [BPI] the sum equivalent to 25% of the total amount due
as atorney's fees; and
To pay the costs of suit.[11]
Acting on Amador's Motion for Reconsideration, the MeTC issued
an Order[12] dated September 6, 2004 affirming its earlier
judgment but reducing the attorney's fees awarded, thus:
WHEREFORE, premises considered the Decision of this Court
dated June 10, 2014 stands, subject to the modification that the
attorney's fees of twenty-five percent (25%) is ordered reduced
to ten percent (10%) of the total amount due.[13]
Dissatisfied, Amador appealed his case before the Regional Trial
Court (RTC) of Manila, Branch 26, wherein it was docketed as
Civil Case No. 04-111100. In its Decision dated February 10,
2005, the RTC held that in novation, consent of the creditor to
the substitution of the debtor need not be by express agreement,
it can be merely implied. The consent is not required to be in any
216
specific or particular form; the only requirement being that it
must be given by the creditor in one way or another. To the RTC,
the following circumstances demonstrated the implied consent of
BPI to the novation: (1) BPI had knowledge of the Deed of Sale
and Assumption of Mortgage executed between Mercy and
Carmelita, but did not interpose any objection to the same; and
(2) BPI (through FEBTC) returned the personal checks of the
spouses Domingo and accepted the payments made by
Carmelita. The RTC also noted that BPI made a demand for
payment upon the spouses Domingo only after 30 months from
the time Carmelita assumed payments for the installments due.
The RTC reasoned that if the spouses Domingo truly remained as
debtors, BPI would not have wasted time in demanding
payments from them. Ultimately, the RTC decreed:
WHEREFORE, premises considered, the judgment appealed from
is hereby reversed. The complaint filed by [BPI] before [MeTC]
Branch 9, Manila, is hereby DISMISSED and ordering [BPI] to
pay defendant/appellant Amador Domingo the following, to wit:
a) One Hundred Thousand (P100,000.00) Pesos as moral
damages;
b) Fifty Thousand (P50,000.00) Pesos as exemplary damages;
c) Fifty Thousand (P50,000.00) Pesos as attorney's fees;
d) Twenty-Five Thousand (P25,000.00) [Pesos] as litigation
expenses;
e) Costs of this suit.[14]
Aggrieved by the foregoing RTC judgment, BPI filed a Petition for
Review with the Court of Appeals, docketed as CA-G.R. SP No.
88836. The Court of Appeals promulgated its Decision on July 11,
2005, affirming the finding of the RTC that novation took place.
The Court of Appeals, relying on the declaration in Babst v. Court
of Appeals[15] that consent of the creditor to the substitution of
debtors need not always be express and may be inferred from
the acts of the creditor, ruled that:
In this case, there is no doubt that FEBTC had the intention to
release private respondent [Amador] and his wife from the
obligation when the latter sold the subject vehicle to [Carmelita].
This intention can be inferred from the following acts of FEBTC:
1) it returned the postdated checks issued by private respondent
[Amador's] wife in favor of FEBTC; 2) it accepted the payments
made by [Carmelita]; 3) it did not interpose any objection
despite knowledge of the existence of the Deed of Sale with
Assumption of Mortgage; and 4) it did not demand payment from
private respondent [Amador] and his wife for thirty (30) long
months.
xxxx
As correctly found by the RTC, the testimony of private
respondent [Amador] as regards the return of the said checks to
them by FEBTC was not rebutted by petitioner BPI.
If indeed the said checks were not returned to private
respondent [Amador's] wife, the least thing that petitioner BPI or
FEBTC could have done was to deposit them. Should the checks
thereafter bounce, then petitioner BPI or FEBTC could have filed
a separate case against private respondent [Amador's] wife. This
was never done by petitioner BPI or FEBTC. Hence, it is safe to
conclude that the said checks were indeed returned to private
respondent [Amador's] wife.[16]
The Court of Appeals rejected the other arguments of BPI:
Petitioner BPI further argues that as regards the payment made
by the alleged new debtor, Carmelita Gonzales, it appears that
the only payment made by her was a PNB Check No. 00190322
dated May 19, 1997 which was dishonored due to Account
Closed.
Careful scrutiny of the records of the case reveals otherwise. As
found by the MeTC in its decision dated June 10, 2004, Carmelita
Gonzales made several payments on the said loan obligation, as

testified to by witness Vicente Magpusao, petitioner BPFs Account
Analyst, thus:
xxx. Based on the subsidiary leger, (Exhibit "2"), there were
three (3) checks that bounced and these are payments from the
new buyer. They only have one (1) photocopy of these checks in
the amount of P325,431.60 (Exhibit 4) while the other two are
missing. He was not aware who owns Cargo and Hardware
Corporation but the check was issued by a certain Miss Gonzales.
xxx.
xxxx
Petitioner BPI further argues that it was not its obligation to
interpose any objection to the Deed of Sale with Assumption of
Mortgage. Rather it should be the vendee, [Carmelita], who
should secure the approval and consent of petitioner BPI to the
Deed of Sale.
This argument is untenable.
The Deed of Sale with Assumption of Mortgage between private
respondent [Amador's] wife and [Carmelita] was executed way
back on July 5, 1994. The check that was issued by [Carmelita]
was dated May 19, 1997. The position of petitioner BPI is not
possible because when the Deed of Sale with Assumption of
Mortgage was executed and the said check was issued, private
respondent [Amador's] wife and [Carmelita] were still dealing
with FEBTC, considering the fact that the merger of petitioner
BPI and FEBTC was formalized on April 10, 2000.
Nevertheless, FEBTC interposed no objection to the Deed of Sale
with Assumption of Mortgage, hence, it consented to it.
From the foregoing, it is clear that novation took place so that
private respondent Domingo is no longer the debtor of petitioner
BPI.[17] (Citations omitted.)
The Court of Appeals, however, deleted the damages awarded to
Amador for the following reasons:
As to the second issue, petitioner BPI argues that the RTC
awarded moral and exemplary damages and attorney's fees to
respondent [Amador] only in the dispositive portion of the
assailed decision without any basis in fact and in law.
This Court finds the argument tenable.
In the case of Solid Homes, Inc. vs. Court of Appeals, it was held
that:
"It is basic that the claim for actual, moral and punitive damages
as well as exemplary damages and attorney's fees must each be
independently identified and justified."
Furthermore, Section 14, paragraph 1 of Article VIII, of the 1987
Constitution lays down the standard in rendering decisions, to
wit: it must be express therein clearly and distinctly the facts and
law on which it is based.
Perusal of the assailed decision reveals that the award of moral
and exemplary damages as well as attorney's fees and litigation
expenses were only touched in the dispositive portion, which is in
clear disregard of the established rules laid down by the
Constitution and existing jurisprudence. Therefore, their deletion
is in order.
As regards the award of litigation expenses and costs of the suit,
the same should also be deleted considering that "no premium
should be placed on the right to litigate."[18] (Citations omitted.)
The Court of Appeals ultimately adjudged:
WHEREFORE, premises considered, the assailed decision dated
February 10, 2005 of the Regional Trial Court, Branch 26, Manila
in Civil Case No. 04-111100 is hereby AFFIRMED with
MODIFICATION in that the award of moral and exemplary
damages as well as attorney's fees, litigation expenses and costs
of suit, is hereby deleted.[19]
In its Resolution dated August 19, 2005, the Court of Appeals
denied the Motion for Partial Reconsideration of BPI.
217
BPI comes to this Court via the present Petition for
Review/Appeal by Certiorari raising the sole issue of whether or
not there had been a novation of the loan obligation with chattel
mortgage of the spouses Domingo to BPI so that the spouses
Domingo were released from said obligation and Carmelita was
substituted as debtor.
The Court answers in the negative and grants the Petition.
In De Cortes v. Venturanza,[20] the Court discussed some
principles and jurisprudence underlying the concept and nature
of novation as a mode of extinguishing obligations:
According to Manresa, novation is the extinguishment of an
obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either
by changing the object or principal conditions, or by substituting
the person of the debtor, or by subrogating a third person to the
rights of the creditor (8 Manresa 428, cited in IV Civil Code of the
Philippines by Tolentino 1962 ed., p. 352). Unlike other modes of
extinction of obligations, novation is a juridical act with a dual
function - it extinguishes an obligation and creates a new one in
lieu of the old.
Article 1293 of the New Civil Code provides:
"Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor." (emphasis supplied)
Under this provision, there are two forms of novation by
substituting the person of the debtor, and they are: (1)
expromision and (2) delegacion. In the former, the initiative for
the change does not come from the debtor and may even be
made without his knowledge, since it consists in a third person
assuming the obligation. As such, it logically requires the consent
of the third person and the creditor. In the latter, the debtor
offers and the creditor accepts a third person who consents to
the substitution and assumes the obligation, so that the
intervention and the consent of these three persons are
necessary (8 Manresa 436-437, cited in IV Civil Code of the
Philippines by Tolentino, 1962 ed., p. 360). In these two modes
of substitution, the consent of the creditor is an indispensable
requirement (Garcia vs. Khu Yek Chiong, 65 Phil. 466, 468).
(Emphases supplied.)
The Court also emphasized in De Cortes the indispensability of
the creditor's consent to the novation, whether expromision or
delegacion, given that the "substitution of one debtor for another
may delay or prevent the fulfillment of the obligation by reason
of the financial inability or insolvency of the new debtor; hence,
the creditor should agree to accept the substitution in order that
it may be binding on him."[21]
Both the RTC and the Court of Appeals found that there was
novation by delegacion in the case at bar. The Deed of Sale with
Assumption of Mortgage was executed between Mercy
(representing herself and her husband Amador) and Carmelita,
thus, their consent to the substitution as debtors and third
person, respectively, are deemed undisputed. It is the existence
of the consent of BPI (or its absorbed corporation FEBTC) as
creditor that is being challenged herein.
As a general rule, since novation implies a waiver of the right the
creditor had before the novation, such waiver must be express.
[22] The Court explained the rationale for the rule in Testate
Estate of Lazaro Mota v. Serra[23]:
It should be noted that in order to give novation its legal effect,
the law requires that the creditor should consent to the
substitution of a new debtor. This consent must be given
expressly for the reason that, since novation extinguishes the
personality of the first debtor who is to be substituted by a new
one, it implies on the part of the creditor a waiver of the right
that he had before the novation, which waiver must be express
under the principle that renuntiatio non praesumitor, recognized
by the law in declaring that a waiver of right may not be
performed unless the will to waive is indisputably shown by him
who holds the right.

However, in Asia Banking Corporation v. Elser,[24] the Court
qualified thus:
The aforecited article 1205 [now 1293] of the Civil Code does not
state that the creditor's consent to the substitution of the new
debtor for the old be express, or given at the time of the
substitution, and the Supreme Court of Spain, in its judgment of
June 16, 1908, construing said article, laid down the doctrine
that "article 1205 of the Civil Code does not mean or require that
the creditor's consent to the change of debtors must be given
simultaneously with the debtor's consent to the substitution; its
evident purpose being to preserve the creditor's full right, it is
sufficient that the latter's consent be given at any time and in
any form whatever, while the agreement of the debtors
subsists." The same rule is stated in the Enciclopedia Juridica
Española, volume 23, page 503, which reads: "The rule that this
kind of novation, like all others, must be express, is not
absolute; for the existence of the consent may well be inferred
from the acts of the creditor, since volition may as well be
expressed by deeds as by words." The understanding between
Henry W. Elser and the principal director of Yangco, Rosenstock
& Co., Inc., with respect to Luis R. Yangco's stock in said
corporation, and the acts of the board of directors after Henry W.
Elser had acquired said shares, in substituting the latter for Luis
R. Yangco, are a clear and unmistakable expression of its
consent. When this court said in the case of Estate of Mota vs.
Serra (47 Phil., 464), that the creditor's express consent is
necessary in order that there may be a novation of a contract by
the substitution of debtors, it did not wish to convey the
impression that the word "express" was to be given an
unqualified meaning, as indicated in the authorities or cases,
both Spanish and American, cited in said decision.
Hence, based on the aforequoted ruling in Asia Banking, the
existence of the creditor's consent may also be inferred from the
creditor's acts, but such acts still need to be "a clear and
unmistakable expression of [the creditor's] consent."[25]
In Ajax Marketing and Development Corporation v. Court of
Appeals,[26] the Court further clarified that:
The well settled rule is that novation is never presumed.
Novation will not be allowed unless it is clearly shown by express
agreement, or by acts of equal import. Thus, to effect an
objective novation it is imperative that the new obligation
expressly declare that the old obligation is thereby extinguished,
or that the new obligation be on every point incompatible with
the new one. In the same vein, to effect a subjective novation by
a change in the person of the debtor it is necessary that the old
debtor be released expressly from the obligation, and the third
person or new debtor assumes his place in the relation. There is
no novation without such release as the third person who has
assumed the debtor's obligation becomes merely a co-debtor or
surety. (Citations omitted.)
The determination of the existence of the consent of BPI to the
substitution of debtors, in accordance with the standards set in
the preceding jurisprudence, is a question of fact because it
requires the Court to review the evidence on record. It is an
established rule that the jurisdiction of the Court in cases
brought before it from the Court of Appeals via a petition for
review on certiorari under Rule 45 of the Rules of Court is
generally limited to reviewing errors of law as the former is not a
trier of facts. Thus, the findings of fact of the Court of Appeals
are conclusive and binding upon the Court in the latter's exercise
of its power to review for it is not the function of the Court to
analyze or weigh evidence all over again.[27] However, several
of the recognized exceptions[28] to this rule are present in the
instant case that justify a factual review, i.e., the inference is
manifestly mistaken, the judgment is based on misapprehension
of facts, and the findings of the Court of Appeals and the RTC are
contrary to those of the MeTC.
The burden of establishing a novation is on the party who asserts
its existence.[29] Contrary to the findings of the Court of Appeals
and the RTC, Amador failed to discharge such burden as he was
unable to present proof of the clear and unmistakable consent of
BPI to the substitution of debtors.
218
Irrefragably, there is no express consent of BPI to the
substitution of debtors. The Court of Appeals and the RTC
inferred the consent of BPI from the following facts: (1) BPI had
a copy of the Deed of Sale and Assumption of Mortgage executed
between Mercy and Carmelita in its file, indicating its knowledge
of said agreement, and still it did not interpose any objection to
the same; (2) BPI (through FEBTC) returned the spouses
Domingo's checks and accepted Carmelita's payments; and (3)
BPI did not demand any payment from the spouses Domingo not
until 30 months after Carmelita assumed the payment of balance
on the Promissory Note.
The Court disagrees with the inferences made by the Court of
Appeals and the RTC.
First, that BPI (or FEBTC) had a copy of the Deed of Sale and
Assumption of Mortgage executed between Mercy and Carmelita
in its file does not mean that it had consented to the same. The
very Deed itself states:
That the VENDEE [Carmelita] assumes as he/she had assumed to
pay the aforecited mortgage in accordance with the original
terms and conditions of said mortgage, and the parties hereto
[Mercy and Carmelita] have agreed to seek the conformity of the
MORTGAGEE [FEBTC].[30]
This brings the Court back to the original question of whether
there is proof of the conformity of BPI.
The Court notes that the documents of BPI concerning the car
loan and chattel mortgage are still in the name of the spouses
Domingo. No new promissory note or chattel mortgage had been
executed between BPI (or FEBTC) and Carmelita. Even the
account itself is still in the names of the spouses Domingo.
The absence of objection on the part of BPI (or FEBTC) cannot be
presumed as consent. Jurisprudence requires presentation of
proof of consent, not mere absence of objection. Amador cannot
rely on Babst which involved a different factual milieu. Relevant
portions of the Court's ruling in Babst are reproduced below:
In the case at bar, Babst, MULTI and ELISCON all maintain that
due to the failure of BPI to register its objection to the take-over
by DBP of ELISCON's assets, at the creditors' meeting held in
June 1981 and thereafter, it is deemed to have consented to the
substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear
indications that BPI was aware of the assumption by DBP of the
obligations of ELISCON. In fact, BPI admits that—
"[T]he Development Blank of the Philippines (DBP), for a time,
had proposed a formula for the settlement of Eliscon's past
obligations to its creditors, including the plaintiff [BPI], but the
formula was expressly rejected by the plaintiff as not acceptable
(long before the filing of the complaint at bar)."
The Court of Appeals held that even if the account officer who
attended the June 1981 creditors' meeting had expressed
consent to the assumption by DBP of ELISCON's debts, such
consent would not bind BPI for lack of a specific authority
therefor. In its petition, ELISCON counters that the mere
presence of the account officer at the meeting necessarily meant
that he was authorized to represent BPI in that creditors'
meeting. Moreover, BPI did not object to the substitution of
debtors, although it objected to the payment formula submitted
by DBP.
Indeed, the authority granted by BPI to its account officer to
attend the creditors' meeting was an authority to represent the
bank, such that when he failed to object to the substitution of
debtors, he did so on behalf of and for the bank. Even granting
arguendo that the said account officer was not so empowered,
BPI could have subsequently registered its objection to the
substitution, especially after it had already learned that DBP had
taken over the assets and assumed the liabilities of ELISCON. Its
failure to do so can only mean an acquiescence in the
assumption by DBP of ELISCON's obligations. As repeatedly
pointed out by ELISCON and MULTI, BPI's objection was to the
proposed payment formula, not to the substitution itself.[31]

In Babst, there was a clear opportunity for BPI, as creditor
therein, to o ject to the substitution of debtors given that its
representative attended a creditor's meeting, during which, said
representative already objected to the proposed payment
formula made by DBP, as the new debtor. Hence, the silence of
BPI during the same meeting as to the matter of substitution of
debtors could already be interpreted as its acquiescence to the
same. In contrast, there was no clear opportunity for BPI (or
FEBTC) to have expressed its objection to the substitution of
debtors in the case at bar.
Second, the consent of BPI to the substitution of debtors cannot
be deduced from its acceptance of payments from Carmelita,
absent proof of its clear and unmistakable consent to release the
spouses Domingo from their obligation. Since the spouses
Domingo remained as debtors of BPI, together with Carmelita,
the fact that BPI demanded payment from the spouses Dokningo
30 months after accepting payment from Carmelita is
insignificant.
The acceptance by a creditor of payments from a third person,
who has assumed the obligation, will result merely to the
addition of debtors and not novation. The creditor may therefore
enforce the obligation against both debtors.[32] As the Court
pronounced in Magdalena Estates, Inc. v. Rodriguez,[33] "[t]he
mere fact that the creditor receives a guaranty or accepts
payments from a third person who has agreed to assume the
obligation, when there is no agreement that the first debtor shall
be released from responsibility, does not constitute a novation,
and the creditor can still enforce the obligation against the
original debtor." The Court reiterated in Quinto v. People[34]
that "[n]ot too uncommon is when a stranger to a contract
agrees to assume an obligation; and while this may have the
effect of adding to the number of persons liable, it does not
necessarily imply the extinguishment of the liability of the first
debtor. Neither would the fact alone that the creditor receives
guaranty or accepts payments from a third person who has
agreed to assume the obligation, constitute an extinctive
novation absent an agreement that the first debtor shall be
released from responsibility."
Absent proof that BPI gave its clear and unmistakable consent to
release the spouses Domingo from the obligation to pay the car
loan, Carmelita is simply considered an additional debtor.
Consequently, BPI can still enforce the obligation against the
spouses Domingo even 30 months after it had started accepting
payments from Carmelita.
And third, there is no sufficient or competent evidence to
establish the return of the checks to the spouses Domingo and
the assurance made by FEBTC that the spouses Domingo were
already released from their obligation.
During his direct examination, Amador testified as follows:
Atty. Rivera:
1.
Q.
Do you remember who was this person who became interested
to buy this car?
A.
Carmelita S. Gonzales, Sir.
2.
Q.
What did you tell Mrs. Gonzales when she expressed interest in
buying this car, this Mazda vehicle?
A.
We told her that the car was mortgaged and she told us that she
is willing to assume the mortgage, Sir.
3.
Q.
With that willingness, what happened next on the part of Mrs.
Gonzales to assume the mortgage?
A.
219
My wife and Mrs. Gonzales went to Far East Bank and Trust
Company and she informed the bank that somebody is interested
in buying the car and assume the mortgage and the bank
informed her that the bank is agreeable and with no objection.
Atty. Ganitano:
Objection, your Honor. May we object to the answer of the
witness, it would be hearsay. The witness testified that it was his
wife and the would-be buyer who went to the bank.
Atty. Rivera:
Then, we are just offering it as part of the narration not
necessarily to prove the truth of the statement, your Honor.
Court:
The witness may continue.
Atty. Rivera:
So, after that meeting with the bank occurred, what happened
next in connection with this intention of Mrs. Gonzales to
purchase the car?
Witness:
After furnishing the bank with the Deed of Absolute Sale duly
notarized, [Ms.] Carmelita Gonzales subsequently issued a check
payable to Far East Bank and Trust Company, Sir.
Atty. Rivera:
1.
Q.
How about the postdated checks that your wife issued to Far East
Bank and Trust Company?
A.
The remaining postdated checks were returned to us, Sir.
2.
Q.
Do you remember what were those postdated checks that were
returned by the bank?
A.
Those were the checks we issued in advance, Sir.
3.
Q.
What were the dates of these checks?
A.
October 30, 1994 to 1997, Sir.
xxxx
Atty. Rivera:
1.
Q.
Aside from this evidence that you have enumerated, were you
able to talk to any representative from Far East Bank relative to
the approval of the change in the personality of the debtor from
your wife to...
A.
As I remember, sometime in 1996, I received a call from a
certain Marvin Orence asking for our assistance to locate the car
that Mrs. Carmelita Gonzales bought from us and informed us
that we have nothing to worry except that we provide them
assistance to locate the car and I informed our lawyer, Atty.
Rivera, about this and Atty. Rivera went to the Land
Transportation Office for assistance.[35]
Amador continued to testify on cross-examination, thus:
CROSS EXAMINATION BY ATTY. GANITANO
1.
Q..
You testified that out of the 48 checks you paid to Far East Bank
& Trust Company, only 12 checks were made good. What
happened to the 36 checks?
A.
When my wife brought the transaction to Far East Bank and
presented the Deed of Absolute Sale, the bank have no objection
to the sale of the car and afterwards, the bank returned all the
postdated checks prepared by my wife that was in the possession
of the bank, Sir.
1.
Q.
Do you have with you those 36 checks that were allegedly
returned by Far East Bank?
 220
A. 4.
AThese checks have already been discarded, Sir. Q.
2. I'm just asking what was the means of communication, was it
Q. only thru phone call?
So, you cannot present those 36 checks anymore?
A. A.
No, Sir. Yes, Sir, thru phone call. I think twice or three times.
3. Atty. Rivera:
Q. We would like to manifest, your Honor, as early as 1997, just to
Who was the alleged buyer of the mortgaged car again? stress this point, as early as March 1997, the name of Marvin
Witness: Oronce...
Carmelita S. Gonzales, Sir. Atty. Ganitano:
Atty. Ganitano: The witness is under cross, your Honor.
1. Court:
Q. You just ask that in re-direct, counsel.
To whom did this Carmelita Gonzales transacted with respect to Atty. Rivera:
the sale of mortgaged vehicle? Yes, you Honor.[36]
A. Amador admitted that it was his wife Mercy, together with
To my wife, Mercy Maryden Domingo, Sir. Carmelita, who directly transacted with FEBTC regarding the sale
2. of the subject vehicle to and assumption of mortgage by
Q. Carmelita. Amador had no personal knpwledge of what had
Not with you, Mr. Witness? happened when Mercy and Carmelita went to the bank so his
A. testimony on the matter was hearsay, which, if not excluded,
Well, I always provide assistance to my wife with regards to deserves no credence.
paper works, Sir.
3. The Court explained in Da Jose v. Angeles[37] that:
Q. Evidence is hearsay when its probative force depends on the
Q When was this Deed of Sale executed, was it before when your competency and credibility of some persons other than the
wife and the buyer went to the bank or after they went to the witness by whom it is sought to be produced. The exclusion of
bank? hearsay evidence is anchored on three reasons: (1) absence of
A. cross-examination; (2) absence of demeanor evidence; and (3)
A I think it was simultaneous, Sir. absence of oath. Basic under the rules of evidence is that a
4. witness can only testify on facts within his or her personal
Q. knowledge. This personal knowledge is a substantive prerequisite
When you say "simultaneous", Mr. Witness, I'm showing to you in accepting testimonial evidence establishing the truth of a
this Deed of Sale with Assumption of Mortgage and you said it disputed fact, x x x. (Citations omitted.)
was with the conformity of the bank. Will you please tell us in The Court of Appeals and the RTC substantively based their
this Deed of Sale with Assumption of Mortgage if you could find finding that BPI (or FEBTC) consented to the substitution of
any entry which indicate that the bank agreed to the sale with debtors on the return of the checks to the spouses Domingo, but
assumption of mortgage? the proof of the issuance of the checks, their delivery to the
Witness: bank, and the return of the checks flimsily consists of Amador's
None, Sir. unsubstantiated testimony. Amador recounted that the postdated
Atty. Ganitano: checks which he and Mercy executed in favor of FEBTC were
Aside from this Deed of Sale with Assumption of Mortgage, do returned to them, however, he failed to provide the details
you have any document which shows that the bank indeed surrounding the return. Amador only stated that when Mercy
conformed to the sale of the mortgaged vehicle with assumption provided FEBTC with a copy of the Deed of Sale and Assumption
of mortgage? of Mortgage, the bank returned the checks to them
Witness: "subsequently" or "afterwards." Amador did not say how the
We were verbally assured that our papers are in order, Sir. checks were returned and to whom. The checks were not
Atty. Ganitano: presented during the trial since according to Amador, they were
So, there is no document, Mr. Witness, it was only made orally? already "discarded," although once more, any other detail
Witness: surrounding the discarding of the checks is sorely lacking. Aside
Yes, Sir, we were verbally assured that our papers are in order. from Amador's bare testimony, no other supporting evidence of
Atty. Ganitano: the return of the checks to the spouses Domingo was submitted
1. during trial. For the foregoing reasons, the Court accords little
Q. weight and credence to Amador's testimony on the return of the
Were you present when your wife and the would be buyer went checks.
to the bank?
A. It is worthy to stress that Amador, as the party asserting
No, Sir. novation, bears the burden of proving its existence. Amador
2. cannot simply rely on the failure of BPI to produce the checks if
Q. these were not actually returned to the spouses Domingo. There
How did you know that there was an assurance from the bank? is simply not enough evidence to establish the prima facie
existence of novation to shift the burden of evidence to BPI to
A. controvert the same.
I received a phone call from Mr. Oronce. I asked about the
transaction and he told me that there is nothing to worry The verbal assurances purportedly given by a Mr. Marvin Orence
because our documents or papers were in order, Sir. or Oronce (Orence/Oronce) of FEBTC to Amador over the
3. telephone that the spouses Domingo's documents were in order
Q. do not constitute the clear and unmistakable consent of the bank
Do I get you right, Mr. Witness, that the confirmation was only to the substitution of debtors. Once again, except for Amador's
through phone call? bare testimony, there is no other evidence of such telephone
conversations taking place and the subject of such telephone
A. conversations. In addition, Mr. Orence/Oronce's identity, position
It was Mr. Oronce who called me, Sir.

at FEBTC, and authority to represent and bind the bank, were
not even clearly established.
The letter dated March 31, 1997 of Atty. Ricardo J.M. Rivera
(Rivera), counsel for the spouses Domingo, addressed to Atty.
Cresenciano L. Espino, counsel for FEBTC, does not serve as
supporting evidence for Amador's testimony regarding the return
of the checks and the verbal assurances given by Mr.
Orence/Oronce. The contents of such letter are rriere hearsay
because the events stated therein did not personally happen to
Aity. Rivera or in his presence, and he merely relied on what his
clients, the spouses Domingo, told him.
The Court is therefore convinced that there is no novation by
delegacion in this case and Amador remains a debtor of BPI. The
Court reinstates the MeTC judgment ordering Amador to pay for
the P275,562.00 lance on the Promissory Note, 10% attorney's
fees, and costs of suit; but modifies the rate of interest imposed
and the date when such interest began to run.
In Ruiz v. Court of Appeals,[38] the Court equitably reduced the
interest te of 3% per month or 36% per annum stipulated in the
promissory notes jrein to 1% per month or 12% per annum,
based on the following ratiocination:
We affirm the ruling of the appellate court, striking down as
invalid the 10% compounded monthly interest, the 10%
surcharge per month stipulated in the promissory notes dated
May 23, 1995 and December 1, 1995, and the 1% compounded
monthly interest stipulated in the promissory note dated April 21,
1995. The legal rate of interest of 12% per annum shall apply
after the maturity dates of the notes until full payment of the
entire amount due. Also, the only permissible rate of surcharge is
1% per month, without compounding. We also uphold the award
of the appellate court of attorney's fees, the amount of which
having been reasonably reduced from the stipulated 25% (in the
March 22, 1995 promissory note) and 10% (in the other three
promissory notes) of the entire amount due, to a fixed amount of
P50,000.00. However, we equitably reduce the 3% per month or
36% per annum interest present in all four (4) promissory notes
to 1% per month or 12% per annum interest.
The foregoing rates of interests and surcharges are in accord
with Medel vs. Court of Appeals, Garcia vs. Court of Appeals,
Bautista vs. Pilar Development Corporation, and the recent case
of Spouses Solangon vs. Salazar. This Court invalidated a
stipulated 5.5% per month or 66% per annum interest on a
P500,000.00 loan in Medel and a 6% per month or 72% per
annum interest on a P60,000.00 loan in Solangon for being
excessive, iniquitous, unconscionable and exorbitant. In both
cases, we reduced the interest rate to 12% per annum. We held
that while the Usury Law has been suspended by Central Bank
Circular No. 905, s. 1982, effective on January 1, 1983, and
parties to a loan agreement have been given wide latitude to
agree on any interest rate, still stipulated interest rates are
illegal if they are unconscionable. Nothing in the said circular
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. On the other hand, in Bautista vs.
Pilar Development Corp., this Court upheld the validity of a 21%
per annum interest on a P142,326.43 loan, and in Garcia vs.
Court of Appeals, sustained the agreement of the parties to a
24% per annum interest on an P8,649,250.00 loan. It is on the
basis of these cases that we reduce the 36% per annum interest
to 12%. An interest of 12% per annum is deemed fair and
reasonable. While it is true that this Court invalidated a much
higher interest rate of 66% per annum in Medel and 72% in
Solangon it has sustained the validity of a much lower interest
rate of 21% in Bautista and 24% in Garcia. We still find the 36%
per annum interest rate in the case at bar to be substantially
greater than those upheld by this Court in the two (2) aforecited
cases. (Citations omitted.)
On the strength of the foregoing jurisprudence, the Court
likewise finds the interest rate of 3% per month or 36% per
annum stipulated in the Promissory Note herein for the balance
of P275,562.00 as excessive, iniquitous, unconscionable, and
221
exorbitant. Following the guidelines set forth in Eastern Shipping
Lines, Inc. v. Court of Appeals[39] and Nacar v. Gallery Frames,
[40] the Court imposes instead legal interest in the following
rates: (1) legal interest of 12% per annum from date of
extrajudicial demand on January 29, 1997 until June 30, 2013;
and (2) legal interest of 6% per annum from July 1, 2013 until
fully paid.
Incidentally, Amador passed away on June 5, 2010 during the
pendency of the instant petition, and is survived by his children,
namely: Joann D. Moya, Annabelle G. Domingo, Cristina G.
Domingo, Amador G. Domingo, Jr., Gloria Maryden D.
Macatangay, Dante Amador G. Domingo, Gregory Amador A.
Domingo, and Ina Joy A. Domingo.[41] To prevent future
litigation in the enforcement of the award, the Court clarifies that
Amador's heirs are not personally responsible for the debts of
their predecessor. The extent of liability of Amador's heirs to BPI
is limited to the value of the estate which they inherited from
Amador. In this jurisdiction, "it is the estate or mass of the
property left by the decedent, instead of the heirs directly, that
becomes vested and charged with his rights and obligations
which survive after his death."[42] To rule otherwise would
unduly deprive Amador's heirs of their properties.
WHEREFORE, in view of the foregoing, the Petition is GRANTED.
The Decision dated July 11, 2005 and Resolution dated August
19, 2005 of the Court of Appeals in CA-G.R. SP No. 88836,
affirming with modification the Decision dated February 10, 2005
of the RTC of Manila, Branch 26 in Civil Case No. 04-111100, is
REVERSED and SET ASIDE. The Decision dated June 10, 2004
and Order dated September 6, 2004 of the MeTC of Manila,
Branch 9 in Civil Case No. 168949-CV, is REINSTATED with
MODIFICATIONS. The heirs of respondent Amador Domingo are
ORDERED to pay petitioner Bank of the Philippine Islands the
following:
(1) the P275,562.00 balance on the Promissory Note, plus legal
interest of 12% from January 29, 1997 to June 30, 2013 and 6%
from July 1, 2013 until fully paid; (2) attorney's fees of 10%;
and (3) costs of suit. However, the liability of Amador Domingo's
heirs is limited to the value of the inheritance they received from
the deceased.
SO ORDERED.
FIRST DIVISION
[ G.R. No. 209370, March 25, 2015 ]
FORT BONIFACIO DEVELOPMENT CORPORATION, PETITIONER,
VS. VALENTIN L. FONG, RESPONDENT.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari[1] are the
Decision[2] dated May 17, 2013 and the Resolution[3] dated
September 2, 2013 rendered by the Court of Appeals (CA) in CA-
G.R. CV. No. 93407, which affirmed the Decision[4] dated
January 28, 2009 of the Regional Trial Court of Mandaluyong
City, Branch 214 (RTC) in Civil Case No. MC06-2928, finding
petitioner Fort Bonifacio Development Corporation (FBDC) liable
to respondent Valentin L. Fong (Fong), as proprietor of VF
Industrial Sales, for the amount of P1,577,115.90 with legal
interest computed from February 13, 2006.
The Facts
On June 5, 2000, FBDC, a domestic corporation engaged in the
real estate development business,[5] entered into a Trade
Contract[6] with MS Maxco Company, Inc. (MS Maxco), then
operating under the name "L&M Maxco, Specialist Engineering
Construction," for the execution of the structural and partial
architectural works of one of its condominium projects in Taguig
City, the Bonifacio Ridge Condominium (Project).[7] Records

show that FBDC had the right to withhold five percent (5%) of
the contract price as retention money.[8]
Under the Trade Contract, FBDC had the option to hire other
contractors to rectify any errors committed by MS Maxco by
reason of its negligence, act, omission, or default, as well as to
deduct or set-off any amount from the contract price in such
cases.[9] Hence, when MS Maxco incurred delays and failed to
comply with the terms of the Trade Contract, FBDC took over
and hired other contractors to complete the unfinished
construction.[10] Unfortunately, corrective work had to likewise
be done on the numerous defects and irregularities caused by MS
Maxco, which cost P11,567,779.12.[11] Pursuant to the Trade
Contract, FBDC deducted the said amount from MS Maxco's
retention money.[12]
The Trade Contract likewise provided that MS Maxco is prohibited
from assigning or transferring any of its rights, obligations, or
liabilities under the said Contract without the written consent of
FBDC.[13]
Sometime in April 2005, FBDC received a letter[14] dated April
18, 2005 (April 18, 2005 letter) from the counsel of Fong
informing it that MS Maxco had already assigned its receivables
from FBDC to him (Fong) by virtue of a notarized Deed of
Assignment[15] dated February 28, 2005.[16] Under the Deed of
Assignment, MS Maxco assigned the amount of P1,577,115.90 to
Fong as payment of the former's obligation to the latter, which
amount was to be taken from the retention money with FBDC.
[17] In its letter-reply[18] dated October 11, 2005, FBDC
acknowledged the five percent (5%) retention money of MS
Maxco, but asserted that the same was not yet due and
demandable and that it was already the subject of
garnishment[19] by MS Maxco's other creditors.
Despite Fong's repeated requests,[20] FBDC refused to deliver to
Fong the amount assigned by MS Maxco. Finally, in a letter[21]
dated January 31, 2006, FBDC informed Fong that after the
rectification of the defects in the Project, as well as the
garnishment made by MS Maxco's creditors, nothing was left of
its retention money with FBDC from which Fong's claims may be
satisfied. This prompted Fong, doing business under the name
"VF Industrial Sales" to file the instant civil case,[22] before the
RTC, against MS Maxco or FBDC for the payment of the sum of
P1,577,115.90, with legal interest due, costs of suit, and
litigation expenses.[23]
In its defense,[24] FBDC reiterated its position that,since MS
Maxco incurred delays and rendered defective works on the
Project, FBDC was constrained to hire other contractors to repair
the defects and complete the work therein, the cost of which it
deducted from MS Maxco's retention money, pursuant to the
express stipulations in the Trade Contract.[25] Likewise, the said
retention money was due only in January 2006, and was already
garnished in favor of MS Maxco's other creditors.[26] As a result
of the deductions and the garnishment, no amount due to MS
Maxco was left from the retention money; and, FBDC was,
therefore, under no obligation to satisfy Fong's claim.[27] FBDC
likewise asserted, inter alia, that it was not bound by the Deed of
Assignment between Fong and MS Maxco, not being a party
thereto.[28] However, Fong, being a mere substitute or assignee
of MS Maxco, was bound to observe the terms and conditions of
the Trade Contract.[29] FBDC also stressed that it paid the
creditors of MS Maxco in compliance with valid court orders.[30]
The RTC Ruling
In a Decision[31] dated January 28, 2009, the RTC found FBDC
liable to pay Fong the amount of P1,577,115.90, with legal
interest computed from the time of the filing of the complaint on
February 13, 2006.[32]
In so ruling, the RTC held that the instant case was one of
assignment of credit under Article 1624[33] of the Civil Code,
hence, did not require FBDC's consent as debtor for its validity
222
and enforceability.[34] What the law requires is not the consent
of the debtor, but merely notice to him, as the assignment takes
effect only from the time of his knowledge thereof.[35] With
respect to third persons without notice of the assignment, the
same becomes effective only if the assignment appears in a
public instrument.[36]
Also, the RTC observed that FBDC did not dispute the
genuineness and due execution of the Deed of Assignment
between MS Maxco and Fong. As such, FBDC became bound
thereby upon its receipt of Fong's April 18, 2005 letter informing
it of the assignment. Effectively, Fong became subrogated to the
right of MS Maxco to collect from FBDC the credit assigned to
him.[37] Likewise, FBDC was bound to recognize the
assignment, which appears in a public instrument.[38]
With respect to the garnishment of the retention money, the RTC
held that it could not adversely affect Fong's rights as assignee
of MS Maxco, considering that the amount indicated in the Deed
of Assignment was no longer MS Maxco's property, but Fong's.
Effectively, when MS Maxco assigned the sum of P1,577,115.90
to Fong, the said amount can no longer be considered MS
Maxco's property that could be garnished or attached by its
creditors. As records show that the garnishment of the retention
money was made on July 30, 2005 and January 26, 2006, or
after FBDC was notified of MS Maxco's assignment in favor of
Fong on April 18, 2005, for all intents and purposes, FBDC must
be considered to have paid MS Maxco's other creditors out of its
own funds.[39]
Finally, with regard to the provision in the Trade Contract
requiring the written consent of FBDC before MS Maxco may
validly assign or transfer any of its rights, obligations, or
liabilities thereunder, the RTC held that Fong was not bound
thereby. It ruled that Fong did not automatically become party to
the provisions of the Trade Contract by virtue of its being the
assignee of MS Maxco, as the said provisions are matters which
exclusively pertain to the parties thereto.[40]
In any event, however, the RTC recognized FBDC's right of
recourse against its co-defendant MS Maxco for the latter's
breach of undertaking under the Trade Contract.[41]
Aggrieved, FBDC appealed[42] to the CA, assailing the RTC's
conclusion that the Deed of Assignment was binding upon it and
that it was liable to satisfy Fong's claims.
The CA Ruling
In a Decision[43] dated May 17, 2013, the CA denied FBDC's
appeal and affirmed the RTC ruling,[44] concurring with the
latter's finding that when FBDC was notified of the assignment
through the April 18, 2005 letter, the assignment produced legal
effects and operated as a transfer of a portion of the receivables
of MS Maxco to Fong.[45] Considering that FBDC's consent as
debtor is not required under the law, as mere notice to it is
sufficient, and taking into account the fact that the Deed of
Assignment was a public instrument, the assignment therefore
bound FBDC and third persons as well.[46]
Likewise, upon a review of the evidence offered by FBDC, the CA
found that as of December 6, 2005, there was still sufficient
amount left in the retention money with which to pay Fong even
after the deduction of the rectification costs for the Project. As
correctly held by the RTC, the payments made by FBDC to MS
Maxco's judgment creditors cannot prejudice Fong since the
Deed of Assignment was valid and enforceable against FBDC and
the said creditors.[47]
FBDC's motion for reconsideration[48] was denied in a
Resolution[49] dated September 2, 2013, hence, this petition.
The Issues Before the Court

The issues for the Court's resolution are whether or not the CA
erred in ruling that FBDC was bound by the Deed of Assignment
between MS Maxco and Fong, and even assuming that it was,
whether or not FBDC was liable to pay Fong the amount of ?
1,577,115.90, representing a portion of MS Maxco's retention
money.
The Court's Ruling
The petition is meritorious.
Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good
faith.[50] As such, the stipulations in contracts are binding on
them unless the contract is contrary to law, morals, good
customs, public order or public policy.[51]
The same principle on obligatory force applies by extension to
the contracting party's assignees, in turn, by virtue of the
principle of relativity of contracts which is fleshed out in Article
1311 of the Civil Code, viz.:
Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the
decedent.
x x x x (Emphasis supplied)
The reason that a contracting party's assignees, although
seemingly a third party to the transaction, remain bound by the
original party's transaction under the relativity principle further
lies in the concept of subrogation, which inheres in assignment.
Case law states that when a person assigns his credit to another
person, the latter is deemed subrogated to the rights as well as
to the obligations of the former.[52] By virtue of the Deed of
Assignment, the assignee is deemed subrogated to the rights
and obligations of the assignor and is bound by exactly the same
conditions as those which bound the assignor.[53] Accordingly,
an assignee cannot acquire greater rights than those pertaining
to the assignor.[54] The general rule is that an assignee of a
non-negotiable chose in action acquires no greater right than
what was possessed by his assignor and simply stands into the
shoes of the latter.[55]
Applying the foregoing, the Court finds that MS Maxco, as the
Trade Contractor, cannot assign or transfer any of its rights,
obligations, or liabilities under the Trade Contract without the
written consent of FBDC, the Client, in view of Clause 19.0 on
"Assignment and Sub-letting" of the Trade Contract between
FBDC and MS Maxco which explicitly provides that:
19.0 ASSIGNMENT AND SUB-LETTING
19.1 The Trade Contractor [Ms Maxco] shall not, without written
consent of the Client [FBDC], assign or transfer any of his rights,
obligations or liabilities under this Contract. The Trade Contractor
shall not, without the written consent of the Client, sub-let any
portion of the Works and such consent, if given, shall not relieve
the Trade Contractor from any liability or obligation under this
Contract.[56] (Emphases supplied)
Fong, as mere assignee of MS Maxco's rights under the Trade
Contract it had previously entered with FBDC, i.e., the right to
recover any credit owing to any unutilized retention money, is
equally bound by the foregoing provision and hence, cannot
validly enforce the same without FBDC's consent.
Without any proof showing that FBDC had consented to the
assignment, Fong cannot validly demand from FBDC the delivery
of the sum of P1,577,115.90 that was supposedly assigned to
him by MS Maxco as a portion of its retention money with FBDC.
223
The practical efficacy of the assignment, although valid between
Fong and MS Maxco, remains contingent on FBDC's consent.
Without the happening of said condition, only MS Maxco, and not
Fong, can collect on the credit. Note, however, that this finding
does not preclude any recourse that Fong may take against MS
Maxco. After all, an assignment of credit for a consideration and
covering a demandable sum of money is considered as a sale of
personal property.[57] To this, Article 1628 of the Civil Code
provides:
Art. 1628. The vendor in good faith shall be responsible for the
existence and legality of the credit at the time of the sale, unless
it should have been sold as doubtful; but not for the solvency of
the debtor, unless it has been so expressly stipulated or unless
the insolvency was prior to the sale and of common knowledge.
Even in these cases he shall only be liable for the price received
and for the expenses specified in No. 1 of Article 1616.[58]
The vendor in bad faith shall always be answerable for the
payment of all expenses, and for damages.
WHEREFORE, the petition is GRANTED. The assailed Decision
dated May 17, 2013 and the Resolution dated September 2,
2013 rendered by the Court of Appeals in CA-G.R. CV. No. 93407
are hereby REVERSED and SET ASIDE, and a new one is entered
DISMISSING the instant complaint against petitioner Fort
Bonifacio Development Corporation.
SO ORDERED.
DIVISION
[ GR No. 202947, Dec 09, 2015 ]
ASB REALTY CORPORATION v. ORTIGAS +
DECISION
BERSAMIN, J.:
This appeal seeks the review and reversal of the amended
decision promulgated on January 9, 2012,[1] whereby the Court
of Appeals (CA) disposed thusly:
WHEREFORE, premises considered, judgment is rendered:
1. Granting the appeal of plaintiff-appellant and herein movant
Ortigas and Company Limited Partnership, and reversing the
Decision of the court a quo dated December 14, 2009;
2. Rescinding the June 24, 1994 Deed of Sale between Ortigas
and Company Limited Partnership and Amethyst Pearl
Corporation in view of the material breached (sic) thereof by
AMETHYST;
3. Ordering ASB Realty Corporation, by way of mutual
restitution, the RECONVEYANCE to ORTIGAS of the subject
property covered by TCT No. PT-105797 upon payment by
ORTIGAS to ASB of the amount of Two Million Twenty Four
Thousand Pesos (PhP 2,024,000.00) plus legal interest at the
rate of 6% per annum from the time of the finality of this
judgment until the same shall have been fully paid; and
4. Ordering the Register of Deeds of Pasig City to cancel TCT No.
PT-105797 and issue a new title over the subject property under
the name of ORTIGAS & COMPANY LIMITED PARTNERSHIP.
No pronouncement as to cost.
SO ORDERED.[2]
The petitioner also assails the resolution promulgated on July 26,
2012,[3] whereby the CA denied its Motion for Reconsideration.
Antecedents

On June 29, 1994, respondent Ortigas & Company Limited
Partnership (Ortigas) entered into a Deed of Sale with Amethyst
Pearl Corporation (Amethyst) involving the parcel of land with an
area of 1,012 square meters situated in Barrio Oranbo, Pasig City
and registered under Transfer Certificate of Title (TCT) No. 65118
of the Register of Deeds of Rizal[4] for the consideration of
P2,024,000.00. The Deed of Sale[5] contained the following
stipulations, among others:
COVENANTS, CONDITIONS AND RESTRICTIONS
This lot has been segregated by ORTIGAS from its subdivisions to
form part of a zonified BUILDING AREA pursuant to its controlled
real estate development project and subdivision scheme, and is
subject to the following covenants which form part of the
consideration of ORTIGAS' sale to VENDEE and its assigns,
namely:
xxxx
B. BUILDING WORKS AND ARCHITECTURE:
1. The building to be constructed on the lot shall be of reinforced
concrete, cement hollow blocks and other high-quality materials
and shall be of the following height of not more than: fourteen
(14) storeys plus one penthouse.
xxxx
L. SUBMISSION OF PLANS:
The final plans and specifications of the said building shall be
submitted to ORTIGAS for approval not later than six (6) months
from date hereof. Should ORTIGAS object to the same, it shall
notify and specify to the VENDEE in writing the amendments
required to conform with its building restrictions and VENDEE
shall submit the amended plans within sixty (60) days from
receipt of said notice.
M. CONSTRUCTION AND COMPLETION OF BUILDING:
The VENDEE shall finish construction of its building within four
(4) years from December 31, 1991.[6]
As a result, the Register of Deeds of Rizal cancelled TCT No.
65118 and issued TCT No. PT-94175 in the name of Amethyst.
[7] The conditions contained in the Deed of Sale were also
annotated on TCT No. PT-94175 as encumbrances.[8]
On December 28, 1996, Amethyst assigned the subject property
to its sole stockholder, petitioner ASB Realty Corporation (the
petitioner), under a so-called Deed of Assignment in Liquidation
in consideration of 10,000 shares of the petitioner's outstanding
capital stock.[9] Thus, the property was transferred to the
petitioner free from any liens or encumbrances except those duly
annotated on TCT No. PT-94175.[10] The Register of Deeds of
Rizal cancelled TCT No. PT-94175 and issued TCT No. PT-105797
in the name of the petitioner with the same encumbrances
annotated on TCT No. PT-94175.[11]
On July 7, 2000, Ortigas filed its complaint for specific
performance against the petitioner,[12] which was docketed as
Civil Case No. 67978 of the Regional Trial Court (RTC) in Pasig
City.[13] Ortigas amended the complaint, and alleged,[14]
among others, that:
5. Defendant has violated the terms of the Deed of Absolute Sale
(Annex "A") in the following manner:
a. While the lot may be used only "for office and residential
purposes", defendant introduced constructions on the property
which are commercial in nature, like restaurants, retail stores
and the like (see par. A, Deed of Absolute Sale, Annex "A").
b. The commercial structures constructed by defendant on the
property extend up to the boundary lines of the lot in question
violating the setbacks established in the contract (see par. B.A.,
ibid).
224
c. Defendant likewise failed to submit the final plans and
specifications of its proposed building not later than six (6)
months from June 29, 1994 and to complete construction of the
same within four (4) years from December 31, 1991. (see pars.
L and M, ibid).
d. Being situated in a first-class office building area, it was
agreed that no advertisements or any kind of commercial signs
shall be allowed on the lot or the improvements therein but this
was violated by defendant when it put up commercial signs and
advertisements all over the area, (see par. F, ibid).
6. Any of the afore-described violations committed by the
defendant empower the plaintiff to sue under parangraph "N.
Unilateral Cancellation", plaintiff may have the Deed of Absolute
Sale (Annex "A") cancelled and the property reverted to it by
paying the defendant the amount it has paid less the items
indicated therein.[15]
For reliefs, Ortigas prayed for the reconveyance of the subject
property, or, alternatively, for the demolition of the structures
and improvements thereon, plus the payment of penalties,
attorney's fees and costs of suit.[16]
During the pendency of the proceedings in the RTC, the
petitioner amended its Articles of Incorporation to change its
name to St. Francis Square Realty Corporation.[17]
After trial on the merits, the RTC rendered its decision on
December 14, 2009,[18] and dismissed the complaint,
pertinently holding as follows:
Ortigas sold the property [to] Amethyst on 29 June 1994.
Amethyst was supposed to finish construction on 31 December
1995. Yet, up to the time the property was transferred to ASB on
28 December 1996, Ortigas never initiated any action against
Amethyst to enforce said provision. Ortigas is therefore guilty of
laches or negligence or omission to assert a right within a
reasonable time, warranting a presumption that the party
entitled to assert it either has abandoned it or declined to assert
it. (Tijam v. Sibonghanoy, L-21450, 15 April 1968, 23 SCRA 29).
It is worth mentioning that the restrictions annotated in TCT No.
94175 (in the name of Amethyst Pearl Corporation) and TCT No.
PT-105797 (in the name of ASB) repeatedly and consistently
refer to the VENDEE. The term VENDEE in the said restrictions
obviously refer to Amethyst Pearls Corporation considering the
fact that the date referred to in Paragraph N thereof
(Construction and Completion of Building), which is four (4)
years from December 31, 1991, obviously refer to the plaintiffs
VENDEE Amethyst Pearl Corporation. Definitely, it cannot refer to
the defendant ASB which is not a vendee of the plaintiff.
Therefore, all references to VENDEE in the restrictions evidently
refer to Amethyst Pearl Corporation, the VENDEE in the sale from
the plaintiff. Such explanation is more consistent with logic than
the plaintiffs convoluted assertions that the said restrictions
apply to the defendant ASB.
Reconveyance of the property to Ortigas necessarily implies
rescission of the sale or transfer from Amethyst to ASB and from
Ortigas to Amethyst. But Amethyst was not made a party to the
case. Reconveyance of the property to the original seller
(Ortigas) applies only on the sale to the original vendee
(Amethyst) and not to subsequent vendees to whom the
property was sold (Ayala Corp. v. Rosa Diana Realty and Dev.
Corp., G.R. No. 134284, Dec. 1, 2000, 346 SCRA 663).
The non-compliance by the plaintiff with the requisites of its own
restrictions further proves that it had no intention whatsoever to
enforce or implement the same. If at all, this evinces an
afterthought of the plaintiff to belatedly and unjustifiably single
out the defendant for alleged non compliance of the said
restrictions which are not applicable to it anyway.
WHEREFORE, foregoing premises considered, the present
complaint is hereby dismissed for lack of basis.
SO ORDERED.[19]

Ortigas appealed to the CA, which initially affirmed the RTC
under the decision promulgated on September 6, 2011,[20]
ruling thusly:
x x x x ORTIGAS can no longer enforce the said restrictions as
against ASB.
The "Covenants, Conditions and Restrictions" of ORTIGAS with
respect to the property clearly states the following purpose:
"This lot has been segregated by ORTIGAS from its subdivisions
to form part of a zonified BUILDING AREA pursuant to its
controlled real estate development project and subdivision
scheme. x x x"
However, it appears from the circumstances obtaining in this
case that ORTIGAS failed to pursue the aforequoted purpose. It
never filed a complaint against its vendee, AMETHYST,
notwithstanding that it required the latter to complete
construction of the building within four (4) years from the
execution of the Deed of Sale. Neither did it make a demand to
enforce the subject restriction. Moreover, while it imposed a
restriction on the registration and issuance of title in the name of
the vendee under Paragraph "P" on "Registration of Sale", to wit:
"P. REGISTRATION OF SALE:
The VENDEE hereby agrees that, for the time being, this Deed
will not be registered and that its title shall not be issued until
the satisfactory construction of the contemplated Office Building
and VENDEE's compliance with all conditions therein. x x x"
AMETHYST was nonetheless able to procure the title to the
property in its name, and subsequently, assigned the same to
ASB.
Besides, records show that there are registered owner-
corporations of several properties within the Ortigas area, where
the subject property is located, that have likewise failed to
comply with the restriction on building construction
notwithstanding the fact of its annotation on the titles covering
their properties. In fact, the tax declarations covering these
properties in the respective names of UNIMART INC., CHAILEASE
DEVELOPMENT CO. INC., CANOGA PARK DEVELOPMENT
CORPORATION, and MAKATI SUPERMARKET CORPORATION
reveal that no improvements or buildings have been erected
thereon.
Notwithstanding such blatant non-compliance, however, records
are bereft of evidence to prove that ORTIGAS took steps to
demand observance of the said restriction from these
corporations, or that it opted to institute any case against them
in order to enforce its rights as seller. Thus, while ORTIGAS
effectively tolerated the non-compliance of these other
corporations, it nonetheless proceeded with the filing of the
Complaint a quo against ASB, seeking the rescission of the
original Deed of Sale on the ground of non-compliance of the
very same restriction being violated by other property owners
similarly situated.
On the basis of the foregoing acts or omissions of ORTIGAS, and
the factual milieu of the present case, it cannot be pretended
that it failed to actively pursue the attainment of its objective of
having a "controlled real estate development project and
subdivision scheme". The Court thus concurs with the
ratiocinations of the RTC when it posited that the restrictions
imposed by ORTIGAS on ASB have been "rendered obsolete and
inexistent" for failure of ORTIGAS to enforce the same uniformly
and indiscriminately against all non-complying property owners.
If the purpose of ORTIGAS for imposing the restrictions was for
its "controlled real estate development project and subdivision
scheme", then it should have sought compliance from all
property owners that have violated the restriction on building
completion. As things stand, ASB would appear to have been
singled out by ORTIGAS, rendering the present action highly
suspect and a mere afterthought.
225
Consequently, while it may be true that ASB was bound by the
restrictions annotated on its title, specifically the restriction on
building completion, ORTIGAS is now effectively estopped from
enforcing the same by virtue of its inaction and silence.
xxxx
In this case, ORTIGAS acquiesced to the conveyance of the
property from AMETHYST to ASB with nary a demand,
reservation or complaint for the enforcement of the restriction on
building construction. It allowed the four-year period within
which to construct a building to lapse before it decided that it
wanted, after all, to enforce the restriction, which cannot be
allowed lest the property rights of the registered owner, ASB, be
transgressed. Such a silence or inaction, which in effect led ASB
to believe that ORTIGAS no longer sought the enforcement of the
restrictions on the contract, therefore bars ORTIGAS from
enforcing the restriction it imposed on the subject property.
xxxx
WHEREFORE, premises considered, the instant appeal is DENIED.
The assailed Decision is hereby AFFIRMED.
SO ORDERED.[21]
Acting on Ortigas' Motion for Reconsideration, however, the CA
promulgated its assailed amended decision on January 9, 2012,
[22] whereby it reversed the decision promulgated on September
6, 2011. It observed and ruled as follows:
It is not disputed that AMETHYST failed to finish construction
within the period stated in the 1994 Deed of Sale. As correctly
pointed out by ORTIGAS, in accordance with Article 1144 of the
Civil Code, the prescriptive period within which to enforce
remedies under the 1994 Deed of sale is ten (10) years from the
time the right of action accrues.
ORTIGAS, therefore, had ten (10) years from 31 December 1995
or until 31 December 2005 within which to file suit to enforce the
restriction. ORTIGAS filed the present complaint on 07 July 2000
well within the prescriptive period for filing the same.
ASB contends that it could not have complied with the particular
restriction to finish construction of the building as the period to
finish the same had already lapsed by the time ASB acquired the
property by way of a Deed of Assignment in Liquidation between
AMETHYST and ASB on 28 December 1996. We hold, however,
that the mere assignment or transfer of the subject property
from AMETHYST to ASB does not serve to defeat the vested right
of ORTIGAS to avail of remedies to enforce the subject restriction
within the applicable prescriptive period.
xxxx
As to the argument that the inaction of ORTIGAS with respect to
other non-compliant properties in the Ortigas area is tantamount
to consenting to such non-compliance, it must be mentioned that
it is the sole prerogative and discretion of Ortigas to initiate any
action against the violators of the deed restrictions. This Court
cannot interfere with the exercise of such prerogative/discretion.
Furthermore, We cannot sustain estoppel in doubtful inference.
Absent the conclusive proof that its essential elements are
present, estoppel must fail. Estoppel, when misapplied, becomes
an effective weapon to accomplish an injustice, inasmuch as it
shuts a man's mouth from speaking the truth.[23]
By its resolution promulgated on July 26, 2012, the CA denied
the petitioner's Motion for Reconsideration[24] for being filed out
of time.[25]
Issues
Hence, this appeal in which ASB submits: (1) that its Motion for
Reconsideration vis-a-vis the CA's amended decision was filed on
time; and (2) that the amended decision promulgated on
January 9, 2012 by CA be reversed and set aside, and the
decision promulgated on September 6, 2011 be reinstated.[26]

The petitioner essentially seeks the resolution of the issue of
whether or not Ortigas validly rescinded the Deed of Sale due to
the failure of Amethyst and its assignee, the petitioner, to fulfil
the covenants under the Deed of Sale.
Ruling of the Court
The petition for review is meritorious.
1.
Petitioner's motion for reconsideration vis-a-vis the amended
decision of the CA was timely filed
In denying the petitioner's Motion for Reconsideration, the CA
concluded as follows:
Per allegation of material dates, the Motion for Reconsideration
filed by Balgos Gumara & Jalandoni, co-counsel with Jose,
Mendoza & Associates, on January 30, 2012 appears to have
been filed on time. However, per registry return attached at the
back of p. 212 of the Rollo, the Motion for Reconsideration was
filed three (3) days late considering that the Amended Decision
was received by defendant appellee's counsel of record, Jose,
Mendoza & Associates, on January 12, 2012.[27]
The conclusion of the CA was unwarranted because the petitioner
established that its filing of the Motion for Reconsideration was
timely.
It is basic that the party who asserts a fact or the affirmative of
an issue has the burden of proving it.[28] Here, that party was
the petitioner. To comply with its burden, it attached to its
petition for review on certiorari: (1) the affidavit executed by
Noel S.R. Rose, Senior Partner of Jose, Mendoza & Associates
attesting that he had requested the postmaster of the
Mandaluyong City Post Office to certify the date when Jose,
Mendoza & Associates had received the copy of the amended
decision of the CA;[29] and (2) the certification issued on August
15, 2012 by Postmaster Rufino C. Robles, and Letter Carrier, Jojo
Salvador, both of the Mandaluyong Central Post Office, certifying
that Registered Letter No. MVC 457 containing the copy of the
amended decision had been delivered to and received on January
18, 2012 by Jose, Mendoza & Associates, through Ric Ancheta.
[30] It thereby sought to prove that it had received the copy of
the amended decision only on January 18, 2012, not January 12,
2012 as stated in the registry return card on record. Thus, it had
until February 2, 2012, or 15 days from January 18, 2012, within
which to file the same. In contrast, Ortigas relied only on the
copy of the registry return to refute the petitioner's assertion.
[31] Under the circumstances, the filing on January 30, 2012 of
the Motion for Reconsideration was timely.
2.
Ortigas' action for rescission could not prosper
The petitioner reiterates that although the restrictions and
covenants imposed by Ortigas under the Deed of Sale with
Amethyst, particularly with regard to the construction of the
building, were similarly imposed on Ortigas' other buyers and
annotated on the latter's respective certificates of title,[32]
Ortigas never took to task such other buyers and Amethyst for
failing to construct the buildings within the periods contractually
imposed.[33] It maintains, therefore, that Ortigas slept on its
rights because it did not take any action against Amethyst during
the period prescribed in the Deed of Sale.[34] It argues that
even assuming that it was bound by the terms of the Deed of
Sale, certain circumstances occurred in the interim that rendered
it impossible for the petitioner to comply with the covenants
embodied in the Deed of Sale, namely: (1) the delay in the
petitioner's possession of the property resulted from the
complaint for forcible entry it had filed in the Metropolitan Trial
Court in Pasig City; (2) at the time the property was transferred
to the petitioner, the period within which to construct the
building had already expired without Ortigas enforcing the
226
obligation against Amethyst; and (3) the petitioner was placed
under corporate rehabilitation by the Securities and Exchange
Commission (SEC) by virtue of which a stay order was issued on
May 4, 2000.[35]
In contrast, Ortigas contends that it had the sole discretion
whether or not to commence any action against a party who
violated a restriction in the Deed of Sale;[36] and that it could
not be estopped because the Deed of Sale with Amethyst and the
deeds of sale with its other buyers contained a uniform provision
to the effect that "any inaction, delay or tolerance by OCLP
(Ortigas) in respect to violation of any of the covenants and
restrictions committed by these buyers shall not bar or estop the
institution of an action to enforce them."[37]
In asserting its right to rescind, Ortigas insists that the petitioner
was bound by the covenants of the Deed of Sale annotated on
TCT No. PT-10597 in the name of the petitioner;[38] and that
the petitioner's privity to the Deed of Sale was by virtue of its
being the successor-in-interest or assignee of Amethyst.[39]
After evaluating the parties' arguments and the records of the
case, the Court holds that Ortigas could not validly demand the
reconveyance of the property, or the demolition of the structures
thereon through rescission.
The Deed of Assignment in Liquidation executed between
Amethyst and the petitioner expressly stated, in part, that:
x x x x [T]he ASSIGNOR hereby assigns, transfers and conveys
unto the ASSIGNEE, its successors and assigns, free from any
lien or encumbrance except those that are duly annotated on the
Transfer Certificate of Title (TCT), one parcel of real property
(with improvements). x x x.
xxxx
The ASSIGNEE in turn in consideration of the foregoing
assignment of assets to it, hereby surrenders to ASSIGNOR,
Amethyst Pearl Corporation, Stock Certificate Nos. (006, 007,
008, 009, 010, 011), covering a total of TEN THOUSAND SHARES
(10,000) registered in the name of the ASSIGNEE and its
nominees in the books of ASSIGNOR, receipt of which is hereby
acknowledged, and in addition hereby releases ASSIGNOR from
any and all claims.[40]
The express terms of the Deed of Assignment in Liquidation,
supra, indicate that Amethyst transferred to the petitioner only
the tangible asset consisting of the parcel of land covered by TCT
No. PT-94175 registered in the name of Amethyst. By no means
did Amethyst assign the rights or duties it had assumed under
the Deed of Sale. The petitioner thus became vested with the
ownership of the parcel of land "free from any lien or
encumbrance except those that are duly annotated on the [title]"
from the time Amethyst executed the Deed of Assignment in
Liquidation.
Although the Deed of Sale stipulated that:
3. The lot, together with any improvements thereon, or any
rights thereto, shall not be transferred, sold or encumbered
before the final completion of the building as herein provided
unless it is with the prior express written approval of ORTIGAS.
[41]
xxxx
The VENDEE hereby agrees that, for the time being, this Deed
will not be registered and that its title shall not be issued until
the satisfactory construction of the contemplated Office Building
and VENDEE's compliance with all conditions herein. x x x[42]
Ortigas apparently recognized without any reservation the
issuance of the new certificate of title in the name of Amethyst
and the subsequent transfer by assignment from Amethyst to the
petitioner that resulted in the issuance of the new certificate of
title under the name of the petitioner. As such, Ortigas was
estopped from assailing the petitioner's acquisition and
ownership of the property.

The application of estoppel was appropriate. The doctrine of
estoppel was based on public policy, fair dealing, good faith and
justice, and its purpose was to forbid a party to speak against his
own act or omission, representation, or commitment to the injury
of another to whom the act, omission, representation, or
commitment was directed and who reasonably relied thereon.
The doctrine sprang from equitable principles and the equities in
the case, and was designed to aid the law in the administration
of justice where without its aid injustice would result. Estoppel
has been applied by the Court wherever and whenever special
circumstances of the case so demanded.[43]
Yet, the query that persists is whether or not the covenants
annotated on TCT No. PT-10597 bound the petitioner to the
performance of the obligations assumed by Amethyst under the
Deed of Sale.
We agree with Ortigas that the annotations on TCT No. PT-10597
bound the petitioner but not to the extent that rendered the
petitioner liable for the non-performance of the covenants
stipulated in the Deed of Sale.
Section 39 of Act No. 496 (The Land Registration Act) requires
that every person receiving a certificate of title in pursuance of a
decree of registration, and every subsequent purchaser of
registered land who takes a certificate of title for value in good
faith shall hold the same free of all encumbrances except those
noted on said certificate. An encumbrance in the context of the
provision is "anything that impairs the use or transfer of
property; anything which constitutes a burden on the title; a
burden or charge upon property; a claim or lien upon
property."[44] It denotes "any right to, or interest in, land which
may subsist in another to the diminution of its value, but
consistent with the passing of the fee by conveyance."[45] An
annotation, on the other hand, is "a remark, note, case
summary, or commentary on some passage of a book, statutory
provision, court decision, of the like, intended to illustrate or
explain its meaning."[46] The purpose of the annotation is to
charge the purchaser or title holder with notice of such burden
and claims.[47] Being aware of the annotation, the purchaser
must face the possibility that the title or the real property could
be subject to the rights of third parties.[48]
By acquiring the parcel of land with notice of the covenants
contained in the Deed of Sale between the vendor (Ortigas) and
the vendee (Amethyst), the petitioner bound itself to
acknowledge and respect the encumbrance. Even so, the
petitioner did not step into the shoes of Amethyst as a party in
the Deed of Sale. Thus, the annotation of the covenants
contained in the Deed of Sale did not give rise to a liability on the
part of the petitioner as the purchaser/successor-in-interest
without its express assumption of the duties or obligations
subject of the annotation. As stated, the annotation was only the
notice to the purchaser/successor-in-interest of the burden,
claim or lien subject of the annotation. In that respect, the Court
has observed in Garcia v. Villar:[49]
The sale or transfer of the mortgaged property cannot affect or
release the mortgage; thus the purchaser or transferee is
necessarily bound to acknowledge and respect the encumbrance.
xxxx
x x x However, Villar, in buying the subject property with notice
that it was mortgaged, only undertook to pay such mortgage or
allow the subject property to be sold upon failure of the
mortgage creditor to obtain payment from the principal debtor
once the debt matures. Villar did not obligate herself to replace
the debtor in the principal obligation, and could not do so in law
without the creditors consent. Article 1293 of the Civil Code
provides:
Art. 1293. Novation which consists in substituting a new debtor
in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
227
consent of the creditor. Payment by the new debtor gives him
the rights mentioned in articles 1236 and 1237.
Therefore, the obligation to pay the mortgage indebtedness
remains with the original debtors Galas and Pingol. x x x
To be clear, contractual obligations, unlike contractual rights or
benefits, are generally not assignable. But there are recognized
means by which obligations may be transferred, such as by sub-
contract and novation. In this case, the substitution of the
petitioner in the place of Amethyst did not result in the novation
of the Deed of Sale. To start with, it does not appear from the
records that the consent of Ortigas to the substitution had been
obtained despite its essentiality to the novation. Secondly, the
petitioner did not expressly assume Amethyst's obligations under
the Deed of Sale, whether through the Deed of Assignment in
Liquidation or another document. And, thirdly, the consent of the
new obligor (i.e., the petitioner), which was as essential to the
novation as that of the obligee (i.e., Ortigas), was not obtained.
[50]
Even if we would regard the petitioner as the assignee of
Amethyst as far as the Deed of Sale was concerned, instead of
being the buyer only of the subject property, there would still be
no express or implied indication that the petitioner had assumed
Amethyst's obligations. In short, the burden to perform the
covenants under the Deed of Sale, or the liability for the non-
performance thereof, remained with Amethyst. As held in an
American case:
The mere assignment of a bilateral executory contract may not
be interpreted as a promise by the assignee to the assignor to
assume the performance of the assignor's duties, so as to have
the effect of creating a new liability on the part of the assignee to
the other party to the contract assigned. The assignee of the
vendee is under no personal engagement to the vendor where
there is no privity between them. (Champion v. Brown, 6 Johns.
Ch. 398; Anderson v. N. Y. & H. R. R. Co., 132 App. Div. 183,
187, 188; Hugel v. Habel, 132 App. Div. 327, 328.) The assignee
may, however, expressly or impliedly, bind himself to perform
the assignor's duties. This he may do by contract with the
assignor or with the other party to the contract. It has been held
(Epstein v. Gluckin, 233 N. Y. 490) that where the assignee of
the vendee invokes the aid of a court of equity in an action for
specific performance, he impliedly binds himself to perform on
his part and subjects himself to the conditions of the judgment
appropriate thereto. "He who seeks equity must do equity." The
converse of the proposition, that the assignee of the vendee
would be bound when the vendor began the action, did not follow
from the decision in that case. On the contrary, the question was
wholly one of remedy rather than right and it was held that
mutuality of remedy is important only so far as its presence is
essential to the attainment of the ends of justice. This holding
was necessary to sustain the decision. No change was made in
the law of contracts nor in the rule for the interpretation of an
assignment of a contract.
A judgment requiring the assignee of the vendee to perform at
the suit of the vendor would operate as the imposition of a new
liability on the assignee which would be an act of oppression and
injustice, unless the assignee had, expressly or by implication,
entered into a personal and binding contract with the assignor or
with the vendor to assume the obligations of the assignor.[51]
Is rescission the proper remedy for Ortigas to recover the subject
property from the petitioner?
The Civil Code uses rescission in two different contexts, namely:
(1) rescission on account of breach of contract under Article
1191; and (2) rescission by reason of lesion or economic
prejudice under Article 1381. Cogently explaining the differences
between the contexts of rescission in his concurring opinion in
Universal Food Corp. v. Court of Appeals,[52] the eminent
Justice J.B.L. Reyes observed:
x x x The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff
but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and
Article 1191 may be scanned without disclosing anywhere that

the action for rescission thereunder is subordinated to anything;
other than the culpable breach of his obligations by the
defendant. This rescission is in principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his
promises when the other violates his, as expressed in the old
Latin aphorism: "Non servanti fidem, non est fides servanda."
Hence, the reparation of damages for the breach is purely
secondary.
On the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of
that prejudice, because it is the raison d'etre as well as the
measure of the right to rescind. Hence, where the defendant
makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Articles 1383
and 1384. But the operation of these two articles is limited to the
cases of rescission for lesion enumerated in Article 1381 of the
Civil Code of the Philippines, and does not apply to cases under
Article 1191.
Based on the foregoing, Ortigas' complaint was predicated on
Article 1191 of the Civil Code, which provides:
Article 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with articles
1385 and 1388 and the Mortgage Law.
Rescission under Article 1191 of the Civil Code is proper if one of
the parties to the contract commits a substantial breach of its
provisions. It abrogates the contract from its inception and
requires the mutual restitution of the benefits received;[53]
hence, it can be carried out only when the party who demands
rescission can return whatever he may be obliged to restore.
Considering the foregoing, Ortigas did not have a cause of action
against the petitioner for the rescission of the Deed of Sale.
Under Section 2, Rule 2 of the Rules of Court, a cause of action is
the act or omission by which a party violates a right of another.
The essential elements of a cause of action are: (1) a right in
favor of the plaintiff by whatever means and under whatever law
it arises or is created; (2) an obligation on the part of the
defendant not to violate such right; and (3) an act or omission
on the part of the defendant in violation of the right of the
plaintiff or constituting a breach of the obligation of the
defendant to the plaintiff for which the latter may maintain an
action for recovery of damages or other relief. It is only upon the
occurrence of the last element that the cause of action arises,
giving the plaintiff the right to file an action in court for the
recovery of damages or other relief.[54]
The second and third elements were absent herein. The
petitioner was not privy to the Deed of Sale because it was not
the party obliged thereon. Not having come under the duty not
to violate any covenant in the Deed of Sale when it purchased
the subject property despite the annotation on the title, its
failure to comply with the covenants in the Deed of Sale did not
constitute a breach of contract that gave rise to Ortigas' right of
rescission. It was rather Amethyst that defaulted on the
covenants under the Deed of Sale; hence, the action to enforce
the provisions of the contract or to rescind the contract should be
against Amethyst. In other words, rescission could not anymore
take place against the petitioner once the subject property
legally came into the juridical possession of the petitioner, who
was a third party to the Deed of Sale.[55]
228
In view of the outcome, we consider to be superfluous any
discussion of the other matters raised in the petition, like the
effects of the petitioner's corporate rehabilitation and whether
Ortigas was guilty of laches.
WHEREFORE, the Court GRANTS the petition for review on
certiorari; ANNULS and REVERSES the amended decision
promulgated on January 9, 2012 and the resolution promulgated
on July 26, 2012 by the Court of Appeals in C.A.-G.R. CV No.
94997; DISMISSES Civil Case No. 67978 for lack of cause of
action; and ORDERS respondent ORTIGAS & COMPANY LIMITED
PARTNERSHIP to pay the costs of suit.
SO ORDERED.
Show opinions
DIVISION
[ GR No. 213582, Jun 28, 2016 ]
NYMPHA S. ODIAMAR v. LINDA ODIAMAR VALENCIA +
RESOLUTION
PERLAS-BERNABE, J.:
Before the Court, is a petition for review on certiorari[2] assailing
the Decision[3] dated March 16, 2012 and the Resolution[4]
dated July 14, 2014 of the Court of Appeals (CA) in C.A. G.R. CV
No. 93624, which affirmed the Decision[5] dated May 5, 2009 of
the Regional Trial Court of San Jose, Camarines Sur, Branch 58
(RTC) in Civil Case No. T-962 ordering petitioner Nympha S.
Odiamar (petitioner) to pay respondent Linda Odiamar Valencia
(respondent) the amount of P1,710,049.00 plus twelve percent
(12%) interest, attorney's fees, litigation expenses, and the
costs of suit.
Facts
On August 20, 2003, respondent filed a complaint[6] for sum of
money and damages against petitioner, alleging that the latter
owed her P2,100,000.00. Petitioner purportedly issued China
Bank Check No. GHB1147212[7] (the check) for the said amount
to guarantee the payment of the debt, but upon presentment,
the same was dishonored.[8] Respondent lamented that
petitioner refused to pay despite repeated demands, and that
had she invested the money loaned to petitioner or deposited the
same in a bank, it would have earned interest at the rate of 36%
per annum or three percent (3%) per month.[9]
For her part, petitioner sought the dismissal[10] of the complaint
on the ground that it was her deceased parents who owed
respondent money. Accordingly, respondent's claim should be
filed in the proceedings for the settlement of their estates.
Petitioner averred that respondent had, in fact, participated in
the settlement proceedings and had issued a certification[11]
stating that it was petitioner's deceased parents who were
indebted to respondent for P2,000,000.00. She further
maintained that as administratix of her parents' estates, she
agreed to pay such indebtedness on installment but respondent
refused to accept her payments.[12]
Respondent countered[13] that petitioner personally borrowed
almost half of the P2,100,000.00 from her, as evidenced by the
check which she issued after agreeing to settle the same in
installments.[14] While respondent conceded that petitioner
made several installment payments from December 29, 2000
until May 31, 2003, she pointed out that the latter failed to make
any succeeding payments.[15] Moreover, respondent denied
participating in the proceedings for the settlement of the estates
of petitioner's parents, clarifying that petitioner was the one who
prepared the certification alluded to and that she (respondent)
signed it on the belief that petitioner would make good her
promise to pay her (respondent).[16]

In an Order[17] dated October 3, 2003, the RTC denied
petitioner's motion to dismiss, thus prompting her to file an
answer.[18] She asserted that respondent merely persuaded her
to issue the check to guarantee her deceased parents' loan. She
further claimed that the check was blank when she issued it and
that despite having no authority to fill up the same, respondent
wrote the amount and date thereon.[19] She also maintained
that from December 29, 2000 to May 31, 2003, she made, in
almost daily installments, payments to respondent ranging from
P500.00 to P10,000.00, and that while she tried to make
succeeding payments, respondent refused to accept the same,
demanding, instead, the payment of the entire balance.[20] As
counterclaim, petitioner prayed that moral damages, attorney's
fees, litigation expenses, and exemplary and punitive damages
be awarded to her.[21]
The RTC Ruling
In a Decision[22] dated May 5, 2009, the RTC ruled in favor of
respondent and ordered petitioner to pay: (a) P1,710,049.00
which represents the unpaid portion of the P2,100,000.00 debt;
(b) twelve percent (12%) interest computed from the time
judicial demand was made on August 20, 2003 until fully paid;
(c) P10,000.00 as attorney's fees; (d) litigation expenses
amounting to P19,662.78; and (e) the costs of suit.[23]
The RTC refused to give credence to petitioner's contention that
it was her deceased parents who borrowed money from
respondent, observing that while the latter acknowledged that
the former's deceased parents owed her P700,000.00 out of the
P2,100,000.00, petitioner likewise admitted that she obtained
personal loans from respondent.[24] Hence, according to the
RTC, petitioner cannot deny her liability to respondent. Further,
by assuming the liability of her deceased parents and agreeing to
pay their debt in installments - which she in fact paid from
December 29, 2000 to May 31, 2003 in amounts of P500.00 to
P10,000.00, and which payments respondent did actually accept
- a mixed novation took place and petitioner was substituted in
their place as debtor. Thus, the liabilities of the estates of
petitioner's deceased parents were extinguished and transferred
to petitioner.[25]
Anent the sum due, the RTC surmised that petitioner and her
deceased parents owed respondent the sum of P2,000,000.00 as
principal and since petitioner undertook to pay the same in
installments, P100,000.00 was added as interest; hence,
petitioner issued the check for P2,100,000.00.[26] Based on the
receipts submitted by petitioner, the genuineness and due
execution of which were not put in issue, petitioner had paid a
total of P389,951.00 in installments, leaving an unpaid balance
of P1,710,049.00, subject to interest of twelve percent (12%)
per annum from the time judicial demand was made on August
20, 2003, in the absence of any written stipulation on interest.
[27]
Aggrieved, petitioner appealed[28] to the CA, arguing that
novation did not take place and no interest was due respondent.
[29]
The CA Ruling
In a Decision[30] dated March 16, 2012, the CA affirmed the
ruling of the RTC.[31] It agreed that petitioner cannot deny her
liability to respondent in view of her admission that she borrowed
money from the latter several times.[32] The CA also found
petitioner's claim that she issued a blank check incredible,
pointing out that petitioner testified in court that she personally
wrote the amount thereon after she and respondent agreed that
the loans she and her deceased parents obtained amounted to
P2,100,000.00.[33]
Anent the issue of novation, the CA concurred with the RTC that
novation took place insofar as petitioner was substituted in place
of petitioner's late parents, considering that petitioner undertook
to pay her deceased parents' debt. However, the CA opined that
229
there was no novation with respect to the object of the contract,
following the rule that an obligation is not novated by an
instrument which expressly recognizes the old obligation and
changes only the terms of paying the same, as in this case where
the parties merely modified the terms of payment of the
P2,100,000.00.[34]
Dissatisfied, petitioner moved for reconsideration,[35] which
was, however, denied in a Resolution[36] dated July 14, 2014;
hence, this petition.
The Issue Before the Court
The primary issue for the Court's resolution is whether or not
petitioner should be held liable to respondent for the entire debt
in the amount of P2,100,000.00.
The Court's Ruling
At the outset, it must be emphasized that the fact of petitioner's
liability to respondent is well-established. As correctly pointed
out by the RTC and the CA, while respondent acknowledged that
petitioner's deceased parents owed her money, petitioner also
admitted obtaining loans from respondent, viz.:
From [respondent's] recollection, the amount due from
[petitioner's] parents is P700,000.00. Aside from her parents'
loans, however, [petitioner] herself admitted having obtained
personal loans from the respondent while her parents were still
alive. She testified:
ATTY. PASA:
You also know that [respondent] was also in [lending]?
[PETITIONER]:
Yes, Madam.
Q:
Because she was in lending you have borrowed money also? (sic)
A:
Yes, Madam.
Q:
Separate from your father?
A:
Yes, Madam.
xxxx
Q:
You borrowed money from [respondent] separate from your
father prior to his death?
A:
Yes, Madam.[37]
Having admitted that she obtained loans from respondent
without showing that the same had already been paid or
otherwise extinguished, petitioner cannot now aver otherwise. It
is settled that judicial admissions made by the parties in the
pleadings or in the course of the trial or other proceedings in the
same case are conclusive and do not require further evidence to
prove them.[38] They are legally binding on the party making it,
[39] except when it is shown that they have been made through
palpable mistake or that no such admission was actually made,
[40] neither of which was shown to exist in this case.
Accordingly, petitioner is bound by her admission of liability and
the only material question remaining is the extent of such
liability.
Based on the records of this case, respondent, for her part,
admitted that petitioner's deceased parents owed her
P700,000.00 of the P2,100,000.00 debt and that petitioner owed
her P1,400,000.00 only:
ATTY. VILLEGAS:
Q
When was the first time that the [petitioner] obtained cash
advances from you?
A
About 1996, sir and then she made several others and she kept
on borrowing money from me.
Q
 230
Do you mean to say that she obtained part of her loan while her place so as to release the estates of the petitioner's deceased
father was still alive? parents from their obligation, which, thus, rendered petitioner
A solely liable for the entire P2,100,000.00 debt; and (b) the
Yes, when he was still alive she already borrowed. P100,000.00 of the P2,100,000,00 debt was in the nature of
Q accrued monetary interests.
Are you telling us that this 2.1 Million Pesos was entirely
borrowed from you by the [petitioner]? On the first matter, while it is observed that petitioner had
A indeed admitted that she agreed to settle her late parents' debt,
There were loans which were obtained by her father, some by which was supposedly evinced by (a) the P2,100,000.00 check
her mother and since they died already[,] when we summarized she issued therefor, and (b) several installment payments she
the amount that was the total amount that she owes me, sir. made to respondent from December 29, 2000 to May 31, 2003,
Q there was no allegation, much less any proof to show, that the
How much is the amount owe[d] to you by the [petitioner's] estates of her deceased parents were released from liability
father? thereby. In S.C. Megaworld Construction and Development
A Corporation v. Parada,[43] the Court held that to constitute
I could no longer recall, sir because that was already long time novation by substitution of debtor, the former debtor must be
ago but it was part of the summary that we made, sir. expressly released from the obligation and the third person or
Q new debtor must assume the former's place in the contractual
Could it be P200,000.00? relations.[44] Moreover, the Court ruled that the "fact that the
A creditor accepts payments from a third person, who has assumed
More or less, that much, sir. the obligation, will result merely in the addition of debtors and
Q not novation."[45] At its core, novation is never presumed, and
What about the defendant's mother? How much was her the animus novandi, whether totally or partially, must appear by
obligation to you? express agreement of the parties, or by their acts that are too
A clear and unequivocal to be mistaken.[46] Here, the intent to
P500,000.00, more or less, but I cannot exactly recall. novate was not satisfactorily proven by respondent. At best,
Q petitioner only manifested her desire to shoulder the debt of her
So, the defendant's parents owed you more than P700,000.00 is parents, which, as above-discussed, does not amount to
it not? novation. Thus, the courts a quo erred in holding petitioner liable
A for the debts obtained by her deceased parents on account of
Yes, sir. novation by substitution of the debtor.
xxxx
COURT: Similarly, both courts faultily concluded that the principal sum
Q loaned by petitioner and her deceased parents amounted to
Is it the impression of the Court that the x x x amount of P2,000,000.00 and the P100,000.00 was added as interest
P700,000.00 is not a personal indebtedness of [petitioner] but because petitioner undertook to pay the loan in installments.
that of her parents? Is that the impression x x x the Court is
getting? It is fundamental that for monetary interest to be due, there
A must be an express written agreement therefor.[47] Article 1956
Yes, Your Honor. of the Civil Code provides that "[n]o interest shall be due unless
xxxx it has been expressly stipulated in writing." In this relation, case
ATTY. VILLEGAS: law states that the lack of a written stipulation to pay interest on
Q the loaned amount bars a creditor from charging monetary
Tell us, how much really to your recollection is the indebtedness interest[48] and the collection of interest without any stipulation
of the [petitioner's] parents? therefor in writing is prohibited by law.[49]
A
To the best of my recollection, that is the amount. More or less Here, respondent herself admitted that there was no written
[P]700,000[.00] for both spouses, sir.[41] (Emphases supplied) agreement that interest would be due on the sum loaned, only
ATTY. PASA: that there was an implicit understanding that the same would be
Q subject to interest since she also borrowed the same from banks
Madam witness, during the last hearing you stated that the which, as a matter of course, charged interest. Respondent also
[petitioner's] parents were indebted [to] you for about testified on cross examination that the P2,100,000.00
P700,000.00? corresponds only to the principal and does not include interest,
A viz.:
Yes, Madam. [Atty. Villegas]: Now, are these loans interest bearing?
Q [Respondent]: Yes, sir, because the money I loaned to them I
How about the [petitioner], how much did she [owe] you? have also obtained as a loan from the bank.
A Q:
More or less 1.4 [Million] Madam.[42] (Emphasis supplied) This 2.1 Million Pesos are included (sic) the interest that you
Applying the same principle on judicial admissions above, it is charge[d] to the [petitioner's] parents and to the petitioner, is it
therefore incontrovertible that petitioner's debt to respondent not?
amounted to only P1,400,000.00 and not P2,100,000.00. Thus, A:
respondent only remains liable to petitioner for such amount. That is the basis of the interest bearing, 2.1 Million Pesos at 3
Considering that petitioner had already paid P389,951.00 in percent per month.
installments as evidenced by the receipts submitted by petitioner Q:
- the genuineness and due execution of which were not put in Are you telling us that when you summarized and computed the
issue - the unpaid balance of petitioner's P1,400,000.00 debt to entire total obligations of the [petitioner and her parents] you
respondent stands at P1,010,049.00. On the other hand, the computed the interest and come out (sic) with 2.1 Million Pesos?
remaining P700,000.00 of the total P2,100,000.00 debt to A:
respondent is properly for the account of the estates of Interest has not yet been included in the 2.1 Million Pesos.
petitioner's deceased parents and, hence, should be claimed in Q:
the relevant proceeding therefor. This agreement of yours to pay interest is not in writing, is it not
(sic)?
At this juncture, the Court finds it apt to correct the mistaken A:
notions that: (a) novation by substitution of the debtor took It is not in writing, sir.[50]

All told, having established that no novation took place and that
no interest was actually due, and factoring in the payments
already made for her account, petitioner is, thus, ordered to pay
respondent the amount of P1,010,049.00, which is the remaining
balance of her principal debt to the latter in the original amount
of P1,400,000.00.
WHEREFORE, the petition is PARTLY GRANTED. The Decision
dated March 16, 2012 and the Resolution dated July 14, 2014 of
the Court of Appeals (CA) in C.A. G.R. CV No. 93624 are hereby
AFFIRMED with MODIFICATION in that petitioner Nympha S.
Odiamar is ORDERED to pay respondent Linda Odiamar Valencia
the amount of P1,010,049.00, which is the remaining balance of
her principal debt to the latter in the original amount of
P1,400,000.00.
SO ORDERED.
SECOND DIVISION
June 29, 2016
G.R. No. 204264
JENNEFER FIGUERA, as substituted by ENHANCE VISA
SERVICES, INC., represented by MA. EDEN R. DUMONT,
Petitioner,
vs.
MARIA REMEDIOS ANG, Respondent.
DECISION
BRION, J.:
We resolve the petition for review on certiorari1under Rule 45 of
the Rules of Court filed by petitioner Jennefer Figuera2 (Figuera)
assailing the June 29, 2012 decision3 and the September 28,
2012 resolution4 of the Court of Appeals (CA) of Cebu City in CA-
G.R. CV. No. 02480.
The Facts
Maria Remedios A.ng (Ang) is the registered owner of a single
proprietorship business named "Enhance Immigration and
Documentation Consultants" (EIDC).
On December 16, 2004, Ang executed a "Deed of Assignment of
Business Rights" (Deed) transferring all of her business rights
over the EIDC to Figuera for One Hundred Fifty Thousand Pesos
(₱150,000.00).
In addition to the assignment of rights, the parties also agreed
that Ang shall pay the bills for electricity, telephone, office
rentals, and the employees’ salaries up to the month of
December 2004.5
Without Ang’s consent, Figuera paid all the utility bills amounting
to ₱107,903.21 as of December 2004. On January 17, 2005,
Figuera tendered only the amount of ₱42,096.79 to Ang, after
deducting the amount paid for the utility bills from the
₱150,000.00 consideration of the Deed.
Ang refused to accept Figuera’s payment. Figuera mailed the
Formal Tender of Payment and gave Ang five (5) days to accept
the amount. Despite the lapse of the 5-day period, however, Ang
still refused to accept the payment.
Thus, Figuera filed a complaint for specific performance before
the Regional Trial Court (RTC), Branch 9 of Cebu City against
Ang. Figuera consigned the amount of ₱42,096.79 to the RTC.
231
In her answer, Ang maintained that the amount due pursuant to
the Deed is ₱150,000.00 and not just ₱42,096.79. She argued
that she cannot be compelled to accept the amount because it is
not what was agreed upon.
On May 19, 2005, Figuera conveyed all her rights, assets,
interests, liabilities, and causes of action over EIDC in favor of
the Enhance Visa Services, Inc. (EVSI) through a "Deed of
Assignment Coupled with Interest." Thus, on June 14, 2005,
EVSI substituted Figuera, on motion, as plaintiff.
The RTC Ruling
The RTC ruled in Ang’s favor in its decision dated December 28,
2007.
The RTC held that the unambiguous language of the Deed
mandates Ang, as the Assignor, to pay the December 2004 utility
bills. Figuera, however, paid the utility bills without Ang’s
consent.
The RTC explained that for the tender of payment and
consignation to be valid, Figuera must tender the full amount of
₱150,000.00 rather than just ₱42,096.79. Ang is not obliged to
accept an amount less than what is agreed upon in the Deed.
Figuera appealed the RTC decision to the CA and argued that by
operation of law, legal subrogation and compensation had taken
place. Consequently, Figuera’s obligation to the extent of the
amount of ₱107,903.21 is extinguished.
The CA Ruling
In its June 29, 2012 decision, the CA affirmed the RTC’s ruling.
The CA held that there is nothing in the Deed that grants Figuera
the option to pay the utility bills and to deduct the payment from
the agreed consideration in the Deed; thus, the amount of
₱150,000.00 remains as the due consideration from Figuera.
Moreover, Figuera failed to prove that Ang consented to the
payment of the bills.
The CA added that Figuera’s payment of ₱42,096.79 cannot be
considered as a valid tender of payment or a valid consignation
because it is insufficient to cover the consideration due to Ang.
As for the other issues and arguments which Figuera failed to
raise before the RTC, the CA held that these issues cannot be
raised for the first time on appeal.
Figuera sought reconsideration of the CA’s decision which the CA
denied for lack of merit in its September 28, 2012 resolution.
The Parties’ Arguments
In the present petition for review, Figuera challenges the CA’s
decision and resolution affirming the RTC ruling.
Figuera argues that the CA committed errors of law based on the
following grounds: First, Figuera was eager to pay the utility bills
being the EIDC’s new owner.
Second, Figuera had been subrogated to the rights of Ang’s
creditor’s (i.e., the Telephone Company, electric company, office
space lessor, and company employees) upon payment of the
utility bills even if the payment was made without Ang’s
knowledge. Consequently, Ang became Figuera’s debtor.
Third, Figuera and Ang became debtors and creditors of one
another for a sum of money that is liquidated, due, demandable,
and without controversy.
Fourth, Figuera and Ang’s obligations amounting to ₱107,903.21
were compensated against each other by operation of law.

Fifth, Figuera’s tender of the amount of ₱42,096.79 to Ang is a
valid tender of payment.
Sixth, Figuera validly consigned the amount of ₱42,096.79.
Finally, Figuera presented the foregoing issues before the RTC
and did not raise them for the first time on appeal.
In her comment,6Ang argued that: first, a petition for review
under Rule 45 of the Rules of Court only allows questions of law.
Figuera’s contention that legal subrogation and compensation
took place requires proof that should have been established
during the trial.
Second, Figuera admitted that the RTC was correct in ruling that
there was nothing in the Deed that grants her the option to pay
the utilities nor allows any deduction from the agreed
consideration upon her payment of the utility bills.
Third, legal subrogation cannot take place because the situation
of the parties under the Deed is not among the instances
provided by law for subrogation to take place.
Fourth and last, Figuera should not be allowed to raise issues
regarding legal subrogation and compensation because these
were raised for the first time on appeal.
The Issue
The main issue to be resolved in this case is whether or not there
was a valid tender of payment and consignation.
Our Ruling
We grant the petition and reverse the CA’s ruling.
The questions raised in this petition are
one of law which the Court can properly
review.
It is a settled rule that the Court cannot review questions of fact
on a petition for review under Rule 45 of the Rules of Court. A
question of fact exists when the truth or falsity of the parties’
factual allegations is in dispute. A question of law, on the other
hand, exists when the application of the law on the stated facts is
in controversy.7
The parties’ description of the questions raised does not
determine whether these questions are of fact or of law. The true
test is whether the appellate court can resolve the issue without
reviewing or evaluating the evidence, in which case, it is a
question of law; otherwise, it is a question of fact.8
Contrary to Ang’s allegation, the question involved in the present
case is a question of law which the Court can properly pass upon.
There is no dispute regarding the existence of the Deed and its
consideration, and the provision that mandates Ang to pay the
EIDC’s bills until December 2004. Ang also did not refute
Figuera’s payment amounting to ₱107,903.21 to Ang’s creditors
and Figuera’s tender of payment to Ang amounting to
₱42,096.79.
The CA can assess Figuera’s contention that legal subrogation
and compensation had taken place even without requiring
Figuera to present further evidence. The issue on the validity of
Figuera’s tender of payment and consignation can be resolved
through the application of the relevant laws.
The Court may properly address the
questions raised even though they are
raised for the first time on appeal.
232
Ang contends that the CA correctly dismissed Figuera’s argument
that her debt amounting to ₱107,903.21 is extinguished through
legal subrogation and compensation. Figuera’s argument, Ang
insists, was not raised before the trial court and cannot be raised
for the first time on appeal.
We disagree. The Court grants to consider and resolve the issues
on the application of legal subrogation and compensation, even
though it was raised for the first time on appeal.
As a general rule, points of law, theories, and arguments not
brought before the trial court cannot be raised for the first time
on appeal and will not be considered by this Court; otherwise, a
denial of the respondent’s right to due process will result.9
In the interest of justice, however, the Court may consider and
resolve issues not raised before the trial court if it is necessary
for the complete adjudication of the rights and obligations of the
parties, and it falls within the issues found by the parties.10
Thus, an appellate court is clothed with authority to review
rulings even if they are not assigned as errors in the appeal in
the following instances:
(a) grounds not assigned as errors but affecting jurisdiction over
the subject matter;
(b) matters not assigned as errors on appeal but are evidently
plain or clerical errors within contemplation of law;
(c) matters not assigned as errors on appeal but consideration of
which is necessary in arriving at a just decision and complete
resolution of the case or to serve the interests of justice or to
avoid dispensing piecemeal justice;
(d) matters not specifically assigned as errors on appeal but
raised in the trial court and are matters of record having some
bearing on the issue submitted which the parties failed to raise
or which the lower court ignored;
(e) matters not assigned as errors on appeal but closely related
to an error assigned; and
(f) matters not assigned as errors on appeal but upon which the
determination of a question properly assigned, is dependent.11
Figuera’s position falls under two of these exceptions, namely –
that the determination of the question newly raised is necessary
in arriving at a just decision and complete resolution of the case,
and that the resolution of a question properly assigned is
dependent on those which were not assigned as errors on
appeal.
For the CA to rule on whether there was a valid tender of
payment and consignation, it must first determine the amount
that Figuera should have tendered. To do so, the appellate court
must examine whether the principles of legal subrogation and
compensation, as Figuera argued, should be applied.
To recall, Figuera claims that the consideration for the
assignment worth ₱150,000.00 should be reduced by
₱107,903.21, representing the amount that she paid for the
EIDC’s utility bills. Figuera argues that her payment of the utility
bills subrogated her to the rights of Ang’s creditors against Ang.
Article 1291 of the New Civil Code12 provides that the
subrogation of a third person to the rights of the creditor is one
of the means to modify obligations. Subrogation, sometimes
referred to as substitution, is "an arm of equity that may guide
or even force one to pay a debt for which an obligation was
incurred but which was in whole or in part paid by another."13 It
transfers to the person subrogated the credit, with all the rights
appertaining thereto, either against the debtor or against third
persons.14

Subrogation of a third person in the rights of a creditor may
either be legal or conventional.15 There is legal subrogation
when: (a) a creditor pays another preferred creditor, even
without the debtor’s knowledge; (b) a third person who is not
interested in the obligation pays with the express or tacit
approval of the debtor; and (c) a person interested in the
fulfilment of the obligation pays, even without the knowledge of
the debtor.16
In the present case, Figuera based her claim on the third type of
subrogation. She claims that as the EIDC’s new owner, she is
interested in fulfilling Ang's obligation to pay the utility bills.
Since the payment of the bills was long overdue prior to the
assignment of business rights to Figuera, the failure to settle the
bills would eventually result in "the disconnection of the
electricity and telephone services, ejectment from the office
premises, and resignation by some, if not all, of the company’s
employees with the possibility of subsequent labor claims for
sums of money."17 These utilities are obviously necessary for
the continuation of Figuera’s business transactions.
A person interested in the fulfilment of the obligation is one who
stands to be benefited or injured in the enforcement of the
obligation. The Court agrees with Figuera that it became
absolutely necessary for her to pay the bills since Ang did not do
so when the obligation became due.
We note that both the RTC and the CA held that Figuera failed to
prove that Ang had consented to the payment of the EIDC bills;
therefore, Figuera cannot deduct the amount she paid for the
utility bills from the ₱150,000.00 consideration.
A clear reading, however, of Article 1302 of the New Civil Code
would lead to a different conclusion. The consent or approval of
the debtor is required only if a third person who is not interested
in the fulfilment of the obligation pays such. On the other hand,
no such requirement exists in cases of payment by a creditor to
another creditor who is preferred, and by a person interested in
the fulfilment of the obligation. Notably, Article 1302 (1) and (3)
does not require the debtor’s knowledge.
Therefore, legal subrogation took place despite the absence of
Ang’s consent to Figuera’s payment of the EIDC bills. Figuera is
now deemed as Ang’s creditor by operation of law.
On Figuera’s argument that legal compensation took place, and
in effect, extinguished her obligation to Ang to the extent of the
amount Figuera paid for the EIDC bills, Article 1278 of the New
Civil Code is instructive.
Article 1278 of the New Civil Code states that there is
compensation when two persons, in their own right, are creditors
and debtors of one another.1âwphi1 These elements must concur
for legal compensation to apply: (1) each one of the debtors is
bound principally, and that the debtor is at the same time a
principal creditor of the other; (2) both debts consist of a sum of
money, or if the things due be consumable, they be of the same
kind and also of the same quality if the latter has been stated;
(3) both debts are due; (4) both debts are liquidated and
demandable; and (5) there be no retention or controversy over
both debts commenced by third persons and communicated in
due time to the debtor.18 When all these elements are present,
compensation takes effect by operation of law and extinguishes
both debts to the corresponding amount, even though both
parties are without knowledge of the compensation.19 It
operates even against the will of the interested parties and even
without their consent.20
We find that all the elements of legal compensation are present
in this case.
First, in the assignment of business rights, Figuera stood as
Ang’s debtor for the consideration amounting to ₱150,000.00.
Figuera, on the other hand, became Ang’s creditor for the
233
amount of ₱107, 903.21 through Figuera’s subrogation to the
rights of Ang’s creditors against the latter.
Second, both debts consist of a sum of money, which are both
due, liquidated, and demandable.
Finally, neither party alleged that there was any claim raised by
third persons against said obligation.
In effect, even without the knowledge and consent of Ang or
Figuera, their obligation as to the amount of ₱107,903.21 had
already been extinguished. Consequently, Figuera owes Ang the
remaining due amount of ₱42,096.79.
While the RTC and the CA correctly held that there was nothing
in the Deed that grants Figuera an option to pay the utility bills
and to deduct the amount from the consideration, we stress that
although not expressly written, laws are deemed incorporated in
every contract entered within our territories. Thus, the Court
reads into the Deed the provisions of law on subrogation and
compensation.
With the determination of the amount of Figuera's obligation to
Ang, the question left to be resolved is: Was there a valid tender
of payment and consignation?
Tender of payment is the act of offering to the creditor what is
due him, together with the demand for the creditor to accept it.
To be valid, the tender of payment must be a "fusion of intent,
ability, and capability to make good such offer, which must be
absolute and must cover the amount due."21
As earlier discussed, the remaining amount due in Figuera's
obligation is P42,096.79. Thus, Figuera's tender of the remaining
amount to Ang is valid and Ang offered no valid justification in
refusing to accept the tender of payment. Due to the creditor's
refusal, without any just cause, to the valid tender of payment,
the debtor is released from her obligation by the consignation of
the thing or sum due. 22
WHEREFORE, the Court GRANTS the petition for review on
certiorari. The decision dated June 29, 2012 and resolution dated
September 28, 2012 of the Court of Appeals in CA-G.R. CV. No.
02480 are hereby REVERSED.
SO ORDERED.
Show opinions
DIVISION
[ GR Nos. 187822-23, Aug 03, 2016 ]
EVER ELECTRICAL MANUFACTURING v. PHILIPPINE BANK OF
COMMUNICATIONS +
RESOLUTION
REYES, J.:
Before the Court is a Petition for Review on Certiorari[1] under
Rule 45 of the Rules of Court filed by Ever Electrical
Manufacturing, Inc. (Ever), its President Vicente Go (Vicente)
and Board Director George Go (collectively, the petitioners)
questioning the Decision[2] dated November 28, 2008 and
Resolution[3] dated May 6, 2009 of the Court of Appeals (CA) in
CA-G.R. SP Nos. 84631 and 87444.
Antecedent Facts
Ever is a duly organized domestic corporation with a history of
transacting with respondent Philippine Bank of Communications
(PBCom), a domestic commercial bank.[4] The parties had been
involved in litigation for collection of a sum of money where
PBCom was able to get a favorable Partial Judgment[5] dated
July 23, 2001 issued by the Regional Trial Court (RTC) of Manila,
Branch 24, in Civil Case No. 01-100899.

On December 13, 2002, Ever, represented by Vicente, took out a
loan from PBCom in the amount of P65,000,000.00 for its
working capital.[6] As security, Ever mortgaged two parcels of
land covered by Transfer Certificates of Title (TCT) Nos. T-61475
and T-61476 with areas of 10,025 square meters and 9,117 sq
m, respectively, located at National Road, Barangay Makiling,
Calamba, Laguna.[7] On December 27, 2002, Ever executed
Promissory Note No. 8200013327,[8] which stated that the loan
had a maturity date of December 27, 2010, and an interest rate
of 8.5937% per annum for 10 years.
On February 14, 2003, the parties entered into a compromise
agreement whereby Vicente voluntarily undertook to pay for
Ever's loan with PBCom. Under the terms of the compromise
agreement, Vicente would make partial payments as stated in
the promissory note with a caveat that any failure on his part to
pay the installment due would make the whole amount
immediately demandable. The compromise agreement reads as
follows:
WHEREAS, [VICENTE] has offered to assume full liability and to
undertake the full payment of all the past due accounts of
[EVER] and to exempt from any and all obligations/liabilities his
co-defendants-sureties GEORGE C. GO and NG MENG TAM
arising from and subject of the above-captioned litigation,
without prejudice to the right of [VICENTE] to avail himself of his
right for reimbursement under Art. 1236 of the Civil Code of the
Philippines;
WHEREAS, [PBCom] has agreed and accepted [VICENTE's]
aforementioned offer to pay, in accordance with the terms and
conditions of the Promissory Note 8200013327 dated 27 Dec.
2002, copy of which is hereto attached as Annex "A" hereof.
WHEREAS, [VICENTE] fully understands that failure on his part to
make partial payments of the amount, due under the said
Promissory Note shall make the whole balance of the unpaid
amounts due and demandable, less the amounts actually paid on
account, without any necessity of notice to him and [PBCom]
shall be entitled to the issuance of the corresponding writ of
execution for the full amounts due as specified in the prayer of
the above-mentioned complaint.[9] (Emphasis ours)
On February 21, 2003, the RTC approved the compromise
agreement.[10] Consequently, the loan was restructured.
However, Vicente was not able to make the necessary payments
as stipulated in the compromise agreement. PBCom, thus, filed
with the RTC a motion for execution. PBCom alleged that Vicente
violated the terms of the compromise agreement for non-
payment of installments from September to December 2003 and
the first quarter of 2004. It prayed that a writ of execution be
issued per the terms of the compromise agreement.[11]
Ruling of the RTC
On May 4, 2004, the RTC found merit in PBCom's application for
a writ of execution and granted the same.[12] A writ of
execution[13] dated May 14, 2004 was thereby issued. The
petitioners moved for reconsideration.[14]
Thereafter, on May 19, 2004, a Notice of Levy upon Realty[15]
was issued by the Deputy Sheriff to the Register of Deeds (RD)
of Calamba, Laguna. He informed the RD that the properties
described under TCT Nos. T-61475 and T-61476 were under
custodia legis and thus requested that the proper annotations be
made in the Book of the RD.
On June 9, 2004, the RTC denied the petitioners' motion for
reconsideration. It found that while the petitioners did in fact
make some payments, these were not in accord with the clear
terms of the compromise agreement which required quarterly
payments for a specific amount.[16]
On June 11, 2004, the Sheriff issued a Notice of Sale and
scheduled the public auction on July 14, 2004 for the parcels of
land.[17] Due to some postponements, public auction was
234
actually held on September 16, 2004 where PBCom won as the
highest bidder.[18]
Ruling of the CA
The petitioners then filed with the CA two petitions for
certiorari[19] questioning the validity of the writ of execution,
levy on execution and the auction sale. The petitions were
consolidated.[20]
While the case was pending, TCT Nos. 61475 and 61476 were
cancelled and TCT Nos. 060-2012023698 and 060-2012023699
were issued by the RD of Calamba, Laguna, in favor of Star Asset
Management NPL, Inc. The pendency of the instant case was
annotated at the back of the new titles.[21]
In the Decision[22] dated November 28, 2008, the CA dismissed
the petitions for lack of merit after finding that the evidence
supported the conclusion of the RTC that Vicente failed to make
installment payments for the period covering. January 21, 2004
to March 31, 2004 in direct contravention of the terms of the
compromise agreement. The liability amounted to P1,125,000.00
including interests and penalty charges. The CA stated that the
petitioners did not deny the allegation, and merely asserted that
Vicente made payments for the period of April 2, 2003 to
January 20, 2004. Since Vicente defaulted in the payments and
under the terms of the compromise agreement to which he
agreed, the immediate issuance of a writ of execution was in
order.
The CA also found no merit with the petitioners' contention that
the writ of execution was not valid on the ground that it was
issued against the properties of Ever and not against Vicente
who assumed sole responsibility for the payment of the loan. The
compromise agreement specifically stated that in the event that
Vicente failed to comply with the terms of the compromise
agreement, execution would revert to the full amounts in the
complaint. Since the writ of execution was valid, the notice of
levy and the levy on execution, as well as the public auction,
were also valid and binding on the parties. The CA, thus, ruled
that the RTC did not commit any grave abuse of discretion. The
dispositive portion of the decision reads:
WHEREFORE, the Consolidated Petition for Certiorari is hereby
DISMISSED.
SO ORDERED.[23]
Vicente moved for reconsideration but it was denied in a
Resolution[24] dated May 6, 2009.
Hence, this petition.
The petitioners assert that Vicente had faithfully complied with
the terms of the compromise agreement. The petitioners argue
that the writ of execution had been issued prematurely on two
points: 1) that Vicente did not violate the terms of the
compromise agreement; and 2) that the compromise agreement
effectively novated the original contract pursuant to Article 1293
of the Civil Code.
Vicente further states that PBCom's application for the issuance
of a writ of execution on March 26, 2004 was premature since
amortizations for the first quarter of 2004 were not yet due and
demandable, as these were still due on March 31, 2004.[25]
More importantly, Vicente argues that the writ of execution was
erroneously issued against Ever. Fie alleges that the Partial
Judgment dated July 23, 2001 of the RTC was novated by the
compromise agreement. As a consequence, Ever's obligation to
PBCom was already extinguished as it was substituted by Vicente
when he assumed full responsibility of the loan repayment.
Under Article 1293 of the Civil Code, Ever had been substituted
by Vicente thus novating the obligation.[26]

For its part, PBCom maintains that the writ of execution was
valid. It reiterates that Vicente had defaulted in the payment of
the quarterly installment, comprising the principal, interests and
penalty amounting to P1,125,000.00 for the period of September
30, 2003 to December 31, 2003. Vicente once again defaulted
paying the installment for the period of December 31, 2003 to
March 31, 2004. With the petitioner's failure to abide by the
terms of the compromise agreement, the whole balance of the
obligation became immediately due and demandable.[27]
With respect to the petitioners' claim that the writ of execution
was directed at the wrong party, PBCom stressed that the
compromise agreement is clear that upon the failure of Vicente
to make installment payments, the bank is entitled to "the
issuance of the corresponding writ of execution for the full
amounts due as specified in the prayer of the above-captioned
complaint."[28]
The Issues Presented
Whether or not the CA correctly drew the conclusion that Vicente
failed to comply with the compromise agreement in the face of
the existence of payments made by Vicente.
Whether or not there was novation of the Partial Judgment dated
July 23, 2001.
Whether or not the issue on novation of the Partial Judgment
dated July 23, 2001 by the February 21, 2003 decision was
resolved by the CA.
Whether or not the writ of execution was correctly issued against
the petitioners.[29]
Simply, the issue for the Court's consideration is whether the CA
erred in ruling that the writ of execution, levy on execution and
auction sale were valid.
Ruling of the Court
The Court denies the petition.
The Court is not a trier of facts. In Spouses Bernales v. Heirs of
Julian Sambaan,[30] the Court reiterated that for a question to
be one of law, it must involve no examination of the probative
value of the evidence presented by the litigants or any of them.
There is a question of law when the doubt or difference arises as
to what the law is pertaining to a certain state of facts. On the
other hand, there is a question of fact when the doubt arises as
to the truth or the falsity of alleged facts.[31]
Here, the petitioners essentially argue that since the parties
entered into a compromise agreement, which was judicially
approved, the same novated the original loan agreement.
The Court disagrees.
Under the Civil Code, novation is one of the means to extinguish
an obligation. This is done either by changing the object or
principal conditions, by substituting the person of the debtor, or
by subrogating a third person in the rights of the creditor.[32] It
is a relative extinguishment since a new obligation is created in
lieu of the old obligation. The following requisites must be met
for novation to take place:
(1)
There must be a previous valid obligation;
(2)
There must be an agreement of the parties concerned to a new
contract;
(3)
There must be the extinguishment of the old contract; and
(4)
There must be the validity of the new contract.[33]
However, novation is never presumed.[34] Article 1292 of the
Civil Code provides:
Art. 1292. In order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so
235
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other.
It must be established that the old and new contracts are
incompatible on all points, or that the will to novate appear by
express agreement of the parties or acts of equivalent import.
[35] In the absence of an express provision, a contract may still
be considered novated impliedly if it passes the test of
incompatibility, that is, whether the contracts can stand
together, each one having an independent existence.[36]
In the early case of Santos v. Reyes, et al.,[37] the Court held
that there was no novation where under the original contract
consisting of a principal debtor and a surety, the latter
subsequently made an agreement with the creditor to be bound
as a principal for the same obligation. There, the Court stated
that there can be no effective novation if the contract was not
extinguished by an instrument subsequently executed therefor.
[38]
As stated in Article 1291, novation may also be brought about by
a change in the person of the debtor. Article 1293 of the Civil
Code states:
Art. 1293. Novation which consists in substituting a new debtor
in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him
the rights mentioned in Articles 1236 and 1237.
In Mercantile Insurance Co., Inc. v. CA,[39] the Court said:
The general rule is that novation is never presumed; it must
always be clearly and unequivocally shown. Thus, "the mere fact
that the creditor receives a guaranty or accepts payments from a
third person who has agreed to assume the obligation, when
there is no agreement that the first debtor shall be released from
responsibility, does not constitute novation, and the creditor can
still enforce the obligation against the original debtor."[40]
(Emphasis ours and citations omitted)
In the present case, the compromise agreement entered into by
the parties does not contain any provision releasing Ever (the
debtor) from its liability to PBCom (the lender). In fact, the first
paragraph of the approved compromise agreement states:
WHEREAS, [VICENTE] has offered to assume full liability and to
undertake the full payment of all the past due accounts of
[EVER] and to exempt from any and all obligations/liabilities his
co-defendants-sureties GEORGE C. GO and NG MENG TAM
arising from and subject of the above-captioned litigation,
without prejudice to the right of [VICENTE] to avail himself of his
right for reimbursement under Art. 1236 of the Civil Code of the
Philippines[.][41] (Emphasis ours)
There is nothing to be construed from the above-stated
paragraph releasing Ever from its obligation. Under the terms of
the agreement, Vicente is an additional person who would ensure
that the loan of Ever to PBCom would be paid. Under the rules of
novation, the mere act of adding another person to be personally
liable, who in this case is Vicente, did not constitute novation
since there was no agreement to release Ever from its
responsibility to PBCom. Thus, absent the release of Ever from
the original obligation, PBCom may still enforce the obligation
against it.
Since there was no novation, PBCom may proceed to collect from
the original debtor, Ever, under the terms of the original loan
agreement. The Court holds that there was no irregularity in the
issuance of the writ of execution, levy on the properties and the
subsequent sale of the auction sale.
WHEREFORE, the petition is DENIED. The Decision dated
November 28, 2008 and Resolution dated May 6, 2009 of the
Court of Appeals in CA-G.R. SP Nos. 84631 and 87444 are
hereby AFFIRMED.
SO ORDERED.
THIRD DIVISION
[ G.R. No. 191174, June 07, 2017 ]

PARADIGM DEVELOPMENT CORPORATION OF THE PHILIPPINES,
PETITIONER, V. BANK OF THE PHILIPPINES ISLANDS,
RESPONDENT.
DECISION
REYES, J.:
This is a Petition for Review on Certiorari[1] filed under Rule 45
of the Rules of Court assailing the Decision[2] dated November
25, 2009 and Resolution[3] dated February 2, 2010 of the Court
of Appeals (CA) in CA-G.R. CV No. 89755, which granted
respondent Bank of the Philippine Islands' (BPI) appeal and
accordingly dismissed the complaint filed by petitioner Paradigm
Development Corporation of the Philippines (PDCP).
The Facts
Sometime in February 1996, Sengkon Trading (Sengkon), a sole
proprietorship owned by Anita Go, obtained a loan from Far East
Bank and Trust Company (FEBTC) under a credit facility
denominated as Omnibus Line in the amount of P100 Million on
several sub-facilities with their particular sub-limits denominated
as follows: (i) Discounting Line for P20 Million; (ii) Letter of
Credit/Trust Receipt (LC-TR) Line for P60 Million; and (iii) Bills
Purchased Line for P8 Million. This was embodied in the
document denominated as "Agreement for Renewal of Omnibus
Line."[4]
On April 19, 1996, FEBTC again granted Sengkon another credit
facility, denominated as Credit Line, in the amount of P60 Million
as contained in the "Agreement for Credit Line." Two real estate
mortgage (REM) contracts were executed by PDCP President
Anthony L. Go (Go) to partially secure Sengkon's obligations
under this Credit Line. One REM, acknowledged on April 22,
1996, was constituted over Transfer Certificate of Title (TCT) No.
RT-55259 (354583) and secured the amount of P8 Million. The
other REM, acknowledged on December 19, 1997, was
constituted over TCT Nos. RT-58281, RT-54993 (348989) and
RT-55260 (352956) and secured the amount of P42,400,000.00.
[5]
In a letter dated September 18, 1997, FEBTC informed Sengkon
regarding the renewal, increase and conversion of its P100
Million Omnibus Line to P150 Million LC-TR Line and P20 Million
Discounting Line, the renewal of the P60 Million Credit Line and
P8 Million Bills Purchased Line.[6]
In the same letter, FEBTC also approved the request of Sengkon
to change the account name from SENGKON TRADING to
SENGKON TRADING, INC. (STI).[7]
Eventually, Sengkon defaulted in the payment of its loan
obligations.[8] Thus, in a letter dated September 8, 1999, FEBTC
demanded payment from PDCP of alleged Credit Line and Trust
Receipt availments with a principal balance of P244,277,199.68
plus interest and other charges which Sengkon failed to pay.
PDCP responded by requesting for segregation of Sengkon's
obligations under the Credit Line and for the pertinent statement
of account and supporting documents.[9]
Negotiations were then held and PDCP proposed to pay
approximately P50 Million, allegedly corresponding to the
obligations secured by its property, for the release of its
properties but FEBTC pressed for a comprehensive repayment
scheme for the entirety of Sengkon's obligations.[10]
Meanwhile, the negotiations were put on hold because BPI
acquired FEBTC and assumed the rights and obligations of the
latter.[11]
When negotiations for the payment of Sengkon's outstanding
obligations, however, fell, FEBTC, on April 5, 2000, initiated
foreclosure proceedings against the mortgaged properties of
PDCP before the Regional Trial Court (RTC) of Quezon City.[12]
In its Bid for the mortgaged properties, FEBTC's counsel stated
that:
236
On behalf of our client, [FEBTC], we hereby submit its Bid for the
Real Properties including all improvements existing thereon
covered by [TCT] Nos. RT - 55259 (354583), 58281, RT - 54993
(348989) and RT- 55260 (352956) which are the subject of the
Auction Sale scheduled on June, 20, 2000 in the amount of:
SEVENTY[-]SIX MILLION FIVE HUNDRED THOUSAND PESOS
ONLY (P76,500,000.00), Philippine Currency.
Please note that the aforesaid Bid is only in PARTIAL
SETTLEMENT of the obligation of [PDCP], x x x.[13]
Upon verification with the Registry of Deeds, PDCP discovered
that FEBTC extra-judicially foreclosed on June 20, 2000 the first
and second mortgage without notice to it as mortgagor and sold
the mortgaged properties to FEBTC as the lone bidder.[14]
Thereafter, on August 8, 2000, the corresponding Certificate of
Sale was registered.[15]
Consequently, on July 19, 2001, PDCP filed a Complaint for
Annulment of Mortgage, Foreclosure, Certificate of Sale and
Damages[16] with the RTC of Quezon City, against BPI,
successor-in-interest of FEBTC, alleging that the REMs and their
foreclosure were null and void.[17]
In its Amended Complaint,[18] PDCP alleged that FEBTC assured
it that the mortgaged properties will only secure the Credit Line
sub-facility of the Omnibus Line. With this understanding, PDCP
President Go allegedly agreed to sign on two separate dates a
pro-forma and blank REM, securing the amount ofP42.4 Million
and P8 Million, respectively. PDCP, however, claimed that it had
no intent to be bound under the second REM, which was not
intended to be a separate contract, but only a means to reduce
registration expenses.[19]
Moreover, PDCP averred that sometime in September 1997,
FEBTC allegedly requested it to sign a document which would
effectively extend the liability of the properties covered by the
mortgage beyond the Credit Line. Because of its refusal to sign
said document, it surmised that this must have been the reason
why, as it later discovered, FEBTC registered not only the first
but also the second REM, contrary to the parties' agreement.[20]
In asking for the nullity of the REMs and the foreclosure
proceeding, PDCP alleged:
a.) THAT although the [REM] of April 22, 1996 for Php 8.0 Million
was not a separate security but was merely intended to reduce
registration expenses, FEBTC, [BPI's] predecessor-in-interest,
fraudulently and in violation of the original intent and agreement
of the parties, made it appear that said [REM] of April 22, 1996
was separate and distinct from that of December 18, 1997 and
caused the registration of both mortgages with separate
considerations totaling Php 50.4 Million;
b.) THAT the subject [REMs] were foreclosed to answer not only
for obligations incurred under SENGKON's Credit Line but also for
other obligations of SENGKON and other companies which were
not secured by said mortgages;
c.) THAT no notice was given to or received by [PDCP] of the
projected foreclosure x x x since the notice of said foreclosure
was sent by defendant SHERIFF to an address (333 EDSA,
Quezon City) other than [PDCP's] known address as stated in the
[REMs] themselves (333 EDSA Caloocan City) x x x;
d.) THAT, contrary to the then prevailing Supreme Court Circular
AM 99-10-05-0 x x x, only one (1) bidder was present and
participated at the foreclosure sale[; and]
e.) THAT, without the knowledge and consent of [PDCP],
obligation of SENGKON has been transferred to STI[,] a juridical
personality separate and distinct from SENGKON, a single
proprietorship. This substitution of SENGKON as debtor by STI x

x x effectively novated the obligation of [PDCP] to FEBTC. x x x.
[21] (Underlining ours)
Ruling of the RTC
On April 16, 2007, the RTC rendered its Decision[22] nullifying
the REMs and the foreclosure proceedings. It also awarded
damages to PDCP. The dispositive portion of the decision reads:
WHEREFORE, premises considered the Court renders judgment in
favor of [PDCP] and against defendants [BPI], Sheriff and the
Register of Deeds of Quezon City in the following manner:
1) Declaring null and void and of no further force and effect the
following:
(a) the [REMs] (Annexes "F" and "F-1" hereof);
(b) the foreclosure thereof;
(c) the Certificate of Sale; and
(d) the entries relating to said [REMs] and Certificate of Sale
annotated on TCT Nos. 58281, RT-54993 (348989), RT-55260
(352956) and RT-55259 (354583) covering the mortgaged
properties;
2) Ordering defendant Registrar of Deeds to cancel all the
annotations of the [REMs] and the Certificate of Sale on the
above stated TCTs covering the mortgaged properties and
otherwise to clear said TCTs of any liens and encumbrances
annotated thereon relating to the invalid [REMs] aforesaid;
3) Ordering defendant [BPI] to return to [PDCP] the owner's
duplicate copies of the TCTs covering the mortgaged properties
free from any and all liens and encumbrances; and,
4) Ordering the defendant BPI to pay [PDCP] the following sums:
(a) Php 150,000.00 as attorney's fees; and,
(b) Php 50,000.00 as litigation expenses.
The Writ of Preliminary Injunction is hereby made FINAL and
PERMANENT.
Costs against defendant [BPI].
SO ORDERED.[23]
The RTC observed that the availments under the Credit Line,
secured by PDCP's properties, may be made only within one
year, or from April 19, 1996 to April 30, 1997. While BPI claimed
that the period of said credit line was extended up to July 31,
1997, PDCP was not notified of the extension and thus could not
have consented to the extension. Anyhow, said the RTC, "no
evidence had been adduced to show that Sengkon availed of any
loan under the credit line up to July 31, 1997." Thus, in the
absence of any monetary obligation that needed to be secured,
the REM cannot be said to subsist.[24]
Further, the RTC agreed with PDCP that novation took place in
this case, which resulted in discharging the latter from its
obligations as third-party mortgagor. In addition, it also nullified
the foreclosure proceedings because the original copies of the
promissory notes (PNs), which were the basis of FEBTC's Petition
for Extrajudicial Foreclosure of Mortgage, were not presented in
court and no notice of the extrajudicial foreclosure sale was
given to PDCP.[25]
Lastly, the RTC ruled that the shorter period of redemption under
Republic Act No. 8791[26] cannot apply to PDCP considering that
the REMs were executed prior to the effectivity of said law. As
such, the longer period of redemption under Act No. 3135[27]
applies.[28]
Aggrieved, BPI appealed to the CA.[29]
Ruling of the CA
237
In its Decision[30] dated November 25, 2009, the CA reversed
the RTC's ruling on all points. The CA found PDCP's contentions
incredible for the following reasons: (i) the fact that PDCP
surrendered the titles to the mortgaged properties to FEBTC only
shows that PDCP intended to mortgage all of these properties;
(ii) if it were true that FEBTC assured PDCP that it would be
registering only one of the two REMs in order to reduce
registration expenses, then each of the two REMs should have
covered the four properties but it was not. On the contrary, the
four properties were spread out with one REM covering one of
the four properties and the other REMs covering the remaining
three properties; and (iii) PDCP never complained to FEBTC
regarding the registration of the two REMs even after it
discovered the same.[31]
Also, the CA ruled that novation could not have taken place from
FEBTC's mere act of approving Sengkon's request to change
account name from Sengkon to STI.[32]
Moreover, it held that the fact that FEBTC failed to submit the
original copies of the PNs that formed the basis of its Petition for
Extrajudicial Foreclosure of Mortgage cannot affect the validity of
foreclosure because the validity of the obligations represented in
those PNs was never denied by Sengkon nor by PDCP.[33]
The CA added that even if the obligations of Sengkon in credit
facilities (other than the Credit Line) were included, since the
REMs contain a dragnet clause, these other obligations were still
covered by PDCP's REMs.[34] Lastly, the CA ruled that the failure
to send a notice of extrajudicial foreclosure sale to PDCP did not
affect the validity of the foreclosure sale because personal notice
to the mortgagor is not even generally required.[35]
Hence, this present petition, where PDCP presented the following
arguments:
THE FINDINGS IN THE CA DECISION WHICH DEVIATED ON
ALMOST ALL POINTS FROM THOSE OF THE RTC ARE NOT IN
ACCORD WITH THE RULES ON THE ASSESSMENT OF THE
CREDIBILITY AND WEIGHT OF THE EVIDENCE;
THE VALIDITY OF THE REMs, AS UPHELD BY THE CA, IS
VITIATED BY THE FACT THAT BPI'S PREDECESSOR-IN-INTEREST
VIOLATED THE TRUE INTENT AND AGREEMENT OF THE PARTIES
THERETO;
THE CA DECISION'S REJECTION OF PDCP'S NOVATION THEORY
BASED ON THE ABSENCE OF AN EXPRESS RELEASE OF THE OLD
DEBTOR AND THE SUBSTITUTION IN ITS PLACE OF A NEW
DEBTOR IS MISPLACED AND ERRONEOUS;
THE FORECLOSURE OF THE REMs WAS VITIATED NOT ONLY BY
THE INADMISSIBILITY OF THE PNs UPON WHICH IT IS BASED
BUT ALSO BECAUSE IT VIOLATED THE THERETO APPLICABLE
RULES; and
THE APPLICATION BY THE CA OF THE SHORTENED PERIOD OF
REDEMPTION IN THIS CASE VIOLATED THE NON-IMPAIRMENT
AND EQUAL PROTECTION CLAUSES OF THE CONSTITUTION.[36]
Ruling of the Court
The Court finds the petition meritorious.
The registration of the REMs, even if
contrary to the supposed intent of the
parties, did not affect the validity of
the mortgage contracts
According to PDCP, when FEBTC registered both REMs, even if
the intent was only to register one, the validity of both REMs was
vitiated by lack of consent. PDCP claims that said intent is
supported by the fact that the REMs were constituted merely as
"partial security" for Sengkon's obligations and therefore there

was really no intent to be bound under both - but only in one -
REM.
The Court cannot see its way clear through PDCP's argument. To
begin with, the registration of the REM contract is not essential
to its validity. Article 2085 of the Civil Code provides:
Art. 2085. The following requisites are essential to the contracts
of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a
principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the
thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have
the free disposal of their property, and in the absence thereof,
that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
In relation thereto, Article 2125 of the Civil Code reads:
Article 2125. In addition to the requisites stated in Article 2085,
it is indispensable, in order that a mortgage may be validly
constituted, that the document in which it appears be recorded in
the Registry of Property. If the instrument is not recorded, the
mortgage is nevertheless binding between the parties.
x x x x (Emphasis ours)
In Mobil Oil Philippines, Inc. v. Diocares, et al., [37] the trial
court refused to order the foreclosure of the mortgaged
properties on the ground that while an unregistered REM contract
created a personal obligation between the parties, the same did
not validly establish a REM. In reversing the trial court, the Court
said:
The lower court predicated its inability to order the foreclosure in
view of the categorical nature of the opening sentence of [Article
2125] that it is indispensable, "in order that a mortgage may be
validly constituted, that the document in which it appears be
recorded in the Registry of Property." Not[e] that it ignored the
succeeding sentence: "If the instrument is not recorded, the
mortgage is nevertheless binding between the parties." Its
conclusion, however, is that what was thus created was merely
"a personal obligation but did not establish a [REM]."
Such a conclusion does not commend itself for approval. The
codal provision is clear and explicit. Even if the instrument were
not recorded, "the mortgage is nevertheless binding between the
parties." The law cannot be any clearer. Effect must be given to
it as written. The mortgage subsists; the parties are bound. As
between them, the mere fact that there is as yet no compliance
with the requirement that it be recorded cannot be a bar to
foreclosure.
xxxx
Moreover to rule as the lower court did would be to show less
than fealty to the purpose that animated the legislators in giving
expression to their will that the failure of the instrument to be
recorded does not result in the mortgage being any the less
"binding between the parties." In the language of the Report of
the Code Commission: "In Article [2125] an additional provision
is made that if the instrument of mortgage is not recorded, the
mortgage, is nevertheless binding between the parties." We are
not free to adopt then an interpretation, even assuming that the
codal provision lacks the forthrightness and clarity that this
particular norm does and therefore requires construction, that
would frustrate or nullify such legislative objective.[38] (Citation
omitted and emphasis and underlining ours)
238
Hence, even assuming that the parties indeed agreed to register
only one of the two REMs, the subsequent registration of both
REMs did not affect an already validly executed REM if there was
no other basis for the declaration of its nullity. That the REMs
were intended merely as "partial security" does not make PDCP's
argument more plausible because as aptly observed by the CA,
the PDCP's act of surrendering all the titles to the properties to
FEBTC clearly establishes PDCP's intent to mortgage all of the
four properties in favor of FEBTC to secure Sengkon's obligation
under the Credit Line. The Court notes that the principal debtor,
Sengkon, has several obligations under its Omnibus Line
corresponding to the several credit sub-facilities made available
to it by FEBTC. As found by the trial court, PDCP intended to be
bound only for Sengkon's availments under the Credit Line sub-
facility and not for just any of Sengkon's availments. Hence, it is
in this sense that the phrase "partial security" should be logically
understood.
In this regard, PDCP argued that what its President signed is a
pro-forma REM whose important details were still left in blank at
the time of its execution. But notably, nowhere in PDCP's
Amended Complaint did it anchor its cause of action for the
nullity of the REMs on this ground. While it indeed alleged this
circumstance, PDCP's Amended Complaint is essentially premised
on the supposed fraud employed on it by FEBTC consisting of the
latter's assurances that the REMs it already signed would not be
registered. In Solidbank Corporation v. Mindanao Ferroalloy
Corporation,[39] the Court discussed the nature of fraud that
would annul or avoid a contract, thus:
Fraud refers to all kinds of deception - whether through insidious
machination, manipulation, concealment or misrepresentation
that would lead an ordinarily prudent person into error after
taking the circumstances into account. In contracts, a fraud
known as dolo causante or causal fraud is basically a deception
used by one party prior to or simultaneous with the contract, in
order to secure the consent of the other. Needless to say, the
deceit employed must be serious. In contradistinction, only some
particular or accident of the obligation is referred to by incidental
fraud or dolo incidente, or that which is not serious in character
and without which the other party would have entered into the
contract anyway.[40] (Citations omitted)
Under Article 1344 of the Civil Code, the fraud must be serious to
annul or avoid a contract and render it voidable. This fraud or
deception must be so material that had it not been present, the
defrauded party would not have entered into the contract.
In the present case, even if FEBTC represented that it will not
register one of the REMs, PDCP cannot disown the REMs it
executed after FEBTC reneged on its alleged promise. As earlier
stated, with or without the registration of the REMs, as between
the parties thereto, the same is valid and PDCP is already bound
thereby. The signature of PDCP's President coupled with its act of
surrendering the titles to the four properties to FEBTC is proof
that no fraud existed in the execution of the contract. Arguably
at most, FEBTC's act of registering the mortgage only amounted
to dolo incidente which is not the kind of fraud that avoids a
contract.
No novation took place
The Court likewise agrees with the CA that no novation took
place in the present case. Novation is a mode of extinguishing an
obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. Article
1293 of the Civil Code defines novation as "consists in
substituting a new debtor in the place of the original one, [which]
may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor." However,
while the consent of the creditor need not be expressed but may
be inferred from the creditor's clear and unmistakable acts,[41]
to change the person of the debtor, the former debtor must be
expressly released from the obligation, and the third person or

new debtor must assume the former's place in the contractual
relation.[42]
Thus, in Ajax Marketing and Development Corporation v. CA,[43]
the Court had already ruled that:
The well-settled rule is that novation is never presumed.
Novation will not be allowed unless it is clearly shown by express
agreement, or by acts of equal import. Thus, to effect an
objective novation it is imperative that the new obligation
expressly declare that the old obligation is thereby extinguished,
or that the new obligation be on every point incompatible with
the new one. In the same vein, to effect a subjective novation by
a change in the person of the debtor it is necessary that the old
debtor be released expressly from the obligation, and the third
person or new debtor assumes his place in the relation. There is
no novation without such release as the third person who has
assumed the debtor's obligation becomes merely a co-debtor or
surety.[44] (Emphasis ours)
In the present case, PDCP failed to prove by preponderance of
evidence that Sengkon was already expressly released from the
obligation and that STI assumed the former's obligation. Again,
as correctly pointed out by the CA, the Deed of Assumption of
Line/Loan with Mortgage (Deed of Assumption) which was
supposed to embody STI's assumption of all the obligations of
Sengkon under the line, including but not necessarily limited to
the repayment of all the outstanding availments thereon, as well
as all applicable interests and other charges, was not signed by
the parties.
Contrary to PDCP's claim, the CA's rejection of its claim of
novation is not based on the absence of the mortgagor's
conformity to the Deed of Assumption. The CA's rejection is
based on the fact that the non-execution of the Deed of
Assumption by Sengkon, STI and FEBTC rendered the existence
of novation doubtful because of lack of clear proof that Sengkon
is being expressly released from its obligation; that STI was
already assuming Sengkon's former place in the contractual
relation; and that FEBTC is giving its conformity to this
arrangement. While FEBTC indeed approved Sengkon's request
for the "change in account name" from Sengkon to STI, such
mere change in account name alone does not meet the required
degree of certainty to establish novation absent any other
circumstance to bolster said conclusion.
The trial court's finding that
Sengkon did not avail under the
Credit Line taints the foreclosure of
the mortgage
PDCP also claims that the foreclosure of the mortgage was
invalid because the PNs that formed the basis of FEBTC's Petition
for Extrajudicial Foreclosure of Mortgage were inadmissible in
evidence. Rejecting this argument, the CA ruled that the
admissibility of the PNs is a non-issue in this case because in
questioning the validity of the REMs and the foreclosure
proceedings, PDCP did not actually assail the validity or existence
of said PNs; what it raised as an issue was whether the
foreclosure covered obligations other than Sengkon's availment
under the Credit Line. As the CA puts it:
[W]hat should have been the focal and critical question to be
answered on the issue of whether the subject [REMs] were
validly foreclosed should have been whether the [REMs]
executed by [PDCP] covered the obligations of [Sengkon] as
represented in those [PNs] or, stated in another way, were the
[PNs] used by defendant BPI in its foreclosure proceedings over
[PDCP's] mortgages availments by [Sengkon] under its Credit
Line?
An examination of the subject [PNs] vis-a-vis the Agreement for
Credit Line would yield an affirmative answer.
239
In the case at bar, a close look at the Agreement for Credit Line
would reveal that the said credit facility for Php60 Million was
granted in favor of [Sengkon] for the purpose of "Additional
Working Capital" and that it would be "available by way of short
term [PN]." In the same manner, an examination of [PNs] PN
Nos. 2-002-028618, 2-002-029436 and 2-002-029437 would
reveal that the said [PNs] were availed of by [Sengkon] for the
purpose of "Additional Working Capital."[45] (Citations omitted
and emphasis in the original)
The Court cannot agree with the CA. In order to determine
whether the obligations sought to be satisfied by the foreclosure
proceedings were only Sengkon's availments under the Credit
Line, the court necessarily needs to refer to the PNs themselves,
as what the CA in fact did. Thus, it is actually the contents of
these PNs that are in issue and the trial court did not err in
applying the best evidence rule.
But even if the Court disregards the best evidence rule, the
circumstances in this case militate against the CA's conclusion.
The trial court made a factual finding that Sengkon's availment
under the Credit Line, which is the one secured by PDCP's
properties, may be made only within one year, or from April 19,
1996 to April 30, 1997. While FEBTC claimed that the period of
said credit line was extended up to July 31, 1997, PDCP was not
notified of the extension. At any rate, the RTC found that "no
evidence had been adduced to show that Sengkon availed of any
loan under the credit line up to July 31, 1997," which was the
period of the extension.
Notably, while PDCP demanded from FEBTC for the segregation
of Sengkon's availments under the Credit Line, FEBTC failed to
heed PDCP's valid request and instead demanded for a
comprehensive payment of Sengkon's entire obligation,
unmindful of the fact of PDCP's status as a mere third-party
mortgagor and not a principal debtor. As a third-party
mortgagor, the limitation on its liability pertains not only to the
properties it mortgaged but also to the obligations specifically
secured thereby. It is well settled that while a REM may
exceptionally secure future loans or advancements, these future
debts must be specifically described in the mortgage contract. An
obligation is not secured by a mortgage unless it comes fairly
within the terms of the mortgage contract.[46]
In this case, there was simply no evidence to support the
conclusion that the PNs were in fact availments under the Credit
Line secured by PDCP's properties. The PNs that were used by
FEBTC in its Petition for Extrajudicial Foreclosure of Mortgage
were all executed beyond the extended duration of Sengkon's
Credit Line (or until July 1997). While FEBTC wrote a letter[47]
dated September 18, 1997, which is a few days short of the date
of the earliest PN (September 23, 1997), addressed to STI,
approving the renewal of the debtor's Credit Line subject to the
condition that the Line "shall be partially secured" by the PDCP's
mortgaged properties, it is worthy to note that this letter did not
bear the conforme of the debtor, lending credence to the trial
court's observation. In this light, FEBTC's failure to heed PDCP's
request for the segregation of the amounts secured by its
properties assumes critical significance. The lack of proof that
the availments subject of the foreclosure proceedings were
within the coverage of PDCP's REMs explains FEBTC's omission.
Despite the foregoing, however, particularly the variance
between the duration of Sengkon's Credit Line and the dates
appearing on the face of the PNs, the CA upheld the validity of
the foreclosure based merely on the similarity in the purpose for
which the Credit Line was granted and the purpose for which the
PNs were executed.
On the implied premise that what is material is only the identity
of the debtor whose obligation the mortgagor secures, the CA
cited Prudential Bank v. Alviar[48] and applied the dragnet
clause in PDCP's REMs. According to the CA, since the REMs
contain a dragnet clause, then PDCP's properties can be made to
answer even if the PNs supporting the Petition for Extrajudicial

Foreclosure of Mortgage refer to Sengkon's obligations in its
other credit facilities.[49]
The CA unfortunately misapplied the ruling in Prudential Bank. In
that case, the Court's discussion on the application of the blanket
mortgage clause or dragnet clause was not as much as critically
important as the Court's novel application of the doctrine of
reliance on security test.
A dragnet clause is a stipulation in a REM contract that extends
the coverage of a mortgage to advances or loans other than
those already obtained or specified in the contract. Where there
are several advances, however, a mortgage containing a dragnet
clause will not be extended to cover future advances, unless the
document evidencing the subsequent advance refers to the
mortgage as providing security therefor or unless there are clear
and supportive evidence to the contrary.[50] This is especially
true in this case where the advances were not only several but
were covered by different sub-facilities. Thus, in Prudential Bank,
the Court stated:
In the case at bar, the subsequent loans obtained by
respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by a "hold-
out" on his foreign currency savings account, while PN BD#76/C-
430, executed by respondents for Donalco Trading, Inc., was
secured by "Clean-Phase out TOD CA 3923" and eventually by a
deed of assignment on two [PNs] executed by Bancom Realty
Corporation with Deed of Guarantee in favor of A.U. Valencia and
Co., and by a chattel mortgage on various heavy and
transportation equipment. The matter of PN BD#76/C-430 has
already been discussed. Thus, the critical issue is whether the
"blanket mortgage" clause applies even to subsequent
advancements for which other securities were intended, or
particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have
emerged on this question. One school advocates that a "dragnet
clause" so worded as to be broad enough to cover all other debts
in addition to the one specifically secured will be construed to
cover a different debt, although such other debt is secured by
another mortgage. The contrary thinking maintains that a
mortgage with such a clause will not secure a note that
expresses on its face that it is otherwise secured as to its
entirety, at least to anything other than a deficiency after
exhausting the security specified therein, such deficiency being
an indebtedness within the meaning of the mortgage, in the
absence of a special contract excluding it from the arrangement.
The latter school represents the better position. The parties
having conformed to the "blanket mortgage clause" or "dragnet
clause," it is reasonable to conclude that they also agreed to an
implied understanding that subsequent loans need not be
secured by other securities, as the subsequent loans will be
secured by the first mortgage. In other words, the sufficiency of
the first security is a corollary component of the "dragnet
clause." But of course, there is no prohibition, as in the mortgage
contract in issue, against contractually requiring other securities
for the subsequent loans. Thus, when the mortgagor takes
another loan for which another security was given it could not be
inferred that such loan was made in reliance solely on the
original security with the "dragnet clause," but rather, on the
new security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California
court in the cited case made an inquiry whether the second loan
was made in reliance on the original security containing a
"dragnet clause." Accordingly, finding a different security was
taken for the second loan no intent that the parties relied on the
security of the first loan could be inferred, so it was held. The
rationale involved, the court said, was that the "dragnet clause"
in the first security instrument constituted a continuing offer by
the borrower to secure further loans under the security of the
first security instrument, and that when the lender accepted a
different security he did not accept the offer.
240
xxxx
Indeed, in some instances, it has been held that in the absence
of clear, supportive evidence of a contrary intention, a mortgage
containing a "dragnet clause" will not be extended to cover
future advances unless the document evidencing the subsequent
advance refers to the mortgage as providing security therefor.
[51] (Citations omitted and emphasis and underlining ours)
In the present case, PDCP's REMs indeed contain a blanket
mortgage clause in the following language:
That, for and in consideration of credit accommodations obtained
from the [FEBTC], and to secure the payment of the same and
those that may hereafter be obtained, the principal of all of
which is hereby fixed at x x x PESOS x x x, Philippine Currency,
as well as those that the [FEBTC] may extend to the [PDCP],
including interest and expenses or any other obligation owing to
the [FEBTC], whether direct or indirect, principal or secondary,
as appears in the accounts, books and records of the [FEBTC] x x
x.[52]
Nonetheless, the parties do not dispute that what the REMs
secured were only Sengkon's availments under the Credit Line
and not all of Sengkon's availments under other sub-facilities
which are also secured by other collaterals.[53] Since the liability
of PDCP's properties was not unqualified, the PNs, used as basis
of the Petition for Extrajudicial Foreclosure of Mortgage should
sufficiently indicate that it is within the terms of PDCP's limited
liability. In this case, the PNs failed to make any reference to
PDCP's availments, if any, under its Credit Line. In fact, it did not
even mention Sengkon's securities under the Credit Line.
Notably, the Disclosure Statements, which were "certified
correct" by FEBTC's authorized representative, Ma. Luisa C.
Ellescas, and which accompanied the PNs, failed to disclose
whether the loan secured thereby was actually secured or not.
Thus, even if the Court brushes aside the Best Evidence Rule, the
foregoing observations clearly support the trial court's
observation that FEBTC's foreclosure did not actually cover the
specific obligations secured by PDCP's properties.
FEBTC's failure to send personal
notice to the mortgagor is fatal to the
validity of the foreclosure proceedings
Indeed, FEBTC's failure to comply with its contractual obligation
to send notice to PDCP of the foreclosure sale is fatal to the
validity of the foreclosure proceedings. In Metropolitan Bank v.
Wong,[54] the Court ruled that while as a rule, personal notice
to the mortgagor is not required, such notice may be subject of a
contractual stipulation, the breach of which is sufficient to nullify
the foreclosure sale, thus:
In resolving the first query, we resort to the fundamental
principle that a contract is the law between the parties and, that
absent any showing that its provisions are wholly or in part
contrary to law, morals, good customs, public order, or public
policy, it shall be enforced to the letter by the courts. Section 3,
Act No. 3135 reads:
xxxx
The Act only requires (1) the posting of notices of sale in three
public places, and (2) the publication of the same in a newspaper
of general circulation. Personal notice to the mortgagor is not
necessary. Nevertheless, the parties to the mortgage contract
are not precluded from exacting additional requirements. In this
case, petitioner and respondent in entering into a contract of
[REM], agreed inter alia:
"all correspondence relative to this mortgage, including demand
letters, summonses, subpoenas, or notifications of any judicial or
extra-judicial action shall be sent to the MORTGAGOR at 40-42

Aldeguer St. Iloilo City, or at the address that may hereafter be
given in writing by the MORTGAGOR to the MORTGAGEE."
Precisely, the purpose of the foregoing stipulation is to apprise
respondent of any action which petitioner might take on the
subject property, thus according him the opportunity to
safeguard his rights. When petitioner failed to send the notice of
foreclosure sale to respondent, he committed a contractual
breach sufficient to render the foreclosure sale on November 23,
1981 null and void.[55] (Citation omitted and italics in the
original)
In trivializing FEBTC's failure to send personal notice to PDCP
however, the CA, citing Philippine National Bank v. Nepomuceno
Productions, Inc.,[56] ruled that since the principal object of a
notice of sale is not so much to notify the mortgagor but to
inform the public in general of the particularities of the
foreclosure, then personal notice to the mortgagor may be
disregarded.[57] The cited case, however, is inapplicable
because that case did not in fact involve stipulations on personal
notice to mortgagor nor the sending of notice to a wrong
address. The issue involved in that case is whether the parties to
the mortgage can validly waive the statutory requirements of
posting and publication and not whether the bank can ignore a
contractual stipulation for personal notice. Neither is PNB v.
Spouses Rabat[58] likewise cited by the CA applicable because
the trial court therein found that the mortgage contract did not in
fact require that personal service of notice of foreclosure sale be
given to the mortgagors. The CA's cavalier disregard of the
mortgagor's contractual right to notice of the foreclosure sale
runs contrary to jurisprudence. In Wong,[59] the Court already
had the occasion to observe:
It is bad enough that the mortgagor has no choice but to yield
his property in a foreclosure proceeding. It is infinitely worse, if
prior thereto, he was denied of his basic right to be informed of
the impending loss of his property. x x x.[60]
While the CA acknowledged that there was indeed a contractual
stipulation for notice to PDCP as mortgagor, it considered the
absence of a particular address in the space provided therefor in
the mortgage contract as merely evincing an expression of
"general intent" between the parties and that this cannot prevail
against their "specific intent" that Act No. 3135 be the controlling
law between them, citing Cortes v. Intermediate Appellate Court.
[61]
The Court cannot agree with the CA. To begin with, the value of
the doctrine enunciated in Cortes has long been considered
questionable by this Court. Thus, in Global Holiday Ownership
Corporation v. Metropolitan Bank and Trust Company,[62] the
Court held:
But what is stated in Cortes no longer applies in light of the
Court's rulings in Wong and all the subsequent cases, which have
been consistent. Cortes has never been cited in subsequent
rulings of the Court, nor has the doctrine therein ever been
reiterated. Its doctrinal value has been diminished by the policy
enunciated in Wong and the subsequent cases; that is, that in
addition to Section 3 of Act 3135, the parties may stipulate that
personal notice of foreclosure proceedings may be required. Act
3135 remains the controlling law, but the parties may agree, in
addition to posting and publication, to include personal notice to
the mortgagor, the non-observance of which renders the
foreclosure proceedings null and void, since the foreclosure
proceedings become an illegal attempt by the mortgagee to
appropriate the property for itself.
Thus, we restate: the general rule is that personal notice to the
mortgagor in extrajudicial foreclosure proceedings is not
necessary, and posting and publication will suffice. Sec. 3 of Act
3135 governing extra-judicial foreclosure of [REMs], as amended
by Act 4118, requires only posting of the notice of sale in three
public places and the publication of that notice in a newspaper of
general circulation. The exception is when the parties stipulate
241
that personal notice is additionally required to be given the
mortgagor. Failure to abide by the general rule, or its exception,
renders the foreclosure proceedings null and void.[63] (Citation
omitted, italics ours, and emphasis and underlining in the original
deleted)
In fact, the 2002 case of Nepomuceno Productions,[64] cited by
the CA, already made it clear that while personal notice to the
mortgagor in extrajudicial foreclosure proceedings is not
necessary, this holds true only if the parties did not stipulate
therefor. Stated differently, personal notice is necessary if the
parties so agreed in their mortgage contract. In the present
case, the parties provided in their REMs that:
12. All correspondence relative to this mortgage, including
demand letters, summonses, subpoenas, or notifications of any
judicial or extrajudicial action shall be sent to the [PDCP] at
_______________ or at the address that may hereafter be given
in writing by the [PDCP] to the [FEBTC]. x x x.[65]
This provision clearly establishes the agreement between the
parties that personal notice is required before FEBTC may
proceed with the foreclosure of the property and thus, FEBTC's
act of proceeding with the foreclosure despite the absence of
personal notice to the mortgagor was its own lookout.
That the portion on the mortgagor's address was left in blank
cannot be simply swept under the rug as "an expression of
general intent" that cannot prevail of the parties' specific intent
not to require personal notice. Apart from the fact that this
reasoning is based on a questionable doctrine, the CA's ruling
completely ignored the fact that the mortgage contract
containing said stipulation was a standard contract prepared by
FEBTC itself. If the latter did not intend to require personal
notice, on top of the statutory requirements of posting and
publication, then said provision should not have at all been
included in the mortgage contract. In other words, the REMs in
this case are contracts of adhesion, and in case of doubt, the
doubt should be resolved against the party who prepared it.[66]
Accordingly, the CA should have considered the "doubt" created
by the blank space in the mortgage contract against FEBTC and
not in its favor. Nonetheless, even if the Court ignores this
particular rule of interpretation, the fact that FEBTC caused the
sending of a notice, albeit at a wrong address, to PDCP is itself a
clear proof that the parties did intend to impose a contractual
requirement of personal notice, FEBTC's undisputed breach of
which sufficiently nullifies the foreclosure proceeding.
With the foregoing, the Court finds it unnecessary to discuss
PDCP's argument based on the alleged violation of its
constitutional right against impairment of obligations and
contract.
WHEREFORE, premises considered, the petition is GRANTED. The
Decision dated November 25, 2009 and Resolution dated
February 2, 2010 of the Court of Appeals in CA-G.R. CV No.
89755 are hereby ANNULLED and SET ASIDE. The Decision dated
April 16, 2007 of the Regional Trial Court of Quezon City, Branch
222, in Civil Case No. Q01-44630 is REINSTATED and AFFIRMED.
SO ORDERED.
Velasco, Jr., (Chairperson), Bersamin, Caguioa,[*] and Tijam,
JJ., concur.