CHEE KlONG YAM, AMPANG MAH, ANlTA YAM JOSE Y.C.

YAM AND RlCHARD

YAM, petitioners,
vs.
HON. NABDAR J. MALlK, Municipal Judge of Jolo, Sulu (Branch l), THE PEOPLE OF
THE PHlLlPPlNES, ROSALlNDA AMlN, TAN CHU KAO and LT. COL. AGOSTO
SAJOR respondents.
Tomas P. Matic, Jr. for petitioners.
Jose E. Fernandez for private respondent.
Office of the Solicitor General for respondent the People of the Philippines.

ABAD SANTOS, J.:
This is a petition for certiorari, prohibition, and mandamus with preliminary injunction.
Petitioners alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu, acted
without jurisdiction, in excess of jurisdiction and with grave abuse of discretion when:
(a) he held in the preliminary investigation of the charges of estafa filed by respondents
Rosalinda Amin, Tan Chu Kao and Augusto Sajor against petitioners that there was a
prima facie case against the latter;
(b) he issued warrants of arrest against petitioners after making the above
determination; and
(c) he undertook to conduct trial on the merits of the charges which were docketed
in his court as Criminal Cases No. M-lll, M-l83 and M-208.
Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction and
with grave abuse of discretion because the facts recited in the complaints did not
constitute the crime of estafa, and assuming they did, they were not within the
jurisdiction of the respondent judge.
ln a resolution dated May 23, l979, we required respondents to comment in the petition
and issued a temporary restraining order against the respondent judge from further
proceeding with Criminal Cases Nos. M-lll, M-l83 and M-208 or from enforcing the
warrants of arrest he had issued in connection with said cases.
Comments by the respondent judge and the private respondents pray for the dismissal
of the petition but the Solicitor General has manifested that the People of the Philippines
have no objection to the grant of the reliefs prayed for, except the damages. We
considered the comments as answers and gave due course to the petition.
The position of the Solicitor General is well taken. We have to grant the petition in order
to prevent manifest injustice and the exercise of palpable excess of authority.
ln Criminal Case No. M-lll, respondent Rosalinda M. Amin charges petitioners Yam
Chee Kiong and Yam Yap Kieng with estafa through misappropriation of the amount of
P50,000.00. But the complaint states on its face that said petitioners received the
amount from respondent Rosalinda M. Amin "as a loan." Moreover, the complaint in
Civil Case No. N-5, an independent action for the collection of the same amount filed by
respondent Rosalinda M. Amin with the Court of First lnstance of Sulu on September
ll, l975, likewise states that the P50,000.00 was a "simple business loan" which
earned interest and was originally demandable six (6) months from July l2, l973.
(Annex E of the petition.)
ln Criminal Case No. M-l83, respondent Tan Chu Kao charges petitioners Yam Chee
Kiong, Jose Y.C. Yam, Ampang Mah and Anita Yam, alias Yong Tay, with estafa
through misappropriation of the amount of P30,000.00. Likewise, the complaint states
on its face that the P30,000.00 was "a simple loan." So does the complaint in Civil Case
No. N-8 filed by respondent Tan Chu Kao on April 6, l976 with the Court of First
lnstance of Sulu for the collection of the same amount. (Annex D of the petition.).
ln Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C.
Yam, Anita Yam alias Yong Tai Mah, Chee Kiong Yam and Richard Yam, with estafa
through misappropriation of the amount of P20,000.00. Unlike the complaints in the
other two cases, the complaint in Criminal Case No. M-208 does not state that the
amount was received as loan. However, in a sworn statement dated September 29,
l976, submitted to respondent judge to support the complaint, respondent Augusto
Sajor states that the amount was a "loan." (Annex G of the petition.).
We agree with the petitioners that the facts alleged in the three criminal complaints do
not constitute estafa through misappropriation.
Estafa through misappropriation is committed according to Article 3l5, paragraph l,
subparagraph (b), of the Revised Penal Code as follows:
Art. 3l5. Swindling (Estafa). Any person who shall defraud another by any of
the means mentioned herein below shall be punished by:
xxx xxx xxx
l. With unfaithfulness or abuse of confidence namely:
xxx xxx xxx
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 partially guaranteed by a
bond; or by denying having received such money, goods, or other property.
ln order that a person can be convicted under the abovequoted provision, it must be
proven that he has the obligation to deliver or return the same money, goods or
personal property that he received. Petitioners had no such obligation to return the
same money, i.e., the bills or coins, which they received from private respondents. This
is so because as clearly stated in criminal complaints, the related civil complaints and
the supporting sworn statements, the sums of money that petitioners received were
loans.
The nature of simple loan is defined in Articles l933 and l953 of the Civil Code.
Art. l933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time and
return it, in which case the contract is called a commodatum; or money or other
consumable thing upon the condition that the same amount of the same kind and quality
shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
ln commodatum the bailor retains the ownership of the thing loaned, while in simple
loam ownership passes to the borrower.
Art. l953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount of
the same kind and quality.
lt can be readily noted from the above-quoted provisions that in simple loan (mutuum),
as contrasted to commodatum, the borrower acquires ownership of the money, goods
or personal property borrowed. Being the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not be considered misappropriation
thereof.
ln U.S. vs. lbaez, l9 Phil. 559, 560 (l9ll), this Court held that it is not estafa for a
person to refuse to nay his debt or to deny its existence.
We are of the opinion and so decide that when the relation is purely that of debtor and
creditor, the debtor can not be held liable for the crime of estafa, under said article, by
merely refusing to pay or by denying the indebtedness.
lt appears that respondent judge failed to appreciate the distinction between the two
types of loan, mutuum and commodatum, when he performed the questioned acts, He
mistook the transaction between petitioners and respondents Rosalinda Amin, Tan Chu
Kao and Augusto Sajor to be commodatum wherein the borrower does not acquire
ownership over the thing borrowed and has the duty to return the same thing to the
lender.
Under Sec. 87 of the Judiciary Act, the municipal court of a provincial capital, which the
Municipal Court of Jolo is, has jurisdiction over criminal cases where the penalty
provided by law does not exceed prision correccional or imprisonment for not more than
six (6) years, or fine not exceeding P6,000.00 or both, The amounts allegedly
misappropriated by petitioners range from P20,000.00 to P50,000.00. The penalty for
misappropriation of this magnitude exceeds prision correccional or 6 year imprisonment.
(Article 3l5, Revised Penal Code), Assuming then that the acts recited in the
complaints constitute the crime of estafa, the Municipal Court of Jolo has no jurisdiction
to try them on the merits. The alleged offenses are under the jurisdiction of the Court of
First lnstance.
Respondents People of the Philippines being the sovereign authority can not be sued
for damages. They are immune from such type of suit.
With respect to the other respondents, this Court is not the proper forum for the
consideration of the claim for damages against them.
WHEREFORE, the petition is hereby granted; the temporary restraining order
previously issued is hereby made permanent; the criminal complaints against petitioners
are hereby declared null and void; respondent judge is hereby ordered to dismiss said
criminal cases and to recall the warrants of arrest he had issued in connection
therewith. Moreover, respondent judge is hereby rebuked for manifest ignorance of
elementary law. Let a copy of this decision be included in his personal life. Costs
against private respondents.
SO ORDERED.
SECOND DlVlSlON
[G.R. No. ll5324. February l9, 2003]
PRODUCERS BANK OF THE PHlLlPPlNES (now FlRST lNTERNATlONAL BANK),
petitioner, vs. HON. COURT OF APPEALS AND FRANKLlN VlVES, respondents.
D E C l S l O N
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision[l] of the Court of Appeals dated
June 25, l99l in CA-G.R. CV No. ll79l and of its Resolution[2] dated May 5, l994,
denying the motion for reconsideration of said decision filed by petitioner Producers
Bank of the Philippines.
Sometime in l979, private respondent Franklin Vives was asked by his neighbor and
friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in
incorporating his business, the Sterela Marketing and Services ("Sterela" for brevity).
Specifically, Sanchez asked private respondent to deposit in a bank a certain amount of
money in the bank account of Sterela for purposes of its incorporation. She assured
private respondent that he could withdraw his money from said account within a month's
time. Private respondent asked Sanchez to bring Doronilla to their house so that they
could discuss Sanchez's request.[3]
On May 9, l979, private respondent, Sanchez, Doronilla and a certain Estrella
Dumagpi, Doronilla's private secretary, met and discussed the matter. Thereafter,
relying on the assurances and representations of Sanchez and Doronilla, private
respondent issued a check in the amount of Two Hundred Thousand Pesos
(P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs. lnocencia
Vives, to accompany Doronilla and Sanchez in opening a savings account in the name
of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines.
However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to deposit the
check. They had with them an authorization letter from Doronilla authorizing Sanchez
and her companions, "in coordination with Mr. Rufo Atienza," to open an account for
Sterela Marketing Services in the amount of P200,000.00. ln opening the account, the
authorized signatories were lnocencia Vives and/or Angeles Sanchez. A passbook for
Savings Account No. l0-l567 was thereafter issued to Mrs. Vives.[4]
Subsequently, private respondent learned that Sterela was no longer holding office in
the address previously given to him. Alarmed, he and his wife went to the Bank to verify
if their money was still intact. The bank manager referred them to Mr. Rufo Atienza, the
assistant manager, who informed them that part of the money in Savings Account No.
l0-l567 had been withdrawn by Doronilla, and that only P90,000.00 remained therein.
He likewise told them that Mrs. Vives could not withdraw said remaining amount
because it had to answer for some postdated checks issued by Doronilla. According to
Atienza, after Mrs. Vives and Sanchez opened Savings Account No. l0-l567, Doronilla
opened Current Account No. l0-0320 for Sterela and authorized the Bank to debit
Savings Account No. l0-l567 for the amounts necessary to cover overdrawings in
Current Account No. l0-0320. ln opening said current account, Sterela, through
Doronilla, obtained a loan of Pl75,000.00 from the Bank. To cover payment thereof,
Doronilla issued three postdated checks, all of which were dishonored. Atienza also
said that Doronilla could assign or withdraw the money in Savings Account No. l0-l567
because he was the sole proprietor of Sterela.[5]
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29,
l979, he received a letter from Doronilla, assuring him that his money was intact and
would be returned to him. On August l3, l979, Doronilla issued a postdated check for
Two Hundred Twelve Thousand Pesos (P2l2,000.00) in favor of private respondent.
However, upon presentment thereof by private respondent to the drawee bank, the
check was dishonored. Doronilla requested private respondent to present the same
check on September l5, l979 but when the latter presented the check, it was again
dishonored.[6]
Private respondent referred the matter to a lawyer, who made a written demand upon
Doronilla for the return of his client's money. Doronilla issued another check for
P2l2,000.00 in private respondent's favor but the check was again dishonored for
insufficiency of funds.[7]
Private respondent instituted an action for recovery of sum of money in the Regional
Trial Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and
petitioner. The case was docketed as Civil Case No. 44485. He also filed criminal
actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez
passed away on March l6, l985 while the case was pending before the trial court. On
October 3, l995, the RTC of Pasig, Branch l57, promulgated its Decision in Civil Case
No. 44485, the dispositive portion of which reads:
lN VlEW OF THE FOREGOlNG, judgment is hereby rendered sentencing defendants
Arturo J. Doronila, Estrella Dumagpi and Producers Bank of the Philippines to pay
plaintiff Franklin Vives jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest at
the legal rate from the filing of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for exemplary
damages;
(c) the amount of P40,000.00 for attorney's fees; and
(d) the costs of the suit.
SO ORDERED.[8]
Petitioner appealed the trial court's decision to the Court of Appeals. ln its Decision
dated June 25, l99l, the appellate court affirmed in toto the decision of the RTC.[9] lt
likewise denied with finality petitioner's motion for reconsideration in its Resolution
dated May 5, l994.[l0]
On June 30, l994, petitioner filed the present petition, arguing that
l.
THE HONORABLE COURT OF APPEALS ERRED lN UPHOLDlNG THAT THE
TRANSACTlON BETWEEN THE DEFENDANT DORONlLLA AND RESPONDENT
VlVES WAS ONE OF SlMPLE LOAN AND NOT ACCOMMODATlON;
ll.
THE HONORABLE COURT OF APPEALS ERRED lN UPHOLDlNG THAT
PETlTlONER'S BANK MANAGER, MR. RUFO ATlENZA, CONNlVED WlTH THE
OTHER DEFENDANTS lN DEFRAUDlNG PETlTlONER (Sic. Should be PRlVATE
RESPONDENT) AND AS A CONSEQUENCE, THE PETlTlONER SHOULD BE HELD
LlABLE UNDER THE PRlNClPLE OF NATURAL JUSTlCE;
lll.
THE HONORABLE COURT OF APPEALS ERRED lN ADOPTlNG THE ENTlRE
RECORDS OF THE REGlONAL TRlAL COURT AND AFFlRMlNG THE JUDGMENT
APPEALED FROM, AS THE FlNDlNGS OF THE REGlONAL TRlAL COURT WERE
BASED ON A MlSAPPREHENSlON OF FACTS;
lV.
THE HONORABLE COURT OF APPEALS ERRED lN DECLARlNG THAT THE ClTED
DEClSlON lN SALUDARES VS. MARTlNEZ, 29 SCRA 745, UPHOLDlNG THE
LlABlLlTY OF AN EMPLOYER FOR ACTS COMMlTTED BY AN EMPLOYEE lS
APPLlCABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED lN UPHOLDlNG THE DEClSlON
OF THE LOWER COURT THAT HERElN PETlTlONER BANK lS JOlNTLY AND
SEVERALLY LlABLE WlTH THE OTHER DEFENDANTS FOR THE AMOUNT OF
P200,000.00 REPRESENTlNG THE SAVlNGS ACCOUNT DEPOSlT, P50,000.00
FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00
FOR ATTORNEY'S FEES AND THE COSTS OF SUlT.[ll]
Private respondent filed his Comment on September 23, l994. Petitioner filed its Reply
thereto on September 25, l995. The Court then required private respondent to submit
a rejoinder to the reply. However, said rejoinder was filed only on April 2l, l997, due to
petitioner's delay in furnishing private respondent with copy of the reply[l2] and several
substitutions of counsel on the part of private respondent.[l3] On January l7, 200l, the
Court resolved to give due course to the petition and required the parties to submit their
respective memoranda.[l4] Petitioner filed its memorandum on April l6, 200l while
private respondent submitted his memorandum on March 22, 200l.
Petitioner contends that the transaction between private respondent and Doronilla is a
simple loan (mutuum) since all the elements of a mutuum are present: first, what was
delivered by private respondent to Doronilla was money, a consumable thing; and
second, the transaction was onerous as Doronilla was obliged to pay interest, as
evidenced by the check issued by Doronilla in the amount of P2l2,000.00, or Pl2,000
more than what private respondent deposited in Sterela's bank account.[l5] Moreover,
the fact that private respondent sued his good friend Sanchez for his failure to recover
his money from Doronilla shows that the transaction was not merely gratuitous but "had
a business angle" to it. Hence, petitioner argues that it cannot be held liable for the
return of private respondent's P200,000.00 because it is not privy to the transaction
between the latter and Doronilla.[l6]
lt argues further that petitioner's Assistant Manager, Mr. Rufo Atienza, could not be
faulted for allowing Doronilla to withdraw from the savings account of Sterela since the
latter was the sole proprietor of said company. Petitioner asserts that Doronilla's May 8,
l979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open a
savings account for Sterela, did not contain any authorization for these two to withdraw
from said account. Hence, the authority to withdraw therefrom remained exclusively
with Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to
the savings account.[l7] Petitioner points out that no evidence other than the
testimonies of private respondent and Mrs. Vives was presented during trial to prove
that private respondent deposited his P200,000.00 in Sterela's account for purposes of
its incorporation.[l8] Hence, petitioner should not be held liable for allowing Doronilla to
withdraw from Sterela's savings account.
Petitioner also asserts that the Court of Appeals erred in affirming the trial court's
decision since the findings of fact therein were not accord with the evidence presented
by petitioner during trial to prove that the transaction between private respondent and
Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to
withdraw from Sterela's savings account.[l9]
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is
not liable for the actual damages suffered by private respondent, and neither may it be
held liable for moral and exemplary damages as well as attorney's fees.[20]
Private respondent, on the other hand, argues that the transaction between him and
Doronilla is not a mutuum but an accommodation,[2l] since he did not actually part with
the ownership of his P200,000.00 and in fact asked his wife to deposit said amount in
the account of Sterela so that a certification can be issued to the effect that Sterela had
sufficient funds for purposes of its incorporation but at the same time, he retained some
degree of control over his money through his wife who was made a signatory to the
savings account and in whose possession the savings account passbook was given.[22]
He likewise asserts that the trial court did not err in finding that petitioner, Atienza's
employer, is liable for the return of his money. He insists that Atienza, petitioner's
assistant manager, connived with Doronilla in defrauding private respondent since it
was Atienza who facilitated the opening of Sterela's current account three days after
Mrs. Vives and Sanchez opened a savings account with petitioner for said company, as
well as the approval of the authority to debit Sterela's savings account to cover any
overdrawings in its current account.[23]
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a
petition for review filed with this Court. The Court has repeatedly held that it is not its
function to analyze and weigh all over again the evidence presented by the parties
during trial.[24] The Court's jurisdiction is in principle limited to reviewing errors of law
that might have been committed by the Court of Appeals.[25] Moreover, factual findings
of courts, when adopted and confirmed by the Court of Appeals, are final and
conclusive on this Court unless these findings are not supported by the evidence on
record.[26] There is no showing of any misapprehension of facts on the part of the Court
of Appeals in the case at bar that would require this Court to review and overturn the
factual findings of that court, especially since the conclusions of fact of the Court of
Appeals and the trial court are not only consistent but are also amply supported by the
evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction
between private respondent and Doronilla was a commodatum and not a mutuum. A
circumspect examination of the records reveals that the transaction between them was
a commodatum. Article l933 of the Civil Code distinguishes between the two kinds of
loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which
case the contract is called a commodatum; or money or other consumable thing, upon
the condition that the same amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
ln commodatum, the bailor retains the ownership of the thing loaned, while in simple
loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be a mutuum. However, there
are some instances where a commodatum may have for its object a consumable thing.
Article l936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is
not the consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the
intention of the parties is to lend consumable goods and to have the very same goods
returned at the end of the period agreed upon, the loan is a commodatum and not a
mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract.[27] ln case of doubt, the
contemporaneous and subsequent acts of the parties shall be considered in such
determination.[28]
As correctly pointed out by both the Court of Appeals and the trial court, the evidence
shows that private respondent agreed to deposit his money in the savings account of
Sterela specifically for the purpose of making it appear "that said firm had sufficient
capitalization for incorporation, with the promise that the amount shall be returned within
thirty (30) days."[29] Private respondent merely "accommodated" Doronilla by lending
his money without consideration, as a favor to his good friend Sanchez. lt was however
clear to the parties to the transaction that the money would not be removed from
Sterela's savings account and would be returned to private respondent after thirty (30)
days.
Doronilla's attempts to return to private respondent the amount of P200,000.00 which
the latter deposited in Sterela's account together with an additional Pl2,000.00,
allegedly representing interest on the mutuum, did not convert the transaction from a
commodatum into a mutuum because such was not the intent of the parties and
because the additional Pl2,000.00 corresponds to the fruits of the lending of the
P200,000.00. Article l935 of the Civil Code expressly states that "[t]he bailee in
commodatum acquires the use of the thing loaned but not its fruits." Hence, it was only
proper for Doronilla to remit to private respondent the interest accruing to the latter's
money deposited with petitioner.
Neither does the Court agree with petitioner's contention that it is not solidarily liable for
the return of private respondent's money because it was not privy to the transaction
between Doronilla and private respondent. The nature of said transaction, that is,
whether it is a mutuum or a commodatum, has no bearing on the question of petitioner's
liability for the return of private respondent's money because the factual circumstances
of the case clearly show that petitioner, through its employee Mr. Atienza, was partly
responsible for the loss of private respondent's money and is liable for its restitution.
Petitioner's rules for savings deposits written on the passbook it issued Mrs. Vives on
behalf of Sterela for Savings Account No. l0-l567 expressly states that
"2. Deposits and withdrawals must be made by the depositor personally or upon his
written authority duly authenticated, and neither a deposit nor a withdrawal will be
permitted except upon the production of the depositor savings bank book in which will
be entered by the Bank the amount deposited or withdrawn."[30]
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the
Assistant Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom
even without presenting the passbook (which Atienza very well knew was in the
possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals
and the trial court found that Atienza allowed said withdrawals because he was party to
Doronilla's "scheme" of defrauding private respondent:
X X X
But the scheme could not have been executed successfully without the knowledge, help
and cooperation of Rufo Atienza, assistant manager and cashier of the Makati
(Buendia) branch of the defendant bank. lndeed, the evidence indicates that Atienza
had not only facilitated the commission of the fraud but he likewise helped in devising
the means by which it can be done in such manner as to make it appear that the
transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendant's Buendia branch precisely because
Atienza was a key officer therein. The records show that plaintiff had suggested that
the P200,000.00 be deposited in his bank, the Manila Banking Corporation, but
Doronilla and Dumagpi insisted that it must be in defendant's branch in Makati for "it will
be easier for them to get a certification". ln fact before he was introduced to plaintiff,
Doronilla had already prepared a letter addressed to the Buendia branch manager
authorizing Angeles B. Sanchez and company to open a savings account for Sterela in
the amount of P200,000.00, as "per coordination with Mr. Rufo Atienza, Assistant
Manager of the Bank x x x" (Exh. l). This is a clear manifestation that the other
defendants had been in consultation with Atienza from the inception of the scheme.
Significantly, there were testimonies and admission that Atienza is the brother-in-law of
a certain Romeo Mirasol, a friend and business associate of Doronilla.
Then there is the matter of the ownership of the fund. Because of the "coordination"
between Doronilla and Atienza, the latter knew before hand that the money deposited
did not belong to Doronilla nor to Sterela. Aside from such foreknowledge, he was
explicitly told by lnocencia Vives that the money belonged to her and her husband and
the deposit was merely to accommodate Doronilla. Atienza even declared that the
money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose
that the only ones empowered to withdraw the same were lnocencia Vives and Angeles
B. Sanchez. ln the signature card pertaining to this account (Exh. J), the authorized
signatories were lnocencia Vives &/or Angeles B. Sanchez. Atienza stated that it is the
usual banking procedure that withdrawals of savings deposits could only be made by
persons whose authorized signatures are in the signature cards on file with the bank.
He, however, said that this procedure was not followed here because Sterela was
owned by Doronilla. He explained that Doronilla had the full authority to withdraw by
virtue of such ownership. The Court is not inclined to agree with Atienza. ln the first
place, he was all the time aware that the money came from Vives and did not belong to
Sterela. He was also told by Mrs. Vives that they were only accommodating Doronilla
so that a certification can be issued to the effect that Sterela had a deposit of so much
amount to be sued in the incorporation of the firm. ln the second place, the signature of
Doronilla was not authorized in so far as that account is concerned inasmuch as he had
not signed the signature card provided by the bank whenever a deposit is opened. ln
the third place, neither Mrs. Vives nor Sanchez had given Doronilla the authority to
withdraw.
Moreover, the transfer of fund was done without the passbook having been presented.
lt is an accepted practice that whenever a withdrawal is made in a savings deposit, the
bank requires the presentation of the passbook. ln this case, such recognized practice
was dispensed with. The transfer from the savings account to the current account was
without the submission of the passbook which Atienza had given to Mrs. Vives. lnstead,
it was made to appear in a certification signed by Estrella Dumagpi that a duplicate
passbook was issued to Sterela because the original passbook had been surrendered
to the Makati branch in view of a loan accommodation assigning the savings account
(Exh. C). Atienza, who undoubtedly had a hand in the execution of this certification,
was aware that the contents of the same are not true. He knew that the passbook was
in the hands of Mrs. Vives for he was the one who gave it to her. Besides, as assistant
manager of the branch and the bank official servicing the savings and current accounts
in question, he also was aware that the original passbook was never surrendered. He
was also cognizant that Estrella Dumagpi was not among those authorized to withdraw
so her certification had no effect whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that
Atienza's active participation in the perpetration of the fraud and deception that caused
the loss. The records indicate that this account was opened three days later after the
P200,000.00 was deposited. ln spite of his disclaimer, the Court believes that Atienza
was mindful and posted regarding the opening of the current account considering that
Doronilla was all the while in "coordination" with him. That it was he who facilitated the
approval of the authority to debit the savings account to cover any overdrawings in the
current account (Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this
case. x x x.[3l]
Under Article 2l80 of the Civil Code, employers shall be held primarily and solidarily
liable for damages caused by their employees acting within the scope of their assigned
tasks. To hold the employer liable under this provision, it must be shown that an
employer-employee relationship exists, and that the employee was acting within the
scope of his assigned task when the act complained of was committed.[32] Case law in
the United States of America has it that a corporation that entrusts a general duty to its
employee is responsible to the injured party for damages flowing from the employee's
wrongful act done in the course of his general authority, even though in doing such act,
the employee may have failed in its duty to the employer and disobeyed the latter's
instructions.[33]
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner
did not deny that Atienza was acting within the scope of his authority as Assistant
Branch Manager when he assisted Doronilla in withdrawing funds from Sterela's
Savings Account No. l0-l567, in which account private respondent's money was
deposited, and in transferring the money withdrawn to Sterela's Current Account with
petitioner. Atienza's acts of helping Doronilla, a customer of the petitioner, were
obviously done in furtherance of petitioner's interests[34] even though in the process,
Atienza violated some of petitioner's rules such as those stipulated in its savings
account passbook.[35] lt was established that the transfer of funds from Sterela's
savings account to its current account could not have been accomplished by Doronilla
without the invaluable assistance of Atienza, and that it was their connivance which was
the cause of private respondent's loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2l80 of
the Civil Code, petitioner is liable for private respondent's loss and is solidarily liable
with Doronilla and Dumagpi for the return of the P200,000.00 since it is clear that
petitioner failed to prove that it exercised due diligence to prevent the unauthorized
withdrawals from Sterela's savings account, and that it was not negligent in the
selection and supervision of Atienza. Accordingly, no error was committed by the
appellate court in the award of actual, moral and exemplary damages, attorney's fees
and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENlED. The assailed Decision and Resolution
of the Court of Appeals are AFFlRMED.
SO ORDERED.
SEVERlNO TOLENTlNO and POTENClANA MANlO, plaintiffs-appellants,
vs.
BENlTO GONZALEZ SY CHlAM, defendants-appellee.
Araneta and Zaragoza for appellants.
Eusebio Orense for appelle.
Johnson, J.:
PRlNClPAL QUESTlONS PRESENTED BY THE APPEAL
The principal questions presented by this appeal are:
(a) ls the contract in question a pacto de retro or a mortgage?
(b) Under a pacto de retro, when the vendor becomes a tenant of the purchaser and
agrees to pay a certain amount per month as rent, may such rent render such a contract
usurious when the amount paid as rent, computed upon the purchase price, amounts to
a higher rate of interest upon said amount than that allowed by law?
(c) May the contract in the present case may be modified by parol evidence?
ANTECEDENT FACTS
Sometime prior to the 28th day of November, l922, the appellants purchased of the
Luzon Rice Mills, lnc., a piece or parcel of land with the camarin located thereon,
situated in the municipality of Tarlac of the Province of Tarlac for the price of P25,000,
promising to pay therefor in three installments. The first installment of P2,000 was due
on or before the 2d day of May, l92l; the second installment of P8,000 was due on or
before 3lst day of May, l92l; the balance of Pl5,000 at l2 per cent interest was due
and payable on or about the 30th day of November, l922. One of the conditions of that
contract of purchase was that on failure of the purchaser (plaintiffs and appellants) to
pay the balance of said purchase price or any of the installments on the date agreed
upon, the property bought would revert to the original owner.
The payments due on the 2d and 3lst of May, l92l, amounting to Pl0,000 were paid
so far as the record shows upon the due dates. The balance of Pl5,000 due on said
contract of purchase was paid on or about the lst day of December, l922, in the
manner which will be explained below. On the date when the balance of Pl5,000 with
interest was paid, the vendor of said property had issued to the purchasers transfer
certificate of title to said property, No. 528. Said transfer certificate of title (No. 528) was
transfer certificate of title from No. 40, which shows that said land was originally
registered in the name of the vendor on the 7th day of November, l9l3.
PRESENT FACTS
On the 7th day of November, l922 the representative of the vendor of the property in
question wrote a letter to the appellant Potenciana Manio (Exhibit A, p. 50), notifying the
latter that if the balance of said indebtedness was not paid, an action would be brought
for the purpose of recovering the property, together with damages for non compliance
with the condition of the contract of purchase. The pertinent parts of said letter read as
follows:
Sirvase notar que de no estar liquidada esta cuenta el dia 30 del corriente,
procederemos judicialmente contra Vd. para reclamar la devolucion del camarin y los
daos y perjuicios ocasionados a la compaia por su incumplimiento al contrato.
Somos de Vd. atentos y S. S.
SMlTH, BELL & CO., LTD.
By (Sgd.) F. l. HlGHAM
Treasurer.
General Managers
LUZON RlCE MlLLS lNC.
According to Exhibits B and D, which represent the account rendered by the vendor,
there was due and payable upon said contract of purchase on the 30th day of
November, l922, the sum Pl6,965.09. Upon receiving the letter of the vendor of said
property of November 7, l922, the purchasers, the appellants herein, realizing that they
would be unable to pay the balance due, began to make an effort to borrow money with
which to pay the balance due, began to make an effort to borrow money with which to
pay the balance of their indebtedness on the purchase price of the property involved.
Finally an application was made to the defendant for a loan for the purpose of satisfying
their indebtedness to the vendor of said property. After some negotiations the
defendants agreed to loan the plaintiffs to loan the plaintiffs the sum of Pl7,500 upon
condition that the plaintiffs execute and deliver to him a pacto de retro of said property.
ln accordance with that agreement the defendant paid to the plaintiffs by means of a
check the sum of Pl6,965.09. The defendant, in addition to said amount paid by check,
delivered to the plaintiffs the sum of P354.9l together with the sum of Pl80 which the
plaintiffs paid to the attorneys for drafting said contract of pacto de retro, making a total
paid by the defendant to the plaintiffs and for the plaintiffs of Pl7,500 upon the
execution and delivery of said contract. Said contracts was dated the 28th day of
November, l922, and is in the words and figures following:
Sepan todos por la presente:
Que nosotros, los conyuges Severino Tolentino y Potenciana Manio, ambos mayores
de edad, residentes en el Municipio de Calumpit, Provincia de Bulacan, propietarios y
transeuntes en esta Ciudad de Manila, de una parte, y de otra, Benito Gonzalez Sy
Chiam, mayor de edad, casado con Maria Santiago, comerciante y vecinos de esta
Ciudad de Manila.
MANlFESTAMOS Y HACEMOS CONSTAR:
Primero. Que nosotros, Severino Tolentino y Potenciano Manio, por y en consideracion
a la cantidad de diecisiete mil quinientos pesos (Pl7,500) moneda filipina, que en este
acto hemos recibido a nuestra entera satisfaccion de Don Benito Gonzalez Sy Chiam,
cedemos, vendemos y traspasamos a favor de dicho Don Benito Gonzalez Sy Chiam,
sus herederos y causahabientes, una finca que, segun el Certificado de Transferencia
de Titulo No. 40 expedido por el Registrador de Titulos de la Provincia de Tarlac a favor
de "Luzon Rice Mills Company Limited" que al incorporarse se donomino y se
denomina "Luzon Rice Mills lnc.," y que esta corporacion nos ha transferido en venta
absoluta, se describe como sigue:
Un terreno (lote No. l) con las mejoras existentes en el mismo, situado en el Municipio
de Tarlac. Linda por el O. y N. con propiedad de Manuel Urquico; por el E. con
propiedad de la Manila Railroad Co.; y por el S. con un camino. Partiendo de un punto
marcado l en el plano, cuyo punto se halla al N. 4l gds. l7' E.859.42 m. del mojon de
localizacion No. 2 de la Oficina de Terrenos en Tarlac; y desde dicho punto l N. 8l gds.
3l' O., 77 m. al punto 2; desde este punto N. 4 gds. 22' E.; 54.70 m. al punto 3; desde
este punto S. 86 gds. l7' E.; 69.25 m. al punto 4; desde este punto S. 2 gds. 42' E.,
6l.48 m. al punto de partida; midiendo una extension superficcial de cuatro mil
doscientos diez y seis metros cuadrados (4,2l6) mas o menos. Todos los puntos
nombrados se hallan marcados en el plano y sobre el terreno los puntos l y 2 estan
determinados por mojones de P. L. S. de 20 x 20 x 70 centimetros y los puntos 3 y 4
por mojones del P. L. S. B. L.: la orientacion seguida es la verdadera, siendo la
declinacion magnetica de 0 gds. 45' E. y la fecha de la medicion, l., de febrero de
l9l3.
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos
contados desde el dia l., de diciembre de l922, devolvemos al expresado Don
Benito Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos pesos
(Pl7,500) queda obligado dicho Sr. Benito Gonzalez y Chiam a retrovendernos la finca
arriba descrita; pero si transcurre dicho plazo de cinco aos sin ejercitar el derecho de
retracto que nos hemos reservado, entonces quedara esta venta absoluta e
irrevocable.
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la
finca arriba descrita, sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, era de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito
Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si el
conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
(c) La falta de pago del alquiler aqui estipulado por dos meses consecutivos dara lugar
a la terminacion de este arrendamieno y a la perdida del derecho de retracto que nos
hemos reservado, como si naturalmente hubiera expirado el termino para ello,
pudiendo en su virtud dicho Sr. Gonzalez Sy Chiam tomar posesion de la finca y
desahuciarnos de la misma.
Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez otorgo que acepto esta escritura
en los precisos terminos en que la dejan otorgada los conyuges Severino Tolentino y
Potenciana Manio.
En testimonio de todo lo cual, firmamos la presente de nuestra mano en Manila, por
cuadruplicado en Manila, hoy a 28 de noviembre de l922.
(Fdo.) SEVERlNO TOLENTlNO
(Fda.) POTENClANA MANlO
(Fdo.) BENlTO GONZALEZ SY CHlAM
Firmado en presencia de:
(Fdos.) MOlSES M. BUHAlN
B. S. BANAAG
An examination of said contract of sale with reference to the first question above, shows
clearly that it is a pacto de retro and not a mortgage. There is no pretension on the part
of the appellant that said contract, standing alone, is a mortgage. The pertinent
language of the contract is:
Segundo. Que es condicion de esta venta la de que si en el plazo de cinco (5) aos
contados desde el dia l., de diciembre de l922, devolvemos al expresado Don
Benito Gonzales Sy Chiam el referido precio de diecisiete mil quinientos pesos
(Pl7,500) queda obligado dicho Sr. Benito Gonzales Sy Chiam a retrovendornos la
finca arriba descrita; pero si transcurre dicho plazo de cinco (5) aos sin ejercitar al
derecho de retracto que nos hemos reservado, entonces quedara esta venta absoluta e
irrevocable.
Language cannot be clearer. The purpose of the contract is expressed clearly in said
quotation that there can certainly be not doubt as to the purpose of the plaintiff to sell
the property in question, reserving the right only to repurchase the same. The intention
to sell with the right to repurchase cannot be more clearly expressed.
lt will be noted from a reading of said sale of pacto de retro, that the vendor, recognizing
the absolute sale of the property, entered into a contract with the purchaser by virtue of
which she became the "tenant" of the purchaser. That contract of rent appears in said
quoted document above as follows:
Tercero. Que durante el expresado termino del retracto tendremos en arrendamiento la
finca arriba descrita, sujeto a condiciones siguientes:
(a) El alquiler que nos obligamos a pagar por mensualidades vencidas a Don Benito
Gonzalez Sy Chiam y en su domicilio, sera de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.
(b) El amillaramiento de la finca arrendada sera por cuenta de dicho Don Benito
Gonzalez Sy Chiam, asi como tambien la prima del seguro contra incendios, si le
conviniera al referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
From the foregoing, we are driven to the following conclusions: First, that the contract of
pacto de retro is an absolute sale of the property with the right to repurchase and not a
mortgage; and, second, that by virtue of the said contract the vendor became the tenant
of the purchaser, under the conditions mentioned in paragraph 3 of said contact quoted
above.
lt has been the uniform theory of this court, due to the severity of a contract of pacto de
retro, to declare the same to be a mortgage and not a sale whenever the interpretation
of such a contract justifies that conclusion. There must be something, however, in the
language of the contract or in the conduct of the parties which shows clearly and
beyond doubt that they intended the contract to be a "mortgage" and not a pacto de
retro. (lnternational Banking Corporation vs. Martinez, l0 Phil., 252; Padilla vs.
Linsangan, l9 Phil., 65; Cumagun vs. Alingay, l9 Phil., 4l5; Olino vs. Medina, l3 Phil.,
379; Manalo vs. Gueco, 42 Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs.
Santiago, 38 Phil., l57.)
We are not unmindful of the fact that sales with pacto de retro are not favored and that
the court will not construe an instrument to one of sale with pacto de retro, with the
stringent and onerous effect which follows, unless the terms of the document and the
surrounding circumstances require it.
While it is general rule that parol evidence is not admissible for the purpose of varying
the terms of a contract, but when an issue is squarely presented that a contract does
not express the intention of the parties, courts will, when a proper foundation is laid
therefor, hear evidence for the purpose of ascertaining the true intention of the parties.
ln the present case the plaintiffs allege in their complaint that the contract in question is
a pacto de retro. They admit that they signed it. They admit they sold the property in
question with the right to repurchase it. The terms of the contract quoted by the plaintiffs
to the defendant was a "sale" with pacto de retro, and the plaintiffs have shown no
circumstance whatever which would justify us in construing said contract to be a mere
"loan" with guaranty. ln every case in which this court has construed a contract to be a
mortgage or a loan instead of a sale with pacto de retro, it has done so, either because
the terms of such contract were incompatible or inconsistent with the theory that said
contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs. Linsangan,
supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs. Pamintuan and De Jesus,
37 Phil., 876.)
ln the case of Padilla vs. Linsangan the term employed in the contract to indicate the
nature of the conveyance of the land was "pledged" instead of "sold". ln the case of
Manlagnit vs. Dy Puico, while the vendor used to the terms "sale and transfer with the
right to repurchase," yet in said contract he described himself as a "debtor" the
purchaser as a "creditor" and the contract as a "mortgage". ln the case of Rodriguez vs.
Pamintuan and De Jesus the person who executed the instrument, purporting on its
face to be a deed of sale of certain parcels of land, had merely acted under a power of
attorney from the owner of said land, "authorizing him to borrow money in such amount
and upon such terms and conditions as he might deem proper, and to secure payment
of the loan by a mortgage." ln the case of Villa vs. Santiago (38 Phil., l57), although a
contract purporting to be a deed of sale was executed, the supposed vendor remained
in possession of the land and invested the money he had obtained from the supposed
vendee in making improvements thereon, which fact justified the court in holding that
the transaction was a mere loan and not a sale. ln the case of Cuyugan vs. Santos (39
Phil., 970), the purchaser accepted partial payments from the vendor, and such
acceptance of partial payments is absolutely incompatible with the idea of irrevocability
of the title of ownership of the purchaser at the expiration of the term stipulated in the
original contract for the exercise of the right of repurchase."
Referring again to the right of the parties to vary the terms of written contract, we quote
from the dissenting opinion of Chief Justice Cayetano S. Arellano in the case of
Government of the Philippine lslands vs. Philippine Sugar Estates Development Co.,
which case was appealed to the Supreme Court of the United States and the contention
of the Chief Justice in his dissenting opinion was affirmed and the decision of the
Supreme Court of the Philippine lslands was reversed. (See decision of the Supreme
Court of the United States, June 3, l9l8.)l The Chief Justice said in discussing that
question:
According to article l282 of the Civil Code, in order to judge of the intention of the
contracting parties, consideration must chiefly be paid to those acts executed by said
parties which are contemporary with and subsequent to the contract. And according to
article l283, however general the terms of a contract may be, they must not be held to
include things and cases different from those with regard to which the interested parties
agreed to contract. "The Supreme Court of the Philippine lslands held the parol
evidence was admissible in that case to vary the terms of the contract between the
Government of the Philippine lslands and the Philippine Sugar Estates Development
Co. ln the course of the opinion of the Supreme Court of the United States Mr. Justice
Brandeis, speaking for the court, said:
lt is well settled that courts of equity will reform a written contract where, owing to
mutual mistake, the language used therein did not fully or accurately express the
agreement and intention of the parties. The fact that interpretation or construction of a
contract presents a question of law and that, therefore, the mistake was one of law is
not a bar to granting relief. . . . This court is always disposed to accept the construction
which the highest court of a territory or possession has placed upon a local statute. But
that disposition may not be yielded to where the lower court has clearly erred. Here the
construction adopted was rested upon a clearly erroneous assumption as to an
established rule of equity. . . . The burden of proof resting upon the appellant cannot be
satisfied by mere preponderance of the evidence. lt is settled that relief by way of
reformation will not be granted unless the proof of mutual mistake be of the clearest and
most satisfactory character.
The evidence introduced by the appellant in the present case does not meet with that
stringent requirement. There is not a word, a phrase, a sentence or a paragraph in the
entire record, which justifies this court in holding that the said contract of pacto de retro
is a mortgage and not a sale with the right to repurchase. Article l28l of the Civil Code
provides: "lf the terms of a contract are clear and leave no doubt as to the intention of
the contracting parties, the literal sense of its stipulations shall be followed." Article l282
provides: "in order to judge as to the intention of the contracting parties, attention must
be paid principally to their conduct at the time of making the contract and subsequently
thereto."
We cannot thereto conclude this branch of our discussion of the question involved,
without quoting from that very well reasoned decision of the late Chief Justice Arellano,
one of the greatest jurists of his time. He said, in discussing the question whether or not
the contract, in the case of Lichauco vs. Berenguer (20 Phil., l2), was a pacto de retro
or a mortgage:
The public instrument, Exhibit C, in part reads as follows: "Don Macarion Berenguer
declares and states that he is the proprietor in fee simple of two parcels of fallow
unappropriated crown land situated within the district of his pueblo. The first has an area
of 73 quiones, 8 balitas and 8 loanes, located in the sitio of Batasan, and its
boundaries are, etc., etc. The second is in the sitio of Panantaglay, barrio of Calumpang
has as area of 73 hectares, 22 ares, and 6 centares, and is bounded on the north, etc.,
etc."
ln the executory part of the said instrument, it is stated:
'That under condition of right to repurchase (pacto de retro) he sells the said properties
to the aforementioned Doa Cornelia Laochangco for P4,000 and upon the following
conditions: First, the sale stipulated shall be for the period of two years, counting from
this date, within which time the deponent shall be entitled to repurchase the land sold
upon payment of its price; second, the lands sold shall, during the term of the present
contract, be held in lease by the undersigned who shall pay, as rental therefor, the sum
of 400 pesos per annum, or the equivalent in sugar at the option of the vendor; third, all
the fruits of the said lands shall be deposited in the sugar depository of the vendee,
situated in the district of Quiapo of this city, and the value of which shall be applied on
account of the price of this sale; fourth, the deponent acknowledges that he has
received from the vendor the purchase price of P4,000 already paid, and in legal tender
currency of this country . . .; fifth, all the taxes which may be assessed against the lands
surveyed by competent authority, shall be payable by and constitute a charge against
the vendor; sixth, if, through any unusual event, such as flood, tempest, etc., the
properties hereinbefore enumerated should be destroyed, wholly or in part, it shall be
incumbent upon the vendor to repair the damage thereto at his own expense and to put
them into a good state of cultivation, and should he fail to do so he binds himself to give
to the vendee other lands of the same area, quality and value.'
x x x x x x x x x
The opponent maintained, and his theory was accepted by the trial court, that
Berenguer's contract with Laochangco was not one of sale with right of repurchase, but
merely one of loan secured by those properties, and, consequently, that the ownership
of the lands in questions could not have been conveyed to Laochangco, inasmuch as it
continued to be held by Berenguer, as well as their possession, which he had not
ceased to enjoy.
Such a theory is, as argued by the appellant, erroneous. The instrument executed by
Macario Berenguer, the text of which has been transcribed in this decision, is very clear.
Berenguer's heirs may not go counter to the literal tenor of the obligation, the exact
expression of the consent of the contracting contained in the instrument, Exhibit C. Not
because the lands may have continued in possession of the vendor, not because the
latter may have assumed the payment of the taxes on such properties, nor yet because
the same party may have bound himself to substitute by another any one of the
properties which might be destroyed, does the contract cease to be what it is, as set
forth in detail in the public instrument. The vendor continued in the possession of the
lands, not as the owner thereof as before their sale, but as the lessee which he became
after its consummation, by virtue of a contract executed in his favor by the vendee in the
deed itself, Exhibit C. Right of ownership is not implied by the circumstance of the
lessee's assuming the responsibility of the payment is of the taxes on the property
leased, for their payment is not peculiarly incumbent upon the owner, nor is such right
implied by the obligation to substitute the thing sold for another while in his possession
under lease, since that obligation came from him and he continues under another
character in its possession-a reason why he guarantees its integrity and obligates
himself to return the thing even in a case of force majeure. Such liability, as a general
rule, is foreign to contracts of lease and, if required, is exorbitant, but possible and
lawful, if voluntarily agreed to and such agreement does not on this account involve any
sign of ownership, nor other meaning than the will to impose upon oneself scrupulous
diligence in the care of a thing belonging to another.
The purchase and sale, once consummated, is a contract which by its nature transfers
the ownership and other rights in the thing sold. A pacto de retro, or sale with right to
repurchase, is nothing but a personal right stipulated between the vendee and the
vendor, to the end that the latter may again acquire the ownership of the thing alienated.
lt is true, very true indeed, that the sale with right of repurchase is employed as a
method of loan; it is likewise true that in practice many cases occur where the
consummation of a pacto de retro sale means the financial ruin of a person; it is also,
unquestionable that in pacto de retro sales very important interests often intervene, in
the form of the price of the lease of the thing sold, which is stipulated as an additional
covenant. (Manresa, Civil Code, p. 274.)
But in the present case, unlike others heard by this court, there is no proof that the sale
with right of repurchase, made by Berenguer in favor of Laonchangco is rather a
mortgage to secure a loan.
We come now to a discussion of the second question presented above, and that is,
stating the same in another form: May a tenant charge his landlord with a violation of
the Usury Law upon the ground that the amount of rent he pays, based upon the real
value of the property, amounts to a usurious rate of interest? When the vendor of
property under a pacto de retro rents the property and agrees to pay a rental value for
the property during the period of his right to repurchase, he thereby becomes a "tenant"
and in all respects stands in the same relation with the purchaser as a tenant under any
other contract of lease.
The appellant contends that the rental price paid during the period of the existence of
the right to repurchase, or the sum of P375 per month, based upon the value of the
property, amounted to usury. Usury, generally speaking, may be defined as contracting
for or receiving something in excess of the amount allowed by law for the loan or
forbearance of money-the taking of more interest for the use of money than the law
allows. lt seems that the taking of interest for the loan of money, at least the taking of
excessive interest has been regarded with abhorrence from the earliest times. (Dunham
vs. Gould, l6 Johnson [N. Y.], 367.) During the middle ages the people of England, and
especially the English Church, entertained the opinion, then, current in Europe, that the
taking of any interest for the loan of money was a detestable vice, hateful to man and
contrary to the laws of God. (3 Coke's lnstitute, l50; Tayler on Usury, 44.)
Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "lf we look back upon
history, we shall find that there is scarcely any people, ancient or modern, that have not
had usury laws. . . . The Romans, through the greater part of their history, had the
deepest abhorrence of usury. . . . lt will be deemed a little singular, that the same voice
against usury should have been raised in the laws of China, in the Hindu institutes of
Menu, in the Koran of Mahomet, and perhaps, we may say, in the laws of all nations
that we know of, whether Greek or Barbarian."
The collection of a rate of interest higher than that allowed by law is condemned by the
Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is it unlawful for the owner
of a property to enter into a contract with the tenant for the payment of a specific
amount of rent for the use and occupation of said property, even though the amount
paid as "rent," based upon the value of the property, might exceed the rate of interest
allowed by law? That question has never been decided in this jurisdiction. lt is one of
first impression. No cases have been found in this jurisdiction answering that question.
Act No. 2655 is "An Act fixing rates of interest upon 'loans' and declaring the effect of
receiving or taking usurious rates."
lt will be noted that said statute imposes a penalty upon a "loan" or forbearance of any
money, goods, chattels or credits, etc. The central idea of said statute is to prohibit a
rate of interest on "loans." A contract of "loan," is very different contract from that of
"rent". A "loan," as that term is used in the statute, signifies the giving of a sum of
money, goods or credits to another, with a promise to repay, but not a promise to return
the same thing. To "loan," in general parlance, is to deliver to another for temporary use,
on condition that the thing or its equivalent be returned; or to deliver for temporary use
on condition that an equivalent in kind shall be returned with a compensation for its use.
The word "loan," however, as used in the statute, has a technical meaning. lt never
means the return of the same thing. lt means the return of an equivalent only, but never
the same thing loaned. A "loan" has been properly defined as an advance payment of
money, goods or credits upon a contract or stipulation to repay, not to return, the thing
loaned at some future day in accordance with the terms of the contract. Under the
contract of "loan," as used in said statute, the moment the contract is completed the
money, goods or chattels given cease to be the property of the former owner and
becomes the property of the obligor to be used according to his own will, unless the
contract itself expressly provides for a special or specific use of the same. At all events,
the money, goods or chattels, the moment the contract is executed, cease to be the
property of the former owner and becomes the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." ln a contract of "rent" the
owner of the property does not lose his ownership. He simply loses his control over the
property rented during the period of the contract. ln a contract of "loan" the thing loaned
becomes the property of the obligor. ln a contract of "rent" the thing still remains the
property of the lessor. He simply loses control of the same in a limited way during the
period of the contract of "rent" or lease. ln a contract of "rent" the relation between the
contractors is that of landlord and tenant. ln a contract of "loan" of money, goods,
chattels or credits, the relation between the parties is that of obligor and obligee. "Rent"
may be defined as the compensation either in money, provisions, chattels, or labor,
received by the owner of the soil from the occupant thereof. lt is defined as the return or
compensation for the possession of some corporeal inheritance, and is a profit issuing
out of lands or tenements, in return for their use. lt is that, which is to paid for the use of
land, whether in money, labor or other thing agreed upon. A contract of "rent" is a
contract by which one of the parties delivers to the other some nonconsumable thing, in
order that the latter may use it during a certain period and return it to the former;
whereas a contract of "loan", as that word is used in the statute, signifies the delivery of
money or other consumable things upon condition of returning an equivalent amount of
the same kind or quantity, in which cases it is called merely a "loan." ln the case of a
contract of "rent," under the civil law, it is called a "commodatum."
From the foregoing it will be seen that there is a while distinction between a contract of
"loan," as that word is used in the statute, and a contract of "rent" even though those
words are used in ordinary parlance as interchangeable terms.
The value of money, goods or credits is easily ascertained while the amount of rent to
be paid for the use and occupation of the property may depend upon a thousand
different conditions; as for example, farm lands of exactly equal productive capacity and
of the same physical value may have a different rental value, depending upon location,
prices of commodities, proximity to the market, etc. Houses may have a different rental
value due to location, conditions of business, general prosperity or depression,
adaptability to particular purposes, even though they have exactly the same original
cost. A store on the Escolta, in the center of business, constructed exactly like a store
located outside of the business center, will have a much higher rental value than the
other. Two places of business located in different sections of the city may be
constructed exactly on the same architectural plan and yet one, due to particular
location or adaptability to a particular business which the lessor desires to conduct, may
have a very much higher rental value than one not so located and not so well adapted
to the particular business. A very cheap building on the carnival ground may rent for
more money, due to the particular circumstances and surroundings, than a much more
valuable property located elsewhere. lt will thus be seen that the rent to be paid for the
use and occupation of property is not necessarily fixed upon the value of the property.
The amount of rent is fixed, based upon a thousand different conditions and may or may
not have any direct reference to the value of the property rented. To hold that "usury"
can be based upon the comparative actual rental value and the actual value of the
property, is to subject every landlord to an annoyance not contemplated by the law, and
would create a very great disturbance in every business or rural community. We cannot
bring ourselves to believe that the Legislature contemplated any such disturbance in the
equilibrium of the business of the country.
ln the present case the property in question was sold. lt was an absolute sale with the
right only to repurchase. During the period of redemption the purchaser was the
absolute owner of the property. During the period of redemption the vendor was not the
owner of the property. During the period of redemption the vendor was a tenant of the
purchaser. During the period of redemption the relation which existed between the
vendor and the vendee was that of landlord and tenant. That relation can only be
terminated by a repurchase of the property by the vendor in accordance with the terms
of the said contract. The contract was one of rent. The contract was not a loan, as that
word is used in Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the courts have no
right to make contracts for parties. They made their own contract in the present case.
There is not a word, a phrase, a sentence or paragraph, which in the slightest way
indicates that the parties to the contract in question did not intend to sell the property in
question absolutely, simply with the right to repurchase. People who make their own
beds must lie thereon.
What has been said above with reference to the right to modify contracts by parol
evidence, sufficiently answers the third questions presented above. The language of the
contract is explicit, clear, unambiguous and beyond question. lt expresses the exact
intention of the parties at the time it was made. There is not a word, a phrase, a
sentence or paragraph found in said contract which needs explanation. The parties
thereto entered into said contract with the full understanding of its terms and should not
now be permitted to change or modify it by parol evidence.
With reference to the improvements made upon said property by the plaintiffs during the
life of the contract, Exhibit C, there is hereby reserved to the plaintiffs the right to
exercise in a separate action the right guaranteed to them under article 36l of the Civil
Code.
For all of the foregoing reasons, we are fully persuaded from the facts of the record, in
relation with the law applicable thereto, that the judgment appealed from should be and
is hereby affirmed, with costs. So ordered.
CARMEN LlWANAG, petitioner, vs. THE HON. COURT OF APPEALS and THE
PEOPLE OF THE PHlLlPPlNES, represented by the Solicitor General, respondents.
D E C l S l O N
ROMERO, J.:
Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC),
Branch 93, Quezon City, in an information which reads as follows:
"That on or between the month of May l9, l988 and August, l988 in Quezon City,
Philippines and within the jurisdiction of this Honorable Court, the said accused, with
intent of gain, with unfaithfulness, and abuse of confidence, did then and there, willfully,
unlawfully and feloniously defraud one lSlDORA ROSALES, in the following manner, to
wit: on the date and in the place aforementioned, said accused received in trust from
the offended party cash money amounting to P536,650.00, Philippine Currency, with the
express obligation involving the duty to act as complainant's agent in purchasing local
cigarettes (Philip Morris and Marlboro cigarettes), to resell them to several stores, to
give her commission corresponding to 40% of the profits; and to return the aforesaid
amount of offended party, but said accused, far from complying her aforesaid obligation,
and once in possession thereof, misapplied, misappropriated and converted the same
to her personal use and benefit, despite repeated demands made upon her, accused
failed and refused and still fails and refuses to deliver and/or return the same to the
damage and prejudice of the said lSlDORA ROSALES, in the aforementioned amount
and in such other amount as may be awarded under the provision of the Civil Code.
CONTRARY TO LAW."
The antecedent facts are as follows:
Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the house
of complainant lsidora Rosales (Rosales) and asked her to join them in the business of
buying and selling cigarettes. Convinced of the feasibility of the venture, Rosales
readily agreed. Under their agreement, Rosales would give the money needed to buy
the cigarettes while Liwanag and Tabligan would act as her agents, with a
corresponding 40% commission to her if the goods are sold; otherwise the money would
be returned to Rosales. Consequently, Rosales gave several cash advances to
Liwanag and Tabligan amounting to P633,650.00.
During the first two months, Liwanag and Tabligan made periodic visits to Rosales to
report on the progress of the transactions. The visits, however, suddenly stopped, and
all efforts by Rosales to obtain information regarding their business proved futile.
Alarmed by this development and believing that the amounts she advanced were being
misappropriated, Rosales filed a case of estafa against Liwanag.
After trial on the merits, the trial court rendered a decision dated January 9, l99l,
finding Liwanag guilty as charged. The dispositive portion of the decision reads thus:
"WHEREFORE, the Court holds, that the prosecution has established the guilt of the
accused, beyond reasonable doubt, and therefore, imposes upon the accused, Carmen
Liwanag, an lndeterminate Penalty of SlX (6) YEARS, ElGHT (8) MONTHS AND
TWENTY ONE (2l) DAYS OF PRlSlON CORRECClONAL TO FOURTEEN (l4)
YEARS AND ElGHT (8) MONTHS OF PRlSlON MAYOR AS MAXlMUM, AND TO PAY
THE COSTS.
The accused is likewise ordered to reimburse the private complainant the sum of
P526,650.00, without subsidiary imprisonment, in case of insolvency.
SO ORDERED."
Said decision was affirmed with modification by the Court of Appeals in a decision dated
November 29, l993, the decretal portion of which reads:
"WHEREFORE, in view of the foregoing, the judgment appealed from is hereby affirmed
with the correction of the nomenclature of the penalty which should be: SlX (6) YEARS,
ElGHT (8) MONTHS and TWENTY ONE (2l) DAYS of prision mayor, as minimum, to
FOURTEEN (l4) YEARS and ElGHT (8) MONTHS of reclusion temporal, as maximum.
ln all other respects, the decision is AFFlRMED.
SO ORDERED."
Her motion for reconsideration having been denied in the resolution of March l6, l994,
Liwanag filed the instant petition, submitting the following assignment of errors:
"l. RESPONDENT APPELLATE COURT GRAVELY ERRED lN AFFlRMlNG THE
CONVlCTlON OF THE ACCUSED-PETlTlONER FOR THE CRlME OF ESTAFA,
WHEN CLEARLY THE CONTRACT THAT EXlST (sic) BETWEEN THE ACCUSED-
PETlTlONER AND COMPLAlNANT lS ElTHER THAT OF A SlMPLE LOAN OR THAT
OF A PARTNERSHlP OR JOlNT VENTURE HENCE THE NON RETURN OF THE
MONEY OF THE COMPLAlNANT lS PURELY ClVlL lN NATURE AND NOT
CRlMlNAL.
2. RESPONDENT APPELLATE COURT GRAVELY ERRED lN NOT ACQUlTTlNG
THE ACCUSED-PETlTlONER ON GROUNDS OF REASONABLE DOUBT BY
APPLYlNG THE 'EQUlPOlSE RULE'."
Liwanag advances the theory that the intention of the parties was to enter into a
contract of partnership, wherein Rosales would contribute the funds while she would
buy and sell the cigarettes, and later divide the profits between them.[l] She also
argues that the transaction can also be interpreted as a simple loan, with Rosales
lending to her the amount stated on an installment basis.[2]
The Court of Appeals correctly rejected these pretenses.
While factual findings of the Court of Appeals are conclusive on the parties and not
reviewable by the Supreme Court, and carry more weight when these affirm the factual
findings of the trial court,[3] we deem it more expedient to resolve the instant petition on
its merits.
Estafa is a crime committed by a person who defrauds another causing him to suffer
damages, by means of unfaithfulness or abuse of confidence, or of false pretenses of
fraudulent acts.[4]
From the foregoing, the elements of estafa are present, as follows: (l) that the accused
defrauded another by abuse of confidence or deceit; and (2) that damage or prejudice
capable of pecuniary estimation is caused to the offended party or third party,[5] and it
is essential that there be a fiduciary relation between them either in the form of a trust,
commission or administration.[6]
The receipt signed by Liwanag states thus:
"May l9, l988 Quezon City
Received from Mrs. lsidora P. Rosales the sum of FlVE HUNDRED TWENTY SlX
THOUSAND AND SlX HUNDRED FlFTY PESOS (P526,650.00) Philippine Currency, to
purchase cigarrets (sic) (Philip & Marlboro) to be sold to customers. ln the event the
said cigarrets (sic) are not sold, the proceeds of the sale or the said products (shall) be
returned to said Mrs. lsidora P. Rosales the said amount of P526,650.00 or the said
items on or before August 30, l988.
(SGD & Thumbedmarked) (sic)
CARMEN LlWANAG
26 H. Kaliraya St.
Quezon City
Signed in the presence of:
(Sgd) lllegible (Sgd) Doming Z. Baligad"
The language of the receipt could not be any clearer. lt indicates that the money
delivered to Liwanag was for a specific purpose, that is, for the purchase of cigarettes,
and in the event the cigarettes cannot be sold, the money must be returned to Rosales.
Thus, even assuming that a contract of partnership was indeed entered into by and
between the parties, we have ruled that when money or property have been received by
a partner for a specific purpose (such as that obtaining in the instant case) and he later
misappropriated it, such partner is guilty of estafa.[7]
Neither can the transaction be considered a loan, since in a contract of loan once the
money is received by the debtor, ownership over the same is transferred.[8] Being the
owner, the borrower can dispose of it for whatever purpose he may deem proper.
ln the instant petition, however, it is evident that Liwanag could not dispose of the
money as she pleased because it was only delivered to her for a single purpose,
namely, for the purchase of cigarettes, and if this was not possible then to return the
money to Rosales. Since in this case there was no transfer of ownership of the money
delivered, Liwanag is liable for conversion under Art. 3l5, par. l(b) of the Revised Penal
Code.
WHEREFORE, in view of the foregoing, the appealed decision of the Court of Appeals
dated November 29, l993, is AFFlRMED. Costs against petitioner.
SO ORDERED.
SAURA lMPORT and EXPORT CO., lNC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHlLlPPlNES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-
appellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.

MAKALlNTAL, J.:p
ln Civil Case No. 55908 of the Court of First lnstance of Manila, judgment was rendered
on June 28, l965 sentencing defendant Development Bank of the Philippines (DBP) to
pay actual and consequential damages to plaintiff Saura lmport and Export Co., lnc. in
the amount of P383,343.68, plus interest at the legal rate from the date the complaint
was filed and attorney's fees in the amount of P5,000.00. The present appeal is from
that judgment.
ln July l953 the plaintiff (hereinafter referred to as Saura, lnc.) applied to the
Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an
industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction
of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance
of the purchase price of the jute mill machinery and equipment; and P9,l00.00 as
additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been
purchased by Saura on the strength of a letter of credit extended by the Prudential Bank
and Trust Co., and arrived in Davao City in July l953; and that to secure its release
without first paying the draft, Saura, lnc. executed a trust receipt in favor of the said
bank.
On January 7, l954 RFC passed Resolution No. l45 approving the loan application for
P500,000.00, to be secured by a first mortgage on the factory building to be
constructed, the land site thereof, and the machinery and equipment to be installed.
Among the other terms spelled out in the resolution were the following:
l. That the proceeds of the loan shall be utilized exclusively for the following
purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,l00.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, lnocencia Arellano, Aniceto Caolboy and
Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly with
the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance
Corporation, subject to availability of funds, and as the construction of the factory
buildings progresses, to be certified to by an appraiser of this Corporation;"
Saura, lnc. was officially notified of the resolution on January 9, l954. The day before,
however, evidently having otherwise been informed of its approval, Saura, lnc. wrote a
letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu
of having China Engineers, Ltd. (which was willing to assume liability only to the extent
of its stock subscription with Saura, lnc.) sign as co-maker on the corresponding
promissory notes, Saura, lnc. would put up a bond for Pl23,500.00, an amount
equivalent to such subscription; and that Maria S. Roca would be substituted for
lnocencia Arellano as one of the other co-makers, having acquired the latter's shares in
Saura, lnc.
ln view of such request RFC approved Resolution No. 736 on February 4, l954,
designating of the members of its Board of Governors, for certain reasons stated in the
resolution, "to reexamine all the aspects of this approved loan ... with special reference
as to the advisability of financing this particular project based on present conditions
obtaining in the operations of jute mills, and to submit his findings thereon at the next
meeting of the Board."
On March 24, l954 Saura, lnc. wrote RFC that China Engineers, Ltd. had again agreed
to act as co-signer for the loan, and asked that the necessary documents be prepared in
accordance with the terms and conditions specified in Resolution No. l45. ln connection
with the reexamination of the project to be financed with the loan applied for, as stated
in Resolution No. 736, the parties named their respective committees of engineers and
technical men to meet with each other and undertake the necessary studies, although in
appointing its own committee Saura, lnc. made the observation that the same "should
not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the
agreement already) entered into," referring to its acceptance of the terms and conditions
mentioned in Resolution No. l45.
On April l3, l954 the loan documents were executed: the promissory note, with F.R.
Halling, representing China Engineers, Ltd., as one of the co-signers; and the
corresponding deed of mortgage, which was duly registered on the following April l7.
lt appears, however, that despite the formal execution of the loan agreement the
reexamination contemplated in Resolution No. 736 proceeded. ln a meeting of the RFC
Board of Governors on June l0, l954, at which Ramon Saura, President of Saura, lnc.,
was present, it was decided to reduce the loan from P500,000.00 to P300,000.00.
Resolution No. 3989 was approved as follows:
RESOLUTlON No. 3989. Reducing the Loan Granted Saura lmport & Export Co., lnc.
under Resolution No. l45, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd.
Res. No. 736, c.s., authorizing the re-examination of all the various aspects of the loan
granted the Saura lmport & Export Co. under Resolution No. l45, c.s., for the purpose
of financing the manufacture of jute sacks in Davao, with special reference as to the
advisability of financing this particular project based on present conditions obtaining in
the operation of jute mills, and after having heard Ramon E. Saura and after extensive
discussion on the subject the Board, upon recommendation of the Chairman,
RESOLVED that the loan granted the Saura lmport & Export Co. be REDUCED from
P500,000 to P300,000 and that releases up to Pl00,000 may be authorized as may be
necessary from time to time to place the factory in actual operation: PROVlDED that all
terms and conditions of Resolution No. l45, c.s., not inconsistent herewith, shall remain
in full force and effect."
On June l9, l954 another hitch developed. F.R. Halling, who had signed the
promissory note for China Engineers Ltd. jointly and severally with the other RFC that
his company no longer to of the loan and therefore considered the same as cancelled
as far as it was concerned. A follow-up letter dated July 2 requested RFC that the
registration of the mortgage be withdrawn.
ln the meantime Saura, lnc. had written RFC requesting that the loan of P500,000.00 be
granted. The request was denied by RFC, which added in its letter-reply that it was
"constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification
... from the China Engineers Ltd., expressing their desire to consider the loan insofar as
they are concerned."
On July 24, l954 Saura, lnc. took exception to the cancellation of the loan and informed
RFC that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of
the note if RFC releases to us the P500,000.00 originally approved by you.".
On December l7, l954 RFC passed Resolution No. 9083, restoring the loan to the
original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing
to sign the promissory notes jointly with the borrower-corporation," but with the following
proviso:
That in view of observations made of the shortage and high cost of imported raw
materials, the Department of Agriculture and Natural Resources shall certify to the
following:
l. That the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for
the requirements of the factory."
The action thus taken was communicated to Saura, lnc. in a letter of RFC dated
December 22, l954, wherein it was explained that the certification by the Department of
Agriculture and Natural Resources was required "as the intention of the original
approval (of the loan) is to develop the manufacture of sacks on the basis of locally
available raw materials." This point is important, and sheds light on the subsequent
actuations of the parties. Saura, lnc. does not deny that the factory he was building in
Davao was for the manufacture of bags from local raw materials. The cover page of its
brochure (Exh. M) describes the project as a "Joint venture by and between the
Mindanao lndustry Corporation and the Saura lmport and Export Co., lnc. to finance,
manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners,
floor mattings, carpets, draperies; out of l00% local raw materials, principal kenaf." The
explanatory note on page l of the same brochure states that, the venture "is the first
serious attempt in this country to use l00% locally grown raw materials notably kenaf
which is presently grown commercially in thelsland of Mindanao where the proposed
jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan
application in the first place, and to require, in its Resolution No. 9083, a certification
from the Department of Agriculture and Natural Resources as to the availability of local
raw materials to provide adequately for the requirements of the factory. Saura, lnc. itself
confirmed the defendant's stand impliedly in its letter of January 2l, l955: (l) stating
that according to a special study made by the Bureau of Forestry "kenaf will not be
available in sufficient quantity this year or probably even next year;" (2) requesting
"assurances (from RFC) that my company and associates will be able to bring in
sufficient jute materials as may be necessary for the full operation of the jute mill;" and
(3) asking that releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equip-
ment per attached list to enable the jute
mill to operate l82,4l3.9l
c) For raw materials and labor 67,586.09
l) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) Pl7,586.09 to be released as soon as the
mill is ready to operate.
On January 25, l955 RFC sent to Saura, lnc. the following reply:
Dear Sirs:
This is with reference to your letter of January 2l, l955, regarding the release of your
loan under consideration of P500,000. As stated in our letter of December 22, l954, the
releases of the loan, if revived, are proposed to be made from time to time, subject to
availability of funds towards the end that the sack factory shall be placed in actual
operating status. We shall be able to act on your request for revised purpose and
manner of releases upon re-appraisal of the securities offered for the loan.
With respect to our requirement that the Department of Agriculture and Natural
Resources certify that the raw materials needed are available in the immediate vicinity
and that there is prospect of increased production thereof to provide adequately the
requirements of the factory, we wish to reiterate that the basis of the original approval is
to develop the manufacture of sacks on the basis of the locally available raw materials.
Your statement that you will have to rely on the importation of jute and your request that
we give you assurance that your company will be able to bring in sufficient jute
materials as may be necessary for the operation of your factory, would not be in line
with our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, lnc. did not pursue
the matter further. lnstead, it requested RFC to cancel the mortgage, and so, on June
l7, l955 RFC executed the corresponding deed of cancellation and delivered it to
Ramon F. Saura himself as president of Saura, lnc.
lt appears that the cancellation was requested to make way for the registration of a
mortgage contract, executed on August 6, l954, over the same property in favor of the
Prudential Bank and Trust Co., under which contract Saura, lnc. had up to December
3l of the same year within which to pay its obligation on the trust receipt heretofore
mentioned. lt appears further that for failure to pay the said obligation the Prudential
Bank and Trust Co. sued Saura, lnc. on May l5, l955.
On January 9, l964, ahnost 9 years after the mortgage in favor of RFC was cancelled
at the request of Saura, lnc., the latter commenced the present suit for damages,
alleging failure of RFC (as predecessor of the defendant DBP) to comply with its
obligation to release the proceeds of the loan applied for and approved, thereby
preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected
contract between the parties and that the defendant was guilty of breach thereof. The
defendant pleaded below, and reiterates in this appeal: (l) that the plaintiff's cause of
action had prescribed, or that its claim had been waived or abandoned; (2) that there
was no perfected contract; and (3) that assuming there was, the plaintiff itself did not
comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article
l934 of the Civil Code, which provides:
ART. l954. An accepted promise to deliver something, by way of commodatum or
simple loan is binding upon the parties, but the commodatum or simple loan itself shall
not be perferted until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, lnc.
for a loan of P500,000.00 was approved by resolution of the defendant, and the
corresponding mortgage was executed and registered. But this fact alone falls short of
resolving the basic claim that the defendant failed to fulfill its obligation and the plaintiff
is therefore entitled to recover damages.
lt should be noted that RFC entertained the loan application of Saura, lnc. on the
assumption that the factory to be constructed would utilize locally grown raw materials,
principally kenaf. There is no serious dispute about this. lt was in line with such
assumption that when RFC, by Resolution No. 9083 approved on December l7, l954,
restored the loan to the original amount of P500,000.00. it imposed two conditions, to
wit: "(l) that the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and (2) that there is prospect of
increased production thereof to provide adequately for the requirements of the factory."
The imposition of those conditions was by no means a deviation from the terms of the
agreement, but rather a step in its implementation. There was nothing in said conditions
that contradicted the terms laid down in RFC Resolution No. l45, passed on January 7,
l954, namely "that the proceeds of the loan shall be utilized exclusively for the
following purposes: for construction of factory building P250,000.00; for payment of
the balance of purchase price of machinery and equipment P240,900.00; for working
capital P9,l00.00." Evidently Saura, lnc. realized that it could not meet the conditions
required by RFC, and so wrote its letter of January 2l, l955, stating that local jute "will
not be able in sufficient quantity this year or probably next year," and asking that out of
the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor."
This was a deviation from the terms laid down in Resolution No. l45 and embodied in
the mortgage contract, implying as it did a diversion of part of the proceeds of the loan
to purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, l955 the negotiations
which had been going on for the implementation of the agreement reached an impasse.
Saura, lnc. obviously was in no position to comply with RFC's conditions. So instead of
doing so and insisting that the loan be released as agreed upon, Saura, lnc. asked that
the mortgage be cancelled, which was done on June l5, l955. The action thus taken by
both parties was in the nature cf mutual desistance what Manresa terms "mutuo
disenso" l which is a mode of extinguishing obligations. lt is a concept that derives
from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment. 2
The subsequent conduct of Saura, lnc. confirms this desistance. lt did not protest
against any alleged breach of contract by RFC, or even point out that the latter's stand
was legally unjustified. lts request for cancellation of the mortgage carried no
reservation of whatever rights it believed it might have against RFC for the latter's non-
compliance. ln l962 it even applied with DBP for another loan to finance a rice and corn
project, which application was disapproved. lt was only in l964, nine years after the
loan agreement had been cancelled at its own request, that Saura, lnc. brought this
action for damages.All these circumstances demonstrate beyond doubt that the said
agreement had been extinguished by mutual desistance and that on the initiative of
the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the
other issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed,
with costs against the plaintiff-appellee.
CRlSTOBAL ROO, petitioner,
vs.
JOSE L. GOMEZ, ET AL., respondents.
Alfonso Farcon for petitioner.
Capistrano & Azores for respondents.
BENGZON, J.:
This petition to review a decision of the Court of Appeals was admitted mainly because
it involves one phase of the vital contemporary question: the repayment of loans given
in Japanese fiat currency during the last war of the Pacific.
On October 5, l944, Cristobal Roo received as a loan four thousand pesos in
Japanese fiat money from Jose L. Gomez. He informed the later that he would use the
money to purchase a jitney; and he agreed to pay that debt one year after date in the
currency then prevailing. He signed a promissory note of the following tenor:
For value received, l promise to pay one year after date the sum of four thousand pesos
(4,000) to Jose L. Gomez. lt is agreed that this will not earn any interest and the
payment lt is agreed that this will not earn any interest and the payment prevailing by
the end of the stipulated period of one year.
ln consideration of this generous loan, l renounce any right that may come to me by
reason of any postwar arrangement, of privilege that may come to me by legislation
wherein this sum may be devalued. l renounce flatly and absolutely any condition, term
right or privilege which in any way will prejudice the right engendered by this agreement
wherein Atty. Jose L. Gomez will receive by right his money in the amount of P4,000. l
affirm the legal tender, currency or any medium of exchange, or money in this sum of
P4,000 will be paid by me to Jose L. Gomez one year after this date, October 5, l944.
On October l5, l945, i.e., after the liberation, Roo was sued for payment in the
Laguna Court of First lnstance. His main defense was his liability should not exceed the
equivalent of 4,000 pesos "mickey mouse" money and could not be 4,000 pesos
Philippine currency, because the contract would be void as contrary to law, public order
and good morals.
After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge, ordered
the defendant Roo to pay four thousand pesos in Philippine currency with legal interest
from the presentation of the complaint plus costs.
On appeal the Court of Appeals in a decision written by Mr. Justice Jugo, affirmed the
judgment with costs. lt declared being a mechanic who knew English was not deceived
into signing the promissory note, and that the contents of the same had not been
misrepresented to him. lt pronounced the contract valid and enforceable according to its
terms and conditions.
One basic principle of the law on contracts of the Civil Code is that "the contracting
parties may establish any pacts, clauses and conditions they may deem advisable,
provided they are not contrary to law, morals or public order." (Article l255.) Another
principle is that "obligations arising from contracts shall have the force of law between
the contracting parties and must be performed in accordance with their stipulations"
(Article l09l).
lnvoking the above proviso, Roo asserts this contract is contrary to the Usury law,
because on the basis of calculations by Government experts he only received the
equivalent of one hundred Philippine pesos and now he is required to disgorge four
thousand pesos or interest greatly in excess of the lawful rates.
But he is not paying interest. Precisely the contract says that the money received "will
not earn any interest." Furthermore, he received four thousand pesos; and he is
required to pay four thousand pesos exactly. The increased intrinsic value and
purchasing power of the current money is consequence of an event (change of
currency) which at the time of the contract neither party knew would certainly happen
within the period of one year. They both elected to subject their rights and obligations to
that contingency. lf within one year another kind of currency became legal tender,
Gomez would probably get more for his money. lf the same Japanese currency
continued, he would get less, the value of Japanese money being then on the
downgrade.
Our legislation has a word for these contracts: aleatory. The Civil Code recognizes their
validity (see art. l790 and Manresa's comment thereon) on a par with insurance policies
and life annuities.
The eventual gain of Gomez in this transaction is not interest within the meaning of
Usury Laws. lnterest is some additional money to be paid in any event, which is not the
case herein, because Gomez might have gotten less if the Japanese occupation had
extended to the end of l945 or if the liberation forces had chosen to permit the
circulation of the Japanese notes.
Moreover, Roo argues, the deal was immoral because taking advantage of his
superior knowledge of war developments Gomez imposed on him this onerous
obligation. ln the first place, the Court of Appeals found that he voluntary agreed to sign
and signed the document without having been misled as to its contents and "in so far as
knowledge of war events was concerned" both parties were on "equal footing". ln the
second place although on October 5, l944 it was possible to surmise the impending
American invasion, the date of victory or liberation was anybody's guess. ln the third
place there was the possibility that upon-re-occupation the Philippine Government
would not invalidate the Japanese currency, which after all had been forced upon the
people in exchange for valuable goods and property. The odds were about even when
Roo and Gomez played their bargaining game. There was no overreaching, nor unfair
advantage.
Again Roo alleges it is immoral and against public order for a man to obtain four
thousand pesos in return for an investment of forty pesos (his estimate of the value of
the Japanese money he borrowed). According to his line of reasoning it would be
immoral for the homeowner to recover ten thousand pesos (Pl0,000, when his house is
burned, because he invested only about one hundred pesos for the insurance policy.
And when the holder of a sweepstakes ticket who paid only four pesos luckily obtains
the first prize of one hundred thousand pesos or over, the whole business is immoral or
against public order.
ln this connection we should explain that this decision does not cover situations where
borrowers of Japanese fiat currency promised to repay "the same amount" or promised
to return the same number of pesos "in Philippines currency" or "in the currency
prevailing after the war." There may be room for argument when those litigations come
up for adjudication. All we say here and now is that the contract in question is legal and
obligatory.
A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez. We
opine with the Court of Appeals that the matter involve a defect in procedure which does
not amount to prejudicial error.
Wherefore, the appealed judgment will be affirmed with costs. So ordered
Today is Monday, November 25, 20l3

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-l328 September 9, l949
MARlANO NEPOMUCENO and AGUEDA G. DE NEPOMUCENO, plaintiffs-appellants,
vs.
EDlLBERTO A. NARClSO and MAURA SUAREZ, defendants-appellees.
Higinio Gopez for appellants.
Fausto, Solima and Gotiangco for appellees.
OZAETA, J.:
On November l4, l938, appellant Mariano Nepomuceno executed a mortgage in favor
of the appellees on a parcel of land situated in the municipality of Angeles, Province of
Pampanga, to secure the payment within the period of seven years from the date of the
mortgage of the sum of P24,000 together with interest thereon at the rate of 8 per cent
per annum.
On September 30, l943, that is to say, more than two years before the maturity of said
mortgage, the parties executed a notarial document entitled "Partial Novation of
Contract" whereby they modified the terms of said mortgage as follows:
(l) From December 8, l94l, to January l, l944, the interest on the mortgage shall
be at 6 per cent per annum, unpaid interest also paying interest also paying interest at
the same rate.
(2) From January l, l944, up to the end of the war, the mortgage debt shall likewise
bear interest at 6 per cent. Unpaid interest during this period shall however not bear any
interest.
(3) At the end of the war the interest shall again become 8 per cent in accordance
with the original contract of mortgage.
(4) While the war goes on, the mortgagor, his administrators or assigns, cannot
redeem the property mortgaged.
(5) When the mortgage lapses on November l4, l945, the mortgage may continue
for another ten years if the mortgagor so chooses, but during this period he may pay
only one half of the capital.
On July 2l, l944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de
Nepomuceno filed their complaint in this case against the mortgagees, which
compplaint, as amended on September 7, l944, alleged the execution of the contract of
mortgage and its principal novation as above indicated, and
7. That as per Annex B, No. 4, it is provided that the mortgagor cannot redeem the
property mortgaged while the war goes on; and that notwithstanding the said provision
the herein plaintiffs-mortgagors are now willing to pay the amount of the indebtedness
together with the corresponding interest due thereon;
8. That on July l9, l944, the mortgagors-plaintiffs went to the house of the
mortgagees-defendants to tender payment of the balance of the mortgage debt with
their corresponding interest, but said spouses defendants refuse and still refuse to
accept payment;
9. That because of this refusal of the defendants to accept tender of payment on
the mortgage consideration, the plaintiffs suffered and still suffer damages in the
amount of P5,000;
l0. That the plaintiffs are now and have deposited with the Clerk of Court of First
lnstance of Pampanga the amount of P22,356 for the payment of the mortgage debt
and the interest due thereon;
Wherefore, it is more respectfully prayed that this Honorable Court will issue an order in
the following tenor:
(a) Ordering the defendants to accept tender of payment from the plaintiffs;
(b) Ordering defendants to execute the corresponding deed of release of mortgage;
(c) Ordering defendants to pay damages in the amount of P5,000; and
(d) Ordering defendants to pay the amount of P3,000 as attorney's fee and the costs
of suit and any other remedy just and equitable in the premises.
After the trial the court sustained the defense that the complaint had been prematurely
presented and dismissed it with costs.
Appellants contend that the stipulation in the contract of September 30, l943, that
"while the war goes on the mortgagor, his administrators or assigns cannot redeem the
property mortgaged," is against public policy and therefore null and void. They cite and
rely on article l255 of the Civil Code, which provides:
ART. l255. The contracting parties may establish any pacts, clauses, and
conditions they may deem advisable, provided they are not contrary to law, morals, or
public order.
They argue that "it would certainly be against public policy and a restraint on the
freedom of commerce to compel a debtor not to release his property from a lien even
if he wanted to by the payment of the indebtedness while the war goes on, which
was undoubtedly of a very uncertain duration."
The first two paragraphs of article ll25 of the Civil Code provide:
ART. ll25. Obligation for the performance of which a day certain has been fixed
shall be demandable only when the day arrives.
A day certain is understood to be one which must necessarily arrive, even though its
date be unknown.
Article ll27 says:
ART. ll27. Whenever a term for the performance of an obligation is fixed, it is
presumed to have been established for the benefit of the creditor and that of the debtor,
unless from its tenor or from other circumstances it should appear that the term was
established for the benefit of one or the other.
lt will be noted that the original contract of mortgage provided for interest at 8 per cent
per annum and that the principal together with the interest was payable within the period
of seven years from November l4, l938. But by mutual agreement of the parties that
term was modified on September 30, l943, by reducing the interest to 6 per cent per
annum from December 8, l94l, until the end of the war and by stipulating that the
mortgagor shall not pay off the mortgage while the war went on.
We find nothing immoral or violative of public order in that stipulation. The mortgagees
apparently did not want to have their prewar credit paid with Japanese military notes,
and the mortgagor voluntarily agreed not to do so in consideration of the reduction of
the rate of interest.
lt was a perfectly equitable and valid transaction, in conformity with the provision of the
Civil Code hereinabove quoted.
Appellants were bound by said contract and appellees were not obligated to receive the
payment before it was due. Hence the latter had reason not to accept the tender of
payment made to them by the former.
The judgment is affirmed, with costs against the appellants.
EQUlTABLE PCl BANK, G.R. No. l7l545
AlMEE YU and BEJAN
LlONEL APAS,
Petitioners, Present:

PUNO, C.J., Chairperson,
- v e r s u s - SANDOVAL-GUTlERREZ,
CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.

NG SHEUNG NGOR doing
business under the name
and style "KEN MARKETlNG," Promulgated:
KEN APPLlANCE DlVlSlON,
lNC. and BENJAMlN E. GO,
Respondents. December l9, 2007


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

D E C l S l O N

CORONA, J.:


This petition for review on certiorari[l] seeks to set aside the decision[2] of the
Court of Appeals (CA) in CA-G.R. SP No. 83ll2 and its resolution[3] denying
reconsideration.

On October 7, 200l, respondents Ng Sheung Ngor,[4] Ken Appliance Division, lnc. and
Benjamin E. Go filed an action for annulment and/or reformation of documents and
contracts[5] against petitioner Equitable PCl Bank (Equitable) and its employees, Aimee
Yu and Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch l6 of Cebu City.[6]
They claimed that Equitable induced them to avail of its peso and dollar credit facilities
by offering low interest rates[7] so they accepted Equitable's proposal and signed the
bank's pre-printed promissory notes on various dates beginning l996. They, however,
were unaware that the documents contained identical escalation clauses granting
Equitable authority to increase interest rates without their consent.[8]

Equitable, in its answer, asserted that respondents knowingly accepted all the
terms and conditions contained in the promissory notes.[9] ln fact, they continuously
availed of and benefited from Equitable's credit facilities for five years.[l0]

After trial, the RTC upheld the validity of the promissory notes. lt found that, in
200l alone, Equitable restructured respondents' loans amounting to US$228,200 and
Pl,000,000.[ll] The trial court, however, invalidated the escalation clause contained
therein because it violated the principle of mutuality of contracts.[l2] Nevertheless, it
took judicial notice of the steep depreciation of the peso during the intervening
period[l3] and declared the existence of extraordinary deflation.[l4] Consequently, the
RTC ordered the use of the l996 dollar exchange rate in computing respondents' dollar-
denominated loans.[l5] Lastly, because the business reputation of respondents was
(allegedly) severely damaged when Equitable froze their accounts,[l6] the trial court
awarded moral and exemplary damages to them.[l7]

The dispositive portion of the February 5, 2004 RTC decision[l8] provided:
WHEREFORE, premises considered, judgment is hereby rendered:

A) Ordering [Equitable] to reinstate and return the amount of [respondents'] deposit
placed on hold status;

B) Ordering [Equitable] to pay [respondents] the sum of Pl2 [m]illion [p]esos as moral
damages;

C) Ordering [Equitable] to pay [respondents] the sum of Pl0 [m]illion [p]esos as
exemplary damages;

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay [respondents],
jointly and severally, the sum of [t]wo [m]illion [p]esos as moral and exemplary
damages;

E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and severally, to
pay [respondents'] attorney's fees in the sum of P300,000; litigation expenses in the
sum of P50,000 and the cost of suit;

F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable] the
unpaid principal obligation for the peso loan as well as the unpaid obligation for the
dollar denominated loan;

G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable] interest as
follows:

l) l2% per annum for the peso loans;

2) 8% per annum for the dollar loans. The basis for the payment of the dollar
obligation is the conversion rate of P26.50 per dollar availed of at the time of incurring of
the obligation in accordance with Article l250 of the Civil Code of the Philippines;

H) Dismissing [Equitable's] counterclaim except the payment of the aforestated unpaid
principal loan obligations and interest.

SO ORDERED.[l9]


Equitable and respondents filed their respective notices of appeal.[20]

ln the March l, 2004 order of the RTC, both notices were denied due course
because Equitable and respondents "failed to submit proof that they paid their
respective appeal fees."[2l]

WHEREFORE, premises considered, the appeal interposed by defendants from the
Decision in the above-entitled case is DENlED due course. As of February 27, 2004,
the Decision dated February 5, 2004, is considered final and executory in so far as
[Equitable, Aimee Yu and Bejan Lionel Apas] are concerned.[22] (emphasis supplied)


Equitable moved for the reconsideration of the March l, 2004 order of the
RTC[23] on the ground that it did in fact pay the appeal fees. Respondents, on the
other hand, prayed for the issuance of a writ of execution.[24]

On March 24, 2004, the RTC issued an omnibus order denying Equitable's
motion for reconsideration for lack of merit[25] and ordered the issuance of a writ of
execution in favor of respondents.[26] According to the RTC, because respondents did
not move for the reconsideration of the previous order (denying due course to the
parties' notices of appeal),[27] the February 5, 2004 decision became final and
executory as to both parties and a writ of execution against Equitable was in order.[28]

A writ of execution was thereafter issued[29] and three real properties of
Equitable were levied upon.[30]

On March 26, 2004, Equitable filed a petition for relief in the RTC from the March
l, 2004 order.[3l] lt, however, withdrew that petition on March 30, 2004[32] and instead
filed a petition for certiorari with an application for an injunction in the CA to enjoin the
implementation and execution of the March 24, 2004 omnibus order.[33]

On June l6, 2004, the CA granted Equitable's application for injunction. A writ of
preliminary injunction was correspondingly issued.[34]

Notwithstanding the writ of injunction, the properties of Equitable previously levied
upon were sold in a public auction on July l, 2004. Respondents were the highest
bidders and certificates of sale were issued to them.[35]

On August l0, 2004, Equitable moved to annul the July l, 2004 auction sale and
to cite the sheriffs who conducted the sale in contempt for proceeding with the auction
despite the injunction order of the CA.[36]

On October 28, 2005, the CA dismissed the petition for certiorari.[37] lt found
Equitable guilty of forum shopping because the bank filed its petition for certiorari in the
CA several hours before withdrawing its petition for relief in the RTC.[38] Moreover,
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[40] but it was denied.[4l] Thus, this petition.

Equitable asserts that it was not guilty of forum shopping because the petition for
relief was withdrawn on the same day the petition for certiorari was filed.[42] lt likewise
avers that its petition for certiorari was 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 l, 2004 order denying its notice of appeal for non
payment of appeal fees was erroneous because it had in fact paid the required fees.[43]
Thus, the RTC, by issuing its March 24, 2004 omnibus order, effectively prevented
Equitable from appealing the patently wrong February 5, 2004 decision.[44]

This petition is meritorious.



EQUlTABLE WAS NOT GUlLTY OF FORUM SHOPPlNG


Forum shopping exists when two or more actions involving the same
transactions, essential facts and circumstances are filed and those actions raise
identical issues, subject matter and causes of action.[45] The test is whether, in two or
more pending cases, there is identity of parties, rights or causes of actions and reliefs.
[46]

Equitable's petition for relief in the RTC and its petition for certiorari in the CA did
not have identical causes of action. The petition for relief from the denial of its notice of
appeal was based on the RTC's judgment or final order preventing it from taking an
appeal by "fraud, accident, mistake or excusable negligence."[47] On the other hand, its
petition for certiorari in the CA, a special civil action, sought to correct the grave abuse
of discretion amounting to lack of jurisdiction committed by the RTC.[48]

ln a petition for relief, the judgment or final order is rendered by a court with competent
jurisdiction. ln a petition for certiorari, the order is rendered by a court without or in
excess of its jurisdiction.

Moreover, Equitable substantially complied with the rule on non-forum shopping
when it moved to withdraw its petition for relief in the RTC on the same day (in fact just
four hours and forty minutes after) it filed the petition for certiorari in the CA. Even if
Equitable failed to disclose that it had a pending petition for relief in the RTC, it rectified
what was doubtlessly a careless oversight by withdrawing the petition for relief just a
few hours after it filed its petition for certiorari in the CA a clear indication that it had
no intention of maintaining the two actions at the same time.


THE TRlAL COURT COMMlTTED GRAVE ABUSE OF DlSCRETlON lN lSSUlNG lTS
MARCH l, 2004 AND MARCH 24, 2004 ORDERS


Section l, Rule 65 of the Rules of Court provides:

Section l. Petition for Certiorari. When any tribunal, board or officer exercising judicial
or quasi-judicial function has acted without or in excess of its or his jurisdiction, or with
grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no
appeal, nor any plain, speedy or adequate remedy in the ordinary course of law, a
person aggrieved thereby may file a verified petition in the proper court, alleging the
facts with certainty and praying that judgment be rendered annulling or modifying the
proceedings of such tribunal, board or officer, and granting such incidental reliefs as law
and justice may require.

The petition shall be accompanied by a certified true copy of the judgment, order
or resolution subject thereof, copies of all pleadings and documents relevant and
pertinent thereto, and a sworn certificate of non-forum shopping as provided in the third
paragraph of Section 3, Rule 46.

There are two substantial requirements in a petition for certiorari. These are:

l. that the tribunal, board or officer exercising judicial or quasi-judicial functions
acted without or in excess of his or its jurisdiction or with grave abuse of discretion
amounting to lack or excess of jurisdiction; and

2. that there is no appeal or any plain, speedy and adequate remedy in the ordinary
course of law.


For a petition for certiorari premised on grave abuse of discretion to prosper,
petitioner must show that the public respondent patently and grossly abused his
discretion and that abuse amounted to an evasion of positive duty or a virtual refusal to
perform a duty enjoined by law or to act at all in contemplation of law, as where the
power was exercised in an arbitrary and despotic manner by reason of passion or
hostility.[49]

The March l, 2004 order denied due course to the notices of appeal of both
Equitable and respondents. However, it declared that the February 5, 2004 decision
was final and executory only with respect to Equitable.[50] As expected, the March 24,
2004 omnibus order denied Equitable's motion for reconsideration and granted
respondents' motion for the issuance of a writ of execution.[5l]

The March l, 2004 and March 24, 2004 orders of the RTC were obviously intended to
prevent Equitable, et al. from appealing the February 5, 2004 decision. Not only that.
The execution of the decision was undertaken with indecent haste, effectively obviating
or defeating Equitable's right to avail of possible legal remedies. No matter how we look
at it, the RTC committed grave abuse of discretion in rendering those orders.

With regard to whether Equitable had a plain, speedy and adequate remedy in
the ordinary course of law, we hold that there was none. The RTC denied due course to
its notice of appeal in the March l, 2004 order. lt affirmed that denial in the March 24,
2004 omnibus order. Hence, there was no way Equitable could have possibly appealed
the February 5, 2004 decision.[52]
Although Equitable filed a petition for relief from the March 24, 2004 order, that
petition was not a plain, speedy and adequate remedy in the ordinary course of law.[53]
A petition for relief under Rule 38 is an equitable remedy allowed only in exceptional
circumstances or where there is no other available or adequate remedy.[54]

Thus, we grant Equitable's petition for certiorari and consequently give due
course to its appeal.



EQUlTABLE RAlSED PURE QUESTlONS OF LAW lN lTS PETlTlON FOR
REVlEW

The jurisdiction of this Court in Rule 45 petitions is limited to questions of law.[55]
There is a question of law "when the doubt or controversy concerns the correct
application of law or jurisprudence to a certain set of facts; or when the issue does not
call for the probative value of the evidence presented, the truth or falsehood of facts
being admitted."[56]

Equitable does not assail the factual findings of the trial court. lts arguments
essentially focus on the nullity of the RTC's 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]


THE PROMlSSORY NOTES WERE VALlD


The RTC upheld the validity of the promissory notes despite respondents' assertion that
those documents were contracts of adhesion.

A contract of adhesion is a contract whereby almost all of its provisions are
drafted by one party.[58] The participation of the other party is limited to affixing his
signature or his "adhesion" to the contract.[59] For this reason, contracts of adhesion
are strictly construed against the party who drafted it.[60]

lt is erroneous, however, to conclude that contracts of 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.[6l]

That was not the case here. As the trial court noted, if the terms and conditions
offered by Equitable had been truly prejudicial to respondents, they would have walked
out and negotiated with another bank at the first available instance. But they did not.
lnstead, they continuously availed of Equitable's credit facilities for five long years.

While the RTC categorically found that respondents had outstanding dollar- and
peso-denominated loans with Equitable, it, however, failed to ascertain the total amount
due (principal, interest and penalties, if any) as of July 9, 200l. The trial court did not
explain how it arrived at the amounts of US$228,200 and Pl,000,000.[62] ln Metro
Manila Transit Corporation v. D.M. Consunji,[63] we reiterated that this Court is not a
trier of facts and it shall pass upon them only for compelling reasons which
unfortunately are not present in this case.[64] Hence, we ordered the partial remand of
the case for the sole purpose of determining the amount of actual damages.[65]







ESCALATlON CLAUSE VlOLATED THE PRlNClPLE OF MUTUALlTY OF
CONTRACTS

Escalation clauses are not void per se. However, one "which grants the creditor
an unbridled right to adjust the interest independently and upwardly, completely
depriving the debtor of the right to assent to an important modification in the agreement"
is void. Clauses of that nature violate the principle of mutuality of contracts.[66] Article
l308[67] of the Civil Code holds that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.[68]

For this reason, we have consistently held that a valid escalation clause provides:

l. that the rate of interest will only be increased if the applicable maximum
rate of interest is increased by law or by the Monetary Board; and

2. that the stipulated rate of interest will be reduced if the applicable
maximum rate of interest is reduced by law or by the Monetary Board (de-escalation
clause).[69]


The RTC found that Equitable's promissory notes uniformly stated:

lf subject promissory note is extended, the interest for subsequent extensions shall be
at such rate as shall be determined by the bank.[70]

Equitable dictated the interest rates if the term (or period for repayment) of the loan was
extended. Respondents had no choice but to accept them. This was a violation of
Article l308 of the Civil Code. Furthermore, the assailed escalation clause did not
contain the necessary provisions for validity, that is, it neither provided that the rate of
interest would be increased only if allowed by law or the Monetary Board, nor allowed
de-escalation. For these reasons, the escalation clause was void.

With regard to the proper rate of interest, in New Sampaguita Builders v.
Philippine National Bank[7l] we 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 l2% per
annum.[72]

Consequently, respondents should pay Equitable the interest rates of l2.66% p.a.
for their dollar-denominated loans and 20% p.a. for their peso-denominated loans from
January l0, 200l to July 9, 200l. Thereafter, Equitable was entitled to legal interest of
l2% p.a. on all amounts due.


THERE WAS NO EXTRAORDlNARY DEFLATlON


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]

Article l250 of the Civil Code provides:


Article l250. ln case an extraordinary inflation or deflation of the currency stipulated
should intervene, 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.


For extraordinary inflation (or deflation) to affect an obligation, the following requisites
must be proven:
l. that there was an official declaration of extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP);[74]

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

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


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


THE AWARD OF MORAL AND EXEMPLARY DAMAGES LACKED BASlS

Moral damages are in the category of an award designed to compensate the
claimant for actual injury suffered, not to impose a penalty to the wrongdoer.[79] To be
entitled to moral damages, a claimant must prove:


l. That he or she suffered besmirched reputation, or physical, mental or
psychological suffering sustained by the claimant;

2. That the defendant committed a wrongful act or omission;

3. That the wrongful act or omission was the proximate cause of the damages the
claimant sustained;

4. The case is predicated on any of the instances expressed or envisioned by Article
22l9[80] and 2220[8l]. [82]


ln culpa contractual or breach of contract, moral damages are recoverable only if the
defendant acted fraudulently or in bad faith or in wanton disregard of his contractual
obligations.[83] The breach must be wanton, reckless, malicious or in bad faith, and
oppressive or abusive.[84]

The RTC found that respondents did not pay Equitable the interest due on
February 9, 200l (or any month thereafter prior to the maturity of the loan)[85] or the
amount due (principal plus interest) due on July 9, 200l.[86] Consequently, Equitable
applied respondents' deposits to their loans upon maturity.

The relationship between a bank and its depositor is that of creditor and debtor.
[87] For this reason, a bank has the right to set-off the deposits in its hands for the
payment of a depositor's indebtedness.[88]

Respondents indeed defaulted on their obligation. For this reason, Equitable had
the option to exercise its legal right to set-off or compensation. However, the RTC
mistakenly (or, as it now appears, deliberately) concluded that Equitable acted
"fraudulently or in bad faith or in wanton disregard" of its contractual obligations despite
the absence of proof. The undeniable fact was that, whatever damage respondents
sustained was purely the consequence of their failure to pay their loans. There was
therefore absolutely no basis for the award of moral damages to them.

Neither was there reason to award exemplary damages. Since respondents were
not entitled to moral damages, neither should they be awarded exemplary damages.[89]
And if respondents were not entitled to moral and exemplary damages, neither could
they be awarded attorney's fees and litigation expenses.[90]

ACCORDlNGLY, the petition is hereby GRANTED.

The October 28, 2005 decision and February 3, 2006 resolution of the Court of
Appeals in CA-G.R. SP No. 83ll2 are hereby REVERSED and SET ASlDE.

The March 24, 2004 omnibus order of the Regional Trial Court, Branch l6, Cebu
City in Civil Case No. CEB-26983 is hereby ANNULLED for being rendered with grave
abuse of discretion amounting to lack or excess of jurisdiction. All proceedings
undertaken pursuant thereto are likewise declared null and void.

The March l, 2004 order of the Regional Trial Court, Branch l6 of Cebu City in
Civil Case No. CEB-26983 is hereby SET ASlDE. The appeal of petitioners Equitable
PCl Bank, Aimee Yu and Bejan Lionel Apas is therefore given due course.

The February 5, 2004 decision of the Regional Trial Court, Branch l6 of Cebu
City in Civil Case No. CEB-26983 is accordingly SET ASlDE. New judgment is hereby
entered:

l. ordering respondents Ng Sheung Ngor, doing business under the name
and style of "Ken Marketing," Ken Appliance Division, lnc. and Benjamin E. Go to pay
petitioner Equitable PCl Bank the principal amount of their dollar- and peso-
denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name
and style of "Ken Marketing," Ken Appliance Division, lnc. and Benjamin E. Go to pay
petitioner Equitable PCl Bank interest at:
a) l2.66% p.a. with respect to their dollar-denominated loans from January
l0, 200l to July 9, 200l;
b) 20% p.a. with respect to their peso-denominated loans from January l0,
200l to July 9, 200l;[9l]
c) pursuant to our ruling in Eastern Shipping Lines v. Court of Appeals,[92]
the total amount due on July 9, 200l shall earn legal interest at l2% p.a. from the time
petitioner Equitable PCl Bank demanded payment, whether judicially or extra-judicially;
and
d) after this Decision becomes final and executory, the applicable rate shall be
l2% p.a. until full satisfaction;
3. all other claims and counterclaims are dismissed.
As a starting point, the Regional Trial Court, Branch l6 of Cebu City shall
compute the exact amounts due on the respective dollar-denominated and peso-
denominated loans, as of July 9, 200l, of respondents Ng Sheung Ngor, doing business
under the name and style of "Ken Marketing," Ken Appliance Division and Benjamin E.
Go.

SO ORDERED.
SECOND DlVlSlON



PAN PAClFlC SERVlCE
CONTRACTORS, lNC. and
RlCARDO F. DEL ROSARlO,
Petitioners,



- versus -



EQUlTABLE PCl BANK (formerly THE PHlLlPPlNE COMMERClAL lNTERNATlONAL
BANK),
Respondent.
G.R. No. l69975

Present:

CARPlO, J., Chairperson,
BRlON,
DEL CASTlLLO,
ABAD, and
PEREZ, JJ.



Promulgated:

March l8, 20l0
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D E C l S l O N


CARPlO, J.:

The Case

PAN PAClFlC SERVlCE CONTRACTORS, lNC. AND RlCARDO F. DEL
ROSARlO (PETlTlONERS) FlLED THlS PETlTlON FOR REVlEW[l] ASSAlLlNG THE
COURT OF APPEALS' (CA) DEClSlON[2] DATED 30 JUNE 2005 lN CA-G.R. CV NO.
63966 AS WELL AS THE RESOLUTlON[3] DATED 5 OCTOBER 2005 DENYlNG THE
MOTlON FOR RECONSlDERATlON. lN THE ASSAlLED DEClSlON, THE CA
MODlFlED THE l2 APRlL l999 DEClSlON[4] OF THE REGlONAL TRlAL COURT OF
MAKATl ClTY, BRANCH 59 (RTC) BY ORDERlNG EQUlTABLE PCl BANK[5]
(RESPONDENT) TO PAY PETlTlONERS Pl,5l6,0l5.07 WlTH lNTEREST AT THE
LEGAL RATE OF l2% PER ANNUM STARTlNG 6 MAY l994 UNTlL THE AMOUNT lS
FULLY PAlD.

The Facts

Pan Pacific Service Contractors, lnc. (Pan Pacific) is engaged in contracting
mechanical works on airconditioning system. On 24 November l989, Pan Pacific,
through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract of
mechanical works (Contract) with respondent for P20,688,800. Pan Pacific and
respondent also agreed on nine change orders for P2,622,6l0.30. Thus, the total
consideration for the whole project was P23,3ll,4l0.30.[6] The Contract stipulated,
among others, that Pan Pacific shall be entitled to a price adjustment in case of
increase in labor costs and prices of materials under paragraphs 70.l[7] and 70.2[8] of
the "General Conditions for the Construction of PClB Tower ll Extension" (the escalation
clause).[9]


Pursuant to the contract, Pan Pacific commenced the mechanical works in the project
site, the PClB Tower ll extension building in Makati City. The project was completed in
June l992. Respondent accepted the project on 9 July l992.[l0]
ln l990, labor costs and prices of materials escalated. On 5 April l99l, in accordance
with the escalation clause, Pan Pacific claimed a price adjustment of P5,l65,945.52.
Respondent's appointed project engineer, TCGl Engineers, asked for a reduction in the
price adjustment. To show goodwill, Pan Pacific reduced the price adjustment to
P4,858,548.67.[ll]
On 28 April l992, TCGl Engineers recommended to respondent that the price
adjustment should be pegged at P3,730,957.07. TCGl Engineers based their evaluation
of the price adjustment on the following factors:
l. Labor lndices of the Department of Labor and Employment.
2. PRlCE lNDEX OF THE NATlONAL STATlSTlCS OFFlCE.
PD l594 AND lTS lMPLEMENTlNG RULES AND REGULATlONS AS AMENDED, l5
MARCH l99l.
SHlPPlNG DOCUMENTS SUBMlTTED BY PPSCl.
SUB-CLAUSE 70.l OF THE GENERAL CONDlTlONS OF THE CONTRACT
DOCUMENTS.[l2]

Pan Pacific contended that with this recommendation, respondent was already
estopped from disclaiming liability of at least P3,730,957.07 in accordance with the
escalation clause.[l3]
Due to the extraordinary increases in the costs of labor and materials, Pan Pacific's
operational capital was becoming inadequate for the project. However, respondent
withheld the payment of the price adjustment under the escalation clause despite Pan
Pacific's repeated demands.[l4] lnstead, respondent offered Pan Pacific a loan of Pl.8
million. Against its will and on the strength of respondent's promise that the price
adjustment would be released soon, Pan Pacific, through Del Rosario, was constrained
to execute a promissory note in the amount of Pl.8 million as a requirement for the
loan. Pan Pacific also posted a surety bond. The Pl.8 million was released directly to
laborers and suppliers and not a single centavo was given to Pan Pacific.[l5]
Pan Pacific made several demands for payment on the price adjustment but respondent
merely kept on promising to release the same. Meanwhile, the Pl.8 million loan
matured and respondent demanded payment plus interest and penalty. Pan Pacific
refused to pay the loan. Pan Pacific insisted that it would not have incurred the loan if
respondent released the price adjustment on time. Pan Pacific alleged that the
promissory note did not express the true agreement of the parties. Pan Pacific
maintained that the Pl.8 million was to be considered as an advance payment on the
price adjustment. Therefore, there was really no consideration for the promissory note;
hence, it is null and void from the beginning.[l6]
Respondent stood firm that it would not release any amount of the price adjustment to
Pan Pacific but it would offset the price adjustment with Pan Pacific's outstanding
balance of P3,226,l86.0l, representing the loan, interests, penalties and collection
charges.[l7]
Pan Pacific refused the offsetting but agreed to receive the reduced amount of
P3,730,957.07 as recommended by the TCGl Engineers for the purpose of extrajudicial
settlement, less Pl.8 million and P4l4,942 as advance payments.[l8]

On 6 May l994, petitioners filed a complaint for declaration of nullity/annulment of the
promissory note, sum of money, and damages against the respondent with the RTC of
Makati City, Branch 59. On l2 April l999, the RTC rendered its decision, the dispositive
portion of which reads:
WHEREFORE, PREMlSES CONSlDERED, JUDGMENT lS HEREBY RENDERED lN
FAVOR OF THE PLAlNTlFFS AND AGAlNST THE DEFENDANT AS FOLLOWS:
l. DECLARlNG THE PROMlSSORY NOTE (EXHlBlT "B") NULL AND VOlD;
ORDERlNG THE DEFENDANT TO PAY THE PLAlNTlFFS THE FOLLOWlNG
AMOUNTS:
A. Pl,389,lll.l0 REPRESENTlNG UNPAlD BALANCE OF THE ADJUSTMENT
PRlCE, WlTH lNTEREST THEREON AT THE LEGAL RATE OF TWELVE (l2%)
PERCENT PER ANNUM STARTlNG MAY 6, l994, THE DATE WHEN THE
COMPLAlNT WAS FlLED, UNTlL THE AMOUNT lS FULLY PAlD;
Pl00,000.00 REPRESENTlNG MORAL DAMAGES;
P50,000.00 REPRESENTlNG EXEMPLARY DAMAGES; AND
P50,000.00 AS AND FOR ATTORNEY'S FEES.
2. DlSMlSSlNG DEFENDANT'S COUNTERCLAlM, FOR LACK OF MERlT; AND
WlTH COSTS AGAlNST THE DEFENDANT.
SO ORDERED.[l9]

On 23 May l999, petitioners partially appealed the RTC Decision to the CA. On 26 May
l999, respondent appealed the entire RTC Decision for being contrary to law and
evidence. ln sum, the appeals of the parties with the CA are as follows:
l. WlTH RESPECT TO THE PETlTlONERS, WHETHER THE RTC ERRED lN
DEDUCTlNG THE AMOUNT OF Pl26,903.97 FROM THE BALANCE OF THE
ADJUSTED PRlCE AND lN AWARDlNG ONLY l2% ANNUAL lNTEREST ON THE
AMOUNT DUE, lNSTEAD OF THE BANK LOAN RATE OF l8% COMPOUNDED
ANNUALLY BEGlNNlNG SEPTEMBER l992.
2. With respect to respondent, whether the RTC erred in declaring the promissory note
void and in awarding moral and exemplary damages and attorney's fees in favor of
petitioners and in dismissing its counterclaim.
ln its decision dated 30 June 2005, the CA modified the RTC decision, with respect to
the principal amount due to petitioners. The CA removed the deduction of Pl26,903.97
because it represented the final payment on the basic contract price. Hence, the CA
ordered respondent to pay Pl,5l6,0l5.07 to petitioners, with interest at the legal rate of
l2% per annum starting 6 May l994.[20]
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a
reconsideration of the CA's Decision imposing the legal rate of l2%. Petitioners claimed
that the interest rate applicable should be the l8% bank lending rate. Respondent
likewise filed a Motion for Reconsideration of the CA's decision. ln a Resolution dated 5
October 2005, the CA denied both motions.
AGGRlEVED BY THE CA'S DEClSlON, PETlTlONERS ELEVATED THE CASE
BEFORE THlS COURT.

The lssue

Petitioners submit this sole issue for our consideration: Whether the CA, in
awarding the unpaid balance of the price adjustment, erred in fixing the interest rate at
l2% instead of the l8% bank lending rate.




Ruling of the Court

We grant the petition.


This Court notes that respondent did not appeal the decision of the CA. Hence, there is
no longer any issue as to the principal amount of the unpaid balance on the price
adjustment, which the CA correctly computed at Pl,5l6,0l5.07. The only remaining
issue is the interest rate applicable for respondent's delay in the payment of the balance
of the price adjustment.
The CA denied petitioners' claim for the application of the bank lending rate of l8%
compounded annually reasoning, to wit:
Anent the l8% interest rate compounded annually, while it is true that the contract
provides for an interest at the current bank lending rate in case of delay in payment by
the Owner, and the promissory note charged an interest of l8%, the said proviso does
not authorize plaintiffs to unilaterally raise the interest rate without the other party's
consent. Unlike their request for price adjustment on the basic contract price, plaintiffs
never informed nor sought the approval of defendant for the imposition of l8% interest
on the adjusted price. To unilaterally increase the interest rate of the adjusted price
would be violative of the principle of mutuality of contracts. Thus, the Court maintains
the legal rate of twelve percent per annum starting from the date of judicial demand.
Although the contract provides for the period when the recommendation of the TCGl
Engineers as to the price adjustment would be binding on the parties, it was
established, however, that part of the adjusted price demanded by plaintiffs was already
disbursed as early as 28 February l992 by defendant bank to their suppliers and
laborers for their account.[2l]

ln this appeal, petitioners allege that the contract between the parties consists of two
parts, the Agreement[22] and the General Conditions,[23] both of which provide for
interest at the bank lending rate on any unpaid amount due under the contract.
Petitioners further claim that there is nothing in the contract which requires the consent
of the respondent to be given in order that petitioners can charge the bank lending rate.
[24] Specifically, petitioners invoke Section 2.5 of the Agreement and Section 60.l0 of
the General Conditions as follows:
Agreement
2.5 lF ANY PAYMENT lS DELAYED, THE CONTRACTOR MAY CHARGE
lNTEREST THEREON AT THE CURRENT BANK LENDlNG RATES, WlTHOUT
PREJUDlCE TO OWNER'S RECOURSE TO ANY OTHER REMEDY AVAlLABLE
UNDER EXlSTlNG LAW.[25]
GENERAL CONDlTlONS
60.l0 TlME FOR PAYMENT
THE AMOUNT DUE TO THE CONTRACTOR UNDER ANY lNTERlM CERTlFlCATE
lSSUED BY THE ENGlNEER PURSUANT TO THlS CLAUSE, OR TO ANY TERM OF
THE CONTRACT, SHALL, SUBJECT TO CLAUSE 47, BE PAlD BY THE OWNER TO
THE CONTRACTOR WlTHlN 28 DAYS AFTER SUCH lNTERlM CERTlFlCATE HAS
BEEN DELlVERED TO THE OWNER, OR, lN THE CASE OF THE FlNAL
CERTlFlCATE REFERRED TO lN SUB-CLAUSE 60.8, WlTHlN 56 DAYS, AFTER
SUCH FlNAL CERTlFlCATE HAS BEEN DELlVERED TO THE OWNER. lN THE
EVENT OF THE FAlLURE OF THE OWNER TO MAKE PAYMENT WlTHlN THE
TlMES STATED, THE OWNER SHALL PAY TO THE CONTRACTOR lNTEREST AT
THE RATE BASED ON BANKlNG LOAN RATES PREVAlLlNG AT THE TlME OF THE
SlGNlNG OF THE CONTRACT UPON ALL SUMS UNPAlD FROM THE DATE BY
WHlCH THE SAME SHOULD HAVE BEEN PAlD. THE PROVlSlONS OF THlS SUB-
CLAUSE ARE WlTHOUT PREJUDlCE TO THE CONTRACTOR'S ENTlTLEMENT
UNDER CLAUSE 69.[26] (EMPHASlS SUPPLlED)

Petitioners thus submit that it is automatically entitled to the bank lending rate of interest
from the time an amount is determined to be due thereto, which respondent should
have paid. Therefore, as petitioners have already proven their entitlement to the price
adjustment, it necessarily follows that the bank lending interest rate of l8% shall be
applied.[27]
On the other hand, respondent insists that under the provisions of 70.l and 70.2 of the
General Conditions, it is stipulated that any additional cost shall be determined by the
Engineer and shall be added to the contract price after due consultation with the Owner,
herein respondent. Hence, there being no prior consultation with the respondent
regarding the additional cost to the basic contract price, it naturally follows that
respondent was never consulted or informed of the imposition of l8% interest rate
compounded annually on the adjusted price.[28]
A perusal of the assailed decision shows that the CA made a distinction between the
consent given by the owner of the project for the liability for the price adjustments, and
the consent for the imposition of the bank lending rate. Thus, while the CA held that
petitioners consulted respondent for price adjustment on the basic contract price,
petitioners, nonetheless, are not entitled to the imposition of l8% interest on the
adjusted price, as petitioners never informed or sought the approval of respondent for
such imposition.[29]
We disagree.
lt is settled that the agreement or the contract between the parties is the formal
expression of the parties' rights, duties, and obligations. lt is the best evidence of the
intention of the parties. Thus, when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be,
between the parties and their successors in interest, no evidence of such terms other
than the contents of the written agreement.[30]
The escalation clause of the contract provides:
CHANGES lN COST AND LEGlSLATlON
70.l lncrease or Decrease of Cost
There shall be added to or deducted from the Contract Price such sums in respect of
rise or fall in the cost of labor and/or materials or any other matters affecting the cost of
the execution of the Works as may be determined.

70.2 Subsequent Legislation
lf, after the date 28 days prior to the latest date of submission of tenders for the
Contract there occur in the country in which the Works are being or are to be executed
changes to any National or State Statute, Ordinance, Decree or other Law or any
regulation or bye-law (sic) of any local or other duly constituted authority, or the
introduction of any such State Statute, Ordinance, Decree, Law, regulation or bye-law
(sic) which causes additional or reduced cost to the contractor, other than under Sub-
Clause 70.l, in the execution of the Contract, such additional or reduced cost shall,
after due consultation with the Owner and Contractor, be determined by the Engineer
and shall be added to or deducted from the Contract Price and the Engineer shall notify
the Contractor accordingly, with a copy to the Owner.[3l]

ln this case, the CA already settled that petitioners consulted respondent on the
imposition of the price adjustment, and held respondent liable for the balance of
Pl,5l6,0l5.07. Respondent did not appeal from the decision of the CA; hence,
respondent is estopped from contesting such fact.

However, the CA went beyond the intent of the parties by requiring respondent to give
its consent to the imposition of interest before petitioners can hold respondent liable for
interest at the current bank lending rate. This is erroneous. A review of Section 2.6 of
the Agreement and Section 60.l0 of the General Conditions shows that the consent of
the respondent is not needed for the imposition of interest at the current bank lending
rate, which occurs upon any delay in payment.

When the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations governs. ln these cases, courts
have no authority to alter a contract by construction or to make a new contract for the
parties. The Court's duty is confined to the interpretation of the contract which the
parties have made for themselves without regard to its wisdom or folly as the court
cannot supply material stipulations or read into the contract words which it does not
contain. lt is only when the contract is vague and ambiguous that courts are permitted to
resort to construction of its terms and determine the intention of the parties.[32]

The escalation clause must be read in conjunction with Section 2.5 of the Agreement
and Section 60.l0 of the General Conditions which pertain to the time of payment. Once
the parties agree on the price adjustment after due consultation in compliance with the
provisions of the escalation clause, the agreement is in effect an amendment to the
original contract, and gives rise to the liability of respondent to pay the adjusted costs.
Under Section 60.l0 of the General Conditions, the respondent shall pay such liability to
the petitioner within 28 days from issuance of the interim certificate. Upon respondent's
failure to pay within the time provided (28 days), then it shall be liable to pay the
stipulated interest.

This is the logical interpretation of the agreement of the parties on the imposition of
interest. To provide a contrary interpretation, as one requiring a separate consent for
the imposition of the stipulated interest, would render the intentions of the parties
nugatory.

Article l956 of the Civil Code, which refers to monetary interest, specifically mandates
that no interest shall be due unless it has been expressly stipulated in writing.
Therefore, payment of monetary interest is allowed only if:
(l) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The concurrence
of the two conditions is required for the payment of monetary interest.[33]
We agree with petitioners' interpretation that in case of default, the consent of the
respondent is not needed in order to impose interest at the current bank lending rate.

Applicable lnterest Rate
Under Article 2209 of the Civil Code, the appropriate measure for damages in case of
delay in discharging an obligation consisting of the payment of a sum of money is the
payment of penalty interest at the rate agreed upon in the contract of the parties. ln the
absence of a stipulation of a particular rate of penalty interest, payment of additional
interest at a rate equal to the regular monetary interest becomes due and payable.
Finally, if no regular interest had been agreed upon by the contracting parties, then the
damages payable will consist of payment of legal interest which is 6%, or in the case of
loans or forbearances of money, l2% per annum.[34] lt is only when the parties to a
contract have failed to fix the rate of interest or when such amount is unwarranted that
the Court will apply the l2% interest per annum on a loan or forbearance of money.[35]

The written agreement entered into between petitioners and respondent provides for an
interest at the current bank lending rate in case of delay in payment and the promissory
note charged an interest of l8%.

To prove petitioners' entitlement to the l8% bank lending rate of interest, petitioners
presented the promissory note[36] prepared by respondent bank itself. This promissory
note, although declared void by the lower courts because it did not express the real
intention of the parties, is substantial proof that the bank lending rate at the time of
default was l8% per annum. Absent any evidence of fraud, undue influence or any vice
of consent exercised by petitioners against the respondent, the interest rate agreed
upon is binding on them.[37]

WHEREFORE, we GRANT the petition. We SET ASlDE the Decision and Resolution of
the Court of Appeals in CA-G.R. CV No. 63966. We ORDER respondent to pay
petitioners Pl,5l6,0l5.07 with interest at the bank lending rate of l8% per annum
starting 6 May l994 until the amount is fully paid.

SO ORDERED.
HElRS OF ZOlLO ESPlRlTU AND PRlMlTlVA ESPlRlTU,
Petitioners,




- versus -




SPOUSES MAXlMO LANDRlTO AND PAZ LANDRlTO, Represented by ZOlLO
LANDRlTO, as their Attorney-in-Fact,
Respondents.

G.R. No. l696l7


Present:


YNARES-SANTlAGO, J.,
Chairperson,
AUSTRlA-MARTlNEZ,
CALLEJO, SR.,
CHlCO-NAZARlO, and
NACHURA, JJ.



Promulgated:

April 4, 2007
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D E C l S l O N


CHlCO-NAZARlO, J.:


This is a petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision of the Court of Appeals,[l] dated 3l August 2005, reversing the
Decision rendered by the trial court on l3 December l995. The Court of Appeals, in its
assailed Decision, fixed the interest rate of the loan between the parties at l2% per
annum, and ordered the Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to
reconvey the subject property to the Spouses Landrito conditioned upon the payment of
the loan.

Petitioners DULCE, BENLlNDA, EDWlN, CYNTHlA, AND MlRlAM ANDREA, all
surnamed ESPlRlTU, are the only children and legal heirs of the Spouses Zoilo and
Primitiva Espiritu, who both died during the pendency of the case before the Honorable
Court of Appeals.[2]

Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein
represented by their son and attorney-in-fact, Zoilo Landrito.[3]

On 5 September l986, Spouses Landrito loaned from the Spouses Espiritu the amount
of P350,000.00 payable in three months. To secure the loan, the Spouses Landrito
executed a real estate mortgage over a five hundred forty (540) square meter lot
located in Alabang, Muntinlupa, covered by Transfer Certificate of Title No. S-48948, in
favor of the Spouses Espiritu. From the P350,000.00 that the Landritos were supposed
to receive, Pl7,500.00 was deducted as interest for the first month which was
equivalent to five percent of the principal debt, and P7,500.00 was further deducted as
service fee. Thus, they actually received a net amount of P325,000.00. The
agreement, however, provided that the principal indebtedness earns "interest at the
legal rate."[4]

After three months, when the debt became due and demandable, the Spouses Landrito
were unable to pay the principal, and had not been able to make any interest payments
other than the amount initially deducted from the proceeds of the loan. On 29
December l986, the loan agreement was extended to 4 January l987 through an
Amendment of Real Estate Mortgage. The loan was restructured in such a way that the
unpaid interest became part of the principal, thus increasing the principal to P385,000.
The new loan agreement adopted all other terms and conditions contained in first
agreement.[5]

Due to the continued inability of the Spouses Landritos to settle their obligations with the
Spouses Espiritu, the loan agreement was renewed three more times. ln all these
subsequent renewals, the same terms and conditions found in the first agreement were
retained. On 29 July l987, the principal was increased to P507,000.00 inclusive of
running interest. On ll March l988, it was increased to P647,000.00. And on 2l
October l988, the principal was increased to P874,l25.00.[6] At the hearing before the
trial court, Zoilo Espiritu testified that the increase in the principal in each amendment of
the loan agreement did not correspond to the amount delivered to the Spouses
Landrito. Rather, the increase in the principal had been due to unpaid interest and
other charges.[7]

The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the
mortgaged property on 3l October l990. During the auction sale, the property was sold
to the Spouses Espiritu as the lone bidder. On 9 January l99l, the Sheriff's Certificate
of Sale was annotated on the title of the mortgaged property, giving the Spouses
Landrito until 8 January l992 to redeem the property. [8]

The Spouses Landrito failed to redeem the subject property although they alleged that
they negotiated for the redemption of the property as early as 30 October l99l. While
the negotiated price for the land started at Pl,595,392.79, it was allegedly increased by
the Spouses Espiritu from time to time. Spouses Landrito allegedly tendered two
manager's checks and some cash, totaling Pl,800,000.00 to the Spouses Espiritu on
l3 January l992, but the latter refused to accept the same. They also alleged that the
Spouses Espiritu increased the amount demanded to P2.5 Million and gave them until
July l992 to pay the said amount. However, upon inquiry, they found out that on 24
June l992, the Spouses Espiritu had already executed an Affidavit of Consolidation of
Ownership and registered the mortgaged property in their name, and that the Register
of Deeds of Makati had already issued Transfer Certificate of Title No. l79802 in the
name of the Spouses Espiritu. On 9 October l992, the Spouses Landrito, represented
by their son Zoilo Landrito, filed an action for annulment or reconveyance of title, with
damages against the Spouses Espiritu before Branch l46 of the Regional Trial Court of
Makati.[9] Among the allegations in their Complaint, they stated that the Spouses
Espiritu, as creditors and mortgagees, "imposed interest rates that are shocking to one's
moral senses."[l0]

The trial court dismissed the complaint and upheld the validity of the foreclosure
sale. The trial court ordered in its Decision, dated l3 December l995:[ll]

WHEREFORE, all the foregoing premises considered, the herein complaint is
hereby dismissed forthwith.

Without pronouncements to costs.


The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 4l of the l997
Rules of Court. ln its Decision dated 3l August 2005, the Court of Appeals reversed
the trial court's decision, decreeing that the five percent (5%) interest imposed by the
Spouses Espiritu on the first month and the varying interest rates imposed for the
succeeding months contravened the provisions of the Real Estate Mortgage contract
which provided that interest at the legal rate, i.e., l2% per annum, would be imposed. lt
also ruled that although the Usury Law had been rendered ineffective by Central Bank
Circular No. 905, which, in effect, removed the ceiling rates prescribed for interests,
thus, allowing parties to freely stipulate thereon, the courts may render void any
stipulation of interest rates which are found iniquitous or unconscionable. As a result,
the Court of Appeals set the interest rate of the loan at the legal rate, or l2% per
annum.[l2]

Furthermore, the Court of Appeals held that the action for reconveyance, filed by the
Spouses Landrito, is still a proper remedy. Even if the Spouses Landrito failed to
redeem the property within the one-year redemption period provided by law, the action
for reconveyance remained as a remedy available to a landowner whose property was
wrongfully registered in another's name since the subject property has not yet passed to
an innocent purchaser for value.[l3]

ln the decretal portion of its Decision, the Court of Appeals ruled[l4]:

WHEREFORE, the instant appeal is hereby GRANTED. The assailed Decision
dated December l3, l995 of the Regional Trial Court of Makati, Branch l46 in Civil
Case No. 92-2920 is hereby REVERSED and SET ASlDE, and a new one is hereby
entered as follows: (l) The legal rate of l2% per annum is hereby FlXED to be applied
as the interest of the loan; and (2) Conditioned upon the payment of the loan,
defendants-appellees spouses Zoilo and Primitiva Espiritu are hereby ordered to
reconvey Transfer Certificate of Title No. S-48948 to appellant spouses Maximo and
Paz Landrito.

The case is REMANDED to the Trial Court for the above determination.


Hence, the present petition. The following issues were raised:[l5]

l
THE HONORABLE COURT OF APPEALS ERRED lN REVERSlNG AND SETTlNG
ASlDE THE DEClSlON OF THE TRlAL COURT AND ORDERlNG HERElN
PETlTlONERS TO RECONVEY TRANSFER CERTlFlCATE OF TlTLE NO. l89l8 TO
HERElN RESPONDENTS, WlTHOUT ANY FACTUAL OR LEGAL BASlS THEREFOR.

ll
THE HONORABLE COURT OF APPEALS ERRED lN FlNDlNG THAT HERElN
PETlTlONERS UNlLATERALLY lMPOSED ON HERElN RESPONDENTS THE
ALLEGEDLY UNREASONABLE lNTERESTS ON THE MORTGAGE LOANS.

lll
THE HONORABLE COURT OF APPEALS ERRED lN NOT CONSlDERlNG THAT
HERElN RESPONDENTS' ATTORNEY-lN-FACT lS NOT ARMED WlTH AUTHORlTY
TO FlLE AND PROSECUTE THlS CASE.


The petition is without merit.

The Real Estate Mortgage executed between the parties specified that "the principal
indebtedness shall earn interest at the legal rate." The agreement contained no other
provision on interest or any fees or charges incident to the debt. ln at least three
contracts, all designated as Amendment of Real Estate Mortgage, the interest rate
imposed was, likewise, unspecified. During his testimony, Zoilo Espiritu admitted that
the increase in the principal in each of the Amendments of the Real Estate Mortgage
consists of interest and charges. The Spouses Espiritu alleged that the parties had
agreed on the interest and charges imposed in connection with the loan, hereunder
enumerated:

l. Pl7,500.00 was the interest charged for the first month and P7,500.00 was imposed
as service fee.
2. P35,000.00 interest and charges, or the difference between the P350,000.00
principal in the Real Estate Mortgage dated 5 September l986 and the P385,000.00
principal in the Amendment of the Real Estate Mortgage dated 29 December l986.

3. Pl32,000.00 interest and charges, or the difference between the P385,000.00
principal in the Amendment of the Real Estate Mortgage dated 29 December l986 and
the P507,000.00 principal in the Amendment of the Real Estate Mortgage dated 29 July
l987.

4. Pl40,000.00 interest and charges, or the difference between the P507,000.00
principal in the Amendment of the Real Estate Mortgage dated 29 July l987 and the
P647,000.00 principal in the Amendment of the Real Estate Mortgage dated ll March
l988.

5. P227,l25.00 interest and charges, or the difference between the P647,000.00
principal in the Amendment of the Real Estate Mortgage dated ll March l988 and the
P874,l25 principal in the Amendment of the Real Estate Mortgage dated 2l October
l988.

The total interest and charges amounting to P559,l25.00 on the original principal
of P350,000 was accumulated over only two years and one month. These charges are
not found in any written agreement between the parties. The records fail to show any
computation on how much interest was charged and what other fees were imposed.
Not only did lack of transparency characterize the aforementioned agreements, the
interest rates and the service charge imposed, at an average of 6.39% per month, are
excessive.

ln enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State seeks
to protect its citizens from a lack of awareness of the true cost of credit by assuring the
full disclosure of such costs. Section 4, in connection with Section 3(3)[l6] of the said
law, gives a detailed enumeration of the specific information required to be disclosed,
among which are the interest and other charges incident to the extension of credit.
Section 6[l7] of the same law imposes on anyone who willfully violates these
provisions, sanctions which include civil liability, and a fine and/or imprisonment.

Although any action seeking to impose either civil or criminal liability had already
prescribed, this Court frowns upon the underhanded manner in which the Spouses
Espiritu imposed interest and charges, in connection with the loan. This is aggravated
by the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to
plead ignorance of the requirements of the law in connection with the transparency of
credit transactions. ln addition, the Civil Code clearly provides that:

Article l956. No interest shall be due unless it has been stipulated in writing.

The omission of the Spouses Espiritu in specifying in the contract the interest rate
which was actually imposed, in contravention of the law, manifested bad faith.

ln several cases, this Court has been known to declare null and void stipulations on
interest and charges that were found excessive, iniquitous, and unconscionable. ln the
case of Medel v. Court of Appeals,[l8] the Court declared an interest rate of 5.5% per
month on a P500,000.00 loan to be excessive, iniquitous, unconscionable and
exorbitant. Even if the parties themselves agreed on the interest rate and stipulated the
same in a written agreement, it nevertheless declared such stipulation as void and
ordered the imposition of a l2% yearly interest rate. ln Spouses Solangon v. Salazar,
[l9] 6% monthly interest on a P60,000.00 loan was likewise equitably reduced to a l%
monthly interest or l2% per annum. ln Ruiz v. Court of Appeals,[20] the Court found a
3% monthly interest imposed on four separate loans with a total of Pl,050,000.00 to be
excessive and reduced the interest to a l% monthly interest or l2% per annum.

ln declaring void the stipulations authorizing excessive interest and charges, the Court
declared that although the Usury Law was suspended by Central Bank Circular No. 905,
s. l982, effective on l January l983, and consequently parties are given a wide latitude
to agree on any interest rate, 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.[2l]

Stipulation authorizing iniquitous or unconscionable interests are contrary to morals, if
not against the law. Under Article l409 of the Civil Code, these contracts are inexistent
and void from the beginning. They cannot be ratified nor the right to set up their illegality
as a defense be waived.[22] The nullity of the stipulation on the usurious interest does
not, however, affect the lender's right to recover the principal of the loan.[23] Nor would
it affect the terms of the real estate mortgage. The right to foreclose the mortgage
remains with the creditors, and said right can be exercised upon the failure of the
debtors to pay the debt due. The debt due is to be considered without the stipulation of
the excessive interest. A legal interest of l2% per annum will be added in place of the
excessive interest formerly imposed.

While the terms of the Real Estate Mortgage remain effective, the foreclosure
proceedings held on 3l Ocotber l990 cannot be given effect. ln the Notice of Sheriff's
Sale[24] dated 5 October l990, and in the Certificate of Sale[25] dated 3l October
l990, the amount designated as mortgage indebtedness amounted to P874,l25.00.
Likewise, in the demand letter[26] dated l2 December l989, Zoilo Espiritu demanded
from the Spouses Landrito the amount of P874,l25.00 for the unpaid loan. Since the
debt due is limited to the principal of P350,000.00 with l2% per annum as legal interest,
the previous demand for payment of the amount of P874,l25.00 cannot be considered
as a valid demand for payment. For an obligation to become due, there must be a valid
demand.[27] Nor can the foreclosure proceedings be considered valid since the total
amount of the indebtedness during the foreclosure proceedings was pegged at
P874,l25.00 which included interest and which this Court now nullifies for being
excessive, iniquitous and exorbitant. lf the foreclosure proceedings were considered
valid, this would result in an inequitable situation wherein the Spouses Landrito will have
their land foreclosed for failure to pay an over-inflated loan only a small part of which
they were obligated to pay.

Moreover, it is evident from the facts of the case that despite considerable effort on their
part, the Spouses Landrito failed to redeem the mortgaged property because they were
unable to raise the total amount, which was grossly inflated by the excessive interest
imposed. Their attempt to redeem the mortgaged property at the inflated amount of
Pl,595,392.79, as early as 30 October l99l, is reflected in a letter, which creditor-
mortgagee Zoilo Landrito acknowledged to have received by affixing his signature
herein.[28] They also attached in their Complaint copies of two checks in the amounts of
P770,000.00 and P995,087.00, both dated l3 January l992, which were allegedly
refused by the Spouses Espiritu.[29] Lastly, the Spouses Espiritu even attached in their
exhibits a copy of a handwritten letter, dated 27 January l994, written by Paz Landrito,
addressed to the Spouses Espiritu, wherein the former offered to pay the latter the sum
of P2,000,000.00.[30] ln all these instances, the Spouses Landrito had tried, but failed,
to pay an amount way over the indebtedness they were supposed to pay i.e.,
P350,000.00 and l2% interest per annum. Thus, it is only proper that the Spouses
Landrito be given the opportunity to repay the real amount of their indebtedness.

Since the Spouses Landrito, the debtors in this case, were not given an opportunity to
settle their debt, at the correct amount and without the iniquitous interest imposed, no
foreclosure proceedings may be instituted. A judgment ordering a foreclosure sale is
conditioned upon a finding on the correct amount of the unpaid obligation and the failure
of the debtor to pay the said amount.[3l] ln this case, it has not yet been shown that
the Spouses Landrito had already failed to pay the correct amount of the debt and,
therefore, a foreclosure sale cannot be conducted in order to answer for the unpaid
debt. The foreclosure sale conducted upon their failure to pay P874,l25 in l990 should
be nullified since the amount demanded as the outstanding loan was overstated;
consequently it has not been shown that the mortgagors the Spouses Landrito, have
failed to pay their outstanding obligation. Moreover, if the proceeds of the sale together
with its reasonable rates of interest were applied to the obligation, only a small part of its
original loans would actually remain outstanding, but because of the unconscionable
interest rates, the larger part corresponded to said excessive and iniquitous interest.

As a result, the subsequent registration of the foreclosure sale cannot transfer any
rights over the mortgaged property to the Spouses Espiritu. The registration of the
foreclosure sale, herein declared invalid, cannot vest title over the mortgaged property.
The Torrens system does not create or vest title where one does not have a rightful
claim over a real property. lt only confirms and records title already existing and vested.
lt does not permit one to enrich oneself at the expense of another.[32] Thus, the decree
of registration, even after the lapse of one (l) year, cannot attain the status of
indefeasibility.

Significantly, the records show that the property mortgaged was purchased by the
Spouses Espiritu and had not been transferred to an innocent purchaser for value. This
means that an action for reconveyance may still be availed of in this case.[33]

Registration of property by one person in his or her name, whether by mistake or fraud,
the real owner being another person, impresses upon the title so acquired the
character of a constructive trust for the real owner, which would justify an action for
reconveyance.[34] This is based on Article l465 of the Civil Code which states that:

Art. l465. lf property acquired through mistakes or fraud, the person obtaining it is, by
force of law, considered a trustee of an implied trust for benefit of the person from whom
the property comes.

The action for reconveyance does not prescribe until after a period of ten years
from the date of the registration of the certificate of sale since the action would be based
on implied trust.[35] Thus, the action for reconveyance filed on 3l October l992, more
than one year after the Sheriff's Certificate of Sale was registered on 9 January l99l,
was filed within the prescription period.

lt should, however, be reiterated that the provisions of the Real Estate Mortgage are not
annulled and the principal obligation stands. ln addition, the interest is not completely
removed; rather, it is set by this Court at l2% per annum. Should the Spouses Landrito
fail to pay the principal, with its recomputed interest which runs from the time the loan
agreement was entered into on 5 September l986 until the present, there is nothing in
this Decision which prevents the Spouses Espiritu from foreclosing the mortgaged
property.

The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized
to file the action for reconveyance filed before the trial court or even to file the appeal
from the judgment of the trial court, by virtue of the Special Power of Attorney dated 30
September l992. They further noted that the trial court and the Court of Appeals failed
to rule on this issue.[36]

The Special Power of Attorney[37] dated 30 September l992 was executed by Maximo
Landrito, Jr., with the conformity of Paz Landrito, in connection with the mortgaged
property. lt authorized Zoilo Landrito:

2. To make, sign, execute and deliver corresponding pertinent contracts, documents,
agreements and other writings of whatever nature or kind and to sue or file legal action
in any court of the Philippines, to collect, ask demands, encash checks, and recover any
and all sum of monies, proceeds, interest and other due accruing, owning, payable or
belonging to me as such owner of the afore-mentioned property. (Emphasis provided.)

Zoilo Landrito's authority to file the case is clearly set forth in the Special Power of
Attorney. Furthermore, the records of the case unequivocally show that Zoilo Landrito
filed the reconveyance case with the full authority of his mother, Paz Landrito, who
attended the hearings of the case, filed in her behalf, without making any protest.[38]
She even testified in the same case on 30 August l995. From the acts of Paz Landrito,
there is no doubt that she had authorized her son to file the action for reconveyance, in
her behalf, before the trial court.

lN VlEW OF THE FOREGOlNG, the instant Petition is DENlED. This Court AFFlRMS
the assailed Decision of the Court of Appeals, promulgated on 3l August 2005, fixing
the interest rate of the loan between the parties at l2% per annum, and ordering the
Spouses Espiritu to reconvey the subject property to the Spouses Landrito conditioned
upon the payment of the loan together with herein fixed rate of interest. Costs against
the petitioners.

SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-47878 July 24, l942
GlL JARDENlL, plaintiff-appellant,
vs.
HEFTl SOLAS (alias HEPTl SOLAS, JEPTl SOLAS), defendant-appellee.
Eleuterio J. Gustilo for appellant.
Jose C. Robles for appellee.
MORAN, J.:
This is an action for foreclosure of mortgage. The only question raised in this appeal is:
ls defendant-appellee bound to pay the stipulated interest only up to the date of maturity
as fixed in the promissory note, or up to the date payment is effected? This question is,
in our opinion controlled by the express stipulation of the parties.
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS MlL CUATROClENTOS
PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti Solas se compromete a pagar al
Sr. Jardenil en o antes del dia treintaiuno (3l) de marzo de mil novecientos
treintaicuarto (l934), con los intereses de dicha suma al tipo de doce por ciento (l2%)
anual a partir desde fecha hasta el dia de su vencimiento o sea treintaiuno (3l) de
marzo de mil novecientos treintaicuatro (l934), por la presente, el Sr. Hepti Solas cede
y traspasa, por via de primera hipoteca, a favor del Sr. Jardenil, sus herederos y
causahabientes, la parcela de terreno descrita en el parrafo primero (l.) de esta
escritura.
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date of
maturity, or until March 3l, l934. As the contract is silent as to whether after that date,
in the event of non-payment, the debtor would continue to pay interest, we cannot in
law, indulge in any presumption as to such interest; otherwise, we would be imposing
upon the debtor an obligation that the parties have not chosen to agree upon. Article
l755 of the Civil Code provides that "interest shall be due only when it has been
expressly stipulated." (Emphasis supplied.)
A writing must be interpreted according to the legal meaning of its language (section
286, Act No. l90, now section 58, Rule l23), and only when the wording of the written
instrument appears to be contrary to the evident intention of the parties that such
intention must prevail. (Article l28l, Civil Code.) There is nothing in the mortgage deed
to show that the terms employed by the parties thereto are at war with their evident
intent. On the contrary the act of the mortgage of granting to the mortgagor on the same
date of execution of the deed of mortgage, an extension of one year from the date of
maturity within which to make payment, without making any mention of any interest
which the mortgagor should pay during the additional period (see Exhibit B attached to
the complaint), indicates that the true intention of the parties was that no interest should
be paid during the period of grace. What reason the parties may have therefor, we need
not here seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed of mortgage
fails to express their agreement, for if such mistake existed, plaintiff would have
undoubtedly adduced evidence to establish it and asked that the deed be reformed
accordingly, under the parcel-evidence rule.
We hold therefore, that as the contract is clear and unmistakable and the terms
employed therein have not been shown to belie or otherwise fail to express the true
intention of the parties and that the deed has not been assailed on the ground of mutual
mistake which would require its reformation, same should be given its full force and
effect. When a party sues on a written contract and no attempt is made to show any
vice therein, he cannot be allowed to lay any claim more than what its clear stipulations
accord. His omission, to which the law attaches a definite warning as an in the instant
case, cannot by the courts be arbitrarily supplied by what their own notions of justice or
equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of l2 per cent on the loan of
P2, 400 from November 8, l932 to March 3l, l934. And it being a fact that extra judicial
demands have been made which we may assume to have been so made on the
expiration of the year of grace, he shall be entitled to legal interest upon the principal
and the accrued interest from April l, l935, until full payment.
Thus modified judgment is affirmed, with costs against appellant.
PRlSMA CONSTRUCTlON & DEVELOPMENT CORPORATlON and ROGELlO S.
PANTALEON,
Petitioners,



- versus -




ARTHUR F. MENCHAVEZ ,
Respondent.

G.R. No. l60545


Present:

NACHURA, J.,
BRlON, Acting Chairperson,
DEL CASTlLLO,
ABAD, and
PEREZ, JJ.



Promulgated:

March 9, 20l0

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

D E C l S l O N

BRlON, J.:

We resolve in this Decision the petition for review on certiorari[l] filed by
petitioners Prisma Construction & Development Corporation (PRlSMA) and Rogelio S.
Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and set aside the
Decision[2] dated May 5, 2003 and the Resolution[3] dated October 22, 2003 of the
Former Ninth Division of the Court of Appeals (CA) in CA-G.R. CV No. 69627. The
assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC), Branch
73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for payment of
P3,526,ll7.00 to respondent Arthur F. Menchavez (respondent), but modified the
interest rate from 4% per month to l2% per annum, computed from the filing of the
complaint to full payment. The assailed CA Resolution denied the petitioners' Motion
for Reconsideration.

FACTUAL BACKGROUND

The facts of the case, gathered from the records, are briefly summarized below.

On December 8, l993, Pantaleon, the President and Chairman of the Board of
PRlSMA, obtained a Pl,000,000.00[4] loan from the respondent, with a monthly interest
of P40,000.00 payable for six months, or a total obligation of Pl,240,000.00 to be paid
within six (6) months,[5] under the following schedule of payments:

January 8, l994 ........ P40,000.00
February 8, l994 ......... P40,000.00
March 8, l994 .......... P40,000.00
April 8, l994 ......... P40,000.00
May 8, l994 .......... P40,000.00
June 8, l994 ....... Pl,040,000.00[6]
Total Pl,240,000.00
To secure the payment of the loan, Pantaleon issued a promissory note[7] that
states:

l, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MlLLlON TWO
HUNDRED FORTY THOUSAND PESOS (Pl,240,000), Philippine Currency, from Mr.
Arthur F. Menchavez, representing a six-month loan payable according to the following
schedule:

January 8, l994 ........ P40,000.00
February 8, l994 ......... P40,000.00
March 8, l994 .......... P40,000.00
April 8, l994 ......... P40,000.00
May 8, l994 .......... P40,000.00
June 8, l994 ....... Pl,040,000.00

The checks corresponding to the above amounts are hereby acknowledged.[8]

and six (6) postdated checks corresponding to the schedule of payments. Pantaleon
signed the promissory note in his personal capacity,[9] and as duly authorized by the
Board of Directors of PRlSMA.[l0] The petitioners failed to completely pay the loan
within the stipulated six (6)-month period.

From September 8, l994 to January 4, l997, the petitioners paid the following amounts
to the respondent:

September 8, l994 ......P320,000.00
October 8, l995........P600,000.00
November 8, l995..........Pl58,772.00
January 4, l997 ....... P30,000.00[ll]


As of January 4, l997, the petitioners had already paid a total of Pl,l08,772.00.
However, the respondent found that the petitioners still had an outstanding balance of
Pl,364,l5l.00 as of January 4, l997, to which it applied a 4% monthly interest.[l2]
Thus, on August 28, l997, the respondent filed a complaint for sum of money with the
RTC to enforce the unpaid balance, plus 4% monthly interest, P30,000.00 in attorney's
fees, Pl,000.00 per court appearance and costs of suit.[l3]

ln their Answer dated October 6, l998, the petitioners admitted the loan of
Pl,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the
interest was not provided in the promissory note. Pantaleon also denied that he made
himself personally liable and that he made representations that the loan would be repaid
within six (6) months.[l4]

THE RTC RULlNG

The RTC rendered a Decision on October 27, 2000 finding that the respondent
issued a check for Pl,000,000.00 in favor of the petitioners for a loan that would earn
an interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month
period. lt noted that the petitioners made several payments amounting to
Pl,228,772.00, but they were still indebted to the respondent for P3,526,ll7.00 as of
February ll,[l5] l999 after considering the 4% monthly interest. The RTC observed
that PRlSMA was a one-man corporation of Pantaleon and used this circumstance to
justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the petitioners
to jointly and severally pay the respondent the amount of P3,526,ll7.00 plus 4% per
month interest from February ll, l999 until fully paid.[l6]

The petitioners elevated the case to the CA via an ordinary appeal under Rule 4l
of the Rules of Court, insisting that there was no express stipulation on the 4% monthly
interest.

THE CA RULlNG

The CA decided the appeal on May 5, 2003. The CA found that the parties
agreed to a 4% monthly interest principally based on the board resolution that
authorized Pantaleon to transact a loan with an approved interest of not more than 4%
per month. The appellate court, however, noted that the interest of 4% per month, or
48% per annum, was unreasonable and should be reduced to l2% per annum. The CA
affirmed the RTC's finding that PRlSMA was a mere instrumentality of Pantaleon that
justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC
Decision by imposing a l2% per annum interest, computed from the filing of the
complaint until finality of judgment, and thereafter, l2% from finality until fully paid.[l7]

After the CA's denial[l8] of their motion for reconsideration,[l9] the petitioners
filed the present petition for review on certiorari under Rule 45 of the Rules of Court.

THE PETlTlON

The petitioners submit that the CA mistakenly relied on their board resolution to
conclude that the parties agreed to a 4% monthly interest because the board resolution
was not an evidence of a loan or forbearance of money, but merely an authorization for
Pantaleon to perform certain acts, including the power to enter into a contract of loan.
The expressed mandate of Article l956 of the Civil Code is that interest due should be
stipulated in writing, and no such stipulation exists. Even assuming that the loan is
subject to 4% monthly interest, the interest covers the six (6)-month period only and
cannot be interpreted to apply beyond it. The petitioners also point out the glaring
inconsistency in the CA Decision, which reduced the interest from 4% per month or 48%
per annum to l2% per annum, but failed to consider that the amount of P3,526,ll7.00
that the RTC ordered them to pay includes the compounded 4% monthly interest.

THE CASE FOR THE RESPONDENT

The respondent counters that the CA correctly ruled that the loan is subject to a
4% monthly interest because the board resolution is attached to, and an integral part of,
the promissory note based on which the petitioners obtained the loan. The respondent
further contends that the petitioners are estopped from assailing the 4% monthly
interest, since they agreed to pay the 4% monthly interest on the principal amount under
the promissory note and the board resolution.

THE lSSUE

The core issue boils down to whether the parties agreed to the 4% monthly
interest on the loan. lf so, does the rate of interest apply to the 6-month payment period
only or until full payment of the loan?

OUR RULlNG

We find the petition meritorious.

lnterest due should be stipulated in writing; otherwise, l2% per annum

Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.[20] When the terms of a contract are
clear and leave no doubt as to the intention of the contracting parties, the literal
meaning of its stipulations governs.[2l] ln such cases, courts have no authority to alter
the contract by construction or to make a new contract for the parties; a court's duty is
confined to the interpretation of the contract the parties made for themselves without
regard to its wisdom or folly, as the court cannot supply material stipulations or read into
the contract words the contract does not contain.[22] lt is only when the contract is
vague and ambiguous that courts are permitted to resort to the interpretation of its terms
to determine the parties' intent.

ln the present case, the respondent issued a check for Pl,000,000.00.[23] ln turn,
Pantaleon, in his personal capacity and as authorized by the Board, executed the
promissory note quoted above. Thus, the Pl,000,000.00 loan shall be payable
within six (6) months, or from January 8, l994 up to June 8, l994. During this period,
the loan shall earn an interest of P40,000.00 per month, for a total obligation of
Pl,240,000.00 for the six-month period. We note that this agreed sum can be computed
at 4% interest per month, but no such rate of interest was stipulated in the promissory
note; rather a fixed sum equivalent to this rate was agreed upon.

Article l956 of the Civil Code specifically mandates that "no interest shall be due
unless it has been expressly stipulated in writing." Under this provision, the payment of
interest in loans or forbearance of money is allowed only if: (l) there was an express
stipulation for the payment of interest; and (2) the agreement for the payment of interest
was reduced in writing. The concurrence of the two conditions is required for the
payment of interest at a stipulated rate. Thus, we held in Tan v. Valdehueza[24] and
Ching v. Nicdao[25] that collection of interest without any stipulation in writing is
prohibited by law.

Applying this provision, we find that the interest of P40,000.00 per month
corresponds only to the six (6)-month period of the loan, or from January 8, l994 to
June 8, l994, as agreed upon by the parties in the promissory note. Thereafter, the
interest on the loan should be at the legal interest rate of l2% per annum, consistent
with our ruling in Eastern Shipping Lines, lnc. v. Court of Appeals:[26]

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. ln the absence of stipulation, the rate of interest shall be
l2% per annum to be computed from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article ll69 of the Civil Code." (Emphasis
supplied)

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 6l,
[27] Sulit v. Court of Appeals,[28] Crismina Garments, lnc. v. Court of Appeals,[29]
Eastern Assurance and Surety Corporation v. Court of Appeals,[30] Sps. Catungal v.
Hao,[3l] Yong v. Tiu,[32] and Sps. Barrera v. Sps. Lorenzo.[33] Thus, the RTC and the
CA misappreciated the facts of the case; they erred in finding that the parties agreed to
a 4% interest, compounded by the application of this interest beyond the promissory
note's six (6)-month period. The facts show that the parties agreed to the payment of a
specific sum of money of P40,000.00 per month for six months, not to a 4% rate of
interest payable within a six (6)-month period.

Medel v. Court of Appeals not applicable

The CA misapplied Medel v. Court of Appeals[34] in finding that a 4% interest per
month was unconscionable.

ln Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5%
per month, a service charge of 2% per annum, and a penalty charge of l% per month,
plus attorney's fee equivalent to 25% of the amount due, until the loan is fully paid.
Taken in conjunction with the stipulated service charge and penalty, we found the
interest rate of 5.5% to be excessive, iniquitous, unconscionable, exorbitant and hence,
contrary to morals, thereby rendering the stipulation null and void.

Applying Medel, we invalidated and reduced the stipulated interest in Spouses
Solangon v. Salazar[35] of 6% per month or 72% per annum interest on a P60,000.00
loan; in Ruiz v. Court of Appeals,[36] of 3% per month or 36% per annum interest on a
P3,000,000.00 loan; in lmperial v. Jaucian,[37] of l6% per month or l92% per annum
interest on a P320,000.00 loan; in Arrofo v. Quio,[38] of 7% interest per month or 84%
per annum interest on a Pl5,000.00 loan; in Bulos, Jr. v. Yasuma,[39] of 4% per month
or 48% per annum interest on a P2,500,000.00 loan; and in Chua v. Timan,[40] of 7%
and 5% per month for loans totalling P964,000.00. We note that in all these cases, the
terms of the loans were open-ended; the stipulated interest rates were applied for an
indefinite period.

Medel finds no application in the present case where no other stipulation exists for the
payment of any extra amount except a specific sum of P40,000.00 per month on the
principal of a loan payable within six months. Additionally, no issue on the
excessiveness of the stipulated amount of P40,000.00 per month was ever put in issue
by the petitioners;[4l] they only assailed the application of a 4% interest rate, since it
was not agreed upon.

lt is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law
between them, the only limitation being that these stipulations, clauses, terms and
conditions are not contrary to law, morals, public order or public policy.[42] The payment
of the specific sum of money of P40,000.00 per month was voluntarily agreed upon by
the petitioners and the respondent. There is nothing from the records and, in fact, there
is no allegation showing that petitioners were victims of fraud when they entered into the
agreement with the respondent.
Therefore, as agreed by the parties, the loan of Pl,000,000.00 shall earn P40,000.00
per month for a period of six (6) months, or from December 8, l993 to June 8, l994, for
a total principal and interest amount of Pl,240,000.00. Thereafter, interest at the rate of
l2% per annum shall apply. The amounts already paid by the petitioners during the
pendency of the suit, amounting to Pl,228,772.00 as of February l2, l999,[43] should
be deducted from the total amount due, computed as indicated above. We remand the
case to the trial court for the actual computation of the total amount due.

Doctrine of Estoppel not applicable

The respondent submits that the petitioners are estopped from disputing the 4%
monthly interest beyond the six-month stipulated period, since they agreed to pay this
interest on the principal amount under the promissory note and the board resolution.

We disagree with the respondent's contention.

We cannot apply the doctrine of estoppel in the present case since the facts and
circumstances, as established by the record, negate its application. Under the
promissory note,[44] what the petitioners agreed to was the payment of a specific sum
of P40,000.00 per month for six months not a 4% rate of interest per month for six (6)
months on a loan whose principal is Pl,000,000.00, for the total amount of
Pl,240,000.00. Thus, no reason exists to place the petitioners in estoppel, barring
them from raising their present defenses against a 4% per month interest after the six-
month period of the agreement. The board resolution,[45] on the other hand, simply
authorizes Pantaleon to contract for a loan with a monthly interest of not more than 4%.
This resolution merely embodies the extent of Pantaleon's authority to contract and
does not create any right or obligation except as between Pantaleon and the board.
Again, no cause exists to place the petitioners in estoppel.

Piercing the corporate veil unfounded

We find it unfounded and unwarranted for the lower courts to pierce the corporate
veil of PRlSMA.

The doctrine of piercing the corporate veil applies only in three (3) basic
instances, namely: a) when the separate and distinct corporate personality defeats
public convenience, as when the corporate fiction is used as a vehicle for the evasion of
an existing obligation; b) in fraud cases, or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a
corporation is essentially a farce, since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.[46] ln the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot be made personally
liable for corporate liabilities.[47]

ln the present case, we see no competent and convincing evidence of any
wrongful, fraudulent or unlawful act on the part of PRlSMA to justify piercing its
corporate veil. While Pantaleon denied personal liability in his Answer, he made himself
accountable in the promissory note "in his personal capacity and as authorized by the
Board Resolution" of PRlSMA.[48] With this statement of personal liability and in the
absence of any representation on the part of PRlSMA that the obligation is all its own
because of its separate corporate identity, we see no occasion to consider piercing the
corporate veil as material to the case.

WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASlDE
the Decision dated May 5, 2003 of the Court of Appeals in CA-G.R. CV No. 69627. The
petitioners' loan of Pl,000,000.00 shall bear interest of P40,000.00 per month for six (6)
months from December 8, l993 as indicated in the promissory note. Any portion of this
loan, unpaid as of the end of the six-month payment period, shall thereafter bear
interest at l2% per annum. The total amount due and unpaid, including accrued
interests, shall bear interest at l2% per annum from the finality of this Decision. Let this
case be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the
proper computation of the amount due as herein directed, with due regard to the
payments the petitioners have already remitted. Costs against the respondent.

SO ORDERED.
COMMlSSlONER OF lNTERNAL REVENUE, Petitioner,
vs.
lSABELA CULTURAL CORPORATlON, Respondent.
D E C l S l O N
YNARES-SANTlAGO, J.:
Petitioner Commissioner of lnternal Revenue (ClR) assails the September 30, 2005
Decisionl of the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26,
2003 Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 52ll, which
cancelled and set aside the Assessment Notices for deficiency income tax and
expanded withholding tax issued by the Bureau of lnternal Revenue (BlR) against
respondent lsabela Cultural Corporation (lCC).
The facts show that on February 23, l990, lCC, a domestic corporation, received from
the BlR Assessment Notice No. FAS-l-86-90-000680 for deficiency income tax in the
amount of P333,l96.86, and Assessment Notice No. FAS-l-86-90-00068l for
deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year l986.
The deficiency income tax of P333,l96.86, arose from:
(l) The BlR's disallowance of lCC's claimed expense deductions for professional and
security services billed to and paid by lCC in l986, to wit:
(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December
3l, l985;4
(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years l984 and l985.5
(c) Expense for security services of El Tigre Security & lnvestigation Agency for the
months of April and May l986.6
(2) The alleged understatement of lCC's interest income on the three promissory notes
due from Realty lnvestment, lnc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and
surcharge) was allegedly due to the failure of lCC to withhold l% expanded withholding
tax on its claimed P244,890.00 deduction for security services.7
On March 23, l990, lCC sought a reconsideration of the subject assessments. On
February 9, l995, however, it received a final notice before seizure demanding payment
of the amounts stated in the said notices. Hence, it brought the case to the CTA which
held that the petition is premature because the final notice of assessment cannot be
considered as a final decision appealable to the tax court. This was reversed by the
Court of Appeals holding that a demand letter of the BlR reiterating the payment of
deficiency tax, amounts to a final decision on the protested assessment and may
therefore be questioned before the CTA. This conclusion was sustained by this Court on
July l, 200l, in G.R. No. l352l0.8 The case was thus remanded to the CTA for further
proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the
assessment notices issued against lCC. lt held that the claimed deductions for
professional and security services were properly claimed by lCC in l986 because it was
only in the said year when the bills demanding payment were sent to lCC. Hence, even
if some of these professional services were rendered to lCC in l984 or l985, it could
not declare the same as deduction for the said years as the amount thereof could not be
determined at that time.
The CTA also held that lCC did not understate its interest income on the subject
promissory notes. lt found that it was the BlR which made an overstatement of said
income when it compounded the interest income receivable by lCC from the promissory
notes of Realty lnvestment, lnc., despite the absence of a stipulation in the contract
providing for a compounded interest; nor of a circumstance, like delay in payment or
breach of contract, that would justify the application of compounded interest.
Likewise, the CTA found that lCC in fact withheld l% expanded withholding tax on its
claimed deduction for security services as shown by the various payment orders and
confirmation receipts it presented as evidence. The dispositive portion of the CTA's
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-l-86-90-
000680 for deficiency income tax in the amount of P333,l96.86, and Assessment
Notice No. FAS-l-86-90-00068l for deficiency expanded withholding tax in the amount
of P4,897.79, inclusive of surcharges and interest, both for the taxable year l986, are
hereby CANCELLED and SET ASlDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,l0 holding that although the professional services (legal and auditing services)
were rendered to lCC in l984 and l985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only in
l986 when lCC received the billing statements for said services. lt further ruled that lCC
did not understate its interest income from the promissory notes of Realty lnvestment,
lnc., and that lCC properly withheld and remitted taxes on the payments for security
services for the taxable year l986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition
contending that since lCC is using the accrual method of accounting, the expenses for
the professional services that accrued in l984 and l985, should have been declared as
deductions from income during the said years and the failure of lCC to do so bars it
from claiming said expenses as deduction for the taxable year l986. As to the alleged
deficiency interest income and failure to withhold expanded withholding tax assessment,
petitioner invoked the presumption that the assessment notices issued by the BlR are
valid.
The issue for resolution is whether the Court of Appeals correctly: (l) sustained the
deduction of the expenses for professional and security services from lCC's gross
income; and (2) held that lCC did not understate its interest income from the promissory
notes of Realty lnvestment, lnc; and that lCC withheld the required l% withholding tax
from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must have been paid or incurred during
the taxable year; (c) it must have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be supported by receipts, records or other
pertinent papers.ll
The requisite that it must have been paid or incurred during the taxable year is further
qualified by Section 45 of the National lnternal Revenue Code (NlRC) which states that:
"[t]he deduction provided for in this Title shall be taken for the taxable year in which
'paid or accrued' or 'paid or incurred', dependent upon the method of accounting upon
the basis of which the net income is computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and
how to report income and deductions.l2 ln the instant case, the accounting method
used by lCC is the accrual method.
Revenue Audit Memorandum Order No. l-2000, provides that under the accrual method
of accounting, expenses not being claimed as deductions by a taxpayer in the current
year when they are incurred cannot be claimed as deduction from income for the
succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and
other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.l3
The accrual method relies upon the taxpayer's right to receive amounts or its obligation
to pay them, in opposition to actual receipt or payment, which characterizes the cash
method of accounting. Amounts of income accrue where the right to receive them
become fixed, where there is created an enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.l4
For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income or
expense? The accrual of income and expense is permitted when the all-events test has
been met. This test requires: (l) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy. However, the test
does not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it must be determined with "reasonable
accuracy." Accordingly, the term "reasonable accuracy" implies something less than an
exact or completely accurate amount.[l5]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year.
[l6] Accrual method of accounting presents largely a question of fact; such that the
taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction.l7
Corollarily, it is a governing principle in taxation that tax exemptions must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and
one who claims an exemption must be able to justify the same by the clearest grant of
organic or statute law. An exemption from the common burden cannot be permitted to
exist upon vague implications. And since a deduction for income tax purposes partakes
of the nature of a tax exemption, then it must also be strictly construed.l8
ln the instant case, the expenses for professional fees consist of expenses for legal and
auditing services. The expenses for legal services pertain to the l984 and l985 legal
and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, and for reimbursement of the expenses of said firm in connection with lCC's
tax problems for the year l984. As testified by the Treasurer of lCC, the firm has been
its counsel since the l960's.l9 From the nature of the claimed deductions and the span
of time during which the firm was retained, lCC can be expected to have reasonably
known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable
year when they could have been claimed as deductions cannot thus be attributed solely
to the delayed billing of these liabilities by the firm. For one, lCC, in the exercise of due
diligence could have inquired into the amount of their obligation to the firm, especially so
that it is using the accrual method of accounting. For another, it could have reasonably
determined the amount of legal and retainer fees owing to its familiarity with the rates
charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the
taxpayer bears the burden of establishing the accrual of an expense or income.
However, lCC failed to discharge this burden. As to when the firm's performance of its
services in connection with the l984 tax problems were completed, or whether lCC
exercised reasonable diligence to inquire about the amount of its liability, or whether it
does or does not possess the information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact which lCC never established. lt
simply relied on the defense of delayed billing by the firm and the company, which
under the circumstances, is not sufficient to exempt it from being charged with
knowledge of the reasonable amount of the expenses for legal and auditing services.
ln the same vein, the professional fees of SGV & Co. for auditing the financial
statements of lCC for the year l985 cannot be validly claimed as expense deductions in
l986. This is so because lCC failed to present evidence showing that even with only
"reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in the year
l985, it cannot determine the professional fees which said company would charge for
its services.
lCC thus failed to discharge the burden of proving that the claimed expense deductions
for the professional services were allowable deductions for the taxable year l986.
Hence, per Revenue Audit Memorandum Order No. l-2000, they cannot be validly
deducted from its gross income for the said year and were therefore properly disallowed
by the BlR.
As to the expenses for security services, the records show that these expenses were
incurred by lCC in l98620 and could therefore be properly claimed as deductions for
the said year.
Anent the purported understatement of interest income from the promissory notes of
Realty lnvestment, lnc., we sustain the findings of the CTA and the Court of Appeals
that no such understatement exists and that only simple interest computation and not a
compounded one should have been applied by the BlR. There is indeed no stipulation
between the latter and lCC on the application of compounded interest.2l Under Article
l959 of the Civil Code, unless there is a stipulation to the contrary, interest due should
not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that lCC truly withheld the
required withholding tax from its claimed deductions for security services and remitted
the same to the BlR is supported by payment order and confirmation receipts.22 Hence,
the Assessment Notice for deficiency expanded withholding tax was properly cancelled
and set aside.
ln sum, Assessment Notice No. FAS-l-86-90-000680 in the amount of P333,l96.86 for
deficiency income tax should be cancelled and set aside but only insofar as the claimed
deductions of lCC for security services. Said Assessment is valid as to the BlR's
disallowance of lCC's expenses for professional services. The Court of Appeal's
cancellation of Assessment Notice No. FAS-l-86-90-00068l in the amount of
P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTlALLY GRANTED. The September 30, 2005
Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFlRMED with the
MODlFlCATlON that Assessment Notice No. FAS-l-86-90-000680, which disallowed
the expense deduction of lsabela Cultural Corporation for professional and security
services, is declared valid only insofar as the expenses for the professional fees of SGV
& Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BlR for the computation of lsabela Cultural Corporation's
liability under Assessment Notice No. FAS-l-86-90-000680.
SO ORDERED.
SPOUSES DAVlD B. CARPO G.R. Nos. l50773 &
and RECHlLDA S. CARPO, l53599
Petitioners,
Present:

- versus - PUNO, J.,
Chairman,
AUSTRlA-MARTlNEZ,
CALLEJO, SR.,
ELEANOR CHUA and TlNGA, and
ELMA DY NG, CHlCO-NAZARlO, JJ.
Respondents.

Promulgated:

September 30, 2005

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


D E C l S l O N

TlNGA, J.:

Before this Court are two consolidated petitions for review. The first, docketed as G.R.
No. l50773, assails the Decision[l] of the Regional Trial Court (RTC), Branch 26 of
Naga City dated 26 October 200l in Civil Case No. 99-4376. RTC Judge Filemon B.
Montenegro dismissed the complaint[2] for annulment of real estate mortgage and
consequent foreclosure proceedings filed by the spouses David B. Carpo and Rechilda
S. Carpo (petitioners).

The second, docketed as G.R. No. l53599, seeks to annul the Court of Appeals'
Decision[3] dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of Appeals Third
Division annulled and set aside the orders of Judge Corazon A. Tordilla to suspend the
sheriff's enforcement of the writ of possession.

The cases stemmed from a loan contracted by petitioners. On l8 July l995, they
borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount of One
Hundred Seventy-Five Thousand Pesos (Pl75,000.00), payable within six (6) months
with an interest rate of six percent (6%) per month. To secure the payment of the loan,
petitioners mortgaged their residential house and lot situated at San Francisco,
Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT) No.
23l80. Petitioners failed to pay the loan upon demand. Consequently, the real estate
mortgage was extrajudicially foreclosed and the mortgaged property sold at a public
auction on 8 July l996. The house and lot was awarded to respondents, who were the
only bidders, for the amount of Three Hundred Sixty-Seven Thousand Four Hundred
Fifty-Seven Pesos and Eighty Centavos (P367,457.80).

Upon failure of petitioners to exercise their right of redemption, a certificate of sale was
issued on 5 September l997 by Sheriff Rolando A. Borja. TCT No. 23l80 was
cancelled and in its stead, TCT No. 29338 was issued in the name of respondents.

Despite the issuance of the TCT, petitioners continued to occupy the said house and lot,
prompting respondents to file a petition for writ of possession with the RTC docketed as
Special Proceedings (SP) No. 98-l665. On 23 March l999, RTC Judge Ernesto A.
Miguel issued an Order[4] for the issuance of a writ of possession.

On 23 July l999, petitioners filed a complaint for annulment of real estate mortgage
and the consequent foreclosure proceedings, docketed as Civil Case No. 99-4376 of
the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven Thousand
One Hundred Ninety-Seven Pesos and Twenty-Six Centavos (P257,l97.26) with the
RTC.

Meanwhile, in SP No. 98-l665, a temporary restraining order was issued upon motion
on 3 August l999, enjoining the enforcement of the writ of possession. ln an Order[5]
dated 6 January 2000, the RTC suspended the enforcement of the writ of possession
pending the final disposition of Civil Case No. 99-4376. Against this Order, respondents
filed a petition for certiorari and mandamus before the Court of Appeals, docketed as
CA-G.R. SP No. 57297.

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

The second petition for review was filed with the Court after the Court of Appeals on 30
April 2002 annulled and set aside the RTC orders in SP No. 98-l665 on the ground that
it was the ministerial duty of the lower court to issue the writ of possession when title
over the mortgaged property had been consolidated in the mortgagee.

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

ln G.R. No. l50773, petitioners claim that following the Court's ruling in Medel v.
Court of Appeals[6] the rate of interest stipulated in the principal loan agreement is
clearly null and void. Consequently, they also argue that the nullity of the agreed
interest rate affects the validity of the real estate mortgage. Notably, while petitioners
were silent in their petition on the issues of prescription and laches on which the RTC
grounded the dismissal of the complaint, they belatedly raised the matters in their
Memorandum. Nonetheless, these points warrant brief comment.

On the other hand, petitioners argue in G.R. No. l53599 that the RTC did not
commit any grave abuse of discretion when it issued the orders dated 3 August l999
and 6 January 2000, and that these orders could not have been "the proper subjects of
a petition for certiorari and mandamus". More accurately, the justiciable issues before
us are whether the Court of Appeals could properly entertain the petition for certiorari
from the timeliness aspect, and whether the appellate court correctly concluded that the
writ of possession could no longer be stayed.


We first resolve the petition in G.R. No. l50773.

Petitioners contend that the agreed rate of interest of 6% per month or 72% per annum
is so excessive, iniquitous, unconscionable and exorbitant that it should have been
declared null and void. lnstead of dismissing their complaint, they aver that the lower
court should have declared them liable to respondents for the original amount of the
loan plus l2% interest per annum and l% monthly penalty charge as liquidated
damages,[7] in view of the ruling in Medel v. Court of Appeals.[8]

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

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

ln a long line of cases, this Court has invalidated similar stipulations on interest rates
for being excessive, iniquitous, unconscionable and exorbitant. ln Solangon v. Salazar,
[l0] we annulled the stipulation of 6% per month or 72% per annum interest on a
P60,000.00 loan. ln lmperial v. Jaucian,[ll] we reduced the interest rate from l6% to
l.l67% per month or l4% per annum. ln Ruiz v. Court of Appeals,[l2] we equitably
reduced the agreed 3% per month or 36% per annum interest to l% per month or l2%
per annum interest. The l0% and 8% interest rates per month on a Pl,000,000.00 loan
were reduced to l2% per annum in Cuaton v. Salud.[l3] Recently, this Court, in Arrofo
v. Quino,[l4] reduced the 7% interest per month on a Pl5,000.00 loan amounting to
84% interest per annum to l8% per annum.

There is no need to unsettle the principle affirmed in Medel and like cases. From
that perspective, it is apparent that the stipulated interest in the subject loan is
excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of
contract principle embodied in Article l306 of the Civil Code, contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order,
or public policy. ln the ordinary course, the codal provision may be invoked to annul the
excessive stipulated interest.

ln the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By
the standards set in the above-cited cases, this stipulation is similarly invalid. However,
the RTC refused to apply the principle cited and employed in Medel on the ground that
Medel did not pertain to the annulment of a real estate mortgage,[l5] as it was a case
for annulment of the loan contract itself. The question thus sensibly arises whether the
invalidity of the stipulation on interest carries with it the invalidity of the principal
obligation.

The question is crucial to the present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage contract. The consideration of
the mortgage contract is the same as that of the principal contract from which it receives
life, and without which it cannot exist as an independent contract. Being a mere
accessory contract, the validity of the mortgage contract would depend on the validity of
the loan secured by it.[l6]

Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to the
more reasonable rate of l2% per annum. The same remedial approach to the wrongful
interest rates involved was employed or affirmed by the Court in Solangon, lmperial,
Ruiz, Cuaton, and Arrofo.

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

We are aware that the Court of Appeals, on certain occasions, had ruled that a
usurious loan is wholly null and void both as to the loan and as to the usurious interest.
[l7] However, this Court adopted the contrary rule,

as comprehensively discussed in Briones v. Cammayo:[l8]

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

. . . .


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

Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 9l9 and
Pascua vs. Perez, L-l9554, January 3l, l964, l0 SCRA l99, 200-202. ln the latter We
expressly held that when a contract is found to be tainted with usury "the only right of
the respondent (creditor) . . . was merely to collect the amount of the loan, plus interest
due thereon."

The view has been expressed, however, that the ruling thus consistently adhered to
should now be abandoned because Article l957 of the new Civil Code a subsequent
law provides that contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury, shall be void, and that in such cases "the
borrower may recover in accordance with the laws on usury." From this the conclusion
is drawn that the whole contract is void and that, therefore, the creditor has no right to
recover not even his capital.

The meaning and scope of our ruling in the cases mentioned heretofore is clearly
stated, and the view referred to in the preceding paragraph is adequately answered, in
Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, l968). On the
question of whether a creditor in a usurious contract may or may not recover the
principal of the loan, and, in the affirmative, whether or not he may also recover interest
thereon at the legal rate, We said the following:

". . . .

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

Great reliance is made by appellants on Art. l4ll of the New Civil Code . . . .

Since, according to the appellants, a usurious loan is void due to illegality of cause or
object, the rule of pari delicto expressed in Article l4ll, supra, applies, so that neither
party can bring action against each other. Said rule, however, appellants add, is
modified as to the borrower, by express provision of the law (Art. l4l3, New Civil
Code), allowing the borrower to recover interest paid in excess of the interest allowed
by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot
recover on the contract. So they continue the New Civil Code provisions must be
upheld as against the Usury Law, under which a loan with usurious interest is not totally
void, because of Article l96l of the New Civil Code, that: "Usurious contracts shall be
governed by the Usury Law and other special laws, so far as they are not inconsistent
with this Code."

We do not agree with such reasoning. Article l4ll of the New Civil Code is not new; it
is the same as Article l305 of the Old Civil Code. Therefore, said provision is no
warrant for departing from previous interpretation that, as provided in the Usury Law
(Act No. 2655, as amended), a loan with usurious interest is not totally void only as to
the interest.

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

And said two stipulations are divisible in the sense that the former can still stand without
the latter. Article l273, Civil Code, attests to this: "The renunciation of the principal debt
shall extinguish the accessory obligations; but the waiver of the latter shall leave the
former in force."

The question therefore to resolve is whether the illegal terms as to payment of interest
likewise renders a nullity the legal terms as to payments of the principal debt. Article
l420 of the New Civil Code provides in this regard: "ln case of a divisible contract, if the
illegal terms can be separated from the legal ones, the latter may be enforced."

ln simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article l350, Civil Code), is not illegal.
The illegality lies only as to the prestation to pay the stipulated interest; hence, being
separable, the latter only should be deemed void, since it is the only one that is illegal.

. . . .

The principal debt remaining without stipulation for payment of interest can thus be
recovered by judicial action. And in case of such demand, and the debtor incurs in
delay, the debt earns interest from the date of the demand (in this case from the filing of
the complaint). Such interest is not due to stipulation, for there was none, the same
being void. Rather, it is due to the general provision of law that in obligations to pay
money, where the debtor incurs in delay, he has to pay interest by way of damages (Art.
2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay
the principal debt with interest thereon at the legal rate, from the date of filing of the
complaint."[l9]

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

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

Yet the RTC pronounced that the complaint was barred by the four-year prescriptive
period provided in Article l39l of the Civil Code, which governs voidable contracts. This
conclusion was derived from the allegation in the complaint that the consent of
petitioners was vitiated through undue influence. While the RTC correctly acknowledged
the rule of prescription for voidable contracts, it erred in applying the rule in this case.
We are hard put to conclude in this case that there was any undue influence in the first
place.

There is ultimately no showing that petitioners' consent to the loan and mortgage
agreements was vitiated by undue influence. The financial condition of petitioners may
have motivated them to contract with respondents, but undue influence cannot be
attributed to respondents simply because they had lent money. Article l39l, in relation
to Article l390 of the Civil Code, grants the aggrieved party the right to obtain the
annulment of contract on account of factors which vitiate consent. Article l337 defines
the concept of undue influence, as follows:

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

While petitioners were allegedly financially distressed, it must be proven that there
is deprivation of their free agency. ln other words, for undue influence to be present,
the influence exerted must have so overpowered or subjugated the mind of a
contracting party as to destroy his free agency, making him express the will of another
rather than his own.[2l] The alleged lingering financial woes of petitioners per se cannot
be equated with the presence of undue influence.

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

ln all these proceedings starting from the foreclosure, followed by the issuance of a
provisional certificate of sale; then the definite certificate of sale; then the issuance of
TCT No. 29338 in favor of the defendants and finally the petition for the issuance of the
writ of possession in favor of the defendants, there is no showing that plaintiffs
questioned the validity of these proceedings. lt was only after the issuance of the writ of
possession in favor of the defendants, that plaintiffs allegedly tendered to the
defendants the amount of P260,000.00 which the defendants refused. ln all these
proceedings, why did plaintiffs sleep on their rights?[22]

Clearly then, with the absence of undue influence, petitioners have no cause of
action. Even assuming undue influence vitiated their consent to the loan contract, their
action would already be barred by prescription when they filed it. Moreover, petitioners
had clearly slept on their rights as they failed to timely assail the validity of the mortgage
agreement. The denial of the petition in G.R. No. l50773 is warranted.

We now resolve the petition in G.R. No. l53599.

Petitioners claim that the assailed RTC orders dated 3 August l999 and 6 January
2000 could no longer be questioned in a special civil action for certiorari and
mandamus as the reglementary period for such action had already elapsed.

lt must be noted that the Order dated 3 August l999 suspending the enforcement
of the writ of possession had a period of effectivity of only twenty (20) days from 3
August l999, or until 23 August l999. Thus, upon the expiration of the twenty (20)-day
period, the said Order became functus officio. Thus, there is really no sense in assailing
the validity of this Order, mooted as it was. For the same reason, the validity of the
order need not have been assailed by respondents in their special civil action before the
Court of Appeals.

On the other hand, the Order dated 6 January 2000 is in the nature of a writ of
injunction whose period of efficacy is indefinite. lt may be properly assailed by way of
the special civil action for certiorari, as it is interlocutory in nature.

As a rule, the special civil action for certiorari under Rule 65 must be filed not later
than sixty (60) days from notice of the judgment or order.[23] Petitioners argue that the
3 August l999 Order could no longer be assailed by respondents in a special civil
action for certiorari before the Court of Appeals, as the petition was filed beyond sixty
(60) days following respondents' receipt of the Order. Considering that the 3 August
l999 Order had become functus officio in the first place, this argument deserves scant
consideration.

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

Since the 6 January 2000 Order is not a final order, but rather interlocutory in
nature, we cannot agree with petitioners who insist that it may be assailed only through
an appeal perfected within fifteen (l5) days from receipt thereof by respondents. lt is
axiomatic that an interlocutory order cannot be challenged by an appeal,

but is susceptible to review only through the special civil action of certiorari.[25] The
sixty (60)-day reglementary period for special civil actions under Rule 65 applies, and
respondents' petition was filed with the Court of Appeals well within the period.

Accordingly, no error can be attributed to the Court of Appeals in granting the
petition for certiorari and mandamus. As pointed out by respondents, the remedy of
mandamus lies to compel the performance of a ministerial duty. The issuance of a writ
of possession to a purchaser in an extrajudicial foreclosure is merely a ministerial
function.[26]

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

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

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

SO ORDERED.

SENTlNEL lNSURANCE CO., lNC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. FLORELlANA CASTRO-
BARTOLOME, Presiding Judge, Court of First lnstance of Rizal, Seventh Judicial
District, Branch XV, THE PROVlNClAL SHERlFF OF RlZAL, and ROSE lNDUSTRlES,
lNC., respondents.
Jesus l. Santos Law Office for petitioner.
Quasha, Asperilla, Ancheta, Valmonte, Pea & Marcos for private respondent.

REGALADO, J.:
Before us is a petition seeking the amendment and modification of the dispositive
portion of respondent court's decision in CA-G.R. No. SP-0933l, l allegedly to make it
conform with the findings, arguments and observations embodied in said decision which
relief was denied by respondent court in its resolution, dated January l5, l980, 2
rejecting petitioner's ex parte motion filed for that purpose. 3
While not involving the main issues in the case threshed out in the court a quo, the
judgment in which had already become final and executory, the factual backdrop of the
present petition is summarized by respondent court as follows:
Petitioner Sentinel lnsurance Co., lnc., was the surety in a contract of suretyship
entered into on November l5, l974 with Nemesio Azcueta, Sr., who is doing business
under the name and style of 'Malayan Trading as reflected in SlCO Bond No.
G(l6)00278 where both of them bound themselves, 'jointly and severally, to fully and
religiously guarantee the compliance with the terms and stipulations of the credit line
granted by private respondent Rose lndustries, lnc., in favor of Nemesio Azcueta, Sr., in
the amount of Pl80,00.00.' Between November 23 to December 23, l974, Azcueta
made various purchases of tires, batteries and tire tubes from the private respondent
but failed to pay therefor, prompting the latter to demand payment but because Azcueta
failed to settle his accounts, the case was referred to the lnsurance Commissioner who
invited the attention of the petitioner on the matter and the latter cancelled the
Suretyship Agreement on May l3, l975 with due notice to the private respondent.
Meanwhile, private respondent filed with the respondent court of Makati a complaint for
collection of sum of money against herein petitioner and Azcueta, docketed as Civil
Case No. 2l248 alleging the foregoing antecedents and praying that said defendants be
ordered to pay jointly and severally unto the plaintiff.
a) The amount of Pl98,602.4l as its principal obligation, including interest and
damage dues as of April 29, l975;
b) To pay interest at l4% per annum and damage dues at the rate of 2% every 45
days commencing from April 30, l975 up to the time the full amount is fully paid:
xxx xxx xxx
After petitioner filed its answer with counterclaim, the case, upon agreement of the
parties, was submitted for summary judgment and on December 29, l975, respondent
court rendered its decision with the following dispositive portion:
xxx xxx xxx
a) To pay interest on the principal obligation at the rate of l4% per annum at the
rate of 2% every 45 days commencing from April 30, l975 until the amount is fully paid.
The decision having become final and executory, the prevailing party moved for its
execution which respondent judge granted and pursuant thereto, a notice of attachment
and levy was served by respondent Provincial Sheriff upon the petitioner. On the same
day, however, the latter filed a motion for 'clarification of the judgment as to its real and
true import because on its face, it would appear that aside from the l4% interest
imposed on the principal obligation, an additional 2% every 45 days corresponding to
the additional penalty has been imposed against the petitioner which imposition would
be usurious and could not have been the intention of respondent Judge.' But the move
did nor prosper because oil May 22, l97l, the judge denied the motion on the theory
that the judgment, having become final and executory, it can no longer be amended or
corrected. 4
Contending that the order was issued with grave abuse of discretion, petitioner went to
respondent court on a petition for certiorari and mandamus to compel the court below to
clarify its decision, particularly Paragraph l(a) of the dispositive portion thereof.
Respondent court granted tile petition in its decision dated December 3, l979, the
disquisition and dispositive portion whereof read:
While it is an elementary rule of procedure that after a decision, order or ruling has
become final, the court loses its jurisdiction orderover the same and can no longer be
subjected to any modification or alteration, it is likewise well-settled that courts are
empowered even after such finality, to correct clerical errors or mistakes in the
decisions (Potenciano vs. CA, L-ll569, 55 O.G. 2895). A clerical error is one that is
visible to the eyes or obvious to the understanding (Black vs. Republic, l04 Phil. 849).
That there was a mistake in the dispositive portion of the decision cannot be denied
considering that in the complaint filed against the petitioner, the prayer as specifically
stated in paragraph (b) was to 'order the latter, to pay interest at l4% per annum and
damage dues at the rate of 2% every 45 days commencing from April 30, l975 up to
the time the amount is fully paid.' But this notwithstanding the respondent court in its
questioned decision decreed the petitioner to pay the interest on the principal obligation
at the rate of l4% per annum and 2% every 45 days commencing from April 30, l975
until the amount is fully paid,' so that, as petitioner correctly observes, it would appear
that on top of the l4% per annum on the principal obligation, another 2% interest every
45 days commencing from April 30, l975 until the amount is fully paid has been
imposed against him (petitioner). ln other words, 365 days in one year divided by 45
days equals 8-l/9 which, multiplied by 2% as ordered by respondent-judge would
amount to a little more than l6%. Adding l6% per annum to the l4% interest imposed
on the principal obligation would be 30% which is veritably usurious and this cannot be
countenanced, much less sanctioned by any court of justice.
We agree with this observation and what is more, it is likewise a settled rule that
although a court may grant any relief allowed by law, such prerogative is delimited by
the cardinal principle that it cannot grant anything more than what is prayed for, for
certainly, the relief to be dispensed cannot rise above its source. (Potenciano vs. CA,
supra.)
WHEREFORE, the writ of certiorari is hereby granted and the respondent judge is
ordered to clarify its judgment complained of in the following manner:
xxx xxx xxx
a) to pay interest at l4% per annum on the principal obligation and damage dues at
the rate of 2% every 45 days commencing from April 30, l975 up to the time the full
amount is fully paid; 5
xxx xxx xxx
As earlier stated, petitioner filed an ex parte motion seeking to amend the above-quoted
decretal portion which respondent court denied, hence the petition at bar.
The amendment sought, ostensibly in order that the dispositive portion of said decision
would conform with the body thereof, is the sole issue for resolution by the Court.
Petitioner itself cites authorities in support of its contention that it is entitled to a correct
and clear expression of a judgment to avoid substantial injustice. 6 ln amplification of its
plaint, petitioner further asseverates that respondent court should not have made an
award for "damage dues" at such late stage of the proceeding since said dues were not
the subject of the award made by the trial court. 7
We disagree with petitioner.
To clarify an ambiguity or correct a clerical error in the judgment, the court may resort to
the pleadings filed by the parties, the findings of fact and the conclusions of law
expressed in the text or body of the decision. 8
lndeed, this was what respondent court did in resolving the original petition. lt examined
the complaint filed against the petitioner and noted that the prayer as stated in
Paragraph (b) thereof was to "order defendant to pay interest at l4 per centum and
damage dues at the rate of 2% every 45 days commencing from April 30, l975 up to
the time the full amount is fully paid." 9
lnsofar as the findings and the dispositive portion set forth in respondent court's
decision are concerned, there is really no inconsistency as wittingly or unwittingly
asserted by petitioner.
The findings made by respondent court did not actually nullify the judgment of the trial
court. More specifically, the statement that the imposition of 2% interest every 45 days
commencing from April 30, l975 on top of the l4% per annum (as would be the
impression from a superficial reading of the dispositive portion of the trial court's
decision) would be usurious is a sound observation. lt should, however, be stressed that
such observation was on the theoretical assumption that the rate of 2% is being
imposed as interest, not as damage dues which was the intendment of the trial court.
Certainly, the damage dues in this case do not include and are not included in the
computation of interest as the two are of different categories and are distinct claims
which may be demanded separately, in the same manner that commissions, fines and
penalties are excluded in the computation of interest where the loan or forbearance is
not secured in whole or in part by real estate or an interest therein. l0
While interest forms part of the consideration of the contract itself, damage dues
(penalties, and so forth) are usually made payable only in case of default or non-
performance of the contract. ll Also, although interest is subject to the provisions of the
Usury Law, l2 there is no policy or provision in such law preventing the enforcement of
damage dues although the effect may be to increase the sum payable beyond the
prescribed ceiling rates.
Petitioner's assertion that respondent court acted without authority in appending the
award of damage dues to the judgment of the trial court should be rejected. As correctly
pointed out by private respondent, the opening sentence of Paragraph l(a) of the
dispositive portion of the lower court's decision explicitly ordered petitioner to pay
private respondent the amount of Pl98,602.4l as principal obligation including interest
and damage dues, which is a clear and unequivocal indication of the lower court's intent
to award both interest and damage dues. l3
Significantly, it bears mention that on several occasions before petitioner moved for a
clarificatory judgment, it offered to settle its account with private respondent without
assailing the imposition of the aforementioned damage dues. l4 As ramified by private
respondent:
2. ... the then counsel of record for the petitioner, Atty. Porfirio Bautista, and Atty.
Teodulfo L. Reyes, petitioner's Assistant Vice- President for Operations, had a
conference with the undersigned attorneys as to how petitioner will settle its account to
avoid execution. During the conference, both parties arrived at almost the same
computation and the amount due from petitioner, which includes 2% damage dues
every 45 days from 30 April l975 until the amount is fully paid, under the judgment. No
question was ever raised as regards same.
xxx xxx xxx
5. The very face of Annex 'D' shows that the '2%' damage dues being questioned by the
present counsel of petitioner had been mentioned no less than TEN (l0) TlMES and
was clearly and distinctly defined by petitioner and included in the computation of its
obligation to herein petitioner as '2% penalty for every 45 days.'
xxx xxx xxx
Petitioner's pretense that it was not the intent of the court to award the damage dues of
2% every 45 days commencing 30 April l975 is belied by the fact (and this is admitted
by petitioner) that upon agreement of the parties, the case before the lower court was
submitted for summary judgment; in other words, the case was submitted upon the facts
as appear in the pleadings with no other evidence presented and a fact that appears
clearly in the pleadings is that the defendants in the case before the lower court were
under contract to pay private respondent, among others, the damage dues of 2% every
45 days commencing on 30 April l975 until the obligation is fully paid; .... l5
Respondent court demonstrably did not err in ordering the clarification of the decision of
the trial court by amending the questioned part of its dispositive portion to include
therein the phrase damage dues to modify the stated rate of 2%, and thereby obviate
any misconception that it is being imposed as interest.
ACCORDlNGLY, certiorari is hereby DENlED and the decision of respondent Court of
Appeals is hereby AFFlRMED.
SO ORDERED.
G.R. Nos. L-43697 and L-442200 March 3l, l938
ln re Liquidation of the Mercantile Bank of China,
GOPOCO GROCERY (GOPOCO), ET AL., claimants-appellants,
vs.
PAClFlC COAST BlSCUlT CO., ET AL., oppositors-appellees.
A.M. Zarate for appellants Gopoco Grocery et al.
Laurel, Del Rosario and Sabido for appellant Tiong-Chui Gion.
Ross, Lawrence and Selph for appellees Pacific Coast Biscuit Co. et al.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese Grocers Asso. et al.
Marcelo Nubla for appellees Ang Cheng Lian et al.
DlAZ, J.:
On petition of the Bank Commissioner who alleged to have found, after an investigation,
that the Mercantile Bank of China could not continue operating as such without running
the risk of suffering losses and prejudice its depositors and customers; and that with the
requisite approval of the corresponding authorities, he had taken charge of all the
assets thereof; the Court of First lnstance of Manila declared the said bank in
liquidation; approved all the acts theretofore executed by the commissioner; prohibited
the officers and agents of the bank from interfering with said commissioner in the
possession of the assets thereof, its documents, deed, vouchers, books of account,
papers, memorandum, notes, bond, bonds and accounts, obligations or securities and
its real and personal properties; required its creditors and all those who had any claim
against it, to present the same in writing before the commissioner within ninety days;
and ordered the publication, as was in fact done, of the order containing all these
provisions, for the two consecutive weeks in two news-papers of general circulation in
the City of Manila, at the expenses of the aforesaid bank. After these publications, and
within the period of ninety days, the following creditors, among others, presented their
presented their claims:
Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy Guan Huat and La
Bella Tondea.
l. The claim of Tiong Chui Gion is for the sum of Pl0,285.27. He alleged that he
deposited said sum in the bank under liquidation on current account.
ll. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48 plus P460. lt
described its claim as follows:
Balance due on open account subject to check P4,927.95
lnterest on c/a 4,53
4,932.48
Surety deposit 460.00
lll. The claim of Tan Locko is for the sum of P7,624.20, and he describes it in turn as
follows:
Balance due on open account subject to check L-759 P7,6l0.44
Savings account No. l56 (foreign) with Mercantile Bank of China L-l6ll Amoy
$l5,000,00 lnterest on said Savings Account No. l56 8.22
lnterest on checking a/c l0.54
7,624.20
lV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set out in its written
claim appearing in the record on appeal as follows:
Balance due on open subject to check L-845 P6,96l.0l
lnterest on checking a/c ll.37
6,972.83
V. The claim of Sy Guan Huat is for the sum of P6,232.88 and the described it as
follows:
Balance due on open account subject to check L-7l8 P6,224.34
lnterest on checking a/c 8.54
6,232.88
Vl. The claim of La Bella Tondea is for the sum of Pl,9l2.79, also described as
follows:
Balance due on open account subject to check Pl9l0.59
lnterest on account 2.20
l,9l2.79
To better resolve not only these claims but also the many others which were presented
against the bank, the lower court, on July l5, l932, appointed Fulgencio Borromeo as
commissioner and referee to receive the evidence which the interested parties may
desire to present; and the commissioner and referee thus named, after qualifying for the
office and receiving the evidence presented to him, resolved the aforesaid six claims by
recommending that the same be considered as an ordinary credit only, and not as a
preferred credit as the interested parties wanted, because they were at the same time
debtors of the bank.
The evidence adduced and the very admissions of the said interested parties in fact
show that (a) the claimant Tiong Chui Gion, while he was a creditor of the Mercantile
Bank of China in the sum of Pl0,285.27 which he deposited on current account, was
also a debtor not only in the sum of P633.76 but also in the sum of P664.77, the amount
of a draft which he accepted, plus interest thereon and the protest fees paid therefor; (b)
the claimant Gopoco Grocery (Gopoco) had a current account in the bank in the sum of
P5,392.48, but it is indebted to it, in Turn, in the sum of $2,334.80, the amount of certain
drafts which it had accepted; (c) the claimant Tan Locko had a deposit of P7,624.20, but
he owed $l,378.90, the amount of a draft which he also accepted; (d) the claimant Woo
& Lo & Co. had a deposit of P6,972.88, but it was indebted in the sum of $3,464.84, the
amount also of certain drafts accepted by it; (e) the claimants Sy Guan Huat and Sy Kia
had a deposit of P6,232.88, but they owed the sum of $3,l07.37, for two drafts
accepted by them and already due; and (f) the claimant La Bella Tondea had, in turn, a
deposit of Pl,9l2.79, but it was, in turn, indebted in the sum of $565.40 including
interest and other expenses, the amount of two drafts drawn upon and accepted by it.
The lower court approved all the recommendations of The commissioner and referee as
to claims of the six appellants as follows; (l) To approve the claim of Tiong Chui Gion
(Pl0,285.27) but only as an ordinary credit, minus the amount of the draft for P664.77;
(2) to approve the claim of Gopoco Grocery (Gopoco) but also as an ordinary credit only
(P5,387.95 according to the referee), minus its obligation amounting to $2,334.80 or
P4,669.60; (3) to approve the claim of Tan Locko but as an ordinary credit only
(P7,6l0.44 according to the referee), deducting therefrom his obligation amounting to
$l,378.90 or P2,757.80; to approve the claim of Woo & Lo & Co. but only as an ordinary
credit (P6,96l.0l according to the referee). after deducting its obligation to the bank,
amounting to $3,464.84 or P6,929.68; (5) to approve the claim of Sy Guan Huat but
only as an ordinary credit (P6,224.34 according to the referee), after deducting his
obligation amounting to $3,l07.37) or P6,2l4.74; and, finally, (6) to approve the claim of
la Bella Tondea but also as an ordinary credit only (l,9l7.50 according to the referee),
after deducting it obligation amounting to $565.40 or Pl,l30.80; but he expressly
refused to authorize the payment of the interest by reason of impossibility upon the
ground set out in the decision. Not agreeable to the decision of the lower court, each of
the interested parties appealed therefrom and thereafter filed their respective briefs.
Tiong Chui Gion argues in his brief filed in case in G. R. No. 442200, that the lower
court erred:
l. ln holding that his deposit of Pl0,285.27 in the Mercantile Bank of China, constitutes
an ordinary credit only and not a preferred credit.
2. ln holding as preferred credits the drafts and checks issued by the bank under
liquidation in payment of the drafts remitted to it for collection from merchants residing in
the country, by foreign entities or banks; and in not holding that the deposits on current
account in said bank should enjoy preference over said drafts and checks; and
3. ln holding that the amount of P633.76 (which should be understood as P664.77),
which the claimant owes to the bank under liquidation, be deducted from his current
account deposit therein, amounting to Pl0,285.27, upon the distribution of the assets of
the bank among its various creditors, instead of holding that, after deducting the
aforesaid sum of P633.76 (should be P664.77) from his aforesaid deposit, there be
turned over to him the balance together with the dividends or shares then corresponding
to him, on the basis of said amount.
The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo & Co., Sy Guan
Huat and La Bella Tondea, in turn argue in the brief they jointly filed in case G. R. No.
43697, that the lower court erred:
l. ln not first deducting from their respective deposits in the bank under liquidation,
whose payment they claim, their respective obligation thereto.
2. ln not holding that their claims constitute a preferred credit.
3. ln holding that the drafts and checks issued by the bank under liquidation in payment
of the drafts remitted to it by foreign entitles and banks for collection from the certain
merchant residing in the country, are preferred credits; and in not holding that the
deposits made by each of them enjoy preference over said drafts and checks, and
4. ln denying their motion for a new trial base on the proposition that the appealed
decision is not in accordance with law and is contrary to the evidence adduced at the
trial.
The questions raised by the appellant in case G. R. No. 44200 and by appellants in
case G.R. 43697 being identical in nature, we believe it practical and proper to resolve
said questions jointly in one decision. Before proceeding, however, it is convenient to
note that the commissioner and referee, classifying the various claims presented
against the bank, placed under one group those partaking of the same nature, the
classification having resulted in six groups.
ln the first group he included all the claims for current account, savings and fixed
deposits.
ln the second group he included the claims for checks or drafts sold by the bank under
liquidation and not paid by the agents or banks in whose favor they had been issued.
ln the third group he included the claims checks or drafts issued by the bank under
liquidation in payment or reimbursement of the drafts or goods remitted to it for
collection, from resident merchants and entitles, by foreign banks and entities.
ln the fourth group he included the claims for drafts or securities to be collected from
resident merchants and entities to be collected from resident merchants and entities
which were pending collection on the date payments were suspended.
ln the fifth group he included the claims of certain depositors or creditors of the bank
who were at the same time debtors thereof; and he considered of this class the claims
of the appellants in these two cases, and
ln the sixth group he included the other claims different in nature from the of the
aforesaid five claims.
l. Now, then, should the appellants' deposits on current account in the bank now under
liquidation be considered preferred credits, and not otherwise, or should they be
considered ordinary credits only? The appellants contend that they are preferred credits
only? The appellants contend that they are preferred credits because they are deposits
in contemplation of law, and as such should be returned with the corresponding interest
thereon. ln support thereof they cite Manresa (ll Manresa, Civil Code, page 663), and
what has been insinuated in the case of Rogers vs. Smith, Bell & Co. (l0 Phil., 3l9),
citing the said commentator who maintains that, notwithstanding the provisions of
articles l767 and l768 and others of the aforesaid Code, from which it is inferred that
the so-called irregular deposits no longer exist, the fact is that said deposits still exist.
And they contend and argue that what they had in the bank should be considered as of
this character. But it happens that they themselves admit that the bank owes them
interest which should have been paid to them before it was declared in a state of
liquidation. This fact undoubtedly destroys the character which they nullifies their
contention that the same be considered as irregular deposits, because the payment of
interest only takes place in the case of loans. On the other hand, as we stated with
respect to the claim of Tan Tiong Tick (ln re Liquidation of Mercantile Bank of China,
G.R. No. 43682), the provisions of the Code of Commerce, and not those of the Civil
Code, are applicable to cases of the nature of those at bar, which have to do with
parties who are both merchants. (Articles 303 and 309, Code of Commerce.) We there
said, and it is not amiss to repeat now, that the so-called current account and savings
deposits have lost their character of deposits, properly so-called and are convertible into
simple commercial loans because, in cases of such deposits, the bank has made use
thereof in the ordinary course of its transactions as an institution engaged in the banking
business, not because it so wishes, but precisely because of the authority deemed to
have been granted to it by the appellants to enable them to collect the interest which
they had been and they are now collecting, and by virtue further of the authority granted
to it by section l25 of the Corporation Law (Act No. l459), as amended by Acts Nos.
2003 and 36l0 and section 9 of the Banking Law (Act No. 3l54), without considering of
course the provisions of article l768 of the Civil Code. Wherefore, it is held that the
deposits on current account of the appellants in the bank under liquidation, with the right
on their right on their part to collect interest, have not created and could not create a
juridical relation between them except that of creditors and debtor, they being the
creditors and the bank the debtor.
What has so far been said resolves adversely the contention of the appellants, the
question raised in the first and second assigned errors Tiong Chui Gion in case G. R.
No. 44200, and the appellants' second and third assigned errors in case G. R. No.
43697.
ll. As to the third and first errors attributed to lower court by Tiong Chui Gion in his case,
and by the other appellants in theirs, respectively, it should be stated that the question
of set-off raised by them cannot be resolved a like question in the said case, G. R. No.
43682, entitled "ln re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant."
lt is proper that set-offs be made, inasmuch as the appellants and the bank being
reciprocally debtors and creditors, the same is only just and according to law (art. ll95,
Civil Code), particularly as none of the appellants falls within the exceptions mentioned
in section 58 of the lnsolvency Law (Act No. l956), reading:
SEC. 58. ln all cases of mutual debts and mutual credits between the parties, the
account between them shall be stated, and one debt set off against the other, and the
balance only shall be allowed and paid. But no set-off or counterclaim shall be allowed
of a claim in its nature not provable against the estate: Provided, That no set-off on
counterclaim shall be allowed in favor of any debtor to the insolvent of a claim
purchased by or transferred to such debtor within thirty days immediately preceding the
filing, or after the filing of the petition by or against the insolvent.
lt has been said with much basis by Morse, in his work on Bank and Banking (6th ed.,
vol. l, pages 776 and 784) that:
The rules of law as to the right of set-off between the bank and its depositors are not
different from those applicable to other parties. (Page 776.)
Where the bank itself stops payment and becomes insolvent, the customer may avail
himself in set-off against his indebtedness to the bank of any indebtedness of the bank
to himself, as, for example, the balance due him on his deposit account. (Page 784.)
But if set-offs are proper in these cases, when and how should they be made,
considering that the appellants ask for the payment of interest? Are they by any chance
entitled to interest? lf they are, when and until what time should they be paid the same?
The question of whether they are entitled to interest should be resolved in the same way
that we resolved the case of the claimant Tan Tiong Tick in the said case, G. R. No.
43682. The circumstances in these two cases are certainly the same as those in the
said case with reference to the said question. The Mercantile Bank of China owes to
each of the appellants the interest claimed by them, corresponding to the year ending
December 4, l93l, the date it was declared in a state of liquidation, but not which the
appellants claim should be earned by their deposits after said date and until the full
amounts thereof are paid to them. And with respect to the question of set-off, this
should be deemed made, of course, as of the date when the Mercantile Bank of China
was declared in a state of liquidation, that is, on December 4, l93l, for then there was
already a reciprocal concurrence of debts, with respect to said bank and the appellants.
(Arts. ll95 and ll96 of the Civil Code; 8 Manresa, 4th ed., p. 36l.)
lll. With respect to the fourth assigned error of the appellants in case G. R. No. 43697,
we hold, in view of the considerations set out in resolving the other assignments of
errors, that the lower court properly denied the motion for new trial of said appellants.
ln view of the foregoing, we modify the appealed judgments by holding that the deposits
claimed by the appellants, and declared by the lower court to be ordinary credits are for
the following amounts: Pl0,285.27 of Tiong Chui Gion; P5,387.95 of Gopoco Grocery
(Gopoco); P7,6l0.44 of Tan Locko; P696l.0l of Woo & Lo & Co.; P6,224.34 of Sy
Guan Huat; and Pl,9l7.50 of La Bella Tondea, plus their corresponding interest up to
December 4, l93l; that their obligations to the bank under liquidation which should be
set off against said deposits, are respectively for the following amounts: P664.77 of
Tiong Chui Gion; P4,669.60 of Gopoco Grocery (Gopoco); P2,757.80 of Tan Locko;
P6,929.68 of Woo & Lo & Co.; P6,2l4.74 of Sy Huat; and Pl,l30.80 of La Bella
Todea; and we order that the set-offs in question be made in the manner stated in this
decision, that is, as of the date already indicated, December 4, l93l. ln all other
respects, we affirm the aforesaid judgments, without special pronouncement as to
costs. So ordered.
G.R. No. L-20ll9 June 30, l967
CENTRAL BANK OF THE PHlLlPPlNES, petitioner,
vs.
THE HONORABLE JUDGE JESUS P. MORFE and FlRST MUTUAL SAVlNG AND
LOAN ORGANlZATlON, lNC., respondents.
Natalio M. Balboa, F. E. Evangelista and Mariano Abaya for petitioner.
Halili, Bolinao, Bolinao and Associates for respondents.
CONCEPClON, C.J.:
This is an original action for certiorari, prohibition and injunction, with preliminary
injunction, against an order of the Court of First lnstance of Manila, the dispositive part
of which reads:
WHEREFORE, upon the petitioner filing an injunction bond in the amount of P3,000.00,
let a writ of preliminary preventive and/or mandatory injunction issue, restraining the
respondents, their agents or representatives, from further searching the premises and
properties and from taking custody of the various documents and papers of the
petitioner corporation, whether in its main office or in any of its branches; and ordering
the respondent Central Bank and/or its co-respondents to return to the petitioner within
five (5) days from service on respondents of the writ of preventive and/or mandatory
injunction, all the books, documents, and papers so far seized from the petitioner
pursuant to the aforesaid search warrant.lwphl.t
Upon the filing of the petition herein and of the requisite bond, we issued, on August l4,
l962, a writ of preliminary injunction restraining and prohibiting respondents herein from
enforcing the order above quoted.
The main respondent in this case, the First Mutual Savings and Loan Organization, lnc.
hereinafter referred to as the Organization is a registered non-stock corporation,
the main purpose of which, according to its Articles of lncorporation, dated February l4,
l96l, is "to encourage . . . and implement savings and thrift among its members, and to
extend financial assistance in the form of loans," to them. The Organization has three
(3) classes of "members,"l namely: (a) founder members who originally joined the
organization and have signed the pre-incorporation papers with the exclusive right to
vote and be voted for ; (b) participating members with "no right to vote or be voted
for" to which category all other members belong; except (c) honorary members, so
made by the board of trustees, "at the exclusive discretion" thereof due to
"assistance, honor, prestige or help extended in the propagation" of the objectives of the
Organization without any pecuniary expenses on the part of said honorary members.
On February l4, l962, the legal department of the Central Bank of the Philippines
hereinafter referred to as the Bank rendered an opinion to the effect that the
Organization and others of similar nature are banking institutions, falling within the
purview of the Central Bank Act.2 Hence, on April l and 3, l963, the Bank caused to be
published in the newspapers the following:
A N N O U N C E M E N T
To correct any wrong impression which recent newspaper reports on "savings and loan
associations" may have created in the minds of the public and other interested parties,
as well as to answer numerous inquiries from the public, the Central Bank of the
Philippines wishes to announce that all "savings and loan associations" now in
operation and other organizations using different corporate names, but engaged in
operations similar in nature to said "associations" HAVE NEVER BEEN AUTHORlZED
BY THE MONETARY BOARD OF THE CENTRAL BANK OF THE PHlLlPPlNES TO
ACCEPT DEPOSlT OF FUNDS FROM THE PUBLlC NOR TO ENGAGE lN THE
BANKlNG BUSlNESS NOR TO PERFORM ANY BANKlNG ACTlVlTY OR FUNCTlON
lN THE PHlLlPPlNES.
Such institutions violate Section. 2 of the General Banking Act, Republic Act No. 337,
should they engage in the "lending of funds obtained from the public through the
receipts of deposits or the sale of bonds, securities or obligations of any kind" without
authority from the Monetary Board. Their activities and operations are not supervised by
the Superintendent of Banks and persons dealing with such institutions do so at their
risk.
CENTRAL BANK OF THE PHlLlPPlNES
Moreover, on April 23, l962, the Governor of the Bank directed the coordination of "the
investigation and gathering of evidence on the activities of the savings and loan
associations which are operating contrary to law." Soon thereafter, or on May l8, l962,
a member of the intelligence division of the Bank filed with the Municipal Court of Manila
a verified application for a search warrant against the Organization, alleging that "after
close observation and personal investigation, the premises at No. 2745 Rizal Avenue,
Manila" in which the offices of the Organization were housed "are being used
unlawfully," because said Organization is illegally engaged in banking activities, "by
receiving deposits of money for deposit, disbursement, safekeeping or otherwise or
transacts the business of a savings and mortgage bank and/or building and loan
association . . . without having first complied with the provisions of Republic Act No.
337" and that the articles, papers, or effects enumerated in a list attached to said
application, as Annex A thereof.3 are kept in said premises, and "being used or
intended to be used in the commission of a felony, to wit: violation of Sections 2 and 6
of Republic Act No. 337."4 Said articles, papers or effects are described in the
aforementioned Annex A, as follows:
l. BOOKS OF ORlGlNAL ENTRY
(l) General Journal
(2) Columnar Journal or Cash Book
(a) Cash Receipts Journal or Cash Receipt Book
(b) Cash Disbursements Journal or Cash Disbursement Book
ll. BOOKS OF FlNAL ENTRY
(l) General Ledger
(2) lndividual Deposits and Loans Ledgers
(3) Other Subsidiary Ledgers
lll. OTHER ACCOUNTlNG RECORDS
(l) Application for Membership
(2) Signature Card
(3) Deposit Slip
(4) Passbook Slip
(5) Withdrawal Slip
(6) Tellers Daily Deposit Report
(7) Application for Loan Credit Statement
(8) Credit Report
(9) Solicitor's Report
(l0) Promissory Note
(ll) l n d o r s e m e n t
(l2) Co-makers' Statements
(l3) Chattel Mortgage Contracts
(l4) Real Estate Mortgage Contracts
(l5) Trial Balance
(l6) Minutes Book Board of Directors
lV. FlNANClAL STATEMENTS
(l) lncome and Expenses Statements
(2) Balance Sheet or Statement of Assets and Liabilities
V. OTHERS
(l) Articles of lncorporation
(2) By-Laws
(3) Prospectus, Brochures Etc.
(4) And other documents and articles which are being used or intended to be used in
unauthorized banking activities and operations contrary to law.
Upon the filing of said application, on May l8, l962, Hon. Roman Cancino, as Judge of
the said municipal court, issued the warrant above referred to,5 commanding the search
of the aforesaid premises at No. 2745 Rizal Avenue, Manila, and the seizure of the
foregoing articles, there being "good and sufficient reasons to believe" upon
examination, under oath, of a detective of the Manila Police Department and said
intelligence officer of the Bank that the Organization has under its control, in the
address given, the aforementioned articles, which are the subject of the offense
adverted to above or intended to be used as means for the commission of said off
offense.
Forthwith, or on the same date, the Organization commenced Civil Case No. 50409 of
the Court of First lnstance of Manila, an original action for "certiorari, prohibition, with
writ of preliminary injunction and/or writ of preliminary mandatory injunction," against
said municipal court, the Sheriff of Manila, the Manila Police Department, and the Bank,
to annul the aforementioned search warrant, upon the ground that, in issuing the same,
the municipal court had acted "with grave abuse of discretion, without jurisdiction and/or
in excess of jurisdiction" because: (a) "said search warrant is a roving commission
general in its terms . . .;" (b) "the use of the word 'and others' in the search warrant . . .
permits the unreasonable search and seizure of documents which have no relation
whatsoever to any specific criminal act . . .;" and (c) "no court in the Philippines has any
jurisdiction to try a criminal case against a corporation . . ."
The Organization, likewise, prayed that, pending hearing of the case on the merits, a
writ of preliminary injunction be issued ex parte restraining the aforementioned search
and seizure, or, in the alternative, if the acts complained of have been partially
performed, that a writ of preliminary mandatory injunction be forthwith issued ex parte,
ordering the preservation of the status quo of the parties, as well as the immediate
return to the Organization of the documents and papers so far seized under, the search
warrant in question. After due hearing, on the petition for said injunction, respondent,
Hon. Jesus P. Morfe, Judge, who presided over the branch of the Court of First lnstance
of Manila to which said Case No. 50409 had been assigned, issued, on July 2, l962,
the order complained of.
Within the period stated in said order, the Bank moved for a reconsideration thereof,
which was denied on August 7, l962. Accordingly, the Bank commenced, in the
Supreme Court, the present action, against Judge Morfe and the Organization, alleging
that respondent Judge had acted with grave abuse of discretion and in excess of his
jurisdiction in issuing the order in question.
At the outset, it should be noted that the action taken by the Bank, in causing the
aforementioned search to be made and the articles above listed to be seized, was
predicated upon the theory that the Organization was illegally engaged in banking by
receiving money for deposit, disbursement, safekeeping or otherwise, or transacting the
business of a savings and mortgage bank and/or building and loan association,
without first complying with the provisions of R.A. No. 337, and that the order
complained of assumes that the Organization had violated sections 2 and 6 of said
Act.6 Yet respondent Judge found the searches and, seizures in question to be
unreasonable, through the following process of reasoning: the deposition given in
support of the application for a search warrant states that the deponent personally
knows that the premises of the Organization, at No. 2745 Rizal Avenue, Manila,7 were
being used unlawfully for banking and purposes. Respondent judge deduce, from this
premise, that the deponent " knows specific banking transactions of the petitioner with
specific persons," and, then concluded that said deponent ". . . could have, if he really
knew of actual violation of the law, applied for a warrant to search and seize only books"
or records:
covering the specific purportedly illegal banking transactions of the petitioner with
specific persons who are the supposed victims of said illegal banking transactions
according to his knowledge. To authorize and seize all the records listed in Annex A to
said application for search warrant, without reference to specific alleged victims of the
purported illegal banking transactions, would be to harass the petitioner, and its officers
with a roving commission or fishing expedition for evidence which could be discovered
by normal intelligence operations or inspections (not seizure) of books and records
pursuant to Section 4 of Republic Act No 337 . . ."
The concern thus shown by respondent judge for the civil liberty involved is, certainly, in
line with the function of courts, as ramparts of justice and liberty and deserves the
greatest encouragement and warmest commendation. lt lives up to the highest
traditions of the Philippine Bench, which underlies the people's faith in and adherence to
the Rule of Law and the democratic principle in this part of the World.
At the same time, it cannot be gainsaid the Constitutional injunction against
unreasonable searches and seizures seeks to forestall, not purely abstract or imaginary
evils, but specific and concrete ones. lndeed, unreasonableness is, in the very nature of
things, a condition dependent upon the circumstances surrounding each case, in much
the same way as the question whether or not "probable cause" exists is one which must
be decided in the light of the conditions obtaining in given situations.
Referring particularly to the one at bar, it is not clear from the order complained of
whether respondent Judge opined that the above mentioned statement of the deponent
to the effect that the Organization was engaged in the transactions mentioned in his
deposition deserved of credence or not. Obviously, however, a mere disagreement
with Judge Cancino, who issued the warrant, on the credibility of said statement, would
not justify the conclusion that said municipal Judge had committed a grave abuse of
discretion, amounting to lack of jurisdiction or excess of jurisdiction. Upon the other
hand, the failure of the witness to mention particular individuals does not necessarily
prove that he had no personal knowledge of specific illegal transactions of the
Organization, for the witness might be acquainted with specific transactions, even if the
names of the individuals concerned were unknown to him.
Again, the aforementioned order would seem to assume that an illegal banking
transaction, of the kind contemplated in the contested action of the officers of the Bank,
must always connote the existence of a "victim." lf this term is used to denote a party
whose interests have been actually injured, then the assumption is not necessarily
justified. The law requiring compliance with certain requirements before anybody can
engage in banking obviously seeks to protect the public against actual, as well as
potential, injury. Similarly, we are not aware of any rule limiting the use of warrants to
papers or effects which cannot be secured otherwise.
The line of reasoning of respondent Judge might, perhaps, be justified if the acts
imputed to the Organization consisted of isolated transactions, distinct and different
from the type of business in which it is generally engaged. ln such case, it may be
necessary to specify or identify the parties involved in said isolated transactions, so that
the search and seizure be limited to the records pertinent thereto. Such, however, is not
the situation confronting us. The records suggest clearly that the transactions objected
to by the Bank constitute the general pattern of the business of the Organization.
lndeed, the main purpose thereof, according to its By-laws, is "to extend financial
assistance, in the form of loans, to its members," with funds deposited by them.
lt is true, that such funds are referred to in the Articles of lncorporation and the By-
laws as their "savings." and that the depositors thereof are designated as
"members," but, even a cursory examination of said documents will readily show that
anybody can be a depositor and thus be a "participating member." ln other words, the
Organization is, in effect, open to the "public" for deposit accounts, and the funds so
raised may be lent by the Organization. Moreover, the power to so dispose of said funds
is placed under the exclusive authority of the "founder members," and "participating
members" are expressly denied the right to vote or be voted for, their "privileges and
benefits," if any, being limited to those which the board of trustees may, in its discretion,
determine from time to time. As a consequence, the "membership" of the "participating
members" is purely nominal in nature. This situation is fraught, precisely, with the very
dangers or evils which Republic Act No. 337 seeks to forestall, by exacting compliance
with the requirements of said Act, before the transactions in question could be
undertaken.
lt is interesting to note, also, that the Organization does not seriously contest the main
facts, upon which the action of the Bank is based. The principal issue raised by the
Organization is predicated upon the theory that the aforementioned transactions of the
Organization do not amount to " banking," as the term is used in Republic Act No. 337.
We are satisfied, however, in the light of the circumstance obtaining in this case, that
the Municipal Judge did not commit a grave abuse of discretion in finding that there was
probable cause that the Organization had violated Sections 2 and 6 of the aforesaid law
and in issuing the warrant in question, and that, accordingly, and in line with Alverez vs.
Court of First lnstance (64 Phil. 33), the search and seizure complained of have not
been proven to be unreasonable.
Wherefore, the order of respondent Judge dated July 2, l962, and the writ of
preliminary mandatory injunction issued in compliance therewith are hereby annulled,
and the writ of preliminary injunction issued by this Court on August l4, l962,
accordingly, made permanent, with costs against respondent First Mutual Savings and
Loan Organization, lnc. lt is so ordered.
MANUEL M. SERRANO, petitioner,
vs.
CENTRAL BANK OF THE PHlLlPPlNES; OVERSEAS BANK OF MANlLA; EMERlTO
M. RAMOS, SUSANA B. RAMOS, EMERlTO B. RAMOS, JR., JOSEFA RAMOS DELA
RAMA, HORAClO DELA RAMA, ANTONlO B. RAMOS, FlLOMENA RAMOS
LEDESMA, RODOLFO LEDESMA, VlCTORlA RAMOS TANJUATCO, and TEOFlLO
TANJUATCO, respondents.
Rene Diokno for petitioner.
F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of the Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for respondent
Overseas Bank of Manila.
Josefina G. Salonga for all other respondents.

CONCEPClON, JR., J.:
Petition for mandamus and prohibition, with preliminary injunction, that seeks the
establishment of joint and solidary liability to the amount of Three Hundred Fifty
Thousand Pesos, with interest, against respondent Central Bank of the Philippines and
Overseas Bank of Manila and its stockholders, on the alleged failure of the Overseas
Bank of Manila to return the time deposits made by petitioner and assigned to him, on
the ground that respondent Central Bank failed in its duty to exercise strict supervision
over respondent Overseas Bank of Manila to protect depositors and the general public.
l Petitioner also prays that both respondent banks be ordered to execute the proper
and necessary documents to constitute all properties fisted in Annex "7" of the Answer
of respondent Central Bank of the Philippines in G.R. No. L-29352, entitled "Emerita M.
Ramos, et al vs. Central Bank of the Philippines," into a trust fund in favor of petitioner
and all other depositors of respondent Overseas Bank of Manila. lt is also prayed that
the respondents be prohibited permanently from honoring, implementing, or doing any
act predicated upon the validity or efficacy of the deeds of mortgage, assignment.
and/or conveyance or transfer of whatever nature of the properties listed in Annex "7" of
the Answer of respondent Central Bank in G.R. No. 29352. 2
A sought for ex-parte preliminary injunction against both respondent banks was not
given by this Court.
Undisputed pertinent facts are:
On October l3, l966 and December l2, l966, petitioner made a time deposit, for one
year with 6% interest, of One Hundred Fifty Thousand Pesos (Pl50,000.00) with the
respondent Overseas Bank of Manila. 3 Concepcion Maneja also made a time deposit,
for one year with 6-% interest, on March 6, l967, of Two Hundred Thousand Pesos
(P200,000.00) with the same respondent Overseas Bank of Manila. 4
On August 3l, l968, Concepcion Maneja, married to Felixberto M. Serrano, assigned
and conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with
respondent Overseas Bank of Manila. 5
Notwithstanding series of demands for encashment of the aforementioned time deposits
from the respondent Overseas Bank of Manila, dating from December 6, l967 up to
March 4, l968, not a single one of the time deposit certificates was honored by
respondent Overseas Bank of Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the
banking system of the Republic and it exercises supervision over all doing business in
the Philippines, but denies the petitioner's allegation that the Central Bank has the duty
to exercise a most rigid and stringent supervision of banks, implying that respondent
Central Bank has to watch every move or activity of all banks, including respondent
Overseas Bank of Manila. Respondent Central Bank claims that as of March l2, l965,
the Overseas Bank of Manila, while operating, was only on a limited degree of banking
operations since the Monetary Board decided in its Resolution No. 322, dated March
l2, l965, to prohibit the Overseas Bank of Manila from making new loans and
investments in view of its chronic reserve deficiencies against its deposit liabilities. This
limited operation of respondent Overseas Bank of Manila continued up to l968. 7
Respondent Central Bank also denied that it is guarantor of the permanent solvency of
any banking institution as claimed by petitioner. lt claims that neither the law nor sound
banking supervision requires respondent Central Bank to advertise or represent to the
public any remedial measures it may impose upon chronic delinquent banks as such
action may inevitably result to panic or bank "runs". ln the years l966-l967, there were
no findings to declare the respondent Overseas Bank of Manila as insolvent. 8
Respondent Central Bank likewise denied that a constructive trust was created in favor
of petitioner and his predecessor in interest Concepcion Maneja when their time
deposits were made in l966 and l967 with the respondent Overseas Bank of Manila as
during that time the latter was not an insolvent bank and its operation as a banking
institution was being salvaged by the respondent Central Bank. 9
Respondent Central Bank avers no knowledge of petitioner's claim that the properties
given by respondent Overseas Bank of Manila as additional collaterals to respondent
Central Bank of the Philippines for the former's overdrafts and emergency loans were
acquired through the use of depositors' money, including that of the petitioner and
Concepcion Maneja. l0
ln G.R. No. L-29362, entitled "Emerita M. Ramos, et al. vs. Central Bank of the
Philippines," a case was filed by the petitioner Ramos, wherein respondent Overseas
Bank of Manila sought to prevent respondent Central Bank from closing, declaring the
former insolvent, and liquidating its assets. Petitioner Manuel Serrano in this case, filed
on September 6, l968, a motion to intervene in G.R. No. L-29352, on the ground that
Serrano had a real and legal interest as depositor of the Overseas Bank of Manila in the
matter in litigation in that case. Respondent Central Bank in G.R. No. L-29352 opposed
petitioner Manuel Serrano's motion to intervene in that case, on the ground that his
claim as depositor of the Overseas Bank of Manila should properly be ventilated in the
Court of First lnstance, and if this Court were to allow Serrano to intervene as depositor
in G.R. No. L-29352, thousands of other depositors would follow and thus cause an
avalanche of cases in this Court. ln the resolution dated October 4, l968, this Court
denied Serrano's, motion to intervene. The contents of said motion to intervene are
substantially the same as those of the present petition. ll
This Court rendered decision in G.R. No. L-29352 on October 4, l97l, which became
final and executory on March 3, l972, favorable to the respondent Overseas Bank of
Manila, with the dispositive portion to wit:
WHEREFORE, the writs prayed for in the petition are hereby granted and respondent
Central Bank's resolution Nos. l263, l290 and l333 (that prohibit the Overseas Bank of
Manila to participate in clearing, direct the suspension of its operation, and ordering the
liquidation of said bank) are hereby annulled and set aside; and said respondent Central
Bank of the Philippines is directed to comply with its obligations under the Voting Trust
Agreement, and to desist from taking action in violation therefor. Costs against
respondent Central Bank of the Philippines. l2
Because of the above decision, petitioner in this case filed a motion for judgment in this
case, praying for a decision on the merits, adjudging respondent Central Bank jointly
and severally liable with respondent Overseas Bank of Manila to the petitioner for the
P350,000 time deposit made with the latter bank, with all interests due therein; and
declaring all assets assigned or mortgaged by the respondents Overseas Bank of
Manila and the Ramos groups in favor of the Central Bank as trust funds for the benefit
of petitioner and other depositors. l3
By the very nature of the claims and causes of action against respondents, they in
reality are recovery of time deposits plus interest from respondent Overseas Bank of
Manila, and recovery of damages against respondent Central Bank for its alleged failure
to strictly supervise the acts of the other respondent Bank and protect the interests of its
depositors by virtue of the constructive trust created when respondent Central Bank
required the other respondent to increase its collaterals for its overdrafts said
emergency loans, said collaterals allegedly acquired through the use of depositors
money. These claims shoud be ventilated in the Court of First lnstance of proper
jurisdiction as We already pointed out when this Court denied petitioner's motion to
intervene in G.R. No. L-29352. Claims of these nature are not proper in actions for
mandamus and prohibition as there is no shown clear abuse of discretion by the Central
Bank in its exercise of supervision over the other respondent Overseas Bank of Manila,
and if there was, petitioner here is not the proper party to raise that question, but rather
the Overseas Bank of Manila, as it did in G.R. No. L-29352. Neither is there anything to
prohibit in this case, since the questioned acts of the respondent Central Bank (the acts
of dissolving and liquidating the Overseas Bank of Manila), which petitioner here intends
to use as his basis for claims of damages against respondent Central Bank, had been
accomplished a long time ago.
Furthermore, both parties overlooked one fundamental principle in the nature of bank
deposits when the petitioner claimed that there should be created a constructive trust in
his favor when the respondent Overseas Bank of Manila increased its collaterals in
favor of respondent Central Bank for the former's overdrafts and emergency loans,
since these collaterals were acquired by the use of depositors' money.
Bank deposits are in the nature of irregular deposits. They are really loans because they
earn interest. All kinds of bank deposits, whether fixed, savings, or current are to be
treated as loans and are to be covered by the law on loans. l4 Current and savings
deposit are loans to a bank because it can use the same. The petitioner here in making
time deposits that earn interests with respondent Overseas Bank of Manila was in
reality a creditor of the respondent Bank and not a depositor. The respondent Bank was
in turn a debtor of petitioner. Failure of he respondent Bank to honor the time deposit is
failure to pay s obligation as a debtor and not a breach of trust arising from depositary's
failure to return the subject matter of the deposit
WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.
SO ORDERED.
TEOFlSTO GUlNGONA, JR., ANTONlO l. MARTlN, and TERESlTA SANTOS,
petitioners,
vs.
THE ClTY FlSCAL OF MANlLA, HON. JOSE B. FLAMlNlANO, ASST. ClTY FlSCAL
FELlZARDO N. LOTA and CLEMENT DAVlD, respondents.

MAKASlAR, Actg. C.J.:+.wph!l
This is a petition for prohibition and injunction with a prayer for the immediate issuance
of restraining order and/or writ of preliminary injunction filed by petitioners on March 26,
l982.
On March 3l, l982, by virtue of a court resolution issued by this Court on the same
date, a temporary restraining order was duly issued ordering the respondents, their
officers, agents, representatives and/or person or persons acting upon their
(respondents') orders or in their place or stead to refrain from proceeding with the
preliminary investigation in Case No. 8l3l938 of the Office of the City Fiscal of Manila
(pp. 47-48, rec.). On January 24, l983, private respondent Clement David filed a motion
to lift restraining order which was denied in the resolution of this Court dated May l8,
l983.
As can be gleaned from the above, the instant petition seeks to prohibit public
respondents from proceeding with the preliminary investigation of l.S. No. 8l-3l938, in
which petitioners were charged by private respondent Clement David, with estafa and
violation of Central Bank Circular No. 364 and related regulations regarding foreign
exchange transactions principally, on the ground of lack of jurisdiction in that the
allegations of the charged, as well as the testimony of private respondent's principal
witness and the evidence through said witness, showed that petitioners' obligation is
civil in nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by the Solicitor
General in its Comment dated June 28,l982, as follows:t.hqw
On December 23,l98l, private respondent David filed l.S. No. 8l-3l938 in the Office of
the City Fiscal of Manila, which case was assigned to respondent Lota for preliminary
investigation (Petition, p. 8).
ln l.S. No. 8l-3l938, David charged petitioners (together with one Robert Marshall and
the following directors of the Nation Savings and Loan Association, lnc., namely
Homero Gonzales, Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto Manalac,
Jaime V. Paz, Paulino B. Dionisio, and one John Doe) with estafa and violation of
Central Bank Circular No. 364 and related Central Bank regulations on foreign
exchange transactions, allegedly committed as follows (Petition, Annex "A"):t.
hqw
"From March 20, l979 to March, l98l, David invested with the Nation Savings and
Loan Association, (hereinafter called NSLA) the sum of Pl,l45,546.20 on nine deposits,
Pl3,53l.94 on savings account deposits (jointly with his sister, Denise Kuhne),
US$l0,000.00 on time deposit, US$l5,000.00 under a receipt and guarantee of
payment and US$50,000.00 under a receipt dated June 8, l980 (au jointly with Denise
Kuhne), that David was induced into making the aforestated investments by Robert
Marshall an Australian national who was allegedly a close associate of petitioner
Guingona Jr., then NSLA President, petitioner Martin, then NSLA Executive Vice-
President of NSLA and petitioner Santos, then NSLA General Manager; that on March
2l, l98l N LA was placed under receivership by the Central Bank, so that David filed
claims therewith for his investments and those of his sister; that on July 22, l98l David
received a report from the Central Bank that only P305,82l.92 of those investments
were entered in the records of NSLA; that, therefore, the respondents in l.S. No. 8l-
3l938 misappropriated the balance of the investments, at the same time violating
Central Bank Circular No. 364 and related Central Bank regulations on foreign
exchange transactions; that after demands, petitioner Guingona Jr. paid only
P200,000.00, thereby reducing the amounts misappropriated to P959,078.l4 and
US$75,000.00."
Petitioners, Martin and Santos, filed a joint counter-affidavit (Petition, Annex' B') in
which they stated the following.t.hqw
"That Martin became President of NSLA in March l978 (after the resignation of
Guingona, Jr.) and served as such until October 30, l980, while Santos was General
Manager up to November l980; that because NSLA was urgently in need of funds and
at David's insistence, his investments were treated as special- accounts with interest
above the legal rate, an recorded in separate confidential documents only a portion of
which were to be reported because he did not want the Australian government to tax his
total earnings (nor) to know his total investments; that all transactions with David were
recorded except the sum of US$l5,000.00 which was a personal loan of Santos; that
David's check for US$50,000.00 was cleared through Guingona, Jr.'s dollar account
because NSLA did not have one, that a draft of US$30,000.00 was placed in the name
of one Paz Roces because of a pending transaction with her; that the Philippine Deposit
lnsurance Corporation had already reimbursed David within the legal limits; that majority
of the stockholders of NSLA had filed Special Proceedings No. 82-l695 in the Court of
First lnstance to contest its (NSLA's) closure; that after NSLA was placed under
receivership, Martin executed a promissory note in David's favor and caused the
transfer to him of a nine and on behalf (9 l/2) carat diamond ring with a net value of
P5l0,000.00; and, that the liabilities of NSLA to David were civil in nature."
Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex' C') stated the
following:t.hqw
"That he had no hand whatsoever in the transactions between David and NSLA since
he (Guingona Jr.) had resigned as NSLA president in March l978, or prior to those
transactions; that he assumed a portion o; the liabilities of NSLA to David because of
the latter's insistence that he placed his investments with NSLA because of his faith in
Guingona, Jr.; that in a Promissory Note dated June l7, l98l (Petition, Annex "D") he
(Guingona, Jr.) bound himself to pay David the sums of P668.307.0l and
US$37,500.00 in stated installments; that he (Guingona, Jr.) secured payment of those
amounts with second mortgages over two (2) parcels of land under a deed of Second
Real Estate Mortgage (Petition, Annex "E") in which it was provided that the mortgage
over one (l) parcel shall be cancelled upon payment of one-half of the obligation to
David; that he (Guingona, Jr.) paid P200,000.00 and tendered another P300,000.00
which David refused to accept, hence, he (Guingona, Jr.) filed Civil Case No. Q-33865
in the Court of First lnstance of Rizal at Quezon City, to effect the release of the
mortgage over one (l) of the two parcels of land conveyed to David under second
mortgages."
At the inception of the preliminary investigation before respondent Lota, petitioners
moved to dismiss the charges against them for lack of jurisdiction because David's
claims allegedly comprised a purely civil obligation which was itself novated. Fiscal Lota
denied the motion to dismiss (Petition, p. 8).
But, after the presentation of David's principal witness, petitioners filed the instant
petition because: (a) the production of the Promisory Notes, Banker's Acceptance,
Certificates of Time Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e., civil obligations on the
part of NSLA which were novated when Guingona, Jr. and Martin assumed them; and
(b) David's principal witness allegedly testified that the duplicate originals of the
aforesaid instruments of indebtedness were all on file with NSLA, contrary to David's
claim that some of his investments were not record (Petition, pp. 8-9).
Petitioners alleged that they did not exhaust available administrative remedies because
to do so would be futile (Petition, p. 9) [pp. l53-l57, rec.].
As correctly pointed out by the Solicitor General, the sole issue for resolution is whether
public respondents acted without jurisdiction when they investigated the charges (estafa
and violation of CB Circular No. 364 and related regulations regarding foreign exchange
transactions) subject matter of l.S. No. 8l-3l938.
There is merit in the contention of the petitioners that their liability is civil in nature and
therefore, public respondents have no jurisdiction over the charge of estafa.
A casual perusal of the December 23, l98l affidavit. complaint filed in the Office of the
City Fiscal of Manila by private respondent David against petitioners Teopisto
Guingona, Jr., Antonio l. Martin and Teresita G. Santos, together with one Robert
Marshall and the other directors of the Nation Savings and Loan Association, will show
that from March 20, l979 to March, l98l, private respondent David, together with his
sister, Denise Kuhne, invested with the Nation Savings and Loan Association the sum
of Pl,l45,546.20 on time deposits covered by Bankers Acceptances and Certificates of
Time Deposits and the sum of Pl3,53l.94 on savings account deposits covered by
passbook nos. 6-632 and 29-742, or a total of Pl,l59,078.l4 (pp. l5-l6, roc.). lt
appears further that private respondent David, together with his sister, made
investments in the aforesaid bank in the amount of US$75,000.00 (p. l7, rec.).
Moreover, the records reveal that when the aforesaid bank was placed under
receivership on March 2l, l98l, petitioners Guingona and Martin, upon the request of
private respondent David, assumed the obligation of the bank to private respondent
David by executing on June l7, l98l a joint promissory note in favor of private
respondent acknowledging an indebtedness of Pl,336,6l4.02 and US$75,000.00 (p. 80,
rec.). This promissory note was based on the statement of account as of June 30, l98l
prepared by the private respondent (p. 8l, rec.). The amount of indebtedness assumed
appears to be bigger than the original claim because of the added interest and the
inclusion of other deposits of private respondent's sister in the amount of Pll6,6l3.20.
Thereafter, or on July l7, l98l, petitioners Guingona and Martin agreed to divide the
said indebtedness, and petitioner Guingona executed another promissory note
antedated to June l7, l98l whereby he personally acknowledged an indebtedness of
P668,307.0l (l/2 of Pl,336,6l4.02) and US$37,500.00 (l/2 of US$75,000.00) in favor
of private respondent (p. 25, rec.). The aforesaid promissory notes were executed as a
result of deposits made by Clement David and Denise Kuhne with the Nation Savings
and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David,
before this Court indisputably show that he has indeed invested his money on time and
savings deposits with the Nation Savings and Loan Association.
lt must be pointed out that when private respondent David invested his money on nine.
and savings deposits with the aforesaid bank, the contract that was perfected was a
contract of simple loan or mutuum and not a contract of deposit. Thus, Article l980 of
the New Civil Code provides that:t.hqw
Article l980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
ln the case of Central Bank of the Philippines vs. Morfe (63 SCRA ll4,ll9 [l975], We
said:t.hqw
lt should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are hat true deposits. are considered simple loans and, as such, are
not preferred credits (Art. l980 Civil Code; ln re Liquidation of Mercantile Batik of China
Tan Tiong Tick vs. American Apothecaries Co., 66 Phil 4l4; Pacific Coast Biscuit Co.
vs. Chinese Grocers Association 65 Phil. 375; Fletcher American National Bank vs. Ang
Chong UM 66 PWL 385; Pacific Commercial Co. vs. American Apothecaries Co., 65
PhiL 429; Gopoco Grocery vs. Pacific Coast Biscuit CO.,65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the
Philippines (96 SCRA l02 [l980]) that:t.hqw
Bank deposits are in the nature of irregular deposits. They are really 'loans because
they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to
be treated as loans and are to be covered by the law on loans (Art. l980 Civil Code
Gullas vs. Phil. National Bank, 62 Phil. 5l9). Current and saving deposits, are loans to a
bank because it can use the same. The petitioner here in making time deposits that
earn interests will respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a debtor of
petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its
obligation as a debtor and not a breach of trust arising from a depositary's failure to
return the subject matter of the deposit (Emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and
Loan Association is that of creditor and debtor; consequently, the ownership of the
amount deposited was transmitted to the Bank upon the perfection of the contract and it
can make use of the amount deposited for its banking operations, such as to pay
interests on deposits and to pay withdrawals. While the Bank has the obligation to
return the amount deposited, it has, however, no obligation to return or deliver the same
money that was deposited. And, the failure of the Bank to return the amount deposited
will not constitute estafa through misappropriation punishable under Article 3l5, par. l(b)
of the Revised Penal Code, but it will only give rise to civil liability over which the public
respondents have no- jurisdiction.
WE have already laid down the rule that:t.hqw
ln order that a person can be convicted under the above-quoted provision, it must be
proven that he has the obligation to deliver or return the some money, goods or
personal property that he received Petitioners had no such obligation to return the same
money, i.e., the bills or coins, which they received from private respondents. This is so
because as clearly as stated in criminal complaints, the related civil complaints and the
supporting sworn statements, the sums of money that petitioners received were loans.
The nature of simple loan is defined in Articles l933 and l953 of the Civil Code.t.
hqw
"Art. l933. By the contract of loan, one of the parties delivers to another, either
something not consumable so that the latter may use the same for a certain time- and
return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and
quality shall he paid in which case the contract is simply called a loan or mutuum.
"Commodatum is essentially gratuitous.
"Simple loan may be gratuitous or with a stipulation to pay interest.
"ln commodatum the bailor retains the ownership of the thing loaned while in simple
loan, ownership passes to the borrower.
"Art. l953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount of
the same kind and quality."
lt can be readily noted from the above-quoted provisions that in simple loan (mutuum),
as contrasted to commodatum the borrower acquires ownership of the money, goods or
personal property borrowed Being the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not be considered misappropriation
thereof' (Yam vs. Malik, 94 SCRA 30, 34 [l979]; Emphasis supplied).
But even granting that the failure of the bank to pay the time and savings deposits of
private respondent David would constitute a violation of paragraph l(b) of Article 3l5 of
the Revised Penal Code, nevertheless any incipient criminal liability was deemed
avoided, because when the aforesaid bank was placed under receivership by the
Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to
private respondent David, thereby resulting in the novation of the original contractual
obligation arising from deposit into a contract of loan and converting the original trust
relation between the bank and private respondent David into an ordinary debtor-creditor
relation between the petitioners and private respondent. Consequently, the failure of the
bank or petitioners Guingona and Martin to pay the deposits of private respondent
would not constitute a breach of trust but would merely be a failure to pay the obligation
as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it may
however, prevent the rise of criminal liability as long as it occurs prior to the filing of the
criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69 [l968])
We held that:t.hqw
As pointed out in People vs. Nery, novation prior to the filing of the criminal information
as in the case at bar may convert the relation between the parties into an ordinary
creditor-debtor relation, and place the complainant in estoppel to insist on the original
transaction or "cast doubt on the true nature" thereof.
Again, in the latest case of Ong vs. Court of Appeals (L-58476, l24 SCRA 578, 580-58l
[l983] ), this Court reiterated the ruling in People vs. Nery ( l0 SCRA 244 [l964] ),
declaring that:t.hqw
The novation theory may perhaps apply prior to the filling of the criminal information in
court by the state prosecutors because up to that time the original trust relation may be
converted by the parties into an ordinary creditor-debtor situation, thereby placing the
complainant in estoppel to insist on the original trust. But after the justice authorities
have taken cognizance of the crime and instituted action in court, the offended party
may no longer divest the prosecution of its power to exact the criminal liability, as
distinguished from the civil. The crime being an offense against the state, only the latter
can renounce it (People vs. Gervacio, 54 Off. Gaz. 2898; People vs. Velasco, 42 Phil.
76; U.S. vs. Montanes, 8 Phil. 620).
lt may be observed in this regard that novation is not one of the means recognized by
the Penal Code whereby criminal liability can be extinguished; hence, the role of
novation may only be to either prevent the rise of criminal habihty or to cast doubt on
the true nature of the original basic transaction, whether or not it was such that its
breach would not give rise to penal responsibility, as when money loaned is made to
appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90
Phil. 58l; U.S. vs. Villareal, 27 Phil. 48l).
ln the case at bar, there is no dispute that petitioners Guingona and Martin executed a
promissory note on June l7, l98l assuming the obligation of the bank to private
respondent David; while the criminal complaint for estafa was filed on December 23,
l98l with the Office of the City Fiscal. Hence, it is clear that novation occurred long
before the filing of the criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided but there
will still be a civil liability on the part of petitioners Guingona and Martin to pay the
assumed obligation.
Petitioners herein were likewise charged with violation of Section 3 of Central Bank
Circular No. 364 and other related regulations regarding foreign exchange transactions
by accepting foreign currency deposit in the amount of US$75,000.00 without authority
from the Central Bank. They contend however, that the US dollars intended by
respondent David for deposit were all converted into Philippine currency before
acceptance and deposit into Nation Savings and Loan Association.
Petitioners' contention is worthy of behelf for the following reasons:
l. lt appears from the records that when respondent David was about to make a
deposit of bank draft issued in his name in the amount of US$50,000.00 with the Nation
Savings and Loan Association, the same had to be cleared first and converted into
Philippine currency. Accordingly, the bank draft was endorsed by respondent David to
petitioner Guingona, who in turn deposited it to his dollar account with the Security Bank
and Trust Company. Petitioner Guingona merely accommodated the request of the
Nation Savings and loan Association in order to clear the bank draft through his dollar
account because the bank did not have a dollar account. lmmediately after the bank
draft was cleared, petitioner Guingona authorized Nation Savings and Loan Association
to withdraw the same in order to be utilized by the bank for its operations.
2. lt is safe to assume that the U.S. dollars were converted first into Philippine
pesos before they were accepted and deposited in Nation Savings and Loan
Association, because the bank is presumed to have followed the ordinary course of the
business which is to accept deposits in Philippine currency only, and that the
transaction was regular and fair, in the absence of a clear and convincing evidence to
the contrary (see paragraphs p and q, Sec. 5, Rule l3l, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners
despite the fact that it was raised. in petitioners' reply filed on May 7, l982 to private
respondent's comment and in the July 27, l982 reply to public respondents' comment
and reiterated in petitioners' memorandum filed on October 30, l982, thereby adding
more support to the conclusion that the US$75,000.00 were really converted into
Philippine currency before they were accepted and deposited into Nation Savings and
Loan Association. Considering that this might adversely affect his case, respondent
David should have promptly denied petitioners' allegation.
ln conclusion, considering that the liability of the petitioners is purely civil in nature and
that there is no clear showing that they engaged in foreign exchange transactions, We
hold that the public respondents acted without jurisdiction when they investigated the
charges against the petitioners. Consequently, public respondents should be restrained
from further proceeding with the criminal case for to allow the case to continue, even if
the petitioners could have appealed to the Ministry of Justice, would work great injustice
to petitioners and would render meaningless the proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of prohibition
and injunction, this court has recognized the resort to the extraordinary writs of
prohibition and injunction in extreme cases, thus:t.hqw
On the issue of whether a writ of injunction can restrain the proceedings in Criminal
Case No. 3l40, the general rule is that "ordinarily, criminal prosecution may not be
blocked by court prohibition or injunction." Exceptions, however, are allowed in the
following instances:t.hqw
"l. for the orderly administration of justice;
"2. to prevent the use of the strong arm of the law in an oppressive and vindictive
manner;
"3. to avoid multiplicity of actions;
"4. to afford adequate protection to constitutional rights;
"5. in proper cases, because the statute relied upon is unconstitutional or was held
invalid" ( Primicias vs. Municipality of Urdaneta, Pangasinan, 93 SCRA 462, 469-470
[l979]; citing Ramos vs. Torres, 25 SCRA 557 [l968]; and Hernandez vs. Albano, l9
SCRA 95, 96 [l967]).
Likewise, in Lopez vs. The City Judge, et al. ( l8 SCRA 6l6, 62l-622 [l966]), We held
that:t.hqw
The writs of certiorari and prohibition, as extraordinary legal remedies, are in the
ultimate analysis, intended to annul void proceedings; to prevent the unlawful and
oppressive exercise of legal authority and to provide for a fair and orderly administration
of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We took cognizance of a
petition for certiorari and prohibition although the accused in the case could have
appealed in due time from the order complained of, our action in the premises being
based on the public welfare policy the advancement of public policy. ln Dimayuga vs.
Fajardo, 43 Phil. 304, We also admitted a petition to restrain the prosecution of certain
chiropractors although, if convicted, they could have appealed. We gave due course to
their petition for the orderly administration of justice and to avoid possible oppression by
the strong arm of the law. And in Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for
certiorari challenging the trial court's action admitting an amended information was
sustained despite the availability of appeal at the proper time.
WHEREFORE, THE PETlTlON lS HEREBY GRANTED; THE TEMPORARY
RESTRAlNlNG ORDER PREVlOUSLY lSSUED lS MADE PERMANENT. COSTS
AGAlNST THE PRlVATE RESPONDENT.
SO ORDERED.lwphl.t
PEOPLE OF THE PHlLlPPlNES, petitioner,
vs.
TERESlTA PUlG and ROMEO PORRAS, respondents.
D E C l S l O N
CHlCO-NAZARlO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with petitioner
People of the Philippines, represented by the Office of the Solicitor General, praying for
the reversal of the Orders dated 30 January 2006 and 9 June 2006 of the Regional Trial
Court (RTC) of the 6th Judicial Region, Branch 68, Dumangas, lloilo, dismissing the ll2
cases of Qualified Theft filed against respondents Teresita Puig and Romeo Porras, and
denying petitioner's Motion for Reconsideration, in Criminal Cases No. 05-3054 to 05-
3l65.
The following are the factual antecedents:
On 7 November 2005, the lloilo Provincial Prosecutor's Office filed before Branch 68 of
the RTC in Dumangas, lloilo, ll2 cases of Qualified Theft against respondents Teresita
Puig (Puig) and Romeo Porras (Porras) who were the Cashier and Bookkeeper,
respectively, of private complainant Rural Bank of Pototan, lnc. The cases were
docketed as Criminal Cases No. 05-3054 to 05-3l65.
The allegations in the lnformationsl filed before the RTC were uniform and pro-forma,
except for the amounts, date and time of commission, to wit:
lNFORMATlON
That on or about the lst day of August, 2002, in the Municipality of Pototan, Province of
lloilo, Philippines, and within the jurisdiction of this Honorable Court, above-named
[respondents], conspiring, confederating, and helping one another, with grave abuse of
confidence, being the Cashier and Bookkeeper of the Rural Bank of Pototan, lnc.,
Pototan, lloilo, without the knowledge and/or consent of the management of the Bank
and with intent of gain, did then and there willfully, unlawfully and feloniously take, steal
and carry away the sum of FlFTEEN THOUSAND PESOS (Pl5,000.00), Philippine
Currency, to the damage and prejudice of the said bank in the aforesaid amount.
After perusing the lnformations in these cases, the trial court did not find the existence
of probable cause that would have necessitated the issuance of a warrant of arrest
based on the following grounds:
(l) the element of 'taking without the consent of the owners' was missing on the ground
that it is the depositors-clients, and not the Bank, which filed the complaint in these
cases, who are the owners of the money allegedly taken by respondents and hence, are
the real parties-in-interest; and
(2) the lnformations are bereft of the phrase alleging "dependence, guardianship or
vigilance between the respondents and the offended party that would have created a
high degree of confidence between them which the respondents could have abused."
lt added that allowing the ll2 cases for Qualified Theft filed against the respondents to
push through would be violative of the right of the respondents under Section l4(2),
Article lll of the l987 Constitution which states that in all criminal prosecutions, the
accused shall enjoy the right to be informed of the nature and cause of the accusation
against him. Following Section 6, Rule ll2 of the Revised Rules of Criminal Procedure,
the RTC dismissed the cases on 30 January 2006 and refused to issue a warrant of
arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on l7 April 2006, by the petitioner.
On 9 June 2006, an Order3 denying petitioner's Motion for Reconsideration was issued
by the RTC, finding as follows:
Accordingly, the prosecution's Motion for Reconsideration should be, as it hereby,
DENlED. The Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under Rule 45,
raising the sole legal issue of:
WHETHER OR NOT THE ll2 lNFORMATlONS FOR QUALlFlED THEFT
SUFFlClENTLY ALLEGE THE ELEMENT OF TAKlNG WlTHOUT THE CONSENT OF
THE OWNER, AND THE QUALlFYlNG ClRCUMSTANCE OF GRAVE ABUSE OF
CONFlDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders dated
30 January 2006 and 9 June 2006 issued by the trial court, and that it be directed to
proceed with Criminal Cases No. 05-3054 to 05-3l65.
Petitioner explains that under Article l980 of the New Civil Code, "fixed, savings, and
current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans." Corollary thereto, Article l953 of the same Code
provides that "a person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount of
the same kind and quality." Thus, it posits that the depositors who place their money
with the bank are considered creditors of the bank. The bank acquires ownership of the
money deposited by its clients, making the money taken by respondents as belonging to
the bank.
Petitioner also insists that the lnformations sufficiently allege all the elements of the
crime of qualified theft, citing that a perusal of the lnformations will show that they
specifically allege that the respondents were the Cashier and Bookkeeper of the Rural
Bank of Pototan, lnc., respectively, and that they took various amounts of money with
grave abuse of confidence, and without the knowledge and consent of the bank, to the
damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on the
ground that a Petition for Review on Certiorari via Rule 45 is the wrong mode of appeal
because a finding of probable cause for the issuance of a warrant of arrest presupposes
evaluation of facts and circumstances, which is not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the Secretary
of Justice, is the principal party to file a Petition for Review on Certiorari, considering
that the incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of the
lnformations and, therefore, because of this defect, there is no basis for the existence of
probable cause which will justify the issuance of the warrant of arrest. Petitioner assails
the dismissal contending that the lnformations for Qualified Theft sufficiently state facts
which constitute (a) the qualifying circumstance of grave abuse of confidence; and (b)
the element of taking, with intent to gain and without the consent of the owner, which is
the Bank.
ln determining the existence of probable cause to issue a warrant of arrest, the RTC
judge found the allegations in the lnformation inadequate. He ruled that the lnformation
failed to state facts constituting the qualifying circumstance of grave abuse of
confidence and the element of taking without the consent of the owner, since the owner
of the money is not the Bank, but the depositors therein. He also cites People v. Koc
Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of
dependence, guardianship or vigilance, between the respondents and the offended
party that has created a high degree of confidence between them, which the
respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that there was
no probable cause simply on the insufficiency of the allegations in the lnformations
concerning the facts constitutive of the elements of the offense charged. This, therefore,
makes the issue of sufficiency of the allegations in the lnformations the focal point of
discussion.
Qualified Theft, as defined and punished under Article 3l0 of the Revised Penal Code,
is committed as follows, viz:
ART. 3l0. Qualified Theft. The crime of theft shall be punished by the penalties next
higher by two degrees than those respectively specified in the next preceding article, if
committed by a domestic servant, or with grave abuse of confidence, or if the property
stolen is motor vehicle, mail matter or large cattle or consists of coconuts taken from the
premises of a plantation, fish taken from a fishpond or fishery or if property is taken on
the occasion of fire, earthquake, typhoon, volcanic eruption, or any other calamity,
vehicular accident or civil disturbance. (Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical taking
of another's property without violence or intimidation against persons or force upon
things. The elements of the crime under this Article are:
l. lntent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
l. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owner's consent;
5. That it be accomplished without the use of violence or intimidation against persons,
nor of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the lnformation, Section 6, Rule ll0 of the Rules of Court requires,
inter alia, that the information must state the acts or omissions complained of as
constitutive of the offense.
On the manner of how the lnformation should be worded, Section 9, Rule ll0 of the
Rules of Court, is enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as constituting
the offense and the qualifying and aggravating circumstances must be stated in ordinary
and concise language and not necessarily in the language used in the statute but in
terms sufficient to enable a person of common understanding to know what offense is
being charged as well as its qualifying and aggravating circumstances and for the court
to pronounce judgment.
lt is evident that the lnformation need not use the exact language of the statute in
alleging the acts or omissions complained of as constituting the offense. The test is
whether it enables a person of common understanding to know the charge against him,
and the court to render judgment properly.5
The portion of the lnformation relevant to this discussion reads:
A]bove-named [respondents], conspiring, confederating, and helping one another, with
grave abuse of confidence, being the Cashier and Bookkeeper of the Rural Bank of
Pototan, lnc., Pototan, lloilo, without the knowledge and/or consent of the management
of the Bank x x x.
lt is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank
who come into possession of the monies deposited therein enjoy the confidence
reposed in them by their employer. Banks, on the other hand, where monies are
deposited, are considered the owners thereof. This is very clear not only from the
express provisions of the law, but from established jurisprudence. The relationship
between banks and depositors has been held to be that of creditor and debtor. Articles
l953 and l980 of the New Civil Code, as appropriately pointed out by petitioner,
provide as follows:
Article l953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount of
the same kind and quality.
Article l980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning loan.
ln a long line of cases involving Qualified Theft, this Court has firmly established the
nature of possession by the Bank of the money deposits therein, and the duties being
performed by its employees who have custody of the money or have come into
possession of it. The Court has consistently considered the allegations in the
lnformation that such employees acted with grave abuse of confidence, to the damage
and prejudice of the Bank, without particularly referring to it as owner of the money
deposits, as sufficient to make out a case of Qualified Theft. For a graphic illustration,
we cite Roque v. People,6 where the accused teller was convicted for Qualified Theft
based on this lnformation:
That on or about the l6th day of November, l989, in the municipality of Floridablanca,
province of Pampanga, Philippines and within the jurisdiction of his Honorable Court,
the above-named accused ASUNClON GALANG ROQUE, being then employed as
teller of the Basa Air Base Savings and Loan Association lnc. (BABSLA) with office
address at Basa Air Base, Floridablanca, Pampanga, and as such was authorized and
reposed with the responsibility to receive and collect capital contributions from its
member/contributors of said corporation, and having collected and received in her
capacity as teller of the BABSLA the sum of TEN THOUSAND PESOS (Pl0,000.00),
said accused, with intent of gain, with grave abuse of confidence and without the
knowledge and consent of said corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of Pl0,000.00, Philippine currency,
by making it appear that a certain depositor by the name of Antonio Salazar withdrew
from his Savings Account No. l359, when in truth and in fact said Antonio Salazar did
not withdr[a]w the said amount of Pl0,000.00 to the damage and prejudice of BABSLA
in the total amount of Pl0,000.00, Philippine currency.
ln convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money in the
teller's possession due to the confidence reposed on the teller, the felony of qualified
theft would be committed.7
Also in People v. Sison,8 the Branch Operations Officer was convicted of the crime of
Qualified Theft based on the lnformation as herein cited:
That in or about and during the period compressed between January 24, l992 and
February l3, l992, both dates inclusive, in the City of Manila, Philippines, the said
accused did then and there wilfully, unlawfully and feloniously, with intent of gain and
without the knowledge and consent of the owner thereof, take, steal and carry away the
following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to the
PHlLlPPlNE COMMERClAL lNTERNATlONAL BANK (PClBank for brevity), Luneta
Branch, Manila represented by its Branch Manager, HELEN U. FARGAS, to the
damage and prejudice of the said owner in the aforesaid amount of P6,000,000.00,
Philippine Currency.
That in the commission of the said offense, herein accused acted with grave abuse of
confidence and unfaithfulness, he being the Branch Operation Officer of the said
complainant and as such he had free access to the place where the said amount of
money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine Commercial
and lndustrial Bank (PClB), is Qualified Theft. Appellant could not have committed the
crime had he not been holding the position of Luneta Branch Operation Officer which
gave him not only sole access to the bank vault xxx. The management of the PClB
reposed its trust and confidence in the appellant as its Luneta Branch Operation Officer,
and it was this trust and confidence which he exploited to enrich himself to the damage
and prejudice of PClB x x x.9
From another end, People v. Locson,l0 in addition to People v. Sison, described the
nature of possession by the Bank. The money in this case was in the possession of the
defendant as receiving teller of the bank, and the possession of the defendant was the
possession of the Bank. The Court held therein that when the defendant, with grave
abuse of confidence, removed the money and appropriated it to his own use without the
consent of the Bank, there was taking as contemplated in the crime of Qualified
Theft.ll
Conspicuously, in all of the foregoing cases, where the lnformations merely alleged the
positions of the respondents; that the crime was committed with grave abuse of
confidence, with intent to gain and without the knowledge and consent of the Bank,
without necessarily stating the phrase being assiduously insisted upon by respondents,
"of a relation by reason of dependence, guardianship or vigilance, between the
respondents and the offended party that has created a high degree of confidence
between them, which respondents abused,"l2 and without employing the word "owner"
in lieu of the "Bank" were considered to have satisfied the test of sufficiency of
allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the
Bank in this case, there is even no reason to quibble on the allegation in the
lnformations that they acted with grave abuse of confidence. ln fact, the lnformation
which alleged grave abuse of confidence by accused herein is even more precise, as
this is exactly the requirement of the law in qualifying the crime of Theft.
ln summary, the Bank acquires ownership of the money deposited by its clients; and the
employees of the Bank, who are entrusted with the possession of money of the Bank
due to the confidence reposed in them, occupy positions of confidence. The
lnformations, therefore, sufficiently allege all the essential elements constituting the
crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the instant
petition, the ruling in Mobilia Products, lnc. v. Hajime Umezawal3 is instructive. The
Court thus enunciated:
ln a criminal case in which the offended party is the State, the interest of the private
complainant or the offended party is limited to the civil liability arising therefrom. Hence,
if a criminal case is dismissed by the trial court or if there is an acquittal, a
reconsideration of the order of dismissal or acquittal may be undertaken, whenever
legally feasible, insofar as the criminal aspect thereof is concerned and may be made
only by the public prosecutor; or in the case of an appeal, by the State only, through the
OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is
well-settled that in appeals by certiorari under Rule 45 of the Rules of Court, only errors
of law may be raised,l4 and herein petitioner certainly raised a question of law.
As an aside, even if we go beyond the allegations of the lnformations in these cases, a
closer look at the records of the preliminary investigation conducted will show that,
indeed, probable cause exists for the indictment of herein respondents. Pursuant to
Section 6, Rule ll2 of the Rules of Court, the judge shall issue a warrant of arrest only
upon a finding of probable cause after personally evaluating the resolution of the
prosecutor and its supporting evidence. Soliven v. Makasiar,l5 as reiterated in Allado v.
Driokno,l6 explained that probable cause for the issuance of a warrant of arrest is the
existence of such facts and circumstances that would lead a reasonably discreet and
prudent person to believe that an offense has been committed by the person sought to
be arrested.l7 The records reasonably indicate that the respondents may have, indeed,
committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the
judge, as the case may be, to relieve the respondents from the pain of going through a
trial once it is ascertained that no probable cause exists to form a sufficient belief as to
the guilt of the respondents, conversely, it is also equally imperative upon the judge to
proceed with the case upon a showing that there is a prima facie case against the
respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby
GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the RTC dismissing
Criminal Cases No. 05-3054 to 05-3l65 are REVERSED and SET ASlDE. Let the
corresponding Warrants of Arrest issue against herein respondents TERESlTA PUlG
and ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas, lloilo, is directed
to proceed with the trial of Criminal Cases No. 05-3054 to 05-3l65, inclusive, with
reasonable dispatch. No pronouncement as to costs.
SO ORDERED.
THE UNlTED STATES, plaintiff-appellee,
vs.
JOSE M. lGPUARA, defendant-appellant.
W. A. Kincaid, Thos. L. Hartigan, and Jose Robles Lahesa for appellant.
Office of the Solicitor-General Harvey for appellee.
ARELLANO, C.J.:
The defendant therein is charged with the crime of estafa, for having swindled Juana
Montilla and Eugenio Veraguth out of P2,498 Philippine currency, which he had take on
deposit from the former to be at the latter's disposal. The document setting forth the
obligation reads:
We hold at the disposal of Eugenio Veraguth the sum of two thousand four hundred and
ninety-eight pesos (P2,498), the balance from Juana Montilla's sugar. lloilo, June 26,
l9ll, Jose lgpuara, for Ramirez and Co.
The Court of First lnstance of lloilo sentenced the defendant to two years of presidio
correccional, to pay Juana Montilla P2,498 Philippine currency, and in case of
insolvency to subsidiary imprisonment at P2.50 per day, not to exceed one-third of the
principal penalty, and the costs.
The defendant appealed, alleging as errors: (l) Holding that the document executed by
him was a certificate of deposit; (2) holding the existence of a deposit, without
precedent transfer or delivery of the P2,498; and (3) classifying the facts in the case as
the crime of estafa.
A deposit is constituted from the time a person receives a thing belonging to another
with the obligation of keeping and returning it. (Art. l758, Civil Code.)
That the defendant received P2,498 is a fact proven. The defendant drew up a
document declaring that they remained in his possession, which he could not have said
had he not received them. They remained in his possession, surely in no other sense
than to take care of them, for they remained has no other purpose. They remained in
the defendant's possession at the disposal of Veraguth; but on August 23 of the same
year Veraguth demanded for him through a notarial instrument restitution of them, and
to date he has not restored them.
The appellant says: "Juana Montilla's agent voluntarily accepted the sum of P2,498 in
an instrument payable on demand, and as no attempt was made to cash it until August
23, l9ll, he could indorse and negotiate it like any other commercial instrument. There
is no doubt that if Veraguth accepted the receipt for P2,498 it was because at that time
he agreed with the defendant to consider the operation of sale on commission closed,
leaving the collection of said sum until later, which sum remained as a loan payable
upon presentation of the receipt." (Brief, 3 and 4.)
Then, after averring the true facts: (l) that a sales commission was precedent; (2) that
this commission was settled with a balance of P2,498 in favor of the principal, Juana
Montilla; and (3) that this balance remained in the possession of the defendant, who
drew up an instrument payable on demand, he has drawn two conclusions, both
erroneous: One, that the instrument drawn up in the form of a deposit certificate could
be indorsed or negotiated like any other commercial instrument; and the other, that the
sum of P2,498 remained in defendant's possession as a loan.
lt is erroneous to assert that the certificate of deposit in question is negotiable like any
other commercial instrument: First, because every commercial instrument is not
negotiable; and second, because only instruments payable to order are negotiable.
Hence, this instrument not being to order but to bearer, it is not negotiable.
lt is also erroneous to assert that sum of money set forth in said certificate is, according
to it, in the defendant's possession as a loan. ln a loan the lender transmits to the
borrower the use of the thing lent, while in a deposit the use of the thing is not
transmitted, but merely possession for its custody or safe-keeping.
ln order that the depositary may use or dispose oft he things deposited, the depositor's
consent is required, and then:
The rights and obligations of the depositary and of the depositor shall cease, and the
rules and provisions applicable to commercial loans, commission, or contract which took
the place of the deposit shall be observed. (Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of the depositary
for using or disposing of the P2,498, which the certificate acknowledges, or any contract
entered into with the depositor to convert the deposit into a loan, commission, or other
contract.
That demand was not made for restitution of the sum deposited, which could have been
claimed on the same or the next day after the certificate was signed, does not operate
against the depositor, or signify anything except the intention not to press it. Failure to
claim at once or delay for sometime in demanding restitution of the things deposited,
which was immediately due, does not imply such permission to use the thing deposited
as would convert the deposit into a loan.
Article 408 of the Code of Commerce of l829, previous to the one now in force,
provided:
The depositary of an amount of money cannot use the amount, and if he makes use of
it, he shall be responsible for all damages that may accrue and shall respond to the
depositor for the legal interest on the amount.
Whereupon the commentators say:
ln this case the deposit becomes in fact a loan, as a just punishment imposed upon him
who abuses the sacred nature of a deposit and as a means of preventing the desire of
gain from leading him into speculations that may be disastrous to the depositor, who is
much better secured while the deposit exists when he only has a personal action for
recovery.
According to article 548, No. 5, of the Penal Code, those who to the prejudice of another
appropriate or abstract for their own use money, goods, or other personal property
which they may have received as a deposit, on commission, or for administration, or for
any other purpose which produces the obligation of delivering it or returning it, and deny
having received it, shall suffer the penalty of the preceding article," which punishes such
act as the crime of estafa. The corresponding article of the Penal Code of the
Philippines in 535, No. 5.
ln a decision of an appeal, September 28, l895, the principle was laid down that: "Since
he commits the crime of estafa under article 548 of the Penal Code of Spain who to
another's detriment appropriates to himself or abstracts money or goods received on
commission for delivery, the court rightly applied this article to the appellant, who, to the
manifest detriment of the owner or owners of the securities, since he has not restored
them, willfully and wrongfully disposed of them by appropriating them to himself or at
least diverting them from the purpose to which he was charged to devote them."
lt is unquestionable that in no sense did the P2,498 which he willfully and wrongfully
disposed of to the detriments of his principal, Juana Montilla, and of the depositor,
Eugenio Veraguth, belong to the defendant.
Likewise erroneous is the construction apparently at tempted to be given to two
decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580, and U. S. vs.
Morales and Morco, l5 Phil. Rep., 236) as implying that what constitutes estafa is not
the disposal of money deposited, but denial of having received same. ln the first of said
cases there was no evidence that the defendant had appropriated the grain deposited in
his possession.
On the contrary, it is entirely probable that, after the departure of the defendant from
Libmanan on September 20, l898, two days after the uprising of the civil guard in
Nueva Caceres, the rice was seized by the revolutionalists and appropriated to their
own uses.
ln this connection it was held that failure to return the thing deposited was not sufficient,
but that it was necessary to prove that the depositary had appropriated it to himself or
diverted the deposit to his own or another's benefit. He was accused or refusing to
restore, and it was held that the code does not penalize refusal to restore but denial of
having received. So much for the crime of omission; now with reference to the crime of
commission, it was not held in that decision that appropriation or diversion of the thing
deposited would not constitute the crime of estafa.
ln the second of said decisions, the accused "kept none of the proceeds of the sales.
Those, such as they were, he turned over to the owner;" and there being no proof of the
appropriation, the agent could not be found guilty of the crime of estafa.
Being in accord and the merits of the case, the judgment appealed from is affirmed, with
costs
BANK OF THE PHlLlPPlNE lSLANDS, petitioner,
vs.
THE lNTERMEDlATE APPELLATE COURT and ZSHORNACK respondents.
Pacis & Reyes Law Office for petitioner.
Ernesto T. Zshornack, Jr. for private respondent.

CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank
and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] ln l980,
the Bank of the Philippine lslands (hereafter referred to as BPl absorbed COMTRUST
through a corporate merger, and was substituted as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,l976 by filing in the Court of First
lnstance of Rizal Caloocan City a complaint against COMTRUST alleging four
causes of action. Except for the third cause of action, the CFl ruled in favor of
Zshornack. The bank appealed to the lntermediate Appellate Court which modified the
CFl decision absolving the bank from liability on the fourth cause of action. The
pertinent portions of the judgment, as modified, read:
lN VlEW OF THE FOREGOlNG, the Court renders judgment as follows:
l. Ordering the defendant COMTRUST to restore to the dollar savings account of
plaintiff (No. 25-4l09) the amount of U.S $l,000.00 as of October 27, l975 to earn
interest together with the remaining balance of the said account at the rate fixed by the
bank for dollar deposits under Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S.
$3,000.00 immediately upon the finality of this decision, without interest for the reason
that the said amount was merely held in custody for safekeeping, but was not actually
deposited with the defendant COMTRUST because being cash currency, it cannot by
law be deposited with plaintiffs dollar account and defendant's only obligation is to
return the same to plaintiff upon demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as
damages in the concept of litigation expenses and attorney's fees suffered by plaintiff as
a result of the failure of the defendant bank to restore to his (plaintiffs) account the
amount of U.S. $l,000.00 and to return to him (plaintiff) the U.S. $3,000.00 cash left for
safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from any
liability to Zshornack. The latter not having appealed the Court of Appeals decision, the
issues facing this Court are limited to the bank's liability with regard to the first and
second causes of action and its liability for damages.
l. We first consider the first cause of action, On the dates material to this case,
Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST, Quezon
City Branch, a dollar savings account and a peso current account.
On October 27, l975, an application for a dollar draft was accomplished by Virgilio V.
Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain
Leovigilda D. Dizon in the amount of $l,000.00. ln the application, Garcia indicated that
the amount was to be charged to Dollar Savings Acct. No. 25-4l09, the savings account
of the Zshornacks; the charges for commission, documentary stamp tax and others
totalling Pl7.46 were to be charged to Current Acct. No. 2l0465-29, again, the current
account of the Zshornacks. There was no indication of the name of the purchaser of the
dollar draft.
On the same date, October 27,l975, COMTRUST, under the signature of Virgilio V.
Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of US
$l,000 drawn on the Chase Manhattan Bank, New York, with an indication that it was to
be charged to Dollar Savings Acct. No. 25-4l09.
When Zshornack noticed the withdrawal of US$l,000.00 from his account, he
demanded an explanation from the bank. ln answer, COMTRUST claimed that the peso
value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on
October 27, l975 when he (Ernesto) encashed with COMTRUST a cashier's check for
P8,450.00 issued by the Manila Banking Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the ruling
of both the trial court and the Appellate Court on the first cause of action. Petitioner
must be held liable for the unauthorized withdrawal of US$l,000.00 from private
respondent's dollar account.
ln its desperate attempt to justify its act of withdrawing from its depositor's savings
account, the bank has adopted inconsistent theories. First, it still maintains that the peso
value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when the latter
encashed the Manilabank Cashier's Check. At the same time, the bank claims that the
withdrawal was made pursuant to an agreement where Zshornack allegedly authorized
the bank to withdraw from his dollar savings account such amount which, when
converted to pesos, would be needed to fund his peso current account. lf indeed the
peso equivalent of the amount withdrawn from the dollar account was credited to the
peso current account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation,
petitioner bank has not shown how the transaction involving the cashier's check is
related to the transaction involving the dollar draft in favor of Dizon financed by the
withdrawal from Rizaldy's dollar account. The two transactions appear entirely
independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality
distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be
considered payment to Rizaldy.
As to the second explanation, even if we assume that there was such an agreement,
the evidence do not show that the withdrawal was made pursuant to it. lnstead, the
record reveals that the amount withdrawn was used to finance a dollar draft in favor of
Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is no
proof whatsoever that peso Current Account No. 2l0-465-29 was ever credited with the
peso equivalent of the US$l,000.00 withdrawn on October 27, l975 from Dollar
Savings Account No. 25-4l09.
2. As for the second cause of action, the complaint filed with the trial court alleged
that on December 8, l975, Zshornack entrusted to COMTRUST, thru Garcia, US
$3,000.00 cash (popularly known as greenbacks) for safekeeping, and that the
agreement was embodied in a document, a copy of which was attached to and made
part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERClAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, l975
MR. RlZALDY T. ZSHORNACK
&/OR MRS SHlRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US DOLLARS:
THREE THOUSAND ONLY (US$3,000.00) for safekeeping.
Received by:
(Sgd.) VlRGlLlO V. GARClA
lt was also alleged in the complaint that despite demands, the bank refused to return
the money.
ln its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's peso
current account at prevailing conversion rates.
lt must be emphasized that COMTRUST did not deny specifically under oath the
authenticity and due execution of the above instrument.
During trial, it was established that on December 8, l975 Zshornack indeed delivered to
the bank US $3,000 for safekeeping. When he requested the return of the money on
May l0, l976, COMTRUST explained that the sum was disposed of in this manner:
US$2,000.00 was sold on December 29, l975 and the peso proceeds amounting to
Pl4,920.00 were deposited to Zshornack's current account per deposit slip
accomplished by Garcia; the remaining US$l,000.00 was sold on February 3, l976 and
the peso proceeds amounting to P8,350.00 were deposited to his current account per
deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's current
account at prevailing conversion rates, BPl now posits another ground to defeat private
respondent's claim. lt now argues that the contract embodied in the document is the
contract of depositum (as defined in Article l962, New Civil Code), which banks do not
enter into. The bank alleges that Garcia exceeded his powers when he entered into the
transaction. Hence, it is claimed, the bank cannot be liable under the contract, and the
obligation is purely personal to Garcia.
Before we go into the nature of the contract entered into, an important point which
arises on the pleadings, must be considered.
The second cause of action is based on a document purporting to be signed by
COMTRUST, a copy of which document was attached to the complaint. ln short, the
second cause of action was based on an actionable document. lt was therefore
incumbent upon the bank to specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it desired: (l) to question the
authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into such
contract. [See, E.B. Merchant v. lnternational Banking Corporation, 6 Phil. 3l4 (l906).]
No sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to
enter into the contract, was ever filed. Hence, the bank is deemed to have admitted not
only Garcia's authority, but also the bank's power, to enter into the contract in question.
ln the past, this Court had occasion to explain the reason behind this procedural
requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be readily
appreciated. ln dealing with corporations the public at large is bound to rely to a large
extent upon outward appearances. lf a man is found acting for a corporation with the
external indicia of authority, any person, not having notice of want of authority, may
usually rely upon those appearances; and if it be found that the directors had permitted
the agent to exercise that authority and thereby held him out as a person competent to
bind the corporation, or had acquiesced in a contract and retained the benefit supposed
to have been conferred by it, the corporation will be bound, notwithstanding the actual
authority may never have been granted
... Whether a particular officer actually possesses the authority which he assumes to
exercise is frequently known to very few, and the proof of it usually is not readily
accessible to the stranger who deals with the corporation on the faith of the ostensible
authority exercised by some of the corporate officers. lt is therefore reasonable, in a
case where an officer of a corporation has made a contract in its name, that the
corporation should be required, if it denies his authority, to state such defense in its
answer. By this means the plaintiff is apprised of the fact that the agent's authority is
contested; and he is given an opportunity to adduce evidence showing either that the
authority existed or that the contract was ratified and approved. [Ramirez v. Orientalist
Co. and Fernandez, 38 Phil. 634, 645- 646 (l9l8).]
Petitioner's argument must also be rejected for another reason. The practical effect of
absolving a corporation from liability every time an officer enters into a contract which is
beyond corporate powers, even without the proper allegation or proof that the
corporation has not authorized nor ratified the officer's act, is to cast corporations in so
perfect a mold that transgressions and wrongs by such artificial beings become
impossible [Bissell v. Michigan Southern and N.l.R. Cos 22 N.Y 258 (l860).] "To say
that a corporation has no right to do unauthorized acts is only to put forth a very plain
truism but to say that such bodies have no power or capacity to err is to impute to them
an excellence which does not belong to any created existence with which we are
acquainted. The distinction between power and right is no more to be lost sight of in
respect to artificial than in respect to natural persons." [lbid.]
Having determined that Garcia's act of entering into the contract binds the corporation,
we now determine the correct nature of the contract, and its legal consequences,
including its enforceability.
The document which embodies the contract states that the US$3,000.00 was received
by the bank for safekeeping. The subsequent acts of the parties also show that the
intent of the parties was really for the bank to safely keep the dollars and to return it to
Zshornack at a later time, Thus, Zshornack demanded the return of the money on May
l0, l976, or over five months later.
The above arrangement is that contract defined under Article l962, New Civil Code,
which reads:
Art. l962. A deposit is constituted from the moment a person receives a thing belonging
to another, with the obligation of safely keeping it and of returning the same. lf the
safekeeping of the thing delivered is not the principal purpose of the contract, there is
no deposit but some other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign
exchange. Hence, the transaction was covered by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Transactions, promulgated on December 9,
l949, which was in force at the time the parties entered into the transaction involved in
this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in them of whatever
nature, including, where applicable their exportation and importation, shall NOT be
effected, except with respect to deposit accounts included in sub-paragraphs (b) and (c)
of this paragraph, when such deposit accounts are owned by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with banks or banking
institutions located in the Philippines, including money, checks, drafts, bullions bank
drafts, deposit accounts (demand, time and savings), all debts, indebtedness or
obligations, financial brokers and investment houses, notes, debentures, stocks, bonds,
coupons, bank acceptances, mortgages, pledges, liens or other rights in the nature of
security, expressed in foreign currencies, or if payable abroad, irrespective of the
currency in which they are expressed, and belonging to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or
corporation residing or located within the Philippines;
(b) Any and all assets of the kinds included and/or described in subparagraph (a)
above, whether or not held through, in, or with banks or banking institutions, and
existent within the Philippines, which belong to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or
corporation not residing or located within the Philippines;
(c) Any and all assets existent within the Philippines including money, checks, drafts,
bullions, bank drafts, all debts, indebtedness or obligations, financial securities
commonly dealt in by bankers, brokers and investment houses, notes, debentures,
stock, bonds, coupons, bank acceptances, mortgages, pledges, liens or other rights in
the nature of security expressed in foreign currencies, or if payable abroad, irrespective
of the currency in which they are expressed, and belonging to any person, firm,
partnership, association, branch office, agency, company or other unincorporated body
or corporation residing or located within the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by
those authorized to deal in foreign exchange. All receipts of foreign exchange by any
person, firm, partnership, association, branch office, agency, company or other
unincorporated body or corporation shall be sold to the authorized agents of the Central
Bank by the recipients within one business day following the receipt of such foreign
exchange. Any person, firm, partnership, association, branch office, agency, company
or other unincorporated body or corporation, residing or located within the Philippines,
who acquires on and after the date of this Circular foreign exchange shall not, unless
licensed by the Central Bank, dispose of such foreign exchange in whole or in part, nor
receive less than its full value, nor delay taking ownership thereof except as such delay
is customary; Provided, further, That within one day upon taking ownership, or receiving
payment, of foreign exchange the aforementioned persons and entities shall sell such
foreign exchange to designated agents of the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person,
firm or corporation, foreign or domestic, who being bound to the observance thereof, or
of such other rules, regulations or directives as may hereafter be issued in
implementation of this Circular, shall fail or refuse to comply with, or abide by, or shall
violate the same, shall be subject to the penal sanctions provided in the Central Bank
Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 28l,
Regulations on Foreign Exchange, promulgated on November 26, l969 by limiting its
coverage to Philippine residents only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company or
corporation shall be sold to authorized agents of the Central Bank by the recipients
within one business day following the receipt of such foreign exchange. Any resident
person, firm, company or corporation residing or located within the Philippines, who
acquires foreign exchange shall not, unless authorized by the Central Bank, dispose of
such foreign exchange in whole or in part, nor receive less than its full value, nor delay
taking ownership thereof except as such delay is customary; Provided, That, within one
business day upon taking ownership or receiving payment of foreign exchange the
aforementioned persons and entities shall sell such foreign exchange to the authorized
agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they
intended the bank to safekeep the foreign exchange, and return it later to Zshornack,
who alleged in his complaint that he is a Philippine resident. The parties did not
intended to sell the US dollars to the Central Bank within one business day from receipt.
Otherwise, the contract of depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the Central Bank
within one business day from receipt, is a transaction which is not authorized by CB
Circular No. 20, it must be considered as one which falls under the general class of
prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void, having
been executed against the provisions of a mandatory/prohibitory law. More importantly,
it affords neither of the parties a cause of action against the other. "When the nullity
proceeds from the illegality of the cause or object of the contract, and the act constitutes
a criminal offense, both parties being in pari delicto, they shall have no cause of action
against each other. . ." [Art. l4ll, New Civil Code.] The only remedy is one on behalf of
the State to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the
concept of litigation expenses and attorney's fees to be reasonable. The award is
sustained.
WHEREFORE, the decision appealed from is hereby MODlFlED. Petitioner is ordered
to restore to the dollar savings account of private respondent the amount of
US$l,000.00 as of October 27, l975 to earn interest at the rate fixed by the bank for
dollar savings deposits. Petitioner is further ordered to pay private respondent the
amount of P8,000.00 as damages. The other causes of action of private respondent are
ordered dismissed.
SO ORDERED.
CA AGRO-lNDUSTRlAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURlTY BANK AND TRUST
COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.

DAVlDE, JR., J.:
ls the contractual relation between a commercial bank and another party in a contract of
rent of a safety deposit box with respect to its contents placed by the latter one of bailor
and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July l979, petitioner (through its President, Sergio Aguirre) and the spouses
Ramon and Paula Pugao entered into an agreement whereby the former purchased
from the latter two (2) parcels of land for a consideration of P350,625.00. Of this
amount, P75,725.00 was paid as downpayment while the balance was covered by three
(3) postdated checks. Among the terms and conditions of the agreement embodied in a
Memorandum of True and Actual Agreement of Sale of Land were that the titles to the
lots shall be transferred to the petitioner upon full payment of the purchase price and
that the owner's copies of the certificates of titles thereto, Transfer Certificates of Title
(TCT) Nos. 284655 and 292434, shall be deposited in a safety deposit box of any bank.
The same could be withdrawn only upon the joint signatures of a representative of the
petitioner and the Pugaos upon full payment of the purchase price. Petitioner, through
Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. l448 of private
respondent Security Bank and Trust Company, a domestic banking corporation
hereinafter referred to as the respondent Bank. For this purpose, both signed a contract
of lease (Exhibit "2") which contains, inter alia, the following conditions:
l3. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
l4. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith. l
After the execution of the contract, two (2) renter's keys were given to the renters one
to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained in the
possession of the respondent Bank. The safety deposit box has two (2) keyholes, one
for the guard key and the other for the renter's key, and can be opened only with the
use of both keys. Petitioner claims that the certificates of title were placed inside the
said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2)
lots at a price of P225.00 per square meter which, as petitioner alleged in its complaint,
translates to a profit of Pl00.00 per square meter or a total of P280,500.00 for the entire
property. Mrs. Ramos demanded the execution of a deed of sale which necessarily
entailed the production of the certificates of title. ln view thereof, Aguirre, accompanied
by the Pugaos, then proceeded to the respondent Bank on 4 October l979 to open the
safety deposit box and get the certificates of title. However, when opened in the
presence of the Bank's representative, the box yielded no such certificates. Because of
the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to
purchase the lots; as a consequence thereof, the petitioner allegedly failed to realize the
expected profit of P280,500.00. Hence, the latter filed on l September l980 a complaint
2 for damages against the respondent Bank with the Court of First lnstance (now
Regional Trial Court) of Pasig, Metro Manila which docketed the same as Civil Case No.
38382.
ln its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no
cause of action because of paragraphs l3 and l4 of the contract of lease (Exhibit "2");
corollarily, loss of any of the items or articles contained in the box could not give rise to
an action against it. lt then interposed a counterclaim for exemplary damages as well as
attorney's fees in the amount of P20,000.00. Petitioner subsequently filed an answer to
the counterclaim. 4
ln due course, the trial court, now designated as Branch l6l of the Regional Trial Court
(RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner on 8
December l986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing plaintiff's
complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to pay
defendant the amount of FlVE THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff. 6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs
l3 and l4 of the contract of lease, the Bank has no liability for the loss of the certificates
of title. The court declared that the said provisions are binding on the parties.
lts motion for reconsideration 7 having been denied, petitioner appealed from the
adverse decision to the respondent Court of Appeals which docketed the appeal as CA-
G.R. CV No. l5l50. Petitioner urged the respondent Court to reverse the challenged
decision because the trial court erred in (a) absolving the respondent Bank from liability
from the loss, (b) not declaring as null and void, for being contrary to law, public order
and public policy, the provisions in the contract for lease of the safety deposit box
absolving the Bank from any liability for loss, (c) not concluding that in this jurisdiction,
as well as under American jurisprudence, the liability of the Bank is settled and (d)
awarding attorney's fees to the Bank and denying the petitioner's prayer for nominal and
exemplary damages and attorney's fees. 8
ln its Decision promulgated on 4 July l989, 9 respondent Court affirmed the appealed
decision principally on the theory that the contract (Exhibit "2") executed by the
petitioner and respondent Bank is in the nature of a contract of lease by virtue of which
the petitioner and its co-renter were given control over the safety deposit box and its
contents while the Bank retained no right to open the said box because it had neither
the possession nor control over it and its contents. As such, the contract is governed by
Article l643 of the Civil Code l0 which provides:
Art. l643. ln the lease of things, one of the parties binds himself to give to another
the enjoyment or use of a thing for a price certain, and for a period which may be
definite or indefinite. However, no lease for more than ninety-nine years shall be valid.
lt invoked Tolentino vs. Gonzales ll which held that the owner of the property loses
his control over the property leased during the period of the contract and Article l975
of the Civil Code which provides:
Art. l975. The depositary holding certificates, bonds, securities or instruments which
earn interest shall be bound to collect the latter when it becomes due, and to take such
steps as may be necessary in order that the securities may preserve their value and the
rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty to
maintain the contents of the box. The stipulation absolving the defendant-appellee from
liability is in accordance with the nature of the contract of lease and cannot be regarded
as contrary to law, public order and public policy." l2 The appellate court was quick to
add, however, that under the contract of lease of the safety deposit box, respondent
Bank is not completely free from liability as it may still be made answerable in case
unauthorized persons enter into the vault area or when the rented box is forced open.
Thus, as expressly provided for in stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be admitted
to any rented safe and beyond this, the Bank will not be responsible for the contents of
any safe rented from it. l3
lts motion for reconsideration l4 having been denied in the respondent Court's
Resolution of 28 August l989, l5 petitioner took this recourse under Rule 45 of the
Rules of Court and urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial court (a) did not properly
and legally apply the correct law in this case, (b) acted with grave abuse of discretion or
in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is
contrary to, or is a departure from precedents adhered to and affirmed by decisions of
this Court and precepts in American jurisprudence adopted in the Philippines. lt
reiterates the arguments it had raised in its motion to reconsider the trial court's
decision, the brief submitted to the respondent Court and the motion to reconsider the
latter's decision. ln a nutshell, petitioner maintains that regardless of nomenclature, the
contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of
deposit governed by Title Xll, Book lV of the Civil Code of the
Philippines. l6 Accordingly, it is claimed that the respondent Bank is liable for the loss
of the certificates of title pursuant to Article l972 of the said Code which provides:
Art. l972. The depositary is obliged to keep the thing safely and to return it, when
required, to the depositor, or to his heirs and successors, or to the person who may
have been designated in the contract. His responsibility, with regard to the safekeeping
and the loss of the thing, shall be governed by the provisions of Title l of this Book.
lf the deposit is gratuitous, this fact shall be taken into account in determining the
degree of care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence l7 which is supposed to
expound on the prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit company leases a safe-
deposit box or safe and the lessee takes possession of the box or safe and places
therein his securities or other valuables, the relation of bailee and bail or is created
between the parties to the transaction as to such securities or other valuables; the fact
that the
safe-deposit company does not know, and that it is not expected that it shall know, the
character or description of the property which is deposited in such safe-deposit box or
safe does not change that relation. That access to the contents of the safe-deposit box
can be had only by the use of a key retained by the lessee ( whether it is the sole key or
one to be used in connection with one retained by the lessor) does not operate to alter
the foregoing rule. The argument that there is not, in such a case, a delivery of
exclusive possession and control to the deposit company, and that therefore the
situation is entirely different from that of ordinary bailment, has been generally rejected
by the courts, usually on the ground that as possession must be either in the depositor
or in the company, it should reasonably be considered as in the latter rather than in the
former, since the company is, by the nature of the contract, given absolute control of
access to the property, and the depositor cannot gain access thereto without the
consent and active participation of the company. . . . (citations omitted).
and a segment from Words and Phrases l8 which states that a contract for the rental of
a bank safety deposit box in consideration of a fixed amount at stated periods is a
bailment for hire.
Petitioner further argues that conditions l3 and l4 of the questioned contract are
contrary to law and public policy and should be declared null and void. ln support
thereof, it cites Article l306 of the Civil Code which provides that parties to a contract
may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order or
public policy.
After the respondent Bank filed its comment, this Court gave due course to the petition
and required the parties to simultaneously submit their respective Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety
deposit box is not an ordinary contract of lease as defined in Article l643 of the Civil
Code. However, We do not fully subscribe to its view that the same is a contract of
deposit that is to be strictly governed by the provisions in the Civil Code on deposit; l9
the contract in the case at bar is a special kind of deposit. lt cannot be characterized as
an ordinary contract of lease under Article l643 because the full and absolute
possession and control of the safety deposit box was not given to the joint renters the
petitioner and the Pugaos. The guard key of the box remained with the respondent
Bank; without this key, neither of the renters could open the box. On the other hand, the
respondent Bank could not likewise open the box without the renter's key. ln this case,
the said key had a duplicate which was made so that both renters could have access to
the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply.
Neither could Article l975, also relied upon by the respondent Court, be invoked as an
argument against the deposit theory. Obviously, the first paragraph of such provision
cannot apply to a depositary of certificates, bonds, securities or instruments which earn
interest if such documents are kept in a rented safety deposit box. lt is clear that the
depositary cannot open the box without the renter being present.
We observe, however, that the deposit theory itself does not altogether find unanimous
support even in American jurisprudence. We agree with the petitioner that under the
latter, the prevailing rule is that the relation between a bank renting out safe-deposit
boxes and its customer with respect to the contents of the box is that of a bail or and
bailee, the bailment being for hire and mutual benefit. 2l This is just the prevailing view
because:
There is, however, some support for the view that the relationship in question might be
more properly characterized as that of landlord and tenant, or lessor and lessee. lt has
also been suggested that it should be characterized as that of licensor and licensee.
The relation between a bank, safe-deposit company, or storage company, and the
renter of a safe-deposit box therein, is often described as contractual, express or
implied, oral or written, in whole or in part. But there is apparently no jurisdiction in
which any rule other than that applicable to bailments governs questions of the liability
and rights of the parties in respect of loss of the contents of safe-deposit boxes. 22
(citations omitted)
ln the context of our laws which authorize banking institutions to rent out safety deposit
boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has been
adopted. Section 72 of the General Banking Act 23 pertinently provides:
Sec. 72. ln addition to the operations specifically authorized elsewhere in this Act,
banking institutions other than building and loan associations may perform the following
services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c) of this
section as depositories or as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of
deposit, i.e., the receiving in custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not independent from, but
related to or in conjunction with, this principal function. A contract of deposit may be
entered into orally or in writing 25 and, pursuant to Article l306 of the Civil Code, the
parties thereto may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs,
public order or public policy. The depositary's responsibility for the safekeeping of the
objects deposited in the case at bar is governed by Title l, Book lV of the Civil Code.
Accordingly, the depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the agreement. 26 ln
the absence of any stipulation prescribing the degree of diligence required, that of a
good father of a family is to be observed. 27 Hence, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being contrary to law and public policy. ln
the instant case, petitioner maintains that conditions l3 and l4 of the questioned
contract of lease of the safety deposit box, which read:
l3. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
l4. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith. 28
are void as they are contrary to law and public policy. We find Ourselves in agreement
with this proposition for indeed, said provisions are inconsistent with the respondent
Bank's responsibility as a depositary under Section 72(a) of the General Banking Act.
Both exempt the latter from any liability except as contemplated in condition 8 thereof
which limits its duty to exercise reasonable diligence only with respect to who shall be
admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be admitted
to any rented safe and beyond this, the Bank will not be responsible for the contents of
any safe rented from it. 29
Furthermore, condition l3 stands on a wrong premise and is contrary to the actual
practice of the Bank. lt is not correct to assert that the Bank has neither the possession
nor control of the contents of the box since in fact, the safety deposit box itself is located
in its premises and is under its absolute control; moreover, the respondent Bank keeps
the guard key to the said box. As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and using this guard key. Clearly then,
to the extent above stated, the foregoing conditions in the contract in question are void
and ineffective. lt has been said:
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit
company, the parties, since the relation is a contractual one, may by special contract
define their respective duties or provide for increasing or limiting the liability of the
deposit company, provided such contract is not in violation of law or public policy. lt
must clearly appear that there actually was such a special contract, however, in order to
vary the ordinary obligations implied by law from the relationship of the parties; liability
of the deposit company will not be enlarged or restricted by words of doubtful meaning.
The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own
fraud or negligence or that of its agents or servants, and if a provision of the contract
may be construed as an attempt to do so, it will be held ineffective for the purpose.
Although it has been held that the lessor of a safe-deposit box cannot limit its liability for
loss of the contents thereof through its own negligence, the view has been taken that
such a lessor may limits its liability to some extent by agreement or stipulation. 30
(citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that
the petition should be dismissed, but on grounds quite different from those relied upon
by the Court of Appeals. ln the instant case, the respondent Bank's exoneration cannot,
contrary to the holding of the Court of Appeals, be based on or proceed from a
characterization of the impugned contract as a contract of lease, but rather on the fact
that no competent proof was presented to show that respondent Bank was aware of the
agreement between the petitioner and the Pugaos to the effect that the certificates of
title were withdrawable from the safety deposit box only upon both parties' joint
signatures, and that no evidence was submitted to reveal that the loss of the certificates
of title was due to the fraud or negligence of the respondent Bank. This in turn flows
from this Court's determination that the contract involved was one of deposit. Since both
the petitioner and the Pugaos agreed that each should have one (l) renter's key, it was
obvious that either of them could ask the Bank for access to the safety deposit box and,
with the use of such key and the Bank's own guard key, could open the said box,
without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no
bad faith on its part had been established, the trial court erred in condemning the
petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision
(dispositive portion) of public respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award for
attorney's fees from the 4 July l989 Decision of the respondent Court of Appeals in CA-
G.R. CV No. l5l50. As modified, and subject to the pronouncement We made above
on the nature of the relationship between the parties in a contract of lease of safety
deposit boxes, the dispositive portion of the said Decision is hereby AFFlRMED and the
instant Petition for Review is otherwise DENlED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
ANGEL JAVELLANA, plaintiff-appellee,
vs.
JOSE LlM, ET AL., defendants-appellants.
R. Zaldarriaga for appellants.
B. Montinola for appellee.
TORRES, J.:
The attorney for the plaintiff, Angel Javellana, file a complaint on the 30th of October,
l906, with the Court of First lnstance of lloilo, praying that the defendants, Jose Lim and
Ceferino Domingo Lim, he sentenced to jointly and severally pay the sum of P2,686.58,
with interest thereon at the rate of l5 per cent per annum from the 20th of January,
l898, until full payment should be made, deducting from the amount of interest due the
sum of Pl,l02.l6, and to pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint was amended
on the l0th of January, l907; it was then alleged, on the 26th of May, l897, the
defendants executed and subscribed a document in favor of the plaintiff reading as
follows:
We have received from Angel Javellana, as a deposit without interest, the sum of two
thousand six hundred and eighty-six cents of pesos fuertes, which we will return to the
said gentleman, jointly and severally, on the 20th of January, l898. Jaro, 26th of
May, l897. Signed Jose Lim. Signed: Ceferino Domingo Lim.
That, when the obligation became due, the defendants begged the plaintiff for an
extension of time for the payment thereof, building themselves to pay interest at the rate
of l5 per cent on the amount of their indebtedness, to which the plaintiff acceded; that
on the l5th of May, l902, the debtors paid on account of interest due the sum of Pl,000
pesos, with the exception of either capital or interest, had thereby been subjected to
loss and damages.
A demurrer to the original complaint was overruled, and on the 4th of January, l907, the
defendants answered the original complaint before its amendment, setting forth that
they acknowledged the facts stated in Nos. l and 2 of the complaint; that they admitted
the statements of the plaintiff relative to the payment of l,l02.l6 pesos made on the
l5th of November, l902, not, however, as payment of interest on the amount stated in
the foregoing document, but on account of the principal, and denied that there had been
any agreement as to an extension of the time for payment and the payment of interest
at the rate of l5 per cent per annum as alleged in paragraph 3 of the complaint, and
also denied all the other statements contained therein.
As a counterclaim, the defendants alleged that they had paid to the plaintiff sums which,
together with the Pl,l02.l6 acknowledged in the complaint, aggregated the total sum of
P5,602.l6, and that, deducting therefrom the total sum of P2,686.58 stated in the
document transcribed in the complaint, the plaintiff still owed the defendants P2,9l5.58;
therefore, they asked that judgment be entered absolving them, and sentencing the
plaintiff to pay them the sum of P2,9l5.58 with the costs.
Evidence was adduced by both parties and, upon their exhibits, together with an
account book having been made of record, the court below rendered judgment on the
l5th of January, l907, in favor of the plaintiff for the recovery of the sum of P5,7l4.44
and costs.
The defendants excepted to the above decision and moved for a new trial. This motion
was overruled and was also excepted to by them; the bill of exceptions presented by the
appellants having been approved, the same was in due course submitted to this court.
The document of indebtedness inserted in the complaint states that the plaintiff left on
deposit with the defendants a given sum of money which they were jointly and severally
obliged to return on a certain date fixed in the document; but that, nevertheless, when
the document appearing as Exhibits 2, written in the Visayan dialect and followed by a
translation into Spanish was executed, it was acknowledged, at the date thereof, the
l5th of November, l902, that the amount deposited had not yet been returned to the
creditor, whereby he was subjected to losses and damages amounting to 830 pesos
since the 20th of January, l898, when the return was again stipulated with the further
agreement that the amount deposited should bear interest at the rate of l5 per cent per
annum, from the aforesaid date of January 20, and that the l,000 pesos paid to the
depositor on the l5th of May, l900, according to the receipt issued by him to the
debtors, would be included, and that the said rate of interest would obtain until the
debtors on the 20th of May, l897, it is called a deposit consisted, and they could have
accomplished the return agreed upon by the delivery of a sum equal to the one received
by them. For this reason it must be understood that the debtors were lawfully authorized
to make use of the amount deposited, which they have done, as subsequent shown
when asking for an extension of the time for the return thereof, inasmuch as,
acknowledging that they have subjected the letter, their creditor, to losses and damages
for not complying with what had been stipulated, and being conscious that they had
used, for their own profit and gain, the money that they received apparently as a
deposit, they engaged to pay interest to the creditor from the date named until the time
when the refund should be made. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered into between the interested
parties was not a deposit, but a real contract of loan.
Article l767 of the Civil Code provides that
The depository can not make use of the thing deposited without the express permission
of the depositor.
Otherwise he shall be liable for losses and damages.
Article l768 also provides that
When the depository has permission to make use of the thing deposited, the contract
loses the character of a deposit and becomes a loan or bailment.
The permission shall not be presumed, and its existence must be proven.
When on one of the latter days of January, l898, Jose Lim went to the office of the
creditor asking for an extension of one year, in view of the fact the money was scare,
and because neither himself nor the other defendant were able to return the amount
deposited, for which reason he agreed to pay interest at the rate of l5 per cent per
annum, it was because, as a matter of fact, he did not have in his possession the
amount deposited, he having made use of the same in his business and for his own
profit; and the creditor, by granting them the extension, evidently confirmed the express
permission previously given to use and dispose of the amount stated as having bee
deposited, which, in accordance with the loan, to all intents and purposes gratuitously,
until the 20th of January, l898, and from that dated with interest at l5 per cent per
annum until its full payment, deducting from the total amount of interest the sum of
l,000 pesos, in accordance with the provisions of article ll73 of the Civil Code.
Notwithstanding that it does not appear that Jose Lim signed the document (Exhibit 2)
executed in the presence of three witnesses on the l5th of November, l902, by
Ceferino Domingo Lim on behalf of himself and the former, nevertheless, the said
document has not been contested as false, either by a criminal or by a civil proceeding,
nor has any doubt been cast upon the authenticity of the signatures of the witnesses
who attested the execution of the same; and from the evidence in the case one is
sufficiently convinced that the said Jose Lim was perfectly aware of and authorized his
joint codebtor to liquidate the interest, to pay the sum of l,000 pesos, on account
thereof, and to execute the aforesaid document No. 2. A true ratification of the original
document of deposit was thus made, and not the least proof is shown in the record that
Jose Lim had ever paid the whole or any part of the capital stated in the original
document, Exhibit l.
lf the amount, together with interest claimed in the complaint, less l,000 pesos appears
as fully established, such is not the case with the defendant's counterclaim for
P5,602.l6, because the existence and certainty of said indebtedness imputed to the
plaintiff has not been proven, and the defendants, who call themselves creditors for the
said amount have not proven in a satisfactory manner that the plaintiff had received
partial payments on account of the same; the latter alleges with good reason, that they
should produce the receipts which he may have issued, and which he did issue
whenever they paid him any money on account. The plaintiffs allegation that the two
amounts of 400 and l,200 pesos, referred to in documents marked "C" and "D" offered
in evidence by the defendants, had been received from Ceferino Domingo Lim on
account of other debts of his, has not been contradicted, and the fact that in the original
complaint the sum of l,l02.l6 pesos, was expressed in lieu of l,000 pesos, the only
payment made on account of interest on the amount deposited according to documents
No. 2 and letter "B" above referred to, was due to a mistake.
Moreover, for the reason above set forth it may, as a matter of course, be inferred that
there was no renewal of the contract deposited converted into a loan, because, as has
already been stated, the defendants received said amount by virtue of real loan contract
under the name of a deposit, since the so-called bailees were forthwith authorized to
dispose of the amount deposited. This they have done, as has been clearly shown.
The original joint obligation contracted by the defendant debtor still exists, and it has not
been shown or proven in the proceedings that the creditor had released Joe Lim from
complying with his obligation in order that he should not be sued for or sentenced to pay
the amount of capital and interest together with his codebtor, Ceferino Domingo Lim,
because the record offers satisfactory evidence against the pretension of Jose Lim, and
it further appears that document No. 2 was executed by the other debtor, Ceferino
Domingo Lim, for himself and on behalf of Jose Lim; and it has also been proven that
Jose Lim, being fully aware that his debt had not yet been settled, took steps to secure
an extension of the time for payment, and consented to pay interest in return for the
concession requested from the creditor.
ln view of the foregoing, and adopting the findings in the judgment appealed from, it is
our opinion that the same should be and is hereby affirmed with the costs of this
instance against the appellant, provided that the interest agreed upon shall be paid until
the complete liquidation of the debt. So ordered.
Arellano, C.J., Carson, Willard and Tracey, JJ., concur.