Credit Transactions Cases Prelim 1st Set

CELESTINA T. NAGUIAT, petitioner, vs. COURT OF APPEALS and AURORA QUEAO, respondents.
DECISION
TINGA, J.:
Before us is a Petition for Review on Certiorari under Rule 45, assailing the decision of the Sixteenth Division of the respondent
Court of Appeals promulgated on 21 December 1994 [1], which affirmed in toto the decision handed down by the Regional Trial Court
(RTC) of Pasay City.[2]
The case arose when on 11 August 1981, private respondent Aurora Queao (Queao) filed a complaint before the Pasay City RTC
for cancellation of a Real Estate Mortgage she had entered into with petitioner Celestina Naguiat (Naguiat). The RTC rendered a
decision, declaring the questioned Real Estate Mortgage void, which Naguiat appealed to the Court of Appeals. After the Court of
Appeals upheld the RTC decision, Naguiat instituted the present petition.
The operative facts follow:
Queao applied with Naguiat for a loan in the amount of Two Hundred Thousand Pesos (P200,000.00), which Naguiat granted. On
11 August 1980, Naguiat indorsed to Queao Associated Bank Check No. 090990 (dated 11 August 1980) for the amount of Ninety Five
Thousand Pesos (P95,000.00), which was earlier issued to Naguiat by the Corporate Resources Financing Corporation. She also issued
her own Filmanbank Check No. 065314, to the order of Queao, also dated 11 August 1980 and for the amount of Ninety Five
Thousand Pesos (P95,000.00). The proceeds of these checks were to constitute the loan granted by Naguiat to Queao. [3]
To secure the loan, Queao executed a Deed of Real Estate Mortgage dated 11 August 1980 in favor of Naguiat, and surrendered
to the latter the owners duplicates of the titles covering the mortgaged properties. [4] On the same day, the mortgage deed was
notarized, and Queao issued to Naguiat a promissory note for the amount of TWO HUNDRED THOUSAND PESOS ( P200,000.00), with
interest at 12% per annum, payable on 11 September 1980. [5] Queao also issued a Security Bank and Trust Company check,
postdated 11 September 1980, for the amount of TWO HUNDRED THOUSAND PESOS ( P200,000.00) and payable to the order of
Naguiat.
Upon presentment on its maturity date, the Security Bank check was dishonored for insufficiency of funds. On the following day,
12 September 1980, Queao requested Security Bank to stop payment of her postdated check, but the bank rejected the request
pursuant to its policy not to honor such requests if the check is drawn against insufficient funds. [6]
On 16 October 1980, Queao received a letter from Naguiats lawyer, demanding settlement of the loan. Shortly thereafter,
Queao and one Ruby Ruebenfeldt (Ruebenfeldt) met with Naguiat. At the meeting, Queao told Naguiat that she did not receive the
proceeds of the loan, adding that the checks were retained by Ruebenfeldt, who purportedly was Naguiats agent. [7]
Naguiat applied for the extrajudicial foreclosure of the mortgage with the Sheriff of Rizal Province, who then scheduled the
foreclosure sale on 14 August 1981. Three days before the scheduled sale, Queao filed the case before the Pasay City RTC, [8] seeking
the annulment of the mortgage deed. The trial court eventually stopped the auction sale. [9]
On 8 March 1991, the RTC rendered judgment, declaring the Deed of Real Estate Mortgage null and void, and ordering Naguiat
to return to Queao the owners duplicates of her titles to the mortgaged lots. [10] Naguiat appealed the decision before the Court of
Appeals, making no less than eleven assignments of error. The Court of Appeals promulgated the decision now assailed before us that
affirmed in toto the RTC decision. Hence, the present petition.
Naguiat questions the findings of facts made by the Court of Appeals, especially on the issue of whether Queao had actually
received the loan proceeds which were supposed to be covered by the two checks Naguiat had issued or indorsed. Naguiat claims
that being a notarial instrument or public document, the mortgage deed enjoys the presumption that the recitals therein are
true. Naguiat also questions the admissibility of various representations and pronouncements of Ruebenfeldt, invoking the rule on the
non-binding effect of the admissions of third persons.[11]
The resolution of the issues presented before this Court by Naguiat involves the determination of facts, a function which this
Court does not exercise in an appeal by certiorari. Under Rule 45 which governs appeal by certiorari, only questions of law may be
raised[12] as the Supreme Court is not a trier of facts. [13] The resolution of factual issues is the function of lower courts, whose findings
on these matters are received with respect and are in fact generally binding on the Supreme Court. [14] A question of law which the
Court may pass upon must not involve an examination of the probative value of the evidence presented by the litigants. [15] There is a
question of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question
of fact when the doubt or difference arises as to the truth or the falsehood of alleged facts. [16]
Surely, there are established exceptions to the rule on the conclusiveness of the findings of facts of the lower courts. [17] But
Naguiats case does not fall under any of the exceptions. In any event, both the decisions of the appellate and trial courts are
supported by the evidence on record and the applicable laws.

Credit Transactions Cases Prelim 1st Set

Against the common finding of the courts below, Naguiat vigorously insists that Queao received the loan proceeds. Capitalizing
on the status of the mortgage deed as a public document, she cites the rule that a public document enjoys the presumption of
validity and truthfulness of its contents. The Court of Appeals, however, is correct in ruling that the presumption of truthfulness of the
recitals in a public document was defeated by the clear and convincing evidence in this case that pointed to the absence of
consideration.[18] This Court has held that the presumption of truthfulness engendered by notarized documents is rebuttable, yielding
as it does to clear and convincing evidence to the contrary, as in this case. [19]
On the other hand, absolutely no evidence was submitted by Naguiat that the checks she issued or endorsed were actually
encashed or deposited. The mere issuance of the checks did not result in the perfection of the contract of loan. For the Civil Code
provides that the delivery of bills of exchange and mercantile documents such as checks shall produce the effect of payment only
when they have been cashed.[20] It is only after the checks have produced the effect of payment that the contract of loan may be
deemed perfected. Art. 1934 of the Civil Code provides:
An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum
or simple loan itself shall not be perfected until the delivery of the object of the contract.
A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of the object of the contract.
In this case, the objects of the contract are the loan proceeds which Queao would enjoy only upon the encashment of the checks
signed or indorsed by Naguiat. If indeed the checks were encashed or deposited, Naguiat would have certainly presented the
corresponding documentary evidence, such as the returned checks and the pertinent bank records. Since Naguiat presented no such
proof, it follows that the checks were not encashed or credited to Queaos account.
[21]

Naguiat questions the admissibility of the various written representations made by Ruebenfeldt on the ground that they could
not bind her following the res inter alia acta alteri nocere non debet rule. The Court of Appeals rejected the argument, holding that
since Ruebenfeldt was an authorized representative or agent of Naguiat the situation falls under a recognized exception to the rule.
[22]
Still, Naguiat insists that Ruebenfeldt was not her agent.
Suffice to say, however, the existence of an agency relationship between Naguiat and Ruebenfeldt is supported by ample
evidence. As correctly pointed out by the Court of Appeals, Ruebenfeldt was not a stranger or an unauthorized person. Naguiat
instructed Ruebenfeldt to withhold from Queao the checks she issued or indorsed to Queao, pending delivery by the latter of
additional collateral. Ruebenfeldt served as agent of Naguiat on the loan application of Queaos friend, Marilou Farralese, and it was in
connection with that transaction that Queao came to know Naguiat. [23] It was also Ruebenfeldt who accompanied Queao in her
meeting with Naguiat and on that occasion, on her own and without Queao asking for it, Reubenfeldt actually drew a check for the
sum of P220,000.00 payable to Naguiat, to cover for Queaos alleged liability to Naguiat under the loan agreement. [24]
The Court of Appeals recognized the existence of an agency by estoppel [25] citing Article 1873 of the Civil Code. [26] Apparently, it
considered that at the very least, as a consequence of the interaction between Naguiat and Ruebenfeldt, Queao got the impression
that Ruebenfeldt was the agent of Naguiat, but Naguiat did nothing to correct Queaos impression. In that situation, the rule is
clear. One who clothes another with apparent authority as his agent, and holds him out to the public as such, cannot be permitted to
deny the authority of such person to act as his agent, to the prejudice of innocent third parties dealing with such person in good faith,
and in the honest belief that he is what he appears to be. [27] The Court of Appeals is correct in invoking the said rule on agency by
estoppel.
More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is irrelevant in the face of the fact
that the checks issued or indorsed to Queao were never encashed or deposited to her account of Naguiat.
All told, we find no compelling reason to disturb the finding of the courts a quo that the lender did not remit and the borrower
did not receive the proceeds of the loan. That being the case, it follows that the mortgage which is supposed to secure the loan is null
and void. 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. [28] A mortgage contract being a mere accessory contract, its validity would
depend on the validity of the loan secured by it. [29]
WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against petitioner.

G.R. No. 106018 December 5, 1994

WILFREDO
vs.
HONORABLE COURT OF APPEALS, HERMINIA PATINIO and JOHN DOE, respondents.
Public Attorney's Office for petitioner.
Trinidad, Reverente, Makanlintal and Cabrera Law Office for private respondents.
RESOLUTION

VERDEJO, petitioner,

Credit Transactions Cases Prelim 1st Set

QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court of the decision of the Court of Appeals in CA-G.R.
CV No. 22638, titled "Wilfredo Verdejo v. Herminia Patinio and John Doe."
On January 11, 1985, petitioner instituted an action for sum of money against private respondents, docketed as Civil Case No. 2546-P
before the Regional Trial Court, Branch 111, Pasay City. He alleged that on November 17, 1983, private respondents executed in his
favor a Deed of Sale with Right to Repurchase for the sum of P60,560.00, to be paid every 15 days starting January 1984 until fully
paid. Private respondents failed to make any payment notwithstanding repeated demands by petitioner, causing the latter to file said
action (Rollo, p. 22).
In their answer with counterclaim, private respondents denied having received the amount of P60,560.00 from petitioner. The claimed
that they had been previously borrowing from petitioner and for the purpose of reconciling their outstanding accounts of P20,000.00
at 10% interest per month, and P7,000.00 at 12% interest per month, the said deed of sale was executed. However, it was
understood by the parties that the amount of P60,560.00 represented their outstanding account of P27,000.00 plus 10% interest per
month. Private respondents pointed out that the actual loan received sometime in 1982 was much lower than P60,650.00 and that
the same had already been paid (Rollo, pp. 25-29).
Private respondents further argued that petitioner charged usurious interest rates of 10% to 12% per month in contravention of the
Usury Law. They sought the recovery of P12,490.00 representing overpayment of interest, damages and attorney's fees.
The trial court dismissed the complaint in its Decision dated September 3, 1986, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered dismissing plaintiff's complaint for lack of merit.
On defendants' counterclaim, plaintiff is hereby ordered to refund to defendants the amount of P13,890.00 and to
further pay to defendants the amount of P5,000.00 as attorney's fees and the costs of this suit (Rollo,
p. 41).
The trial court found that the Deed of Sale with Right to Repurchase was the culmination of a series of loan transactions entered into
by the parties. Of the P60,650.00 consideration, the actual amount received by private respondents by way of loan was P22,000.00
with the balance of P38,560.00 representing interest. It ruled that the usurious interest rates were incorporated to the main
consideration of P60,650.00 to circumvent the laws against usury. Considering that at the time the loans were entered into, the Usury
Law was still in effect and beyond the scope of Central Bank (CB) Circular No. 905, January 1, 1983, which lifted the ceiling on interest
rates prescribed under the Usury Law, it held that the contract of loan was valid as to the loan but avoid as to the usurious interest
(Rollo, pp. 37-39).
The trial court also found that private respondents made a total payment of P35,890.00 with an overpayment of P13,890.00 (Rollo, p.
41).
On appeal by petitioner, the Court of Appeals modified the judgment of the trial court in its Decision dated April 30, 1992, the
dispositive portion of which provides:
WHEREFORE, except for the modification that plaintiff Wilfredo Verdejo should be ordered to refund defendant
Herminia Patinio the amount of P15,990.00 instead of P13,890.00 as found by the lower court, and that the award
of attorney's fees of P5,000.00 should be disallowed, the Decision of September 3, 1986 of the RTC-Pasay City,
Branch 111, in Civil Case No. 2546-P, is hereby AFFIRMED, in all other respects (Rollo, p. 106).
The appellate court explained that the loans were obtained by private respondents before the promulgation of CB Circular No. 905,
thus:
. . . While Exhibit A, Deed of Sale with Right to Repurchase, was executed on November 17, 1983, the same was a
consolidation or carry over of previous loan transactions in February, 1982 (Exhibit 1), November, 1982 (Exhibit
2), and November-December, 1982 (Exhibit 1), before the "open ceiling policy" of the Central Bank Circular No. 905
took effect. At the time the transactions took place per Exhibits 1, 2 and 3, the Usury Law was still in effect, and
Exhibit A, which was merely a carry over of transactions in Exhibits 1, 2 and 3 could not legalize previous unlawful
loan transactions (Rollo, p. 103, Emphasis supplied).
The Court of Appeals denied petitioner's motion for reconsideration in its Resolution dated June 23, 1992 (Rollo, p. 111).
Hence, the instant petition where petitioner raised the following errors of the appellate court in: (1) holding that the Deed of Sale with
Right to Repurchase cannot be enforced against private respondent Herminia Patinio notwithstanding the effectivity of CB Circular No.
905; and (2) making conclusions of fact unsupported by substantial evidence.

Credit Transactions Cases Prelim 1st Set

The petition is bereft of merit and merely raises factual issues, the determination of which is best left to the trial court. Well-settled is
the rule that findings of fact of the trial court and the Court of Appeals are not to be disturbed on appeal and are entitled to great
weight and respect (Tay Chun Suy v. Court of Appeals, 229 SCRA 151 [1993]). We see no reason to depart from the findings of the
Court of Appeals.
CONSIDERING THE FOREGOING, the Court Resolved to DENY the petition for lack of merit.
G.R. No. L-1927

May 31, 1949

CRISTOBAL
vs.
JOSE L. GOMEZ, ET AL., respondents.
Alfonso
Capistrano & Azores for respondents.

ROO, petitioner,

Farcon

for

petitioner.

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, 1944, 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, I promise to pay one year after date the sum of four thousand pesos (4,000) to Jose L. Gomez. It is
agreed that this will not earn any interest and the payment It is agreed that this will not earn any interest and the payment
prevailing by the end of the stipulated period of one year.
In consideration of this generous loan, I 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. I 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. I 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, 1944.
On October 15, 1945, i.e., after the liberation, Roo was sued for payment in the Laguna Court of First Instance. 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. It 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. It 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 1255.) 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 1091).
Invoking 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. If
within one year another kind of currency became legal tender, Gomez would probably get more for his money. If 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. 1790 and Manresa's
comment thereon) on a par with insurance policies and life annuities.

Credit Transactions Cases Prelim 1st Set

The eventual gain of Gomez in this transaction is not interest within the meaning of Usury Laws. Interest 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 1945 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. In 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". In the second place although on October 5, 1944 it was possible to surmise the impending American invasion, the
date of victory or liberation was anybody's guess. In 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 (P10,000, 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.
In 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.
G.R. No. 82082 March 25, 1988
INSULAR
BANK
OF
ASIA
AND
vs.
SPOUSES EPIFANIA SALAZAR and RICARDO SALAZAR, defendants-appellees.

AMERICA,plaintiff-appellant,

GUTIERREZ, JR., J.:

This is an appeal by the Insular Bank of Asia and America (IBAA) from the judgment of the Regional Trial Court of Leyte in Civil Case
No. 6932 for collection of a sum of money with preliminary attachment. The appeal was originally brought to the Court of Appeals but
was certified to us by that tribunal because it raises only a question of law.
The facts are not disputed.
On November 22, 1978, defendants-appellees Epifania Salazar and Ricardo Salazar obtained a loan from the plaintiff-appellant in the
amount of Forty Two Thousand and Fifty Pesos ( P42,050.00 ) payable on or before December 12, 1980. This loan transaction was
evidenced by a promissory note where the defendants-appellees bound themselves jointly and severally to pay the amount with
interest at 19% per annum and with the express authority to increase without notice the rate of interest up to the maximum allowed
by law and subject further to penalty charges or liquidated damages upon default equivalent to 2% per month on any amount due
and unpaid. In the event the account was referred to an attorney for collection, the defendants-appellees were also bound to pay 25%
of any amount due as attorney's fees plus expenses of litigation and costs.
In accordance with the agreement, the plaintiff-appellant increased the rate of interest to 21% pursuant to Central Bank Circular No.
705 dated December 1, 1979.
The promissory note matured but the defendants-appellees failed to pay their account. It was only after several demands that the
defendants-appellees were able to make partial payment. As of November 25, 1983, they were able to pay a total of P68,676.75
which payments were applied to partially satisfy the penalty and interest charges.
On September 12, 1984, the plaintiff-appellant filed a complaint with the Regional Trial Court alleging that the defendants-appellees
were indebted to IBAA in the amount of P87,647.19 as of September 15, 1984. including interest at 21% per annum penalty charges,
and attorney's fees.
At the pre-trial on October 31, 1984, the parties and their counsels appeared. The defendant-spouses admitted the execution of the
promissory note in consideration of P48,050.00. The trial court then rendered a summary judgment the dispositive portion of which
reads:

Credit Transactions Cases Prelim 1st Set

WHEREFORE, judgment is hereby ordered in favor of the plaintiff ordering the defendant spouses Ricardo Salazar
and Epifania Salazar to pay Insular Bank of Asia and America (IBAA) the sum of Eleven Thousand Two Hundred Fifty
Three Pesos and Twenty Five Centavos ( P11,253.25 ), with interest thereon at the rate of 19% per annum from the
filing of the complaint on September 12, 1984 until fully paid. The defendants are further ordered to pay the
plaintiff-attorney's fees in the amount of one Thousand Pesos ( P1,000.00 ) and to pay the costs. (p. 4, PlaintiffAppellant's Brief).

Plaintiff-appellant now raises the following assigned errors:

I THE LOWER COURT ERRED IN NOT AWARDING TO PLAINTIFF-APPELLANT PENALTY CHARGES OR LIQUIDATED DAMAGES IN THE
AMOUNT OF 2% PER MONTH ON ALL AMOUNTS DUE AND UNPAID;
II THE LOWER COURT ERRED IN NOT AWARDING INTEREST ON THE LOAN AT 21 % PER ANNUM.
III THE LOWER COURT ERRED IN THE COMPUTATION OF THE AMOUNT OF OBLIGATION DUE FROM DEFENDANTS-APPELLEES APPELLEES
IN FAVOR OF PLAINTIFF-APPELLANT
III THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF- APPELLANT ATTORNEY'S FEES EQUIVALENT TO 25% OF THE AMOUNT DUE
AND EXPENSES OF LITIGATION; and
IV THE LOWER COURT ERRED IN NOT ORDERING DEFENDANTS-APELLEES TO JOINTLY AND SEVERALLY PAY THE OBLIGATION. (pp. 4-5,
Plaintiff-Appellant's Brief)
The Escalation Clause provided in the promissory note reads:
The interest herein charged shall be subject to in , without notice, depending on whatever policy IBAA may in the
future adopt conformable to law, especially to compensate for any in Central Bank interests or rediscounting rates.
Finding strength in the argument that the promissory note is the contract between the parties and, under the law, obligations arising
from contracts have the force of law between the parties, the plaintiff-appellant increased the interest rate to 21% per annum
effective December 1, 1979 pursuant to Central Bank Circular No. 705.
In line with the Court's ruling in the case of Banco Filipino v. Navarro (G.R. No. L-46591, July 28,1987), the interest rate may not be
increased by the plaintiff-appellant in the instant case. It is the nile that escalation clauses are valid stipulations in commercial
contracts to maintain fiscal stability and to retain the value of money in long term contracts. However, the enforceability of such
stipulations are subject to certain conditions.
In the Banco Filipino case, the borrower questioned the additional interest charges on the loan of P41,300.00 she obtained when the
interest rates were increased from 12% to 17% per Central Bank Circular No. 494, issued on January 2, 1976. In a letter written by the
Central Bank to the borrower, some clarifications were made. Pertinent portions of the letter read:
In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976
adopted the following guidelines to govern interest rate adjustments by banks and non-banks performing quasibanking functions on loans already existing as of January 3, 1976, in the light of Central Rank Circulars Nos. 492498:
1 Only banks and non-bank financial intermediaries performing quasi-banking functions may interest rates on I
already existing as of January 2,1976, provided that:
a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing
lending bank or non-bank performing quasi-banking functions to increase the rate of interest
stipulated in the contract, in the event that any law or Central Bank regulation is promulgated
increasing the maximum interest rate for loans; and
b. Said loans were directly granted by them and the remaining maturities thereof were more than
730 days as of January 2, 1976, and
2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date. (Emphasis
supplied)
Moreover, in its comment and supplemental comment submit, ted upon orders of this Court, the Central Bank took the position that
the issuance of its circulars is a valid exercise of its authority to prescribe maximum rates of interest and based on the general
principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that- 41) the increased rate imposed
or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier
than the effectivity of the law or regulation authorizing such an increase and (3) the remaining maturities of the loans are more than
730 days as of the effectivity of the law or regulation authorizing such an increase. (Emphasis supplied)

Credit Transactions Cases Prelim 1st Set

In the case at bar, the loan was obtained on November 21, 1978 and was payable on or before November 12, 1980. Central Bank
Circular No. 705, authorizing the increase from 19% to 21% was issued on December 1, 1979. Obviously, as of this date, December 1,
1979, the remaining maturity of the loan was less than 730 days. Hence, the plaintiff-appellant's second assignment of error is
without merit.
With respect to the penalty clause, we have upheld the validity of such agreements in several cases. As the Court stated in the case
of Government Service Insurance System v. Court of appeals (145 SCRA 311, 321):
In the Bachrach case (supra) the Supreme Court ruled that the Civil Code permits the agreement upon a penalty
apart from the interest. Should there be such an agreement, the penalty does not include the interest, and as such
the two are different and distinct things which may be demanded separately. Reiterating the same principle in the
later case of Equitable Banking Corp. (supra), where this Court held that the stipulation about payment of such
additional rate partakes of the nature of a penalty clause, winch is sanctioned by law.
In the case of Equitable Banking Corporation v. Liwanag (32 SCRA 293, 297), the Court explained:
xxx xxx xxx
... We have not overlooked the 14% interest that appellant has been sentenced to pay. This may appear to be
usurious, but it is not so. The rate stipulated was 9%, subject, however, to an additional rate of 5%, in the event of
default. The stipulation about payment of such additional rate partakes of the nature of a penalty clause, which is
sanctioned by law, (Art. 1226, Civil Code of the Philippines), although, the penalty may also be reduced by the
courts if it is iniquitous or unconscionable. (Art 1229, Civil Code of the Philippines). ...
Admittedly, the defendants-appellees in the instant case failed to pay the loan on the due date. However, with earnest efforts, they
tried to pay the loan little by little so that as of November 25, 1983, a total of P68,676.75 had been paid. The plaintiff-appellant, on
the other hand, merely applied this amount to satisfy the penalty and interest charges which it additionally imposed. We do not find
any evidence of bad faith on the part of the defendants-appellees in their failure to pay the loan on time. Efforts were indeed made to
make good their promise. We note the trial court's observation that the plaintiff-appellant did not even state in the complaint that the
defendants-appellees had made partial payments, making it appear that the spouses Salazars refused to pay the loan. In their answer
with counterclaim, the defendants-appellees alleged that the bank neglected to credit said payments in the defendant's account folio
and subjected it as it did to the additional charges. Furthermore, we agree with the trial court that the bank has already profited
considerably from the loan. In a span of about six (6) years, the bank was enriched by P 26,626.75 (p. 17, Records). The penalty
charges of 2% a month are, therefore, out of proportion to the damage incurred by the bank. In accordance with Article 1229 of the
Civil Code, the Court is constrained to reduce the penalty for being highly iniquitous
With respect to the attorney's fees, the court is likewise empowered to reduce the same if they are unreasonable or unconscionable
notwithstanding the express contract for attorney's fees. The award of one thousand ( P1,000.00 ) pesos by the trial court appears to
be enough.
The promissory note signed by the defendants-appellants states that the loan of P42,050.00 shall bear interest at the rate of 19% per
annum. This would yield interest of P7,989.50 per annum or a total of P 46,339.10 from November 22, 1978 to September 12, 1984,
the date of filing the complaint. Penalty interest of 1% a month or 12% per annum is reasonable so that from December 12, 1980 up
to September 12, 1984, penalty charges should be P19,202.83. Considering that the defendants-appellees have paid the amount of
P68,676.75, they, therefore, owed the bank the amount of P38,915.18 when the complaint was filed. There is no indication in the
records as to the fluctuation of actual interest rates from 1984 and, therefore, we order interest at the legal rate of 12% per annum
on the unpaid amount.
WHEREFORE, the decision of the lower court is MODIFIED. The defendants-appellants Ricardo Salazar and Epifania Salazar are
ordered to pay Insular Bank of Asia and America (IBAA) the sum of THIRTY-EIGHT THOUSAND NINE HUNDRED PESOS and EIGHTEEN
CENTAVOS (P38,915.18 ) with interest thereon at the rate of Twelve Percent (12%) per annum from the filing of the complaint until
fully paid.
G.R. No. L-9262

July 10, 1959

MARINO
vs.
EFRAIN Y. MICLAT, respondent.
Zavalla,
Bautista
Domingo F. de Guzman for respondent.

S.

and

UMALI, petitioner,

Nuevas

for

petitioner.

BAUTISTA ANGELO, J.:

This is an action to recover certain sums of money, plus damages and attorney's fees, for some work done by plaintiff for defendant
Marino S. Umali. Defendant Antonio M. Tiongco was included in his capacity as guarantor of Umali but he was never served with
summons. With leave of Court, defendant Umali filed a third party complaint against Maharlika Pictures, Inc., a corporation duly
organized under the laws of the Philippines, but because the latter failed to file its answer, it was declared in default.

Credit Transactions Cases Prelim 1st Set

Defendant Umali set up the defense that the work done by the plaintiff was not complete or satisfactorily; that the contract upon
which the action is based was executed by the Maharlika Pictures, Inc., of which he is the President and General Manager, and so
plaintiff's action should be directed against said corporation.
After trial, the lower court rendered judgment ordering defendant Umali to pay plaintiff the sum of P675.00, plus 10% surcharge
thereon as stipulated, and the sum of P200.00 as attorney's fees; and with respect to the second claim, to pay the sum of P344.50.
The Court ordered that the sums of P675.00 and P344.50 shall bear 6% interest per annum for the date of the filing of the complaint
until paid. The complaint with respect to defendant Tiongco and the third party complaint against the corporation were dismissed.
Costs were taxed against defendant Umali.
Umali took the case on appeal to the Court of Appeals, and the decision of the lower court was affirmed in toto, with costs against
appellant. Hence the present petition for review.
It appears that in accordance with the contract Exhibit "A" and the Job Order Exhibit "D", appellee prepared posters, a theater show
board display, a theater display standee, a float, and other forms of advertisement for the showing of the film "LAGRIMAS"; that for
the work specified in Exhibit "A", Umali agreed to pay the sum of P900, of which appellee was paid P225 in advance; that for work
called for in Exhibit "D", Umali agreed to pay the sum of P344.50; that the work covered by the contract and job order above
mentioned were completely done and the articles called for therein delivered to Umali; and that notwithstanding several demands
made upon Umali, he refused to pay without justification.
The first defense set up by appellant is that the contracts which appellee's action is based were executed by and between the
appellee and the Maharlika Pictures, Inc., of which appellant is the President and General Manager, and so the action should have
been directed against the corporation and not against him in his personal capacity. Appellant does not dispute the correctness of the
amounts claimed in the complaint.
The Court of Appeals, in meeting this contention, made the following observation:
We have gone carefully over the evidence of record, and we have arrived at the conclusion that the decision appealed from
should be affirmed. As the contract (Exhibit A) would show, Umali signed the same in his personal capacity. While it is
mentioned therein that he is the President and General Manager of Maharlika Pictures, Inc., it is not stated that, as such, he
was duly authorized to enter into the contract for and on behalf of the corporation. If it were true that it was the intention of
the contracting parties to hold Maharlika Pictures, Inc., solely and exclusively liable, it was not explained why Umali allowed
Maharlika Pictures, Inc., of which he was still an Officer at the time of trial of this case, to be declared in default by not filing
its answer to the third-party complaint filed by him. Neither did Umali present in evidence any resolution or minutes of
meeting of Maharlika Pictures, Inc., which Umali admits is a corporation duly organized and existing under and by virtue of
the laws of the Philippines, or of its Board of Directors, ratifying the action of Umali and confirming the contract (Exhibit A) as
an act of the corporation. As President and General Manager of the corporation and the party appearing to be solely and
personally liable under the contract (Exhibit A), Umali should have taken steps to enable the Board of Directors of the
corporation to adopt a resolution confirming the execution by him of Exhibit A as an act of the corporation because this was
for his own protection.
We find the above observation supported by evidence. Indeed it appears in the contract Exhibit "A" that the one who contracted for
the work to be done is appellant in his personal capacity, although he described himself therein as President and General Manager of
the Maharlika Pictures, Inc. Umali signed the contract as "party of the second part" without stating that he was acting in behalf of the
corporation. And from what may be gathered from the decision both of the lower court and the Court of Appeals, Umali never
explained that when he entered into such a contract he acted in behalf of the corporation or was authorized to do so by its Board of
Directors. It is strange that, after bringing the corporation into this case as party-defendant, Umali allowed it to be declared in default
being its president and general manager as he claims to be, which gives rise to the suspicion that his claim is merely an attempt to
shift to the corporation the responsibility for the transaction. The same consideration may be made with regard to the job order
Exhibit "D". It is true that on its face it appears that the articles mentioned therein were delivered to the corporation, but apparently
the requisition of said articles was made by appellant himself for which reason he was made personally responsible by the trial court
and the Court of Appeals. This is a question of fact which we cannot now look into.
The next question refers to the surcharge of 10% which was agreed upon in the contract Exhibit "A". It appears therein that if
appellant should fail to pay the balance of P675 after the lapse of 30 days from the date exhibition of the film "LAGRIMAS" has
started, he should pay a surcharge of 10% every 30 days thereafter until the amount has been fully paid. It is claimed that this
surcharged is unconscionable and unreasonable, because it is tantamount to imposing an interest of 10% a month, or 120% a year on
the balance of the obligation until the same is paid in full.
There is merit in this contention. While this surcharge partakes of the nature of a penal clause which the parties may stipulate under
the law,1 however, one cannot deny that the same is unreasonable, for if that is to be maintained, we would have that on the basis of
P675 which is the balance that remains outstanding, appellant would pay P67.50 a month, or P810 a year, which considering the time
that has already elapsed since appellant defaulted, would amount to P3,420. This is indeed a case where equity demands that the
penalty be reduced in fairness to the debtor. And so, making use of the discretion that the law grants us on the matter, we are of the
opinion that a surcharge of 20% per annum would be reasonable. We therefore hold that the penalty should be reduced accordingly. 2
The last claim of appellant refers to the portion of the decision which orders the payment of 6% interest per annum from the date of
the filing of the complaint until full payment of the obligation due, which is also considered unreasonable considering that appellant
was already ordered to pay the penalty agreed upon.

Credit Transactions Cases Prelim 1st Set

This claim is untenable in the light of the law and the contract of the parties. Thus, Article 1226 of the new Civil Code provides that "in
obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty. . . .". In other words, the penalty takes the place of the interests only if there is no stipulation to the contrary, and even then,
damages may still be collected if the obligor refuses to pay the penalty. In this case not only is there an express stipulation to pay
damages in addition to the penalty, but appellant has failed to pay his obligation as well as the penalty. This appears in paragraph (f)
of the contract Exhibit "A". The imposition of 6% interest per annum is, therefore, justified.
Modified with regard to the amount of the surcharge to be imposed on appellant as above indicated, we hereby affirm the decision
appealed from in all other respects, without pronouncement as to costs.